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# Valero Energy Corporation (VLO): Business, Risks and Management's Discussion Current period: second quarter of 2026 (quarter ended June 30, 2026). Valero's fiscal year is the calendar year. The annual material below comes from the Form 10-K for the year ended December 31, 2025 (accession 0001628280-26-011499). The current-quarter material comes from the Form 10-Q for the quarter ended June 30, 2026 (accession 0001628280-26-050937) and the second-quarter earnings release furnished on Form 8-K (accession 0001628280-26-050822). ## Business *Source: FY2025 Form 10-K, accession 0001628280-26-011499 (Items 1 and 2, Business and Properties).* Valero makes and sells liquid transportation fuels, both petroleum-based and low-carbon, along with petrochemical products. Its products are gasoline and blendstocks, diesel, jet fuel, asphalt and other refined products, plus renewable diesel, renewable naphtha, neat sustainable aviation fuel (SAF) and ethanol. It sells mainly in the United States, Canada, the United Kingdom, Ireland and Latin America. Customers buy wholesale: through truck racks (wholesalers, distributors, retailers and truck-delivered end users) and in bulk (petroleum companies, traders, and large users such as railroads, airlines and utilities). Valero earns the margin between what it gets for its products and what it pays for feedstocks: crude oil, waste and renewable fats and oils, and corn. It produces none of its primary feedstocks, except the distillers corn oil that comes out of its ethanol plants. It also owns no retail network. About 7,000 independently owned outlets carry its brands under multi-year supply contracts: Valero, Beacon, Diamond Shamrock and Shamrock in the U.S., Ultramar in Canada, Valero and Texaco in the U.K. and Ireland, and Valero in Mexico. Most rack volume is sold unbranded. Valero reports three segments: - **Refining** is the core of the business. At December 31, 2025 Valero owned 15 refineries in the U.S., Canada and the U.K., with combined throughput capacity of about 3.19 million barrels per day; crude oil capacity was about 2.7 million. The largest were Port Arthur (435,000 BPD), Corpus Christi East and West (370,000), St. Charles (340,000), Pembroke in Wales (270,000), Texas City (260,000), Houston (255,000) and Quebec City (235,000). The segment includes the logistics assets behind the refineries (pipelines, terminals, tanks and marine docks), and Valero has grown its terminal access in Mexico and Peru to serve Latin American demand. In 2025, Refining generated $116.16 billion of the company's $122.69 billion of external revenue and $4.04 billion of operating income ($5.27 billion adjusted), on throughput of 2.99 million barrels per day. The 170,000 BPD Benicia, California refinery was fully idled in April 2026. Since then Valero has described itself as operating 14 refineries with about 3.0 million barrels per day of capacity (second-quarter 2026 earnings release, accession 0001628280-26-050822). - **Renewable Diesel** is Diamond Green Diesel (DGD), a 50/50 joint venture with Darling Ingredients that Valero operates and consolidates. DGD's two Gulf Coast plants process waste and renewable feedstocks, mainly animal fats, used cooking oil and inedible distillers corn oil. The St. Charles plant can make about 700 million gallons of renewable diesel a year and the Port Arthur plant about 470 million, for a combined 1.2 billion gallons of renewable diesel and 50 million gallons of renewable naphtha. Since the fourth quarter of 2024, a SAF project at Port Arthur has allowed about half of that plant's capacity to be upgraded to neat SAF. Darling's half of DGD's results is reported as noncontrolling interest. In 2025 the segment lost $156 million at the operating level, and sales fell to 2.75 million gallons per day from 3.53 million. - **Ethanol** consists of 12 dry-mill corn ethanol plants in the Mid-Continent: Indiana, Iowa, Minnesota, Nebraska, Ohio and South Dakota. They have about 1.7 billion gallons a year of capacity and also produce distillers grains for animal feed and inedible corn oil. The segment earned $374 million of operating income in 2025 on production of 4.61 million gallons per day. Government blending programs work against one part of the business and for another. Valero's refineries are obligated parties under the U.S. Renewable Fuel Standard (RFS), the California Low Carbon Fuel Standard (LCFS), Canada's Clean Fuel Regulations and the U.K. Renewable Transport Fuel Obligation. To comply they must blend renewable fuels or buy credits, chiefly RINs. The renewable diesel and ethanol segments sell low-carbon fuels and credits into the same programs. Federal tax support changed in 2025, when the $1.00-per-gallon blender's tax credit was replaced by the Section 45Z clean fuel production credit. The One Big Beautiful Bill Act (OBBB) extended that credit through 2029. For fuel produced from 2026 onward, the OBBB also requires feedstocks from the U.S., Mexico or Canada and generally caps the credit at $1.00 per gallon. It excludes indirect land-use emissions from the calculation, which Valero expects will let much of its corn ethanol qualify. By the end of 2025 Valero had invested $6.0 billion in low-carbon fuels: $4.1 billion in renewable diesel (100% of DGD's capital) and $1.9 billion in ethanol. In 2025 it also signed an agreement to capture, transport and store carbon dioxide from its Linden, Indiana ethanol plant. Valero had 9,811 employees at December 31, 2025, of whom 8,182 were in the U.S. and 1,782 were covered by collective bargaining or similar agreements. A Fluid Catalytic Cracking (FCC) unit optimization project at the St. Charles refinery, intended to raise output of high-value products, was under way at year-end. ## Risk factors *Source: FY2025 Form 10-K, accession 0001628280-26-011499 (Item 1A). The second-quarter 2026 Form 10-Q (accession 0001628280-26-050937) reports no material changes to these risk factors.* The risks with the most bearing on Valero's earnings and asset values: - **Volatile margins and crude differentials.** Earnings depend on the spread between product prices and feedstock costs, and much of Valero's profit comes from processing crudes that trade below benchmark grades. Both swing with global supply and demand, OPEC+ production decisions, trade policy and geopolitics. Feedstocks are bought well before the products are sold, so price moves in between hit results, and falling prices can force inventory write-downs. Some refineries are closing, but new capacity is also being added globally, which adds uncertainty to future margins. - **Energy and water supply.** The refineries use large amounts of natural gas, electricity and water. In Texas, the real-time market of the state's largest grid operator exposes many refineries to "scarcity pricing" when supply runs short. Valero expects electrification and data-center demand to make power supply less reliable. Several Texas refineries face ongoing water-supply problems that have required, or are expected to require, added capital spending or ongoing costs. - **Feedstock access, sanctions and tariffs.** Sanctions on Russian and Iranian oil and uncertainty around Venezuela affect trade flows and crude access. U.S. tariffs have hit DGD's foreign feedstock supply. Meanwhile several foreign jurisdictions have put duties on U.S.-made renewable diesel and SAF, while comparable U.S. duties on imported finished product have not been broadly applied. At times this has made foreign feedstocks uneconomic for DGD and cut its margins and output. Valero says its Refining and Ethanol segments have not been significantly affected by recent tariffs so far. - **Policy hostile to refining, especially in California.** California's SBx 1-2 and Assembly Bill No. 1, cap-and-trade, South Coast Air Quality Management District Rule 1109.1 on refinery NOx emissions, and possible bans on hydrofluoric acid alkylation all raise costs and limit operations. Valero calls these risks "particularly acute in California." Mexico has an informal nationwide retail price cap on regular gasoline that could widen or become legally binding. - **RFS and LCFS rulemaking.** The EPA's proposed 2026–2027 RFS rules would raise renewable volume obligations, particularly for biomass-based diesel. They would also halve the RINs generated by fuels made from foreign feedstocks, lower the RIN value of hydrogenated renewable diesel of the kind DGD produces, and possibly shift 50% to 100% of small-refinery-exemption volumes onto obligated parties such as Valero. Valero warns the final obligations could be "infeasible" and could hurt both Refining and Renewable Diesel. California's amended LCFS targets a 30% cut in carbon intensity by 2030 and 90% by 2045, and limits credits from soybean, canola and sunflower oil-based fuels to 20% of each producer's total. - **Climate litigation and disclosure mandates.** Valero is a co-defendant in a suit brought in state court by an Oregon county seeking significant damages and abatement. It is also a co-defendant in a federal class action in California alleging antitrust and consumer-protection claims over LCFS compliance costs. New York and Vermont have passed climate cost-recovery laws that hold refiners strictly liable. California and New York emissions-reporting rules and the EU's sustainability directives add compliance burdens and litigation exposure. - **Plant outages and insurance gaps.