UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2010

OR

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                                           to                                           

Commission file number 1-13175

VALERO ENERGY CORPORATION

(Exact name of registrant as specified in its charter)

Delaware (State or other jurisdiction of incorporation or organization)		74-1828067 (I.R.S. Employer Identification No.)

One Valero Way
San Antonio, Texas
(Address of principal executive offices)
78249
(Zip Code)

(210) 345-2000
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for shorter period that the registrant was required to submit and post such files). Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer þ		Accelerated filer o		Non-accelerated filer o		Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

The number of shares of the registrant’s only class of common stock, $0.01 par value, outstanding as of July 30, 2010 was 566,260,467.

 

 

VALERO ENERGY CORPORATION AND SUBSIDIARIES

INDEX

		Page
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of June 30, 2010 and December 31, 2009			3
Consolidated Statements of Income for the Three and Six Months Ended June 30, 2010 and 2009			4
Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2010 and 2009			5
Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2010 and 2009			6
Condensed Notes to Consolidated Financial Statements			7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			41
Item 3. Quantitative and Qualitative Disclosures About Market Risk			65
Item 4. Controls and Procedures			66
PART II – OTHER INFORMATION
Item 1. Legal Proceedings			67
Item 1A. Risk Factors			68
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			70
Item 6. Exhibits			71
SIGNATURE			72
EX-12.01
EX-31.01
EX-31.02
EX-32.01
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT

PART I – FINANCIAL INFORMATION

VALERO ENERGY CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(Millions of Dollars, Except Par Value)

		June 30,				December 31,
		2010				2009
		(Unaudited)
ASSETS
Current assets:
Cash and temporary cash investments		$	2,001			$	825
Restricted cash			13				122
Receivables, net			4,122				3,773
Inventories			4,767				4,863
Income taxes receivable			79				888
Deferred income taxes			171				180
Prepaid expenses and other			170				261
Assets held for sale and assets related to discontinued operations			25				224
Total current assets			11,348				11,136
Property, plant and equipment, at cost			29,439				28,463
Accumulated depreciation			(6,076	)			(5,592	)
Property, plant and equipment, net			23,363				22,871
Intangible assets, net			223				227
Deferred charges and other assets, net			1,543				1,395
Total assets		$	36,477			$	35,629
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current portion of debt and capital lease obligations		$	523			$	237
Accounts payable			5,856				5,760
Accrued expenses			440				514
Taxes other than income taxes			572				725
Income taxes payable			237				95
Deferred income taxes			184				253
Liabilities related to discontinued operations			102				225
Total current liabilities			7,914				7,809
Debt and capital lease obligations, less current portion			7,511				7,163
Deferred income taxes			4,270				4,063
Other long-term liabilities			1,731				1,869
Commitments and contingencies
Stockholders’ equity:
Common stock, $0.01 par value; 1,200,000,000 shares authorized; 673,501,593 and 673,501,593 shares issued			7				7
Additional paid-in capital			7,833				7,896
Treasury stock, at cost; 107,249,003 and 108,798,847 common shares			(6,620	)			(6,721	)
Retained earnings			13,591				13,178
Accumulated other comprehensive income			240				365
Total stockholders’ equity			15,051				14,725
Total liabilities and stockholders’ equity		$	36,477			$	35,629

See Condensed Notes to Consolidated Financial Statements.

VALERO ENERGY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME
(Millions of Dollars, Except per Share Amounts)
(Unaudited)

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2010				2009				2010				2009
Operating revenues (1)		$	21,775			$	17,376			$	41,418			$	30,704
Costs and expenses:
Cost of sales			19,320				16,014				37,456				27,218
Operating expenses			847				781				1,759				1,626
Retail selling expenses			187				171				360				340
General and administrative expenses			131				122				228				267
Depreciation and amortization expense			367				361				724				711
Asset impairment loss			2				119				2				141
Total costs and expenses			20,854				17,568				40,529				30,303
Operating income (loss)			921				(192	)			889				401
Other income (expense), net			1				(23	)			12				(24	)
Interest and debt expense:
Incurred			(138	)			(118	)			(285	)			(237	)
Capitalized			22				34				42				73
Income (loss) from continuing operations before income tax expense (benefit)			806				(299	)			658				213
Income tax expense (benefit)			276				(108	)			229				40
Income (loss) from continuing operations			530				(191	)			429				173
Income (loss) from discontinued operations, net of income taxes			53				(63	)			41				(118	)
Net income (loss)		$	583			$	(254	)		$	470			$	55
Earnings (loss) per common share:
Continuing operations		$	0.94			$	(0.36	)		$	0.76			$	0.33
Discontinued operations			0.10				(0.12	)			0.07				(0.22	)
Total		$	1.04			$	(0.48	)		$	0.83			$	0.11
Weighted-average common shares outstanding (in millions)			563				525				563				520
Earnings (loss) per common share – assuming dilution:
Continuing operations		$	0.93			$	(0.36	)		$	0.76			$	0.33
Discontinued operations			0.10				(0.12	)			0.07				(0.22	)
Total		$	1.03			$	(0.48	)		$	0.83			$	0.11
Weighted-average common shares outstanding – assuming dilution (in millions)			567				525				567				525
Dividends per common share		$	0.05			$	0.15			$	0.10			$	0.30
Supplemental information:
(1) Includes excise taxes on sales by our U.S. retail system		$	225			$	229			$	433			$	433

See Condensed Notes to Consolidated Financial Statements.

