10-K

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

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

For the fiscal year ended December 31, 2008

OR

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

For the transition period from                      to      

Commission file number 1-13175

VALERO ENERGY CORPORATION

(Exact name of registrant as specified in its charter)

Delaware (State or other jurisdiction of incorporation or organization)	74-1828067 (I.R.S. Employer Identification No.)
One Valero Way San Antonio, Texas (Address of principal executive offices)	78249 (Zip Code)

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

Securities registered pursuant to Section 12(b) of the Act: Common stock, $0.01 par value per share listed on the New York Stock Exchange.

Securities registered pursuant to Section 12(g) of the Act: None.

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes þ No o

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes o No þ

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

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

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

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

The aggregate market value of the voting and non-voting common stock held by non-affiliates was approximately $21.6 billion based on the last sales price quoted as of June 30, 2008 on the New York Stock Exchange, the last business day of the registrant’s most recently completed second fiscal quarter.

As of January 31, 2009, 516,308,274 shares of the registrant’s common stock were issued and outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

We intend to file with the Securities and Exchange Commission a definitive Proxy Statement for our Annual Meeting of Stockholders scheduled for April 30, 2009, at which directors will be elected. Portions of the 2009 Proxy Statement are incorporated by reference in Part III of this Form 10-K and are deemed to be a part of this report.

CROSS-REFERENCE SHEET

The following table indicates the headings in the 2009 Proxy Statement where certain information required in Part III of Form 10-K may be found.

Form 10-K Item No. and Caption	Heading in 2009 Proxy Statement
10. Directors, Executive Officers and Corporate Governance	Information Regarding the Board of Directors, Independent Directors, Audit Committee, Governance Documents and Codes of Ethics, Proposal No. 1 Election of Directors, Information Concerning Nominees and Other Directors, and Section 16(a) Beneficial Ownership Reporting Compliance
11. Executive Compensation	Compensation Committee, Compensation Discussion and Analysis, Director Compensation, Executive Compensation, and Certain Relationships and Related Transactions
12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	Beneficial Ownership of Valero Securities and Equity Compensation Plan Information
13. Certain Relationships and Related Transactions, and Director Independence	Certain Relationships and Related Transactions and Independent Directors
14. Principal Accountant Fees and Services	KPMG Fees for Fiscal Year 2008, KPMG Fees for Fiscal Year 2007, and Audit Committee Pre-Approval Policy

Copies of all documents incorporated by reference, other than exhibits to such documents, will be provided without charge to each person who receives a copy of this Form 10-K upon written request to Jay D. Browning, Senior Vice President-Corporate Law and Secretary, Valero Energy Corporation, P.O. Box 696000, San Antonio, Texas 78269-6000.

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CONTENTS

		PAGE
PART I
Items 1., 1A. & 2.	Business, Risk Factors and Properties		1
	Segments		2
	Valero’s Operations		3
	Risk Factors		12
	Environmental Matters		16
	Properties		16
	Executive Officers of the Registrant		17
Item 1B.	Unresolved Staff Comments		17
Item 3.	Legal Proceedings		18
Item 4.	Submission of Matters to a Vote of Security Holders		19
PART II
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities		20
Item 6.	Selected Financial Data		23
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		24
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk		51
Item 8.	Financial Statements and Supplementary Data		57
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		132
Item 9A.	Controls and Procedures		132
Item 9B.	Other Information		132
PART III
Item 10.	Directors, Executive Officers and Corporate Governance		133
Item 11.	Executive Compensation		133
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		133
Item 13.	Certain Relationships and Related Transactions, and Director Independence		133
Item 14.	Principal Accountant Fees and Services		133
PART IV
Item 15.	Exhibits and Financial Statement Schedules		133
Signatures			138

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PART I

The terms “Valero,” “we,” “our,” and “us,” as used in this report, may refer to Valero Energy Corporation, to one or more of our consolidated subsidiaries, or to all of them taken as a whole. In this Form 10-K, we make certain forward-looking statements, including statements regarding our plans, strategies, objectives, expectations, intentions, and resources, under the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. You should read our forward-looking statements together with our disclosures beginning on page 24 below under the heading: “CAUTIONARY STATEMENT FOR THE PURPOSE OF SAFE HARBOR PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995.”

ITEMS 1., 1A. and 2. BUSINESS, RISK FACTORS AND PROPERTIES

Overview. We are a Fortune 500 company based in San Antonio, Texas. Our corporate offices are at One Valero Way, San Antonio, Texas, 78249, and our telephone number is (210) 345-2000. Our common stock trades on the New York Stock Exchange under the symbol “VLO.” We were incorporated in Delaware in 1981 under the name Valero Refining and Marketing Company, and our name was changed to Valero Energy Corporation on August 1, 1997. On January 31, 2009, we had 21,765 employees.

We own and operate 16 refineries located in the United States, Canada, and Aruba that produce conventional gasolines, distillates, jet fuel, asphalt, petrochemicals, lubricants, and other refined products as well as a slate of premium products including CBOB and RBOB¹, gasoline meeting the specifications of the California Air Resources Board (CARB), CARB diesel fuel, low-sulfur and ultra-low-sulfur diesel fuel, and oxygenates (liquid hydrocarbon compounds containing oxygen).

We market branded and unbranded refined products on a wholesale basis in the United States and Canada through an extensive bulk and rack marketing network. We also sell refined products through a network of about 5,800 retail and wholesale branded outlets in the United States, Canada, and Aruba.

Available Information. Our internet website address is www.valero.com. Information contained on our website is not part of this annual report on Form 10-K. Our annual reports on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K filed with (or furnished to) the Securities and Exchange Commission (SEC) are available on our internet website (in the “Investor Relations” section), free of charge, soon after we file or furnish such material. We also post our corporate governance guidelines, code of business conduct and ethics, code of ethics for senior financial officers, and the charters of the committees of our board of directors in the same website location. Our governance documents are available in print to any stockholder that makes a written request to Jay D. Browning, Senior Vice President-Corporate Law and Secretary, Valero Energy Corporation, P.O. Box 696000, San Antonio, Texas 78269-6000.

¹ CBOB, or “conventional blendstock for oxygenate blending,” is conventional gasoline blendstock intended for blending with oxygenates downstream of the refinery where it was produced. CBOB becomes conventional gasoline after blending with oxygenates. RBOB is a base unfinished reformulated gasoline mixture known as “reformulated gasoline blendstock for oxygenate blending.” It is a specially produced reformulated gasoline blendstock intended for blending with oxygenates downstream of the refinery where it was produced to produce finished gasoline that meets or exceeds U.S. emissions performance requirements for federal reformulated gasoline.

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SEGMENTS

Our business is organized into two reportable segments: refining and retail. Our refining segment includes refining operations, wholesale marketing, product supply and distribution, and transportation operations. The refining segment is segregated geographically into the Gulf Coast, Mid-Continent, West Coast, and Northeast regions.

Our retail segment includes company-operated convenience stores, Canadian dealers/jobbers, truckstop facilities, cardlock facilities, and home heating oil operations. The retail segment is segregated into two geographic regions. Our retail operations in eastern Canada are referred to as Retail – Canada. Our retail operations in the United States are referred to as Retail – U.S. The financial information about our segments in Note 20 of Notes to Consolidated Financial Statements is incorporated herein by reference.

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VALERO’S OPERATIONS

REFINING

On December 31, 2008, our refining operations included 16 refineries in the United States, Canada, and Aruba with a combined total throughput capacity of approximately 3.0 million barrels per day (BPD). The following table presents the locations of these refineries and their approximate feedstock throughput capacities as of December 31, 2008.

		Throughput Capacity(a)
Refinery	Location	(barrels per day)
Gulf Coast:
Corpus Christi (b)	Texas		315,000
Port Arthur	Texas		310,000
St. Charles	Louisiana		250,000
Texas City	Texas		245,000
Aruba	Aruba		235,000
Houston	Texas		145,000
Three Rivers	Texas		100,000
			1,600,000
West Coast:
Benicia	California		170,000
Wilmington	California		135,000
			305,000
Mid-Continent:
Memphis	Tennessee		195,000
McKee	Texas		170,000
Ardmore	Oklahoma		90,000
			455,000
Northeast:
Quebec City	Quebec, Canada		235,000
Delaware City	Delaware		210,000
Paulsboro	New Jersey		185,000
			630,000
Total			2,990,000

(a)	“Throughput capacity” represents estimated capacity for processing crude oil, intermediates, and other feedstocks. Total estimated crude oil capacity is approximately 2.6 million BPD.
(b)	Represents the combined capacities of two refineries – the Corpus Christi East and Corpus Christi West Refineries.

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     Total Refining System

The following table presents the percentages of principal charges and yields (on a combined basis) for all of our refineries for the year ended December 31, 2008. Our total combined throughput volumes averaged 2,643,000 BPD for the 12 months ended December 31, 2008. (The information presented below includes the charges and yields of the Krotz Springs, Louisiana refinery, which we sold effective July 1, 2008. The sale is more fully described in Note 2 of Notes to Consolidated Financial Statements.)

Combined Refining Charges and Yields

		Percentage
Charges:
	sour crude oil		48	%
	acidic sweet crude oil		3	%
	sweet crude oil		23	%
	residual fuel oil		9	%
	other feedstocks		5	%
	blendstocks		12	%
Yields:
	gasolines and blendstocks		45	%
	distillates		35	%
	petrochemicals		3	%
	other products (includes vacuum gas oil, No. 6 fuel oil, petroleum coke, asphalt, and other)		17	%

     Gulf Coast

The following table presents the percentages of principal charges and yields (on a combined basis) for the eight refineries in this region for the year ended December 31, 2008. Total throughput volumes for the Gulf Coast refining region averaged 1,404,000 BPD for the 12 months ended December 31, 2008. (The information presented below includes the charges and yields of the Krotz Springs, Louisiana refinery, which we sold effective July 1, 2008.)

Combined Gulf Coast Region Charges and Yields

		Percentage
Charges:
	sour crude oil		57	%
	sweet crude oil		9	%
	residual fuel oil		13	%
	other feedstocks		7	%
	blendstocks		14	%
Yields:
	gasolines and blendstocks		41	%
	distillates		34	%
	petrochemicals		4	%
	other products (includes vacuum gas oil, No. 6 fuel oil, petroleum coke, asphalt, and other)		21	%

Corpus Christi East and West Refineries. Our Corpus Christi East and West Refineries are located on the Texas Gulf Coast along the Corpus Christi Ship Channel. The West Refinery specializes in processing primarily lower-cost sour crude oil and resid into premium products such as RBOB. The East Refinery processes heavy, high-sulfur crude oil into conventional gasoline, diesel, jet fuel, asphalt, aromatics, and other light products. The East and West Refineries are substantially integrated allowing for the transfer of various feedstocks and blending components between the two refineries and the sharing

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of resources. The refineries typically receive and deliver feedstocks and products by tanker and barge via deepwater docking facilities along the Corpus Christi Ship Channel. Three truck racks with a total of 16 bays service local markets for gasoline, diesel, jet fuels, liquefied petroleum gases, and asphalt. The refineries distribute refined products using the Colonial, Explorer, Valley, and other major pipelines.

Port Arthur Refinery. Our Port Arthur Refinery is located on the Texas Gulf Coast approximately 90 miles east of Houston. The refinery processes primarily heavy sour crude oils and other feedstocks into conventional and premium gasoline and RBOB, as well as diesel, jet fuel, petrochemicals, petroleum coke, and sulfur. The refinery receives crude oil over marine docks and through crude oil pipelines, and has access to the Sunoco and Oiltanking terminals at Nederland, Texas. Finished products are distributed into the Colonial, Explorer, and TEPPCO pipelines, across the refinery docks into ships or barges, and through a local truck rack.

St. Charles Refinery. Our St. Charles Refinery is located approximately 15 miles from New Orleans along the Mississippi River. The refinery processes sour crude oils and other feedstocks into gasoline, distillates, and other light products. The refinery receives crude oil over five marine docks and has access to the Louisiana Offshore Oil Port where it can receive crude oil through a 24-inch pipeline. Finished products can be shipped over these docks or through the Colonial pipeline network for distribution to the eastern United States.

Texas City Refinery. Our Texas City Refinery is located southeast of Houston on the Texas City Ship Channel. The refinery processes primarily heavy sour crude oils into a wide slate of products. The refinery receives and delivers its feedstocks and products by tanker and barge via deepwater docking facilities along the Texas City Ship Channel and uses the Colonial, Explorer, and TEPPCO pipelines for distribution of its products.

Aruba Refinery. Our Aruba Refinery is located on the island of Aruba in the Caribbean Sea. It processes primarily heavy sour crude oil and produces primarily intermediate feedstocks and finished distillate products. Significant amounts of the refinery’s intermediate feedstock production are transported and further processed in our other refineries in the Gulf Coast, West Coast, and Northeast regions. The refinery receives crude oil by ship at its two deepwater marine docks, which can berth ultra-large crude carriers. The refinery’s products are delivered by ship primarily into markets in the United States, the Caribbean, Europe, and South America.

Houston Refinery. Our Houston Refinery is located on the Houston Ship Channel. It processes primarily sour crude oils and low-sulfur resid into conventional gasoline and distillates. The refinery receives its feedstocks via tanker at deepwater docking facilities along the Houston Ship Channel and delivers its products through major refined-product pipelines, including the Colonial, Explorer, and TEPPCO pipelines.

Three Rivers Refinery. Our Three Rivers Refinery is located in South Texas between Corpus Christi and San Antonio. It processes primarily heavy sweet and medium sour crude oils into conventional gasoline, distillates, and aromatics. The refinery has access to crude oil from foreign sources delivered to the Texas Gulf Coast at Corpus Christi as well as crude oil from domestic sources through third-party pipelines. A 70-mile pipeline with capacity of 120,000 BPD transports crude oil via connections to the Three Rivers Refinery from Corpus Christi. The refinery distributes its refined products primarily through pipelines owned by NuStar Energy L.P.

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     West Coast

The following table presents the percentages of principal charges and yields (on a combined basis) for the two refineries in this region for the year ended December 31, 2008. Total throughput volumes for the West Coast refining region averaged approximately 276,000 BPD for the 12 months ended December 31, 2008.

Combined West Coast Region Charges and Yields

		Percentage
Charges:
	sour crude oil		68	%
	acidic sweet crude oil		4	%
	residual fuel oil		1	%
	other feedstocks		11	%
	blendstocks		16	%
Yields:
	gasolines and blendstocks		60	%
	distillates		25	%
	other products (includes vacuum gas oil, No. 6 fuel oil, petroleum coke, asphalt, and other)		15	%

Benicia Refinery. Our Benicia Refinery is located northeast of San Francisco on the Carquinez Straits of San Francisco Bay. It processes sour crude oils into premium products, primarily CARBOB gasoline. (CARBOB is a reformulated gasoline mixture that meets the specifications of the California Air Resources Board when blended with ethanol.) The refinery receives crude oil supplies via a deepwater dock that can berth large crude oil carriers and a 20-inch crude oil pipeline connected to a southern California crude oil delivery system. Most of the refinery’s products are distributed via the Kinder Morgan pipeline in California.

Wilmington Refinery. Our Wilmington Refinery is located near Los Angeles, California. The refinery processes a blend of lower-cost heavy and high-sulfur crude oils. The refinery can produce all of its gasoline as CARBOB gasoline and produces both ultra-low-sulfur diesel and CARB diesel. The refinery is connected by pipeline to marine terminals and associated dock facilities that can move and store crude oil and other feedstocks. Refined products are distributed via the Kinder Morgan pipeline system and various third-party terminals in southern California, Nevada, and Arizona.

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     Mid-Continent

The following table presents the percentages of principal charges and yields (on a combined basis) for the three refineries in this region for the year ended December 31, 2008. Total throughput volumes for the Mid-Continent refining region averaged 423,000 BPD for the 12 months ended December 31, 2008.

Combined Mid-Continent Region Charges and Yields

		Percentage
Charges:
	sour crude oil		13	%
	sweet crude oil		79	%
	other feedstocks		1	%
	blendstocks		7	%
Yields:
	gasolines and blendstocks		49	%
	distillates		40	%
	petrochemicals		3	%
	other products (includes vacuum gas oil, No. 6 fuel oil, asphalt, and other)		8	%

Memphis Refinery. Our Memphis Refinery is located in Tennessee along the Mississippi River’s Lake McKellar. It processes primarily light sweet crude oils. Almost all of its production is light products, including regular and premium gasoline, diesel, jet fuels, and petrochemicals. Crude oil is supplied to the refinery via the Capline pipeline and can also be received, along with other feedstocks, via barge. The refinery’s products are distributed via truck racks at our three product terminals, barges, and a pipeline directly to the Memphis airport.

McKee Refinery. Our McKee Refinery is located in the Texas Panhandle. It processes primarily sweet crude oils and produces conventional gasoline, RBOB, low-sulfur diesel, jet fuels, and asphalt. The refinery has access to crude oil from Texas, Oklahoma, Kansas, and Colorado through third-party pipelines. The refinery also has access at Wichita Falls, Texas to third-party pipelines that transport crude oil from the Texas Gulf Coast and West Texas to the Mid-Continent region. The refinery distributes its products primarily via NuStar Energy L.P.’s pipelines to markets in Texas, New Mexico, Arizona, Colorado, and Oklahoma.

Ardmore Refinery. Our Ardmore Refinery is located in Ardmore, Oklahoma, approximately 90 miles south of Oklahoma City. It processes medium sour and light sweet crude oils into conventional gasoline, low-sulfur diesel, liquefied petroleum gas products, and asphalt. Local crude oil is gathered by TEPPCO’s crude oil gathering/trunkline systems and trucking operations, and then transported to the refinery through NuStar Energy L.P.’s crude oil pipeline systems. Foreign, midland, and other domestic crude oils are received via third-party pipelines. Refined products are transported via the Magellan pipeline system, railcars, and trucks.

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     Northeast

The following table presents the percentages of principal charges and yields (on a combined basis) for the three refineries in this region for the year ended December 31, 2008. Total throughput volumes for the Northeast refining region averaged 540,000 BPD for the 12 months ended December 31, 2008.

Combined Northeast Region Charges and Yields

		Percentage
Charges:
	sour crude oil		40	%
	acidic sweet crude oil		11	%
	sweet crude oil		29	%
	residual fuel oil		7	%
	other feedstocks		4	%
	blendstocks		9	%
Yields:
	gasolines and blendstocks		43	%
	distillates		38	%
	petrochemicals		1	%
	other products (includes vacuum gas oil, No. 6 fuel oil, petroleum coke, asphalt, and other)		18	%

Quebec City Refinery. Our Quebec City Refinery is located in Lévis, Canada (near Quebec City). It processes sweet crude oils and lower-quality, sweet acidic crude oils into conventional gasoline, low-sulfur diesel, jet fuels, heating oil, and propane. The refinery receives crude oil by ship at its deepwater dock on the St. Lawrence River. We charter large ice-strengthened, double-hulled crude oil tankers that can navigate the St. Lawrence River year-round. The refinery transports its products to its primary terminals in Quebec and Ontario primarily by train, and also uses ships and trucks extensively throughout eastern Canada.

Delaware City Refinery. Our Delaware City Refinery is located along the Delaware River near Wilmington, Delaware. The refinery processes primarily sour crude oils into a wide slate of products including conventional gasoline, CBOB, RBOB, petroleum coke, sulfur, low-sulfur diesel, home heating oil, and petrochemicals (benzene). Feedstocks and refined products are transported via pipeline, barge, and truck-rack facilities. The refinery’s production is sold primarily in the northeastern U.S.

Paulsboro Refinery. Our Paulsboro Refinery is located in Paulsboro, New Jersey, approximately 15 miles south of Philadelphia on the Delaware River. The refinery processes primarily sour crude oils into a wide slate of products including gasoline, distillates, lube oil basestocks, asphalt, petroleum coke, sulfur, fuel oil, propane, and butane. Feedstocks and refined products are typically transported by tanker and barge via refinery-owned dock facilities along the Delaware River, Buckeye Partners’ product distribution system (into western Pennsylvania and Ohio), an onsite truck rack owned by NuStar Energy L.P., railcars, and the Colonial pipeline, which allows products to be sold into the New York Harbor market.

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     Feedstock Supply

Approximately 65% of our current crude oil feedstock requirements are purchased through term contracts while the remaining requirements are generally purchased on the spot market. Our term supply agreements include arrangements to purchase feedstocks at market-related prices directly or indirectly from various foreign national oil companies (including feedstocks originating in the Middle East, Africa, Asia, Mexico, and South America) as well as international and domestic oil companies. The term contracts generally permit the parties to amend the contracts (or terminate them), effective as of the next scheduled renewal date, by giving the other party proper notice within a prescribed period of time (e.g., 60 days, 6 months) before expiration of the current term. The majority of the crude oil purchased under Valero’s term contracts is purchased at the producer’s official stated price (i.e., the “market” price established by the seller for all purchasers) and not at a negotiated price specific to Valero. About 80% of our crude oil feedstocks under term supply agreements are imported from foreign sources and about 20% are domestic. In the event we become unable to purchase crude oil from any one of these sources, we believe that adequate alternative supplies of crude oil would be available.

The U.S. network of crude oil pipelines and terminals allows us to acquire crude oil from producing leases, domestic crude oil trading centers, and ships delivering cargoes of foreign and domestic crude oil. Our Quebec City and Aruba Refineries rely on foreign crude oil that is delivered to the refineries’ dock facilities by ship. We use the futures market to manage a portion of the price risk inherent in purchasing crude oil in advance of the delivery date and holding inventories of crude oils and refined products.

     Refining Segment Sales

Our refining segment includes sales of refined products in both the wholesale rack and bulk markets. These sales include refined products that are manufactured in our refining operations as well as refined products purchased or received on exchange from third parties. Most of our refineries have access to deepwater transportation facilities and interconnect with common-carrier pipeline systems, allowing us to sell products in most major geographic regions of the United States and eastern Canada. No customer accounted for more than 10% of our total operating revenues in 2008.

          Wholesale Marketing

We market branded and unbranded transportation fuels on a wholesale basis in 44 states through an extensive rack marketing network. The principal purchasers of our transportation fuels from terminal truck racks are wholesalers, distributors, retailers, and truck-delivered end users throughout the United States.