** Accidents, severe weather, cyber incidents or mechanical failures at a refinery can cut earnings, and insurance does not cover every loss. The March 2026 fire at Port Arthur is an example (see Current quarter). - **Joint ventures and consolidated entities.** Valero does not fully control DGD; major decisions, including asset sales, financing and distribution policy, need Darling's approval. Valero also consolidates Central Mexico Terminals, in which it has no ownership interest. - **Demand erosion.** Better fuel efficiency, electric and hybrid vehicles, government mandates and new competitors in low-carbon fuels could all reduce demand for Valero's products. Demand for many low-carbon fuels depends on continued government support. - **Cyber and data privacy.** Valero's systems face frequent intrusion attempts, including ransomware, and AI-assisted attacks add to the risk. Data-protection regimes such as the GDPR and the California Consumer Privacy Act add compliance cost. - **Capital projects and portfolio actions.** Projects can run late or over budget, or be cancelled. Valero notes that market conditions recently moved against its forecasts for certain low-carbon projects in the Renewable Diesel segment. Strategic moves such as the California restructuring may not deliver the expected benefits. - **Financing, tax and labor.** Tighter credit markets or rating downgrades would raise funding costs. Tax laws can change, including the OBBB and Pillar Two minimum taxes. Unionized workforces at five U.S. refineries, the Canadian and U.K. refineries, and the Montreal terminal carry a risk of strikes or other work stoppages. ## Management's discussion: full year 2025 *Source: FY2025 Form 10-K, accession 0001628280-26-011499 (Item 7).* Net income attributable to Valero stockholders fell to $2.35 billion ($7.57 per diluted share) in 2025 from $2.77 billion ($8.58) in 2024. The biggest single factor was a $1.1 billion asset impairment loss ($877 million after tax) on the Benicia and Wilmington refineries, recorded in March 2025. Valero took it after approving a plan to idle Benicia by April 2026 and while considering strategic alternatives for its remaining California operations. Operating income fell $574 million to $3.18 billion, and "other income, net" fell $119 million as lower interest rates cut interest earned on cash. Net income attributable to noncontrolling interests fell $338 million as DGD earned less. Excluding the impairment and other adjustments, operating income rose $615 million to $4.41 billion. Revenue fell $7.2 billion on lower product prices, but cost of sales fell $7.8 billion as crude and other feedstock costs dropped. - **Refining:** Adjusted operating income rose $1.29 billion to $5.27 billion and refining margin rose $2.1 billion to $13.40 billion. Higher margins drove the gain: distillate (about +$1.8 billion), other products (+$940 million) and gasoline (+$650 million). Throughput rose 76,000 barrels per day (+$340 million). Partly offsetting these, crude oil differentials narrowed (about -$1.1 billion) and differentials on other feedstocks narrowed (-$600 million). Adjusted operating expenses rose $430 million, mainly energy ($197 million), employee compensation ($84 million) and maintenance ($69 million). Depreciation rose $363 million, including about $300 million of accelerated depreciation at Benicia. - **Renewable Diesel:** Operating income swung $663 million, to a $156 million loss. Feedstock costs rose about $940 million because new tariffs raised the cost of foreign feedstocks and pushed up domestic prices. Tax incentives fell in value by about $675 million when the blender's credit gave way to the 45Z credit, which covers fewer gallons at lower rates. Higher renewable diesel prices offset about $880 million. - **Ethanol:** Operating income rose $86 million to $374 million; on an adjusted basis it rose $59 million. Higher ethanol prices (+$150 million) and volumes (+$30 million) outweighed higher corn costs (-$50 million). Operations generated $5.8 billion of cash in 2025. Valero also issued $650 million of 5.150% Senior Notes due 2030 and repaid $440 million of notes that matured in 2025. Capital investment was $1.9 billion, and $4.0 billion went back to stockholders through dividends and the repurchase of 16.66 million shares for $2.6 billion. Cash, cash equivalents and restricted cash ended the year at $4.9 billion, and liquidity was $9.76 billion. Senior unsecured ratings were Baa2 (Moody's), BBB (S&P) and BBB (Fitch), all with stable outlooks. On February 25, 2026 the Board authorized a further $2.5 billion of buybacks, on top of $1.7 billion still available under the September 2024 program. The 10-K planned 2026 capital investment of $1.725 billion ($1.7 billion attributable to Valero), most of it for sustaining the business. Looking into early 2026, the 10-K expected rising global demand for gasoline, diesel and jet fuel, with jet fuel growing fastest. It expected refining capacity cuts in the U.S. and Europe, Russian refinery outages and slow start-ups of new capacity to keep the remaining refineries busy. It also expected crude differentials to widen as OPEC+ produced more sour crude and Venezuelan sanctions changed. ## Current quarter: second quarter 2026 *Source: Form 10-Q for the quarter ended June 30, 2026, accession 0001628280-26-050937 (Part I Items 1–2 and Part II), unless another accession is cited.