10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended June 30, 2007

OR

[  ] 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	74-1828067
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	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 X No __

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one).

Large accelerated filer X Accelerated filer __ Non-accelerated filer __

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

The number of shares of the registrant’s only class of common stock, $0.01 par value, outstanding as of July 31, 2007 was 553,823,222.

VALERO ENERGY CORPORATION AND SUBSIDIARIES

INDEX

	Page
PART I — FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of June 30, 2007 and December 31, 2006		3
Consolidated Statements of Income for the Three and Six Months Ended June 30, 2007 and 2006		4
Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2007 and 2006		5
Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2007 and 2006		6
Condensed Notes to Consolidated Financial Statements		7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		30
Item 3. Quantitative and Qualitative Disclosures About Market Risk		50
Item 4. Controls and Procedures		54
PART II — OTHER INFORMATION
Item 1. Legal Proceedings		54
Item 1A. Risk Factors		55
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		55
Item 4. Submission of Matters to a Vote of Security Holders		56
Item 6. Exhibits		57
SIGNATURE		58

2

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

VALERO ENERGY CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Millions of Dollars, Except Par Value)

	June 30,			December 31,
	2007			2006
	(Unaudited)
ASSETS
Current assets:
Cash and temporary cash investments	$	2,336		$	1,590
Restricted cash		31			31
Receivables, net		4,693			4,384
Inventories		4,578			3,979
Income taxes receivable		-			32
Deferred income taxes		183			143
Prepaid expenses and other		133			145
Assets held for sale		1,613			1,527
Total current assets		13,567			11,831
Property, plant and equipment, at cost		24,452			23,421
Accumulated depreciation		(3,667	)		(3,241	)
Property, plant and equipment, net		20,785			20,180
Intangible assets, net		293			303
Goodwill		4,092			4,103
Deferred charges and other assets, net		1,613			1,336
Total assets	$	40,350		$	37,753
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current portion of long-term debt and capital lease obligations	$	66		$	475
Accounts payable		7,348			6,841
Accrued expenses		536			507
Taxes other than income taxes		603			584
Income taxes payable		522			23
Deferred income taxes		337			363
Liabilities related to assets held for sale		53			67
Total current liabilities		9,465			8,860
Long-term debt and capital lease obligations, less current portion		6,855			4,619
Deferred income taxes		4,146			4,047
Other long-term liabilities		1,769			1,622
Commitments and contingencies (Note 14)
Stockholders’ equity:
Common stock, $0.01 par value; 1,200,000,000 shares authorized; 627,501,593 and 627,501,593 shares issued		6			6
Additional paid-in capital		7,446			7,779
Treasury stock, at cost; 74,188,725 and 23,738,162 common shares		(4,876	)		(1,396	)
Retained earnings		15,204			11,951
Accumulated other comprehensive income		335			265
Total stockholders’ equity		18,115			18,605
Total liabilities and stockholders’ equity	$	40,350		$	37,753

See Condensed Notes to Consolidated Financial Statements.

3

VALERO ENERGY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(Millions of Dollars, Except per Share Amounts)

(Unaudited)

	Three Months Ended June 30,						Six Months Ended June 30,
	2007			2006			2007			2006
Operating revenues (1)	$	24,202		$	25,592		$	42,957		$	45,567
Costs and expenses:
Cost of sales		19,310			21,311			34,820			38,525
Refining operating expenses		985			911			1,919			1,795
Retail selling expenses		200			182			371			354
General and administrative expenses		177			171			322			322
Depreciation and amortization expense		337			279			659			534
Total costs and expenses		21,009			22,854			38,091			41,530
Operating income		3,193			2,738			4,866			4,037
Equity in earnings of NuStar Energy L.P.		—			10			—			22
Other income (expense), net		7			(5	)		12			(5	)
Interest and debt expense:
Incurred		(110	)		(93	)		(199	)		(189	)
Capitalized		27			45			58			81
Income from continuing operations before income tax expense		3,117			2,695			4,737			3,946
Income tax expense		1,055			876			1,587			1,299
Income from continuing operations		2,062			1,819			3,150			2,647
Income from discontinued operations, net of income tax expense		187			78			243			99
Net income		2,249			1,897			3,393			2,746
Preferred stock dividends		—			1			—			2
Net income applicable to common stock	$	2,249		$	1,896		$	3,393		$	2,744
Earnings per common share:
Continuing operations	$	3.66		$	2.97		$	5.42		$	4.30
Discontinued operations		0.33			0.13			0.42			0.16
Total	$	3.99		$	3.10		$	5.84		$	4.46
Weighted-average common shares outstanding (in millions)		563			611			581			615
Earnings per common share – assuming dilution:
Continuing operations	$	3.57		$	2.86		$	5.28		$	4.13
Discontinued operations		0.32			0.12			0.40			0.16
Total	$	3.89		$	2.98		$	5.68		$	4.29
Weighted-average common equivalent shares outstanding (in millions)		578			636			597			640
Dividends per common share	$	0.12		$	0.08		$	0.24		$	0.14
Supplemental information:
(1) Includes excise taxes on sales by our U.S. retail system	$	203		$	196		$	399		$	390

See Condensed Notes to Consolidated Financial Statements.

4

VALERO ENERGY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Millions of Dollars)

(Unaudited)

	Six Months Ended June 30,
	2007			2006
Cash flows from operating activities:
Net income	$	3,393		$	2,746
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization expense		675			553
Stock-based compensation expense		46			52
Deferred income tax expense		153			116
Changes in current assets and current liabilities		60			381
Changes in deferred charges and credits and other, net		24			(25	)
Net cash provided by operating activities		4,351			3,823
Cash flows from investing activities:
Capital expenditures		(1,042	)		(1,588	)
Deferred turnaround and catalyst costs		(230	)		(387	)
Investment in Cameron Highway Oil Pipeline Company, net		(215	)		(10	)
Advance proceeds related to sale of Lima Refinery		96			—
Contingent payments in connection with acquisitions		(75	)		(76	)
Other investing activities, net		15			28
Net cash used in investing activities		(1,451	)		(2,033	)
Cash flows from financing activities:
Long-term notes:
Borrowings		2,245			—
Repayments		(413	)		(221	)
Bank credit agreements:
Borrowings		3,000			501
Repayments		(3,000	)		(439	)
Termination of interest rate swaps		—			(54	)
Purchase of treasury stock		(4,181	)		(1,187	)
Issuance of common stock in connection with employee benefit plans		111			65
Benefit from tax deduction in excess of recognized stock-based compensation cost		215			130
Common and preferred stock dividends		(139	)		(87	)
Other financing activities		(21	)		(1	)
Net cash used in financing activities		(2,183	)		(1,293	)
Effect of foreign exchange rate changes on cash		29			4
Net increase in cash and temporary cash investments		746			501
Cash and temporary cash investments at beginning of period		1,590			436
Cash and temporary cash investments at end of period	$	2,336		$	937

See Condensed Notes to Consolidated Financial Statements.

5

VALERO ENERGY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Millions of Dollars)

(Unaudited)

	Three Months Ended June 30,					Six Months Ended June 30,
	2007			2006		2007			2006
Net income	$	2,249		$	1,897	$	3,393		$	2,746
Other comprehensive income (loss):
Foreign currency translation adjustment, net of income tax expense of $31, $0, $31 and $0		141			80		161			72
Pension and other postretirement benefits net loss reclassified into income, net of income tax benefit of $1, $0, $2 and $0		2			-		3			-
Net loss on derivative instruments designated and qualifying as cash flow hedges:
Net gain (loss) arising during the period, net of income tax (expense) benefit of $24, $0, $47 and $(1)		(45	)		-		(87	)		2
Net (gain) loss reclassified into income, net of income tax expense (benefit) of $(2), $0, $4 and $3		4			-		(7	)		(6	)
Net loss on cash flow hedges		(41	)		-		(94	)		(4	)
Other comprehensive income (loss)		102			80		70			68
Comprehensive income	$	2,351		$	1,977	$	3,463		$	2,814

See Condensed Notes to Consolidated Financial Statements.

6

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 of accounting.

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, 2007 and 2006 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, 2007 are not necessarily indicative of the results that may be expected for the year ending December 31, 2007.

The consolidated balance sheet as of December 31, 2006 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, 2006. As discussed in Note 3, the assets and liabilities related to the Lima Refinery as of December 31, 2006 have been reclassified as held for sale, and the results of operations of the Lima Refinery have been presented as discontinued operations in the statements of income for all periods presented.

On December 22, 2006, we sold our remaining ownership interest in NuStar GP Holdings, LLC (formerly Valero GP Holdings, LLC), which indirectly owns the general partner interest, the incentive distribution rights, and a 21.4% limited partner interest in NuStar Energy L.P. (formerly Valero L.P.). As a result, our consolidated statements of income reflect no equity in earnings of NuStar Energy L.P. subsequent to December 21, 2006.

Reclassifications
Previously reported amounts have been reclassified to present the operations of the Lima Refinery as discontinued operations as discussed above. In addition, operating revenues, cost of sales, and retail selling expenses reported in our consolidated statements of income for 2006 have been reclassified for certain credit card transactions. Commencing January 1, 2007, fees received from our distributors and dealers associated with certain credit card transactions processed on behalf of those distributors and dealers are being netted against third-party processing costs incurred on such transactions to better reflect the nature of the credit card transactions. These credit card reclassifications increased (decreased) amounts previously reported in 2006 as follows (in millions):

7

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

	Three Months			Six Months
	Ended			Ended
	June 30, 2006			June 30, 2006
Operating revenues	$	(20	)	$	(34	)
Cost of sales		2			5
Retail selling expenses		(22	)		(39	)

2. ACCOUNTING PRONOUNCEMENTS

FASB Statement No. 155
In February 2006, the Financial Accounting Standards Board (FASB) issued Statement No. 155, “Accounting for Certain Hybrid Financial Instruments,” which amends Statement No. 133, “Accounting for Derivative Instruments and Hedging Activities,” and Statement No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.” This statement improves the financial reporting of certain hybrid financial instruments and simplifies the accounting for these instruments. In particular, Statement No. 155 (i) permits fair value remeasurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation, (ii) clarifies which interest-only and principal-only strips are not subject to the requirements of Statement No. 133, (iii) establishes a requirement to evaluate interests in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation, (iv) clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives, and (v) amends Statement No. 140 to eliminate the prohibition on a qualifying special-purpose entity holding a derivative financial instrument that pertains to a beneficial interest other than another derivative financial instrument. The adoption of Statement No. 155 on January 1, 2007 has not affected our financial position or results of operations.

FASB Statement No. 156
In March 2006, the FASB issued Statement No. 156, “Accounting for Servicing of Financial Assets,” which amends Statement No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.” Statement No. 156 requires the initial recognition at fair value of a servicing asset or servicing liability when an obligation to service a financial asset is undertaken by entering into a servicing contract. The adoption of Statement No. 156 on January 1, 2007 has not affected our financial position or results of operations.

FASB Interpretation No. 48
In June 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109” (FIN 48). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109, “Accounting for Income Taxes,” by prescribing a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. If a tax position is more likely than not to be sustained upon examination, then an enterprise is required to recognize in its financial statements the largest amount of benefit that is greater than 50% likely of being realized upon ultimate settlement. The adoption of FIN 48 on January 1, 2007 did not materially affect our financial position or results of operations.

8

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

We have elected to classify any interest expense related to the underpayment of income taxes in “income tax expense” in our consolidated statements of income. Any penalties related to the underpayment of income taxes are recorded in the corresponding expense category in our consolidated statements of income.

EITF Issue No. 06-3
In June 2006, the FASB ratified its consensus on EITF Issue No. 06-3, “How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (That Is, Gross versus Net Presentation)” (EITF No. 06-3). The scope of EITF No. 06-3 includes any tax assessed by a governmental authority that is imposed concurrent with or subsequent to a revenue-producing transaction between a seller and a customer. For taxes within the scope of this issue that are significant in amount, the consensus requires the following disclosures: (i) the accounting policy elected for these taxes and (ii) the amount of the taxes reflected gross in the income statement on an interim and annual basis for all periods presented. The disclosure of those taxes can be provided on an aggregate basis. We adopted the consensus on January 1, 2007. We present excise taxes on sales by our U.S. retail system on a gross basis with supplemental information regarding the amount of such taxes included in revenues provided in a footnote on the face of the income statement. All other excise taxes are presented on a net basis in the income statement.

FASB Statement No. 157
In September 2006, the FASB issued Statement No. 157, “Fair Value Measurements.” Statement No. 157 defines fair value, establishes a framework for measuring fair value under GAAP, and expands disclosures about fair value measures. Statement No. 157 is effective for fiscal years beginning after November 15, 2007, with early adoption encouraged. The provisions of Statement No. 157 are to be applied on a prospective basis, with the exception of certain financial instruments for which retrospective application is required. The adoption of Statement No. 157 is not expected to materially affect our financial position or results of operations.

FASB Statement No. 159
In February 2007, the FASB issued Statement No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities.” Statement No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. Statement No. 159 is effective for fiscal years beginning after November 15, 2007, with early adoption permitted provided the entity also elects to apply the provisions of Statement No. 157. We do not expect the adoption of Statement No. 159 to have any impact on our financial position or results of operations.

3. DISPOSITION OF LIMA REFINERY

On May 2, 2007, we entered into an agreement to sell our refinery in Lima, Ohio to Husky Refining Company (Husky), a wholly owned subsidiary of Husky Energy Inc. As a result, the assets and liabilities related to the Lima Refinery as of June 30, 2007 and December 31, 2006 have been presented in the consolidated balance sheets as “assets held for sale” and “liabilities related to assets held for sale,” respectively. In addition, the consolidated statements of income reflect the operations related to the Lima Refinery in “income from discontinued operations, net of income tax expense” for all periods presented.

9

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

On July 3, 2007, we consummated the sale of our Lima Refinery to Husky with an effective date of July 1, 2007. Proceeds from the sale were $1.9 billion, plus $540 million representing a preliminary working capital settlement. The working capital settlement is expected to be finalized within 90 days after the effective date of the sale. In connection with the sale, we entered into a transition services agreement with Husky under which we agreed to provide certain accounting and administrative services to Husky beginning July 3, 2007, with the services terminating by July 31, 2008.

Financial information related to the assets and liabilities sold is summarized as follows (in millions):

	June 30,		December 31,
	2007		2006
Current assets (primarily inventory)	$	533	$	456
Property, plant and equipment, net		929		918
Goodwill		108		108
Deferred charges and other assets, net		43		45
Assets held for sale	$	1,613	$	1,527
Current liabilities, including current portion of capital lease obligation	$	15	$	29
Capital lease obligation, excluding current portion		38		38
Liabilities related to assets held for sale	$	53	$	67

	Three Months Ended June 30,				Six Months Ended June 30,
	2007		2006		2007		2006
Operating revenues	$	1,288	$	1,169	$	2,231	$	2,121
Income before income tax expense		300		128		391		163

4. INVENTORIES

Inventories consisted of the following (in millions):

	June 30,		December 31,
	2007		2006
Refinery feedstocks	$	2,318	$	1,680
Refined products and blendstocks		2,007		2,056
Convenience store merchandise		88		85
Materials and supplies		165		158
Inventories	$	4,578	$	3,979

As of June 30, 2007 and December 31, 2006, the replacement cost (market value) of LIFO inventories exceeded their LIFO carrying amounts by approximately $4.7 billion and $2.9 billion, respectively.

10

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

5. INVESTMENT IN AND TRANSACTIONS WITH NUSTAR ENERGY L.P.

Our ownership interest in NuStar Energy L.P. as of June 30, 2006 was 23.4%, which was composed of a 2% general partner interest, incentive distribution rights, and a 21.4% limited partner interest. The limited partner interest was represented by 10,222,630 common units of NuStar Energy L.P., of which 9,599,322 were previously subordinated units that converted to common units on May 8, 2006 upon the termination of the subordination period in accordance with the terms of NuStar Energy L.P.’s partnership agreement.

Through the date of termination of the subordination period, NuStar Energy L.P. had issued common units to the public on three separate occasions, which had diluted our ownership percentage. These three issuances resulted in increases (or credits, known as SAB 51 credits due to the Securities and Exchange Commission Staff Accounting Bulletin that provides accounting guidance for such credits) in our proportionate share of NuStar Energy L.P.’s capital because, in each case, the issuance price per unit exceeded our carrying amount per unit at the time of issuance. We had not recognized any SAB 51 credits in our consolidated financial statements through March 31, 2006 and were not permitted to do so until the subordinated units converted to common units. In conjunction with the conversion of the subordinated units held by us to common units in the second quarter of 2006, we recognized the entire balance of $158 million in SAB 51 credits as an increase in our investment in NuStar Energy L.P. and $101 million after tax as an increase to “additional paid-in capital” in our consolidated balance sheet.

NuStar GP Holdings, LLC completed public offerings in July and December 2006 through which we sold all of our ownership interest in NuStar GP Holdings, LLC. As a result, we no longer owned any interest in NuStar Energy L.P. as of December 31, 2006. Financial information reported by NuStar Energy L.P. for the three months and six months ended June 30, 2006 is summarized below (in millions):

	Three Months		Six Months
	Ended		Ended
	June 30, 2006		June 30, 2006
Revenues	$	280	$	554
Operating income		47		103
Net income		32		71

Related-Party Transactions
Through December 31, 2006, we provided NuStar Energy L.P. with certain corporate functions for an annual fee as prescribed by a services agreement. Effective January 1, 2007, the services agreement was amended to provide for limited services. The amended services agreement provided for a termination date of December 31, 2010, unless we terminated the agreement earlier, in which case we were required to pay a termination fee of $13 million. In April, we notified NuStar Energy L.P. of our decision to terminate the services agreement. Accordingly, the $13 million termination fee was accrued and paid during the second quarter of 2007.

11

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

The following table summarizes the results of transactions with NuStar Energy L.P. for the three months and six months ended June 30, 2006 (in millions):

	Three Months		Six Months
	Ended		Ended
	June 30, 2006		June 30, 2006
Fees and expenses charged by us to NuStar Energy L.P.	$	31	$	57
Fees and expenses charged to us by NuStar Energy L.P.		64		125

6. DEBT

On February 1, 2007, we redeemed our 9.25% senior notes for $183 million, or 104.625% of stated value. These notes had a carrying amount of $187 million on the date of redemption, resulting in a gain of $4 million that was included in “other income (expense), net” in the consolidated statement of income.

In April 2007, we repaid in full at the scheduled maturity date $230 million related to our 6.125% notes. Also in April 2007, we borrowed $3 billion under a 364-day term credit agreement with a financial institution to fund the accelerated share repurchase program discussed in Note 7. The term loan bore interest at LIBOR plus a margin, or an alternate base rate as defined under the term credit agreement. In May 2007, we repaid $500 million of the borrowings under the term credit agreement. The remaining balance of $2.5 billion was repaid in June 2007 using available cash and proceeds from our issuance of long-term notes described below.

On June 8, 2007, we issued $750 million of 6.125% notes due June 15, 2017 and $1.5 billion of 6.625% notes due June 15, 2037. Proceeds from the issuance of these notes totaled $2.245 billion, before deducting underwriting discounts of $18 million.

During the six months ended June 30, 2007, we had no borrowings under our revolving credit facilities or our short-term uncommitted bank credit facilities.

7. STOCKHOLDERS’ EQUITY

Treasury Stock
During the six months ended June 30, 2007 and 2006, we purchased 61.9 million and 20.4 million shares of our common stock at a cost of $4.2 billion and $1.2 billion, respectively. These purchases were made in connection with the administration of our employee benefit plans and the $6 billion common stock purchase program authorized by our board of directors, including the effect of the accelerated share repurchase program discussed below. During the six months ended June 30, 2007, we issued 11.4 million shares from treasury at an average cost of $61.28 per share, and for the six months ended June 30, 2006, we issued 9.6 million shares from treasury at an average cost of $53.52 per share, for our employee benefit plans.

Accelerated Share Repurchase Program
On April 25, 2007, our board of directors approved an amendment to our $2 billion common stock purchase program to increase the authorized purchases under the program to $6 billion. In conjunction with the increase in our common stock purchase program, we entered into an agreement with a financial institution to purchase $3 billion of our shares under an accelerated share repurchase program, and in late

12

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

April, 42.1 million shares were purchased under this agreement. As described in Note 6 above, the purchase of these shares was initially funded with a 364-day term credit agreement, which we subsequently replaced with longer-term financing. The cost of the shares purchased under this accelerated share repurchase program was to be adjusted at the expiration of the program, with the final purchase cost based on a discount to the average trading price of our common stock, weighted by the daily volume of shares traded, during the program period. Any adjustment to the cost could be paid in cash or stock, at our option. Prior to the settlement of the accelerated share repurchase program, the number of shares of our common stock included in the calculation of “earnings per common share – assuming dilution” for the three months and six months ended June 30, 2007 included the number of shares that would have been payable under the agreement assuming we elected settlement in shares of our common stock. The weighted-average number of shares included in each respective period was based on the initial shares purchased under the program multiplied by the price adjustment as of June 30, 2007 using the final purchase price formula described above, divided by our closing price as of June 30, 2007.

The accelerated share repurchase program was completed on July 23, 2007, resulting in an additional $94.5 million payment by us for the shares purchased. At that time, we elected to pay this additional amount in cash.

Common Stock Dividends
On July 12, 2007, our board of directors declared a regular quarterly cash dividend of $0.12 per common share payable on September 6, 2007 to holders of record at the close of business on August 8, 2007.

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

8. EARNINGS PER COMMON SHARE

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

	Three Months Ended June 30,				Six Months Ended June 30,
	2007		2006		2007		2006
Earnings per common share from continuing operations:
Income from continuing operations	$	2,062	$	1,819	$	3,150	$	2,647
Preferred stock dividends		-		1		-		2
Income from continuing operations applicable to common stock	$	2,062	$	1,818	$	3,150	$	2,645
Weighted-average common shares outstanding		563		611		581		615
Earnings per common share from continuing operations	$	3.66	$	2.97	$	5.42	$	4.30
Earnings per common share from continuing operations – assuming dilution:
Income from continuing operations applicable to common equivalent shares	$	2,062	$	1,819	$	3,150	$	2,647
Weighted-average common shares outstanding		563		611		581		615
Effect of dilutive securities:
Stock options		13		19		14		19
Performance awards and other benefit plans		1		1		1		1
Contingently issuable shares related to accelerated share repurchase program		1		-		1		-
Mandatory convertible preferred stock		-		5		-		5
Weighted-average common equivalent shares outstanding		578		636		597		640
Earnings per common share from continuing operations – assuming dilution	$	3.57	$	2.86	$	5.28	$	4.13

14

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

9. STATEMENTS OF CASH FLOWS

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,
	2007			2006
Decrease (increase) in current assets:
Receivables, net	$	(268	)	$	(648	)
Inventories		(638	)		(573	)
Income taxes receivable		32			46
Prepaid expenses and other		14			(105	)
Increase (decrease) in current liabilities:
Accounts payable		464			1,316
Accrued expenses		(71	)		(148	)
Taxes other than income taxes		3			(1	)
Income taxes payable		524			494
Changes in current assets and current liabilities	$	60		$	381

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 long-term debt and capital lease obligations, as well as the effect of certain noncash investing and financing activities discussed below;

• previously accrued capital expenditures, deferred turnaround and catalyst costs, and contingent earn-out payments, as well as advance proceeds related to the sale of the Lima Refinery, are reflected in investing activities in the consolidated statements of cash flows;

• changes in assets held for sale and liabilities related to assets held for sale in the consolidated balance sheets are reflected in the line item to which the changes relate in the table above and in the consolidated statements of cash flows; and

• 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, 2007.

Noncash investing activities for the six months ended June 30, 2006 included the pre-tax recognition of $158 million of SAB 51 credits related to our investment in NuStar Energy L.P. as discussed in Note 5. Noncash investing activities also included adjustments to property, plant and equipment, goodwill and certain current and noncurrent assets and liabilities resulting from adjustments to the purchase price allocation related to the acquisitions of Premcor and UDS. Noncash financing activities for the six months ended June 30, 2006 included the conversion of 747,260 shares of preferred stock into 1,481,066 shares of our common stock.