The majority of our rack volume is sold through unbranded channels. The remainder is sold to distributors and dealers that are members of the Valero-brand family that operate approximately 3,950 branded sites. These sites are independently owned and are supplied by us under multi-year contracts. For wholesale branded sites, we promote our Valero^® brand throughout the United States. In addition, we offer the Beacon^® brand in California and the Shamrock^® brand elsewhere in the United States.

          Bulk Sales and Trading

We sell a significant portion of our gasoline and distillate production through bulk sales channels in domestic and international markets. Our bulk sales are made to various oil companies and traders as well as certain bulk end-users such as railroads, airlines, and utilities. Our bulk sales are transported primarily by pipeline, barges, and tankers to major tank farms and trading hubs.

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We also enter into refined product exchange and purchase agreements. These agreements help to minimize transportation costs, optimize refinery utilization, balance refined product availability, broaden geographic distribution, and provide access to markets not connected to our refined product pipeline systems. Exchange agreements provide for the delivery of refined products by us to unaffiliated companies at our and third parties’ terminals in exchange for delivery of a similar amount of refined products to us by these unaffiliated companies at specified locations. Purchase agreements involve our purchase of refined products from third parties with delivery occurring at specified locations.

          Specialty Products

We also sell a variety of other products produced at our refineries, which we refer to collectively as “Specialty Products.” Our Specialty Products include asphalt, lube oils, natural gas liquids (NGLs), petroleum coke, petrochemicals, and sulfur.

• We produce asphalt at six of our refineries. Our asphalt products are sold for use in road construction, road repair, and roofing applications through a network of refinery and terminal loading racks.

• We produce lube oils at two of our refineries. We produce and market paraffinic, naphthenic, and aromatic oils suitable for use in a wide variety of lubricant and process applications.

• NGLs produced at our refineries include butane, isobutane, and propane. These products can be used for gasoline blending, home heating, and petrochemical plant feedstocks.

• We are a significant producer of petroleum coke, supplying primarily power generation customers and cement manufacturers. Petroleum coke is used largely as a substitute for coal.

• We produce and market a number of commodity petrochemicals including aromatic solvents (benzene, toluene, and xylene) and two grades of propylene. Aromatic solvents and propylenes are sold to customers in the chemical industry for further processing into such products as paints, plastics, and adhesives.

• We are a large producer of sulfur with sales primarily to customers in the agricultural sector. Sulfur is used in manufacturing fertilizer.

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RETAIL

Our retail segment operations include the following:

• sales of transportation fuels at retail stores and unattended self-service cardlocks,

• sales of convenience store merchandise in retail stores, and

• sales of home heating oil to residential customers.

We are one of the largest independent retailers of refined products in the central and southwest United States and eastern Canada. Our retail operations are segregated geographically into two groups: Retail – U.S. and Retail – Canada.

     Retail – U.S.

Sales in Retail – U.S. represent sales of transportation fuels and convenience store merchandise through our company-operated retail sites. For the year ended December 31, 2008, total sales of refined products through Retail – U.S.’s retail sites averaged approximately 115,900 BPD. In addition to transportation fuels, our company-operated convenience stores sell snacks, candy, beer, fast foods, cigarettes, and fountain drinks. On December 31, 2008, we had 1,010 company-operated sites in Retail – U.S. (of which 79% were owned and 21% were leased). Our company-operated stores are operated primarily under the brand name Corner Store^®. Transportation fuels sold in our Retail – U.S. stores are sold primarily under the Valero^® brand.

     Retail – Canada

Sales in Retail – Canada include the following:

• sales of refined products and convenience store merchandise through our company-operated retail sites and cardlocks,

• sales of refined products through sites owned by independent dealers and jobbers, and

• sales of home heating oil to residential customers.

Retail – Canada includes retail operations in eastern Canada where we are a major supplier of refined products serving Quebec, Ontario, and the Atlantic Provinces of Newfoundland, Nova Scotia, New Brunswick, and Prince Edward Island. For the year ended December 31, 2008, total retail sales of refined products through Retail – Canada averaged approximately 76,000 BPD. Transportation fuels are sold under the Ultramar^® brand through a network of 865 outlets throughout eastern Canada. On December 31, 2008, we owned or leased 412 retail stores in Retail – Canada and distributed gasoline to 453 dealers and independent jobbers. In addition, Retail – Canada operates 85 cardlocks, which are card- or key-activated, self-service, unattended stations that allow commercial, trucking, and governmental fleets to buy transportation fuel 24 hours a day. Retail – Canada operations also include a large home heating oil business that provides home heating oil to approximately 141,000 households in eastern Canada. Our home heating oil business tends to be seasonal to the extent of increased demand for home heating oil during the winter.

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RISK FACTORS

Our financial results are affected by volatile refining margins and global economic activity.

Our financial results are primarily affected by the relationship, or margin, between refined product prices and the prices for crude oil and other feedstocks. Our cost to acquire feedstocks and the price at which we can ultimately sell refined products depend upon several factors beyond our control, including regional and global supply of and demand for crude oil, gasoline, diesel, and other feedstocks and refined products. These in turn depend on, among other things, the availability and quantity of imports, the production levels of domestic and foreign suppliers, levels of refined product inventories, productivity and growth (or the lack thereof) of U.S. and global economies, U.S. relationships with foreign governments, political affairs, and the extent of governmental regulation. Historically, refining margins have been volatile, and we believe they will continue to be volatile in the future.

Continued economic turmoil and hostilities, including the threat of future terrorist attacks, could affect the economies of the United States and other countries. Lower levels of economic activity during periods of recession could result in declines in energy consumption, including declines in the demand for and consumption of our refined products, which could cause our revenues and margins to decline and limit our future growth prospects.

Refining margins are also significantly impacted by additional refinery conversion capacity through the expansion of existing refineries or the construction of new refineries. Worldwide refining capacity expansions may result in refining production capability far exceeding refined product demand, which would have a significant adverse effect on refining margins.

A significant portion of our profitability is derived from the ability to purchase and process crude oil feedstocks that historically have been cheaper than benchmark crude oils, such as West Texas Intermediate crude oil. These crude oil feedstock differentials vary significantly depending on overall economic conditions and trends and conditions within the markets for crude oil and refined products, and they could decline in the future, which would have a negative impact on our earnings.

Uncertainty and illiquidity in credit and capital markets can impair our ability to obtain credit and financing on acceptable terms, and can adversely affect the financial strength of our business partners.

Our ability to obtain credit and capital depends in large measure on capital markets and liquidity factors over which we exert no control. Recent disruptions in the credit and capital markets and concerns about economic growth have had a significant adverse impact on global financial markets. Our ability to access credit and capital markets may be restricted at a time when we would like, or need, to access those markets, which could have an impact on our flexibility to react to changing economic and business conditions. In addition, the cost and availability of debt and equity financing may be adversely impacted by unstable or illiquid market conditions. Protracted uncertainty and illiquidity in these markets also could have an adverse impact on our lenders, commodity hedging counterparties, or our customers, causing them to fail to meet their obligations to us. In addition, decreased returns on pension fund assets may also materially increase our pension funding requirements.

We currently maintain investment-grade ratings by Standard & Poor’s Ratings Services (S&P), Moody’s Investors Service (Moody’s), and Fitch Ratings (Fitch) on our senior unsecured debt. (Ratings from credit agencies are not recommendations to buy, sell, or hold our securities. Each rating should be evaluated independently of any other rating.) We cannot provide assurance that any of our current ratings will remain in effect for any given period of time or that a rating will not be lowered or withdrawn entirely by a rating agency if, in its judgment, circumstances so warrant. Specifically, if S&P, Moody’s,

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or Fitch were to downgrade our long-term rating, particularly below investment grade, our borrowing costs would increase, which could adversely affect our ability to attract potential investors and our funding sources could decrease. In addition, we may not be able to obtain favorable credit terms from our suppliers or they may require us to provide collateral, letters of credit, or other forms of security which would increase our operating costs. As a result, a downgrade in our credit ratings could have a material adverse impact on our future operations and financial position.

From time to time, our cash needs may exceed our internally generated cash flow, and our business could be materially and adversely affected if we were unable to obtain necessary funds from financing activities. From time to time, we may need to supplement our cash generation with proceeds from financing activities. We have existing revolving credit facilities, committed letter of credit facilities, and an accounts receivable sales facility to provide us with available financing to meet our ongoing cash needs. Uncertainty and illiquidity continues to exist in the financial markets that may materially impact the ability of the participating financial institutions to fund their commitments to us under our various financing facilities. In light of these uncertainties and the volatile current market environment, we can make no assurances that we will be able to obtain the full amount of the funds available under our financing facilities to satisfy our cash requirements. Our failure to do so could have a material adverse effect on our operations and financial position.

Compliance with and changes in environmental laws could adversely affect our performance.

The principal environmental risks associated with our operations are emissions into the air and releases into the soil, surface water, or groundwater. Our operations 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 gasoline and diesel fuels. If we violate or fail to comply with these laws and regulations, we could be fined or otherwise sanctioned. Because environmental laws and regulations are becoming more stringent and new environmental laws and regulations are continuously being enacted or proposed, such as those relating to greenhouse gas emissions and climate change (e.g., California’s AB-32 “Global Warming Solutions Act”), the level of expenditures required for environmental matters could increase in the future. Future legislative action and regulatory initiatives could result in changes to operating permits, additional remedial actions, material changes in operations, or increased capital expenditures and operating costs that cannot be assessed with certainty at this time. In addition, any major upgrades in any of our refineries could require material additional expenditures to comply with environmental laws and regulations.

Disruption of our ability to obtain crude oil could adversely affect our operations.

A significant portion of our feedstock requirements is satisfied through supplies originating in the Middle East, Africa, Asia, North America, and South America. We are, therefore, subject to the political, geographic, and economic risks attendant to doing business with suppliers located in, and supplies originating from, those areas. If one or more of our supply contracts were terminated, or if political events disrupt our traditional crude oil supply, we believe that adequate alternative supplies of crude oil would be available, but it is possible that we would be unable to find alternative sources of supply. If we are unable to obtain adequate crude oil volumes or are able to obtain such volumes only at unfavorable prices, our results of operations could be materially adversely affected, including reduced sales volumes of refined products or reduced margins as a result of higher crude oil costs.

In addition, the U.S. government can prevent or restrict us from doing business in or with foreign countries. These restrictions, and those of foreign governments, could limit our ability to gain access to business opportunities in various countries. Actions by both the United States and foreign countries have affected our operations in the past and will continue to do so in the future.

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Competitors that produce their own supply of feedstocks, have more extensive retail outlets, or have greater financial resources may have a competitive advantage.

The refining and marketing industry is highly competitive with respect to both feedstock supply and refined product markets. We compete with many companies for available supplies of crude oil and other feedstocks and for outlets for our refined products. We do not produce any of our crude oil feedstocks. Many of our competitors, however, obtain a significant portion of their feedstocks from company-owned production and some have more extensive retail outlets than we have. Competitors that have their own production or extensive retail outlets (and greater brand-name recognition) are at times able to offset losses from refining operations with profits from producing or retailing operations, and may be better positioned to withstand periods of depressed refining margins or feedstock shortages.

Some of our competitors also have materially greater financial and other resources than we have. Such competitors have a greater ability to bear the economic risks inherent in all phases of our industry. In addition, we compete with other industries that provide alternative means to satisfy the energy and fuel requirements of our industrial, commercial, and individual consumers.

A significant interruption in one or more of our refineries could adversely affect our business.

Our refineries are our principal operating assets. As a result, our operations could be subject to significant interruption if one or more of our refineries were to experience a major accident or mechanical failure, encounter work stoppages relating to organized labor issues, be damaged by severe weather or other natural or man-made disaster, such as an act of terrorism, or otherwise be forced to shut down. If any refinery were to experience an interruption in operations, earnings from the refinery could be materially adversely affected (to the extent not recoverable through insurance) because of lost production and repair costs. A significant interruption in one or more of our refineries could also lead to increased volatility in prices for crude oil feedstocks and refined products, and could increase instability in the financial and insurance markets, making it more difficult for us to access capital and to obtain insurance coverage that we consider adequate.

We maintain insurance against many, but not all, potential losses arising from operating hazards. Failure by one or more insurers to honor its coverage commitments for an insured event could materially and adversely affect our future cash flows, operating results, and financial condition.

Our refining and marketing operations are subject to various hazards common to the industry, including explosions, fires, toxic emissions, maritime hazards, and natural catastrophes. As protection against these hazards, we maintain insurance coverage against some, but not all, such potential losses and liabilities. We may not be able to maintain or obtain insurance of the type and amount we desire at reasonable rates. As a result of market conditions, premiums and deductibles for certain of our insurance policies have increased substantially, and could escalate further. In some instances, certain insurance could become unavailable or available only for reduced amounts of coverage. For example, coverage for hurricane damage is very limited, and coverage for terrorism risks includes very broad exclusions. If we were to incur a significant liability for which we were not fully insured, it could have a material adverse effect on our financial position.

Our insurance program includes a number of insurance carriers. Disruptions in the U.S. financial markets have resulted in the deterioration in the financial condition of many financial institutions, including insurance companies. We are not currently aware of any information that would indicate that any of our insurers is unlikely to perform in the event of a covered incident. However, in light of this uncertainty and the volatile current market environment, we can make no assurances that we will be able to obtain the full amount of our insurance coverage for insured events.

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Compliance with and changes in tax laws could adversely affect our performance.

We are subject to extensive tax liabilities, including United States, 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. Many 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.

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ENVIRONMENTAL MATTERS

We incorporate by reference into this Item the environmental disclosures contained in the following sections of this report:

• Item 1 under the caption “Risk Factors – Compliance with and changes in environmental laws could adversely affect our performance,”

• Item 3 “Legal Proceedings” under the caption “Environmental Enforcement Matters,” and

• Item 8 “Financial Statements and Supplementary Data” in Note 24 of Notes to Consolidated Financial Statements under the caption “Environmental Matters.”

Capital Expenditures Attributable to Compliance with Environmental Regulations. In 2008, our capital expenditures attributable to compliance with environmental regulations were approximately $480 million, and are currently estimated to be approximately $635 million for 2009 and approximately $830 million for 2010. The estimates for 2009 and 2010 do not include amounts related to capital investments at our facilities that management has deemed to be strategic investments rather than expenditures relating to environmental regulatory compliance.

PROPERTIES

Our principal properties are described above under the caption “Valero’s Operations,” and that information is incorporated herein by reference. We also own feedstock and refined product storage facilities in various locations. We believe that our properties and facilities are generally adequate for our operations and that our facilities are maintained in a good state of repair. As of December 31, 2008, we were the lessee under a number of cancelable and non-cancelable leases for certain properties. Our leases are discussed more fully in Note 23 of Notes to Consolidated Financial Statements.

Our patents relating to our refining operations are not material to us as a whole. The trademarks and tradenames under which we conduct our retail and branded wholesale business – including Valero^®, Diamond Shamrock^®, Shamrock^®, Ultramar^®, Beacon^®, Corner Store^®, and Stop N Go^® – and other trademarks employed in the marketing of petroleum products are integral to our wholesale and retail marketing operations.

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EXECUTIVE OFFICERS OF THE REGISTRANT

Name	Age*		Positions Held with Valero	Officer Since
William R. Klesse		62	Chief Executive Officer, President, and Chairman of the Board		2001
Kimberly S. Bowers		44	Executive Vice President and General Counsel		2003
Michael S. Ciskowski		51	Executive Vice President and Chief Financial Officer		1998
S. Eugene Edwards		52	Executive Vice President-Corporate Development and Strategic Planning		1998
Joseph W. Gorder		51	Executive Vice President-Marketing and Supply		2003
Richard J. Marcogliese		56	Executive Vice President and Chief Operating Officer		2001

* on January 31, 2009

Mr. Klesse was elected as Valero’s Chairman of the Board in January 2007, and as Chief Executive Officer on December 31, 2005. He added the title of President in January 2008. He was Valero’s Vice-Chairman of the Board from October 31, 2005 to January 18, 2007. He previously served as Executive Vice President and Chief Operating Officer since January 2003. He served as an Executive Vice President of Valero since the date of our acquisition of Ultramar Diamond Shamrock Corporation (UDS) on December 31, 2001.

Ms. Bowers was elected Executive Vice President and General Counsel in October 2008. She previously served as Senior Vice President and General Counsel of the Company since April 2006. Before that, she was Valero’s Vice President-Legal Services from 2003 to 2006. Ms. Bowers joined Valero’s legal department in 1997.

Mr. Ciskowski was elected Executive Vice President and Chief Financial Officer in August 2003. Before that, he served as Executive Vice President-Corporate Development since April 2003, and Senior Vice President in charge of business and corporate development since 2001.

Mr. Edwards was elected Executive Vice President-Corporate Development and Strategic Planning in December 2005. He previously served as Senior Vice President since December 2001 with responsibilities for product supply, trading, and wholesale marketing. He has held several positions in the company with responsibility for planning and economics, business development, risk management, and marketing.

Mr. Gorder was elected Executive Vice President-Marketing and Supply in December 2005. He previously served as Senior Vice President-Corporate Development since August 2003. Prior to that he held several positions with Valero and UDS with responsibilities for corporate development and marketing.

Mr. Marcogliese was elected Executive Vice President and Chief Operating Officer in October 2007. He previously held the title Executive Vice President-Operations since December 2005. Prior to that he served as Senior Vice President overseeing refining operations since July 2001.

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

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ITEM 3. LEGAL PROCEEDINGS

          Litigation

For the legal proceedings listed below, we incorporate by reference into this Item our disclosures made in Part II, Item 8 of this report included in Note 25 of Notes to Consolidated Financial Statements under the caption “Litigation Matters.”

• MTBE Litigation

• Retail Fuel Temperature Litigation

• Rosolowski

• Other 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 us, 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.

Bay Area Air Quality Management District (BAAQMD) (Benicia Refinery). From 2006 to 2008, the BAAQMD issued 86 violation notices (VNs) for various alleged air regulation and air permit violations at our Benicia Refinery and asphalt plant. No penalties have been specified in these VNs. We are pursuing settlement of all VNs.

Delaware Department of Natural Resources and Environmental Control (DDNREC) (Delaware City Refinery). Our Delaware City Refinery is subject to 12 outstanding notices of violation (NOVs) issued by the DDNREC. Ten of the NOVs allege unauthorized air emission events at the refinery. Two NOVs allege solid waste violations. No penalties have been specified in these NOVs. We are pursuing settlement of these NOVs.

Los Angeles Regional Water Quality Control Board (LARWQCB) (Wilmington Marine Terminal). In December 2007, as part of the National Pollutant Discharge Elimination System Permit renewal process for our Wilmington marine terminal, the LARWQCB issued an NOV and Request for Information. The NOV alleges violations of acute toxicity effluent limits between 2000 and 2006 and reporting violations between 2001 and 2005. We are currently pursuing settlement of this NOV.

New Jersey Department of Environmental Protection (NJDEP) (Paulsboro Refinery). In 2008, the NJDEP issued three air-related Administrative Order and Notice of Civil Administrative Penalty Assessments (Notices) to our Paulsboro Refinery that we reasonably believe may result in monetary sanctions of $100,000 or more. The Notices allege the refinery’s failure to comply with a number of air permit and regulatory requirements. The Notices propose penalties of approximately $780,000 in the aggregate. We are pursuing settlement of these Notices with the NJDEP.

Oklahoma Department of Environmental Quality (ODEQ) (Ardmore Refinery). We have received a penalty demand of $385,839 from the ODEQ for alleged excess air emission violations at our Ardmore Refinery occurring from 2006 to 2008. We are in settlement discussions with the ODEQ to resolve this matter.

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People of the State of Illinois, ex rel. v. The Premcor Refining Group Inc., et al., Third Judicial Circuit Court, Madison County (Case No. 03-CH-00459, filed May 29, 2003) (Hartford refinery and terminal). The Illinois Environmental Protection Agency has issued several NOVs alleging violations of air and waste regulations at Premcor’s Hartford, Illinois terminal and now-closed refinery. We are negotiating the terms of a consent order for corrective action.

South Coast Air Quality Management District (SCAQMD) (Wilmington Refinery). In November 2008, the SCAQMD issued an NOV for alleged air regulation and air permit violations related to a September 2008 flaring event at our Wilmington Refinery. We are pursuing settlement of the NOV.

State of Ohio, Office of the Attorney General, Environmental Enforcement (The Premcor Refining Group Inc. former Clark Retail Enterprises, Inc. retail sites). In June 2008, the Attorney General’s office of the State of Ohio issued a penalty demand of $11,133,000 to our wholly owned subsidiary, The Premcor Refining Group Inc., for alleged environmental violations arising from a predecessor’s operation or ownership of underground storage tanks at several sites. We are in settlement discussions with the Ohio Attorney General to resolve this matter.

Texas Commission on Environmental Quality (TCEQ) (McKee Refinery). In March 2008, we received a proposed Agreed Order from the TCEQ for $101,386 to resolve nine alleged violations of air regulations at our McKee Refinery. We are currently in settlement discussions with the TCEQ to resolve this matter.

TCEQ (Port Arthur Refinery). In September 2005, we received two enforcement actions from the TCEQ relating to alleged Texas Clean Air Act violations at the Port Arthur Refinery dating back to 2002. The TCEQ had originally proposed penalties of $880,240 for these events. In 2007, these enforcement actions were referred to the Texas Attorney General’s office and consolidated with TCEQ Docket No. 2005-1596-AIR-E, which assessed an additional penalty of $130,563. We recently reached a tentative agreement with the Texas Attorney General’s office to resolve this matter.

TCEQ (Texas City Refinery). In January 2008, we received a proposed Agreed Order from the TCEQ for $181,200 relating to an open valve and associated flaring at the Texas City Refinery. We agreed to the terms of the order, which was adopted by the TCEQ in February 2009, thus resolving this matter.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

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PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Our common stock trades on the New York Stock Exchange under the symbol “VLO.”

As of January 31, 2009, there were 6,927 holders of record of our common stock.

The following table shows the high and low sales prices of and dividends declared on our common stock for each quarter of 2008 and 2007.

	Sales Prices of the				Dividends
	Common Stock				Per
Quarter Ended	High		Low		Common Share
2008:
December 31	$	30.36	$	13.94	$	0.15
September 30		40.74		28.20		0.15
June 30		55.00		39.20		0.15
March 31		71.12		44.94		0.12
2007:
December 31	$	75.75	$	60.80	$	0.12
September 30		78.68		60.00		0.12
June 30		77.89		63.53		0.12
March 31		66.02		47.66		0.12

On January 20, 2009, our board of directors declared a quarterly cash dividend of $0.15 per common share payable March 11, 2009 to holders of record at the close of business on February 11, 2009.