VALERO ENERGY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(Millions of Dollars)
(Unaudited)

		Six Months Ended June 30,
		2010				2009
Cash flows from operating activities:
Net income		$	470			$	55
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization expense			724				767
Asset impairment loss			2				159
Gain on sale of Delaware City Refinery assets			(92	)			–
Noncash interest expense and other income, net			4				15
Stock-based compensation expense			22				23
Deferred income tax expense (benefit)			83				(125	)
Changes in current assets and current liabilities			613				557
Changes in deferred charges and credits and other operating activities, net			(56	)			(44	)
Net cash provided by operating activities			1,770				1,407
Cash flows from investing activities:
Capital expenditures			(785	)			(1,351	)
Deferred turnaround and catalyst costs			(343	)			(249	)
Purchase of ethanol facilities			(260	)			(556	)
Proceeds from the sale of the Delaware City Refinery assets and associated terminal and pipeline assets			220				–
Minor acquisitions			–				(29	)
Other investing activities, net			11				11
Net cash used in investing activities			(1,157	)			(2,174	)
Cash flows from financing activities:
Non-bank debt:
Borrowings			1,244				998
Repayments			(517	)			(209	)
Accounts receivable sales program:
Proceeds from sale of receivables			1,225				500
Repayments			(1,325	)			(500	)
Proceeds from the sale of common stock, net of issuance costs			–				799
Issuance of common stock in connection with employee benefit plans			11				4
Common stock dividends			(57	)			(155	)
Debt issuance costs			(10	)			(8	)
Other financing activities, net			4				(1	)
Net cash provided by financing activities			575				1,428
Effect of foreign exchange rate changes on cash			(12	)			22
Net increase in cash and temporary cash investments			1,176				683
Cash and temporary cash investments at beginning of period			825				940
Cash and temporary cash investments at end of period		$	2,001			$	1,623

See Condensed Notes to Consolidated Financial Statements.

VALERO ENERGY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Millions of Dollars)
(Unaudited)

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2010				2009				2010				2009
Net income (loss)		$	583			$	(254	)		$	470			$	55
Other comprehensive income (loss):
Foreign currency translation adjustment			(138	)			191				(37	)			110
Pension and other postretirement benefits:
Net loss arising during the period, net of income tax benefit of $–, $–, $–, and $–			(21	)			–				(21	)			–
Net gain reclassified into income, net of income tax expense of $–, $–, $–, and $–			(1	)			–				(2	)			–
Net loss on pension and other postretirement benefits			(22	)			–				(23	)			–
Derivative instruments designated and qualifying as cash flow hedges:
Net gain (loss) arising during the period, net of income tax (expense) benefit of $–, $(2), $1, and $(34)			–				3				(1	)			63
Net gain reclassified into income, net of income tax expense of $17, $39, $34, and $60			(32	)			(72	)			(64	)			(112	)
Net loss on cash flow hedges			(32	)			(69	)			(65	)			(49	)
Other comprehensive income (loss)			(192	)			122				(125	)			61
Comprehensive income (loss)		$	391			$	(132	)		$	345			$	116

See Condensed Notes to Consolidated Financial Statements.

VALERO ENERGY CORPORATION AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. BASIS OF PRESENTATION, PRINCIPLES OF CONSOLIDATION, AND SIGNIFICANT ACCOUNTING POLICIES

As used in this report, the terms “Valero,” “we,” “us,” or “our” may refer to Valero Energy Corporation, one or more of its consolidated subsidiaries, or all of them taken as a whole.

These unaudited consolidated financial statements include the accounts of Valero and subsidiaries in which Valero has a controlling interest. Intercompany balances and transactions have been eliminated in consolidation. Investments in significant non-controlled entities are accounted for using the equity method.

These unaudited consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles (GAAP) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X of the Securities Exchange Act of 1934. Accordingly, they do not include all of the information and notes required by GAAP for complete consolidated financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. All such adjustments are of a normal recurring nature unless disclosed otherwise. Financial information for the three and six months ended June 30, 2010 and 2009 included in these Condensed Notes to Consolidated Financial Statements is derived from our unaudited consolidated financial statements. Operating results for the three and six months ended June 30, 2010 are not necessarily indicative of the results that may be expected for the year ending December 31, 2010.

The consolidated balance sheet as of December 31, 2009 has been derived from the audited financial statements as of that date. For further information, refer to the consolidated financial statements and notes thereto included in our annual report on Form 10-K for the year ended December 31, 2009.

We have evaluated subsequent events that occurred after June 30, 2010 through the filing of this Form 10-Q. Any material subsequent events that occurred during this time have been properly recognized or disclosed in our financial statements.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. On an ongoing basis, we review our estimates based on currently available information. Changes in facts and circumstances may result in revised estimates.

Reclassifications

Certain amounts previously reported have been reclassified to conform to the 2010 presentation.

As discussed in Note 4, we permanently shut down our Delaware City Refinery in the fourth quarter of 2009, and our board of directors approved a plan of sale for our shutdown refinery and associated terminal and pipeline assets at Delaware City in the first quarter of 2010. As a result, these assets have been presented in the consolidated balance sheet as assets held for sale and assets of discontinued operations as of June 30, 2010 and December 31, 2009. In addition, the results of operations of the Delaware City Refinery have been presented as discontinued operations in the consolidated statements of income for all periods presented.

VALERO ENERGY CORPORATION AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Asset impairment losses have been presented on a separate line in the consolidated statements of income. These asset impairment losses resulted from the cancellation of certain capital projects classified as “construction in progress,” and for the three and six months ended June 30, 2009, such losses have been reclassified from operating expenses and presented separately. The asset impairment losses are also presented on a separate line in the consolidated statements of cash flows, which resulted in an adjustment to “changes in deferred charges and credits and other operating activities, net” previously reported for the six months ended June 30, 2009. Asset impairment losses presented in the consolidated statements of cash flows for the six months ended June 30, 2009 includes asset impairment losses associated with the Delaware City Refinery, but such losses are included in discontinued operations in the consolidated statements of income.