15

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

Cash flows related to the discontinued operations of the Lima Refinery have been combined with the cash flows from continuing operations within each category in the consolidated statement of cash flows for each period presented. Cash provided by operating activities related to our discontinued results of operations was $260 million and $113 million for the six months ended June 30, 2007 and 2006, respectively. Cash used in investing activities related to the Lima Refinery were $14 million and $70 million for the six months ended June 30, 2007 and 2006, respectively.

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

	Six Months Ended June 30,
	2007		2006
Interest paid (net of amount capitalized)	$	139	$	164
Income taxes paid (net of tax refunds received)		811		569

10. PRICE RISK MANAGEMENT ACTIVITIES

The net gain (loss) recognized in income representing the amount of hedge ineffectiveness was as follows (in millions):

	Three Months Ended June 30,						Six Months Ended June 30,
	2007			2006			2007			2006
Fair value hedges	$	(1	)	$	(3	)	$	(2	)	$	(6	)
Cash flow hedges		(7	)		5			(6	)		5

The above amounts were included in “cost of sales” in the consolidated statements of income. No component of the derivative instruments’ gains or losses was excluded from the assessment of hedge effectiveness. No amounts were recognized in income for hedged firm commitments that no longer qualify as fair value hedges.

For cash flow hedges, gains and losses reported in “accumulated other comprehensive income” in the consolidated balance sheets are reclassified into “cost of sales” when the forecasted transactions affect income. During the six months ended June 30, 2007, we recognized in “accumulated other comprehensive income” unrealized after-tax losses of $87 million on certain cash flow hedges, primarily related to forward sales of distillates and associated forward purchases of crude oil, with $48 million of cumulative after-tax losses on cash flow hedges remaining in “accumulated other comprehensive income” as of June 30, 2007. We expect that the deferred losses as of June 30, 2007 will be reclassified into “cost of sales” over the next nine months as a result of hedged transactions that are forecasted to occur. The amount ultimately realized in income, however, will differ as commodity prices change. For the six months ended June 30, 2007 and 2006, there were no amounts reclassified from “accumulated other comprehensive income” into income as a result of the discontinuance of cash flow hedge accounting.

11. INCOME TAXES

As discussed in Note 2, on January 1, 2007, we adopted the provisions of FIN 48. We did not recognize a significant change in our liability for uncertain tax positions as a result of our implementation of FIN 48; however, certain amounts previously reported in “deferred income taxes” were reclassified to “other long-

16

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

term liabilities” in the consolidated balance sheet as of January 1, 2007. In accordance with the provisions of FIN 48, prior period amounts were not reclassified. The total amount of unrecognized tax benefits as of January 1, 2007 was $179 million of which $85 million, if recognized, would impact our effective rate. Accrued liabilities for interest and penalties related to unrecognized tax benefits were $43 million as of January 1, 2007. We anticipate that any matters resolved with tax authorities within the next 12 months will not result in a material change in our financial position or results of operations. As of June 30, 2007, we remain subject to examination in the U.S. federal and various state jurisdictions for the tax years from 1999 through 2006 and Canadian federal and various provincial jurisdictions for tax years from 2001 to 2006.

12. SEGMENT INFORMATION

Segment information for our two reportable segments, refining and retail, was as follows (in millions):

	Refining		Retail		Corporate			Total
Three months ended June 30, 2007:
Operating revenues from external customers	$	21,883	$	2,319	$	-		$	24,202
Intersegment revenues		1,654		-		-			1,654
Operating income (loss)		3,327		56		(190	)		3,193
Three months ended June 30, 2006:
Operating revenues from external customers		23,361		2,231		-			25,592
Intersegment revenues		1,601		-		-			1,601
Operating income (loss)		2,873		46		(181	)		2,738
Six months ended June 30, 2007:
Operating revenues from external customers		38,732		4,225		-			42,957
Intersegment revenues		2,963		-		-			2,963
Operating income (loss)		5,103		109		(346	)		4,866
Six months ended June 30, 2006:
Operating revenues from external customers		41,445		4,122		-			45,567
Intersegment revenues		2,912		-		-			2,912
Operating income (loss)		4,311		67		(341	)		4,037

Total assets by reportable segment were as follows (in millions):

	June 30,		December 31,
	2007		2006
Refining	$	35,583	$	34,275
Retail		1,919		1,826
Corporate		2,848		1,652
Total consolidated assets	$	40,350	$	37,753

The entire balance of goodwill as of June 30, 2007 and December 31, 2006 has been included in the total assets of the refining reportable segment. Total assets related to the Lima Refinery have been included in the refining reportable segment for both periods presented.

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

13. EMPLOYEE BENEFIT PLANS

The components of net periodic benefit cost related to our defined benefit plans were as follows for the three and six months ended June 30, 2007 and 2006 (in millions):

							Other Postretirement
	Pension Plans						Benefit Plans
	2007			2006			2007			2006
Three months ended June 30:
Components of net periodic benefit cost:
Service cost	$	24		$	25		$	4		$	4
Interest cost		17			16			6			6
Expected return on plan assets		(21	)		(15	)		-			-
Amortization of:
Prior service cost (credit)		-			-			(2	)		(3	)
Net loss		3			4			1			1
Net periodic benefit cost before special charges		23			30			9			8
Charge for special termination benefits		7			—			1			—
Net periodic benefit cost	$	30		$	30		$	10		$	8
Six months ended June 30:
Components of net periodic benefit cost:
Service cost	$	48		$	50		$	7		$	7
Interest cost		35			32			13			12
Expected return on plan assets		(42	)		(29	)		-			-
Amortization of:
Prior service cost (credit)		1			1			(5	)		(5	)
Net loss		5			7			3			3
Net periodic benefit cost before special charges		47			61			18			17
Charge for special termination benefits		7			—			1			—
Net periodic benefit cost	$	54		$	61		$	19		$	17

Although we have only $1 million of minimum required contributions to our qualified pension plans during 2007 under the Employee Retirement Income Security Act, we expect to contribute $36 million to our qualified plans during 2007. There were no contributions made during the six months ended June 30, 2007. For the six months ended June 30, 2006, we contributed $45 million to our qualified pension plans.

14. COMMITMENTS AND CONTINGENCIES

Accounts Receivable Sales Facility
As of June 30, 2007, we had an accounts receivable sales facility with a group of third-party financial institutions to sell on a revolving basis up to $1 billion of eligible trade receivables, which matures in August 2008. As of June 30, 2007 and December 31, 2006, the amount of eligible receivables sold to the third-party financial institutions was $1 billion.

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

Contingent Earn-Out Agreements
In June 2007, we made a previously accrued payment of $25 million related to the Delaware City Refinery contingent earn-out agreement. In both January 2007 and January 2006, we made previously accrued earn-out payments of $50 million related to the acquisition of the St. Charles Refinery. In the second quarter of 2006, we made an earn-out contingency payment of $26 million to Salomon Inc in conjunction with our acquisition of Basis Petroleum, Inc.

The following table summarizes the aggregate payments we have made through June 30, 2007 and payment limitations related to the following acquisitions (in millions):

	Aggregate
	Payments		Annual
	Made Through		Maximum		Aggregate
	June 30, 2007		Limit		Limit
St. Charles Refinery	$	150	$	50	$	175
Delaware City Refinery		50		25		50

Tax Matters
We are subject to extensive tax liabilities, including federal, state, and foreign income taxes and transactional taxes such as excise, sales/use, payroll, franchise, withholding, and ad valorem taxes. New tax laws and regulations and changes in existing tax laws and regulations are continuously being enacted or proposed that could result in increased expenditures for tax liabilities in the future. Certain of these liabilities are subject to periodic audits by the respective taxing authority. Subsequent changes to our tax liabilities as a result of these audits may subject us to interest and penalties.

Effective January 1, 2007, the Government of Aruba (GOA) enacted a turnover tax on revenues from the sale of goods produced and services rendered in Aruba. The turnover tax, which is 3% for on-island sales and services and 1% on export sales, is being assessed by the GOA on sales by our Aruba Refinery. However, due to a previous tax holiday that was granted to our Aruba Refinery by the GOA through December 31, 2010, we believe that sales by our Aruba Refinery should not be subject to this turnover tax. As a result, no amounts have been accrued with respect to this turnover tax. We have filed a request for arbitration with the Netherlands Arbitration Institute pursuant to which we will seek to enforce our rights under the tax holiday.

Litigation
MTBE Litigation
As of August 1, 2007, we were named as a defendant in 82 active cases alleging liability related to MTBE contamination in groundwater. The plaintiffs are generally water providers, governmental authorities, and private water companies alleging that refiners and marketers of MTBE and gasoline containing MTBE are liable for manufacturing or distributing a defective product. We have been named in these lawsuits together with many other refining industry companies. We are being sued primarily as a refiner and marketer of MTBE and gasoline containing MTBE. We do not own or operate gasoline station facilities in most of the geographic locations in which damage is alleged to have occurred. The lawsuits generally seek individual, unquantified compensatory and punitive damages, injunctive relief, and attorneys’ fees. Although most of the cases are pending in federal court and consolidated for pre-trial proceedings in the U.S. District Court for the Southern District of New York (Multi-District Litigation Docket No. 1358, In re: Methyl-Tertiary Butyl Ether Products Liability Litigation), a recent ruling on

19

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

jurisdiction from the U.S. Court of Appeals for the Second Circuit may result in a remand of many of the cases to state court. Two cases, Riverview Water District and California Water Services Company, have already been remanded to state courts in California. Valero is involved in four cases that have been selected as “focus cases” for discovery and pre-trial motions. One of these, the Suffolk County Water Authority case, is scheduled for trial in March 2008. Activity in the “non-focus” cases is generally stayed. We believe that we have strong defenses to these claims and are vigorously defending the cases. We have recorded a loss contingency liability with respect to this matter in accordance with FASB Statement No. 5. However, due to the inherent uncertainty of litigation, we believe that it is reasonably possible (as defined in FASB Statement No. 5) that we may suffer a loss with respect to one or more of the lawsuits in excess of the amount accrued. We believe that such an outcome in any one of these lawsuits would not have a material adverse effect on our results of operations or financial position. However, we believe that an adverse result in all or a substantial number of these cases could have a material effect on our results of operations and financial position. An estimate of the possible loss or range of loss from an adverse result in all or substantially all of these cases cannot reasonably be made.

Retail Fuel Temperature Litigation
Along with several other defendants in the retail petroleum marketing business, as of August 1, 2007, we were named in 17 consumer class action lawsuits relating to fuel temperature. The complaints, filed in federal courts in several states, allege that because fuel volume increases with fuel temperature, the defendants have violated state consumer protection laws by failing to adjust the volume of fuel when the fuel temperature exceeded 60 degrees Fahrenheit. The complaints seek to certify classes of retail consumers who purchased fuel in various locations. The complaints seek an order compelling the installation of temperature correction devices as well as associated monetary relief. In June 2007, the federal lawsuits were consolidated into a multidistrict litigation case in the U.S. District Court for the District of Kansas (Multi-District Litigation Docket No. 1840, In re: Motor Fuel Temperature Sales Practices Litigation). We believe that we have several strong defenses to these lawsuits and intend to contest them. We have not recorded a loss contingency liability with respect to this matter, but due to the inherent uncertainty of litigation, we believe that it is reasonably possible (as defined in FASB Statement No. 5) that we may suffer a loss with respect to one or more of the lawsuits. An estimate of the possible loss or range of loss from an adverse result in all or substantially all of these cases cannot reasonably be made.

Other Litigation
We are also a party to additional claims and legal proceedings arising in the ordinary course of business. We believe that there is only a remote likelihood that future costs related to known contingent liabilities related to these legal proceedings would have a material adverse impact on our consolidated results of operations or financial position.

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

15. CONDENSED CONSOLIDATING FINANCIAL INFORMATION

In conjunction with the acquisition of Premcor Inc. (Premcor) on September 1, 2005, Valero Energy Corporation has fully and unconditionally guaranteed the following debt of The Premcor Refining Group Inc. (PRG), a wholly owned subsidiary of Valero Energy Corporation, that was outstanding as of June 30, 2007:

• 6.75% senior notes due February 2011,

• 6.125% senior notes due May 2011,

• 9.5% senior notes due February 2013,

• 6.75% senior notes due May 2014, and

• 7.5% senior notes due June 2015.

In addition, PRG has fully and unconditionally guaranteed all of the outstanding debt issued by Valero Energy Corporation.

The following condensed consolidating financial information is provided for Valero and PRG as an alternative to providing separate financial statements for PRG. The accounts for all companies reflected herein are presented using the equity method of accounting for investments in subsidiaries.

21

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

Condensed Consolidating Balance Sheet as of June 30, 2007
(unaudited, in millions)

	Valero						Other Non-
	Energy						Guarantor
	Corporation			PRG			Subsidiaries			Eliminations			Consolidated
ASSETS
Current assets:
Cash and temporary cash investments	$	1,364		$	-		$	972		$	-		$	2,336
Restricted cash		22			2			7			-			31
Receivables, net		2			94			4,597			-			4,693
Inventories		-			441			4,137			-			4,578
Income taxes receivable		-			4			-			(4	)		-
Deferred income taxes		-			-			183			-			183
Prepaid expenses and other		-			8			125			-			133
Assets held for sale		-			935			1,613			(935	)		1,613
Total current assets		1,388			1,484			11,634			(939	)		13,567
Property, plant and equipment, at cost		-			6,530			17,922			-			24,452
Accumulated depreciation		-			(311	)		(3,356	)		-			(3,667	)
Property, plant and equipment, net		-			6,219			14,566			-			20,785
Intangible assets, net		-			2			291			-			293
Goodwill		-			1,819			2,273			-			4,092
Investment in Valero Energy affiliates		6,515			856			801			(8,172	)		-
Long-term notes receivable from affiliates		17,999			-			-			(17,999	)		-
Deferred charges and other assets, net		216			166			1,231			-			1,613
Total assets	$	26,118		$	10,546		$	30,796		$	(27,110	)	$	40,350
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current portion of long-term debt and capital lease obligations	$	63		$	-		$	3		$	-		$	66
Accounts payable		77			269			7,002			-			7,348
Accrued expenses		80			43			413			-			536
Taxes other than income taxes		-			16			587			-			603
Income taxes payable		524			-			2			(4	)		522
Deferred income taxes		65			272			-			-			337
Liabilities related to assets held for sale		-			-			53			-			53
Total current liabilities		809			600			8,060			(4	)		9,465
Long-term debt and capital lease obligations, less current portion		5,524			1,290			41			-			6,855
Long-term notes payable to affiliates		-			7,656			10,343			(17,999	)		-
Deferred income taxes		841			7			3,298			-			4,146
Other long-term liabilities		829			192			748			-			1,769
Stockholders’ equity:
Common stock		6			-			2			(2	)		6
Additional paid-in capital		7,446			100			4,113			(4,213	)		7,446
Treasury stock		(4,876	)		-			-			-			(4,876	)
Retained earnings		15,204			700			4,249			(4,949	)		15,204
Accumulated other comprehensive income (loss)		335			1			(58	)		57			335
Total stockholders’ equity		18,115			801			8,306			(9,107	)		18,115
Total liabilities and stockholders’ equity	$	26,118		$	10,546		$	30,796		$	(27,110	)	$	40,350

22

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

Condensed Consolidating Balance Sheet as of December 31, 2006
(in millions)

	Valero						Other Non-
	Energy						Guarantor
	Corporation			PRG			Subsidiaries			Eliminations			Consolidated
ASSETS
Current assets:
Cash and temporary cash investments	$	712		$	-		$	878		$	-		$	1,590
Restricted cash		22			2			7			-			31
Receivables, net		1			76			4,307			-			4,384
Inventories		-			377			3,602			-			3,979
Income tax receivable		-			5			32			(5	)		32
Deferred income taxes		-			-			143			-			143
Prepaid expenses and other		-			12			133			-			145
Assets held for sale		-			977			550			-			1,527
Total current assets		735			1,449			9,652			(5	)		11,831
Property, plant and equipment, at cost		-			6,481			16,940			-			23,421
Accumulated depreciation		-			(231	)		(3,010	)		-			(3,241	)
Property, plant and equipment, net		-			6,250			13,930			-			20,180
Intangible assets, net		-			3			300			-			303
Goodwill		-			1,826			2,277			-			4,103
Investment in Valero Energy affiliates		2,114			705			101			(2,920	)		-
Long-term notes receivable from affiliates		20,920			-			-			(20,920	)		-
Deferred income taxes		-			111			-			(111	)		-
Deferred charges and other assets, net		196			184			956			-			1,336
Total assets	$	23,965		$	10,528		$	27,216		$	(23,956	)	$	37,753
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current portion of long-term debt and capital lease obligations	$	285		$	187		$	3		$	-		$	475
Accounts payable		80			281			6,480			-			6,841
Accrued expenses		76			76			355			-			507
Taxes other than income taxes		-			19			565			-			584
Income taxes payable		21			-			7			(5	)		23
Deferred income taxes		91			272			-			-			363
Liabilities related to assets held for sale		-			67			-			-			67
Total current liabilities		553			902			7,410			(5	)		8,860
Long-term debt and capital lease obligations, less current portion		3,281			1,295			43			-			4,619
Long-term notes payable to affiliates		-			8,003			12,917			(20,920	)		-
Deferred income taxes		868			-			3,290			(111	)		4,047
Other long-term liabilities		658			227			737			-			1,622
Stockholders’ equity:
Common stock		6			-			2			(2	)		6
Additional paid-in capital		7,779			100			1,458			(1,558	)		7,779
Treasury stock		(1,396	)		-			-			-			(1,396	)
Retained earnings		11,951			-			1,322			(1,322	)		11,951
Accumulated other comprehensive income		265			1			37			(38	)		265
Total stockholders’ equity		18,605			101			2,819			(2,920	)		18,605
Total liabilities and stockholders’ equity	$	23,965		$	10,528		$	27,216		$	(23,956	)	$	37,753

23

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

Condensed Consolidating Statement of Income for the Three Months Ended June 30, 2007
(unaudited, in millions)

	Valero						Other Non-
	Energy						Guarantor
	Corporation			PRG			Subsidiaries			Eliminations			Consolidated
Operating revenues	$	-		$	6,080		$	24,936		$	(6,814	)	$	24,202
Costs and expenses:
Cost of sales		-			5,116			21,008			(6,814	)		19,310
Refining operating expenses		-			209			776			-			985
Retail selling expenses		-			-			200			-			200
General and administrative expenses		-			4			173			-			177
Depreciation and amortization expense		-			77			260			-			337
Total costs and expenses		-			5,406			22,417			(6,814	)		21,009
Operating income		-			674			2,519			-			3,193
Equity in earnings of subsidiaries		2,095			276			540			(2,911	)		-
Other income (expense), net		342			(99	)		247			(483	)		7
Interest and debt expense:
Incurred		(120	)		(143	)		(330	)		483			(110	)
Capitalized		-			1			26			-			27
Income from continuing operations before income tax expense		2,317			709			3,002			(2,911	)		3,117
Income tax expense (1)		68			169			818			-			1,055
Income from continuing operations		2,249			540			2,184			(2,911	)		2,062
Income from discontinued operations, net of income tax expense		-			-			187			-			187
Net income	$	2,249		$	540		$	2,371		$	(2,911	)	$	2,249

(1) The income tax expense reflected in each column does not include any tax effect of the equity in earnings of subsidiaries.

24

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

Condensed Consolidating Statement of Income for the Three Months Ended June 30, 2006
(unaudited, in millions)

	Valero						Other Non-
	Energy						Guarantor
	Corporation			PRG			Subsidiaries			Eliminations			Consolidated
Operating revenues	$	-		$	7,227		$	25,273		$	(6,908	)	$	25,592
Costs and expenses:
Cost of sales		-			6,671			21,548			(6,908	)		21,311
Refining operating expenses		-			195			716			-			911
Retail selling expenses		-			-			182			-			182
General and administrative expenses		2			11			158			-			171
Depreciation and amortization expense		-			90			189			-			279
Total costs and expenses		2			6,967			22,793			(6,908	)		22,854
Operating income (loss)		(2	)		260			2,480			-			2,738
Equity in earnings of subsidiaries		1,747			176			284			(2,207	)		-
Equity in earnings of NuStar Energy L.P.		-			-			10			-			10
Other income (expense), net		410			(23	)		437			(829	)		(5	)
Interest and debt expense:
Incurred		(190	)		(237	)		(495	)		829			(93	)
Capitalized		-			15			30			-			45
Income from continuing operations before income tax expense (benefit)		1,965			191			2,746			(2,207	)		2,695
Income tax expense (benefit) (1)		68			(15	)		823			-			876
Income from continuing operations		1,897			206			1,923			(2,207	)		1,819
Income from discontinued operations, net of income tax expense		-			78			-			-			78
Net income		1,897			284			1,923			(2,207	)		1,897
Preferred stock dividends		1			-			-			-			1
Net income applicable to common stock	$	1,896		$	284		$	1,923		$	(2,207	)	$	1,896

(1) The income tax expense (benefit) reflected in each column does not include any tax effect of the equity in earnings of subsidiaries.

25

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

Condensed Consolidating Statement of Income for the Six Months Ended June 30, 2007
(unaudited, in millions)

	Valero						Other Non-
	Energy						Guarantor
	Corporation			PRG			Subsidiaries			Eliminations			Consolidated
Operating revenues	$	-		$	10,952		$	41,266		$	(9,261	)	$	42,957
Costs and expenses:
Cost of sales		-			9,397			34,684			(9,261	)		34,820
Refining operating expenses		-			408			1,511			-			1,919
Retail selling expenses		-			-			371			-			371
General and administrative expenses		-			7			315			-			322
Depreciation and amortization expense		-			150			509			-			659
Total costs and expenses		-			9,962			37,390			(9,261	)		38,091
Operating income		-			990			3,876			-			4,866
Equity in earnings of subsidiaries		3,022			342			703			(4,067	)		-
Other income (expense), net		699			(131	)		436			(992	)		12
Interest and debt expense:
Incurred		(214	)		(305	)		(672	)		992			(199	)
Capitalized		-			2			56			-			58
Income from continuing operations before income tax expense		3,507			898			4,399			(4,067	)		4,737
Income tax expense (1)		114			259			1,214			-			1,587
Income from continuing operations		3,393			639			3,185			(4,067	)		3,150
Income from discontinued operations, net of income tax expense		-			64			179			-			243
Net income	$	3,393		$	703		$	3,364		$	(4,067	)	$	3,393

(1) The income tax expense reflected in each column does not include any tax effect of the equity in earnings of subsidiaries.

26

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

Condensed Consolidating Statement of Income for the Six Months Ended June 30, 2006
(unaudited, in millions)

	Valero						Other Non-
	Energy						Guarantor
	Corporation			PRG			Subsidiaries			Eliminations			Consolidated
Operating revenues	$	-		$	11,885		$	45,025		$	(11,343	)	$	45,567
Costs and expenses:
Cost of sales		-			10,941			38,927			(11,343	)		38,525
Refining operating expenses		-			376			1,419			-			1,795
Retail selling expenses		-			-			354			-			354
General and administrative expenses		2			26			294			-			322
Depreciation and amortization expense		-			128			406			-			534
Total costs and expenses		2			11,471			41,400			(11,343	)		41,530
Operating income (loss)		(2	)		414			3,625			-			4,037
Equity in earnings of subsidiaries		2,470			328			488			(3,286	)		-
Equity in earnings of NuStar Energy L.P.		-			-			22			-			22
Other income (expense), net		721			(4	)		578			(1,300	)		(5	)
Interest and debt expense:
Incurred		(278	)		(396	)		(815	)		1,300			(189	)
Capitalized		-			28			53			-			81
Income from continuing operations before income tax expense (benefit)		2,911			370			3,951			(3,286	)		3,946
Income tax expense (benefit) (1)		165			(19	)		1,153			-			1,299
Income from continuing operations		2,746			389			2,798			(3,286	)		2,647
Income from discontinued operations, net of income tax expense		-			99			-			-			99
Net income		2,746			488			2,798			(3,286	)		2,746
Preferred stock dividends		2			-			-			-			2
Net income applicable to common stock	$	2,744		$	488		$	2,798		$	(3,286	)	$	2,744

(1) The income tax expense (benefit) reflected in each column does not include any tax effect of the equity in earnings of subsidiaries.