Dividends are considered quarterly by the board of directors and may be paid only when approved by the board.

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The following table discloses purchases of shares of Valero’s common stock made by us or on our behalf during the fourth quarter of 2008.

Period	Total		Average		Total Number of		Total Number of		Approximate Dollar
	Number of		Price		Shares Not		Shares Purchased		Value of Shares that
	Shares		Paid per		Purchased as Part		as Part of		May Yet Be Purchased
	Purchased		Share		of Publicly		Publicly		Under the Plans or
					Announced Plans		Announced Plans		Programs (2)
					or Programs (1)		or Programs
October 2008		8,366,493	$	21.62		446,928		7,919,565	$ 3.46 billion
November 2008		20,526	$	19.61		20,526		–	$ 3.46 billion
December 2008		507	$	17.52		507		–	$ 3.46 billion
Total		8,387,526	$	21.61		467,961		7,919,565	$ 3.46 billion

(1)

The shares reported in this column represent purchases settled in the fourth quarter of 2008 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, as authorized by our board of directors on April 25, 2007. The $6 billion common stock purchase program has no expiration date. On February 28, 2008, we announced that our board of directors approved a new $3 billion common stock purchase program. This program is in addition to the $6 billion program. This new $3 billion program has no expiration date. Our stock purchase programs are more fully described in Note 14 of Notes to Consolidated Financial Statements, and we hereby incorporate by reference into this Item our disclosures made in Note 14.

The following Performance Graph is not “soliciting material,” is not deemed filed with the SEC, and is not to be incorporated by reference into any of Valero’s filings under the Securities Act of 1933 or the Securities Exchange Act of 1934, as amended, respectively.

This Performance Graph and the related textual information are based on historical data and are not indicative of future performance.

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The following line graph compares the cumulative total return* on an investment in our common stock against the cumulative total return of the S&P 500 Composite Index and an index of peer companies (selected by us) for the five-year period commencing December 31, 2003 and ending December 31, 2008. The New Peer Group consists of the following 13 companies that are engaged in domestic refining operations: Alon USA Energy, Inc., Chevron Corporation, ConocoPhillips, CVR Energy, Inc., Exxon Mobil Corporation, Frontier Oil Corporation, Hess Corporation, Holly Corporation, Marathon Oil Corporation, Murphy Oil Corporation, Sunoco, Inc., Tesoro Corporation, and Western Refining, Inc. The Old Peer Group consisted of the following ten companies: Chevron Corporation, ConocoPhillips, Exxon Mobil Corporation, Frontier Oil Corporation, Hess Corporation, Marathon Oil Corporation, Murphy Oil Corporation, Occidental Petroleum Corporation, Sunoco, Inc., and Tesoro Corporation. The New Peer Group serves as an update to our Old Peer Group by including additional domestic independent refiners (Alon USA Energy, Inc., CVR Energy, Inc., Holly Corporation, and Western Refining, Inc.) and removing one energy company that does not conduct domestic refining operations (Occidental Petroleum Corporation).

COMPARISON OF 5-YEAR CUMULATIVE TOTAL RETURN*

Among Valero Energy Corporation, The S&P 500 Index,
A New Peer Group and an Old Peer Group

	12/2003		12/2004		12/2005		12/2006		12/2007		12/2008
Valero Common Stock	$	100	$	197.64	$	451.53	$	450.06	$	620.65	$	195.21
S&P 500		100		110.88		116.33		134.70		142.10		89.53
New Peer Group		100		128.93		152.64		205.69		263.27		202.99
Old Peer Group		100		129.30		153.99		206.52		268.02		207.99

* Assumes that an investment in Valero common stock and each index was $100 on December 31, 2003. “Cumulative total return” is based on share price appreciation plus reinvestment of dividends from December 31, 2003 through December 31, 2008.

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ITEM 6. SELECTED FINANCIAL DATA

The selected financial data for the five-year period ended December 31, 2008 was derived from our audited consolidated financial statements. The following table should be read together with the historical consolidated financial statements and accompanying notes included in Item 8, “Financial Statements and Supplementary Data,” and with Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

The following summaries are in millions of dollars except for per share amounts:

	Year Ended December 31,
	2008 (a)			2007 (a) (b)		2006 (a) (b)		2005 (a) (b) (c)		2004 (a) (d)
Operating revenues (e)	$	119,114		$	95,327	$	87,640	$	80,616	$	54,589
Operating income		563			6,918		7,722		5,268		2,979
Income (loss) from continuing operations		(1,131	)		4,565		5,287		3,473		1,804
Earnings (loss) per common share from continuing operations – assuming dilution		(2.16	)		7.72		8.36		5.90		3.27
Dividends per common share		0.57			0.48		0.30		0.19		0.145
Property, plant and equipment, net		23,213			21,560		20,032		17,266		10,234
Goodwill		–			4,019		4,061		4,792		2,388
Total assets		34,417			42,722		37,753		32,798		19,392
Debt and capital lease obligations (less current portion)		6,264			6,470		4,619		5,156		3,901
Stockholders’ equity		15,620			18,507		18,605		15,050		7,798

(a)	Effective July 1, 2008, we sold our Krotz Springs Refinery to Alon Refining Krotz Springs, Inc. Therefore, the assets and liabilities related to the sale are presented as “assets held for sale” and “liabilities related to assets held for sale,” respectively, in the consolidated balance sheets as of December 31, 2007, 2006, 2005, and 2004, and as a result, certain balance sheet amounts reflected herein have been reclassified.
(b)	Effective July 1, 2007, we sold our Lima Refinery to Husky Refining Company. The results of operations of the Lima Refinery are reported as discontinued operations in the consolidated statements of income for the years ended December 31, 2007, 2006, and 2005 and therefore are not included in the statement of income information presented in this table.
(c)	Includes the operations related to the Premcor Acquisition beginning September 1, 2005.
(d)	Includes the operations related to the acquisition of the Aruba Refinery and related businesses beginning March 5, 2004.
(e)	Operating revenues reported for 2005 and 2004 include approximately $7.8 billion and $4.9 billion, respectively, related to crude oil buy/sell arrangements.

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following review of our results of operations and financial condition should be read in conjunction with Items 1, 1A and 2, “Business, Risk Factors and Properties,” and Item 8, “Financial Statements and Supplementary Data,” included in this report. In the discussions that follow, all per-share amounts assume dilution.

CAUTIONARY STATEMENT FOR THE PURPOSE OF SAFE HARBOR PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

This report, including without limitation our disclosures 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,” “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;

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• refinery overcapacity or undercapacity;

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

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

• 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;

• overall economic conditions, including the stability and liquidity of financial markets; and

• other factors generally described in the “Risk Factors” section included in “Items 1., 1A. & 2. – Business, Risk Factors and Properties” in this report.

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.

25

OVERVIEW

In this overview, we describe some of the primary factors that we believe affected our results of operations during the year ended December 31, 2008. We reported a loss from continuing operations of $1.1 billion, or $2.16 per share, for the year ended December 31, 2008 compared to income from continuing operations of $4.6 billion, or $7.72 per share, for the year ended December 31, 2007. The 2008 results included a charge in the fourth quarter of 2008 of $4.1 billion ($4.0 billion after tax) resulting from the impairment of goodwill.

The goodwill impairment loss, which represented a write-off of the entire balance of our goodwill, was associated with a significant decline in our market capitalization in the fourth quarter of 2008 that resulted in large part from severe disruptions in the capital and commodities markets. In performing our goodwill impairment test under applicable accounting rules, we estimate fair value by discounting the estimated future cash flows from our refineries. The decline in our market capitalization during the fourth quarter of 2008 resulted in the use of higher, risk-adjusted discount rates in determining the fair values of our reporting units, which reflected the significant risk premium implied by our stock price as of December 31, 2008. As a result of applying these higher discount rates to the cash flows of our reporting units, the fair values in each of our reporting units were below their net book values including goodwill, thus indicating potential impairment. Due to this conclusion of potential impairment, existing accounting rules required additional analysis for each of the reporting units to determine the amount of the loss, and this additional analysis indicated that all of the goodwill in each of our reporting units should be written off.

Effective July 1, 2008, we sold our refinery in Krotz Springs, Louisiana to a subsidiary of Alon USA Energy, Inc. The sale resulted in a pre-tax gain of $305 million, or $170 million after tax, as discussed in Note 2 of Notes to Consolidated Financial Statements. Net cash proceeds from the sale were $463 million, including approximately $135 million from the sale of working capital. In addition, we received contingent consideration in the form of a three-year earn-out agreement based on certain product margins.

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 weakening of industry fundamentals for refined products that we experienced in the fourth quarter of 2007 continued throughout 2008. Gasoline margins declined significantly in all of our refining regions in 2008 compared to 2007. The decline in margins was primarily due to a decrease in gasoline demand and an increase in ethanol production. Margins on certain secondary refined products, such as petroleum coke and petrochemical feedstocks, also declined during 2008 due to a significant increase in the cost of crude oil and other feedstocks used to produce them. However, these decreases were partially offset by the effect of favorable diesel margins in 2008, which increased compared to 2007 primarily due to strong global demand.

Because more than 65% of our total crude oil throughput consists of sour crude oil and acidic sweet crude oil feedstocks that historically have been 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.” During 2008, sour crude oil differentials remained wide and improved somewhat in 2008 compared to 2007 levels.

Regarding operations, on January 25, 2008, our Aruba Refinery was shut down due to a fire in its vacuum unit. We resumed partial operation of the refinery in mid-February, and during the second quarter of 2008 we completed the repairs and resumed full operations of the refinery. During the third quarter of 2008, certain of our refineries were shut down as a result of two hurricanes that impacted the Gulf Coast.

26

Although we avoided major damage from the hurricanes, repair costs and downtime attributable to the hurricanes and the Aruba downtime reduced our results of operations for 2008.

During the year ended December 31, 2008, we increased our quarterly common stock dividend from $0.12 per share to $0.15 per share and purchased 23.0 million shares of our common stock under our board-authorized programs, which represented more than 4% of our shares outstanding at the beginning of 2008. We also redeemed $350 million of 9.5% callable debt that was due in 2013 and invested $3.2 billion in capital expenditures and deferred turnaround and catalyst costs.

27

RESULTS OF OPERATIONS

2008 Compared to 2007

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

	Year Ended December 31,
	2008			2007 (a)			Change
Operating revenues	$	119,114		$	95,327		$	23,787
Costs and expenses:
Cost of sales		107,429			81,645			25,784
Refining operating expenses		4,555			4,016			539
Retail selling expenses		768			750			18
General and administrative expenses		559			638			(79	)
Depreciation and amortization expense:
Refining		1,327			1,222			105
Retail		105			90			15
Corporate		44			48			(4	)
Gain on sale of Krotz Springs Refinery		(305	)		–			(305	)
Goodwill impairment loss (b)		4,069			–			4,069
Total costs and expenses		118,551			88,409			30,142
Operating income		563			6,918			(6,355	)
Other income, net		113			167			(54	)
Interest and debt expense:
Incurred		(451	)		(466	)		15
Capitalized		111			107			4
Income from continuing operations before income tax expense		336			6,726			(6,390	)
Income tax expense		1,467			2,161			(694	)
Income (loss) from continuing operations		(1,131	)		4,565			(5,696	)
Income from discontinued operations, net of income tax expense (a)		–			669			(669	)
Net income (loss)	$	(1,131	)	$	5,234		$	(6,365	)
Earnings (loss) per common share – assuming dilution:
Continuing operations	$	(2.16	)	$	7.72		$	(9.88	)
Discontinued operations		–			1.16			(1.16	)
Total	$	(2.16	)	$	8.88		$	(11.04	)

See the footnote references on page 31. 

28

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

	Year Ended December 31,
	2008			2007			Change
Refining (a):
Operating income (b)	$	797		$	7,355		$	(6,558	)
Throughput margin per barrel (c)	$	10.79		$	12.33		$	(1.54	)
Operating costs per barrel:
Refining operating expenses	$	4.71		$	3.93		$	0.78
Depreciation and amortization		1.37			1.20			0.17
Total operating costs per barrel	$	6.08		$	5.13		$	0.95
Throughput volumes (thousand barrels per day):
Feedstocks:
Heavy sour crude		592			638			(46	)
Medium/light sour crude		673			635			38
Acidic sweet crude		79			80			(1	)
Sweet crude		606			724			(118	)
Residuals		228			247			(19	)
Other feedstocks		149			173			(24	)
Total feedstocks		2,327			2,497			(170	)
Blendstocks and other		316			301			15
Total throughput volumes		2,643			2,798			(155	)
Yields (thousand barrels per day):
Gasolines and blendstocks		1,187			1,285			(98	)
Distillates		915			919			(4	)
Petrochemicals		71			82			(11	)
Other products (d)		463			507			(44	)
Total yields		2,636			2,793			(157	)
Retail – U.S.:
Operating income	$	260		$	154		$	106
Company-operated fuel sites (average)		973			957			16
Fuel volumes (gallons per day per site)		5,000			4,979			21
Fuel margin per gallon	$	0.229		$	0.174		$	0.055
Merchandise sales	$	1,097		$	1,024		$	73
Merchandise margin (percentage of sales)		29.9	%		29.7	%		0.2	%
Margin on miscellaneous sales	$	99		$	101		$	(2	)
Retail selling expenses	$	505		$	494		$	11
Depreciation and amortization expense	$	70		$	59		$	11
Retail – Canada:
Operating income	$	109		$	95		$	14
Fuel volumes (thousand gallons per day)		3,193			3,234			(41	)
Fuel margin per gallon	$	0.268		$	0.248		$	0.020
Merchandise sales	$	200		$	187		$	13
Merchandise margin (percentage of sales)		28.5	%		27.8	%		0.7	%
Margin on miscellaneous sales	$	36		$	37		$	(1	)
Retail selling expenses	$	263		$	256		$	7
Depreciation and amortization expense	$	35		$	31		$	4

See the footnote references on page 31. 

29

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

	Year Ended December 31,
	2008			2007		Change
Gulf Coast:
Operating income	$	3,191		$	4,505	$	(1,314	)
Throughput volumes (thousand barrels per day)		1,404			1,537		(133	)
Throughput margin per barrel (c)	$	11.57		$	12.81	$	(1.24	)
Operating costs per barrel:
Refining operating expenses	$	4.65		$	3.70	$	0.95
Depreciation and amortization		1.30			1.08		0.22
Total operating costs per barrel	$	5.95		$	4.78	$	1.17
Mid-Continent (a):
Operating income	$	577		$	910	$	(333	)
Throughput volumes (thousand barrels per day)		423			402		21
Throughput margin per barrel (c)	$	9.27		$	11.66	$	(2.39	)
Operating costs per barrel:
Refining operating expenses	$	4.26		$	4.13	$	0.13
Depreciation and amortization		1.29			1.33		(0.04	)
Total operating costs per barrel	$	5.55		$	5.46	$	0.09
Northeast:
Operating income	$	724		$	1,084	$	(360	)
Throughput volumes (thousand barrels per day)		540			570		(30	)
Throughput margin per barrel (c)	$	9.95		$	10.46	$	(0.51	)
Operating costs per barrel:
Refining operating expenses	$	4.88		$	3.98	$	0.90
Depreciation and amortization		1.40			1.27		0.13
Total operating costs per barrel	$	6.28		$	5.25	$	1.03
West Coast:
Operating income	$	374		$	856	$	(482	)
Throughput volumes (thousand barrels per day)		276			289		(13	)
Throughput margin per barrel (c)	$	10.84		$	14.41	$	(3.57	)
Operating costs per barrel:
Refining operating expenses	$	5.37		$	4.82	$	0.55
Depreciation and amortization		1.77			1.49		0.28
Total operating costs per barrel	$	7.14		$	6.31	$	0.83
Operating income for regions above	$	4,866		$	7,355	$	(2,489	)
Goodwill impairment loss (b)		(4,069	)		–		(4,069	)
Total refining operating income	$	797		$	7,355	$	(6,558	)

See the footnote references on page 31. 

30

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

	Year Ended December 31,
	2008			2007		Change
Feedstocks:
West Texas Intermediate (WTI) crude oil	$	99.56		$	72.27	$	27.29
WTI less sour crude oil at U.S. Gulf Coast (g)		5.20			4.95		0.25
WTI less Mars crude oil		6.13			5.61		0.52
WTI less Alaska North Slope (ANS) crude oil		1.22			0.58		0.64
WTI less Maya crude oil		15.71			12.41		3.30
Products:
U.S. Gulf Coast:
Conventional 87 gasoline less WTI		4.85			13.78		(8.93	)
No. 2 fuel oil less WTI		18.35			11.94		6.41
Ultra-low-sulfur diesel less WTI		22.96			17.76		5.20
Propylene less WTI		(3.69	)		11.05		(14.74	)
U.S. Mid-Continent:
Conventional 87 gasoline less WTI		4.46			18.02		(13.56	)
Low-sulfur diesel less WTI		24.12			21.30		2.82
U.S. Northeast:
Conventional 87 gasoline less WTI		3.22			13.98		(10.76	)
No. 2 fuel oil less WTI		20.23			12.96		7.27
Lube oils less WTI		68.79			48.29		20.50
U.S. West Coast:
CARBOB 87 gasoline less ANS		11.15			23.80		(12.65	)
CARB diesel less ANS		23.81			22.66		1.15

The following notes relate to references on pages 28 through 31.
(a)	Effective July 1, 2007, we sold our Lima Refinery to Husky Refining Company (Husky). Therefore, the results of operations of the Lima Refinery for the six months of 2007 prior to its sale, as well as the gain on the sale of the refinery, are reported as discontinued operations, and all refining operating highlights, both consolidated and for the Mid-Continent region, exclude the Lima Refinery. The sale resulted in a pre-tax gain of $827 million ($426 million after tax), which is included in “Income from discontinued operations, net of income tax expense” for the year ended December 31, 2007.
(b)	Upon applying the goodwill impairment testing criteria under existing accounting rules during the fourth quarter of 2008, we determined that the goodwill in all four of our reporting units was impaired, which resulted in a goodwill impairment loss of $4.1 billion ($4.0 billion after tax). This goodwill impairment loss is included in the refining segment operating income but is excluded from the consolidated and regional throughput margins per barrel and the regional operating income amounts presented for the year ended December 31, 2008 in order to make that information comparable between periods.
(c)	Throughput margin per barrel represents operating revenues less cost of sales divided by throughput volumes.
(d)	Other products primarily include gas oils, No. 6 fuel oil, petroleum coke, and asphalt.
(e)	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 (for periods prior to its sale effective July 1, 2008), 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.
(f)	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.
(g)	The market reference differential for sour crude oil is based on 50% Arab Medium and 50% Arab Light posted prices.

31

General

Operating revenues increased 25% for the year ended December 31, 2008 compared to the year ended December 31, 2007 primarily as a result of higher average refined product prices. Refined product prices were significantly higher in the first nine months of 2008 compared to the same period of 2007, but fourth quarter 2008 refined product prices declined to levels substantially below the fourth quarter of 2007. This resulted in a $10.1 billion decrease in fourth quarter 2008 revenues compared to 2007, which lowered the revenue increase for the year to $23.8 billion. Offsetting the higher revenues were substantially higher average feedstock costs.

Operating income decreased $6.4 billion, or 92%, and income from continuing operations decreased $5.7 billion for the year ended December 31, 2008 compared to the year ended December 31, 2007 primarily due to a $6.6 billion decrease in refining segment operating income. The decrease was primarily due to a goodwill impairment loss of $4.1 billion recorded in the fourth quarter of 2008 as discussed in Note 8 of Notes to Consolidated Financial Statements. Also, see “Impairment of Assets” under “Critical Accounting Policies Involving Critical Accounting Estimates” below for a detailed analysis of the methodology and assumptions used in the determination of this goodwill impairment loss. The goodwill impairment loss is included in the refining segment operating income but is excluded from the consolidated and regional throughput margins per barrel and regional operating income amounts for the year ended December 31, 2008 for comparability purposes. The refining segment operating income and income from continuing operations for the year ended December 31, 2007 exclude the operations of the Lima Refinery and the gain on its sale, which are classified as discontinued operations due to our sale of that refinery effective July 1, 2007 as discussed in Note 2 of Notes to Consolidated Financial Statements.

Refining

Operating income for our refining segment decreased from $7.4 billion for the year ended December 31, 2007 to $797 million for the year ended December 31, 2008, resulting mainly from the $4.1 billion goodwill impairment loss discussed above, a 12% decrease in throughput margin per barrel, a 12% increase in refining operating expenses (including depreciation and amortization expense), and a 6% decline in throughput volumes. These decreases were partially offset by a $305 million gain on the sale of our Krotz Springs Refinery effective July 1, 2008, which is discussed in Note 2 of Notes to Consolidated Financial Statements.

Total refining throughput margins for 2008 compared to 2007 were impacted by the following factors:

• Distillate margins in 2008 increased in all of our refining regions from the margins in 2007. The increase in distillate margins was primarily due to strong global demand.

• Gasoline margins decreased significantly in all of our refining regions in 2008 compared to the margins in 2007. The decline in gasoline margins was primarily due to a decrease in gasoline demand and an increase in ethanol production.

• Margins on various secondary refined products such as asphalt, fuel oils, propylene, and petroleum coke declined from 2007 to 2008 as prices for these products did not increase in proportion to the large increase in the costs of the feedstocks used to produce them.

• Sour crude oil feedstock differentials to WTI crude oil in 2008 remained favorable and were wider than the differentials in 2007. These favorable differentials were 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.

• Throughput volumes decreased 155,000 barrels per day during 2008 compared to 2007 primarily due to a fire in the vacuum unit at our Aruba Refinery in January of 2008, downtime for

32

maintenance at our Port Arthur and Delaware City Refineries, unplanned downtime at our Port Arthur, Texas City, St. Charles, and Houston Refineries related to Hurricanes Ike and Gustav, the sale of our Krotz Springs Refinery, and economic decisions to reduce throughputs in certain of our refineries as a result of unfavorable market fundamentals, partially offset by the 2007 shutdown of our McKee Refinery discussed in Note 23 of Notes to Consolidated Financial Statements.