2. ACCOUNTING PRONOUNCEMENTS

Transfers of Financial Assets

In June 2009, Topic 860 of the Accounting Standards Codification (ASC), “Transfers and Servicing,” was modified to clarify the requirements for derecognizing transferred financial assets, remove the concept of a qualifying special-purpose entity and related exceptions, and require additional disclosures related to transfers of financial assets. This guidance was effective for fiscal years, and interim periods within those fiscal years, beginning after November 15, 2009, and earlier application was prohibited. The adoption of these provisions of ASC Topic 860 effective January 1, 2010 did not affect our financial position or results of operations.

Variable Interest Entities

In June 2009, ASC Topic 810, “Consolidation,” was amended to modify provisions related to variable interest entities to include entities previously considered qualifying special-purpose entities, as the concept of these entities was eliminated. This modification also clarifies consolidation requirements and expands disclosure requirements related to variable interest entities. These provisions of ASC Topic 810 were effective for fiscal years, and interim periods within those fiscal years, beginning after November 15, 2009, and earlier application was prohibited. The adoption of these provisions of ASC Topic 810 effective January 1, 2010 did not affect our financial position or results of operations.

3. ACQUISITIONS

The acquired ethanol businesses discussed below involve the production and marketing of ethanol and its co-products, including distillers grains. The operations of our ethanol business complement our existing clean motor fuels business.

Acquisitions of ASA and Renew Assets

In December 2009, we signed an agreement with ASA Ethanol Holdings, LLC (ASA) to buy two ethanol plants located in Linden, Indiana and Bloomingburg, Ohio and made a $20 million advance payment towards the purchase of these facilities. On January 13, 2010, we completed the acquisition of the facilities, including certain inventories, for a total purchase price of $202 million.

Also in December 2009, we received approval from a bankruptcy court to acquire an ethanol facility located near Jefferson, Wisconsin from Renew Energy LLC (Renew) and made a $1 million advance payment towards the purchase of this facility. We completed the acquisition of this facility, including certain receivables and inventories, on February 4, 2010 for a total purchase price of $79 million.

VALERO ENERGY CORPORATION AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The assets acquired from ASA and Renew were recognized at acquisition-date fair values as determined by independent appraisals and other evaluations as follows (in millions):

Current assets, primarily inventory		$	11
Property, plant and equipment			269
Identifiable intangible assets			1
Total consideration		$	281

Neither goodwill nor a gain from a bargain purchase was recognized in conjunction with the ASA and Renew acquisitions, and no contingent assets or liabilities were acquired or assumed. In addition, pro forma results of operations for the three and six months ended June 30, 2009 have not been presented for these acquisitions as the acquisitions were not material to our financial position or results of operations. The consolidated statement of income for the six months ended June 30, 2010 includes the results of the ASA and Renew acquisitions as of their acquisition dates in the first quarter of 2010.

Acquisition of VeraSun Assets

In the second quarter of 2009, we acquired seven ethanol plants and a site under development from VeraSun Energy Corporation (VeraSun). The acquisition of these ethanol plants (referred to as the VeraSun Acquisition) was completed under three separate closing transactions. The purchase price for the VeraSun Acquisition was $477 million plus $79 million primarily for inventory and certain other working capital.

The assets acquired and liabilities assumed were recognized at their acquisition-date fair values as determined by an independent appraisal and other evaluations as follows (in millions):

Current assets, primarily inventory		$	77
Property, plant and equipment			491
Identifiable intangible assets			1
Current liabilities			(10	)
Other long-term liabilities			(3	)
Total consideration		$	556

Neither goodwill nor a gain from a bargain purchase was recognized in conjunction with the VeraSun Acquisition, and no contingent assets or liabilities were acquired or assumed in the acquisition.

VALERO ENERGY CORPORATION AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The consolidated statements of income include the results of operations of the ethanol plants commencing on their closing dates in the second quarter of 2009. Two of the acquired plants with closing dates subsequent to April 1, 2009 were not operating at the time of acquisition. Therefore, pro forma information for the three months ended June 30, 2009 is the same as our actual consolidated results of operations for that period. The pro forma information presented below for the six months ended June 30, 2009 assumes that the VeraSun Acquisition occurred on January 1, 2009 and that the purchase price was funded with proceeds from the issuance of $556 million of debt on January 1, 2009. The consolidated pro forma operating revenues, net income, and earnings per common share – assuming dilution of the combined entity are shown in the table below (in millions, except per share amount).

		Six Months Ended
		June 30, 2009
Consolidated pro forma:
Operating revenues		$	30,927
Income from continuing operations			166
Earnings per common share from continuing operations – assuming dilution			0.32

4. SALE OF DELAWARE CITY REFINERY ASSETS AND ASSOCIATED TERMINAL AND PIPELINE ASSETS

On November 20, 2009, we announced the permanent shutdown of our Delaware City Refinery due to financial losses caused by poor economic conditions, significant capital spending requirements, and high operating costs. In the fourth quarter of 2009, we recorded a pre-tax loss of $1.9 billion, of which $1.4 billion represented the write-down of the book value of the refinery assets to net realizable value. The results of operations of the Delaware City Refinery have been presented as discontinued operations in the consolidated statements of income for all periods presented because of the permanent shutdown of the refinery. Certain terminal and pipeline assets previously associated with the refinery were not shut down and continued to be operated until the date of their sale. The results of their operations are reflected in continuing operations in the consolidated statements of income for all periods presented due to our post-closing participation in the terminalling agreement described below.

In the first quarter of 2010, our board of directors approved a plan of sale for our shutdown refinery assets and associated terminal and pipeline assets at Delaware City. Effective June 1, 2010, we sold these assets to wholly owned subsidiaries of PBF Energy Partners LP (PBF) for $220 million of cash proceeds. The sale resulted in a gain of $92 million related to the shutdown refinery assets and a gain of $3 million related to the terminal and pipeline assets. The gain on the sale of the shutdown refinery assets primarily resulted from the scrap value of the assets and the reversal of certain liabilities recorded in the fourth quarter of 2009 associated with the shutdown of the refinery, which we will not incur because of the sale. This gain is presented in “income (loss) from discontinued operations, net of income taxes” in the consolidated statements of income for the three and six months ended June 30, 2010.