* **Results.** Second-quarter net income attributable to Valero stockholders was $3.72 billion ($12.62 per diluted share), up from $714 million ($2.28) a year earlier. For the first six months it was $4.98 billion ($16.78), compared with $119 million ($0.37) in the first half of 2025, which carried the California impairment. Second-quarter revenue rose $14.6 billion to $44.48 billion. Operating income rose $4.2 billion to $5.20 billion, and adjusted operating income rose from $1.00 billion to $5.18 billion. Income tax expense rose $815 million and income attributable to noncontrolling interests rose $404 million, both reflecting higher earnings, the latter mainly at DGD. **What drove it.** Management attributes the quarter to strong global demand for transportation fuels while supply stayed constrained. Geopolitical developments, including conflict in the Middle East, took more refining capacity offline and pushed up both product and crude prices. Brent averaged $97.06 a barrel against $66.59 a year earlier. The U.S. Gulf Coast diesel margin over Brent (adjusted for RVO cost) widened to $43.52 from $14.79 a barrel. The RVO compliance cost rose to $13.78 from $6.14 a barrel. Valero's own cost of meeting renewable and low-carbon fuel credit obligations was $731 million in the quarter, compared with $408 million a year earlier. - **Refining:** Operating income was $4.47 billion ($4.44 billion adjusted), up from $1.27 billion. Refining margin rose $3.1 billion to $6.34 billion: distillate margins added about $2.9 billion and gasoline margins about $980 million, while narrower sweet-crude differentials cost about $780 million. Throughput averaged 2.95 million barrels per day, compared with 2.92 million. For the first half, the 10-Q says higher volumes at other refineries more than made up for lower volumes at Benicia and Port Arthur. - **Renewable Diesel:** Operating income was $717 million, against a $79 million loss a year earlier. Margin rose $825 million to $879 million, as higher product prices (about +$1.0 billion) outweighed higher feedstock costs (about -$200 million). Sales rose to 3.83 million gallons per day from 2.73 million. The segment also recorded a $51 million tariff refund (below). Management expects renewable diesel demand to stay strong because the EPA raised renewable volume obligations for 2026 and 2027, particularly for biomass-based diesel. - **Ethanol:** Operating income was $318 million, up from $54 million. Under the OBBB, certain Valero ethanol became eligible for the 45Z credit from January 1, 2026, and this quarter's operating income includes $99 million of those credits. The amount includes credits for first-quarter sales, recognized after updated emissions modeling released during the quarter raised the credits generated. Higher ethanol prices added about $90 million, higher co-product prices about $50 million and lower corn costs about $30 million. **Benicia shutdown.** Valero began idling Benicia's processing units in the first quarter and finished in April 2026. It will keep the site's operating permits and maintain the plant in an idled condition while it evaluates redevelopment options. It plans to keep supplying Northern California customers through imports or other arrangements. From the second quarter, decommissioning and redevelopment costs are reported in corporate rather than Refining. Valero settled about $70 million of Benicia's asset retirement obligation in the quarter ($170 million in the first half). In 2025 it had recognized $337 million of expected asset retirement obligations for the Benicia and Wilmington refineries combined. Lower California inventories caused a LIFO liquidation that gave a $44 million benefit. In the same quarter, Valero resolved with the Bay Area Air Quality Management District a group of Benicia violation notices issued between 2019 and 2023. No single notice exceeded the $1 million disclosure threshold. **Port Arthur fire.