•

Throughput margin in 2008 included approximately $100 million related to the McKee Refinery business interruption settlement discussed in Note 23 of Notes to Consolidated Financial Statements.

Refining operating expenses, excluding depreciation and amortization expense, increased $0.78 per barrel, or 20%, for the year ended December 31, 2008 compared to the year ended December 31, 2007. Per-barrel operating expenses increased mainly due to an increase in energy costs, as well as the effect of the throughput volume decline discussed above. Refining depreciation and amortization expense increased 9% from 2007 to 2008 primarily due to the implementation of new capital projects and increased turnaround and catalyst amortization.

Retail

Retail operating income was $369 million for the year ended December 31, 2008 compared to $249 million for the year ended December 31, 2007. This 48% increase in operating income was primarily attributable to a $0.055 per gallon increase in retail fuel margins and increased in-store sales in our U.S. retail operations. The significant improvement in fuel margins was largely the result of rapidly declining crude oil prices in the second half of 2008.

Corporate Expenses and Other

General and administrative expenses, including corporate depreciation and amortization expense, decreased $83 million for the year ended December 31, 2008 compared to the year ended December 31, 2007. This decrease was primarily due to lower variable incentive compensation expenses combined with the nonrecurrence of 2007 expenses related to executive retirement costs and a $13 million termination fee paid for the cancellation of our services agreement with NuStar Energy L.P.

“Other income, net” decreased for the year ended December 31, 2008 compared to the year ended December 31, 2007 primarily due to a $91 million foreign currency exchange rate gain in 2007 resulting from the repayment of a loan by a foreign subsidiary, reduced interest income resulting from lower cash balances and interest rates, and a reduction in the fair value of certain nonqualified benefit plan assets. These decreases were partially offset by income related to the Alon earn-out agreement discussed in Notes 2 and 17 of Notes to Consolidated Financial Statements, lower costs incurred under our accounts receivable sales program, an increase in earnings from our equity investment in Cameron Highway Oil Pipeline Company, and a $14 million gain in 2008 on the redemption of our 9.5% senior notes as discussed in Note 12 of Notes to Consolidated Financial Statements.

Interest and debt expense decreased primarily due to reduced interest on tax liabilities, partially offset by higher average debt balances.

Income tax expense decreased $694 million from 2007 to 2008 mainly as a result of lower operating income, excluding the effect on operating income of the $4.1 billion goodwill impairment loss discussed above that has an insignificant tax effect. Excluding this goodwill impairment loss, our effective tax rate for the year ended December 31, 2008 was comparable to the effective tax rate for the year ended December 31, 2007.

33

Income from discontinued operations for the year ended December 31, 2007 represents a $426 million after-tax gain on the sale of the Lima Refinery effective July 1, 2007 and net income from its operations prior to the sale.

34

2007 Compared to 2006

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

	Year Ended December 31,
	2007 (a)			2006 (a)			Change
Operating revenues	$	95,327		$	87,640		$	7,687
Costs and expenses:
Cost of sales		81,645			73,863			7,782
Refining operating expenses		4,016			3,622			394
Retail selling expenses		750			719			31
General and administrative expenses		638			598			40
Depreciation and amortization expense:
Refining		1,222			985			237
Retail		90			87			3
Corporate		48			44			4
Total costs and expenses		88,409			79,918			8,491
Operating income		6,918			7,722			(804	)
Equity in earnings of NuStar Energy L.P. (b)		–			45			(45	)
Other income, net		167			350			(183	)
Interest and debt expense:
Incurred		(466	)		(377	)		(89	)
Capitalized		107			165			(58	)
Minority interest in net income of NuStar GP Holdings, LLC (b)		–			(7	)		7
Income from continuing operations before income tax expense		6,726			7,898			(1,172	)
Income tax expense		2,161			2,611			(450	)
Income from continuing operations		4,565			5,287			(722	)
Income from discontinued operations, net of income tax expense (a)		669			176			493
Net income		5,234			5,463			(229	)
Preferred stock dividends		–			2			(2	)
Net income applicable to common stock	$	5,234		$	5,461		$	(227	)
Earnings per common share – assuming dilution:
Continuing operations	$	7.72		$	8.36		$	(0.64	)
Discontinued operations		1.16			0.28			0.88
Total	$	8.88		$	8.64		$	0.24

See the footnote references on page 38.

35

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

	Year Ended December 31,
	2007			2006			Change
Refining (a):
Operating income	$	7,355		$	8,182		$	(827	)
Throughput margin per barrel (c)	$	12.33		$	12.47		$	(0.14	)
Operating costs per barrel:
Refining operating expenses	$	3.93		$	3.53		$	0.40
Depreciation and amortization		1.20			0.96			0.24
Total operating costs per barrel	$	5.13		$	4.49		$	0.64
Throughput volumes (thousand barrels per day):
Feedstocks:
Heavy sour crude		638			697			(59	)
Medium/light sour crude		635			618			17
Acidic sweet crude		80			65			15
Sweet crude		724			752			(28	)
Residuals		247			234			13
Other feedstocks		173			147			26
Total feedstocks		2,497			2,513			(16	)
Blendstocks and other		301			298			3
Total throughput volumes		2,798			2,811			(13	)
Yields (thousand barrels per day):
Gasolines and blendstocks		1,285			1,348			(63	)
Distillates		919			891			28
Petrochemicals		82			80			2
Other products (d)		507			491			16
Total yields		2,793			2,810			(17	)
Retail – U.S.:
Operating income	$	154		$	113		$	41
Company-operated fuel sites (average)		957			982			(25	)
Fuel volumes (gallons per day per site)		4,979			4,985			(6	)
Fuel margin per gallon	$	0.174		$	0.162		$	0.012
Merchandise sales	$	1,024		$	960		$	64
Merchandise margin (percentage of sales)		29.7	%		29.6	%		0.1	%
Margin on miscellaneous sales	$	101		$	85		$	16
Retail selling expenses	$	494		$	485		$	9
Depreciation and amortization expense	$	59		$	60		$	(1	)
Retail – Canada:
Operating income	$	95		$	69		$	26
Fuel volumes (thousand gallons per day)		3,234			3,176			58
Fuel margin per gallon	$	0.248		$	0.217		$	0.031
Merchandise sales	$	187		$	167		$	20
Merchandise margin (percentage of sales)		27.8	%		27.4	%		0.4	%
Margin on miscellaneous sales	$	37		$	32		$	5
Retail selling expenses	$	256		$	234		$	22
Depreciation and amortization expense	$	31		$	27		$	4

See the footnote references on page 38.

36

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

	Year Ended December 31,
	2007		2006		Change
Gulf Coast:
Operating income	$	4,505	$	5,109	$	(604	)
Throughput volumes (thousand barrels per day)		1,537		1,532		5
Throughput margin per barrel (c)	$	12.81	$	13.23	$	(0.42	)
Operating costs per barrel:
Refining operating expenses	$	3.70	$	3.26	$	0.44
Depreciation and amortization		1.08		0.84		0.24
Total operating costs per barrel	$	4.78	$	4.10	$	0.68
Mid-Continent (a):
Operating income	$	910	$	1,041	$	(131	)
Throughput volumes (thousand barrels per day)		402		410		(8	)
Throughput margin per barrel (c)	$	11.66	$	11.32	$	0.34
Operating costs per barrel:
Refining operating expenses	$	4.13	$	3.36	$	0.77
Depreciation and amortization		1.33		1.00		0.33
Total operating costs per barrel	$	5.46	$	4.36	$	1.10
Northeast:
Operating income	$	1,084	$	944	$	140
Throughput volumes (thousand barrels per day)		570		563		7
Throughput margin per barrel (c)	$	10.46	$	9.80	$	0.66
Operating costs per barrel:
Refining operating expenses	$	3.98	$	4.10	$	(0.12	)
Depreciation and amortization		1.27		1.11		0.16
Total operating costs per barrel	$	5.25	$	5.21	$	0.04
West Coast:
Operating income	$	856	$	1,088	$	(232	)
Throughput volumes (thousand barrels per day)		289		306		(17	)
Throughput margin per barrel (c)	$	14.41	$	15.07	$	(0.66	)
Operating costs per barrel:
Refining operating expenses	$	4.82	$	4.04	$	0.78
Depreciation and amortization		1.49		1.27		0.22
Total operating costs per barrel	$	6.31	$	5.31	$	1.00

See the footnote references on page 38.

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

	Year Ended December 31,
	2007		2006		Change
Feedstocks:
WTI crude oil	$	72.27	$	66.00	$	6.27
WTI less sour crude oil at U.S. Gulf Coast (g)		4.95		7.01		(2.06	)
WTI less Mars crude oil		5.61		7.12		(1.51	)
WTI less ANS crude oil		0.58		2.47		(1.89	)
WTI less Maya crude oil		12.41		14.80		(2.39	)
Products:
U.S. Gulf Coast:
Conventional 87 gasoline less WTI		13.78		11.34		2.44
No. 2 fuel oil less WTI		11.94		9.80		2.14
Ultra-low-sulfur diesel less WTI (h)		17.76		N.A.		N.A.
Propylene less WTI		11.05		8.78		2.27
U.S. Mid-Continent:
Conventional 87 gasoline less WTI		18.02		12.16		5.86
Low-sulfur diesel less WTI		21.30		18.59		2.71
U.S. Northeast:
Conventional 87 gasoline less WTI		13.98		10.62		3.36
No. 2 fuel oil less WTI		12.96		9.60		3.36
Lube oils less WTI		48.29		55.56		(7.27	)
U.S. West Coast:
CARBOB 87 gasoline less ANS		23.80		21.52		2.28
CARB diesel less ANS		22.66		23.96		(1.30	)

The following notes relate to references on pages 35 through 38.
(a)	Effective July 1, 2007, we sold our Lima Refinery to Husky. Therefore, the results of operations of the Lima Refinery are reported as discontinued operations, and all refining operating highlights, both consolidated and for the Mid-Continent region, exclude the Lima Refinery.
(b)	On December 22, 2006, we sold our remaining ownership interest in NuStar GP Holdings, LLC (formerly Valero GP Holdings, LLC), which indirectly owned 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. or minority interest in net income of NuStar GP Holdings, LLC subsequent to December 21, 2006.
(c)	Throughput margin per barrel represents operating revenues less cost of sales divided by throughput volumes.
(d)	Other products primarily include gas oils, No. 6 fuel oil, petroleum coke, and asphalt.
(e)	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.
(f)	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.
(g)	The market reference differential for sour crude oil is based on 50% Arab Medium and 50% Arab Light posted prices.
(h)	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 year ended December 31, 2006.

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General

Operating revenues increased 9% for the year ended December 31, 2007 compared to the year ended December 31, 2006 primarily as a result of higher refined product prices. Operating income decreased $804 million, or 10%, and income from continuing operations decreased $722 million, or 14%, for the year ended December 31, 2007 compared to the year ended December 31, 2006 primarily due to an $827 million decrease in refining segment operating income. The refining segment operating income and income from continuing operations exclude the operations of the Lima Refinery, which are classified as discontinued operations due to our sale of that refinery as discussed in Note 2 of Notes to Consolidated Financial Statements.

Refining

Operating income for our refining segment decreased from $8.2 billion for the year ended December 31, 2006 to $7.4 billion for the year ended December 31, 2007 resulting mainly from increased refining operating expenses (including depreciation and amortization expense) of $631 million. In addition, total throughput margin for the refining segment declined by $196 million due to a $0.14 per barrel decrease in refining throughput margin and lower throughput volumes.

Refining operating expenses, excluding depreciation and amortization expense, increased $0.40 per barrel, or 11%, for the year ended December 31, 2007 compared to the year ended December 31, 2006. Operating expenses increased mainly due to increases in maintenance expense, employee compensation and related benefits, outside services, and energy costs, as well as increased accruals for sales and use taxes. Refining depreciation and amortization expense increased 24% from 2006 to 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 a fire originating in its propane deasphalting unit in February 2007.

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

• Overall, gasoline and distillate margins relative to WTI increased in 2007 compared to 2006 due to a decline in refined product inventory levels resulting from unplanned refinery outages, lower imports, more stringent product specifications and regulations, and heavy industry turnaround activity, as well as moderately stronger demand.

• Sour crude oil feedstock differentials to WTI crude oil during 2007 decreased from the strong differentials in 2006. However, other light, sweet crude oils priced at a premium to WTI in 2007; thus, sour crude oil feedstock differentials relative to those other light, sweet crude oils in 2007 were comparable to the wide differentials experienced in 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 various secondary refined products such as asphalt, fuel oils, petroleum coke, and sulfur were lower in 2007 compared to 2006 as prices for these products did not increase in proportion to the costs of the feedstocks used to produce them.

• Throughput volumes decreased 13,000 barrels per day during 2007 compared to 2006 primarily due to a reduction in throughput volumes at our McKee Refinery as a result of the fire discussed above.

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Retail

Retail operating income was $249 million for the year ended December 31, 2007 compared to $182 million for the year ended December 31, 2006. This 37% increase in operating income was primarily attributable to increased in-store sales and improved retail fuel margins in our U.S. and Canadian retail operations, partially offset by higher selling expenses related mainly to retail reorganization expenses and an increase in the Canadian dollar exchange rate relative to the U.S. dollar.

Corporate Expenses and Other

General and administrative expenses, including corporate depreciation and amortization expense, increased $44 million for the year ended December 31, 2007 compared to the year ended December 31, 2006. This increase was primarily due to 2007 executive retirement expenses, an increase in employee compensation and benefits, including incentive compensation, a $13 million termination fee paid in 2007 for the cancellation of our services agreement with NuStar Energy L.P., and increased charitable contributions, partially offset by 2006 expenses attributable to Premcor headquarters personnel that were not incurred during 2007.

“Other income, net” for the year ended December 31, 2007 included a $91 million pre-tax gain related to a foreign currency exchange rate gain resulting from the repayment of a loan by a foreign subsidiary. “Other income, net” for the year ended December 31, 2006 included a pre-tax gain of $328 million related to the sale of our ownership interest in NuStar GP Holdings, LLC, as discussed in Note 9 of Notes to Consolidated Financial Statements. Excluding these effects, “other income, net” increased $54 million from 2006 to 2007 primarily due to increased interest income related to our significantly higher cash balance during 2007.

Interest and debt expense increased primarily due to the issuance of $2.25 billion of notes in June 2007 to fund the accelerated share repurchase program (as discussed in Note 12 of Notes to Consolidated Financial Statements), increased interest on tax liabilities, and reduced capitalized interest due to a reduced balance of capital projects under construction.

Income tax expense decreased $450 million from 2006 to 2007 mainly as a result of lower income from continuing operations before income tax expense. Our effective tax rate for the year ended December 31, 2007 decreased from the year ended December 31, 2006 primarily due to an increase in the percentage of pre-tax income contributed by the Aruba Refinery, the profits of which are non-taxable in Aruba through December 31, 2010, combined with favorable tax law changes.

Income from discontinued operations, net of income tax expense, increased $493 million from the year ended December 31, 2006 to the year ended December 31, 2007 due primarily to a pre-tax gain of $827 million, or $426 million after tax, on the sale of the Lima Refinery in July 2007 combined with a $67 million increase in net income from the operations of the Lima Refinery between the two years. The increase in net income from the operations of the Lima Refinery was mainly attributable to a 94% increase in the refinery’s throughput margin per barrel, from $8.99 per barrel for the year ended December 31, 2006 to $17.41 per barrel for the six months ended June 30, 2007, which more than offset the effect of a decline in throughput volumes resulting from only six months of operations in 2007 prior to its sale.

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OUTLOOK

Based on current forward market indicators, we expect both refined product margins and sour crude oil differentials for 2009 to be lower than the corresponding amounts reported in 2008. We expect the current economic slowdown to unfavorably impact demand for refined products. Although gasoline margins in the first quarter of 2009 have recovered somewhat from the negative margins experienced in late 2008, gasoline margins are expected to remain under pressure until demand begins to recover. Distillate margins are also expected to be unfavorably affected by reduced demand attributable to the current economic recession. We believe that distillate margins will continue to depend primarily on the pace of global economic activity and the rate at which new refining capacity is brought online.

In regard to feedstocks, thus far in 2009, sour crude oil differentials have decreased from fourth quarter 2008 levels and are expected to remain lower for the first half of 2009. Reduced overall crude oil production by OPEC has caused a reduction in the supply of sour crude oil and a resulting increase in the price of such crude oils relative to sweet crude oils. In light of the current and expanding weakness in the U.S. and global economies, we expect 2009 will be a challenging year for the refining industry and our company.

LIQUIDITY AND CAPITAL RESOURCES

Cash Flows for the Year Ended December 31, 2008
Net cash provided by operating activities for the year ended December 31, 2008 was $3.0 billion compared to $5.3 billion for the year ended December 31, 2007. The decrease in cash generated from operating activities was due primarily to the decrease in operating income discussed above under “Results of Operations,” after excluding the effect of the goodwill impairment loss included in the 2008 operating income that had no effect on cash. Changes in cash provided by or used for working capital during the years ended December 31, 2008 and 2007 are shown in Note 16 of Notes to Consolidated Financial Statements. Both receivables and accounts payable decreased in 2008 due to a significant decrease in crude oil and refined product prices at December 31, 2008 compared to such prices at the end of 2007. Receivables for 2008 also decreased due to the termination in the first quarter of 2008 of certain agreements related to the sale of the Lima Refinery to Husky and the timing of receivable collections at year-end 2007. The change in working capital for 2007 includes a $900 million decrease in the eligible trade receivables sold under our accounts receivable sales facility as discussed below in the discussion of 2007 versus 2006 cash flows.

See the 2007 cash flow discussion below for information related to the cash flows of the discontinued operations of the Lima Refinery.

The net cash generated from operating activities during the year ended December 31, 2008, combined with $1.5 billion of available cash on hand and $463 million of proceeds from the sale of our Krotz Springs Refinery, were used mainly to:

• fund $3.2 billion of capital expenditures and deferred turnaround and catalyst costs;

• make an early redemption of our 9.5% senior notes for $367 million and scheduled debt repayments of $7 million;

• purchase 23.0 million shares of our common stock at a cost of $955 million;

• fund a $25 million contingent earn-out payment in connection with the acquisition of the St. Charles Refinery, an $87 million acquisition of retail fuel sites, and a $57 million acquisition primarily of an interest in a refined product pipeline; and

• pay common stock dividends of $299 million.

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Cash Flows for the Year Ended December 31, 2007
Net cash provided by operating activities for the year ended December 31, 2007 was $5.3 billion compared to $6.3 billion for the year ended December 31, 2006. The decrease in cash generated from operating activities was due primarily to the decrease in operating income discussed above under “Results of Operations” and a $900 million decrease in the eligible trade receivables sold under our accounts receivable sales facility, as discussed in Note 4 of Notes to Consolidated Financial Statements. Other changes in cash provided by or used for working capital during the years ended December 31, 2007 and 2006 are shown in Note 16 of Notes to Consolidated Financial Statements. Both receivables and accounts payable increased in 2007 due to a significant increase in gasoline, distillate, and crude oil prices at December 31, 2007 compared to such prices at the end of 2006.

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 operations was $260 million and $215 million for the years ended December 31, 2007 and 2006, respectively. Cash used in investing activities related to the Lima Refinery was $14 million and $133 million for the years ended December 31, 2007 and 2006, respectively.

The net cash generated from operating activities during the year ended December 31, 2007, combined with $2.2 billion of proceeds from the issuance of long-term notes, $2.4 billion of proceeds from the sale of our Lima Refinery, a $311 million benefit from tax deductions in excess of recognized stock-based compensation cost, and $159 million of proceeds from the issuance of common stock related to our employee benefit plans, were used mainly to:

• fund $2.8 billion of capital expenditures and deferred turnaround and catalyst costs;

• purchase 84.3 million shares of our common stock at a cost of $5.8 billion;

• make an early debt redemption of $183 million and scheduled debt repayments of $280 million;

• fund capital contributions, net of distributions, of $209 million to the Cameron Highway Oil Pipeline Company mainly 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 $271 million; and

• increase available cash on hand by $874 million.

Capital Investments
During the year ended December 31, 2008, we expended $2.8 billion for capital expenditures and $408 million for deferred turnaround and catalyst costs. Capital expenditures for the year ended December 31, 2008 included $479 million of costs related to environmental projects.

In connection with our acquisition of the St. Charles Refinery in 2003, the seller was entitled to receive payments in any of the seven years following this acquisition if certain average refining margins during any of those years exceeded a specified level (see the discussion in Note 23 of Notes to Consolidated Financial Statements). Payments due under this earn-out arrangement were limited based on annual and aggregate limits. In January 2008, we made a $25 million earn-out payment related to the St. Charles Refinery, which was the final payment based on the aggregate limitation under that agreement. Subsequent to this payment, we have no further commitments with respect to contingent earn-out agreements.

For 2009, we expect to incur approximately $2.7 billion for capital investments, including approximately $2.2 billion for capital expenditures (approximately $635 million of which is for environmental projects) and approximately $490 million for deferred turnaround and catalyst costs. The capital expenditure

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estimate excludes anticipated expenditures related to strategic acquisitions. We continuously evaluate our capital budget and make changes as conditions warrant.

Krotz Springs Refinery Disposition
Effective July 1, 2008, we consummated the sale of our Krotz Springs Refinery to Alon Refining Krotz Springs, Inc. (Alon), a subsidiary of Alon USA Energy, Inc. The sale resulted in a pre-tax gain of $305 million, or $170 million after tax. Cash proceeds, net of certain costs related to the sale, were $463 million, including approximately $135 million from the sale of working capital to Alon primarily related to the sale of inventory by our marketing and supply subsidiary. In addition to the cash consideration received, we also received contingent consideration in the form of a three-year earn-out agreement based on certain product margins, which had a fair value of $171 million as of July 1, 2008. We have hedged the risk of a decline in the referenced product margins by entering into certain commodity derivative contracts. In addition, we entered into various agreements with Alon as further described in Note 2 of Notes to Consolidated Financial Statements.

Contractual Obligations
Our contractual obligations as of December 31, 2008 are summarized below (in millions).

