premier refiner

2017 summary annual report valero energy corporation 2017 summary annual report contents

financial highlights...... 2

a letter to our stockholders...... 4

valero vision and guiding principles...... 8

company summary...... 10

map of operations...... 12

maintaining manufacturing excellence...... 16

allocating capital to deliver results...... 20

focusing on earnings growth...... 24

board of directors...... 26

executive team...... 28

2017 summary annual report 1 financial highlights

2 [Millions of dollars, except per-share amounts]

2017 2016

Operating Revenues $ 93,980 $ 76,659

Operating Income $ 3,599 $ 3,572

Net Income Attributable to Valero Stockholders $ 4,065 $ 2,289

Earnings Per Common Share – Assuming Dilution $ 9.16 $ 4.94

Total Assets $ 50,158 $ 46,173

Valero Stockholders’ Equity $ 21,991 $ 20,024

Capital Expenditures, Deferred Turnaround and $ 2,282 $ 2,000 Catalyst Costs, and Investments in Joint Ventures

Please visit www.valero.com to learn more about our company. The terms “Valero,” “we,” “our” and “us,” when used herein, may refer to Valero Energy Corporation, to one or more of our consolidated subsidiaries, or to all of them taken as a whole.

This is only a financial summary. The company’s full, audited financial statements are contained in its Annual Report on Form 10-K for the year ended December 31, 2017, which has been filed with the U.S. Securities and Exchange Commission and made available to all stockholders. This information is also available at www.valero.com.

2017 summary annual report 3 a letter to our stockholders

4 I am very pleased to report that in 2017, Turning to the markets, 2017 certainly was a Valero set new operational performance tale of two halves. In the first half of the year, records for safety, reliability and environmental we saw a gradual but steady improvement in stewardship, exemplifying our commitment to margins from the low levels of 2016. The return premier operations that drive and deliver stable of global economic growth created strong earnings. product demand.

For the year, excluding a significant benefit And on the supply side, our flexibility allowed from the unprecedented tax reform passed in us to optimize our system away from the OPEC December, adjusted net income attributable to supply-constrained crudes to capture more stockholders was $4.96 per share, compared margin available on Canadian and domestic with $3.72 per share in 2016. crude supply. In fact, we processed a record 1.4 million barrels per day of light crude during the In operations, our refineries recorded their fourth quarter. lowest-ever employee injury rates – far lower than the industry average – and best-ever In the second half of the year, the catastrophic process safety event rate. At the same time, weather-related events accelerated the decline they achieved their highest-ever mechanical in industry product inventories to below five- availability percentage and lowest-ever number year averages. These events brought national of environmental incidents. attention to the complexity and efficiency of the U.S. fuel supply chain and renewed appreciation They also maintained the lowest refining cash for the critical role our products play in the lives operating expense per barrel of throughput of families and communities. in our peer group, excluding turnaround and depreciation and amortization expenses. With supply of refined light product inventories remaining low and global economic growth I would be remiss if I didn’t say once again continuing, we expect good demand in how proud I was of our Valero team and the domestic and export markets and healthy energy industry as a whole for the response to margins in the coming year. Hurricane Harvey, whose path touched almost all of Valero’s Gulf Coast operations. We remain committed to our capital allocation framework, which prioritizes maintaining our It was impressive that the epicenter of the investment-grade credit ratings and non- refining industry on the Gulf Coast could take discretionary spending to sustain our business a direct hit from a Category 4 hurricane and and pay dividends. Growth investments, keep supply disruptions as short-lived as they mergers and acquisitions, and incremental cash were. I applaud our employees; our local, state returns compete for the remaining discretionary and federal government officials; and all of our cash flow. Incremental cash flow resulting from business partners who worked closely with tax reform should increase our capacity in this us to return the supply of our fuels to affected area, but will not alter our framework. communities.