27

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

Condensed Consolidating Statement of Cash Flows for the Six Months Ended June 30, 2007
(unaudited, in millions)

	Valero						Other Non-
	Energy						Guarantor
	Corporation			PRG (1)			Subsidiaries (1)			Eliminations			Consolidated
Net cash provided by operating activities	$	985		$	591		$	2,775		$	-		$	4,351
Cash flows from investing activities:
Capital expenditures		-			(168	)		(874	)		-			(1,042	)
Deferred turnaround and catalyst costs		-			(24	)		(206	)		-			(230	)
Investment in Cameron Highway Oil Pipeline Company, net		-			-			(215	)		-			(215	)
Advance proceeds related to sale of Lima Refinery		-			-			96			-			96
Contingent payments in connection with acquisitions		-			(25	)		(50	)		-			(75	)
Investments in subsidiaries		(3,658	)		(58	)		-			3,716			-
Return of investment		2,222			-			3			(2,225	)		-
Net intercompany loan repayments		3,100			-			-			(3,100	)		-
Other investing activities, net		-			5			10			-			15
Net cash provided by (used in) investing activities		1,664			(270	)		(1,236	)		(1,609	)		(1,451	)
Cash flows from financing activities:
Long-term notes:
Borrowings		2,245			-			-			-			2,245
Repayments		(230	)		(183	)		-			-			(413	)
Bank credit agreements:
Borrowings		3,000			-			-			-			3,000
Repayments		(3,000	)		-			-			-			(3,000	)
Purchase of treasury stock		(4,181	)		-			-			-			(4,181	)
Benefit from tax deduction in excess of recognized stock-based compensation cost		215			-			-			-			215
Dividends to parent		-			(3	)		(2,222	)		2,225			-
Capital contributions from parent		-			-			3,716			(3,716	)		-
Net intercompany repayments		-			(135	)		(2,965	)		3,100			-
Other financing activities, net		(47	)		-			(2	)		-			(49	)
Net cash used in financing activities		(1,998	)		(321	)		(1,473	)		1,609			(2,183	)
Effect of foreign exchange rate changes on cash		-			-			29			-			29
Net increase in cash and temporary cash investments		651			-			95			-			746
Cash and temporary cash investments at beginning of period		712			-			878			-			1,590
Cash and temporary cash investments at end of period	$	1,363		$	-		$	973		$	-		$	2,336

(1) The information presented herein excludes a $686 million noncash capital contribution of property and other assets, net of certain liabilities, from PRG to Lima Refining Company (included in “Other Non-Guarantor Subsidiaries”) on April 1, 2007, in anticipation of the pending sale of the Lima Refinery as discussed in Note 3.

28

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

Condensed Consolidating Statement of Cash Flows for the Six Months Ended June 30, 2006
(unaudited, in millions)

	Valero						Other Non-
	Energy						Guarantor
	Corporation			PRG			Subsidiaries			Eliminations			Consolidated
Net cash provided by operating activities	$	897		$	370		$	2,556		$	-		$	3,823
Cash flows from investing activities:
Capital expenditures		-			(513	)		(1,075	)		-			(1,588	)
Deferred turnaround and catalyst costs		-			(118	)		(269	)		-			(387	)
Contingent payments in connection with acquisitions		-			-			(76	)		-			(76	)
Net intercompany loan repayments		1,030			-			-			(1,030	)		-
Other investing activities, net		-			-			18			-			18
Net cash provided by (used in) investing activities		1,030			(631	)		(1,402	)		(1,030	)		(2,033	)
Cash flows from financing activities:
Long-term note repayments		(220	)		(1	)		-			-			(221	)
Bank credit agreements:
Borrowings		8			-			493			-			501
Repayments		(8	)		-			(431	)		-			(439	)
Termination of interest rate swaps		(54	)		-			-			-			(54	)
Purchase of treasury stock		(1,187	)		-			-			-			(1,187	)
Benefit from tax deduction in excess of recognized stock-based compensation cost		130			-			-			-			130
Net intercompany borrowings (repayments)		-			258			(1,288	)		1,030			-
Other financing activities, net		(22	)		-			(1	)		-			(23	)
Net cash provided by (used in) financing activities		(1,353	)		257			(1,227	)		1,030			(1,293	)
Effect of foreign exchange rate changes on cash		-			-			4			-			4
Net increase (decrease) in cash and temporary cash investments		574			(4	)		(69	)		-			501
Cash and temporary cash investments at beginning of period		11			5			420			-			436
Cash and temporary cash investments at end of period	$	585		$	1		$	351		$	-		$	937

29

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

FORWARD-LOOKING STATEMENTS

This Form 10-Q, including without limitation our discussion below under the heading “Results of Operations — Outlook,” includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. You can identify our forward-looking statements by the words “anticipate,” “believe,” “expect,” “plan,” “intend,” “estimate,” “project,” “projection,” “predict,” “budget,” “forecast,” “goal,” “guidance,” “target,” “will,” “could,” “should,” “may,” and similar expressions.

These forward-looking statements include, among other things, statements regarding:

• future refining margins, including gasoline and distillate margins;

• future retail margins, including gasoline, diesel, home heating oil, and convenience store merchandise margins;

• expectations regarding feedstock costs, including crude oil differentials, and operating expenses;

• anticipated levels of crude oil and refined product inventories;

• our anticipated level of capital investments, including deferred refinery turnaround and catalyst costs and capital expenditures for environmental and other purposes, and the effect of those capital investments on our results of operations;

• anticipated trends in the supply of and demand for crude oil and other feedstocks and refined products in the United States, Canada, and elsewhere;

• expectations regarding environmental, tax, and other regulatory initiatives; and

• the effect of general economic and other conditions on refining and retail industry fundamentals.

We based our forward-looking statements on our current expectations, estimates, and projections about ourselves and our industry. We caution that these statements are not guarantees of future performance and involve risks, uncertainties, and assumptions that we cannot predict. In addition, we based many of these forward-looking statements on assumptions about future events that may prove to be inaccurate. Accordingly, our actual results may differ materially from the future performance that we have expressed or forecast in the forward-looking statements. Differences between actual results and any future performance suggested in these forward-looking statements could result from a variety of factors, including the following:

• acts of terrorism aimed at either our facilities or other facilities that could impair our ability to produce or transport refined products or receive feedstocks;

• political and economic conditions in nations that consume refined products, including the United States, and in crude oil producing regions, including the Middle East and South America;

• the domestic and foreign supplies of refined products such as gasoline, diesel fuel, jet fuel, home heating oil, and petrochemicals;

• the domestic and foreign supplies of crude oil and other feedstocks;

• the ability of the members of the Organization of Petroleum Exporting Countries (OPEC) to agree on and to maintain crude oil price and production controls;

• the level of consumer demand, including seasonal fluctuations;

• refinery overcapacity or undercapacity;

• the actions taken by competitors, including both pricing and the expansion and retirement of refining capacity in response to market conditions;

• environmental, tax, and other regulations at the municipal, state, and federal levels and in foreign countries;

30

• the level of foreign imports of refined products;

• accidents or other unscheduled shutdowns affecting our refineries, machinery, pipelines, or equipment, or those of our suppliers or customers;

• changes in the cost or availability of transportation for feedstocks and refined products;

• the price, availability, and acceptance of alternative fuels and alternative-fuel vehicles;

• delay of, cancellation of, or failure to implement planned capital projects and realize the various assumptions and benefits projected for such projects or cost overruns in constructing such planned capital projects;

• earthquakes, hurricanes, tornadoes, and irregular weather, which can unforeseeably affect the price or availability of natural gas, crude oil and other feedstocks, and refined products;

• rulings, judgments, or settlements in litigation or other legal or regulatory matters, including unexpected environmental remediation costs, in excess of any reserves or insurance coverage;

• legislative or regulatory action, including the introduction or enactment of federal, state, municipal, or foreign legislation or rulemakings, which may adversely affect our business or operations;

• changes in the credit ratings assigned to our debt securities and trade credit;

• changes in currency exchange rates, including the value of the Canadian dollar relative to the U.S. dollar; and

• overall economic conditions.

Any one of these factors, or a combination of these factors, could materially affect our future results of operations and whether any forward-looking statements ultimately prove to be accurate. Our forward-looking statements are not guarantees of future performance, and actual results and future performance may differ materially from those suggested in any forward-looking statements. We do not intend to update these statements unless we are required by the securities laws to do so.

All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the foregoing. We undertake no obligation to publicly release the results of any revisions to any such forward-looking statements that may be made to reflect events or circumstances after the date of this report or to reflect the occurrence of unanticipated events.

31

OVERVIEW

In this overview, we describe some of the primary factors that we believe affected our operations in the first six months of 2007. Our profitability is substantially determined by the spread between the price of refined products and the price of crude oil, referred to as the “refined product margin.” The strong industry fundamentals for refined products that we experienced throughout 2006 continued during the first six months of 2007. Gasoline and distillate demand in the United States remained strong through the first six months of 2007, and growing worldwide demand has increased competition for gasoline and distillate supplies. In addition, other factors such as unscheduled refinery outages and the implementation of more restrictive sulfur regulations on gasoline and diesel resulted in tight supplies of refined products and favorable refined product margins during the first six months of 2007.

Since approximately 65% of our total crude oil throughput represents sour crude oil and acidic sweet crude oil feedstocks that are purchased at prices less than sweet crude oil, our profitability is also significantly affected by the spread between sweet crude oil and sour crude oil prices, referred to as the “sour crude oil differential.” First and second quarter 2007 sour crude oil differentials relative to West Texas Intermediate (WTI) crude oil declined compared to the strong 2006 first and second quarter differentials as the price of WTI weakened. However, the sour crude oil differentials relative to light, sweet crude oils other than WTI in the first six months of 2007 were comparable to those experienced in the first six months of 2006.

On February 16, 2007, our McKee Refinery was shut down due to a fire originating in its propane deasphalting unit, resulting in estimated reduced operating income of approximately $250 million in the first six months of 2007. The refinery recommenced operations on April 12 at a reduced throughput rate, with run rates by the end of June having increased to about 90% of the refinery’s capacity.

The favorable gasoline and distillate margins discussed above contributed to strong operating results in the second quarter and first six months of 2007. We reported net income of $2.2 billion, or $3.89 per share, for the second quarter of 2007 compared to $1.9 billion, or $2.98 per share, for the second quarter of 2006, and net income of $3.4 billion, or $5.68 per share, for the first six months of 2007 compared to $2.7 billion, or $4.29 per share, for the first six months of 2006. As a result of these strong earnings during the first six months of 2007, we generated $4.4 billion of net cash from operating activities. During the second quarter of 2007, we entered into an accelerated share repurchase program as discussed in Note 7 of Notes to Consolidated Financial Statements under which we purchased 42.1 million shares of our common stock for $3 billion, which was partially financed by $2.25 billion of long-term notes issued in the second quarter.

Effective July 1, 2007, we consummated the sale of our refinery in Lima, Ohio to Husky Refining Company (Husky), a wholly owned subsidiary of Husky Energy Inc. The sales price was $1.9 billion, plus $540 million for a preliminary working capital settlement.

32

RESULTS OF OPERATIONS

Second Quarter 2007 Compared to Second Quarter 2006

Financial Highlights
(millions of dollars, except per share amounts)

	Three Months Ended June 30,
	2007 (a)			2006 (a)			Change
Operating revenues (b)	$	24,202		$	25,592		$	(1,390	)
Costs and expenses:
Cost of sales (b)		19,310			21,311			(2,001	)
Refining operating expenses		985			911			74
Retail selling expenses (b)		200			182			18
General and administrative expenses		177			171			6
Depreciation and amortization expense:
Refining		302			248			54
Retail		22			21			1
Corporate		13			10			3
Total costs and expenses		21,009			22,854			(1,845	)
Operating income		3,193			2,738			455
Equity in earnings of NuStar Energy L.P. (c)		-			10			(10	)
Other income (expense), net		7			(5	)		12
Interest and debt expense:
Incurred		(110	)		(93	)		(17	)
Capitalized		27			45			(18	)
Income from continuing operations before income tax expense		3,117			2,695			422
Income tax expense		1,055			876			179
Income from continuing operations		2,062			1,819			243
Income from discontinued operations, net of income tax expense		187			78			109
Net income		2,249			1,897			352
Preferred stock dividends		-			1			(1	)
Net income applicable to common stock	$	2,249		$	1,896		$	353
Earnings per common share – assuming dilution:
Continuing operations	$	3.57		$	2.86		$	0.71
Discontinued operations		0.32			0.12			0.20
Total	$	3.89		$	2.98		$	0.91

See the footnote references on page 36.

33

Operating Highlights
(millions of dollars, except per barrel and per gallon amounts)

	Three Months Ended June 30,
	2007			2006			Change
Refining (a):
Operating income	$	3,327		$	2,873		$	454
Throughput margin per barrel (d)	$	18.14		$	15.59		$	2.55
Operating costs per barrel:
Refining operating expenses	$	3.87		$	3.52		$	0.35
Depreciation and amortization		1.19			0.96			0.23
Total operating costs per barrel	$	5.06		$	4.48		$	0.58
Throughput volumes (thousand barrels per day):
Feedstocks:
Heavy sour crude		618			674			(56	)
Medium/light sour crude		650			641			9
Acidic sweet crude		86			51			35
Sweet crude		717			736			(19	)
Residuals		273			278			(5	)
Other feedstocks		150			151			(1	)
Total feedstocks		2,494			2,531			(37	)
Blendstocks and other		300			312			(12	)
Total throughput volumes		2,794			2,843			(49	)
Yields (thousand barrels per day):
Gasolines and blendstocks		1,277			1,354			(77	)
Distillates		913			879			34
Petrochemicals		81			74			7
Other products (e)		517			530			(13	)
Total yields		2,788			2,837			(49	)
Retail – U.S.:
Operating income	$	37		$	24		$	13
Company-operated fuel sites (average)		958			988			(30	)
Fuel volumes (gallons per day per site)		5,006			4,916			90
Fuel margin per gallon	$	0.202		$	0.145		$	0.057
Merchandise sales	$	269		$	251		$	18
Merchandise margin (percentage of sales)		29.8	%		30.5	%		(0.7	)%
Margin on miscellaneous sales (b)	$	24		$	22		$	2
Retail selling expenses (b)	$	139		$	123		$	16
Depreciation and amortization expense	$	16		$	15		$	1
Retail – Canada:
Operating income	$	19		$	22		$	(3	)
Fuel volumes (thousand gallons per day)		3,144			3,114			30
Fuel margin per gallon	$	0.222		$	0.237		$	(0.015	)
Merchandise sales	$	47		$	43		$	4
Merchandise margin (percentage of sales)		28.3	%		28.0	%		0.3	%
Margin on miscellaneous sales	$	9		$	7		$	2
Retail selling expenses	$	61		$	59		$	2
Depreciation and amortization expense	$	6		$	6		$	-

See the footnote references on page 36.

34

Refining Operating Highlights by Region (f)
(millions of dollars, except per barrel amounts)

	Three Months Ended June 30,
	2007		2006		Change
Gulf Coast:
Operating income	$	1,935	$	1,715	$	220
Throughput volumes (thousand barrels per day)		1,543		1,589		(46	)
Throughput margin per barrel (d)	$	18.52	$	15.92	$	2.60
Operating costs per barrel:
Refining operating expenses	$	3.65	$	3.28	$	0.37
Depreciation and amortization		1.09		0.78		0.31
Total operating costs per barrel	$	4.74	$	4.06	$	0.68
Mid-Continent (a):
Operating income	$	483	$	456	$	27
Throughput volumes (thousand barrels per day)		373		430		(57	)
Throughput margin per barrel (d)	$	19.96	$	15.70	$	4.26
Operating costs per barrel:
Refining operating expenses	$	4.42	$	2.97	$	1.45
Depreciation and amortization		1.34		1.06		0.28
Total operating costs per barrel	$	5.76	$	4.03	$	1.73
Northeast:
Operating income	$	523	$	291	$	232
Throughput volumes (thousand barrels per day)		577		520		57
Throughput margin per barrel (d)	$	14.83	$	11.73	$	3.10
Operating costs per barrel:
Refining operating expenses	$	3.62	$	4.34	$	(0.72	)
Depreciation and amortization		1.25		1.26		(0.01	)
Total operating costs per barrel	$	4.87	$	5.60	$	(0.73	)
West Coast:
Operating income	$	386	$	411	$	(25	)
Throughput volumes (thousand barrels per day)		301		304		(3	)
Throughput margin per barrel (d)	$	20.35	$	20.29	$	0.06
Operating costs per barrel:
Refining operating expenses	$	4.81	$	4.20	$	0.61
Depreciation and amortization		1.42		1.24		0.18
Total operating costs per barrel	$	6.23	$	5.44	$	0.79

See the footnote references on page 36.

35

Average Market Reference Prices and Differentials (g)
(dollars per barrel)

	Three Months Ended June 30,
	2007			2006		Change
Feedstocks:
West Texas Intermediate (WTI) crude oil	$	64.89		$	70.40	$	(5.51	)
WTI less sour crude oil at U.S. Gulf Coast (h)		3.08			7.24		(4.16	)
WTI less Mars crude oil		2.70			6.67		(3.97	)
WTI less Alaska North Slope (ANS) crude oil		(0.86	)		1.62		(2.48	)
WTI less Maya crude oil		9.60			15.68		(6.08	)
Products:
U.S. Gulf Coast:
Conventional 87 gasoline less WTI		28.95			20.01		8.94
No. 2 fuel oil less WTI		14.95			11.78		3.17
Ultra-low-sulfur diesel less WTI (i)		22.26			19.31		2.95
Propylene less WTI		16.67			10.54		6.13
U.S. Mid-Continent:
Conventional 87 gasoline less WTI		34.09			19.03		15.06
Low-sulfur diesel less WTI		25.61			20.73		4.88
U.S. Northeast:
Conventional 87 gasoline less WTI		26.15			16.94		9.21
No. 2 fuel oil less WTI		15.41			11.73		3.68
Lube oils less WTI		53.25			49.81		3.44
U.S. West Coast:
CARBOB 87 gasoline less ANS		37.36			33.11		4.25
CARB diesel less ANS		26.16			28.14		(1.98	)

The following notes relate to references on pages 33 through 36.

(a)	On May 2, 2007, we entered into an agreement to sell our Lima Refinery to Husky. Therefore, the results of operations of the Lima Refinery are reported as discontinued operations for the three months ended June 30, 2007 and 2006, and all refining operating highlights, both consolidated and for the Mid-Continent region, exclude the Lima Refinery for the three months ended June 30, 2007 and 2006. The sale of the Lima Refinery was consummated effective July 1, 2007.
(b)	Certain amounts previously reported in 2006 for operating revenues, cost of sales, and retail selling expenses have been reclassified for comparability with amounts reported in 2007.
(c)	On December 22, 2006, we sold our remaining ownership interest in NuStar GP Holdings, LLC (formerly Valero GP Holdings, LLC), which indirectly owns the general partner interest, the incentive distribution rights, and a 21.4% limited partner interest in NuStar Energy L.P. (formerly Valero L.P.). As a result, the financial highlights reflect no equity in earnings of NuStar Energy L.P. subsequent to December 21, 2006.
(d)	Throughput margin per barrel represents operating revenues less cost of sales divided by throughput volumes.
(e)	Other products primarily include gas oils, No. 6 fuel oil, petroleum coke, and asphalt.
(f)	The regions reflected herein contain the following refineries: the Gulf Coast refining region includes the Corpus Christi East, Corpus Christi West, Texas City, Houston, Three Rivers, Krotz Springs, St. Charles, Aruba, and Port Arthur Refineries; the Mid-Continent refining region includes the McKee, Ardmore, and Memphis Refineries; the Northeast refining region includes the Quebec City, Paulsboro, and Delaware City Refineries; and the West Coast refining region includes the Benicia and Wilmington Refineries.
(g)	The average market reference prices and differentials, with the exception of the propylene and lube oil differentials, are based on posted prices from Platts Oilgram. The propylene differential is based on posted propylene prices in Chemical Market Associates, Inc. and the lube oil differential is based on Exxon Mobil Corporation postings provided by Independent Commodity Information Services-London Oil Reports. The average market reference prices and differentials are presented to provide users of the consolidated financial statements with economic indicators that significantly affect our operations and profitability.
(h)	The market reference differential for sour crude oil is based on 50% Arab Medium and 50% Arab Light posted prices.
(i)	The market reference differential for ultra-low-sulfur diesel for the three months ended June 30, 2006 represents only the months of May and June, since the ultra-low-sulfur diesel less WTI market reference was not available prior to May 1, 2006.

36

General

Operating revenues decreased 5% for the second quarter of 2007 compared to the second quarter of 2006 primarily as a result of lower sales volumes between the two periods. Operating income of $3.2 billion and income from continuing operations of $2.1 billion for the three months ended June 30, 2007 increased approximately 17% and 13%, respectively, from the corresponding amounts in the second quarter of 2006 primarily due to a $454 million increase in refining segment operating income. The refining segment operating income and income from continuing operations exclude the operations of the Lima Refinery which was classified as discontinued operations due to our pending sale of that refinery as discussed in Note 3 of Condensed Notes to Consolidated Financial Statements.

Refining

Operating income for our refining segment increased from $2.9 billion for the second quarter of 2006 to $3.3 billion for the second quarter of 2007, resulting mainly from a 16% increase in throughput margin per barrel, partially offset by a $128 million increase in refining operating expenses (including depreciation and amortization expense) and a 49,000 barrel-per-day decrease in throughput volumes.

Total refining throughput margins for the second quarter of 2007 compared to the second quarter of 2006 were impacted by the following factors:

• Overall gasoline and distillate margins increased in the second quarter of 2007 compared to the second quarter of 2006. The improvement in refined product margins for the second quarter of 2007 was primarily due to an increase in demand combined with a decline in refined product inventory levels resulting from various factors, including lower imports, more stringent product specifications and regulations, and unplanned refinery outages.

• Sour crude oil feedstock differentials to WTI crude oil during the second quarter of 2007 were lower than the differentials in the second quarter of 2006. However, other light, sweet crude oils priced at a premium to WTI in the second quarter of 2007; thus, sour crude oil feedstock differentials relative to those other light, sweet crude oils in the second quarter of 2007 were comparable to the wide differentials experienced in the second quarter of 2006. These wide differentials are attributable to continued ample supplies of sour crude oils and heavy sour residual fuel oils on the world market. Differentials on sour crude oil feedstocks also continued to benefit from increased demand for sweet crude oil resulting from lower sulfur specifications for gasoline and diesel and a global increase in refined product demand.

• Margins on other refined products such as propylene, petroleum coke, and sulfur improved from the second quarter of 2006 to the second quarter of 2007 due to a decrease in the price of crude oil between the periods.

• Throughput volumes declined by 49,000 barrels per day in the second quarter of 2007 compared to the second quarter of 2006 due mainly to a continuing reduction in throughput volumes at our McKee Refinery as a result of a fire originating in its propane deasphalting unit in February 2007.

Refining operating expenses, excluding depreciation and amortization expense, were 8% higher for the quarter ended June 30, 2007 compared to the quarter ended June 30, 2006 due primarily to increases in employee compensation and related benefits, energy costs, and maintenance expense. Refining depreciation and amortization expense increased 22% from the second quarter of 2006 to the second quarter of 2007 primarily due to the implementation of new capital projects and increased turnaround and catalyst amortization.