	Payments Due by Period
	2009		2010		2011		2012		2013		Thereafter		Total
Debt and capital lease obligations	$	315	$	39	$	424	$	765	$	495	$	4,619	$	6,657
Operating lease obligations		397		272		174		84		51		257		1,235
Purchase obligations		12,812		2,507		1,589		1,208		623		1,752		20,491
Other long-term liabilities		–		163		150		150		149		1,549		2,161
Total	$	13,524	$	2,981	$	2,337	$	2,207	$	1,318	$	8,177	$	30,544

Debt and Capital Lease Obligations
Payments for debt and capital lease obligations in the table above reflect stated values and minimum rental payments, respectively.

On February 1, 2008, we redeemed our 9.50% senior notes for $367 million, or 104.75% of stated value. In addition, in March 2008, we made a scheduled debt repayment of $7 million related to certain of our other debt.

As of December 31, 2008, “current portion of debt and capital lease obligations” as reflected in the consolidated balance sheet consisted primarily of $200 million related to our 3.5% notes that matures in April 2009, $100 million of debt secured by certain of our accounts receivable that matures in June 2009 (discussed below), and the remaining $9 million of our 5.125% Series 1997D industrial revenue bonds that matures in April 2009.

We have an accounts receivable sales facility with a group of third-party entities and financial institutions to sell on a revolving basis up to $1 billion of eligible trade receivables. In June 2008, we amended the agreement to extend the maturity date from August 2008 to June 2009. As of December 31, 2008, the amount of eligible receivables sold to the third-party entities and financial institutions was $100 million; the proceeds from the sale are reflected as debt in our consolidated balance sheet as of December 31, 2008. The amount outstanding as of December 31, 2008 was repaid in February 2009. Note 4 of Notes to Consolidated Financial Statements includes additional discussion of this program.

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

43

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 December 31, 2008, 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	Baa2 (stable outlook)
Fitch Ratings	BBB (stable outlook)

We cannot provide assurance that these ratings will remain in effect for any given period of time or that one or more of these ratings will not be lowered or withdrawn entirely by a rating agency. We note that these credit ratings are not recommendations to buy, sell, or hold our securities and may be revised or withdrawn at any time by the rating agency. Each rating should be evaluated independently of any other rating. Any future reduction or withdrawal of one or more of our credit ratings could have a material adverse impact on our ability to obtain short- and long-term financing and the cost of such financings.

Operating Lease Obligations
Our operating lease obligations include leases for land, office facilities and equipment, retail facilities and equipment, dock facilities, transportation equipment, and various facilities and equipment used in the storage, transportation, production, and sale of refinery feedstocks and refined products. Operating lease obligations include all operating leases that have initial or remaining noncancelable terms in excess of one year, and are not reduced by minimum rentals to be received by us under subleases. The operating lease obligations reflected in the table above have been reduced by related obligations that are included in “other long-term liabilities.”

Purchase Obligations
A purchase obligation is an enforceable and legally binding agreement to purchase goods or services that specifies significant terms, including (i) fixed or minimum quantities to be purchased, (ii) fixed, minimum, or variable price provisions, and (iii) the approximate timing of the transaction. We have various purchase obligations including industrial gas and chemical supply arrangements (such as hydrogen supply arrangements), crude oil and other feedstock supply arrangements, and various throughput and terminalling agreements. We enter into these contracts to ensure an adequate supply of utilities and feedstock and adequate storage capacity to operate our refineries. Substantially all of our purchase obligations are based on market prices or adjustments based on market indices. Certain of these purchase obligations include fixed or minimum volume requirements, while others are based on our usage requirements. The purchase obligation amounts included in the table above include both short-term and long-term obligations and are based on (a) fixed or minimum quantities to be purchased and (b) fixed or estimated prices to be paid based on current market conditions. As of December 31, 2008, our short-term and long-term purchase obligations decreased by $18.2 billion from the amount reported as of December 31, 2007. The decrease is primarily attributable to lower crude oil and other feedstock prices at December 31, 2008 compared to December 31, 2007.

Other Long-term Liabilities
Our “other long-term liabilities” are described in Note 13 of Notes to Consolidated Financial Statements. For purposes of reflecting amounts for other long-term liabilities in the table above, we have made our best estimate of expected payments for each type of liability based on information available as of December 31, 2008.

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Other Commercial Commitments
As of December 31, 2008, our committed lines of credit were as follows:

	Borrowing
	Capacity	Expiration
Letter of credit facility	$300 million	June 2009
Letter of credit facility	$275 million	July 2009
Revolving credit facility	$2.5 billion	November 2012
Canadian revolving credit facility	Cdn. $115 million	December 2012

In June 2008, we entered into a one-year committed revolving letter of credit facility under which we may obtain letters of credit of up to $300 million. In July 2008, we entered into another one-year committed revolving letter of credit facility under which we may obtain letters of credit of up to $275 million. Both of these credit facilities support certain of our crude oil purchases. We are being charged letter of credit issuance fees in connection with these letter of credit facilities.

As of December 31, 2008, we had $201 million of letters of credit outstanding under uncommitted short-term bank credit facilities, $431 million of letters of credit outstanding under our three U.S. committed revolving credit facilities, and Cdn. $19 million of letters of credit outstanding under our Canadian committed revolving credit facility. These letters of credit expire during 2009 and 2010.

Stock Purchase Programs
On February 28, 2008, our board of directors approved a new $3 billion common stock purchase program. This program is in addition to the remaining amount under the $6 billion program previously authorized. This new $3 billion program has no expiration date. As of December 31, 2008, we had made no purchases of our common stock under the new $3 billion program. As of December 31, 2008, we have approvals under these stock purchase programs to purchase approximately $3.5 billion of our common stock.

During 2008, we purchased 18.0 million shares of our common stock for $667 million under our $6 billion common stock purchase program and 5.0 million shares for $288 million in connection with the administration of our employee benefit plans. These purchases represented approximately 4% of our outstanding shares of common stock as of December 31, 2008.

Pension Plan Funded Status
During 2008, we contributed $110 million to our qualified pension plans. Based on a 5.40% discount rate and fair values of plan assets as of December 31, 2008, the fair value of the assets in our qualified pension plans was equal to approximately 76% of the projected benefit obligation under those plans as of the end of 2008. The fair value of the assets in our qualified pension plans was in excess of the projected benefit obligation under those plans as of December 31, 2007. However, due primarily to a significant decline in the fair value of the plan assets during 2008 resulting from unfavorable economic and market conditions, the qualified pension plans were underfunded as of December 31, 2008.

Although we have only $8 million of minimum required contributions to our Qualified Plans during 2009 under the Employee Retirement Income Security Act, we plan to contribute approximately $130 million to our Qualified Plans during 2009. In January 2009, $50 million of this total expected contribution was contributed to our main Qualified Plan.

Environmental Matters
As discussed in Note 24 of Notes to Consolidated Financial Statements, 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

45

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.

Tax Matters
As discussed in Note 23 of Notes to Consolidated Financial Statements, we are subject to extensive tax liabilities. 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. Many 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 as well as other reasons, we believe that exports by our Aruba Refinery should not be subject to this turnover tax. Accordingly, no expense or liability has been recognized in our consolidated financial statements with respect to this turnover tax on exports. We commenced arbitration proceedings with the Netherlands Arbitration Institute pursuant to which we are seeking to enforce our rights under the tax holiday and other agreements related to the refinery. The arbitration hearing was held on February 3-4, 2009. We anticipate a decision sometime later this year. We have also filed protests of these assessments through proceedings in Aruba. In April 2008, we entered into an escrow agreement with the GOA and Caribbean Mercantile Bank NV (CMB), pursuant to which we agreed to deposit an amount equal to the disputed turnover tax on exports into an escrow account with CMB, pending resolution of the tax protest proceedings in Aruba. Under this escrow agreement, we are required to continue to deposit an amount equal to the disputed tax on a monthly basis until the tax dispute is resolved through the Aruba proceedings. Amounts deposited under this escrow agreement, which totaled $102 million as of December 31, 2008, are reflected as “restricted cash” in our consolidated balance sheet.

In addition to the turnover tax described above, the GOA has also asserted other tax amounts aggregating approximately $25 million related to dividends and other tax items. The GOA, through the arbitration, is also now questioning the validity of the tax holiday generally, although the GOA has never issued any formal assessment for profit tax at any time during the tax holiday period. We believe that the provisions of our tax holiday agreement exempt us from all of these taxes and, accordingly, no expense or liability has been recognized in our consolidated financial statements. We are also challenging approximately $30 million in foreign exchange payments made to the Central Bank of Aruba as payments exempted under our tax holiday, as well as other reasons. These taxes and assessments are also being addressed in the arbitration proceedings discussed above.

Other
In July 2008, we entered into an agreement to participate as a prospective shipper on the 500,000 barrel-per-day expansion of the Keystone crude oil pipeline system, which is expected to be completed by 2012. Once completed, the pipeline will enable crude oil to be transported from Western Canada to the U.S. Gulf Coast at Port Arthur, Texas. In addition to our commitment to ship crude oil through the pipeline, we have an option to acquire an equity interest in the Keystone partnerships. We have also secured commitments from several Canadian oil producers to sell to us heavy sour crude oil for shipment through the pipeline.

During the first quarter of 2007, our McKee Refinery was shut down due to a fire originating in its propane deasphalting unit, resulting in business interruption losses for which we submitted claims to our insurance

46

carriers under our insurance policies. We reached a settlement with the insurance carriers on our claims, resulting in pre-tax income of approximately $100 million in the first quarter of 2008 that was recorded as a reduction to “cost of sales.”

On January 25, 2008, our Aruba Refinery was shut down due to a fire in its vacuum unit. During the second quarter, we completed the repairs and resumed full operations of the refinery. This incident reduced our operating income for the year ended December 31, 2008.

In November 2007, we announced plans to explore strategic alternatives related to our Aruba Refinery. We are continuing to pursue potential transactions for this refinery, which may include the sale of the refinery.

Our refining and marketing operations have a concentration of customers in the refining industry and customers who are refined product wholesalers and retailers. These concentrations of customers may impact our overall exposure to credit risk, either positively or negatively, in that these customers may be similarly affected by changes in economic or other conditions. However, we believe that our portfolio of accounts receivable is sufficiently diversified to the extent necessary to minimize potential credit risk. Historically, we have not had any significant problems collecting our accounts receivable.

We believe that we have sufficient funds from operations and, to the extent necessary, from borrowings under our credit facilities, 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 in the public and private capital markets or the arrangement of additional credit facilities. However, there can be no assurances regarding the availability of any future financings or additional credit facilities or whether such financings or additional credit facilities can be made available on terms that are acceptable to us.

NEW ACCOUNTING PRONOUNCEMENTS

As discussed in Note 1 of Notes to Consolidated Financial Statements, certain new financial accounting pronouncements have been issued that 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. The adoption of these pronouncements has not had, and is not expected to have, a material effect on our consolidated financial statements.

CRITICAL ACCOUNTING POLICIES INVOLVING CRITICAL ACCOUNTING ESTIMATES

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. The following summary provides further information about our critical accounting policies that involve critical accounting estimates, and should be read in conjunction with Note 1 of Notes to Consolidated Financial Statements, which summarizes our significant accounting policies. The following accounting policies involve estimates that are considered critical due to the level of sensitivity and judgment involved, as well as the impact on our consolidated financial position and results of operations. We believe that all of our estimates are reasonable.

Impairment of Assets
Long-lived assets (excluding goodwill, intangible assets with indefinite lives, equity method investments, and deferred tax assets) are required to be tested for recoverability whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. An impairment loss should be recognized only if the carrying amount of the asset is not recoverable and exceeds its fair value.

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Goodwill and intangible assets that have indefinite useful lives must be tested for impairment annually or more frequently if events or changes in circumstances indicate that the asset might be impaired. An impairment loss should be recognized if the carrying amount of the asset exceeds its fair value. We evaluate our equity method investments for impairment when there is evidence that we may not be able to recover the carrying amount of our investments or the investee is unable to sustain an earnings capacity that justifies the carrying amount. A loss in the value of an investment that is other than a temporary decline is recognized currently in earnings, and is based on the difference between the estimated current fair value of the investment and its carrying amount.

In order to test for recoverability, management must make estimates of projected cash flows related to the asset being evaluated, which include, but are not limited to, assumptions about the use or disposition of the asset, its estimated remaining life, and future expenditures necessary to maintain its existing service potential. In order to determine fair value, management must make certain estimates and assumptions including, among other things, an assessment of market conditions, projected cash flows, investment rates, interest/equity rates, and growth rates, that could significantly impact the fair value of the asset being tested for impairment. Due to the significant subjectivity of the assumptions used to test for recoverability and to determine fair value, changes in market conditions could result in significant impairment charges in the future, thus affecting our earnings. Due to adverse changes in market conditions during the fourth quarter of 2008, as discussed further below in our discussion of goodwill, we evaluated our significant operating assets for potential impairment as of December 31, 2008, and we determined that the carrying amount of each of these assets was recoverable. Our impairment evaluations are based on assumptions that management deems to be reasonable. Providing sensitivity analysis if other assumptions were used in performing the impairment evaluations is not practicable due to the significant number of assumptions involved in the estimates.

In regard to goodwill, we have historically performed our goodwill impairment test as of October 1 of each year. However, during the fourth quarter of 2008, there were severe disruptions in the capital and commodities markets that contributed to a significant decline in our common stock price, thus causing our market capitalization to decline to a level substantially below our net book value. Because a low market capitalization relative to net book value represents a key indicator that goodwill may be impaired, we determined that goodwill needed to be evaluated for impairment as of December 31, 2008 in addition to our normal annual testing date. As of the date of this goodwill impairment evaluation, all of our goodwill was allocated among four reporting units, namely each of the four geographic regions of our refining segment (the Gulf Coast, Mid-Continent, Northeast, and West Coast regions). No goodwill was reported in our retail segment.

Goodwill impairment testing is comprised of two steps. The first step (step 1) is to compare the estimated fair value of each reporting unit to its net book value, including any goodwill assigned to that reporting unit. If the estimated fair value of a reporting unit is higher than its recorded net book value, no impairment is deemed to exist and no further testing is required. If, however, the estimated fair value of a reporting unit is less than its recorded net book value, then the second step of the goodwill impairment test (step 2) is required to determine the amount of the goodwill impairment loss, if any. In the second step, the estimated fair value derived for the reporting unit in step 1 is deemed to represent the purchase price in a hypothetical acquisition of that reporting unit. The fair values of each of the reporting unit’s identifiable assets and liabilities are determined as they would be in a purchase business combination, and the excess of the deemed purchase price over the net fair value of all of the identifiable assets and liabilities represents the implied fair value of the goodwill of that reporting unit. If the carrying amount of that reporting unit’s goodwill exceeds this implied fair value of goodwill, an impairment loss is recognized in the amount of that excess to reduce the carrying amount of goodwill to the implied fair value determined in this hypothetical purchase price allocation.

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Because quoted market prices for our reporting units are not available, the impairment testing rules required management to exercise its judgment to determine the estimated fair values of our four reporting units for purposes of performing step 1 of the goodwill impairment test. Management considered the cyclicality of the refining business in deriving the set of prices that were applied to the anticipated charge and production volumes in each reporting unit. In determining the present values of each reporting unit’s cash flow streams, management utilized discount rates that were commensurate with the risks involved in the assets. To this applicable discount rate, management added a reasonable risk premium in order to consider the impact of volatility within the refining industry and current tightness in the capital markets on an investor’s required rate of return.

An important requirement related to this fair value determination process is to reconcile the sum of the fair values determined for the various reporting units to our market capitalization. In order to perform this reconciliation, we first determined a fair value for our retail segment using an appropriate discount rate. Then we compared the sum of the fair values of the retail segment and the four refining reporting units to our total enterprise value, with our market capitalization determined based on our common stock price as of December 31, 2008. For this purpose, we also added a control premium to our market capitalization, in recognition of the fact that an acquiring entity generally is willing to pay more for equity ownership that gives it a controlling interest than an individual investor would pay for shares that constitute less than a controlling interest. The control premium that we added to our market capitalization represented a reasonable premium for acquisitions in our industry. Because the enterprise value, including the control premium, was comparable to the sum of the fair values determined above, we concluded that the assumptions utilized to determine the fair values of our reporting units were reasonable. The computed fair value of each of the reporting units was less than its net book value including goodwill, and therefore the goodwill in each of the reporting units was potentially impaired.

We then applied step 2 of the goodwill impairment test to each of the reporting units, with the fair value for each reporting unit derived in step 1 constituting the assumed purchase price in a hypothetical acquisition of each of those reporting units. In allocating value to the property, plant and equipment of each of the reporting units, we used current replacement costs for the refineries that comprised each reporting unit and applied a depreciation factor based on historical depreciation. We adjusted deferred income taxes based on the fair value assigned to property, plant and equipment and reflected the fair value of inventory and other working capital included in each reporting unit. Our calculations indicated that the net fair value of each reporting unit’s identifiable assets and liabilities was significantly in excess of the deemed purchase price, and therefore no implied fair value of goodwill existed in any of the four reporting units. As a result, we concluded that an impairment of the entire amount of recorded goodwill was required, which resulted in a $4.1 billion pre-tax goodwill impairment loss, or $4.0 billion after tax, in the fourth quarter of 2008.

Environmental Liabilities
Our operations are subject to extensive environmental regulation by federal, state, and local authorities relating primarily to discharge of materials into the environment, waste management, and pollution prevention measures. Future legislative action and regulatory initiatives could result in changes to required operating permits, additional remedial actions, or increased capital expenditures and operating costs that cannot be assessed with certainty at this time.

Accruals for environmental liabilities are based on best estimates of probable undiscounted future costs assuming currently available remediation technology and applying current regulations, as well as our own internal environmental policies. However, environmental liabilities are difficult to assess and estimate due to uncertainties related to the magnitude of possible remediation, the timing of such remediation, and the determination of our obligation in proportion to other parties. Such estimates are subject to change due to many factors, including the identification of new sites requiring remediation, changes in environmental

49

laws and regulations and their interpretation, additional information related to the extent and nature of remediation efforts, and potential improvements in remediation technologies. An estimate of the sensitivity to earnings for changes in those factors is not practicable due to the number of contingencies that must be assessed, the number of underlying assumptions, and the wide range of possible outcomes.

The balance of and changes in our accruals for environmental matters as of and for the years ended December 31, 2008, 2007, and 2006 is included in Note 24 of Notes to Consolidated Financial Statements.

Pension and Other Postretirement Benefit Obligations
We have significant pension and other postretirement benefit liabilities and costs that are developed from actuarial valuations. Inherent in these valuations are key assumptions including discount rates, expected return on plan assets, future compensation increases, and health care cost trend rates. Changes in these assumptions are primarily influenced by factors outside our control. For example, the discount rate assumption represents a yield curve comprised of various long-term bonds that each receive one of the two highest ratings given by the recognized rating agencies as of the end of each year, while the expected return on plan assets is based on a compounded return calculated for us by an outside consultant using historical market index data with an asset allocation of 65% equities and 35% bonds, which is representative of the asset mix in our qualified pension plans. These assumptions can have a significant effect on the amounts reported in our consolidated financial statements. For example, a 0.25% decrease in the assumptions related to the discount rate or expected return on plan assets or a 0.25% increase in the assumptions related to the health care cost trend rate or rate of compensation increase would have the following effects on the projected benefit obligation as of December 31, 2008 and net periodic benefit cost for the year ending December 31, 2009 (in millions):

			Other
	Pension		Postretirement
	Benefits		Benefits
Increase in projected benefit obligation resulting from:
Discount rate decrease	$	66	$	15
Compensation rate increase		28		–
Health care cost trend rate increase		–		9
Increase in expense resulting from:
Discount rate decrease		10		1
Expected return on plan assets decrease		4		–
Compensation rate increase		6		–
Health care cost trend rate increase		–		1

Tax Liabilities
Our operations are subject to extensive tax liabilities, including federal, state, and foreign income taxes. We are also subject to various 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, and the implementation of future legislative and regulatory tax initiatives could result in increased tax liabilities that cannot be predicted at this time. In addition, we have received claims from various jurisdictions related to certain tax matters. Tax liabilities include potential assessments of penalty and interest amounts.

We record tax liabilities based on our assessment of existing tax laws and regulations. A contingent loss related to a transactional tax claim is recorded if the loss is both probable and estimable. The recording of our tax liabilities requires significant judgments and estimates. Actual tax liabilities can vary from our estimates for a variety of reasons, including different interpretations of tax laws and regulations and

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different assessments of the amount of tax due. In addition, in determining our income tax provision, we must assess the likelihood that our deferred tax assets, primarily consisting of net operating loss and tax credit carryforwards, will be recovered through future taxable income. Significant judgment is required in estimating the amount of valuation allowance, if any, that should be recorded against those deferred income tax assets. If our actual results of operations differ from such estimates or our estimates of future taxable income change, the valuation allowance may need to be revised. However, an estimate of the sensitivity to earnings that would result from changes in the assumptions and estimates used in determining our tax liabilities is not practicable due to the number of assumptions and tax laws involved, the various potential interpretations of the tax laws, and the wide range of possible outcomes.

Legal Liabilities
A variety of claims have been made against us in various lawsuits. Although we have been successful in defending litigation in the past, we cannot be assured of similar success in future litigation due to the inherent uncertainty of litigation and the individual fact circumstances in each case. We record a liability related to a loss contingency attributable to such legal matters if we determine the loss to be both probable and estimable. The recording of such liabilities requires judgments and estimates, the results of which can vary significantly from actual litigation results due to differing interpretations of relevant law and differing opinions regarding the degree of potential liability and the assessment of reasonable damages. However, an estimate of the sensitivity to earnings if other assumptions were used in recording our legal liabilities is not practicable due to the number of contingencies that must be assessed and the wide range of reasonably possible outcomes, both in terms of the probability of loss and the estimates of such loss.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

COMMODITY PRICE RISK

We are exposed to market risks related to the volatility of crude oil and refined product prices, as well as volatility in the price of natural gas used in our refining operations. In order to reduce the risks of these price fluctuations, we use derivative commodity instruments to hedge a portion of our refinery feedstock and refined product inventories and a portion of our unrecognized firm commitments to purchase these inventories (fair value hedges). From time to time, we use derivative commodity instruments to hedge the price risk of forecasted transactions such as forecasted feedstock and product purchases, refined product sales, and natural gas purchases (cash flow hedges). We also use derivative commodity instruments that do not receive hedge accounting treatment to manage our exposure to price volatility on a portion of our refinery feedstock and refined product inventories and on certain forecasted feedstock and product purchases, refined product sales, and natural gas purchases. These derivative instruments are considered economic hedges for which changes in their fair value are recorded currently in income. Finally, we enter into derivative commodity instruments based on our fundamental and technical analysis of market conditions that we mark to market for accounting purposes. See “Derivative Instruments” in Note 1 of Notes to Consolidated Financial Statements for a discussion of our accounting for the various types of derivative transactions.