2017 summary annual report 5 6 In 2017, we invested $2.4 billion to sustain and We maintained our strong balance sheet, grow the business. Among our projects: investment-grade credit ratings and a low debt-to-capital ratio of 23 percent, net of y yThe Diamond Pipeline started up in $2 billion in cash. Regarding cash returns November, connecting the crude-oil hub of to our stockholders, we paid out 63 percent Cushing, Oklahoma, to our Memphis refinery. of adjusted net cash provided by operating yyA new cogeneration unit went online at activities, which exceeded our target annual our Wilmington refinery, helping reduce payout range of 40 to 50 percent. the plant’s operating expenses while also increasing the reliability of its power and Our board in January approved a 14 percent steam supplies. increase in the regular quarterly dividend to $0.80 per share, or $3.20 annually, further y yOur expansion of the Diamond Green Diesel demonstrating our commitment to our investors. plant initially is expected to boost annual production capacity to 275 million gallons Looking ahead, we see strong tailwinds with the from 160 million gallons, with completion anticipated reduction in our taxes, regulatory expected in third-quarter 2018. changes such as the IMO 2020 standard, and yyConstruction of a new alkylation unit at the continued economic growth. We expect Valero’s Houston refinery remains on track for an net cash provided by operating activities to expected first-half 2019 completion. benefit significantly. yyOur logistics investments in central Texas In closing, with continued solid operational and and along the Houston Ship Channel are safety performance, as well as our advantaged also progressing. Estimated startups are in position as a low-cash cost manufacturer with mid-2019 for central Texas pipelines and flexibility to process a wide range of feedstocks, terminals, and early 2020 for a terminal in we are optimistic about 2018. Pasadena. Thank you for your continued support and trust. A new $400 million alkylation unit at St. Charles, recently approved by the board, also is projected for startup in second-half 2020.

We also signed a long-term agreement to Joe Gorder supply product into central Mexico. With recent Chairman, President and Chief Executive Officer constitutional reform there, Valero may now import refined products through a subsidiary at the new Port of Veracruz and distribute directly into Mexico, including branded sales. This transaction will enable us to extend our supply chain to efficiently supply gasoline, diesel and jet fuel to the growing Mexican market.

2017 summary annual report 7 valero vision and guiding principles

8 vision statement Valero will be the premier manufacturer, distributor and marketer of quality transportation fuels and petrochemical feedstocks, while serving the needs of our employees, communities and stakeholders.

guiding principles:

safety Safety is our foundation for success.

environment We produce environmentally clean products and are committed stewards of the environment.

community We share our success with the communities where we live and work through volunteerism, charitable giving and the economic support of being a good employer.

employees We consider our employees a competitive advantage and our greatest asset. As such, we provide them with a safe and rewarding work environment with opportunities for growth and personal development.

stakeholders Our stakeholders are our partners to whom we pledge to deliver operational excellence, disciplined management of capital and long-term value.