** On March 23, 2026, a fire in a distillate hydrotreater forced a full shutdown of the Port Arthur refinery. It restarted at reduced rates in April and was back to normal rates during the second quarter. Valero recorded a $78 million insurance recovery receivable and $15 million of directly attributable repair costs; no insurance proceeds had been received by June 30. Valero expects insurance to cover a substantial portion of the 2026 repair and capital costs, subject to its self-insured retention. Lawsuits have been filed, including a proposed class action alleging personal injury, property damage and nuisance. Some seek unspecified damages above $1 million. As of the 10-Q date, no formal regulatory enforcement action had been started. **Tariff refund.** On February 20, 2026, the U.S. Supreme Court ruled that tariffs imposed under the International Emergency Economic Powers Act were invalid. DGD filed a $51 million Phase 1 refund claim, which U.S. Customs and Border Protection accepted. Valero recorded the claim in April 2026 as a reduction in Renewable Diesel cost of materials, and a significant portion had been received by June 30. Nothing has been booked for possible later refund phases. **Cash, capital and returns.** In the first half, operations generated $7.0 billion of cash. Capital investment was $798 million. Stockholders received $3.6 billion, including the repurchase of 11.34 million shares for $2.8 billion. Second-quarter buybacks were 9.01 million shares at an average price of $251.08, which completed the September 2024 program and left $1.4 billion under the February 2026 program at June 30. On March 10, 2026, Valero issued $850 million of 5.150% Senior Notes due 2036. Cash, cash equivalents and restricted cash rose $3.2 billion to $8.1 billion, and total liquidity was $12.73 billion. The earnings release reported total debt of $9.1 billion, $2.2 billion of finance lease obligations and a net debt-to-capitalization ratio of 11% at June 30 (accession 0001628280-26-050822). Valero raised its 2026 capital investment estimate to about $2.0 billion, up from the $1.725 billion planned in the 10-K. The new figure includes about $250 million tied to the Port Arthur incident, much of which Valero expects insurance to cover; about $1.7 billion is for sustaining the business. According to the release, the $230 million St. Charles FCC optimization project was still expected to start up in the third quarter. **Third-quarter outlook.** Management expected demand for gasoline, diesel and jet fuel to stay resilient, though growth had slowed amid the Middle East conflict. It expected continued outages at Middle Eastern and Russian refineries and export facilities, along with crude-supply limits elsewhere, to keep global product inventories low. It expected crude differentials to stay volatile while shipping routes are disrupted. Routes that partly bypass the Strait of Hormuz, releases from strategic petroleum reserves and higher crude output elsewhere could ease that volatility. Ethanol demand was expected to follow normal seasonal patterns. ## Subsequent events *Source: Form 10-Q for the quarter ended June 30, 2026, accession 0001628280-26-050937 (Notes 4 and 6 and Part II Item 2), unless another accession is cited.* The 10-Q discloses these events after June 30, 2026, covering debt, a credit facility, buybacks and the dividend: - **Debenture repayment:** In July 2026, Valero repaid the $100 million outstanding principal of its 7.65% Debentures, which matured July 1, 2026. Part of the proceeds of the March 2026 note issue paid for it. The 10-Q said the rest of those proceeds were expected to be used for general corporate purposes, including repaying, repurchasing or redeeming the remaining $426 million of 3.400% Senior Notes due September 15, 2026 and the remaining $146 million of 4.375% Senior Notes due December 15, 2026, which Valero Energy Partners LP issued and Valero guarantees. - **Receivables facility:** In July 2026, Valero extended its $1.3 billion accounts receivable sales facility, which had been due in July 2026, to June 2027. - **Share repurchases:** On July 16, 2026, the Board authorized up to $5.0 billion of additional buybacks with no expiration date. This is on top of the $1.4 billion left under the February 2026 program. Valero also announced it on Form 8-K that day (accession 0001628280-26-048495). - **Dividend:** On July 16, 2026, the Board declared a quarterly dividend of $1.20 per share, payable August 31, 2026 to holders of record on July 31, 2026. The third-quarter 2026 earnings release (Form 8-K, accession 0001628280-26-066795, October 22, 2026) reported that Valero repaid the $426 million of 3.400% Senior Notes when they matured in September 2026, and that the St. Charles FCC Unit optimization project was completed during the third quarter, on schedule and within budget. Neither the 10-Q nor the Form 8-K filings that followed it through October 22, 2026 disclose an acquisition or divestiture.