37

Retail

Retail operating income of $56 million for the quarter ended June 30, 2007 was approximately 22% higher than the $46 million reported for the quarter ended June 30, 2006. This increase in operating income was mainly attributable to an approximate $0.06 per gallon increase in average fuel margins in our U.S. retail operations, partially offset by increased selling expenses of $16 million attributable to costs associated with a reorganization of our U.S. retail operations.

Corporate Expenses and Other

General and administrative expenses, including corporate depreciation and amortization expense, increased $9 million from the second quarter of 2006 to the second quarter of 2007. This increase was primarily due to a $13 million termination fee paid in the second quarter of 2007 for the cancellation of our services agreement with NuStar Energy L.P., partially offset by a decrease in stock-based compensation expense from the second quarter of 2006 to the second quarter of 2007.

Equity in earnings of NuStar Energy L.P. is not reflected in the second quarter of 2007 due to the sale of our remaining ownership interest in NuStar GP Holdings, LLC in December 2006.

Income tax expense increased $179 million from the second quarter of 2006 to the second quarter of 2007 mainly as a result of higher operating income.

Income from discontinued operations, net of income tax expense, increased $109 million from the second quarter of 2006 to the second quarter of 2007 due primarily to an 89% increase in Lima Refinery’s throughput margin per barrel, from $12.69 per barrel in 2006 to $24.00 per barrel in 2007.

38

Six Months Ended June 30, 2007 Compared to Six Months Ended June 30, 2006

Financial Highlights
(millions of dollars, except per share amounts)

	Six Months Ended June 30,
	2007 (a)			2006 (a)			Change
Operating revenues (b)	$	42,957		$	45,567		$	(2,610	)
Costs and expenses:
Cost of sales (b)		34,820			38,525			(3,705	)
Refining operating expenses		1,919			1,795			124
Retail selling expenses (b)		371			354			17
General and administrative expenses		322			322			-
Depreciation and amortization expense:
Refining		595			474			121
Retail		40			41			(1	)
Corporate		24			19			5
Total costs and expenses		38,091			41,530			(3,439	)
Operating income		4,866			4,037			829
Equity in earnings of NuStar Energy L.P. (c)		-			22			(22	)
Other income (expense), net		12			(5	)		17
Interest and debt expense:
Incurred		(199	)		(189	)		(10	)
Capitalized		58			81			(23	)
Income from continuing operations before income tax expense		4,737			3,946			791
Income tax expense		1,587			1,299			288
Income from continuing operations		3,150			2,647			503
Income from discontinued operations, net of income tax expense		243			99			144
Net income		3,393			2,746			647
Preferred stock dividends		-			2			(2	)
Net income applicable to common stock	$	3,393		$	2,744		$	649
Earnings per common share – assuming dilution:
Continuing operations	$	5.28		$	4.13		$	1.15
Discontinued operations		0.40			0.16			0.24
Total	$	5.68		$	4.29		$	1.39

See the footnote references on page 42.

39

Operating Highlights
(millions of dollars, except per barrel and per gallon amounts)

	Six Months Ended June 30,
	2007			2006			Change
Refining (a):
Operating income	$	5,103		$	4,311		$	792
Throughput margin per barrel (d)	$	15.19		$	13.02		$	2.17
Operating costs per barrel:
Refining operating expenses	$	3.83		$	3.55		$	0.28
Depreciation and amortization		1.18			0.94			0.24
Total operating costs per barrel	$	5.01		$	4.49		$	0.52
Throughput volumes (thousand barrels per day):
Feedstocks:
Heavy sour crude		654			719			(65	)
Medium/light sour crude		632			597			35
Acidic sweet crude		85			58			27
Sweet crude		711			737			(26	)
Residuals		259			217			42
Other feedstocks		151			167			(16	)
Total feedstocks		2,492			2,495			(3	)
Blendstocks and other		278			296			(18	)
Total throughput volumes		2,770			2,791			(21	)
Yields (thousand barrels per day):
Gasolines and blendstocks		1,263			1,337			(74	)
Distillates		912			870			42
Petrochemicals		82			77			5
Other products (e)		513			506			7
Total yields		2,770			2,790			(20	)
Retail – U.S.:
Operating income	$	61		$	24		$	37
Company-operated fuel sites (average)		961			992			(31	)
Fuel volumes (gallons per day per site)		4,994			4,899			95
Fuel margin per gallon	$	0.163		$	0.122		$	0.041
Merchandise sales	$	502		$	470		$	32
Merchandise margin (percentage of sales)		29.9	%		30.1	%		(0.2	)%
Margin on miscellaneous sales (b)	$	49		$	42		$	7
Retail selling expenses (b)	$	252		$	239		$	13
Depreciation and amortization expense	$	27		$	28		$	(1	)
Retail – Canada:
Operating income	$	48		$	43		$	5
Fuel volumes (thousand gallons per day)		3,257			3,199			58
Fuel margin per gallon	$	0.234		$	0.231		$	0.003
Merchandise sales	$	84		$	79		$	5
Merchandise margin (percentage of sales)		28.8	%		28.0	%		0.8	%
Margin on miscellaneous sales	$	18		$	15		$	3
Retail selling expenses	$	119		$	115		$	4
Depreciation and amortization expense	$	13		$	13		$	-

See the footnote references on page 42.

40

Refining Operating Highlights by Region (f)
(millions of dollars, except per barrel amounts)

	Six Months Ended June 30,
	2007		2006		Change
Gulf Coast:
Operating income	$	3,018	$	2,718	$	300
Throughput volumes (thousand barrels per day)		1,534		1,550		(16	)
Throughput margin per barrel (d)	$	15.47	$	13.73	$	1.74
Operating costs per barrel:
Refining operating expenses	$	3.55	$	3.23	$	0.32
Depreciation and amortization		1.05		0.81		0.24
Total operating costs per barrel	$	4.60	$	4.04	$	0.56
Mid-Continent (a):
Operating income	$	574	$	523	$	51
Throughput volumes (thousand barrels per day)		363		391		(28	)
Throughput margin per barrel (d)	$	14.81	$	11.72	$	3.09
Operating costs per barrel:
Refining operating expenses	$	4.57	$	3.37	$	1.20
Depreciation and amortization		1.50		0.96		0.54
Total operating costs per barrel	$	6.07	$	4.33	$	1.74
Northeast:
Operating income	$	812	$	470	$	342
Throughput volumes (thousand barrels per day)		575		548		27
Throughput margin per barrel (d)	$	12.73	$	10.05	$	2.68
Operating costs per barrel:
Refining operating expenses	$	3.69	$	4.22	$	(0.53	)
Depreciation and amortization		1.24		1.08		0.16
Total operating costs per barrel	$	4.93	$	5.30	$	(0.37	)
West Coast:
Operating income	$	699	$	600	$	99
Throughput volumes (thousand barrels per day)		298		302		(4	)
Throughput margin per barrel (d)	$	18.97	$	16.50	$	2.47
Operating costs per barrel:
Refining operating expenses	$	4.60	$	4.24	$	0.36
Depreciation and amortization		1.41		1.28		0.13
Total operating costs per barrel	$	6.01	$	5.52	$	0.49

See the footnote references on page 42.

41

Average Market Reference Prices and Differentials (g)
(dollars per barrel)

	Six Months Ended June 30,
	2007		2006		Change
Feedstocks:
WTI crude oil	$	61.45	$	66.84	$	(5.39	)
WTI less sour crude oil at U.S. Gulf Coast (h)		4.50		7.61		(3.11	)
WTI less Mars crude oil		3.81		7.19		(3.38	)
WTI less ANS crude oil		0.72		2.02		(1.30	)
WTI less Maya crude oil		11.11		15.65		(4.54	)
Products:
U.S. Gulf Coast:
Conventional 87 gasoline less WTI		19.58		14.00		5.58
No. 2 fuel oil less WTI		12.38		10.32		2.06
Ultra-low-sulfur diesel less WTI (i)		19.81		N.A.		N.A.
Propylene less WTI		16.44		8.84		7.60
U.S. Mid-Continent:
Conventional 87 gasoline less WTI		23.11		13.56		9.55
Low-sulfur diesel less WTI		22.97		17.00		5.97
U.S. Northeast:
Conventional 87 gasoline less WTI		19.08		11.85		7.23
No. 2 fuel oil less WTI		13.38		10.38		3.00
Lube oils less WTI		58.53		48.36		10.17
U.S. West Coast:
CARBOB 87 gasoline less ANS		33.67		24.16		9.51
CARB diesel less ANS		26.35		24.55		1.80

The following notes relate to references on pages 39 through 42.

(a)	On May 2, 2007, we entered into an agreement to sell our Lima Refinery to Husky. Therefore, the results of operations of the Lima Refinery are reported as discontinued operations for the six months ended June 30, 2007 and 2006, and all refining operating highlights, both consolidated and for the Mid-Continent region, exclude the Lima Refinery for the six months ended June 30, 2007 and 2006. The sale of the Lima Refinery was consummated effective July 1, 2007.
(b)	Certain amounts previously reported in 2006 for operating revenues, cost of sales, and retail selling expenses have been reclassified for comparability with amounts reported in 2007.
(c)	On December 22, 2006, we sold our remaining ownership interest in NuStar GP Holdings, LLC (formerly Valero GP Holdings, LLC), which indirectly owns the general partner interest, the incentive distribution rights, and a 21.4% limited partner interest in NuStar Energy L.P. (formerly Valero L.P.). As a result, the financial highlights reflect no equity in earnings of NuStar Energy L.P. subsequent to December 21, 2006.
(d)	Throughput margin per barrel represents operating revenues less cost of sales divided by throughput volumes.
(e)	Other products primarily include gas oils, No. 6 fuel oil, petroleum coke, and asphalt.
(f)	The regions reflected herein contain the following refineries: the Gulf Coast refining region includes the Corpus Christi East, Corpus Christi West, Texas City, Houston, Three Rivers, Krotz Springs, St. Charles, Aruba, and Port Arthur Refineries; the Mid-Continent refining region includes the McKee, Ardmore, and Memphis Refineries; the Northeast refining region includes the Quebec City, Paulsboro, and Delaware City Refineries; and the West Coast refining region includes the Benicia and Wilmington Refineries.
(g)	The average market reference prices and differentials, with the exception of the propylene and lube oil differentials, are based on posted prices from Platts Oilgram. The propylene differential is based on posted propylene prices in Chemical Market Associates, Inc. and the lube oil differential is based on Exxon Mobil Corporation postings provided by Independent Commodity Information Services-London Oil Reports. The average market reference prices and differentials are presented to provide users of the consolidated financial statements with economic indicators that significantly affect our operations and profitability.
(h)	The market reference differential for sour crude oil is based on 50% Arab Medium and 50% Arab Light posted prices.
(i)	The market reference differential for ultra-low-sulfur diesel was not available prior to May 1, 2006, and therefore no market reference differential is presented for the six months ended June 30, 2006.

42

General

Operating revenues decreased 6% for the first six months of 2007 compared to the first six months of 2006 primarily as a result of lower sales volumes between the two periods. Operating income increased $829 million, or 21%, and income from continuing operations increased $503 million, or 19%, from the six months ended June 30, 2006 to the six months ended June 30, 2007 primarily due to a $792 million increase in refining segment operating income and a $42 million increase in retail segment operating income. The refining segment operating income and income from continuing operations exclude the operations of the Lima Refinery which was classified as discontinued operations due to our pending sale of that refinery as discussed in Note 3 of Condensed Notes to Consolidated Financial Statements.

Refining

Operating income for our refining segment increased from $4.3 billion for the first six months of 2006 to $5.1 billion for the first six months of 2007, resulting mainly from a 17% increase in throughput margin per barrel, partially offset by a $245 million increase in refining operating expenses (including depreciation and amortization expense) and a 21,000 barrel-per-day decrease in throughput volumes.

Total refining throughput margins for the first six months of 2007 compared to the first six months of 2006 were impacted by the following factors:

• Gasoline and distillate margins improved in all of our refining regions in the first six months of 2007 compared to the margins in the first six months of 2006. The increase in refined product margins for the first six months of 2007 was primarily due to stronger demand combined with a decline in refined product inventory levels resulting from lower imports, more stringent product specifications and regulations, heavy industry turnaround activity, and unplanned refinery outages.

• Sour crude oil feedstock differentials to WTI crude oil during the first six months of 2007 were lower than the differentials in the first six months of 2006. However, other light, sweet crude oils priced at a premium to WTI in the first six months of 2007; thus, sour crude oil feedstock differentials relative to those other light, sweet crude oils in the first six months of 2007 were comparable to the wide differentials experienced in the first six months of 2006. These wide differentials are attributable to continued ample supplies of sour crude oils and heavy sour residual fuel oils on the world market. Differentials on sour crude oil feedstocks also continued to benefit from increased demand for sweet crude oil resulting from lower sulfur specifications for gasoline and diesel and a global increase in refined product demand.

• Margins on other refined products such as propylene, petroleum coke, and sulfur improved from the first six months of 2006 to the first six months of 2007 due to a decrease in the price of crude oil between the periods.

• Throughput volumes declined by 21,000 barrels per day in the first six months of 2007 compared to the first six months of 2006 due mainly to a continuing reduction in throughput volumes at our McKee Refinery as a result of a fire originating in its propane deasphalting unit in February 2007.

Refining operating expenses, excluding depreciation and amortization expense, were 7% higher for the six months ended June 30, 2007 compared to the six months ended June 30, 2006 due primarily to increases in employee compensation and related benefits and maintenance expense. Refining depreciation and amortization expense increased 26% from the first six months of 2006 to the first six months of 2007 primarily due to the implementation of new capital projects, increased turnaround and catalyst amortization, and the write-off of costs related to the McKee Refinery as a result of the fire discussed above.

43

Retail

Retail operating income of $109 million for the six months ended June 30, 2007 was approximately 63% higher than the $67 million reported for the six months ended June 30, 2006. This increase in operating income was mainly attributable to a $0.04 per gallon increase in average fuel margins in our U.S. retail operations.

Corporate Expenses and Other

General and administrative expenses, including corporate depreciation and amortization expense, were essentially unchanged from the first six months of 2006 to the first six months of 2007. Reductions in expense resulting from 2006 expenses attributable to Premcor headquarters personnel that were not incurred in the first six months of 2007 and lower stock-based compensation were offset by executive retirement expenses and the services agreement termination fee paid to NuStar Energy L.P. that were incurred in the first six months of 2007.

Equity in earnings of NuStar Energy L.P. is not reflected in the first six months of 2007 due to the sale of our remaining ownership interest in NuStar GP Holdings, LLC in December 2006.

Income tax expense increased $288 million from the first six months of 2006 to the first six months of 2007 mainly as a result of higher operating income.

Income from discontinued operations, net of income tax expense, increased $144 million from the first six months of 2006 to the first six months of 2007 due primarily to an 86% increase in Lima Refinery’s throughput margin per barrel, from $9.38 per barrel in 2006 to $17.41 per barrel in 2007.

OUTLOOK

Since the end of the 2007 second quarter, refined product margins have declined despite key refining industry fundamentals remaining favorable. U.S. light product inventories, on a days-of-supply basis, remain low and demand continues to be strong relative to prior years. Going forward, refined product markets are entering the seasonal transition period that historically occurs in late summer and early fall which is typically a volatile period for refined product margins. Regarding feedstocks, sour crude oil differentials relative to sweet crude oils have widened and are expected to remain favorable through the third quarter due to ample supplies of sour crude oil and continued strong demand for sweet crude oil.

On February 16, 2007, our McKee Refinery experienced a fire originating in its propane deasphalting unit. The refinery recommenced operations on April 12, 2007 at approximately 50% of capacity. Throughput rates at the McKee Refinery increased to approximately 150,000 barrels per day by the end of the second quarter of 2007 and are expected to reach full capacity by the end of 2007 or early 2008. In regard to other operations, we have minimal turnaround activity scheduled for the third quarter of 2007. We expect to benefit during the remainder of 2007 from capital improvement projects that have been completed, including the crude unit expansion project at our Port Arthur Refinery, the addition of mild hydrocracker units at our St. Charles and Houston Refineries, and the addition of a diesel hydrotreater unit at our Benicia Refinery.

LIQUIDITY AND CAPITAL RESOURCES

Cash Flows for the Six Months Ended June 30, 2007 and 2006
Net cash provided by operating activities for the six months ended June 30, 2007 was $4.4 billion compared to $3.8 billion for the six months ended June 30, 2006. The increase in cash generated from

44

operating activities was due primarily to the increase in net income, including the effect of discontinued operations related to the Lima Refinery, discussed above under “Results of Operations,” partially offset by a $321 million decrease from an unfavorable change in working capital between the years. Changes in cash provided by or used for working capital during the first six months of 2007 and 2006 are shown in Note 9 of Condensed Notes to Consolidated Financial Statements.

Cash flows related to the discontinued operations of the Lima Refinery have been combined with the cash flows from continuing operations within each category in the consolidated statement of cash flows for each period presented. Cash provided by operating activities related to our discontinued results of operations was $260 million and $113 million for the six months ended June 30, 2007 and 2006, respectively. Cash used in investing activities related to the Lima Refinery was $14 million and $70 million for the six months ended June 30, 2007 and 2006, respectively.

The net cash generated from operating activities during the first six months of 2007, combined with $2.245 billion of proceeds from the issuance of long-term notes, a $215 million benefit from tax deductions in excess of recognized stock-based compensation cost, and $111 million of proceeds from the issuance of common stock related to our employee benefit plans, were used mainly to:

• fund $1.3 billion of capital expenditures and deferred turnaround and catalyst costs;

• purchase 61.9 million shares of treasury stock at a cost of $4.2 billion;

• make an early debt repurchase of $183 million and a scheduled debt repayment of $230 million;

• fund capital contributions of $215 million to Cameron Highway Oil Pipeline Company to enable the joint venture to redeem all of its outstanding debt;

• fund contingent earn-out payments in connection with the acquisition of the St. Charles Refinery and the Delaware City Refinery of $50 million and $25 million, respectively;

• pay common stock dividends of $139 million; and

• increase available cash on hand by $746 million.

The net cash generated from operating activities during the first six months of 2006, combined with a $130 million benefit from tax deductions in excess of recognized stock-based compensation cost, $65 million of proceeds from the issuance of common stock related to our employee benefit plans, and $62 million of net borrowings (net of repayments) under our bank credit facilities were used mainly to:

• fund $2.0 billion of capital expenditures and deferred turnaround and catalyst costs;

• purchase 20.4 million shares of treasury stock at a cost of $1.2 billion;

• make long-term note repayments of $221 million;

• fund contingent earn-out payments in connection with the acquisition of Basis Petroleum, Inc. and the St. Charles Refinery of $26 million and $50 million, respectively;

• terminate our interest rate swap contracts for $54 million;

• pay common and preferred stock dividends of $87 million; and

• increase available cash on hand by $501 million.

Capital Investments
During the six months ended June 30, 2007, we expended $1.0 billion for capital expenditures and $230 million for deferred turnaround and catalyst costs. Capital expenditures for the six months ended June 30, 2007 included $349 million of costs related to environmental projects.

In connection with our acquisition of the St. Charles Refinery in 2003, the seller is entitled to receive payments in any of the seven years following this acquisition if certain average refining margins during any of those years exceed a specified level. In connection with the Premcor Acquisition in 2005, we assumed Premcor’s obligation under a contingent earn-out agreement related to Premcor’s acquisition of the Delaware City Refinery from Motiva Enterprises LLC. Any payments due under these earn-out

45

arrangements are limited based on annual and aggregate limits. In January 2007, we made an earn-out payment of $50 million related to the St. Charles Refinery. In June 2007, we made an earn-out payment of $25 million related to the acquisition of the Delaware City Refinery, which was the maximum remaining payment based on the aggregate limitation under the agreement.

For 2007, we expect to incur approximately $3.5 billion for capital investments, including approximately $3.0 billion for capital expenditures (approximately $730 million of which is for environmental projects) and approximately $460 million for deferred turnaround and catalyst costs. The capital expenditure estimate excludes expenditures related to the earn-out contingency agreements discussed above and strategic acquisitions. We continuously evaluate our capital budget and make changes as economic conditions warrant.

In May and June of 2007, we made cash capital contributions of $190 million and $25 million, respectively, to Cameron Highway Oil Pipeline Company, representing our 50% portion of the amount required for the Cameron Highway Oil Pipeline joint venture to redeem its fixed-rate notes and variable-rate debt, respectively. Our capital contributions, along with equal capital contributions from the other 50% joint venture partner, were used to redeem all of the joint venture’s outstanding debt.

Lima Refinery Disposition
Effective July 1, 2007, we consummated the sale of our Lima Refinery to Husky. Proceeds from the sale were $1.9 billion, plus $540 million representing a preliminary working capital settlement. The working capital settlement is expected to be finalized within 90 days after the effective date of the sale. In connection with the sale, we entered into a transition services agreement with Husky under which we agreed to provide certain accounting and administrative services to Husky beginning July 3, 2007, with the services terminating by July 31, 2008.

Contractual Obligations
As of June 30, 2007, our contractual obligations included long-term debt, capital lease obligations, operating leases, purchase obligations, and other long-term liabilities. We had the following changes to our long-term debt during the six months ended June 30, 2007.

On February 1, 2007, we redeemed our 9.25% senior notes for $183 million, or 104.625% of stated value. In April 2007, we repaid in full at the scheduled maturity date $230 million related to our 6.125% notes.

In April 2007, we borrowed $3 billion under a 364-day term credit agreement with a financial institution to fund the accelerated share repurchase program discussed in Note 7 of Condensed Notes to Consolidated Financial Statements. In May 2007, we repaid $500 million of the borrowings under the 364-day term credit agreement. The remaining balance of $2.5 billion was repaid in June 2007 using available cash and proceeds from the issuance of $2.25 billion of notes described in Note 6 of Condensed Notes to Consolidated Financial Statements.

During the six months ended June 30, 2007, we had no material changes outside the ordinary course of our business in operating leases or purchase obligations. Other long-term liabilities increased during the first six months of 2007 due to the adoption of FIN 48 on January 1, 2007, as discussed in Note 11 of Condensed Notes to Consolidated Financial Statements.

46

Our agreements do not have rating agency triggers that would automatically require us to post additional collateral. However, in the event of certain downgrades of our senior unsecured debt to below investment grade ratings by Moody’s Investors Service and Standard & Poor’s Ratings Services, the cost of borrowings under some of our bank credit facilities and other arrangements would increase. As of June 30, 2007, all of our ratings on our senior unsecured debt are at or above “investment grade” level as follows:

Rating Agency	Rating
Standard & Poor’s Ratings Services	BBB (stable outlook)
Moody’s Investors Service	Baa3 (positive outlook)
Fitch Ratings	BBB (stable outlook)

Other Commercial Commitments
As of June 30, 2007, our committed lines of credit included:

	Borrowing
	Capacity	Expiration
Revolving credit facility	$2.5 billion	August 2011
Canadian revolving credit facility	Cdn. $115 million	December 2010

As of June 30, 2007, we had $631 million of letters of credit outstanding under our uncommitted short-term bank credit facilities and $164 million of letters of credit outstanding under our committed revolving credit facility. Under our Canadian committed revolving credit facility, we had Cdn. $8 million of letters of credit outstanding as of June 30, 2007. These letters of credit expire during 2007, 2008, and 2009.

Stock Purchase Programs
During the first quarter of 2007, we had two stock purchase programs that had been previously approved by our board of directors, which authorized our purchase of treasury stock in open market transactions to satisfy employee benefit plan requirements as well as a $2 billion common stock purchase program. Stock purchases under the $2 billion program during the first quarter of 2007 were made from time to time at prevailing prices as permitted by securities laws and other legal requirements, subject to market conditions and other factors. The programs do not have a scheduled expiration date.