2017 summary annual report 9 company summary

10 Valero Energy Corporation (NYSE: VLO), through Valero also owns 50 percent of a joint venture, its subsidiaries, is an international manufacturer Diamond Green Diesel Holdings LLC (DGD), and marketer of transportation fuels and other which operates an 11,000-barrel-per-day petrochemical products. renewable diesel plant in Norco, Louisiana, that processes used cooking oil, recycled animal fat Valero is a Fortune 50 company based in San and inedible corn oil into renewable diesel fuel. Antonio, Texas, with approximately 10,000 employees, and it operates 15 petroleum refineries with a combined throughput capacity Valero, through its of approximately 3.1 million barrels per day and subsidiaries, is the world’s 11 ethanol plants with a combined production capacity of approximately 1.45 billion gallons largest independent per year. In addition, Valero owns the 2 percent general partner interest and a majority limited petroleum refiner. partner interest in Valero Energy Partners LP (NYSE: VLP), formed by Valero to own, operate, Valero’s ethanol segment includes its ethanol develop and acquire crude oil and refined operations, associated marketing activities petroleum products pipelines, terminals and and logistics assets that support its ethanol other transportation and logistics assets. operations. Through subsidiaries, Valero owns plants in Albert City, Charles City, Fort Dodge Valero’s refining segment includes its refining and Hartley, Iowa; Albion, Nebraska; Aurora, operations, associated marketing activities and South Dakota; Bloomingburg, Ohio; Jefferson, certain logistics assets that support its refining Wisconsin; Linden and Mount Vernon, Indiana; operations. Valero, through its subsidiaries, and Welcome, Minnesota. is the world’s largest independent petroleum refiner, with refineries in Ardmore, Oklahoma; Valero sells its ethanol primarily to refiners Benicia and Wilmington, California; Corpus and gasoline blenders under term and spot Christi (Bill Greehey refineries East and West), contracts in the wholesale bulk markets. The Houston, Sunray (McKee), Port Arthur, Texas ethanol is distributed through logistics assets, City and Three Rivers, Texas; Memphis, which include railcars owned by Valero. Tennessee; and Meraux and Norco (St. Charles), Louisiana. Valero also owns the Jean Gaulin Valero’s VLP segment consists of operations of refinery in Canada at Lévis, Québec, and the the publicly traded master limited partnership Pembroke refinery in the United Kingdom, in Valero formed in July 2013, Valero Energy Wales. Partners LP, which includes crude oil and refined petroleum products pipeline and The company sells its refined petroleum terminal systems in the U.S. Gulf Coast and products in both the bulk and wholesale rack U.S. Mid-Continent regions. This segment markets, and approximately 7,400 outlets carry provides transportation and terminal services to the Valero®, Beacon®, Diamond Shamrock® and the refining segment and its assets are integral Shamrock® brands in the United States; the to the operations of Valero’s Ardmore, Corpus Ultramar® brand in Canada; and the Texaco® Christi, Houston, McKee, Memphis, Meraux, brand in the U.K. and Ireland. Port Arthur, St. Charles and Three Rivers refineries. Valero has a wholesale marketing presence in 43 American states, six Canadian provinces, the U.K. and Ireland.

2017 summary annual report 11 map of operations

12 HARTLEY ALBERT CITY JEAN GAULIN ALBION FORT DODGE (QUEBEC) AURORA WELCOME CHARLES CITY JEFFERSON MONTREAL CANADA

UNITED STATES

BLOOMINGBURG

LINDEN BENICIA

MOUNT VERNON

WILMINGTON MEMPHIS

MCKEE SAN ANTONIO ARDMORE ST. CHARLES MERAUX THREE RIVERS BILL GREEHEY PORT ARTHUR (CORPUS CHRISTI EAST AND WEST) HOUSTON TEXAS CITY

UNITED WHOLESALE MARKETING PRESENCE VALERO OFFICES KINGDOM BRANDED WHOLESALE PRESENCE DIAMOND GREEN DIESEL

VALERO REFINERIES VALERO ENERGY PARTNERS ASSETS IRELAND VALERO ETHANOL PLANTS SUNRAY WIND

VALERO TERMINALS PIPELINES PEMBROKE LONDON

2017 summary annual report 13 14 2017 summary annual report Valero Port Arthur Refinery, Texas 15 maintaining manufacturing excellence

Safety and reliability are Our combined refinery Under the program, Valero goes imperative for profitability. In employee and contractor rate beyond regulatory compliance 2017, Valero improved in critical stood at 0.32. in voluntarily submitting to benchmarks, which led to rigorous safety audits. Valero greater margin capture, lower has the most VPP Star Sites of operating expenses and better lowest-ever any refiner. efficiency. refinery employee Three of our asphalt terminals In personnel safety, Valero injury rate in 2017 also hold VPP Stars, as does posted its lowest-ever refinery our aviation department. employee injury rate, with 0.28 In 2017, our refineries at total recordable incidents per Memphis and St. Charles In addition, company refineries 200,000 work hours, an industry earned Voluntary Protection in Québec and Wales each hold metric, down 20 percent from Program (VPP) Star Site internal Valero VPP Stars after 2016 and far below the industry designations, the highest plant- passing audits patterned after average of 0.60. It marked the safety recognition by the U.S. those in the U.S., conducted by fourth straight year of record- Occupational Safety and Health teams of independent OSHA- setting performance. Administration and affiliated trained inspectors. state agencies.