The types of instruments used in our hedging and trading activities described above include swaps, futures, and options. Our positions in derivative commodity instruments are monitored and managed on a daily basis by a risk control group to ensure compliance with our stated risk management policy that has been approved by our board of directors.

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The following tables provide information about our derivative commodity instruments as of December 31, 2008 and 2007 (dollars in millions, except for the weighted-average pay and receive prices as described below), including:

Fair Value Hedges – Fair value hedges are used to hedge certain recognized refining inventories (which had a carrying amount of $4.4 billion and $3.8 billion as of December 31, 2008 and 2007, respectively, and a fair value of $5.1 billion and $10.0 billion as of December 31, 2008 and 2007, respectively) and our unrecognized firm commitments (i.e., binding agreements to purchase inventories in the future). 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.

Cash Flow Hedges – Cash flow hedges are used to hedge certain forecasted feedstock and product purchases, refined product sales, and natural gas purchases. 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.

Economic Hedges – Economic hedges are hedges not designated as fair value or cash flow hedges that are used to:

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

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

– manage price volatility in the referenced product margins associated with the Alon earn-out agreement as discussed in Note 2 of Notes to Consolidated Financial Statements.

The derivative instruments related to economic hedges are recorded at fair value and changes in the fair value of the derivative instruments are recognized currently in income.

Trading Activities – These represent derivative commodity instruments held or issued for trading purposes. The derivative instruments entered into by us for trading activities are recorded at fair value and changes in the fair value of the derivative instruments are recognized currently in income.

The following tables include only open positions at the end of the reporting period. 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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	December 31, 2008
			Wtd Avg		Wtd Avg							Pre-tax
	Contract		Pay		Receive		Contract		Market			Fair
	Volumes		Price		Price		Value		Value			Value
Fair Value Hedges:
Futures – short:
2009 (crude oil and refined products)		6,904		N/A	$	48.28	$	333	$	320		$	13
Cash Flow Hedges:
Swaps – long:
2009 (crude oil and refined products)		60,162	$	121.69		58.44		N/A		(3,805	)		(3,805	)
2010 (crude oil and refined products)		4,680		63.72		64.03		N/A		1			1
Swaps – short:
2009 (crude oil and refined products)		60,162		62.38		129.80		N/A		4,056			4,056
2010 (crude oil and refined products)		4,680		76.32		78.69		N/A		11			11
Futures – long:
2009 (crude oil and refined products)		780		38.62		N/A		30		27			(3	)
Economic Hedges:
Swaps – long:
2009 (crude oil and refined products)		25,987		96.88		55.25		N/A		(1,082	)		(1,082	)
2010 (crude oil and refined products)		19,734		105.96		63.94		N/A		(829	)		(829	)
2011 (crude oil and refined products)		3,900		124.78		67.99		N/A		(221	)		(221	)
Swaps – short:
2009 (crude oil and refined products)		25,931		59.65		106.81		N/A		1,223			1,223
2010 (crude oil and refined products)		19,734		72.18		121.96		N/A		982			982
2011 (crude oil and refined products)		3,900		74.08		136.66		N/A		244			244
Futures – long:
2009 (crude oil and refined products)		135,882		59.17		N/A		8,040		7,319			(721	)
2010 (crude oil and refined products)		3,466		78.33		N/A		271		240			(31	)
2009 (natural gas)		4,310		8.46		N/A		36		24			(12	)
Futures – short:
2009 (crude oil and refined products)		135,091		N/A		62.74		8,475		7,510			965
2010 (crude oil and refined products)		3,692		N/A		84.66		313		276			37
2009 (natural gas)		4,310		N/A		5.68		24		24			–
Options – long:
2009 (crude oil and refined products)		57		60.64		N/A		1		–			(1	)
Trading Activities:
Swaps – long:
2009 (crude oil and refined products)		19,887		77.56		45.09		N/A		(646	)		(646	)
2010 (crude oil and refined products)		10,050		40.66		35.35		N/A		(53	)		(53	)
2011 (crude oil and refined products)		1,950		78.36		65.80		N/A		(24	)		(24	)
Swaps – short:
2009 (crude oil and refined products)		16,084		56.44		97.17		N/A		655			655
2010 (crude oil and refined products)		5,850		64.19		73.12		N/A		52			52
2011 (crude oil and refined products)		1,950		68.06		80.59		N/A		24			24

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	December 31, 2008
			Wtd Avg		Wtd Avg						Pre-tax
	Contract		Pay		Receive		Contract		Market		Fair
	Volumes		Price		Price		Value		Value		Value
Futures – long:
2009 (crude oil and refined products)		24,039	$	71.70		N/A	$	1,724	$	1,300	$	(424	)
2010 (crude oil and refined products)		956		84.12		N/A		80		70		(10	)
2009 (natural gas)		200		5.79		N/A		1		1		–
Futures – short:
2009 (crude oil and refined products)		21,999		N/A		73.38		1,614		1,209		405
2010 (crude oil and refined products)		956		N/A		83.63		80		70		10
2009 (natural gas)		200		N/A		5.82		1		1		–
Options – long:
2009 (crude oil and refined products)		100		30.00		N/A		–		–		–
Total pre-tax fair value of open positions											$	816

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	December 31, 2007
			Wtd Avg		Wtd Avg							Pre-tax
	Contract		Pay		Receive		Contract		Market			Fair
	Volumes		Price		Price		Value		Value			Value
Fair Value Hedges:
Futures – long:
2008 (crude oil and refined products)		68,873	$	97.69		N/A	$	6,728	$	6,961		$	233
Futures – short:
2008 (crude oil and refined products)		79,188		N/A	$	96.89		7,673		8,005			(332	)
Cash Flow Hedges:
Swaps – long:
2008 (crude oil and refined products)		18,175		81.44		98.50		N/A		310			310
Swaps – short:
2008 (crude oil and refined products)		18,175		102.55		86.25		N/A		(296	)		(296	)
Futures – long:
2008 (crude oil and refined products)		80,960		103.50		N/A		8,379		8,596			217
Futures – short:
2008 (crude oil and refined products)		73,735		N/A		103.62		7,640		7,826			(186	)
Economic Hedges:
Swaps – long:
2008 (crude oil and refined products)		12,012		33.16		39.48		N/A		76			76
Swaps – short:
2008 (crude oil and refined products)		7,397		63.91		54.25		N/A		(71	)		(71	)
Futures – long:
2008 (crude oil and refined products)		77,902		96.20		N/A		7,494		7,802			308
Futures – short:
2008 (crude oil and refined products)		76,426		N/A		96.18		7,351		7,663			(312	)
Options – long:
2008 (crude oil and refined products)		89		47.72		N/A		–		1			1
Trading Activities:
Swaps – long:
2008 (crude oil and refined products)		14,677		11.77		12.98		N/A		18			18
Swaps – short:
2008 (crude oil and refined products)		15,952		12.47		11.56		N/A		(15	)		(15	)
Futures – long:
2008 (crude oil and refined products)		28,801		98.01		N/A		2,823		2,923			100
Futures – short:
2008 (crude oil and refined products)		28,766		N/A		98.20		2,824		2,920			(96	)
Options – short:
2008 (crude oil and refined products)		66		N/A		49.00		1		1			–
Total pre-tax fair value of open positions												$	(45	)

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INTEREST RATE RISK

In general, our primary market risk exposure for changes in interest rates relates to our debt obligations. We manage our exposure to changing interest rates through the use of a combination of fixed-rate and floating-rate debt. In addition, we sometimes utilize interest rate swap agreements to manage a portion of our exposure to changing interest rates by converting certain fixed-rate debt to floating rate. These interest rate swap agreements are generally accounted for as fair value hedges. The gain or loss on the derivative instrument and the gain or loss on the debt that is being hedged are recorded in interest expense. The recorded amounts of the derivative instrument and debt balances are adjusted accordingly. We had no interest rate derivative instruments outstanding as of December 31, 2008 and 2007.

The following table provides information about our debt instruments (dollars in millions), the fair value of which is sensitive to changes in interest rates. Principal cash flows and related weighted-average interest rates by expected maturity dates are presented.

	December 31, 2008
	Expected Maturity Dates
																There-						Fair
	2009			2010			2011			2012			2013			after			Total			Value
Debt:
Fixed rate	$	209		$	33		$	418		$	759		$	489		$	4,597		$	6,505		$	6,362
Average interest rate		3.6	%		6.8	%		6.4	%		6.9	%		5.5	%		6.8	%		6.6	%
Floating rate	$	100		$	–		$	–		$	–		$	–		$	–		$	100		$	100
Average interest rate		3.9	%		–	%		–	%		–	%		–	%		–	%		3.9	%

	December 31, 2007
	Expected Maturity Dates
																There-						Fair
	2008			2009			2010			2011			2012			after			Total			Value
Debt:
Fixed rate	$	356		$	209		$	33		$	418		$	759		$	5,086		$	6,861		$	7,109
Average interest rate		9.4	%		3.6	%		6.8	%		6.4	%		6.9	%		6.7	%		6.8	%

FOREIGN CURRENCY RISK

We enter into foreign currency exchange and purchase contracts to manage our exposure to exchange rate fluctuations on transactions related to our Canadian operations. Changes in the fair value of these contracts are recognized currently in income and are intended to offset the income effect of translating the foreign currency denominated transactions that they are intended to hedge.

As of December 31, 2008, we had commitments to purchase $280 million of U.S. dollars. Our market risk was minimal on these contracts, as they matured on or before January 30, 2009, resulting in a 2009 gain of $2 million.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Our management is responsible for establishing and maintaining adequate “internal control over financial reporting” (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) for Valero. Our management evaluated the effectiveness of Valero’s internal control over financial reporting as of December 31, 2008. In its evaluation, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control - Integrated Framework. Management believes that as of December 31, 2008, our internal control over financial reporting was effective based on those criteria.

Our independent registered public accounting firm has issued an attestation report on the effectiveness of our internal control over financial reporting, which begins on page 59 of this report.

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders
of Valero Energy Corporation and subsidiaries:

We have audited the accompanying consolidated balance sheets of Valero Energy Corporation and subsidiaries (the Company) as of December 31, 2008 and 2007, and the related consolidated statements of income, stockholders’ equity, cash flows and comprehensive income for each of the years in the three-year period ended December 31, 2008. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States) (the PCAOB). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Valero Energy Corporation and subsidiaries as of December 31, 2008 and 2007, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2008, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the PCAOB, the Company’s internal control over financial reporting as of December 31, 2008, based on criteria established in Internal Control–Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February 26, 2009, expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

/s/ KPMG LLP

San Antonio, Texas
February 26, 2009

58

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders
of Valero Energy Corporation and subsidiaries:

We have audited Valero Energy Corporation and subsidiaries’ (the Company’s) internal control over financial reporting as of December 31, 2008, based on criteria established in Internal Control–Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States) (the PCAOB). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed 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. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, Valero Energy Corporation and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December 31, 2008, based on criteria established in Internal Control–Integrated Framework issued by COSO.

59

We also have audited, in accordance with the standards of the PCAOB, the consolidated balance sheets of Valero Energy Corporation and subsidiaries as of December 31, 2008 and 2007, and the related consolidated statements of income, stockholders’ equity, cash flows and comprehensive income for each of the years in the three-year period ended December 31, 2008, and our report dated February 26, 2009 expressed an unqualified opinion on those consolidated financial statements.

/s/ KPMG LLP

San Antonio, Texas
February 26, 2009

60

VALERO ENERGY CORPORATION AND SUBSIDIARIES

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

	December 31,
	2008			2007
ASSETS
Current assets:
Cash and temporary cash investments	$	940		$	2,464
Restricted cash		131			31
Receivables, net		2,897			7,691
Inventories		4,637			4,073
Income taxes receivable		197			–
Deferred income taxes		98			247
Prepaid expenses and other		550			175
Assets held for sale		–			306
Total current assets		9,450			14,987
Property, plant and equipment, at cost		28,103			25,599
Accumulated depreciation		(4,890	)		(4,039	)
Property, plant and equipment, net		23,213			21,560
Intangible assets, net		224			290
Goodwill		–			4,019
Deferred charges and other assets, net		1,530			1,866
Total assets	$	34,417		$	42,722
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current portion of debt and capital lease obligations	$	312		$	392
Accounts payable		4,446			9,587
Accrued expenses		374			500
Taxes other than income taxes		592			632
Income taxes payable		–			499
Deferred income taxes		485			293
Liabilities related to assets held for sale		–			11
Total current liabilities		6,209			11,914
Debt and capital lease obligations, less current portion		6,264			6,470
Deferred income taxes		4,163			4,021
Other long-term liabilities		2,161			1,810
Commitments and contingencies
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		7,190			7,111
Treasury stock, at cost; 111,290,436 and 90,841,602 common shares		(6,884	)		(6,097	)
Retained earnings		15,484			16,914
Accumulated other comprehensive income (loss)		(176	)		573
Total stockholders’ equity		15,620			18,507
Total liabilities and stockholders’ equity	$	34,417		$	42,722

See Notes to Consolidated Financial Statements.

61

VALERO ENERGY CORPORATION AND SUBSIDIARIES

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

	Year Ended December 31,
	2008			2007			2006
Operating revenues (1)	$	119,114		$	95,327		$	87,640
Costs and expenses:
Cost of sales		107,429			81,645			73,863
Refining operating expenses		4,555			4,016			3,622
Retail selling expenses		768			750			719
General and administrative expenses		559			638			598
Depreciation and amortization expense		1,476			1,360			1,116
Gain on sale of Krotz Springs Refinery		(305	)		–			–
Goodwill impairment loss		4,069			–			–
Total costs and expenses		118,551			88,409			79,918
Operating income		563			6,918			7,722
Equity in earnings of NuStar Energy L.P.		–			–			45
Other income, net		113			167			350
Interest and debt expense:
Incurred		(451	)		(466	)		(377	)
Capitalized		111			107			165
Minority interest in net income of NuStar GP Holdings, LLC		–			–			(7	)
Income from continuing operations before income tax expense		336			6,726			7,898
Income tax expense		1,467			2,161			2,611
Income (loss) from continuing operations		(1,131	)		4,565			5,287
Income from discontinued operations, net of income tax expense		–			669			176
Net income (loss)		(1,131	)		5,234			5,463
Preferred stock dividends		–			–			2
Net income (loss) applicable to common stock	$	(1,131	)	$	5,234		$	5,461
Earnings (loss) per common share:
Continuing operations	$	(2.16	)	$	8.08		$	8.65
Discontinued operations		–			1.19			0.29
Total	$	(2.16	)	$	9.27		$	8.94
Weighted-average common shares outstanding (in millions)		524			565			611
Earnings (loss) per common share – assuming dilution:
Continuing operations	$	(2.16	)	$	7.72		$	8.36
Discontinued operations		–			1.16			0.28
Total	$	(2.16	)	$	8.88		$	8.64
Weighted-average common shares outstanding – assuming dilution (in millions)		524			579			632
Dividends per common share	$	0.57		$	0.48		$	0.30
Supplemental information:
(1) Includes excise taxes on sales by our U.S. retail system	$	816		$	801		$	782

See Notes to Consolidated Financial Statements.

62

VALERO ENERGY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Millions of Dollars)

Accumulated

Additional

Other

Preferred

Common

Paid-in

Treasury

Retained

Comprehensive

Stock

Stock

Capital

Stock

Earnings

Income (Loss)

Balance as of December 31, 2005

$

68

$

6

$

8,164

$

(196

)

$

6,673

$

335

Net income

–

–

–

–

5,463

–

Dividends on common stock

–

–

–

–

(183

)

–

Dividends on and accretion of preferred stock

1

–

–

–

(2

)

–

Conversion of preferred stock

(69

)

–

69

–

–

–

Credits from subsidiary stock sales, net of tax

–

–

101

–

–

–

Stock-based compensation expense

–

–

81

–

–

–

Shares repurchased, net of shares issued, in connection with employee stock plans and other

–

–

(636

)

(1,200

)

–

–

Other comprehensive income

–

–

–

–

–

29

Adjustment to initially apply FASB Statement No. 158, net of tax

–

–

–

–

–

(99

)

Balance as of December 31, 2006

–

6

7,779

(1,396

)

11,951

265

Net income

–

–

–

–

5,234

–

Dividends on common stock

–

–

–

–

(271

)

–

Stock-based compensation expense

–

–

89

–

–

–

Shares repurchased under $6 billion common stock purchase program

–

–

–

(4,873

)

–

–

Shares issued, net of shares repurchased, in connection with employee stock plans and other

–

–

(757

)

172

–

–

Other comprehensive income

–

–

–

–

–

308

Balance as of December 31, 2007

–

6

7,111

(6,097

)

16,914

573

Net loss

–

–

–

–

(1,131

)

–

Dividends on common stock

–

–

–

–

(299

)

–

Stock-based compensation expense

–

–

62

–

–

–

Shares repurchased under $6 billion common stock purchase program

–

–

–

(667

)

–

–

Shares repurchased, net of shares issued, in connection with employee stock plans and other

–

–

17

(120

)

–

–

Other comprehensive loss

–

–

–

–

–

(749

)

Balance as of December 31, 2008

$

–

$

6

$

7,190

$

(6,884

)

$

15,484

$

(176

)

See Notes to Consolidated Financial Statements.

63

VALERO ENERGY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(Millions of Dollars)

	Year Ended December 31,
	2008			2007			2006
Cash flows from operating activities:
Net income (loss)	$	(1,131	)	$	5,234		$	5,463
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization expense		1,476			1,376			1,155
Goodwill impairment loss		4,069			–			–
Gain on sale of Krotz Springs Refinery		(305	)		–			–
Gain on sale of Lima Refinery		–			(827	)		–
Gain on sale of NuStar GP Holdings, LLC		–			–			(328	)
Noncash interest expense and other income, net		(76	)		(10	)		31
Stock-based compensation expense		59			100			108
Deferred income tax expense (benefit)		675			(131	)		290
Changes in current assets and current liabilities		(1,630	)		(469	)		(144	)
Changes in deferred charges and credits and other operating activities, net		(145	)		(15	)		(263	)
Net cash provided by operating activities		2,992			5,258			6,312
Cash flows from investing activities:
Capital expenditures		(2,790	)		(2,260	)		(3,187	)
Deferred turnaround and catalyst costs		(408	)		(518	)		(569	)
Proceeds from sale of Krotz Springs Refinery		463			–			–
Proceeds from sale of Lima Refinery		–			2,428			–
Proceeds from sale of NuStar GP Holdings, LLC		–			–			880
Contingent payments in connection with acquisitions		(25	)		(75	)		(101	)
(Investment) return of investment in Cameron Highway Oil Pipeline Company, net		24			(209	)		(26	)
Proceeds from minor dispositions of property, plant and equipment		25			63			64
Minor acquisitions		(144	)		–			–
Other investing activities, net		(7	)		(11	)		(32	)
Net cash used in investing activities		(2,862	)		(582	)		(2,971	)
Cash flows from financing activities:
Non-bank debt:
Borrowings		–			2,245			–
Repayments		(374	)		(463	)		(249	)
Bank credit agreements:
Borrowings		296			3,000			830
Repayments		(296	)		(3,000	)		(830	)
Termination of interest rate swaps		–			–			(54	)
Purchase of common stock for treasury		(955	)		(5,788	)		(2,020	)
Issuance of common stock in connection with employee benefit plans		16			159			122
Benefit from tax deduction in excess of recognized stock-based compensation cost		9			311			206
Common and preferred stock dividends		(299	)		(271	)		(184	)
Other financing activities		(4	)		(24	)		(9	)
Net cash used in financing activities		(1,607	)		(3,831	)		(2,188	)
Effect of foreign exchange rate changes on cash		(47	)		29			1
Net increase (decrease) in cash and temporary cash investments		(1,524	)		874			1,154
Cash and temporary cash investments at beginning of year		2,464			1,590			436
Cash and temporary cash investments at end of year	$	940		$	2,464		$	1,590

See Notes to Consolidated Financial Statements.

64

VALERO ENERGY CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Millions of Dollars)

	Year Ended December 31,
	2008			2007			2006
Net income (loss)	$	(1,131	)	$	5,234		$	5,463
Other comprehensive income (loss):
Foreign currency translation adjustment, net of income tax expense of $-, $31, and $-		(490	)		250			(11	)
Pension and other postretirement benefits:
Net gain (loss) arising during the year, net of income tax (expense) benefit of $227, $(56), and $-		(410	)		80			(1	)
Net (gain) loss reclassified into income, net of income tax expense (benefit) of $-, $(3), and $-		(1	)		6			–
Net gain (loss) on pension and other postretirement benefits		(411	)		86			(1	)
Net gain (loss) on derivative instruments designated and qualifying as cash flow hedges:
Net gain (loss) arising during the year, net of income tax (expense) benefit of $(46), $6, and $(38)		85			(11	)		70
Net (gain) loss reclassified into income, net of income tax expense (benefit) of $(36), $9, and $15		67			(17	)		(29	)
Net gain (loss) on cash flow hedges		152			(28	)		41
Other comprehensive income (loss)		(749	)		308			29
Comprehensive income (loss)	$	(1,880	)	$	5,542		$	5,492

See Notes to Consolidated Financial Statements.

65

VALERO ENERGY CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation and Principles of Consolidation
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. We are an independent refining and marketing company and own and operate 16 refineries with a combined total throughput capacity as of December 31, 2008 of approximately 3.0 million barrels per day. We market our refined products through an extensive bulk and rack marketing network and approximately 5,800 retail and wholesale branded outlets in the United States and eastern Canada under various brand names including Valero^®, Diamond Shamrock^®, Shamrock^®, Ultramar^®, and Beacon^®. Our operations are affected by:

• company-specific factors, primarily refinery utilization rates and refinery maintenance turnarounds;

• seasonal factors, such as the demand for refined products during the summer driving season and heating oil during the winter season; and

• industry factors, such as movements in and the level of crude oil prices including the effect of quality differential between grades of crude oil, the demand for and prices of refined products, industry supply capacity, and competitor refinery maintenance turnarounds.