On April 25, 2007, our board of directors approved an amendment to our $2 billion common stock purchase program to increase the authorized purchases under the program to $6 billion. In conjunction with the increase in our common stock purchase program, we entered into an agreement with a financial institution to purchase $3 billion of our shares under an accelerated share repurchase program, and in late April, 42.1 million shares were purchased under this agreement. The purchase of these shares was funded with a short-term bridge loan, which we subsequently replaced with longer-term financing as described in Note 6 of Condensed Notes to Consolidated Financial Statements. The cost of the shares purchased under the accelerated share repurchase program was to be adjusted, with the final purchase cost based on a discount to the average trading price of our common stock, weighted by the daily volume of shares traded, during the program period. Any adjustment to the cost could be paid in cash or stock, at our option.

The accelerated share repurchase program was completed on July 23, 2007, resulting in an additional $94.5 million payment by us for the shares purchased. At that time, we elected to pay this additional amount in cash. This cash payment will have a dilutive effect on our third quarter computation of earnings per common share – assuming dilution.

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During the first six months of 2007, we purchased 61.9 million shares of our common stock at a cost of $4.2 billion in connection with the administration of our employee benefit plans and the common stock purchase programs authorized by our board of directors, including shares purchased under the accelerated share repurchase program discussed above.

Tax Matters
We are subject to extensive tax liabilities, including federal, state, and foreign income taxes and transactional taxes such as excise, sales/use, payroll, franchise, withholding, and ad valorem taxes. New tax laws and regulations and changes in existing tax laws and regulations are continuously being enacted or proposed that could result in increased expenditures for tax liabilities in the future. Certain of these liabilities are subject to periodic audits by the respective taxing authority. Subsequent changes to our tax liabilities as a result of these audits may subject us to interest and penalties.

Effective January 1, 2007, the Government of Aruba (GOA) enacted a turnover tax on revenues from the sale of goods produced and services rendered in Aruba. The turnover tax, which is 3% for on-island sales and services and 1% on export sales, is being assessed by the GOA on sales by our Aruba Refinery. However, due to a previous tax holiday that was granted to our Aruba Refinery by the GOA through December 31, 2010, we believe that sales by our Aruba Refinery should not be subject to this turnover tax. As a result, no amounts have been accrued with respect to this turnover tax. We have filed a request for arbitration with the Netherlands Arbitration Institute pursuant to which we will seek to enforce our rights under the tax holiday.

Other
Although we have only $1 million of minimum required contributions to our qualified pension plans during 2007 under the Employee Retirement Income Security Act, we expect to contribute $36 million to our qualified pension plans during 2007.

We are subject to extensive federal, state, and local environmental laws and regulations, including those relating to the discharge of materials into the environment, waste management, pollution prevention measures, greenhouse gas emissions, and characteristics and composition of gasolines and distillates. Because environmental laws and regulations are becoming more complex and stringent and new environmental laws and regulations are continuously being enacted or proposed, the level of future expenditures required for environmental matters could increase in the future. In addition, any major upgrades in any of our refineries could require material additional expenditures to comply with environmental laws and regulations.

We believe that we have sufficient funds from operations and, to the extent necessary, from the public and private capital markets and bank markets, to fund our ongoing operating requirements. We expect that, to the extent necessary, we can raise additional funds from time to time through equity or debt financings. However, there can be no assurances regarding the availability of any future financings or whether such financings can be made available on terms that are acceptable to us.

OFF-BALANCE SHEET ARRANGEMENTS

Accounts Receivable Sales Facility
As of June 30, 2007, we had an accounts receivable sales facility with a group of third-party financial institutions to sell on a revolving basis up to $1 billion of eligible trade receivables, which matures in August 2008. As of June 30, 2007 and December 31, 2006, the amount of eligible receivables sold to the third-party financial institutions was $1 billion.

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CRITICAL ACCOUNTING POLICIES

The preparation of financial statements in accordance with United States generally accepted accounting principles requires management 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. Our critical accounting policies are disclosed in our Annual Report on Form 10-K for the year ended December 31, 2006.

As discussed in Note 2 of Condensed Notes to Consolidated Financial Statements, certain new financial accounting pronouncements have been issued which either have already been reflected in the accompanying consolidated financial statements, or will become effective for our financial statements at various dates in the future.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

COMMODITY PRICE RISK

The following tables provide information about our derivative commodity instruments as of June 30, 2007 and December 31, 2006 (dollars in millions, except for the weighted-average pay and receive prices as described below), including:

• fair value hedges which are used to hedge our recognized refining inventories (which had a carrying amount of $4.3 billion and $3.7 billion as of June 30, 2007 and December 31, 2006, respectively, and a fair value of $9.0 billion and $6.6 billion as of June 30, 2007 and December 31, 2006, respectively) and unrecognized firm commitments (i.e., binding agreements to purchase inventories in the future);

• cash flow hedges which are used to hedge our forecasted feedstock and product purchases, refined product sales, and natural gas purchases;

• economic hedges (hedges not designated as fair value or cash flow hedges) which are used to:

- manage price volatility in refinery feedstock and refined product inventories, and

- manage price volatility in forecasted feedstock and product purchases, refined product sales, and natural gas purchases; and

• derivative commodity instruments held or issued for trading purposes.

The gain or loss on a derivative instrument designated and qualifying as a fair value hedge and the offsetting loss or gain on the hedged item 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 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 following tables include only open positions at the end of the reporting period, and therefore do not include amounts related to closed cash flow hedges for which the gain or loss remains in “accumulated other comprehensive income” pending consummation of the forecasted transactions.

Contract volumes are presented in thousands of barrels (for crude oil and refined products) or in billions of British thermal units (for natural gas). The weighted-average pay and receive prices represent amounts per barrel (for crude oil and refined products) or amounts per million British thermal units (for natural gas). Volumes shown for swaps represent notional volumes, which are used to calculate amounts due under the agreements. For futures, the contract value represents the contract price of either the long or short position multiplied by the derivative contract volume, while the market value amount represents the period-end market price of the commodity being hedged multiplied by the derivative contract volume. The pre-tax fair value for futures, swaps, and options represents the fair value of the derivative contract. The pre-tax fair value for swaps represents the excess of the receive price over the pay price multiplied by the notional contract volumes. For futures and options, the pre-tax fair value represents (i) the excess of the market value amount over the contract amount for long positions, or (ii) the excess of the contract amount over the market value amount for short positions. Additionally, for futures and options, the weighted-average pay price represents the contract price for long positions and the weighted-average receive price represents the contract price for short positions. The weighted-average pay price and weighted-average receive price for options represents their strike price.

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	June 30, 2007
			Wtd Avg		Wtd Avg							Pre-tax
	Contract		Pay		Receive		Contract		Market			Fair
	Volumes		Price		Price		Value		Value			Value
Fair Value Hedges:
Futures – long:
2007 (crude oil and refined products)		29,882	$	68.74		N/A	$	2,054	$	2,130		$	76
Futures – short:
2007 (crude oil and refined products)		36,082		N/A	$	68.16		2,459		2,571			(112	)
Cash Flow Hedges:
Swaps – long:
2007 (crude oil and refined products)		22,490		67.34		71.91		N/A		103			103
2008 (crude oil and refined products)		6,975		70.39		72.00		N/A		11			11
Swaps – short:
2007 (crude oil and refined products)		22,490		85.42		77.91		N/A		(169	)		(169	)
2008 (crude oil and refined products)		6,975		84.76		81.63		N/A		(22	)		(22	)
Futures – long:
2007 (crude oil and refined products)		4,867		82.26		N/A		400		408			8
Futures – short:
2007 (crude oil and refined products)		1,589		N/A		79.28		126		133			(7	)
Economic Hedges:
Swaps – long:
2007 (crude oil and refined products)		9,914		26.61		28.63		N/A		20			20
2007 (natural gas)		543		0.21		0.26		N/A		-			-
Swaps – short:
2007 (crude oil and refined products)		5,656		69.04		66.48		N/A		(14	)		(14	)
2007 (natural gas)		543		0.12		0.10		N/A		-			-
Futures – long:
2007 (crude oil and refined products)		94,286		73.73		N/A		6,952		7,134			182
2008 (crude oil and refined products)		60		81.30		N/A		5		5			-
2007 (natural gas)		740		8.17		N/A		6		5			(1	)
Futures – short:
2007 (crude oil and refined products)		91,280		N/A		72.96		6,660		6,840			(180	)
2007 (natural gas)		940		N/A		8.74		8		7			1
Options – long:
2007 (crude oil and refined products)		3		84.14		N/A		-		-			-
2008 (crude oil and refined products)		1		85.68		N/A		-		-			-
Options – short:
2007 (crude oil and refined products)		1,200		N/A		15.78		3		-			3
Trading Activities:
Swaps – long:
2007 (crude oil and refined products)		649		30.04		30.07		N/A		-			-
2008 (crude oil and refined products)		112		12.18		11.31		N/A		-			-
Swaps – short:
2007 (crude oil and refined products)		699		32.48		32.50		N/A		-			-
2008 (crude oil and refined products)		112		11.31		12.05		N/A		-			-
Futures – long:
2007 (crude oil and refined products)		6,456		85.96		N/A		555		565			10
2008 (crude oil and refined products)		1		85.23		N/A		-		-			-
Futures – short:
2007 (crude oil and refined products)		6,456		N/A		86.81		560		565			(5	)
2008 (crude oil and refined products)		1		N/A		85.05		-		-			-
Total pre-tax fair value of open positions												$	(96	)

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	December 31, 2006
			Wtd Avg		Wtd Avg							Pre-tax
	Contract		Pay		Receive		Contract		Market			Fair
	Volumes		Price		Price		Value		Value			Value
Fair Value Hedges:
Futures – long:
2007 (crude oil and refined products)		15,261	$	63.66		N/A	$	972	$	949		$	(23	)
Futures – short:
2007 (crude oil and refined products)		22,091		N/A	$	64.56		1,426		1,379			47
Cash Flow Hedges:
Swaps – long:
2007 (crude oil and refined products)		39,125		70.14		65.16		N/A		(195	)		(195	)
Swaps – short:
2007 (crude oil and refined products)		39,125		69.66		76.30		N/A		260			260
Futures – long:
2007 (crude oil and refined products)		21,087		64.75		N/A		1,365		1,336			(29	)
Futures – short:
2007 (crude oil and refined products)		18,356		N/A		64.82		1,190		1,161			29
Economic Hedges:
Swaps – long:
2007 (crude oil and refined products)		13,244		12.02		11.02		N/A		(13	)		(13	)
2007 (natural gas)		893		0.76		0.78		N/A		-			-
Swaps – short:
2007 (crude oil and refined products)		7,605		26.47		27.66		N/A		9			9
2007 (natural gas)		833		0.85		0.89		N/A		-			-
Futures – long:
2007 (crude oil and refined products)		50,442		64.28		N/A		3,242		3,171			(71	)
2007 (natural gas)		400		7.33		N/A		3		3			-
Futures – short:
2007 (crude oil and refined products)		51,623		N/A		64.15		3,312		3,252			60
2007 (natural gas)		400		N/A		8.21		3		3			-
Options – long:
2007 (crude oil and refined products)		31		84.29		N/A		-		-			-
Options – short:
2007 (crude oil and refined products)		1,478		N/A		61.94		-		(6	)		6
Trading Activities:
Futures – long:
2007 (crude oil and refined products)		801		77.29		N/A		62		59			(3	)
Futures – short:
2007 (crude oil and refined products)		801		N/A		84.87		68		58			10
Total pre-tax fair value of open positions												$	87

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INTEREST RATE RISK

The following table provides information about our long-term debt instruments (dollars in millions), all of which are sensitive to changes in interest rates. Principal cash flows and related weighted-average interest rates by expected maturity dates are presented. We had no interest rate derivative instruments outstanding as of June 30, 2007 and December 31, 2006.

	June 30, 2007
	Expected Maturity Dates
																There-						Fair
	2007			2008			2009			2010			2011			after			Total			Value
Long-term Debt:
Fixed rate	$	57		$	6		$	209		$	33		$	418		$	6,196		$	6,919		$	7,049
Average interest rate		6.2	%		6.0	%		3.6	%		6.8	%		6.4	%		6.9	%		6.7	%

	December 31, 2006
	Expected Maturity Dates
																There-						Fair
	2007			2008			2009			2010			2011			after			Total			Value
Long-term Debt:
Fixed rate	$	462		$	6		$	209		$	33		$	418		$	3,946		$	5,074		$	5,361
Average interest rate		7.3	%		6.0	%		3.6	%		6.8	%		6.4	%		7.1	%		6.9	%

FOREIGN CURRENCY RISK

As of June 30, 2007, we had commitments to purchase $350 million of U.S. dollars. Our market risk was minimal on these contracts, as they matured on or before July 23, 2007, resulting in less than $1 million of loss in the third quarter of 2007.

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Item 4. Controls and Procedures.

(a) Evaluation of disclosure controls and procedures.

Our management has evaluated, with the participation of our principal executive officer and principal financial officer, the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this report, and has concluded that our disclosure controls and procedures were operating effectively as of June 30, 2007.

(b) Changes in internal control over financial reporting.

There has been no change in our internal control over financial reporting that occurred during our last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II – OTHER INFORMATION

Item 1. Legal Proceedings.

The information below describes new proceedings or material developments in proceedings that we previously reported in our annual report on Form 10-K for the year ended December 31, 2006 or our quarterly report on Form 10-Q for the quarter ended March 31, 2007.

     Litigation

For the legal proceedings listed below, we hereby incorporate by reference into this Item our disclosures made in Part I, Item 1 of this Report included in Note 14 of Condensed Notes to Consolidated Financial Statements under the caption “Litigation.”

• MTBE Litigation

• Retail Fuel Temperature Litigation

     Environmental Enforcement Matters

While it is not possible to predict the outcome of the following environmental proceedings, if any one or more of them were decided against Valero, we believe that there would be no material effect on our consolidated financial position or results of operations. We are reporting these proceedings to comply with SEC regulations, which require us to disclose certain information about proceedings arising under federal, state, or local provisions regulating the discharge of materials into the environment or protecting the environment if we reasonably believe that such proceedings will result in monetary sanctions of $100,000 or more.

Delaware Department of Natural Resources and Environmental Control (DDNREC) (Delaware City Refinery) (this matter was last reported in our Form 10-K for the year ended December 31, 2006). In June 2007, we reached an agreement with the DDNREC to settle six notices of violation (dating from 2005 to 2007) alleging excess air and waste emissions at our Delaware City Refinery. The settlement includes our payment of a $455,000 administrative penalty plus additional expenditures for certain off- and on-site supplemental environmental projects.

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Item 1A. Risk Factors.

There have been no material changes from the risk factors disclosed in the “Risk Factors” section of our annual report on Form 10-K for the year ended December 31, 2006.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

     (a) Unregistered Sales of Equity Securities. Not applicable.

     (b) Use of Proceeds. Not applicable.

     (c) Issuer Purchases of Equity Securities. The following table discloses purchases of shares of Valero’s common stock made by us or on our behalf for the periods shown below.

									Maximum Number (or
					Total Number of		Total Number of		Approximate Dollar
					Shares Not		Shares Purchased		Value) of Shares that
	Total		Average		Purchased as Part		as Part of		May Yet Be Purchased
	Number of		Price		of Publicly		Publicly		Under the Plans or
	Shares		Paid per		Announced Plans		Announced Plans		Programs (at month
Period	Purchased		Share		or Programs (1)		or Programs		end) (2)
April 2007		46,286,924	$	70.74		3,689,364		42,597,560	$2.15  billion
May 2007		31,207	$	75.05		31,207		0	$2.15  billion
June 2007		7,440	$	75.13		7,440		0	$2.15  billion
Total		46,325,571	$	70.74		3,728,011		42,597,560

(1)

The shares reported in this column represent purchases settled in the second quarter of 2007 relating to: (a) our purchases of shares in open-market transactions to meet our obligations under employee benefit plans, and (b) our purchases of shares from our employees and non-employee directors in connection with the exercise of stock options, the vesting of restricted stock, and other stock compensation transactions in accordance with the terms of our incentive compensation plans.

(2)

On April 26, 2007, we publicly announced an increase in our common stock purchase program from $2 billion to $6 billion, including a $3 billion accelerated share repurchase program, as authorized by our board of directors on April 25, 2007. The $6 billion common stock purchase program has no expiration date. The $6 billion common stock purchase program is more fully described above in Note 7 of Condensed Notes to Consolidated Financial Statements, and we hereby incorporate by reference into this Item our disclosures made in Note 7.

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Item 4. Submission of Matters to a Vote of Security Holders.

Valero’s annual meeting of stockholders (the Annual Meeting) was held April 26, 2007. Matters voted on at the Annual Meeting and the results thereof were as follows:

(a) Proposal 1: a proposal to elect three Class I directors to serve until the 2010 annual meeting was approved as follows:

Directors	For		Withheld		Non-Votes
Ruben M. Escobedo		442,415,493		75,812,169	n/a
Bob Marbut		393,863,274		124,364,388	n/a
Robert A. Profusek		509,791,124		8,436,539	n/a

	Directors whose terms of office continued after the annual meeting were: W.E. “Bill” Bradford, Ronald K. Calgaard, Jerry D. Choate, Irl F. Engelhardt, William R. Klesse, Donald L. Nickles, and Susan Kaufman Purcell.
(b)	Proposal 2: a proposal to ratify the appointment of KPMG LLP to serve as Valero’s independent registered public accounting firm for the fiscal year ending December 31, 2007 was approved as follows:

For	Against	Abstain	Non-Votes
510,892,465	3,412,012	3,923,186	n/a

(c) Proposal 3: a shareholder proposal entitled, “Director Election Majority Vote Proposal” was approved as follows:

For	Against	Abstain	Non-Votes
257,068,863	151,060,989	4,474,548	105,623,262

(d) Proposal 4: a shareholder proposal entitled, “Shareholder Ratification of Executive Compensation Proposal” was not approved as follows:

For	Against	Abstain	Non-Votes
180,493,489	160,221,268	71,889,644	105,623,262

(e) Proposal 5: a shareholder proposal entitled, “Supplemental Executive Retirement Plan Policy Proposal” was not approved as follows:

For	Against	Abstain	Non-Votes
137,179,964	267,799,325	7,625,111	105,623,262

Brokers holding shares for the beneficial owners of such shares must vote according to specific instructions received from the beneficial owners. If specific instructions are not received, a broker generally may vote the shares in the broker’s discretion in certain instances. However, the New York Stock Exchange (NYSE) precludes brokers from exercising voting discretion on certain proposals without specific instructions from the beneficial owner. This results in a “broker non-vote” on the proposal. A broker non-vote is treated as “present” for purposes of determining a quorum, has the effect of a negative vote when approval for a particular proposal requires a majority of the voting power of the issued and outstanding shares of the company, and has no effect when approval for a proposal requires a majority of the voting power of the shares present in person or by proxy and entitled to vote or a plurality of the votes cast. Per the NYSE’s rules, brokers did not have discretion to vote on the shareholder proposals

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presented as Proposals 3, 4, and 5 at the Annual Meeting, but did have discretion to vote on Proposals 1 and 2. Shares voted to “abstain” are treated as “present” for purposes of determining a quorum, and have the effect of a negative vote when approval for a proposal requires a majority of the voting power of the issued and outstanding shares of the company or a majority of the voting power of the shares present in person or by proxy and entitled to vote.

For Proposal 1, directors were to be elected by a plurality of votes cast by the holders of shares of Valero’s common stock present in person or by proxy at the Annual Meeting and entitled to vote. Proposals 2, 3, 4, and 5 required approval by the affirmative vote of a majority of the voting power of the shares present in person or by proxy at the Annual Meeting and entitled to vote. Only Proposals 1, 2, and 3 received the required votes for approval.

Item 6. Exhibits.

Exhibit No.	Description
*10.01	Amended and Restated Supplemental Executive Retirement Plan, amended July 11, 2007, effective January 1, 2008.
*10.02	Amended and Restated Restricted Stock Plan for Non-Employee Directors dated July 11, 2007.
*12.01	Statements of Computations of Ratios of Earnings to Fixed Charges and Ratios of Earnings to Fixed Charges and Preferred Stock Dividends.
*31.01	Rule 13a-14(a) Certifications (under Section 302 of the Sarbanes-Oxley Act of 2002).
*32.01	Section 1350 Certifications (as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002).

* Filed herewith.

57

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

VALERO ENERGY CORPORATION
		(Registrant)
	By:	/s/ Michael S. Ciskowski
		Michael S. Ciskowski
		Executive Vice President and
		Chief Financial Officer
		(Duly Authorized Officer and Principal
		Financial and Accounting Officer)

Date: August 8, 2007

58

EX-10.01

EXHIBIT 10.01

VALERO ENERGY CORPORATION
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN

(AS AMENDED AND RESTATED EFFECTIVE JANUARY 1, 2008)

VALERO ENERGY CORPORATION
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN

TABLE OF CONTENTS

		Page
ARTICLE I	DEFINITIONS		1
1.1	Accrued Benefit		1
1.2	Actuarial Equivalent or Actuarially Equivalent Basis		1
1.3	Board of Directors		1
1.4	Change in Control		1
1.5	Code		2
1.6	Company		2
1.7	Committee		2
1.8	Credited Service		2
1.9	Eligible Earnings		3
1.10	Final Average Compensation		3
1.11	Monthly Covered Compensation		3
1.12	Monthly FICA Amount		3
1.13	Normal Retirement Date		3
1.14	Participant		3
1.15	Plan		3
1.16	Plan of Deferred Compensation		3
1.17	Plan Year		3
1.18	Retirement		4
1.19	Rules		4
1.20	Securities Act		4
1.21	Separation from Service		4
1.22	Subsidiary		4
1.23	Surviving Spouse		4
1.24	Trust		4
1.25	Trustee		4
1.26	Valero		4
1.27	Valero Pension Plan		4
1.28	Valero Pension Plan Benefit		4
ARTICLE II	ELIGIBILITY		5
2.1	Eligibility		5
2.2	Frozen Participation		5
2.3	Renewed Eligibility		5
ARTICLE III	VESTING		5
ARTICLE IV	RETIREMENT BENEFIT		6
4.1	Calculation of Retirement Benefit		6
4.2	Form and Time of Payment		6
4.3	Modification of Pension		6
4.4	Delay of Certain Payments		7

ii

		Page
ARTICLE V	PRERETIREMENT SPOUSAL DEATH BENEFIT		7
5.1	Death Prior to Retirement		7
5.2	Beneficiary Designation Prohibited		7
ARTICLE VI	PROVISIONS RELATING TO ALL BENEFITS		7
6.1	Effect of This Article		7
6.2	No Duplication of Benefits		7
6.3	Forfeiture Upon Termination for Cause		7
6.4	Forfeiture for Competition		8
6.5	Expenses Incurred in Enforcing the Plan		8
6.6	No Restrictions on any Portion of Benefits
	Determined to be Excess Parachute Payments		8
6.7	Benefits Upon Re-employment		8
ARTICLE VII	ADMINISTRATION		8
7.1	Committee Appointment		8
7.2	Committee Organization and Voting		9
7.3	Powers of the Committee		9
7.4	Committee Discretion		9
7.5	Reliance Upon Information		9
7.6	Approval of Benefit Modifications		10
ARTICLE VIII	ADOPTION BY SUBSIDIARIES		10
8.1	Procedure for and Status After Adoption		10
8.2	Termination of Participation By Adopting Subsidiary		10
8.3	Spinoff Plan		10
ARTICLE IX	AMENDMENT AND/OR TERMINATION		11
9.1	Amendment or Termination of the Plan		11
9.2	No Retroactive Effect on Annual Benefits		11
9.3	Effect of Termination		11
9.4	Effect of Change in Control		11
ARTICLE X	FUNDING		12
10.1	Payments from Trust		12
10.2	Plan May Be Funded Through Life Insurance		12
10.3	Required Funding of Rabbi Trust		12
10.4	Ownership of Assets; Release		13
10.5	Reversion of Excess Assets		13
10.6	Repurchase of Valero Stock		13
10.7	Participants Must Rely Only on General Credit of the Companies		13
ARTICLE XI	MISCELLANEOUS		14
11.1	Responsibility for Distributions and Withholding of Taxes		14
11.2	Limitation of Rights		14
11.3	Arbitration of Disputes.		15
11.4	Distributions to Incompetents		16
11.5	Nonalienation of Benefits		17
11.6	Severability		17
11.7	Notice		17
11.8	Gender and Number		17
11.9	Governing Law		17

iii

		Page
11.10	Effective Date		17

iv

VALERO ENERGY CORPORATION
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN

     WHEREAS, Valero Energy Corporation (the “Company”) established the Valero Energy Corporation Supplemental Executive Retirement Plan (the “Plan”), originally effective January 1, 1983 which provides, for certain highly compensated, management personnel, a supplement to their benefits under the Valero Pension Plan so as to retain their loyalty and to offer a further incentive to them to maintain and increase their standard of performance; and

     WHEREAS, pursuant to Section 9.1, the Committee may amend the Plan at any time by an instrument in writing; and

     WHEREAS, the Committee has determined that the Plan should be amended and restated to reflect the spinoff of liabilities relating to eligible Employees of NuStar Energy, LLC (formerly Valero GP, LLC) into a separate plan effective as of July 1, 2006, and to make certain other changes consistent with Code section 409A;

     NOW, THEREFORE, the Company amends and restates the Plan as follows:

ARTICLE I

DEFINITIONS

     All defined terms used in the Valero Pension Plan shall have the same meaning for this Plan, except as otherwise set forth below.