16 maintaining manufacturing excellence

4

Straight years of record-setting safety performance

St. Charles, in earning the Those systems go through 71% Valero Chairman’s Safety a continuous improvement Award, went two years without process that ensures we an employee recordable maintain industry-leading injury and posted a three-year performance. Reduction in contractor incident rate of 0.24. process safety events Process safety also is a major since 2010 Valero’s ethanol plants also emphasis at our ethanol plants, have maintained injury rates where Valero’s entire fleet of lower than the industry average, 11 plants recorded no Tier 1 in each year of operation. process safety events for three years. The Hartley plant, winner Our refineries also continue to of the Chairman’s Award for make significant strides in key Renewables Plant Excellence, areas of process safety and has not recorded a Tier 1 reliability. process safety event in more We recorded our best-ever than six years. Process Safety Event Tier 1 Process safety and reliability performance, the industry’s go hand in hand, and there has primary process safety metric, been measurable improvement representing a 71 percent in overall reliability of Valero’s reduction since 2010. refineries. Our reliability Our proprietary management networks conduct periodic systems allow us to consistently comprehensive assessments. deliver predictable and desirable operating results.

2017 summary annual report 17 In 2017, Valero refineries spent billions of dollars on achieved 97.3 percent environmental upgrades at our 97.3% mechanical availability, a refineries that have reduced leading reliability measure emissions and improved the representing the percentage environment. of time our units are available to run. That was Valero’s best Mechanical reliability performance ever. availability 70+% in 2017 The Jean Gaulin refinery in Québec won the Valero reduction in flaring Chairman’s Award for and emissions over reliability, tops across a broad set of measures focused on the last decade equipment reliability, frequency and extent of shutdowns, Six refineries either set or tied 32% and overall turnaround environmental performance management. records in 2017. And refinery flaring events and emissions Valero takes a systematic are down more than 70 percent approach to reliability, with Reduction in over the last decade. programs maintained within environmental events a low-cost framework as Valero’s commitment to since 2015 capital investment continues to manufacturing excellence has address the largest challenges. resulted in improvement in As a result, we have achieved industry benchmarks across best-in-industry simultaneous the board – from mechanical cost and mechanical availability to personnel index, performance. maintenance index, non-energy cash operating expenses Finally, Valero achieved its best- and energy intensity index ever environmental performance – providing for best-in-class for a second consecutive year, operations. reducing its number of incidents by 5 percent from the previous year, on top of a 32 percent reduction from 2015. And over the past decade, performance has improved by 71 percent.

We accomplished this by strengthening incident investigations and taking corrective actions to prevent recurrence of environmental events. We additionally have

18 2017 summary annual report 19 allocating capital to deliver results

Disciplined capital allocation is Our capital is allocated between must be evaluated against a constant in Valero’s strategy, investments to sustain or grow alternative uses of cash. with an eye on delivering our business, acquisitions and distinctive financial results cash returns in the form of For 2018, we project sustaining and peer-leading returns to dividends and stock buybacks. capital of approximately $1.7 stockholders. billion, and growth capital of In the first category, about $1.0 billion. Critical to this strategy is “sustaining” capital for maintaining a strong balance turnarounds, catalysts and Delivering cash returns to sheet, including sustaining regulatory compliance is key our stockholders is one of investment-grade credit ratings to safe and reliable operations. our priorities. We consider and targeting a debt-to- In determining growth capital, dividends as a commitment, capitalization ratio of 20 to 30 internal rate of return (IRR) targeting a payout at the percent. Valero finished 2017 must be projected to clear 25 high end of our peer group with a ratio of 23 percent, net of percent, with a lower hurdle of independent refiners. Our $2 billion in cash. rate required for steady cash- annual dividend per share has flow midstream projects. Any grown to $3.20 from just $0.30 acquisitions for refining projects in 2011.