The shutdown refinery assets and the associated terminal and pipeline assets were presented in the consolidated balance sheets within assets held for sale as of December 31, 2009. All other related assets and liabilities of the shutdown refinery that were not sold are presented as assets and liabilities related to discontinued operations as of June 30, 2010 and December 31, 2009 summarized as follows (in millions).

VALERO ENERGY CORPORATION AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

		June 30, 2010
						Assets and
						Liabilities
		Assets				Related to
		Held				Discontinued
		for Sale				Operations				Total
Current assets:
Receivables, net		$	–			$	6			$	6
Deferred income taxes			–				19				19
Current assets		$	–			$	25			$	25
Current liabilities:
Accounts payable		$	–			$	4			$	4
Accrued expenses			–				98				98
Current liabilities		$	–			$	102			$	102
		December 31, 2009
						Assets and
						Liabilities
		Assets				Related to
		Held				Discontinued
		for Sale				Operations				Total
Current assets:
Receivables, net		$	–			$	6			$	6
Inventories			–				4				4
Property, plant and equipment, net
Refinery			16				–				16
Terminal and pipeline			141				–				141
Deferred income taxes			–				57				57
Current assets		$	157			$	67			$	224
Current liabilities:
Accounts payable		$	–			$	36			$	36
Accrued expenses			–				189				189
Current liabilities		$	–			$	225			$	225

Results of operations for the Delaware City Refinery prior to its sale, excluding the gain on the sale, are summarized as follows (in millions):

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2010				2009				2010				2009
Operating revenues		$	–			$	549			$	–			$	1,045
Loss before income tax benefit			(7	)			(124	)			(33	)			(209	)

VALERO ENERGY CORPORATION AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

In connection with this sale, we entered into a terminalling and offtake agreement with PBF under which PBF will provide certain terminalling services including receipt, storage, handling, and redelivery of refined products for us. If PBF resumes refinery operations, the terminalling agreement will terminate and we have agreed to purchase certain off-take products as prescribed in the agreement. The initial term of this agreement is for one year and shall automatically renew for 180-day periods until terminated by either party.

5. IMPAIRMENTS

Due to the economic slowdown that persisted throughout 2009 and its negative impact on the refining industry, we evaluated our refining operating assets for potential impairment in 2009. Such evaluations were based on expected future cash flows for each of our refineries using significant estimates and assumptions about the future operations of those refineries, including overall throughput volumes, types of crude oil processed, types of products produced, and prices for crude oil and refined products. Prices for crude oil and refined products fluctuate significantly based on market factors, including geopolitical matters. Prices, in turn, impact refinery throughput assumptions. In addition, we considered strategic alternatives, including potential sales of our Aruba and Paulsboro Refineries to develop expected future cash flows for those refineries. We determined that there was no indication of impairment of our refining operating assets as of December 31, 2009.

While the economy and refining industry fundamentals improved during the first six months of 2010, refining industry fundamentals continued to be negatively impacted by the economic slowdown. As a result, we updated our evaluation of potential impairments of our refining operating assets as of June 30, 2010, and we determined that there was no indication of impairment. Our cash flow estimates are based on expected improvements in refined product prices resulting from an expected improvement in the U.S. and worldwide economies. We updated our assumptions related to matters specific to our Aruba and Paulsboro Refineries that impact their expected future cash flows, as further discussed below, because the sensitivity of our estimates is most significant with respect to those refineries. We believe that our estimates used to develop expected cash flows are reasonable; however, future cash flows will differ from our estimates and such differences may be material.

Our Aruba Refinery was shut down in July 2009 because narrow heavy sour crude oil differentials made the refinery uneconomical to operate. In addition, various tax disputes with the Government of Aruba (GOA) created uncertainties with respect to the future economics of the refinery. As discussed in Note 15, we entered into a settlement agreement with the GOA on February 24, 2010, and that agreement became effective June 1, 2010. We also entered into a new tax regime in Aruba effective June 1, 2010, which resolved uncertainties regarding the tax environment in Aruba. In addition, heavy sour crude oil differentials began to widen in the first six months of 2010. Because of these positive developments, we commenced refinery-wide maintenance to prepare the refinery’s production units for potential restart by the end of the third quarter of 2010. We considered these positive developments in our updated impairment evaluation of the operating assets of the Aruba Refinery, and that evaluation indicated that there was no impairment. However, future decisions regarding the timing of a restart of the refinery that differ materially from our expectations or a decision to permanently shut down the refinery would have a significant impact on our cash flow estimates, and we could determine that the refinery’s operating assets are impaired. The Aruba Refinery had a net book value of $1.1 billion as of June 30, 2010; therefore, an impairment loss could be material to our results of operations.

VALERO ENERGY CORPORATION AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

We have continued to evaluate strategic alternatives for our Paulsboro Refinery, and we entered into negotiations related to a potential sale of the refinery in the second quarter of 2010. Negotiations are proceeding, but there is no certainty that we will sell the refinery. Our updated evaluation of a potential impairment of the operating assets of the Paulsboro Refinery considered the possibility of selling the refinery based on the facts and circumstances that existed as of June 30, 2010, and that evaluation indicated that there was no impairment. The Paulsboro Refinery had a net book value of $1.3 billion as of June 30, 2010; therefore, an impairment loss could be material to our results of operations.

For further information regarding impairments, see Note 3 of Notes to Consolidated Financial Statements included in our annual report on Form 10-K for the year ended December 31, 2009.

6. INVENTORIES

Inventories consisted of the following (in millions):

		June 30,				December 31,
		2010				2009
Refinery feedstocks		$	2,572			$	2,124
Refined products and blendstocks			1,719				2,317
Ethanol feedstocks and products			187				141
Convenience store merchandise			96				96
Materials and supplies			193				185
Inventories		$	4,767			$	4,863

As of June 30, 2010 and December 31, 2009, the replacement cost (market value) of LIFO inventories exceeded their LIFO carrying amounts by approximately $4.3 billion and $4.5 billion, respectively.