     1.1 Accrued Benefit. “Accrued Benefit” means, as of any given date of determination, the Retirement benefit calculated under Section 4.1 with Final Average Compensation, but with the offsets for benefits provided by the Valero Pension Plan and Credited Service determined as of that date.

     1.2 Actuarial Equivalent or Actuarially Equivalent Basis. “Actuarial Equivalent” or “Actuarially Equivalent Basis” means an equality in value of the aggregate amounts expected to be received under different forms of payment based on the same mortality and interest rate assumptions. For this purpose, the mortality and interest rate assumptions used in computing benefits under the Valero Pension Plan will be used. If there is no Valero Pension Plan or successor qualified defined benefit plan, then the actuarial assumptions to be used will be those actuarial assumptions deemed appropriate by the actuarial firm, which last served as independent actuary for the Valero Pension Plan prior to its termination or merger had the Valero Pension Plan remained in existence with its last participant census.

     1.3 Board of Directors. “Board of Directors” means the Board of Directors of Valero.

     1.4 Change in Control. “Change in Control” means the occurrence of one or more of the following events:

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     (a) Change in Ownership of Valero. The acquisition by any one person, or more than one person acting as a group (within the meaning of Code § 409A), of ownership of stock of Valero that, together with stock held by such person or group, constitutes more than fifty percent (50%) of the total fair market value or total voting power of the stock of Valero.

     (b) Change in Effective Control of Valero. Either of the following:

(i) The acquisition, during any 12-month period, by any one person, or more than one person acting as a group (within the meaning of Code § 409A), of stock of Valero comprising thirty percent (30%) or more of the total voting power of the stock of Valero; or

(ii) The replacement, during any 12-month period, of a majority of the members of the Board of Directors with directors whose appointment or election is not endorsed by the majority of the members of the Board of Directors before the date of such appointment or election.

     (c) Change in Ownership of a Substantial Portion of Valero’s Assets. The acquisition by any one person, or more than one person acting as a group (within the meaning of Code § 409A), during the 12 month period ending on the date of the most recent acquisition by such person or persons, of assets of Valero that have a total gross fair market value equal to or more than forty percent (40%) of the total gross fair market value of all of the assets of Valero immediately before such acquisition or acquisitions. For purposes of this provision, “gross fair market value” means the value of the assets of Valero, or the value of the assets being disposed of, determined without regard to any liabilities associated with such assets.

     1.5 Code. “Code” means the Internal Revenue Code of 1986, as amended from time to time.

     1.6 Company. “Company” means Valero and any Subsidiary adopting the Plan.

     1.7 Committee. “Committee” means the Compensation Committee of the Board of Directors.

     1.8 Credited Service. “Credited Service” means a Participant’s continuing period of employment with a Company (whether or not contiguous), commencing on the first day for which such Participant is paid, or entitled to payment, for the performance of duties with a Company and terminating with the Participant’s final cessation of participation in the Plan. With respect to any full calendar year in which a Participant receives Eligible Earnings in each payroll period as an active employee, he shall be credited with one year of Credited Service. With respect to any partial calendar year in which a Participant receives Eligible Earnings as an active employee (such as the calendar year in which employment commences or participation ceases) he shall be credited with a fraction of a year of Credited Service, in the same proportion that the number of payroll periods during such calendar year that he received Eligible Earnings as an active employee bears to the total number of payroll periods during such year. All partial years of Credited Service shall be aggregated so that a Participant receives credit for all periods of

2

employment regardless of whether the Credited Service is interrupted. Credited Service shall also include, and a Participant shall be credited with, such additional periods of time, if any, as may have been agreed upon by the Participant and a Company in connection with the Participant’s employment, termination or otherwise.

     1.9 Eligible Earnings. “Eligible Earnings” means all compensation paid or payable by a Company to the employee in the form of base salary or wages and annual bonuses (whether paid or payable in cash or securities or any combination thereof), including therein any amounts of such base salary or wages and annual bonuses earned which, at the employee’s election, in lieu of a cash payment to him, are contributed to a Plan of Deferred Compensation maintained by the Company. During a leave of absence from work, with or without pay, such as disability leave of absence or personal leave of absence, the Participant’s base rate of pay in effect immediately prior to the leave of absence and his most recent annual bonus amount earned shall be used in computing his Eligible Earnings.

     1.10 Final Average Compensation. “Final Average Compensation” means a Participant’s average monthly Eligible Earnings from any Company for the thirty-six consecutive calendar months that give the highest average monthly rate of Eligible Earnings for the Participant out of all calendar months next preceding the earliest of (a) the date upon which a Participant becomes ineligible for participation in this Plan pursuant to Section 2.2; (b) his Retirement; or (c) the termination of the Plan.

     1.11 Monthly Covered Compensation. “Monthly Covered Compensation” means the quotient resulting from dividing Covered Compensation by 12.

     1.12 Monthly FICA Amount. “Monthly FICA Amount” means the quotient resulting from dividing by 12 the Taxable Wage Base in effect or assumed to be in effect at the beginning of the calendar year in which a Participant attains social security retirement age (as defined in Section 415(b)(8) of the Code).

     1.13 Normal Retirement Date. “Normal Retirement Date” means the first day of the month coincident with or next following the date on which the Participant attains the age of 65 years.

     1.14 Participant. “Participant” means either (a) an employee of a Company who is eligible for and is participating in the Plan or (b) a former employee of a Company who is eligible to receive benefits under the Plan upon such former employee’s Retirement.

     1.15 Plan. “Plan” means the Valero Energy Corporation Supplemental Executive Retirement Plan as set forth in this document, as amended from time to time.

     1.16 Plan of Deferred Compensation. “Plan of Deferred Compensation” means the Valero Energy Corporation Executive Deferred Compensation Plan, any successor, alternative or additional nonqualified plan of deferred compensation, and any contributions made under a salary reduction agreement to a Code Section 125 cafeteria plan or Code Section 401(k) cash or deferred arrangement maintained by the Company.

     1.17 Plan Year. “Plan Year” means the calendar year.

3

     1.18 Retirement. “Retirement”, “Retires”, “Retire” or “Retired” means the first day of the month coincident with or next following the date that a Participant incurs a Separation from Service after having attained at least age 55 and completing at least five (5) years of Credited Service.

     1.19 Rules. “Rules” means the Commercial Arbitration Rules of the American Arbitration Association in effect at the date of commencement of any arbitration hereunder.

     1.20 Securities Act. “Securities Act” means the Securities Exchange Act of 1934, as amended from time to time.

     1.21 Separation from Service. “Separation from Service” means a separation from service within the meaning of Code section 409A.

     1.22 Subsidiary. “Subsidiary” means (i) any corporation 50% or more of whose stock having ordinary voting power to elect directors (irrespective of whether or not at the time stock of any class or classes of such corporation shall have or might have voting power by reason of the happening of any contingency) is at the time owned, directly or indirectly, by Valero, and (ii) any partnership, association, joint venture or other entity in which, Valero, directly or indirectly, has a 50% or greater equity interest at the time.

     1.23 Surviving Spouse. “Surviving Spouse” means the spouse of a Participant who is eligible to receive a Qualified Preretirement Survivor Annuity benefit under the Valero Pension Plan.

     1.24 Trust. “Trust” or “Trust Agreement” shall mean the Valero Energy Corporation Supplemental Executive Retirement Plan Trust as is created by the terms and conditions of said Trust and as may be amended from time to time.

     1.25 Trustee. “Trustee” means collectively one or more persons or corporations with trust power which have been appointed by the Committee and have accepted the duties of Trustee of the Trust and any and all successor or successors appointed by Valero.

     1.26 Valero. “Valero” means Valero Energy Corporation, the sponsor of this Plan, and its successors.

     1.27 Valero Pension Plan. “Valero Pension Plan” means the Valero Energy Corporation Pension Plan, a defined benefit plan qualified under Section 401(a) of the Code, as it may be amended from time to time and any successor qualified defined benefit plan.

     1.28 Valero Pension Plan Benefit. “Valero Pension Plan Benefit” means the amount of monthly benefit payable from the Valero Pension Plan which (a) in the case of an unmarried Participant, is based upon a lifetime annuity payable to such Participant pursuant to the provisions of Article 4 of the Valero Pension Plan, or any successor provision; or, (b) in the case of a married Participant, is based upon a joint and survivor pension of Actuarially Equivalent Value to the pension otherwise payable to such Participant for life pursuant to the provisions of Article 4 of the Valero Pension Plan or any successor provision.

4

ARTICLE II

ELIGIBILITY

     2.1 Eligibility. An employee shall become a Participant in the Plan as of the date he is selected by the Committee for inclusion as a Participant in the Plan. Ongoing eligibility and participation of Participants shall be determined by the Committee in its sole discretion, and no employee shall have a right to initial or ongoing participation in this Plan.

     2.2 Frozen Participation. If, at any time, the Committee determines that an employee who is a Participant is no longer eligible to continue to participate, and such employee is still employed by a Company, his Accrued Benefit will be frozen as of the last day of the Plan Year prior to the Plan Year during which he initially became ineligible to participate. He will later be entitled to that frozen Accrued Benefit upon his Retirement (if, at the time of such Retirement, his Accrued Benefit is vested), subject to the requirements of Articles III and IV. The frozen Accrued Benefit will be payable at the time and in the form set forth in Article IV.

     Notwithstanding the foregoing provisions, in the event that the Participant has, as of the date of his Retirement, accrued a vested benefit in the Valero Energy Corporation Excess Pension Plan which is greater than his frozen accrued benefit hereunder, such Participant shall be entitled to receive his accrued benefit under the Valero Energy Corporation Excess Pension Plan, and shall not be eligible for any benefits hereunder. Under no circumstances shall a Participant be entitled to benefits under both this Plan and the Valero Energy Corporation Excess Pension Plan. The Surviving Spouse of a Participant whose Accrued Benefit is frozen at the time of the Participant’s death shall not be entitled to any death benefit under this Plan. A Participant whose Accrued Benefit is frozen at the time of incurring a disability shall not accrue any further Credited Service either for accrual or vesting purposes after the disability occurs so long as the Participant’s Accrued Benefit in this Plan is frozen. If the frozen Accrued Benefit is less than the benefit which could otherwise be provided without this limitation, then the benefit will not exceed the Participant’s frozen Accrued Benefit. Additionally, if any of the events described in Article VI should occur, the Participant whose Accrued Benefit is frozen shall be subject to having his frozen Accrued Benefit either restricted in amount or forfeited in accordance with Article VI.

     2.3 Renewed Eligibility. If an employee who is a Participant becomes ineligible to continue to participate but remains employed by a Company, and the Committee later determines that the employee is again eligible to participate, the Participant will be given Credited Service for the intervening period, will have his Final Average Compensation computed as though the freeze had never occurred, and will be treated for all purposes as though he had not had his participation interrupted.

ARTICLE III

VESTING

     Except as otherwise set forth herein, a Participant shall vest in his Accrued Benefits pursuant to the following vesting schedule:

5

Participant’s Years of
Credited Service	Vested Percentage
Less than 5	0%
or more	100%

     Except as otherwise set forth herein, a Participant’s Accrued Benefit attributable to Credited Service on or after January 1, 1996 shall vest only upon the occurrence of the Participant’s death, disability or Retirement, and all benefits under this Plan shall be forfeited if the Participant terminates employment from all Companies prior to death, disability or Retirement.

     The foregoing notwithstanding, a Participant’s Accrued Benefit (whether attributable to Credited Service occurring before, on or after January 1, 1996) shall become fully vested upon: (i) the occurrence of a Change in Control; (ii) termination of the Plan pursuant to Section 9.1; or (iii) the termination of participation in this Plan by the Subsidiary employing the Participant, if such Participant’s participation in the Plan is not promptly continued through employment by another adopting Subsidiary. Upon a Participant’s Separation from Service for any reason prior to becoming fully vested hereunder, the Participant and any Surviving Spouse shall forfeit any interest in and under this Plan, and shall have no right to any benefit hereunder.

ARTICLE IV

RETIREMENT BENEFIT

     4.1 Calculation of Retirement Benefit. Subject to the following provisions of this Section 4.1, the provisions of Section 4.3 and Article III; the benefit payable under the Plan shall be an amount equal to the present value of a lifetime annuity based on the sum of (i) plus (ii) minus (iii) where (i) equals: 1.60% of the Participant’s Final Average Compensation multiplied by his number of years of Credited Service; (ii) equals .35% multiplied by the product of his years of Credited Service (not to exceed 35 years) times the excess of his Final Average Compensation over the lesser of (a) 1.25 times his Monthly Covered Compensation or (b) the Monthly FICA Amount; and (iii) equals the Participant’s Valero Pension Plan Benefit. The lump sum amount payable hereunder shall be determined using the lump sum actuarial factors provided for, and/or used under, the Valero Pension Plan.

     4.2 Form and Time of Payment. Effective for benefit payments commencing as a result of a Participant’s Retirement on or after January 1, 2008, benefits shall be made in a single lump sum payment as of the January 1 following the Participant’s Retirement.

     4.3 Modification of Pension. The Committee shall have the right to modify the calculation of the benefit payable as to any Participant as it may desire from time to time; provided, however, that any such modification shall not result in a reduction of the benefit payable below the amount set forth above in Section 4.1. The amount of the benefits payable to a Participant under this Plan may be modified by written agreement entered into between the Participant and a Company and approved pursuant to Section 7.6. If so modified, the provisions

6

of such written agreement shall prevail in determining the amount of the benefits payable to the Participant under this Plan. In addition, benefits payable under this Plan to any Participant shall not affect any other right or entitlement a Participant may have by contract or otherwise, except as may be provided in any such contract.

     4.4 Delay of Certain Payments. With respect to any Participant who is a “Specified Employee”, as defined in Code section 409A and the regulations and rulings issued thereunder, any benefit that becomes payable by reason of such Participant’s Separation from Service shall not commence prior to the date that is six (6) months following such Participant’s separation from service. The provisions of this Section 4.4 shall not apply (a) with respect to any benefit that becomes payable due to the death of the Participant, or (b) if, at the time of such Participant’s Separation from Service, no stock of the Company is publicly traded on an established securities market or otherwise.

ARTICLE V

PRERETIREMENT SPOUSAL DEATH BENEFIT

     5.1 Death Prior to Retirement. In the event that a Participant who has attained age 55 and completed five years of Credited Service dies while employed by a Company but has not Retired, the Participant’s Surviving Spouse shall receive a Surviving Spouse benefit under the Plan, which shall be payable in the form of a lump sum as of the date of the Participant’s death and shall be equal to fifty percent (50%) of the amount the Participant would have received under Section 4.1 if he had Retired on his date of death.

     5.2 Beneficiary Designation Prohibited. Since the only death benefit payable under the Plan is to a Surviving Spouse as provided in Section 5.1 above, no Participant shall have the right to designate a beneficiary to receive any benefits hereunder.

ARTICLE VI

PROVISIONS RELATING TO ALL BENEFITS

     6.1 Effect of This Article. The provisions of this Article will control over all other provisions of this Plan.

     6.2 No Duplication of Benefits. It is not intended that there be any duplication of benefits. Therefore, in no event will a Participant and such Participant’s Surviving Spouse qualify for separate benefit payments under Articles IV and V.

     6.3 Forfeiture Upon Termination for Cause. If the Committee finds, after full consideration of the facts presented on behalf of both the Company and a Participant, that the Participant was discharged by a Company for fraud, embezzlement, theft, commission of a felony, proven dishonesty in the course of his employment by a Company which damaged the Company, or for disclosing trade secrets of a Company, the entire Accrued Benefit of the Participant will be forfeited even though it may have been previously vested, and the Participant and any Surviving Spouse shall have no right to a benefit hereunder. The decision of the Committee as to the cause of a former Participant’s discharge and the damage done to the

7

Company will be final and binding on all parties. No decision of the Committee will affect the finality of the discharge of the Participant by the Company in any manner. Notwithstanding the foregoing, no forfeiture should be permitted pursuant to this Section following Plan termination or a Change in Control unless pursuant to arbitration consistent with the provisions of Section 11.3.

     6.4 Forfeiture for Competition. If the Committee finds, after full consideration of the facts presented on behalf of the Company and a Participant, that the Participant, at any time within two years following his termination of employment from all Companies and without written consent of a Company, directly or indirectly owns, operates, manages, controls or participates in the ownership (other than through ownership of less than 5% of the voting equity securities or other interests of a publicly traded entity), management, operation or control of or is employed by, or is paid as a consultant or other independent contractor by a business which competes with the Company, and if the Participant continues to be so engaged sixty (60) days after written notice has been given to him: (a) the Participant shall, upon the demand of the Committee, repay to Valero the full amount of the payment previously made to the Participant hereunder; or (b) if the Participant has not yet received the payment of his vested Accrued Benefit, the Participant and any Surviving Spouse shall forfeit any rights under this Plan and shall not be entitled to receive any benefit hereunder.

     6.5 Expenses Incurred in Enforcing the Plan. Valero will pay a Participant for all reasonable legal fees and expenses incurred by him in successfully contesting or disputing his termination of employment by a Company or in successfully seeking to obtain or enforce any benefit provided by this Plan if such termination occurs or a benefit is payable following a Change in Control.

     6.6 No Restrictions on any Portion of Benefits Determined to be Excess Parachute Payments. Notwithstanding that any benefit received or to be received by a Participant in connection with a Change in Control, or the termination of his employment by a Company, would not be deductible, whether in whole or in part, by a Company or any affiliated company, as a result of Section 280G of the Code, the benefit payable under this Plan shall nevertheless not be reduced.

     6.7 Benefits Upon Re-employment. If a former employee who received a benefit under this Plan for his past service is re-employed by the Company, and participates in the Plan during such period of re-employment, the amount of his benefit upon his subsequent Retirement will be based on his total Credited Service, and will be reduced by the amount of the previous payment made hereunder.

ARTICLE VII

ADMINISTRATION

     7.1 Committee Appointment. The members of the Compensation Committee of the Board of Directors shall serve as the Committee; provided, that the Board of Directors will have the sole discretion to remove any one or more Committee members and appoint one or more

8

replacement or additional Committee members from time to time. Each Committee member will serve until his or her resignation or removal.

     7.2 Committee Organization and Voting. The Committee shall be organized and shall conduct its business in accordance with the bylaws of Valero, provided, however, that a member of the Committee who is also a Participant will not vote or act on any matter relating to himself or which is otherwise reasonably likely to enhance the benefits payable to such Participant hereunder.

     7.3 Powers of the Committee. The Committee will have the exclusive responsibility for the general administration of this Plan according to the terms and provisions of this Plan and will have all powers necessary to accomplish those purposes, including but not by way of limitation the right, power and authority:

     (a) to make rules and regulations for the administration of this Plan;

     (b) to construe all terms, provisions, conditions and limitations of this Plan;

     (c) to correct any defect, supply any omission or reconcile any inconsistency that may appear in this Plan;

     (d) to determine all controversies relating to the administration of this Plan, including but not limited to:

     (1) differences of opinion arising between a Company and a Participant except when the difference of opinion relates to the entitlement to, the amount of or the method or timing of payment of a benefit affected by a Change of Control, in which event it shall be decided only pursuant to arbitration as set forth in Section 11.3, and

     (2) any question it deems advisable to determine in order to promote the uniform administration of this Plan for the benefit of all interested parties; and

     (e) to delegate powers of investment and administration, as well as those clerical and recordation duties of the Committee, as it deems necessary or advisable for the proper and efficient administration of this Plan.

     7.4 Committee Discretion. The Committee in exercising any power or authority granted under this Plan or in making any determination under this Plan may use its sole discretion and judgment. Any decision made or any act or omission, by the Committee in good faith shall be final and binding on all parties and, except as otherwise set forth in Sections 6.4, 6.5 and 7.3(d)(1), shall not be subject to de novo review.

     7.5 Reliance Upon Information. The Committee will not be liable for any decision or action taken in good faith in connection with the administration of this Plan. Without limiting the generality of the foregoing, any decision or action taken by the Committee when it relies upon information supplied it by any officer of the Company, the Company’s legal counsel, the

9

Company’s actuary, the Company’s independent accountants or other advisors in connection with the administration of this Plan will be deemed to have been taken in good faith.

     7.6 Approval of Benefit Modifications. The Chief Executive Officer (“CEO”) of Valero shall have authority to approve enhancements to the Credited Service, or other modifications to the benefits, of any Participant or prospective Participant under the Plan in connection with the employment, retention, retirement or termination of a Participant; provided however, that any such modification made with respect to the benefits of the CEO or President of Valero shall be recommended to and approved by the Board of Directors.

ARTICLE VIII

ADOPTION BY SUBSIDIARIES

     8.1 Procedure for and Status After Adoption. Any Subsidiary of Valero at the date of adoption of this Plan, and any entity becoming a Subsidiary of Valero after such date of adoption, may adopt this Plan by appropriate action of its board of directors or other governing body. Any power reserved under this Plan to the Company may be exercised separately by each such Subsidiary adopting the Plan; provided, however, that (i) powers reserved under this Plan to the Board of Directors or the Committee shall be exercised only by the Board of Directors of Valero or Committee thereof and (ii) powers reserved under this Plan to Valero shall be exercised only by Valero. Each Subsidiary adopting the Plan delegates to Valero exclusive administrative responsibility for the Plan. However, Valero may allocate the costs of Plan benefits among the Companies in any reasonable manner such that each Company shall bear the costs of participation by those Participants who are or were employees of such Company. Each Subsidiary, by adopting this Plan, and in consideration of the like undertakings of the other adopting Subsidiaries, agrees that the obligations and liabilities of the Company(ies) for the payment of benefits to any Participants (and to any person claiming through a Participant) hereunder shall be the joint and several obligation of each Subsidiary adopting the Plan, not solely of the Company employing or previously employing a Participant. Accordingly, each such adopting Subsidiary agrees that, to the extent permitted under-Section 10.4, each Participant (and any person claiming through a Participant) shall have recourse and a right of action to enforce benefits payable under this Plan against any and all Companies contemporaneously participating in the Plan during the period of such Participant’s Credited Service.

     8.2 Termination of Participation By Adopting Subsidiary. Any Subsidiary adopting this Plan may, by appropriate action of its board of directors or other governing body, terminate its participation in this Plan. The Committee may, in its discretion, also terminate a Subsidiary’s participation in this Plan at any time. The termination of the participation in this Plan by a Subsidiary will not, however, affect the rights of any Participant who is working or has worked for the Subsidiary as to benefits previously vested under Article III of this Plan.