20 allocating capital to deliver results

23%

Debt-to-capitalization ratio

$1.7 We have shown discipline in billion capital allocation through steady investments to maintain our In 2018 to sustain safe and reliable asset base, improve margins and operations optimize our portfolio.

We also reduced our weighted Valero has a steady pipeline of average shares outstanding high-return projects, roughly to 78 percent of what it was in split between refining and 2011. logistics projects.

Through the combination of In all, projects either just dividends and stock buybacks, completed, in execution or in we are targeting a payout ratio development are expected to between 40 and 50 percent of contribute from $1.2 billion to adjusted net cash provided by $1.4 billion in earnings before operating activities for 2018. In interest, taxes, depreciation and 2017, we exceeded that target, amortization (EBITDA). at 63 percent. Projects completed in 2017 Overall, we have shown included the Diamond Pipeline discipline in capital allocation connecting the crude-oil hub through steady investments of Cushing, Oklahoma, with to maintain our asset base, our Memphis refinery, and a improve margins and optimize new cogeneration unit at our our portfolio. Wilmington refinery.

2017 summary annual report 21 Among our projects in the Valero Energy execution phase (with expected Partners LP $1.0 completion dates): billion Valero’s 2 percent general y yDiamond Green Diesel partner interest and majority expansion (third-quarter limited partner interest in Valero 2018) Energy Partners LP (NYSE: VLP) Targeted for yyHouston alkylation unit serves as a primary vehicle to growth capital (first-half 2019) grow Valero’s logistics business. in 2018 y yCentral Texas pipelines and Since Valero formed the master terminals (mid-2019) limited partnership in 2013, yyPasadena, Texas, terminal it has focused on executing (early 2020) from a position of fundamental yySt. Charles alkylation unit strength, with logistics assets (second-half 2020) serving 10 Valero refineries at 22% the end of 2017.

Other projects in development VLP maintains its growth profile phases: by targeting “drop-downs” of assets from Valero, as well as Valero’s share of yyExpanding product supply organic projects and midstream U.S. ethanol chain into Mexico and Latin acquisitions. Its strategy is exports America to deliver top-tier distribution yyIncreasing light-products growth, as well as maintain yield and octane investment-grade credit ratings. enhancement in U.S. Gulf Coast In 2017, the partnership delivered peer-leading yyCogeneration in North distribution coverage, Atlantic increasing its quarterly cash yyLogistics for feedstock and distribution 139 percent over product flexibility minimum quarterly distribution yyHigh-grading secondary (MQD), and grew annualized products into petrochemicals EBITDA attributable to the partnership to more than $365 million.

VLP boosted operating income from acquisition of the Red River pipeline in Oklahoma, as well as from Port Arthur terminal assets and Parkway Pipeline, all added in 2017.

22 Ethanol Business Valero’s 11 ethanol plants in the Ethanol demand is expected Midwest reached 1.45 billion to be strong globally, driven by gallons annual production, with strong demand and attractive plants running at 130 percent of economics for corn-based original design. ethanol exports.

The plants are lower-cost Valero’s share of U.S. ethanol producers compared with the exports grew to 22 percent in industry, originally purchased 2017. at 35 percent of replacement cost and highly efficient with scale and located in the Corn Belt. Also, Valero has been able to transfer operational best practices of its refineries to its ethanol plants.