7. DEBT

Non-Bank Debt

In March 2009, we issued $750 million of 9.375% notes due March 15, 2019 and $250 million of 10.5% notes due March 15, 2039. Proceeds from the issuance of these notes totaled $998 million, before deducting underwriting discounts and other issuance costs of $8 million.

In April 2009, we made scheduled debt repayments of $200 million related to our 3.5% notes and $9 million related to our 5.125% Series 1997D industrial revenue bonds.

In February 2010, we issued $400 million of 4.50% notes due in February 2015 and $850 million of 6.125% notes due in February 2020. Proceeds from the issuance of these notes totaled $1.244 billion, before deducting underwriting discounts and other issuance costs of $10 million.

In March 2010, we redeemed our 7.50% senior notes with a maturity date of June 15, 2015 for $294 million, or 102.5% of stated value. These notes had a carrying amount of $296 million as of the redemption date, resulting in a $2 million gain that was included in “other income (expense)” in the consolidated statements of income.

VALERO ENERGY CORPORATION AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

In April 2010, we made scheduled debt repayments of $8 million related to our Series A 5.45%, Series B 5.40%, and Series C 5.40% industrial revenue bonds.

In May 2010, we redeemed our 6.75% senior notes with a maturity date of May 1, 2014 for $190 million, or 102.25% of stated value. These notes had a carrying amount of $187 million as of the redemption date, resulting in a $3 million dollar loss that was included in “other income (expense)” in the consolidated statements of income.

In June 2010, we made scheduled debt repayments of $25 million related to our 7.25% debentures.

Bank Credit Facilities

We have a revolving credit facility (the Revolver) that has a maturity date of November 2012. As of June 30, 2010, the Revolver had a borrowing capacity of $2.4 billion. The Revolver has certain restrictive covenants, including a maximum debt-to-capitalization ratio of 60%. As of June 30, 2010 and December 31, 2009, our debt-to-capitalization ratios, calculated in accordance with the terms of the Revolver, were 28.6% and 30.9%, respectively. We believe that we will remain in compliance with this covenant.

During the six months ended June 30, 2010, we had no borrowings or repayments under our Revolver or other revolving bank credit facilities. As of June 30, 2010 and December 31, 2009, we had no borrowings outstanding under these committed revolving bank credit facilities.

As of June 30, 2010 and December 31, 2009, we had $76 million and $259 million, respectively, of letters of credit outstanding under our uncommitted short-term bank credit facilities and $225 million and $299 million, respectively, of letters of credit outstanding under our U.S. committed revolving credit facilities. Under our Canadian committed revolving credit facility, we had Cdn. $20 million and Cdn. $22 million of letters of credit outstanding as of June 30, 2010 and December 31, 2009 respectively.

In June 2010, we entered into a one-year committed revolving letter of credit facility under which we may obtain letters of credit of up to $300 million to support certain of our crude oil purchases. This agreement matures in June 2011.

Accounts Receivable Sales Facility

We have an accounts receivable sales facility with a group of third-party entities and financial institutions to sell on a revolving basis up to $1 billion of eligible trade receivables. We amended our agreement in June 2010 to extend the maturity date to June 2011. As of December 31, 2009, the amount of eligible receivables sold was $200 million. During the six months ended June 30, 2010, we sold $1.2 billion of eligible receivables and repaid $1.3 billion. As of June 30, 2010, the amount of eligible receivables sold was $100 million. Proceeds from the sale of receivables under this facility are reflected as debt in our consolidated balance sheets.

VALERO ENERGY CORPORATION AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Other Disclosures

The estimated fair value of our debt, including the current portion, was as follows (in millions):

		June 30,				December 31,
		2010				2009
Carrying amount		$	7,996			$	7,364
Fair value			9,360				8,228

8. STOCKHOLDERS’ EQUITY

Treasury Stock

No significant purchases of our common stock were made during the six months ended June 30, 2010 and 2009. During the six months ended June 30, 2010 and 2009, we issued 1.5 million shares and 0.5 million shares from treasury, respectively, for our employee benefit plans.

Common Stock Dividends

On July 29, 2010, our board of directors declared a regular quarterly cash dividend of $0.05 per common share payable on September 15, 2010 to holders of record at the close of business on August 18, 2010.

Common Stock Offering

On June 3, 2009, we sold in a public offering 46 million shares of our common stock, which included 6 million shares related to an overallotment option exercised by the underwriters, at a price of $18.00 per share and received proceeds, net of underwriting discounts and commissions and other issuance costs, of $799 million.

VALERO ENERGY CORPORATION AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

9. EARNINGS (LOSS) PER COMMON SHARE

Earnings (loss) per common share amounts were computed as follows (dollars and shares in millions, except per share amounts):

		Three Months Ended June 30,
		2010								2009
		Restricted				Common				Restricted				Common
		Stock				Stock				Stock				Stock
Earnings (loss) per common share from continuing operations:
Income (loss) from continuing operations						$	530							$	(191	)
Less dividends paid:
Common stock							29								77
Nonvested restricted stock							–								1
Undistributed earnings (loss)						$	501							$	(269	)
Weighted-average common shares outstanding			3				563				2				525
Earnings (loss) per common share from continuing operations:
Distributed earnings		$	0.05			$	0.05			$	0.15			$	0.15
Undistributed earnings (loss)			0.89				0.89				–				(0.51	)
Total earnings (loss) per common share from continuing operations		$	0.94			$	0.94			$	0.15			$	(0.36	)
Earnings (loss) per common share from continuing operations – assuming dilution:
Income (loss) from continuing operations						$	530							$	(191	)
Weighted-average common shares outstanding							563								525
Common equivalent shares (1):
Stock options							3								–
Performance awards and unvested restricted stock							1								–
Weighted-average common shares outstanding – assuming dilution							567								525
Earnings (loss) per common share from continuing operations – assuming dilution						$	0.93							$	(0.36	)

(1)		Common equivalent shares were excluded from the computation of diluted loss per share for the three months ended June 30, 2009 because the effect of including such shares would be antidilutive.