     8.3 Spinoff Plan. Notwithstanding the foregoing, effective as of July 1, 2006, all benefits accrued under this Plan with respect to Participants employed by NuStar Energy, LLC, formerly, Valero GP, LLC (“NuStar”) were spun off into a separate plan sponsored by NuStar, now known as the NuStar Supplemental Executive Retirement Plan (“NuStar SERP”). In this regard, effective as of July 1, 2006, NuStar established what is now known as the NuStar

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Pension Plan, a defined benefit plan qualified under Code section 401(a), which will provide benefits to eligible employees of NuStar with respect to service earned by eligible employees of NuStar and its participating affiliated companies from and after July 1, 2006. It is the intent of the Company that the NuStar SERP assumed the current liabilities of this Plan with respect to such Participants, and shall provide a single supplemental benefit to such employees that is based upon the benefits such Participant receives under the Valero Pension Plan, as well as the NuStar Pension Plan. From and after July 1, 2006, employees of NuStar who had been participating in this Plan ceased participating in this Plan. This Plan shall have no liability of any kind to such individuals. Additionally, from and after July 1, 2006, NuStar ceased being a participating Subsidiary under this Plan.

ARTICLE IX

AMENDMENT AND/OR TERMINATION

     9.1 Amendment or Termination of the Plan. The Committee may amend or terminate this Plan at any time by an instrument in writing without the consent of any Company.

     9.2 No Retroactive Effect on Annual Benefits. No amendment will affect the rights of any Participant to the Retirement benefit provided in Article IV previously accrued by the Participant or will change a Participant’s rights under any provision relating to a Change of Control after a Change of Control has occurred without his consent. However, the Board of Directors retains the right at any time to change in any manner the Retirement benefit provided in Article IV but only as to accruals after the date of the amendment.

     9.3 Effect of Termination. If this Plan is terminated, the accrued benefit of all Participants shall immediately become fully vested, and the benefit of each Participant (determined as of the date of the Plan termination and calculated in the manner provided in this Plan) shall, except as provided in Section 9.4, be paid at the time it would otherwise be paid under the terms of the Plan.

     9.4 Effect of Change in Control. In the event of a Change in Control, the accrued benefit of all Participants in the Plan shall immediately become fully vested. Additionally, the Committee may, within the period beginning thirty (30) days prior to the effective date of the Change in Control, and ending twelve (12) months after the effective date of the Change in Control, make an irrevocable decision to terminate the Plan (and all deferred compensation plans maintained by Valero which must be aggregated with the Plan under Code section 409A) and distribute all benefits to Participants. In the event of such termination following a Change in Control, the accrued benefits of each Participant (determined as of the date of Plan termination and calculated in the manner provided for in this Plan) shall be distributed in the form of a lump sum payment within twelve (12) months following the termination of this Plan. In the absence of such Plan termination, a Change in Control shall not alter the time and manner of the payment of benefits hereunder, and all benefits shall be paid at the time and in the manner as they would otherwise be paid in accordance with the provisions of this Plan.

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ARTICLE X

FUNDING

     10.1 Payments from Trust. As set forth in Section 8.1, the Companies are jointly and severally liable to pay the benefits due under this Plan; however should they fail to do so when a benefit is due, the Participant, Surviving Spouse or other person entitled to payment of a benefit hereunder may apply for payment of such benefit to the Trustee of the Trust, which shall pay such benefit in accordance with the provisions of the Trust Agreement. In any event, if the Trust fails to pay for any reason, the Companies shall remain jointly and severally liable for the payment of all benefits provided by this Plan.

     10.2 Plan May Be Funded Through Life Insurance. It is specifically recognized that Valero may, but is not required to, purchase life insurance so as to accumulate assets sufficient to fund obligations under this Plan and that Valero may, but is not required to contribute any policy or policies it may purchase and any amount it finds desirable to the Trust or any other trust established to accumulate assets to fund obligations under this Plan. However, under all circumstances, the Participants will have no rights in or to any such policies.

     10.3 Required Funding of Rabbi Trust. Subject to any limitations under applicable law, Valero will make contributions of cash or other assets sufficient to fund the Trust on an actuarially sound basis so as to ensure that at all times assets within the Trust equal or exceed the Actuarial Equivalent of Accrued Benefits of all Participants under the Plan, assuming the Accrued Benefits to be fully vested (whether they are or not). As of the end of each Plan Year, Valero shall cause the actuary who last performed the annual actuarial evaluation of the Valero Pension Plan, to determine the Actuarial Equivalent of the Accrued Benefits of all Plan Participants, assuming the Accrued Benefits to be fully vested (whether they are or not) as of the end of the preceding Plan Year. This annual determination shall be performed by the actuary, as soon as practicable following the close of the Plan Year, and the actuary shall prepare and provide to Valero a written report detailing the Accrued Benefits of the Participants. If such report shows that the Plan assets are less than the Actuarial Equivalent of the Accrued Benefits, then Valero, commencing within 60 days of receipt of the written report from the actuary, shall, subject to any limitations under applicable law, contribute to the Trust (which contribution may be made, at Valero’s sole discretion, in up to four quarterly installments, the last such installment to be made not later than December 31 of the Plan Year during which, such report is received) such assets that it may choose in its sole discretion in an amount necessary to ensue that the sum of (i) the fair market value of the Trust assets as of the end of such preceding Plan Year, and (ii) the fair market value of such contributions as of the date each such contribution is made, equals or exceeds the Actuarial Equivalent of the Accrued Benefits of all Participants so reported, assuming the Accrued Benefits to be fully vested (whether they are or not) as of the end of the prior Plan Year. All Participants shall be entitled to a copy of the report prepared by the actuary and likewise shall be furnished a schedule of Trust assets reflecting Valero’s satisfaction of its funding obligation under this Section 10.3, such report to be furnished to each Plan Participant within 30 days following the due date of Valero’s final contribution to the Trust for the Plan Year, if any may be required for the particular Plan Year.

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     10.4 Ownership of Assets; Release. All policies of insurance or other assets contributed to the Trust (or to any other trust established for the purpose of funding benefits hereunder) pursuant to Sections 10.2, 10.3 or otherwise shall be contributed by Valero, and all such policies or other assets shall be owned solely by Valero immediately prior to such contribution. No Company, other than Valero, shall contribute policies or assets to the Trust. As an internal accounting matter, as between Valero and the other Companies, Valero may charge or allocate all or any part of such contributions to other Companies in any reasonable manner determined by Valero in accordance with generally accepted accounting principles, and may record the amounts so allocated as obligations owing among Valero and such Companies. Valero may also allocate or distribute assets received by it from the Trust pursuant to Section 10.5 hereof to other Companies in any reasonable manner determined by Valero in accordance with generally accepted accounting principles. However, notwithstanding the fact that a Company may be deemed to have a claim against Valero with respect to such contributions or distributions, no Company (other than Valero) shall at any time own or be deemed to own or have any contingent, reversionary or other beneficial interest in any portion of the policies and other assets held in the Trust or any claim, against the Trustee or otherwise, with respect thereto. Each Company (other than Valero), by its adoption of this Plan, and in consideration of the mutual covenants herein contained, for itself, its successors, assigns, representatives, administrators, trustees and other persons claiming by, through or under such Company, hereby irrevocably and forever releases and relinquishes (i) any and all rights, claims and interests (beneficial, reversionary, actual, contingent or otherwise), known or unknown, asserted or unasserted, which it has or may have, or may hereafter have, in or with respect to the Trust, the Trust Fund (as such term is defined in the Trust Agreement) and the policies and assets now or hereafter from time to time contributed or contributable thereto, held therein or thereby, or distributable therefrom or thereby, and (ii) any claim, demand, action or cause of action whatsoever which it has or may have, or may hereafter have, against the Trustee, its successors or assigns, with respect thereto.

     10.5 Reversion of Excess Assets. Assets held pursuant to the Trust shall not be loaned to any Company. However, Valero may, at any time, request the actuary who last performed the annual actuarial valuation of the Valero Pension Plan to determine the Actuarial Equivalent of the Accrued Benefits, assuming the Accrued Benefits to be fully vested (whether they are or not), as of the end of the previous Plan Year. If the fair market value of the assets held in the Trust, as determined by the actuary, exceeds the Actuarial Equivalent of the Accrued Benefits of all such Participants by not less than 25%, then Valero may direct the Trustee to return to Valero that part of the assets which is in excess of 125% of the Actuarial Equivalent of the Accrued Benefits. Following the termination of the Plan and the final distribution of all Accrued Benefits and the full satisfaction of all obligations of the Plan and the Trust, any remaining assets in the Trust shall revert to Valero.

     10.6 Repurchase of Valero Stock. In order to facilitate diversification of Plan assets, Valero shall be entitled, from time to time, upon notice to the Trustee, to repurchase shares of Valero equity securities held in the Trust. Such repurchases shall be made for cash or in exchange for other assets having a fair market value, as determined by the Trustee, equal to the fair market value of such Valero securities at such date of purchase.

     10.7 Participants Must Rely Only on General Credit of the Companies. The provisions of Sections 10.2 and 10.3 notwithstanding, it is specifically recognized by the

13

Companies and the Participants that this Plan is an unsecured corporate commitment and that each Participant (and any Surviving Spouse or other person claiming through a Participant) must rely upon the general credit of the Companies for the fulfillment of their obligations under this Plan. Nothing contained in this Plan or in the Trust Agreement will constitute a representation, covenant or guarantee by any Company that the policies and assets transferred to the Trust (or any other trust established for the purpose of funding benefits hereunder) or the general assets of such Company (or Companies) will be sufficient to pay any or all benefits under this Plan Neither this Plan nor the Trust creates any secured or priority position, preferential right, lien, claim, encumbrance, right, title or other interest of any kind in any Participant in any policy or other asset held by any Company, contributed to the Trust (or any other trust established for the purpose of funding benefits hereunder) or otherwise designated to be used for payment of any obligations created in this Plan. No policy or other specific asset of any Company has otherwise been or will be set aside, or has been or will be pledged in any way for the performance of obligations under this Plan, which would remove the policy or asset from being subject to the claims of the general creditors of the respective Company. The Trust Agreement (and any other agreement entered into to fund obligations under this Plan) shall specify that, with respect to their benefits under this Plan, the Participants (and any Surviving Spouse or other person claiming through a Participant) are only unsecured general creditors.

ARTICLE XI

MISCELLANEOUS

     11.1 Responsibility for Distributions and Withholding of Taxes. Valero shall calculate the amount of any distribution payable to a Participant hereunder, and the amounts of any deductions required with respect to federal, state or local tax withholding, and shall withhold or cause the same to be withheld. However, any and all taxes payable with respect to any distribution or benefit hereunder shall be the sole responsibility of the Participant, not of Valero or any Company, whether or not Valero or any Company shall have withheld or collected from the Participant any sums required to be so withheld or collected in respect thereof and whether or not any sums so withheld or collected shall be sufficient to provide for any such taxes. Without limitation of the foregoing, and except as may otherwise be provided in any separate employment, severance or other agreement between the Participant and any Company, the individual Participant or Surviving Spouse, as the case may be, shall be solely responsible for payment of any excise, income or other tax imposed (i) upon any payment hereunder which may be deemed to constitute an “excess parachute payment” pursuant to Section 4999 of the Code, or (ii) based upon any theory of “constructive receipt” of any lump-sum or other amount hereunder.

     11.2 Limitation of Rights. Nothing in this Plan will be construed:

     (a) to give a Participant or other person claiming through him any right with respect to any benefit except in accordance with the terms of this Plan or an agreement modifying rights under this Plan;

     (b) to limit m any way the right of the Company to terminate a Participant’s employment with the Company at any time;

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     (c) to evidence any agreement or understanding, expressed or implied, that the Company will employ a Participant in any particular position or for any particular remuneration; or

     (d) to give a Participant or any other person claiming through him any interest or right under this Plan other than that of any unsecured general creditor.

     11.3 Arbitration of Disputes.

     A. It is agreed that any and all disputes, claims, (whether tort, contract, statutory or otherwise) and/or controversies which relate, in any manner to the Plan shall be submitted to final and binding arbitration. The claims covered by this agreement to arbitrate include, but are not limited to, those which relate to the following:

     a. The application and interpretation of the Plan.

     b. Forfeitures pursuant to Section 6.5 or 6.6 of the Plan.

     c. Eligibility for and the calculation of benefits from the Plan.

     d. That in interpreting or applying the provisions of the Plan, the Company has treated the Participant unfairly or discriminated against the Participant in connection with a work-related injury, disease or death, or claim for benefits under the Plan in violation of the Texas Commission on Human Rights Act, Title VII of the Civil Rights Act of 1964, as amended, The Equal Pay Act of 1963, as amended, the Americans with Disabilities Act, the Age Discrimination in Employment Act of 1967, as amended, the Rehabilitation Act of 1973, as amended, or any other provision forbidding discrimination in employment on any basis.

     e. That Valero or the Committee in interpreting or applying the provisions of the Plan, breached any contract or covenant (express or implied), committed a tort or act of discrimination (including, but not limited to race, sex, religion, national origin, age, marital status, or medical condition, handicap or disability), or violated any federal, state or other governmental law, statute, regulation, or ordinance.

     f. That a Company has discharged or in any manner discriminated against the Participant because the Participant in good faith filed a claim, hired a lawyer to represent him or her in a claim, instituted, or caused to be instituted, in good faith, any proceeding under the Plan or the TWCA, or has testified in any such proceeding.

     B. This Arbitration provision is expressly made pursuant to and shall be governed by the Federal Arbitration Act, 9 U.S.C. §§ 1-14. Except to the extent herein modified, all arbitration proceedings shall be conducted in accordance with the Rules. The parties hereto agree that, pursuant to Section 9 of the Federal Arbitration Act, a judgment of the United States District Court for the Western District of Texas, San Antonio Division, or of any other court of competent jurisdiction, may be entered upon an award made pursuant to arbitration.

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     C. The neutral arbitrator (“Arbitrator”) shall be appointed in the manner prescribed in Rule 13 of the Rules. The decision of the Arbitrator selected thereunder shall be final and binding on all parties.

     D. Except as may be modified by the Arbitrator for good cause shown, the following procedures shall be followed in addition to those set forth within the Rules themselves. (1) At least twenty (20) days before the arbitration, the parties must exchange lists of witnesses, including any experts, and copies of all exhibits intended to be used at the arbitration. Except for good cause, the Arbitrator may refuse to allow into evidence the testimony of any witness not timely disclosed. In addition, except for good cause, the Arbitrator may exclude from evidence any exhibit not previously tendered to the opposing parry in a timely fashion. (2) Each party may take the deposition of one individual and any or all expert witnesses designated by another party. Additional discovery, including but not limited to interrogatories and requests for production of documents, medical or psychological examinations, may be had, upon a showing of substantial need, where the Arbitrator so orders. (3) The Arbitrator shall apply the substantive law (and the law of remedies, if applicable) of the State of Texas, or federal law or both as applicable to the claim(s) asserted. (4) The Arbitrator shall have the authority to entertain a motion to dismiss and/or a motion for summary judgment by any party and shall apply the standards governing such motions under the Federal Rules of Civil Procedure. (5) Rule 31 of the Rules is amended to allow for the use of sworn depositions taken in conformity with the Federal Rules of Civil Procedure. (6) The results of the arbitration shall be confidential and shall not be publicly released or reported by the Arbitrator or by either parry.

     E. The Participant (or other person claiming through him) shall pay one half of the fees and cost of the Arbitrator. Funds or other appropriate security shall be posted by each party for its share of the Arbitrator’s fee, in an amount and manner determined by the Arbitrator, ten (10) days before the first day of hearing. Each party shall pay for its own cost and attorneys fees, if any. However, if any parry prevails on a statutory claim which affords the prevailing party attorney’s fees, or if there is a written agreement providing for fees, the Arbitrator may award reasonable fees to the prevailing party.

     F. This agreement to arbitrate shall survive the termination of Participant’s employment. It can only be revoked or modified by a writing signed by the parties which specifically states an intent to revoke or modify the provisions of this Section 11.3.

     G. Should one or more provisions of this Section 11.3 be rendered or declared invalid by reason of any existing or subsequently enacted legislation, or by a decree of a court of competent jurisdiction, such invalidation of such provision or provisions hereof shall not affect the remaining portions of this agreement to arbitrate.

     H. Any arbitration proceeding commenced under this Section 11.3 shall, to the extent practicable, be consolidated with any arbitration proceeding relating to the same or similar facts and circumstances between the Trustee and Valero pursuant to the Trust Agreement.

     11.4 Distributions to Incompetents. Should a Participant or a Surviving Spouse be incompetent at the time any payment is due hereunder, as determined by the Committee in its sole discretion, Valero is authorized to make such payment to the guardian or conservator of the

16

incompetent Participant or Surviving Spouse or directly to the Participant or Surviving Spouse or to apply those funds for the benefit of the incompetent Participant or Surviving Spouse in any manner the Committee determines in its sole discretion.

     11.5 Nonalienation of Benefits. No right or benefit provided in this Plan will be transferable by the Participant, except upon his death to a Surviving Spouse as provided in this Plan. No right or benefit under this Plan will be subject to anticipation, alienation, sale, assignment, pledge, encumbrance or charge, and any attempt to anticipate, alienate, sell, assign, pledge, encumber, or charge the same will be void. No right or benefit under this Plan will in any manner be liable for or subject to any debts, contracts, liabilities or torts of the person entitled to such benefits. If any Participant or any Surviving Spouse becomes bankrupt or attempts to anticipate, alienate, sell, assign, pledge, encumber or charge any right or benefit under this Plan, that right or benefit will, in the discretion of the Committee, cease. In that event, the Committee may have Valero hold or apply the right or benefit or any part of it to the benefit of the Participant or Surviving Spouse, his or her spouse, children or other dependents or any of them in any manner and in any proportion the Committee believes to be proper in its sole and absolute discretion, but is not required to do so.

     11.6 Severability. If any term, provision, covenant or condition of this Plan is held to be invalid, void or otherwise unenforceable, the rest of this Plan will remain in full force and effect and will in no way be affected, impaired or invalidated.

     11.7 Notice. Any notice or filing required or permitted to be given to a Company, the Committee or a Participant will be sufficient if in writing and hand delivered or sent by U.S. mail to the principal office of Valero, acting on behalf of the Company or Committee, or to the residential mailing address of the Participant. Notice will be deemed to be given as of the date of hand delivery or if delivery is by mail, as of the date shown on the postmark.

     11.8 Gender and Number. If the context requires it, words of one gender when used in this Plan will include the other gender, and words used in the singular or plural will include the other.

     11.9 Governing Law. The Plan will be construed, administered and governed in all respects by the laws of the State of Texas.

     11.10 Effective Date. Except as otherwise provided herein, this amendment and restatement of the Plan is effective as of January 1, 2008.

     IN WITNESS WHEREOF, Valero has executed this amendment and restatement of the Plan effective as of the Effective Date provided for herein.

VALERO ENERGY CORPORATION
By:	/s/ William R. Klesse

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EX-10.02

Exhibit 10.02

VALERO ENERGY CORPORATION

RESTRICTED STOCK PLAN
for
NON-EMPLOYEE DIRECTORS

Adopted April 23, 1997,
as amended and restated through July 11, 2007

RESTRICTED STOCK PLAN FOR NON-EMPLOYEE DIRECTORS

TABLE OF CONTENTS

		Page
1.	Purpose and Effective Date of Plan		2
2.	Certain Definitions		2
3.	Shares Subject to the Plan		3
4.	Eligibility		3
5.	Automatic Grants to Non-Employee Directors		3
6.	Administration of the Plan		4
7.	Restrictions Applicable to Restricted Shares		5
8.	Forfeiture, Completion of Restriction Period		7
9.	Adjustment in Event of Changes in Common Stock		8
10.	Non-Alienation of Benefits		8
11.	Appointment of Attorney-in-Fact		8
12.	Withholding Taxes		8
13.	Amendment and Termination of Plan		9
14.	[reserved]		9
15.	Government and Other Regulations		9
16.	No Right to Nomination		10
17.	Non-Exclusivity of Plan		10
18.	Governing Law		10
19.	Miscellaneous Provisions		10

VALERO ENERGY CORPORATION

Restricted Stock Plan for Non-Employee Directors

1. Purpose and Effective Date of Plan. The purpose of this Plan is to supplement the compensation paid to Non-Employee Directors, to increase their proprietary interest in the Company, to attract and retain persons of outstanding caliber to serve as directors of the Company and to enhance their identification with the interests of the Company’s stockholders through ownership of Common Stock. The Effective Date of this Plan is July 31, 1997. Shares awarded under the Plan shall be in addition to, and shall not replace, any cash or other compensation arrangement available to Non-Employee Directors.

2. Certain Definitions.

(a)	“Annual Meeting” shall mean the annual meeting of stockholders for election of directors of the Company. In the event of any adjournment of any such meeting, the date on which the inspectors appointed for such meeting declare directors to have been elected shall be deemed the meeting date for purposes of the Plan.
(b)	“Board” shall mean the board of directors of the Company.
(c)	“Common Stock” shall mean the common stock, $0.01 par value, of the Company.
(d)	“Company” shall mean Valero Energy Corporation, a Delaware corporation.
(e)	“Compensation Committee” shall mean the Compensation Committee of the Board.
(e-1)	“Effective Date” shall mean July 31, 1997.
(f)	“Employee Director” shall mean a member of the Board who is an employee of the Company or any subsidiary of the Company.
(g)	“Exchange Act” shall mean the Securities Exchange Act of 1934, as amended.
(h)	“Fair Market Value” shall mean the average of the high and low sales prices of the Common Stock on a Grant Date (or if Common Stock was not traded on such day, the first day following the Grant Date on which Common Stock was traded) as reported on the New York Stock Exchange.
(i)	“Grant Date” shall mean the date on which Restricted Shares are awarded to a Non-Employee Director pursuant to Paragraph 5.
(j)	“Mandatory Retirement Policy” shall mean the retirement policy set forth in Article I, Section 6, of the Corporate Governance Guidelines of the Company, or any successor policy.
(k)	“Non-Employee Director” shall mean a member of the Board who is not an employee of the Company or any subsidiary of the Company.
(l)	“Participant” shall have the meaning given in Paragraph 5(c).
(m)	“Plan” shall mean this Restricted Stock Plan for Non-Employee Directors.
(n)	“Restriction Period” shall mean the period of time, as specified in Paragraph 7(c), applicable to Restricted Shares granted under the Plan.
(o)	“Restricted Shares” shall mean shares of Common Stock granted to a Non-Employee Director pursuant to Paragraph 5.
(p)	“Restricted Shares Agreement” shall mean the agreement described in Paragraph 5(c).

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(q)	“Retained Distributions” shall mean distributions that are retained by the Company pursuant to Paragraph 7(e)(ii).
(r)	“Share” means a share of Common Stock.
(s)	“Subsidiary of the Company” shall mean any corporation, partnership or other entity in which the Company owns, directly or indirectly, a controlling interest.

3. Shares Subject to the Plan.

(a)	Subject to the provisions of Paragraph 9 below, the maximum aggregate number of shares of Common Stock that may be granted under the Plan shall be 100,000 Shares (pre-split), provided, however, that any Restricted Shares granted under the Plan that are forfeited pursuant to the terms of the Plan or otherwise surrendered shall again become available for grant under the Plan. Shares withheld by the Company, or delivered to the Company, to pay taxes pursuant to Paragraph 12 shall not be available for additional grants under the Plan.
(b)	The Restricted Shares may be, in whole or in part, authorized but unissued shares of Common Stock or shares of Common Stock previously issued and outstanding and reacquired by the Company.
(c)	The Company shall not be required to issue fractional Shares, and in lieu thereof any fractional Shares shall be rounded to the next higher number of whole Shares.