These 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 noncontrolled entities are accounted for using the equity method.

As discussed in Note 2, we sold our Krotz Springs Refinery and our Lima Refinery effective July 1, 2008 and July 1, 2007, respectively. The assets and liabilities of the Krotz Springs Refinery, as well as inventory sold by our marketing and supply subsidiary associated with that transaction, have been reclassified as held for sale as of December 31, 2007. See Note 2 for a discussion of the presentation in the statements of income of the results of operations for these two refineries for periods preceding the effective dates of the sales.

On July 19, 2006, we sold a 40.6% interest in NuStar GP Holdings, LLC (formerly Valero GP Holdings, LLC), which indirectly owned the general partner interest, incentive distribution rights, and a 21.4% limited partner interest in NuStar Energy L.P. (formerly Valero L.P.) On December 22, 2006, we sold our remaining interest in NuStar GP Holdings, LLC. These financial statements consolidate NuStar GP Holdings, LLC through December 21, 2006, with net income attributable to the 40.6% interest held by public unitholders from July 19, 2006 through December 21, 2006 presented as a minority interest in the consolidated statement of income. See Note 9 under “Sale of NuStar GP Holdings, LLC” for a discussion of the sale of NuStar GP Holdings, LLC.

The term UDS Acquisition refers to the merger of Ultramar Diamond Shamrock Corporation (UDS) into Valero effective December 31, 2001. The term Premcor Acquisition refers to the merger of Premcor Inc. (Premcor) into Valero effective September 1, 2005.

66

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

Hierarchy of Generally Accepted Accounting Principles
In May 2008, the Financial Accounting Standards Board (FASB) issued Statement No. 162, “The Hierarchy of Generally Accepted Accounting Principles.” Statement No. 162 identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements that are presented in conformity with United States generally accepted accounting principles (GAAP). Statement No. 162 was effective November 15, 2008. The adoption of Statement No. 162 has not affected our financial position or results of operations.

Use of Estimates
The preparation of financial statements in conformity with GAAP requires our 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. On an ongoing basis, management reviews its estimates based on currently available information. Changes in facts and circumstances may result in revised estimates.

Cash and Temporary Cash Investments
Our temporary cash investments are highly liquid, low-risk debt instruments that have a maturity of three months or less when acquired. Cash and temporary cash investments exclude cash that is not available to us due to restrictions related to its use. Such amounts are segregated in the consolidated balance sheets in “restricted cash” as described in Note 3.

Inventories
Inventories are carried at the lower of cost or market. The cost of refinery feedstocks purchased for processing and refined products are determined under the last-in, first-out (LIFO) method using the dollar-value LIFO method, with any increments valued based on average purchase prices during the year. The cost of feedstocks and products purchased for resale and the cost of materials, supplies, and convenience store merchandise are determined principally under the weighted-average cost method.

Property, Plant and Equipment
Additions to property, plant and equipment, including capitalized interest and certain costs allocable to construction and property purchases, are recorded at cost.

The costs of minor property units (or components of property units), net of salvage value, retired or abandoned are charged or credited to accumulated depreciation under the composite method of depreciation. Gains or losses on sales or other dispositions of major units of property are recorded in income and are reported in “depreciation and amortization expense” in the consolidated statements of income, except gains or losses on dispositions of certain property, plant and equipment that are reported on a separate line item due to materiality.

Depreciation of property, plant and equipment is recorded on a straight-line basis over the estimated useful lives of the related facilities primarily using the composite method of depreciation. Leasehold improvements and assets acquired under capital leases are amortized using the straight-line method over the shorter of the lease term or the estimated useful life of the related asset.

Goodwill and Intangible Assets
Goodwill represents the excess of the cost of an acquired entity over the fair value of the assets acquired less liabilities assumed. Intangible assets are assets that lack physical substance (excluding financial

67

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

assets). Goodwill acquired in a business combination and intangible assets with indefinite useful lives are not amortized and intangible assets with finite useful lives are amortized on a straight-line basis over 1 to 40 years. Goodwill and intangible assets not subject to amortization are tested for impairment annually or more frequently if events or changes in circumstances indicate the asset might be impaired. We use October 1 of each year as our valuation date for annual impairment testing purposes. See Note 8.

Deferred Charges and Other Assets
“Deferred charges and other assets, net” include the following:

• refinery turnaround costs, which are incurred in connection with planned major maintenance activities at our refineries and which are deferred when incurred and amortized on a straight-line basis over the period of time estimated to lapse until the next turnaround occurs;

• fixed-bed catalyst costs, representing the cost of catalyst that is changed out at periodic intervals when the quality of the catalyst has deteriorated beyond its prescribed function, which are deferred when incurred and amortized on a straight-line basis over the estimated useful life of the specific catalyst;

• investments in entities that we do not control; and

• other noncurrent assets such as long-term investments, convenience store dealer incentive programs, pension plan assets, debt issuance costs, and various other costs.

We evaluate our equity method investments for impairment when there is evidence that we may not be able to recover the carrying amount of our investments or the investee is unable to sustain an earnings capacity that justifies the carrying amount. A loss in the value of an investment that is other than a temporary decline is recognized currently in earnings, and is based on the difference between the estimated current fair value of the investment and its carrying amount. We believe that the carrying amounts of our equity method investments as of December 31, 2008 are recoverable.

Impairment and Disposal of Long-Lived Assets
Long-lived assets (excluding goodwill, intangible assets with indefinite lives, equity method investments, and deferred tax assets) are tested for recoverability whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. A long-lived asset is not recoverable if its carrying amount exceeds the sum of the undiscounted cash flows expected to result from its use and eventual disposition. If a long-lived asset is not recoverable, an impairment loss is recognized in an amount by which its carrying amount exceeds its fair value, with fair value determined based on discounted estimated net cash flows. We believe that the carrying amounts of our long-lived assets as of December 31, 2008 are recoverable.

Taxes Other than Income Taxes
“Taxes other than income taxes” includes primarily liabilities for ad valorem, excise, sales and use, and payroll taxes.

Income Taxes
Income taxes are accounted for under the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred amounts are measured using enacted tax rates expected to apply to taxable income in the year those temporary differences are expected to be recovered or settled.

68

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

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 would be required to recognize in its financial statements the largest amount of benefit that is greater than 50% likely of being realized upon ultimate settlement. As discussed in Note 19, the adoption of FIN 48 effective January 1, 2007 did not materially affect our financial position or results of operations.

We have elected to classify any interest expense and penalties related to the underpayment of income taxes in “income tax expense” in our consolidated statements of income.

Asset Retirement Obligations
We record a liability, which is referred to as an asset retirement obligation, at fair value for the estimated cost to retire a tangible long-lived asset at the time we incur that liability, which is generally when the asset is purchased, constructed, or leased. We record the liability when we have a legal obligation to incur costs to retire the asset and when a reasonable estimate of the fair value of the liability can be made. If a reasonable estimate cannot be made at the time the liability is incurred, we record the liability when sufficient information is available to estimate the liability’s fair value.

We have asset retirement obligations with respect to certain of our refinery assets due to various legal obligations to clean and/or dispose of various component parts of each refinery at the time they are retired. However, these component parts can be used for extended and indeterminate periods of time as long as they are properly maintained and/or upgraded. It is our practice and current intent to maintain our refinery assets and continue making improvements to those assets based on technological advances. As a result, we believe that our refineries have indeterminate lives for purposes of estimating asset retirement obligations because dates or ranges of dates upon which we would retire refinery assets cannot reasonably be estimated at this time. When a date or range of dates can reasonably be estimated for the retirement of any component part of a refinery, we estimate the cost of performing the retirement activities and record a liability for the fair value of that cost using established present value techniques.

We also have asset retirement obligations for the removal of underground storage tanks (USTs) for refined products at owned and leased retail locations. There is no legal obligation to remove USTs while they remain in service. However, environmental laws require that unused USTs be removed within certain periods of time after the USTs no longer remain in service, usually one to two years depending on the jurisdiction in which the USTs are located. We have estimated that USTs at our owned retail locations will not remain in service after 25 years of use and that we will have an obligation to remove those USTs at that time. For our leased retail locations, our lease agreements generally require that we remove certain improvements, primarily USTs and signage, upon termination of the lease. While our lease agreements typically contain options for multiple renewal periods, we have not assumed that such leases will be renewed for purposes of estimating our obligation to remove USTs and signage.

Foreign Currency Translation
The functional currencies of our Canadian and Aruban operations are the Canadian dollar and the Aruban florin, respectively. The translation of the Canadian operations into U.S. dollars is computed for balance

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sheet accounts using exchange rates in effect as of the balance sheet date and for revenue and expense accounts using the weighted-average exchange rates during the year. Adjustments resulting from this translation are reported in “accumulated other comprehensive income (loss).” The value of the Aruban florin is fixed to the U.S. dollar at 1.79 Aruban florins to one U.S. dollar. The translation of the Aruban operations into U.S. dollars is computed based on this fixed exchange rate for both balance sheet and income statement accounts. As a result, there are no adjustments resulting from this translation reported in “accumulated other comprehensive income (loss).”

Revenue Recognition
Revenues for products sold by both the refining and retail segments are recorded upon delivery of the products to our customers, which is the point at which title to the products is transferred, and when payment has either been received or collection is reasonably assured. Revenues for services are recorded when the services have been provided.

In June 2006, the FASB ratified its consensus on Emerging Issues Task Force (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 effective 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.

We enter into certain purchase and sale arrangements with the same counterparty that are deemed to be made in contemplation of one another. Commencing January 1, 2006, the date of our adoption of EITF Issue No. 04-13, “Accounting for Purchases and Sales of Inventory with the Same Counterparty,” we combine these transactions and, as a result, revenues and cost of sales are not recognized in connection with these arrangements.

We also enter into refined product exchange transactions to fulfill sales contracts with our customers by accessing refined products in markets where we do not operate our own refinery. These refined product exchanges are accounted for as exchanges of non-monetary assets, and no revenues are recorded on these transactions.

Product Shipping and Handling Costs
Costs incurred for shipping and handling of products are included in “cost of sales” in the consolidated statements of income.

Environmental Matters
Liabilities for future remediation costs are recorded when environmental assessments and/or remedial efforts are probable and the costs can be reasonably estimated. Other than for assessments, the timing and magnitude of these accruals generally are based on the completion of investigations or other studies or a commitment to a formal plan of action. Environmental liabilities are based on best estimates of probable

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undiscounted future costs over a 20-year time period using currently available technology and applying current regulations, as well as our own internal environmental policies. Amounts recorded for environmental liabilities have not been reduced by possible recoveries from third parties.

Derivative Instruments
All derivative instruments are recorded in the balance sheet as either assets or liabilities measured at their fair values. When we enter into a derivative instrument, it is designated as a fair value hedge, a cash flow hedge, an economic hedge, or a trading activity. The gain or loss on a derivative instrument designated and qualifying as a fair value hedge, as well as the offsetting loss or gain on the hedged item attributable to the hedged risk, are recognized currently in income in the same period. The effective portion of the gain or loss on a derivative instrument designated and qualifying as a cash flow hedge is initially reported as a component of “other comprehensive income” and is then recorded in income in the period or periods during which the hedged forecasted transaction affects income. The ineffective portion of the gain or loss on the cash flow derivative instrument, if any, is recognized in income as incurred. For our economic hedging relationships (hedges not designated as fair value or cash flow hedges) and for derivative instruments entered into by us for trading purposes, the derivative instrument is recorded at fair value and changes in the fair value of the derivative instrument are recognized currently in income. Income effects of commodity derivative instruments, other than certain contracts related to an earn-out agreement discussed in Notes 2 and 17, are recorded in “cost of sales” while income effects of interest rate swaps (if applicable) are recorded in “interest and debt expense.”

In September 2008, the FASB issued Staff Position No. FAS 133-1 and FIN 45-4, “Disclosures about Credit Derivatives and Certain Guarantees: An Amendment of FASB Statement No. 133 and FASB Interpretation No. 45; and Clarification of the Effective Date of FASB Statement No. 161” (FSP No. FAS 133-1 and FIN 45-4). FSP No. FAS 133-1 and FIN 45-4 amends FASB Statement No. 133, “Accounting for Derivative Instruments and Hedging Activities,” to require disclosures by sellers of credit derivatives, including those embedded in hybrid instruments. FSP No. FAS 133-1 and FIN 45-4 also amends FASB Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others,” to require disclosure about the current status of the payment/performance risk of a guarantee. Additionally, FSP No. FAS 133-1 and FIN 45-4 clarifies the FASB’s intent that disclosures required by FASB Statement No. 161, “Disclosures about Derivatives and Hedging Activities,” should be provided for any reporting period beginning after November 15, 2008. The provisions of FSP No. FAS 133-1 and FIN 45-4 that amend Statement No. 133 and Interpretation No. 45 are effective for fiscal years, and interim periods within those fiscal years, ending after November 15, 2008. Since FSP No. FAS 133-1 and FIN 45-4 only affects disclosure requirements, the adoption of FSP No. FAS 133-1 and FIN 45-4 effective December 31, 2008 has not affected our financial position or results of operations.

Financial Instruments
Our financial instruments include cash and temporary cash investments, restricted cash, receivables, payables, debt, capital lease obligations, commodity derivative contracts, and foreign currency derivative contracts. The estimated fair values of these financial instruments approximate their carrying amounts as reflected in the consolidated balance sheets, except for certain debt as discussed in Note 12. The fair values of our debt, commodity derivative contracts, and foreign currency derivative contracts were estimated primarily based on year-end quoted market prices.

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In February 2006, the 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 effective January 1, 2007 did not affect our financial position or results of operations.

In March 2006, the FASB issued Statement No. 156, “Accounting for Servicing of Financial Assets,” which amends Statement No. 140. 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 effective January 1, 2007 did not affect our financial position or results of operations.

In February 2007, the FASB issued Statement No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities – Including an Amendment of FASB Statement No. 115.” 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. The adoption of Statement No. 159 effective January 1, 2008 did not materially affect our financial position or results of operations.

Fair Value Measurements
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, but does not require any new fair value measurements. We adopted Statement No. 157 effective January 1, 2008, with the exceptions allowed under FASB Staff Position No. FAS 157-2 (FSP No. FAS 157-2) (further described under “New Accounting Pronouncements"), the adoption of which did not affect our financial position or results of operations but did result in additional required disclosures, which are provided in Note 17.

In October 2008, the FASB issued Staff Position No. FAS 157-3, “Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active” (FSP No. FAS 157-3). FSP No. FAS 157-3 applies to financial assets within the scope of accounting pronouncements that require or permit fair value measurements in accordance with Statement No. 157. FSP No. FAS 157-3 clarifies the application of Statement No. 157 in a market that is not active and provides an example to illustrate key considerations in determining the fair value of a financial asset when the market for that financial asset is not active. We adopted FSP No. FAS 157-3 effective October 10, 2008 and applied its provisions to our financial statements commencing in the third quarter of 2008. The adoption of FSP No. FAS 157-3 has not materially affected our financial position or results of operations.

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Earnings per Common Share
Earnings per common share is computed by dividing net income applicable to common stock by the weighted-average number of common shares outstanding for the year. Earnings per common share assuming dilution reflects the potential dilution of our outstanding stock options and nonvested shares granted to employees in connection with our stock compensation plans, as well as the 2% mandatory convertible preferred stock prior to its conversion as discussed in Note 14. In addition, see Notes 14 and 15 for a discussion of an accelerated share repurchase program during 2007 and its effect on earnings per common share assuming dilution for the year ended December 31, 2007. Common equivalent shares were excluded from the computation of diluted earnings per share for the year ended December 31, 2008 because the effect of including such shares would be anti-dilutive.

Comprehensive Income
Comprehensive income consists of net income (loss) and other gains and losses affecting stockholders’ equity that, under GAAP, are excluded from net income (loss), including foreign currency translation adjustments, gains and losses related to certain derivative contracts, and gains or losses, prior service costs or credits, and transition assets or obligations associated with pension or other postretirement benefits that have not been recognized as components of net periodic benefit cost.

Defined Benefit Pension and Other Postretirement Plans
In September 2006, the FASB issued Statement No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans,” which amends Statement No. 87, “Employers’ Accounting for Pensions,” Statement No. 88, “Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits,” Statement No. 106, “Employers’ Accounting for Postretirement Benefits Other Than Pensions,” Statement No. 132 (revised 2003), “Employers’ Disclosures about Pensions and Other Postretirement Benefits,” and other related accounting literature.

Statement No. 158 requires an employer to recognize the overfunded or underfunded status of a defined benefit postretirement plan as an asset or a liability in the statement of financial position and to recognize changes in that funded status through comprehensive income in the year the changes occur. This statement also requires an employer to measure the funded status of a plan as of the date of the employer’s year-end statement of financial position. We adopted the funded status recognition and related disclosure requirements of Statement No. 158 as of December 31, 2006, the adoption of which did not materially affect our financial position or results of operations in 2006. See Note 21 for information regarding the funded status of our defined benefit plans as of December 31, 2008 and 2007.

Stock-Based Compensation
Effective January 1, 2006, we adopted Statement No. 123 (revised 2004), “Share-Based Payment” (Statement No. 123(R)), which requires the expensing of the fair value of stock options. We adopted the fair value recognition provisions of Statement No. 123(R) using the modified prospective application. Accordingly, we recognize compensation expense for all newly granted stock options and stock options modified, repurchased, or cancelled on or after January 1, 2006. Compensation expense for stock options granted on or after January 1, 2006 is being recognized on a straight-line basis. In addition, compensation cost for the unvested portion of stock options and other awards that were outstanding as of January 1, 2006 is being recognized over the remaining vesting period based on the fair value at date of grant and applying the attribution approach utilized in determining the pro forma effect of expensing stock options that was required for periods prior to the effective date of Statement No. 123(R). Our total stock-based compensation expense recognized for the years ended December 31, 2008, 2007, and 2006 was

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

$38 million, net of tax benefits of $21 million, $65 million, net of tax benefits of $35 million, and $70 million, net of tax benefits of $38 million, respectively.

Under our employee stock compensation plans, certain awards of stock options and restricted stock provide that employees vest in the award when they retire or will continue to vest in the award after retirement over the nominal vesting period established in the award. Upon the adoption of Statement No. 123(R), we changed our method of recognizing compensation cost for new grants that have retirement-eligibility provisions from recognizing such costs over the nominal vesting period to the non-substantive vesting period approach. Under the non-substantive vesting period approach, compensation cost is recognized immediately for awards granted to retirement-eligible employees or over the period from the grant date to the date retirement eligibility is achieved if that date is expected to occur during the nominal vesting period. If the non-substantive vesting period approach had been used by us for awards granted prior to January 1, 2006, net income (loss) applicable to common stock and net income (loss) would have increased by $2 million, $4 million, and $4 million for the years ended December 31, 2008, 2007 and 2006, respectively.

Statement No. 123(R) also requires the benefits of tax deductions in excess of recognized stock-based compensation cost to be reported as a financing cash flow, rather than as an operating cash flow as previously required. While we cannot estimate the specific magnitude of this change on future cash flows because it depends on, among other things, when employees exercise stock options, the cash flows recognized in financing activities for such excess tax deductions were $9 million, $311 million, and $206 million for the years ended December 31, 2008, 2007, and 2006, respectively.

Sales of Subsidiary Stock
Securities and Exchange Commission (SEC) Staff Accounting Bulletin No. 51, “Accounting for Sales of Stock by a Subsidiary” (SAB 51), provides guidance on accounting for the effect of issuances of a subsidiary’s stock on the parent’s investment in that subsidiary. SAB 51 allows registrants to elect an accounting policy of recording such increases or decreases in a parent’s investment (SAB 51 credits or charges, respectively) either in income or in stockholders’ equity. In accordance with the election provided in SAB 51, we adopted a policy of recording such SAB 51 credits or charges directly to “additional paid-in capital” in stockholders’ equity. As further discussed in Note 9, we recognized in 2006 certain SAB 51 credits related to our investment in NuStar Energy L.P. under this policy.

New Accounting Pronouncements
FSP No. FAS 157-2
In February 2008, the FASB issued Staff Position No. FAS 157-2, which delayed the effective date of Statement No. 157 for nonfinancial assets and nonfinancial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually), until fiscal years beginning after November 15, 2008. The exceptions apply to the following: nonfinancial assets and nonfinancial liabilities measured at fair value in a business combination; impaired property, plant and equipment; goodwill; and the initial recognition of the fair value of asset retirement obligations and restructuring costs. The implementation of Statement No. 157 for these assets and liabilities effective January 1, 2009 has not had a material effect on our financial position or results of operations.

FASB Statement No. 141 (revised 2007)
In December 2007, the FASB issued Statement No. 141 (revised 2007), “Business Combinations” (Statement No. 141(R)). This statement improves the financial reporting of business combinations and

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clarifies the accounting for these transactions. The provisions of Statement No. 141(R) are to be applied prospectively to business combinations with acquisition dates on or after the beginning of an entity’s fiscal year that begins on or after December 15, 2008, with early adoption prohibited. Due to its application to future acquisitions, the adoption of Statement No. 141(R) effective January 1, 2009 has not had any immediate effect on our financial position or results of operations.

FASB Statement No. 160
In December 2007, the FASB issued Statement No. 160, “Noncontrolling Interests in Consolidated Financial Statements – an amendment of ARB No. 51.” Statement No. 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. This statement provides guidance for the accounting and reporting of noncontrolling interests, changes in controlling interests, and the deconsolidation of subsidiaries. In addition, Statement No. 160 amends FASB Statement No. 128, “Earnings per Share,” to specify the computation, presentation, and disclosure requirements for earnings per share if an entity has one or more noncontrolling interests. The adoption of Statement No. 160 effective January 1, 2009 is not expected to materially affect our financial position or results of operations.

FASB Statement No. 161
In March 2008, the FASB issued Statement No. 161, “Disclosures about Derivative Instruments and Hedging Activities.” Statement No. 161 establishes, among other things, the disclosure requirements for derivative instruments and for hedging activities. This statement requires qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of and gains and losses on derivative instruments, and disclosures about contingent features related to credit risk in derivative agreements. Statement No. 161 is effective for fiscal years, and interim periods within those fiscal years, beginning after November 15, 2008. Since Statement No. 161 only affects disclosure requirements, the adoption of Statement No. 161 effective January 1, 2009 has not affected our financial position or results of operations.