VALERO ENERGY CORPORATION AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

		Six Months Ended June 30,
		2010								2009
		Restricted				Common				Restricted				Common
		Stock				Stock				Stock				Stock
Earnings per common share from continuing operations:
Income from continuing operations						$	429							$	173
Less dividends paid:
Common stock							57								154
Nonvested restricted stock							–								1
Undistributed earnings						$	372							$	18
Weighted-average common shares outstanding			3				563				2				520
Earnings per common share from continuing operations:
Distributed earnings		$	0.10			$	0.10			$	0.30			$	0.30
Undistributed earnings			0.66				0.66				0.03				0.03
Total earnings per common share from continuing operations		$	0.76			$	0.76			$	0.33			$	0.33
Earnings per common share from continuing operations – assuming dilution:
Income from continuing operations						$	429							$	173
Weighted-average common shares outstanding							563								520
Common equivalent shares:
Stock options							3								4
Performance awards and unvested restricted stock							1								1
Weighted-average common shares outstanding – assuming dilution							567								525
Earnings per common share from continuing operations – assuming dilution						$	0.76							$	0.33

VALERO ENERGY CORPORATION AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The following table reflects potentially dilutive securities (in millions) that were excluded from the calculation of “earnings (loss) per common share from continuing operations – assuming dilution” as the effect of including such securities would have been antidilutive. These potentially dilutive securities included common equivalent shares (primarily stock options), which were excluded due to the loss from continuing operations for the three months ended June 30, 2009, and stock options for which the exercise prices were greater than the average market price of the common shares during each respective reporting period.

		Three Months Ended June 30,								Six Months Ended June 30,
		2010				2009				2010				2009
Common equivalent shares			–				5				–				–
Stock options			11				11				11				10

10. SUPPLEMENTAL CASH FLOW INFORMATION

In order to determine net cash provided by operating activities, net income is adjusted by, among other things, changes in current assets and current liabilities as follows (in millions):

		Six Months Ended June 30,
		2010				2009
Decrease (increase) in current assets:
Restricted cash		$	109			$	(10	)
Receivables, net			(394	)			(1,286	)
Inventories			102				172
Income taxes receivable			808				181
Prepaid expenses and other			15				11
Increase (decrease) in current liabilities:
Accounts payable			122				1,592
Accrued expenses			(145	)			(97	)
Taxes other than income taxes			(151	)			(41	)
Income taxes payable			147				35
Changes in current assets and current liabilities		$	613			$	557

The above changes in current assets and current liabilities differ from changes between amounts reflected in the applicable consolidated balance sheets for the respective periods for the following reasons:

	•		the amounts shown above exclude changes in cash and temporary cash investments, deferred income taxes, and current portion of debt and capital lease obligations, as well as the effect of certain noncash investing and financing activities discussed below;
	•		amounts accrued for capital expenditures and deferred turnaround and catalyst costs are reflected in investing activities in the consolidated statements of cash flows when such amounts are paid;
	•		amounts accrued for common stock purchases in the open market that are not settled as of the balance sheet date are reflected in financing activities in the consolidated statements of cash flows when the purchases are settled and paid;
	•		changes in assets and liabilities related to the discontinued operations of the Delaware City Refinery prior to its shutdown are reflected in the line items to which the changes relate in the table above; and

VALERO ENERGY CORPORATION AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

•

certain differences between consolidated balance sheet changes and consolidated statement of cash flow changes reflected above result from translating foreign currency denominated amounts at different exchange rates.

There were no significant noncash investing or financing activities for the six months ended June 30, 2010 and 2009.

Cash flows related to interest and income taxes were as follows (in millions):

		Six Months Ended June 30,
		2010				2009
Interest paid in excess of amount capitalized		$	225			$	152
Income taxes paid (received), net			(797	)			(144	)

Cash flows related to the discontinued operations of the Delaware City Refinery have been combined with the cash flows from continuing operations within each category in the consolidated statements of cash flows for both periods presented and are summarized as follows (in millions):

		Six Months Ended June 30,
		2010				2009
Cash used in operating activities		$	(76	)		$	(134	)
Cash used in investing activities			–				(67	)

11. FAIR VALUE MEASUREMENTS

A fair value hierarchy (Level 1, Level 2, or Level 3) is used to categorize fair value amounts based on the quality of inputs used to measure fair value. Accordingly, fair values determined by Level 1 inputs utilize quoted prices in active markets for identical assets or liabilities. Fair values determined by Level 2 inputs are based on quoted prices for similar assets and liabilities in active markets, and inputs other than quoted prices that are observable for the asset or liability. Level 3 inputs are unobservable inputs for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability. We use appropriate valuation techniques based on the available inputs to measure the fair values of our applicable assets and liabilities. When available, we measure fair value using Level 1 inputs because they generally provide the most reliable evidence of fair value.

The tables below present information (dollars in millions) about our financial assets and liabilities measured and recorded at fair value on a recurring basis and indicate the fair value hierarchy of the inputs utilized by us to determine the fair values as of June 30, 2010 and December 31, 2009.