4. Eligibility. The only persons eligible to participate in the Plan shall be Non-Employee Directors. An Employee Director who retires from employment with the Company or any Subsidiary of the Company shall be (without further action by the Committee) eligible to participate in the Plan and shall be entitled to receive a grant of Restricted Shares immediately upon the commencement of his or her service as a Non-Employee Director.

5. Automatic Grants to Non-Employee Directors.

(a)	On the date of each Annual Meeting, each Non-Employee Director who is elected as a Non-Employee Director at the Annual Meeting or whose term of office otherwise continues following the date of the Annual Meeting shall thereupon receive an automatic grant of Restricted Shares valued at $160,000 in the aggregate based upon the Fair Market Value of a Share on such Grant Date.
(b)	Each person who is first elected or appointed as a Non-Employee Director on a date other than the date of an Annual Meeting shall automatically receive, on the date so elected or appointed, a pro-rata grant of Restricted Shares (as compared to the annual grant of Restricted Shares described in Paragraph 5(a) above) valued (based upon the Fair Market Value of a Share on the Grant Date) at an amount equal to $160,000 multiplied by a number equal to the quotient of the whole number of months (rounding upward for fractional months) until the next Annual Meeting divided by 12.
(c)	The officers of the Company shall promptly cause the Company to enter into an agreement with each Non-Employee Director who is granted Restricted Shares pursuant to this Paragraph 5 (“Restricted Share Agreement”), and shall cause the Company to issue such Restricted Shares, all without further action by the Company, the Board, the Compensation Committee or the Special Committee. Each Non-Employee Director receiving an automatic grant of Restricted Shares pursuant to this Paragraph 5 is referred to herein as a “Participant.” The execution and delivery of a Restricted Shares Agreement shall be a condition precedent to the issuance of Restricted Shares to a Participant.

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6. Administration of the Plan.

(a)

Except as otherwise set forth herein, the Plan shall be administered by the Compensation Committee, as appointed and constituted from time to time by the Board so long as the Compensation Committee is composed solely of two or more “Non-Employee Directors” (as defined in Rule 16b-3 under the Exchange Act). In the event the Compensation Committee shall fail to meet the foregoing criteria, then additional or different persons shall be appointed by the Board for purposes of administering this Plan so that the committee administering this Plan shall be composed solely of two or more Non-Employee Directors (as defined in Rule 16b-3).

(b)

In connection with its administration of this Plan, the Compensation Committee is empowered to:

(i)	Make rules and regulations for the administration of the Plan that are not inconsistent with the terms and provisions of this Plan;
(ii)	Construe all terms, provisions, conditions and limitations of the Plan in good faith, and adopt amendments to the Plan;
(iii)	Make equitable adjustments for any mistakes or errors in the administration of this Plan or deemed to be necessary as the result of any unusual situation or any ambiguity in the Plan;
(iv)	Select, employ and compensate, from time to time, consultants, accountants, attorneys and other agents and employees as the Compensation Committee may deem necessary or advisable for the proper and efficient administration of this Plan.

(c)	The foregoing list of express powers granted to the Compensation Committee upon the adoption of this Plan is not necessarily intended to be either complete or exclusive, and the Compensation Committee shall, in addition to the specific powers granted by this Plan, have such powers not inconsistent with the Plan or Rule 16b-3, whether or not expressly authorized herein, which it may deem necessary, desirable, advisable, proper, convenient or appropriate for the supervision and administration of this Plan. Except as otherwise specifically provided herein, the decisions and judgment of the Compensation Committee on any question or claim arising hereunder shall be final, binding and conclusive upon the Participants and all persons claiming by, through or under a Participant.
(d)	Notwithstanding the foregoing, the Compensation Committee shall have no authority to exercise discretion with respect to the selection of any Non-Employee Director as a Participant in the Plan, the determination of the number of Restricted Shares that are allocated to any such Non-Employee Director or the terms or conditions of any such allocation, and shall have no authority to amend any provision of the Plan relating to eligibility for participation in the Plan, the amount or timing of grants under the Plan or the imposition or removal of restrictions on the vesting of Restricted Shares.
(e)	Distributions of Shares may, as the Compensation Committee shall in its sole discretion determine, be made from authorized but unissued Shares or from treasury or reacquired Shares.

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7. Restrictions Applicable to Restricted Shares.

(a)	All Restricted Shares granted pursuant to Paragraph 5 of the Plan shall be subject to the risk of forfeiture during the applicable Restriction Period. The Restriction Period for each grant of Restricted Shares shall commence on the Grant Date.
(b)	The Restriction Period for Restricted Shares granted to a Non-Employee Director shall end and the Restricted Shares and any related Retained Distributions shall become nonforfeitable on the earlier of any of the following events:

(i)	The date a Non-Employee Director ceases to be a Director of the Company by reason of the Mandatory Retirement Policy;
(ii)	The date a Non-Employee Director completes his or her tenure as a Director of the Company as provided in the bylaws of the Company and declines to stand for reelection;
(iii)	The date a Non-Employee Director, having been nominated for and having agreed to stand for reelection, is not reelected by the stockholders of the Company to serve as a member of the Board;
(iv)	The date of the death of a Non-Employee Director;
(v)	The date a Non-Employee Director certifies in writing to the Company that he or she is resigning as a member of the Board due to medical or health reasons which render such Non-Employee Director unable to continue to serve as a member of the Board;
(vi)	Subject to the provisions of and definitions contained in Paragraph 7(f), the occurrence of a Change of Control of the Company; or
(vii)	The date specified in Paragraph 7(c).

(c) Except as otherwise provided herein, the Restriction Period shall terminate as follows, and the Restricted Shares (and any Retained Distributions) shall vest and accrue (i.e., become non-forfeitable) to the Non-Employee Director as follows:

(i)

with respect to (A) any grant of Restricted Shares under Paragraph 5(b), and (B) any first-time grant of Restricted Shares under Paragraph 5(a) to a Non-Employee Director, the Restriction Period for one-third of such Restricted Shares shall terminate on the date of the first Annual Meeting following the Grant Date, the Restriction Period for another one-third of such Restricted Shares shall terminate on the date of the second Annual Meeting following the Grant Date, and the Restriction Period for the final one-third of such Restricted Shares shall terminate on the date of the third Annual Meeting following the Grant Date;

(ii)

with respect to any second-time grant of Restricted Shares under Paragraph 5(a) to such Non-Employee Director, the Restriction Period for one-third of such Restricted Shares shall terminate on the date of the first Annual Meeting following the Grant Date, and the Restriction Period for the remaining two-thirds of such Restricted Shares shall terminate on the date of the second Annual Meeting following the Grant Date;

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(iii)	with respect to any third-time grant of Restricted Shares under Paragraph 5(a) to such Non-Employee Director, the Restriction Period for such Restricted Shares shall terminate on the date of the first Annual Meeting following the Grant Date; and
(iv)	with respect to any subsequent grant of Restricted Shares under Paragraph 5(a) to such Non-Employee Director, no Restriction Period shall apply to such Restricted Shares and such shares shall immediately vest and accrue on the Grant Date.

(d)

Restricted Shares and the shares of Common Stock issuable in connection with the vesting of the Restricted Shares will be issued in uncertificated form, pursuant to the Direct Registration System (“DRS”) or similar system for recording the issuance and transfer of uncertificated shares of Common Stock that is administered by the Company’s stock transfer agent.

(e)

Restricted Shares shall constitute issued and outstanding shares of Common Stock for all corporate purposes. The Non-Employee Director will have the right to vote such Restricted Shares, to receive and retain all regular cash dividends paid on such Restricted Shares and to exercise all other rights, powers and privileges of a holder of Common Stock with respect to such Restricted Shares, with the exception that:

(i)	the Non-Employee Director will not be entitled to delivery of a stock certificate or a designation of “unrestricted” status in the DRS until the Restriction Period applicable to such Restricted Shares shall have expired and all other vesting requirements with respect thereto shall have been fulfilled;
(ii)	other than cash dividends and rights to purchase stock which might be distributed to shareholders of the Company, the Company will retain custody of all distributions (“Retained Distributions”) made or declared with respect to Restricted Shares (and such Retained Distributions will be subject to the same restrictions, terms and conditions as are applicable to the Restricted Shares with respect to which they were made, paid or declared) until such time, if ever, as the Restriction Period applicable to the Restricted Shares with respect to which such Retained Distributions shall have been made, paid or declared shall have expired, and such Retained Distributions shall not bear interest or be segregated in separate accounts;
(iii)	upon the breach of any restrictions, terms or conditions provided in the Plan with respect to any Restricted Shares or Retained Distributions, such Restricted Shares and any related Retained Distributions shall thereupon be automatically forfeited.

(f) A “Change of Control” as used herein, shall be deemed to occur when:

(i) the stockholders of the Company approve any agreement or transaction pursuant to which:

(A)	the Company will merge or consolidate with any other person (other than a wholly owned subsidiary of the Company) and will not be the surviving entity (or in which the Company survives only as the subsidiary of another entity);
(B)	the Company will sell all or substantially all of its assets to any other person (other than a wholly owned subsidiary of the Company); or
(C)	the Company will be liquidated or dissolved; or

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(ii)	any “person” or “group” (as these terms are used in Section 13(d) and 14(d) of the Exchange Act) other than the Company, any subsidiary of the Company, any employee benefit plan of the Company or its subsidiaries, or any entity holding Common Stock for or pursuant to the terms of such employee benefit plans, is or becomes an “Acquiring Person” as defined in the Rights Agreement dated June 18, 1997 (“Rights Agreement”) between the Company and Computershare Investor Services, L.L.C., as Rights Agent (successor Rights Agent to Harris Trust and Savings Bank), as amended (or any successor Rights Agreement) (or, if no Rights Agreement is then in effect, such person or group acquires or holds such number of shares as, under the terms and conditions of the most recent such Rights Agreement to be in force and effect, would have caused such person or group to be an “Acquiring Person” thereunder); or
(iii)	any “person” or “group” shall commence a tender offer or exchange offer for 15% or more of the shares of Common Stock then outstanding, or for any number or amount of shares which, if the tender or exchange offer were to be fully subscribed and all shares for which the tender or exchange offer is made were to be purchased or exchanged pursuant to the offer, would result in the acquiring person or group directly or indirectly beneficially owning 50% or more of the shares of Common Stock then outstanding; or
(iv)	individuals who, as of any date, constitute the Board (the “Incumbent Board”) thereafter cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director whose election, or nomination for election by the Company’s stockholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a person or group other than the Board; or
(v)	the occurrence of the Distribution Date (as defined in the Rights Agreement); or
(vi)	any other event determined by the Board or the Committee to constitute a “Change of Control” hereunder.

8. Forfeiture, Completion of Restriction Period.

(a)	If a Non-Employee Director ceases to be a member of the Board for any reason other than as set forth in Paragraph 7(b), then all Restricted Shares and all Retained Distributions with respect thereto issued to such Non-Employee Director and to which the Restriction Period still applies shall be forfeited to the Company and the Non-Employee Director shall not have any rights (including dividend and voting rights) with respect to such forfeited Restricted Shares and Retained Distributions.
(b)	Upon expiration of the Restriction Period with respect to a Non-Employee Director’s Restricted Shares, and the satisfaction of any other applicable restrictions, terms and conditions, such Restricted Shares and any Retained Distributions with respect to such Restricted Shares shall become nonforfeitable. The Company shall promptly thereafter direct the Company’s stock transfer agent to redesignate such shares in the Non-Employee Director’s DRS account as “issued and unrestricted” Shares.
(c)	Notwithstanding any other provision of this Plan, if the Committee finds by a majority vote, that the Participant, before or after termination of his or her capacity as a Non-Employee

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Director of the Company, committed fraud, embezzlement, theft, commission of felony, or proven dishonesty in the course of his or her relationship to the Company and/or a Subsidiary of the Company which conduct damaged the Company and/or a Subsidiary of the Company, or disclosed trade secrets of the Company or a Subsidiary of the Company, then all Restricted Shares and all Retained Distributions with respect thereto issued to such Participant to which the Restriction Period still applies shall be forfeited to the Company and the Participant will have no further rights with respect thereto. The decision of the Committee will be final.

9.   Adjustment in Event of Changes in Common Stock. In the event of a recapitalization, stock split, stock dividend, combination or exchange of shares, merger, consolidation, liquidation or other similar event, the aggregate number and class of Restricted Shares and other securities or property available for grant under the Plan shall be automatically adjusted so that the total number of Restricted Shares or other securities or property issuable under the Plan immediately following such event shall be the number of shares of Common Stock and other securities or property which, had all remaining shares of Common Stock available under the Plan been granted to a single holder immediately prior to such event, would be held or received by such holder immediately following such event.

10. Non-Alienation of Benefits. No Shares, Retained Distributions, or other rights or benefits under the Plan or any Restricted Shares Agreement shall be subject, prior to the end of any applicable Restriction Period or other restrictive period, to anticipation, alienation, sale, assignment, hypothecation, pledge, exchange, transfer, encumbrance or charge (other than by will or the laws of descent and distribution), and any such attempt to anticipate, alienate, sell, assign, hypothecate, pledge, exchange, transfer, encumber or charge the same shall be void. No Shares, Retained Distributions, or other rights or benefits under the Plan shall in any manner be liable for or subject to the debts, contracts, liabilities or torts of the person entitled to such right or benefit. If any Non-Employee Director or other person claiming by, through or under a Non-Employee Director hereunder should attempt to anticipate, alienate, sell, assign, hypothecate, pledge, exchange, transfer, encumber or charge any Shares, Retained Distributions, or any right or benefit hereunder, prior to the end of any applicable Restriction Period or other restrictive period, then such Restricted Shares and related Retained Distributions shall be automatically forfeited and such rights or benefits shall cease and terminate.

11. Appointment of Attorney-in-Fact. Upon the grant of any Restricted Sharesthe Non-Employee Director shall be deemed to have appointed the Company, acting through its Corporate Secretary, the attorney-in-fact of the Non-Employee Director, with full power of substitution, for the purpose of carrying out the provisions of this Plan and taking any action and executing any instruments which such attorney-in-fact may deem necessary or advisable to accomplish the purposes hereof, which appointment as attorney-in-fact shall be irrevocable and coupled with an interest. The Company as attorney-in-fact for the Non-Employee Director may, in the name and stead of the Non-Employee Director, make and execute all conveyances, assignments and transfers of the Restricted Shares and Retained Distributions deposited with the Company or its stock transfer agent pursuant to the Plan. The Non-Employee Director shall, if so requested by the Company, execute and deliver to the Company all such instruments as may, in the judgement of the Company, be advisable for such purpose.

12. Withholding Taxes.

 (a) At the time any Restricted Shares become nonforfeitable under the Plan (or, if at the time of receipt the Participant shall not be subject to taxation with respect to such Shares, at such later date as such Participant becomes subject to taxation with respect to such Shares; whichever such date is applicable being referred to herein as the “tax date”), the Participant

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shall make a cash payment to the Company equal to the amount required by applicable provisions of law to be withheld by the Company in connection with federal income tax, FICA and all other federal, state and local taxes in respect of such Shares (or such greater amount as the Participant shall elect to have withheld in respect of such taxes; whichever such amount is applicable being referred to herein as the “tax amount”), provided that subject to the prior approval of the Committee, the Participant may elect that all or any portion of the tax amount be collected by withholding from the number of Shares otherwise to be delivered to the Participant that number of Shares having a Fair Market Value on the tax date equal to all or any portion of the amount otherwise to be collected subject to any limitations prescribed by applicable law, in all cases, only that number of whole Shares the Fair Market Value of which does not exceed the tax amount shall be withheld or delivered and the Participant shall make a cash payment to the Company equal to any excess amount to be withheld or collected. In lieu of the foregoing withholding procedure, a Participant, subject to the prior approval of the Committee, may satisfy the tax withholding or collection requirement by delivering to the Company on the tax date certificates for other Shares already owned by the Participant, endorsed in blank with appropriate signature guarantee, having a Fair Market Value on the tax date equal to the tax amount. All taxes payable with respect to income of a Participant resulting from the grant or issuance of any Shares hereunder shall be the sole responsibility of the Participant, not of the Company, whether or not the Company shall have withheld or collected from the Participant any sums required to be so withheld or collected in respect of such income, and whether or not any sums so withheld or collected shall be sufficient to provide for any such taxes. The determination of any tax resulting from the award or vesting of Shares or from cash or other distributions with respect to Shares or Retained Distributions shall be the sole responsibility of the Participant.

(b) To the extent permitted under the Internal Revenue Code of 1986, as amended, a Non-Employee Director granted Restricted Shares may elect (which, apart from any other notice required by law, shall require that the Non-Employee Director notify the Company of such election at the time it is made) within 30 days after the Grant Date to include in gross income for federal income tax purposes an amount equal to the Fair Market Value of such Shares at the Grant Date.

13. Amendment and Termination of Plan. Subject to the provisions of Paragraph 6(d), the Compensation Committee may at any time terminate, modify or amend the Plan as it shall deem advisable. Notwithstanding the foregoing, shareholder approval shall be obtained for any action with respect to the Plan to the extent required by applicable state or federal rules, regulations or laws. No termination or amendment of the Plan shall adversely affect the rights of any Non-Employee Director under any grant previously made.

14. [reserved]

15. Government and Other Regulations. Notwithstanding any other provisions of the Plan, the obligations of the Company with respect to Restricted Shares or Retained Distributions shall be subject to all applicable laws, rules and regulations, and such approvals by any governmental agencies as may be required or deemed appropriate by the Company. The Company reserves the right to delay or restrict, in whole or in part, the issuance or delivery of Common Stock pursuant to any grants of Restricted Shares or Retained Distributions under the Plan until such time as any legal requirements or regulations shall have been met relating to the issuance of such Restricted Shares or Retained Distributions.

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16. No Right to Nomination. Nothing in the Plan or in any grant shall confer upon any Director the right be nominated for reelection to the Board.

17. Non-Exclusivity of Plan. Neither the adoption of the Plan by the Compensation Committee nor any submission of the Plan to the stockholders of the Company for approval shall be construed as creating any limitations on the power of the Compensation Committee or the Board to adopt such other incentive arrangements as it may deem desirable, including, without limitation, the awarding of Common Stock otherwise than under the Plan, and such arrangements as may be either generally acceptable or applicable in specific cases.

18. Governing Law. The Plan shall be governed by, and construed in accordance with, the laws of the State of Texas.

19. Miscellaneous Provisions.

(a)	Except as to automatic grants to Non-Employee Directors pursuant to Paragraph 5 hereof, no employee or other person shall have any claim or right to be granted Shares under this Plan.
(b)	The expenses of the Plan shall be born by the Company.
(c)	By accepting any grant under the Plan, each Non-Employee Director and each personal representative or beneficiary and each other person claiming by, through or under such Non-Employee Director shall be conclusively deemed to have indicated his or her acceptance and ratification of, and consent to, any action taken under the Plan by the Company, the Board or the Compensation Committee.
(d)	[reserved].
(e)	Each grant of Restricted Shares to any person serving at the Grant Date as a Non-Employee Director shall be in consideration of past services of the Participant. Each grant of Restricted Shares to a person who was not serving as a Non-Employee Director prior to the Grant Date shall be in consideration of such person’s agreement to stand for election as or be considered for appointment as a Non-Employee Director and to serve as such if so elected or appointed. Each such grant shall be deemed to constitute a conclusive finding by the Board that such services or agreement, as applicable, have a value equal to or in excess of the value of such Restricted Shares, and constitute payment in full therefor. All authorized and unissued shares issued as Restricted Shares in accordance with the Plan shall be fully paid and nonassessable shares and free from preemptive rights. No Restricted Shares shall be issued for consideration having a value less than the par value of the Common Stock.

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EX-12.01

Exhibit 12.01

VALERO ENERGY CORPORATION AND SUBSIDIARIES
STATEMENTS OF COMPUTATIONS OF RATIOS OF EARNINGS TO FIXED
CHARGES AND RATIOS OF EARNINGS TO FIXED CHARGES AND PREFERRED
STOCK DIVIDENDS
(Millions of Dollars)

	Six
	Months
	Ended
	June 30,			Year Ended December 31,
	2007			2006			2005			2004			2003			2002
Ratio of Earnings to Fixed Charges:
Earnings:
Income from continuing operations before income tax expense, minority interest in net income of consolidated subsidiaries, distributions on preferred securities of subsidiary trusts, and income from equity investees	$	4,756		$	7,872		$	5,013		$	2,726		$	981		$	191
Add:
Fixed charges		297			566			474			410			396			409
Amortization of capitalized interest		7			9			8			7			6			6
Distributions from equity investees		—			47			50			42			26			5
Less:
Interest capitalized		(58	)		(165	)		(65	)		(37	)		(26	)		(16	)
Distributions on preferred securities of subsidiary trusts		—			—			—			—			(17	)		(30	)
Minority interest in net income of NuStar Energy L.P.		—			—			—			—			(2	)		(14	)
Total earnings	$	5,002		$	8,329		$	5,480		$	3,148		$	1,364		$	551
Fixed charges:
Interest expense, net	$	141		$	212		$	269		$	260		$	261		$	286
Interest capitalized		58			165			65			37			26			16
Rental expense interest factor (1)		98			189			140			113			92			77
Distributions on preferred securities of subsidiary trusts		—			—			—			—			17			30
Total fixed charges	$	297		$	566		$	474		$	410		$	396		$	409
Ratio of earnings to fixed charges		16.8x			14.7x			11.6x			7.7x			3.4x			1.3x
Ratio of Earnings to Fixed Charges and Preferred Stock Dividends:
Total earnings	$	5,002		$	8,329		$	5,480		$	3,148		$	1,364		$	551
Total fixed charges	$	297		$	566		$	474		$	410		$	396		$	409
Preferred stock dividends		—			3			20			19			7			—
Total fixed charges and preferred stock dividends	$	297		$	569		$	494		$	429		$	403		$	409
Ratio of earnings to fixed charges and preferred stock dividends		16.8x			14.6x			11.1x			7.3x			3.4x			1.3x

(1) The interest portion of rental expense represents one-third of rents, which is deemed representative of the interest portion of rental
expense.

EX-31.01

Exhibit 31.01

CERTIFICATION PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002

     I, William R. Klesse, certify that:

     1. I have reviewed this quarterly report on Form 10-Q of Valero Energy Corporation;

     2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

     3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

     4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

     (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

     (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

     (c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

     (d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

     5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

     (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

     (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 8, 2007

     /s/ William R. Klesse William R. Klesse
Chief Executive Officer

CERTIFICATION PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002

     I, Michael S. Ciskowski, certify that:

     1. I have reviewed this quarterly report on Form 10-Q of Valero Energy Corporation;

     2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

     3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

     4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

     (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

     (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

     (c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

     (d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

     5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

     (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

     (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 8, 2007

     /s/ Michael S. Ciskowski Michael S. Ciskowski
Executive Vice President and Chief Financial Officer

EX-32.01

Exhibit 32.01

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Valero Energy Corporation (the Company) on Form 10-Q for the quarter ended June 30, 2007, as filed with the Securities and Exchange Commission on the date hereof (the Report), I, William R. Klesse, Chief Executive Officer of the Company, hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

1.	The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2.	The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ William R. Klesse William R. Klesse
Chief Executive Officer
August 8, 2007

A signed original of the written statement required by Section 906 has been provided to Valero Energy Corporation and will be retained by Valero Energy Corporation and furnished to the Securities and Exchange Commission or its staff upon request.

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Valero Energy Corporation (the Company) on Form 10-Q for the quarter ended June 30, 2007, as filed with the Securities and Exchange Commission on the date hereof (the Report), I, Michael S. Ciskowski, Executive Vice President and Chief Financial Officer of the Company, hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

1.	The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2.	The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Michael S. Ciskowski Michael S. Ciskowski
Executive Vice President and Chief Financial Officer
August 8, 2007

A signed original of the written statement required by Section 906 has been provided to Valero Energy Corporation and will be retained by Valero Energy Corporation and furnished to the Securities and Exchange Commission or its staff upon request.