2017 summary annual report 23 focusing on earnings growth

Valero is focused on earnings and flexibility of our U.S. Gulf peers, giving us an advantage growth through a combination Coast refineries position us well to process a wide variety of of market expansion, margin to fill the demand. crude oils – both from the improvement and operating region and imported – as well cost control. Valero has supplied fuels to as access to a deep pool of Mexico for more than 10 years. skilled labor. Our portfolio of advantaged But an agreement reached refineries and logistics in 2017 will enable a new Valero’s refineries are capable optimizes product exports Valero subsidiary to receive of processing 1.6 million barrels globally. And we’re investing imported products at Veracruz per day of light sweet crude to grow export and wholesale and distribute wholesale and oil in the U.S. Gulf Coast, in fuels volume. branded fuel to central Mexico’s addition to having the flexibility most-populous cities. to process heavy sour, medium/ For example, Mexico’s refined light sour, residuals and other product demand is expected Our refineries are advantaged in feedstocks. That flexibility is to grow, with imports filling a other ways. We have the most key to managing and improving large percentage of the supply refining capacity in the U.S. Gulf margins. shortage. The proximity, scale Coast and Mid-Continent of our

24 And our ability to optimize our In summary, Valero’s premier portfolio and improve reliability asset portfolio and best-in- has enabled high utilization and class operations provide a 1.6 lower operating expense. Valero solid foundation for value million is proving that high levels of creation. And we are investing reliability are compatible with in long-term earnings growth to low cash operating costs. generate distinctive cash flow and lower earnings volatility Barrels per day of light We once again posted the across margin cycles. sweet crude oil in U.S. Gulf lowest refining cash operating Coast processing capacity expenses per barrel of in Valero’s refineries throughput in our peer group, at $3.65, excluding turnaround, depreciation and amortization expenses. $3.65 Valero’s premier asset portfolio and best-in-class operations Lowest refining cash provide a solid foundation for operating expense per barrel of throughput value creation.

2017 summary annual report 25 board of directors board of directors

26 Joe Gorder H. Paulett Eberhart Kimberly S. Greene Deborah Platt Majoras Chairman of the Board, Chair and CEO, Chairman, CEO and Chief Legal Officer and President and CEO, Valero HMS Ventures President, Southern Secretary, The Procter & Energy Corporation Company Gas Gamble Company

Sen. Don Nickles Philip J. Pfeiffer Robert A. Profusek Dr. Susan Kaufman Retired U.S. Senator Of Counsel, Norton Rose Partner and Practice Purcell (R-Okla.); Chairman and Fulbright LLP, San Antonio Leader, Global Mergers and Retired Director, Center for CEO, The Nickles Group Acquisitions, Jones Day Hemispheric Policy, University of Miami

Stephen M. Waters Randall J. Rayford Wilkins Jr. Managing Partner, Compass Weisenburger Former CEO-Diversified Partners Advisers LLP; former Managing Member, Mile26 Businesses, AT&T Chief Executive, Compass Capital LLC; former EVP and Partners European Equity Fund CFO, Omnicom Group Inc.

2017 summary annual report 27 executive team

28 Joe Gorder Lane Riggs Jay Browning Mike Ciskowski Donna Titzman Chairman, President and Executive Vice President Executive Vice President Executive Vice President Executive Vice President CEO and Chief Operating Officer and General Counsel and Chief Financial Officer and Chief Financial Officer (retiring May 3, 2018) (as of May 3, 2018)

Jason Fraser Rich Lashway Mark Schmeltekopf Gary Simmons Ken Applegate Senior Vice President- Senior Vice President- Senior Vice President and Senior Vice President- Vice President-Transportation Strategy, Public Policy and Corporate Development and Chief Accounting Officer Supply, International Operations Investor Relations Midstream Operations and Systems Optimization

Greg Bram Eric Fisher Eric Honeyman Martin Parrish Chris Quinn Vice President-Supply Chain Vice President-Wholesale Vice President-Refining Vice President-Alternative Vice President and Treasurer Optimization Marketing and International Operations Fuels Commercial Operations

Julia Rendon Reinhart Cheryl Thomas Rich Walsh Vice President-HR and Vice President and Vice President and Administration Chief Information Officer Deputy General Counsel

2017 summary annual report 29 Valero Energy Corporation Corporate Headquarters P.O. Box 696000 San Antonio, TX 78269 valero.com Printed in the U.S.A.