VALERO ENERGY CORPORATION AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Fair Value Measurements Using

Quoted

Significant

Prices

Other

Significant

in Active

Observable

Unobservable

Total as of

Markets

Inputs

Inputs

June 30,

(Level 1)

(Level 2)

(Level 3)

2010

Assets:

Commodity derivative contracts

$

27

$

169

$

–

$

196

Nonqualified benefit plans

95

–

10

105

Liabilities:

Commodity derivative contracts

17

7

–

24

Nonqualified benefit plans

33

–

–

33

Fair Value Measurements Using

Quoted

Significant

Prices

Other

Significant

in Active

Observable

Unobservable

Total as of

Markets

Inputs

Inputs

December 31,

(Level 1)

(Level 2)

(Level 3)

2009

Assets:

Commodity derivative contracts

$

10

$

349

$

–

$

359

Nonqualified benefit plans

99

–

10

109

Liabilities:

Commodity derivative contracts

100

9

–

109

Nonqualified benefit plans

34

–

–

34

The valuation methods used to measure our financial instruments at fair value are as follows:

	•		Commodity derivative contracts, consisting primarily of exchange-traded futures and swaps, are measured at fair value using the market approach. Exchange-traded futures are valued based on quoted prices from the exchange and are categorized in Level 1 of the fair value hierarchy. Swaps are priced using third-party broker quotes, industry pricing services, and exchange-traded curves, with appropriate consideration of counterparty credit risk, but since they have contractual terms that are not identical to exchange-traded futures instruments with a comparable market price, these financial instruments are categorized in Level 2 of the fair value hierarchy.
	•		The nonqualified benefit plan assets and nonqualified benefit plan liabilities categorized in Level 1 of the fair value hierarchy are measured at fair value using a market approach based on quotations from national securities exchanges. The nonqualified benefit plan assets categorized in Level 3 of the fair value hierarchy represent insurance contracts, the fair value of which is provided by the insurer.

As of June 30, 2010 and December 31, 2009, cash received from brokers of $58 million and $64 million, respectively, resulting from the equity in broker accounts covered by master netting arrangements exceeding the minimum margin requirements for such accounts, is netted against the fair value of the commodity derivatives reflected in Level 1. Certain of our commodity derivative contracts under master netting arrangements include both asset and liability positions. We have elected to offset the fair value amounts recognized for multiple similar derivative instruments executed with the same counterparty, including any related cash collateral asset or obligation.

VALERO ENERGY CORPORATION AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The following is a reconciliation of the beginning and ending balances (in millions) for fair value measurements developed using significant unobservable inputs for the three and six months ended June 30, 2010 and 2009.

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2010				2009				2010				2009
Balance at beginning of period		$	10			$	24			$	10			$	13
Net unrealized gains included in earnings			–				14				–				25
Balance at end of period		$	10			$	38			$	10			$	38

Unrealized gains for the three and six months ended June 30, 2009, which are reported in “other income (expense), net” in the consolidated statements of income, relate to the three-year earn-out agreement with Alon Refining Krotz Springs Inc. (Alon) that was entered into in connection with the sale of our Krotz Springs Refinery. That agreement was settled in August 2009. These unrealized gains were offset by the recognition in “other income (expense), net” of losses on commodity derivative instruments entered into to hedge the risk of changes in the fair value of the Alon earn-out agreement.

12. PRICE RISK MANAGEMENT ACTIVITIES

We are exposed to market risks related to the volatility in the price of commodities, interest rates and foreign currency exchange rates, and we enter into derivative instruments to manage those risks. We also enter into derivative instruments to manage the price risk on other contractual derivatives into which we have entered. The only types of derivative instruments we enter into are those related to the various commodities we purchase or produce, interest rate swaps, and foreign currency exchange and purchase contracts, as described below. All derivative instruments are recorded on our balance sheet as either assets or liabilities measured at their fair values.

When we enter into a derivative instrument, it is designated as a fair value hedge, a cash flow hedge, an economic hedge, or a trading activity. The gain or loss on a derivative instrument designated and qualifying as a fair value hedge, as well as the offsetting loss or gain on the hedged item attributable to the hedged risk, are recognized currently in income in the same period. The effective portion of the gain or loss on a derivative instrument designated and qualifying as a cash flow hedge is initially reported as a component of other comprehensive income and is then recorded in income in the period or periods during which the hedged forecasted transaction affects income. The ineffective portion of the gain or loss on the cash flow derivative instrument, if any, is recognized in income as incurred. For our economic hedging relationships (hedges not designated as fair value or cash flow hedges) and for derivative instruments entered into by us for trading purposes, the derivative instrument is recorded at fair value and changes in the fair value of the derivative instrument are recognized currently in income. The cash flow effects of all of our derivative contracts are reflected in operating activities in the consolidated statements of cash flows for both periods presented.

Commodity Price Risk

We are exposed to market risks related to the price of crude oil, refined products (primarily gasoline and distillate), grain (primarily corn), and natural gas used in our refining operations. To reduce the impact of price volatility on our results of operations and cash flows, we use commodity derivative instruments, including swaps, futures, and options. We use the futures markets for the available liquidity, which

VALERO ENERGY CORPORATION AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

provides greater flexibility in transacting our hedging and trading operations. We use swaps primarily to convert our floating price exposure to a fixed price. Our positions in commodity derivative instruments are monitored and managed on a daily basis by a risk control group to ensure compliance with our stated risk management policy that has been approved by our board of directors.

For risk management purposes, we use fair value hedges, cash flow hedges, and economic hedges. In addition to the use of derivative instruments to manage commodity price risk, we also enter into certain commodity derivative instruments for trading purposes. Our objective for entering into each type of hedge or trading activity is described below.

Fair Value Hedges

Fair value hedges are used to hedge certain refining inventories and firm commitments to purchase inventories. The level of activity for our fair value hedges is based on the level of our operating inventories, and generally represents the amount by which our inventories differ from our previous year-end LIFO inventory levels.

As of June 30, 2010, we had the following outstanding commodity derivative instruments that were entered into to hedge crude oil and refined product inventories. The information presents the notional volume of outstanding contracts by type of instrument and year of maturity (volumes in thousands of barrels).

		Notional Contract
		Volumes by
Derivative Instrument		Year of Maturity
		2010
Crude oil and refined products:
Futures - short			17,796

Cash Flow Hedges

Cash flow hedges are used to hedge certain forecasted feedstock and refined product purchases, refined product sales, and natural gas purchases. The objective of our cash flow hedges is to lock in the price of forecasted feedstock, refined product or natural gas purchases or refined product sales at existing market prices that we deem favorable.

As of June 30, 2010, we had the following outstanding commodity derivative instruments that were entered into to hedge forecasted purchases or sales of crude oil and refined products. The information presents the notional volume of outstanding contracts by type of instrument and year of maturity (volumes in thousands of barrels).

		Notional Contract
		Volumes by
Derivative Instrument		Year of Maturity
		2010
Crude oil and refined products:
Swaps - long			21,300
Swaps - short			21,300

VALERO ENERGY CORPORATION AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Economic Hedges

Economic hedges are hedges not designated as fair value or cash flow hedges that are used to (i) manage price volatility in certain refinery feedstock, refined product and corn inventories, and (ii) manage price volatility in certain forecasted refinery feedstock, refined product and corn purchases, refined product sales, and natural gas purchases. Our objective in entering into economic hedges is consistent with the objectives discussed above for fair value hedges and cash flow hedges. However, the economic hedges are not designated as a fair value hedge or a cash flow hedge for accounting purposes, usually due to the difficulty of establishing the required documentation at the date that the derivative instrument is entered into that would allow us to achieve “hedge deferral accounting.”

As of June 30, 2010, we had the following outstanding commodity derivative instruments that were entered into as economic hedges. The information presents the notional volume of outstanding contracts by type of instrument and year of maturity (volumes in thousands of barrels, except those identified as corn contracts that are presented in thousands of bushels).

		Notional Contract Volumes by
Derivative Instrument		Year of Maturity
		2010				2011
Crude oil and refined products:
Swaps - long			120,048				83,017
Swaps - short			118,363				83,005
Futures - long			334,198				3,118
Futures - short			327,138				3,035
Corn:
Futures - long			24,535				165
Futures - short			49,305				2,605

VALERO ENERGY CORPORATION AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Trading Activities

Derivatives entered into for trading purposes represent commodity derivative instruments held or issued for trading purposes. Our objective in entering into commodity derivative instruments for trading purposes is to take advantage of existing market conditions related to crude oil and refined products that we perceive as opportunities to benefit our results of operations and cash flows, but for which there are no related physical transactions.

As of June 30, 2010, we had the following outstanding commodity derivative instruments that were entered into for trading purposes. The information presents the notional volume of outstanding contracts by type of instrument and year of maturity (volumes represent thousands of barrels, except those identified as natural gas contracts that are presented in billions of British thermal units).

		Notional Contract Volumes by
Derivative Instrument		Year of Maturity
		2010				2011
Crude oil and refined products:
Swaps - long			29,809				9,720
Swaps - short			29,384				9,720
Futures - long			50,291				3,296
Futures - short			50,602				3,079
Options - long			350				–
Options - short			400				–
Natural gas:
Futures - long			3,950				–
Futures - short			3,950				–

Interest Rate Risk

Our primary market risk exposure for changes in interest rates relates to our debt obligations. We manage our exposure to changing interest rates through the use of a combination of fixed-rate and floating-rate debt. In addition, at times we have used interest rate swap agreements to manage our fixed to floating interest rate position by converting certain fixed-rate debt to floating-rate debt. These interest rate swap agreements are generally accounted for as fair value hedges. However, we have not had any outstanding interest rate swap agreements since 2006.

Foreign Currency Risk

We are exposed to exchange rate fluctuations on transactions related to our Canadian operations. To manage our exposure to these exchange rate fluctuations, we use foreign currency exchange and purchase contracts. These contracts are not designated as hedging instruments for accounting purposes, and therefore they are classified as economic hedges. As of June 30, 2010, we had commitments to purchase $325 million of U.S. dollars. These commitments matured on or before July 30, 2010.

Fair Values of Derivative Instruments

The following tables provide information about the fair values of our derivative instruments as of June 30, 2010 and December 31, 2009 (in millions) and the line items in the balance sheet in which the fair values are reflected. See Note 11 for additional information related to the fair values of our derivative instruments. As indicated in Note 11, we net fair value amounts recognized for multiple similar derivative instruments executed with the same counterparty under master netting arrangements. The

VALERO ENERGY CORPORATION AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

tables below, however, are presented on a gross asset and gross liability basis, which results in the reflection of certain assets in liability accounts and certain liabilities in asset accounts. In addition, in Note 11, we netted cash collateral received from brokers against the fair value of the commodity derivatives; these cash amounts are not reflected in the tables below.

		Asset Derivatives						Liability Derivatives
				Fair Value						Fair Value
				as of						as of
		Balance Sheet		June 30,				Balance Sheet		June 30,
		Location		2010				Location		2010
Derivatives designated as hedging instruments
Commodity contracts:
Futures		Receivables, net		$	9			Receivables, net		$	6
Futures		Accrued expenses			442			Accrued expenses			520
Swaps		Receivables, net			114			Receivables, net			101
Swaps		Prepaid expenses and other			153			Prepaid expenses and other			70
Swaps		Accrued expenses			3			Accrued expenses			3
Total derivatives designated as hedging instruments				$	721					$	700
Derivatives not designated as hedging instruments
Commodity contracts:
Futures		Receivables, net		$	24			Receivables, net		$	21
Futures		Accrued expenses			3,201			Accrued expenses			3,061
Swaps		Receivables, net			276			Receivables, net			195
Swaps		Prepaid expenses and other			638			Prepaid expenses and other			645
Swaps		Accrued expenses			3			Accrued expenses			11
Options		Accrued expenses			1			Accrued expenses			1
Total derivatives not designated as hedging instruments				$	4,143					$	3,934
Total derivatives				$	4,864					$	4,634