FSP No. EITF 03-6-1
In June 2008, the FASB issued Staff Position No. EITF 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities” (FSP No. EITF 03-6-1). FSP No. EITF 03-6-1 addresses whether instruments granted in share-based payment transactions are participating securities prior to vesting and, therefore, need to be included in the earnings allocation in computing earnings per share under the two-class method described in Statement No. 128. FSP No. EITF 03-6-1 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2008; early adoption is not permitted. The adoption of FSP No. EITF 03-6-1 effective January 1, 2009 is not expected to materially affect our calculation of earnings per common share.

EITF Issue No. 08-6
In November 2008, the FASB ratified its consensus on EITF Issue No. 08-6, “Equity Method Investment Accounting Considerations” (EITF No. 08-6). EITF No. 08-6 applies to all investments accounted for under the equity method and provides guidance regarding (i) initial measurement of an equity investment, (ii) recognition of other-than-temporary impairment of an equity method investment, including any impairment charge taken by the investee, and (iii) accounting for a change in ownership level or degree of influence on an investee. The consensus is effective for fiscal years beginning on or after December 15, 2008, and interim periods within those fiscal years. EITF No. 08-6 is to be applied prospectively and earlier application is not permitted. Due to its application to future equity method investments, the

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

adoption of EITF No. 08-6 effective January 1, 2009 has not had any immediate effect on our financial position or results of operations.

FSP No. FAS 132(R)-1
In December 2008, the FASB issued Staff Position No. FAS 132(R)-1, “Employers’ Disclosures about Postretirement Benefit Plan Assets” (FSP No. FAS 132(R)-1). FSP No. FAS 132(R)-1 amends FASB Statement No. 132 (revised 2003), “Employers’ Disclosures about Pensions and Other Postretirement Benefits,” to provide guidance on an employer’s disclosures about plan assets of a defined benefit pension or other postretirement plan. The additional requirements of FSP No. FAS 132(R)-1 are designed to enhance disclosures regarding (i) investment policies and strategies, (ii) categories of plan assets, (iii) fair value measurements of plan assets, and (iv) significant concentrations of risk. FSP No. FAS 132(R)-1 is effective for fiscal years ending after December 15, 2009, with earlier application permitted. Since FSP No. FAS 132(R)-1 only affects disclosure requirements, the adoption of FSP No. FAS 132(R)-1 will not affect our financial position or results of operations.

Reclassifications
Our consolidated balance sheet as of December 31, 2007 has been reclassified to present the assets and liabilities of the Krotz Springs Refinery as “assets held for sale” and “liabilities related to assets held for sale,” respectively. In addition, certain other minor amounts previously reported in our annual report on Form 10-K for the year ended December 31, 2007 have been reclassified to conform to the 2008 presentation.

2. ACQUISITIONS AND DISPOSITIONS

Sale of Krotz Springs Refinery
Effective July 1, 2008, we sold our refinery in Krotz Springs, Louisiana to Alon Refining Krotz Springs, Inc. (Alon), a subsidiary of Alon USA Energy, Inc. As a result, the assets and liabilities related to the Krotz Springs Refinery as of December 31, 2007 have been presented in the consolidated balance sheet as “assets held for sale” and “liabilities related to assets held for sale,” respectively. The nature and significance of our post-closing participation in the offtake agreement described below represents a continuation of activities with the Krotz Springs Refinery for accounting purposes, and as such the results of operations related to the Krotz Springs Refinery have not been presented as discontinued operations in the consolidated statements of income for any of the periods presented.

The sale resulted in a pre-tax gain of $305 million ($170 million after tax), which is presented in “gain on sale of Krotz Springs Refinery” in the consolidated statement of income for the year ended December 31, 2008. Cash proceeds, net of certain costs related to the sale, were $463 million, including approximately $135 million from the sale of working capital to Alon primarily related to the sale of inventory by our marketing and supply subsidiary. In addition to the cash consideration received, we also received contingent consideration in the form of a three-year earn-out agreement based on certain product margins, which had a fair value of $171 million as of July 1, 2008. We have hedged the risk of a decline in the referenced product margins by entering into certain commodity derivative contracts.

In connection with the sale, we also entered into the following agreements with Alon:

• an agreement to supply crude oil and other feedstocks to the Krotz Springs Refinery through September 30, 2008, which was subsequently extended until November 30, 2008;

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• an offtake agreement under which we agreed to (i) purchase all refined products from the Krotz Springs Refinery for three months after the effective date of the sale, (ii) purchase certain products for an additional one to five years after the expiration of the initial three-month period of the agreement, and (iii) provide certain refined products to Alon that are not produced at the Krotz Springs Refinery for an initial term of 15 months and thereafter until terminated by either party; and

• a transition services agreement under which we agreed to provide certain accounting and administrative services to Alon, with the services terminating by July 31, 2009. Substantially all of these services had been transitioned to Alon as of December 31, 2008.

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

	July 1,		December 31,
	2008		2007
Current assets (primarily inventory)	$	138	$	111
Property, plant and equipment, net		153		149
Goodwill		42		42
Deferred charges and other assets, net		4		4
Assets held for sale	$	337	$	306
Current liabilities	$	10	$	11
Liabilities related to assets held for sale	$	10	$	11

Sale of Lima Refinery
Effective July 1, 2007, we sold our refinery in Lima, Ohio to Husky Refining Company (Husky), a wholly owned subsidiary of Husky Energy Inc. In addition, our marketing and supply subsidiary separately sold certain inventory amounts to Husky as part of this transaction. The consolidated statements of income reflect the operations related to the Lima Refinery for the periods prior to the effective date of the sale in “income from discontinued operations, net of income tax expense.”

Proceeds from the sale were approximately $2.4 billion, including approximately $550 million from the sale of working capital to Husky primarily related to the sale of inventory by our marketing and supply subsidiary. The sale resulted in a pre-tax gain of $827 million, or $426 million after tax, which is included in “income from discontinued operations, net of income tax expense” in the consolidated statement of income for the year ended December 31, 2007. 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; all of these services were transitioned to Husky by the middle of 2008.

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Financial information related to the assets and liabilities sold is summarized as follows (in millions). The statement of income information presented below for 2007 does not include the gain on the sale of the Lima Refinery.

	July 1,		December 31,
	2007		2006
Current assets (primarily inventory)	$	570	$	456
Property, plant and equipment, net		929		918
Goodwill		107		108
Deferred charges and other assets, net		46		45
Assets held for sale	$	1,652	$	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

	Year Ended December 31,
	2007		2006
Operating revenues	$	2,231	$	4,119
Income before income tax expense		391		291

Minor Acquisitions
In February 2008, we purchased ConocoPhillips’ one-third undivided joint interest in a refined product pipeline and terminal for $57 million. These assets provide transportation and storage services for moving refined products from our McKee Refinery to markets in El Paso, Texas and Phoenix and Tucson, Arizona.

In August 2008, we purchased 70 convenience stores and fueling kiosks from Albertson’s LLC for $87 million, including $4 million for inventory. These retail sites, which are located in Texas, Colorado, Arizona, and Louisiana, enhance our existing retail network and supply chain.

3. RESTRICTED CASH

Restricted cash consisted of the following (in millions):

	December 31,
	2008		2007
Cash held in trust related to the UDS Acquisition	$	22	$	23
Cash held in trust related to the Premcor Acquisition		7		8
Cash related to escrow agreement with the Government of Aruba (see Note 23)		102		–
Restricted cash	$	131	$	31

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4. RECEIVABLES

Receivables consisted of the following (in millions):

	December 31,
	2008			2007
Accounts receivable	$	2,939		$	7,702
Notes receivable and other		16			32
		2,955			7,734
Allowance for doubtful accounts		(58	)		(43	)
Receivables, net	$	2,897		$	7,691

The changes in the allowance for doubtful accounts consisted of the following (in millions):

	Year Ended December 31,
	2008			2007			2006
Balance as of beginning of year	$	43		$	33		$	31
Increase in allowance charged to expense		43			34			16
Accounts charged against the allowance, net of recoveries		(27	)		(25	)		(14	)
Foreign currency translation		(1	)		1			–
Balance as of end of year	$	58		$	43		$	33

We have an accounts receivable sales facility with a group of third-party entities and financial institutions to sell on a revolving basis up to $1 billion of eligible trade receivables. In June 2008, we amended the agreement to extend the maturity date from August 2008 to June 2009. We use this program as a source of working capital funding. Under this program, one of our marketing subsidiaries (Valero Marketing) sells eligible receivables, without recourse, to another of our subsidiaries (Valero Capital), whereupon the receivables are no longer owned by Valero Marketing. Valero Capital, in turn, sells an undivided percentage ownership interest in the eligible receivables, without recourse, to the third-party entities and financial institutions. To the extent that Valero Capital retains an ownership interest in the receivables it has purchased from Valero Marketing, such interest is included in our consolidated financial statements solely as a result of the consolidation of the financial statements of Valero Capital with those of Valero Energy Corporation; the receivables are not available to satisfy the claims of the creditors of Valero Marketing or Valero Energy Corporation.

As of December 31, 2008 and 2007, $1.3 billion and $4.0 billion, respectively, of our accounts receivable composed the designated pool of accounts receivable included in the program. As of December 31, 2008 and 2007, the amount of eligible receivables sold to the third-party entities and financial institutions was $100 million. At December 31, 2008, proceeds from the sale of receivables under this facility were reflected as debt in our consolidated balance sheet. The amount outstanding as of December 31, 2008 was repaid in February 2009. Prior to December 31, 2008, amounts received under the program were reflected as a reduction of “receivables, net” in the consolidated balance sheet, with the residual interest that we retained in the designated pool of receivables recorded at fair value. Due to (i) a short average collection cycle for such receivables, (ii) our collection experience history, and (iii) the composition of the designated pool of trade accounts receivable that are part of this program, the fair value of our retained interest approximated the total amount of the designated pool of accounts receivable reduced by

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the amount of accounts receivable sold to the third-party entities and financial institutions under the program.

We remain responsible for servicing the receivables sold to the third-party entities and financial institutions and pay certain fees related to our sale of receivables under the program. The costs we incurred related to this facility, which were included in “other income, net” in the consolidated statements of income, were $6 million, $40 million, and $55 million for the years ended December 31, 2008, 2007, and 2006, respectively. Proceeds from collections under this facility of $3.3 billion, $19.3 billion, and $31.2 billion for the years ended December 31, 2008, 2007, and 2006, respectively, were reinvested in the program by the third-party entities and financial institutions. However, the third-party entities’ and financial institutions’ interests in our accounts receivable were never in excess of the sales facility limits at any time under this program. No accounts receivable included in this program were written off during 2008, 2007, or 2006.

5. INVENTORIES

Inventories consisted of the following (in millions):

	December 31,
	2008		2007
Refinery feedstocks	$	2,140	$	1,701
Refined products and blendstocks		2,224		2,117
Convenience store merchandise		90		85
Materials and supplies		183		170
Inventories	$	4,637	$	4,073

Refinery feedstock and refined product and blendstock inventory volumes totaled 114 million barrels and 105 million barrels as of December 31, 2008 and 2007, respectively. There were no substantial liquidations of LIFO inventory layers for the years ended December 31, 2008, 2007, and 2006.

As of December 31, 2008 and 2007, the replacement cost (market value) of LIFO inventories exceeded their LIFO carrying amounts by approximately $686 million and $6.2 billion, respectively.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

6. PROPERTY, PLANT AND EQUIPMENT

Major classes of property, plant and equipment, which include capital lease assets, consisted of the following (in millions):

	Estimated	December 31,
	Useful Lives	2008			2007
Land		$	602		$	574
Crude oil processing facilities	10 - 33 years		21,194			20,509
Butane processing facilities	30 years		246			246
Pipeline and terminal facilities	24 - 42 years		549			511
Retail facilities	5 - 22 years		787			735
Buildings	13 - 47 years		872			775
Other	1 - 44 years		1,102			1,006
Construction in progress			2,751			1,243
Property, plant and equipment, at cost			28,103			25,599
Accumulated depreciation			(4,890	)		(4,039	)
Property, plant and equipment, net		$	23,213		$	21,560

We had crude oil processing facilities, pipeline and terminal facilities, and certain buildings and other equipment under capital leases totaling $54 million as of both December 31, 2008 and 2007. Accumulated amortization on assets under capital leases was $13 million and $10 million, respectively, as of December 31, 2008 and 2007.

Depreciation expense for the years ended December 31, 2008, 2007, and 2006 was $990 million, $916 million, and $776 million, respectively.

7. INTANGIBLE ASSETS

Intangible assets consisted of the following (in millions):

	December 31, 2008					December 31, 2007
	Gross		Accumulated			Gross		Accumulated
	Cost		Amortization			Cost		Amortization
Intangible assets subject to amortization:
Customer lists	$	97	$	(43	)	$	116	$	(45	)
Canadian retail operations		127		(22	)		156		(23	)
U.S. retail store operations		95		(76	)		94		(66	)
Air emission credits		62		(29	)		62		(23	)
Royalties and licenses		25		(12	)		25		(11	)
Gasoline and diesel sulfur credits		27		(27	)		27		(23	)
Other		4		(4	)		4		(3	)
Intangible assets subject to amortization	$	437	$	(213	)	$	484	$	(194	)

All of our intangible assets are subject to amortization. Amortization expense for intangible assets was $33 million, $48 million, and $35 million for the years ended December 31, 2008, 2007, and 2006,

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respectively. The estimated aggregate amortization expense for the years ending December 31, 2009 through December 31, 2013 is as follows (in millions):

	Amortization
	Expense
2009	$	23
2010		20
2011		14
2012		14
2013		14

During the year ended December 31, 2008, gross cost and accumulated amortization of intangible assets decreased by $50 million and $14 million, respectively, due to fluctuations in the Canadian dollar exchange rate.

8. GOODWILL

The changes in the carrying amount of goodwill were as follows (in millions):

	Year Ended December 31,
	2008			2007
Balance as of beginning of year	$	4,019		$	4,061
Settlements and adjustments related to acquisition tax contingencies, stock option exercises, and other		50			(42	)
Goodwill impairment loss		(4,069	)		–
Balance as of end of year	$	–		$	4,019

Settlements and adjustments related to acquisition tax contingencies, stock option exercises, and other reflected in the table above relate primarily to settlements and adjustments of various income tax contingencies assumed in the UDS and Premcor Acquisitions and exercises of stock options assumed in those acquisitions, the effects of which were recorded as purchase price adjustments.

All of our goodwill was allocated among four reporting units that comprise the refining segment. These reporting units are the Gulf Coast, Mid-Continent, Northeast, and West Coast refining regions. Our annual test for impairment of goodwill has historically been performed as of October 1 of each year. However, during the fourth quarter of 2008, there were severe disruptions in the capital and commodities markets that contributed to a significant decline in our common stock price. As a result, our equity market capitalization fell significantly below our net book value. Because this situation is an indicator that goodwill may be impaired, we performed an additional analysis to evaluate the potential impairment of our goodwill as of December 31, 2008. Based on this additional analysis, we determined that all of the goodwill in our four reporting units was impaired, which resulted in the recognition of a goodwill impairment loss of $4.1 billion ($4.0 billion after tax). For purposes of this goodwill impairment test, the fair value of each reporting unit was estimated based on the present value of expected future cash flows, with the present value determined using discount rates that reflected the risk inherent in the assets and risk premiums that reflected the volatility in the industry and the financial markets.

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

NuStar Energy L.P. is a limited partnership that owns and operates crude oil and refined product pipeline, terminalling, and storage tank assets. As discussed in Note 1 under “Basis of Presentation and Principles of Consolidation,” one of our previously wholly owned subsidiaries, NuStar GP Holdings, LLC, served as the general partner of and held our limited partner interest in NuStar Energy L.P. Our ownership interest in NuStar Energy L.P. was 23.4% as of June 30, 2006 (the end of the quarter prior to the offerings discussed below under the heading “Sale of NuStar GP Holdings, LLC”), 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 SAB 51 credits (see Note 1 under “Sales of Subsidiary Stock”), 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.

Sale of NuStar GP Holdings, LLC
On July 19, 2006, NuStar GP Holdings, LLC consummated an initial public offering (IPO) of 17,250,000 of its units representing limited liability company interests to the public at $22.00 per unit, before an underwriters’ discount of $1.265 per unit. On December 22, 2006, NuStar GP Holdings, LLC completed a secondary public offering of 20,550,000 units representing limited liability company interests at a price of $21.62 per unit, before an underwriters’ discount of $0.8648 per unit. In addition, NuStar GP Holdings, LLC sold 4,700,000 unregistered units to its chairman of the board of directors (who was at that time also chairman of Valero’s board of directors) at $21.62 per unit. All such units were sold by our subsidiaries that held various ownership interests in NuStar GP Holdings, LLC. As a result, NuStar GP Holdings, LLC did not receive any proceeds from these offerings, and our indirect ownership interest in NuStar GP Holdings, LLC was reduced to zero.

Proceeds to our selling subsidiaries from the IPO totaled approximately $355 million, net of the underwriters’ discount and other offering expenses, which resulted in a pre-tax gain to us of $132 million on the sale of the units. Proceeds to our selling subsidiaries from the secondary offering and private sale of units totaled approximately $525 million, net of the underwriters’ discount and other offering expenses, which resulted in an additional pre-tax gain to us of $196 million. The total pre-tax gain of $328 million is included in “other income, net” in the consolidated statement of income for the year ended December 31, 2006. The funds received from these offerings were used for general corporate purposes.

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Summary Financial Information
Financial information reported by NuStar Energy L.P. for the year ended December 31, 2006 is summarized below (in millions):

Revenues	$	1,136
Operating income		211
Net income		150

Related-Party Transactions
Under various throughput, handling, terminalling, and service agreements, we use NuStar Energy L.P.’s pipelines to transport crude oil shipped to and refined products shipped from certain of our refineries and use NuStar Energy L.P.’s refined product terminals for certain terminalling services. In addition, through 2006, we provided personnel to NuStar Energy L.P. to perform operating and maintenance services with respect to certain assets for which we received reimbursement from NuStar Energy L.P. We recognized in “cost of sales” both our costs related to the throughput, handling, terminalling, and service agreements with NuStar Energy L.P. and the receipt from NuStar Energy L.P. of payment for operating and maintenance services we provided to NuStar Energy L.P. We have indemnified NuStar Energy L.P. for certain environmental liabilities related to assets we previously sold to NuStar Energy L.P. that were known on the date the assets were sold or are discovered within a specified number of years after the assets were sold and result from events occurring or conditions existing prior to the date of sale.

Under a services agreement in existence during 2006, we provided NuStar Energy L.P. with certain corporate functions for an administrative fee, which was recorded as a reduction of “general and administrative expenses.” Effective January 1, 2007, the services agreement was amended to provide for limited services. This 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 2007, 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.

The following table summarizes the results of transactions with NuStar Energy L.P. for the year ended December 31, 2006 (in millions):

Expenses charged by us to NuStar Energy L.P.	$	127
Fees and expenses charged to us by NuStar Energy L.P.		261

10. DEFERRED CHARGES AND OTHER ASSETS

“Deferred charges and other assets, net” includes refinery turnaround and catalyst costs. As indicated in Note 1, refinery turnaround costs are deferred when incurred and amortized on a straight-line basis over the period of time estimated to lapse until the next turnaround occurs. Fixed-bed catalyst costs are deferred when incurred and amortized on a straight-line basis over the estimated useful life of the specific catalyst. Amortization expense for deferred refinery turnaround and catalyst costs was $438 million, $383 million, and $293 million for the years ended December 31, 2008, 2007, and 2006, respectively.

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Cameron Highway Oil Pipeline Project
We own a 50% interest in Cameron Highway Oil Pipeline Company, a general partnership formed to construct and operate a crude oil pipeline. The 390-mile crude oil pipeline delivers up to 500,000 barrels per day from the Gulf of Mexico to the major refining areas of Port Arthur and Texas City, Texas. Our investment in Cameron Highway Oil Pipeline Company is accounted for using the equity method and is included in “deferred charges and other assets, net” in the consolidated balance sheets. During May and June of 2007, we made cash capital contributions of $215 million representing our 50% portion of the amount required to enable the joint venture to redeem its fixed-rate notes and variable-rate debt. As of December 31, 2008 and 2007, our investment in Cameron Highway Oil Pipeline Company totaled $289 million and $297 million, respectively.

11. ACCRUED EXPENSES

Accrued expenses consisted of the following (in millions):

	December 31,
	2008		2007
Employee wage and benefit costs	$	169	$	258
Interest expense		66		79
Contingent earn-out obligations		–		25
Derivative liabilities		7		10
Environmental liabilities		42		55
Other		90		73
Accrued expenses	$	374	$	500

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

12. DEBT AND CAPITAL LEASE OBLIGATIONS

Debt balances, at stated values, and capital lease obligations consisted of the following (in millions):

			December 31,
	Maturity		2008			2007
Bank credit facilities	Various		$	–		$	–
Industrial revenue bonds:
Tax-exempt Revenue Refunding Bonds (a):
Series 1997A, 5.45%		2027		24			24
Series 1997B, 5.40%		2018		33			33
Series 1997C, 5.40%		2018		33			33
Series 1997D, 5.125%		2009		9			9
Tax-exempt Waste Disposal Revenue Bonds:
Series 1997, 5.6%		2031		25			25
Series 1998, 5.6%		2032		25			25
Series 1999, 5.7%		2032		25			25
Series 2001, 6.65%		2032		19			19
3.50% notes		2009		200			200
4.75% notes		2013		300			300
4.75% notes		2014		200			200
6.125% notes		2017		750			750
6.625% notes		2037		1,500			1,500
6.875% notes		2012		750			750
7.50% notes		2032		750			750
8.75% notes		2030		200			200
Debentures:
7.25% (non-callable)		2010		25			25
7.65%		2026		100			100
8.75% (non-callable)		2015		75			75
Senior Notes:
6.125%		2011		200			200
6.70%		2013		180			180
6.75%		2011		210			210
6.75%		2014		185			185
6.75% (putable October 15, 2009; callable thereafter)		2037		100			100
7.20% (callable)		2017		200			200
7.45% (callable)		2097		100			100
7.50% (callable)		2015		287			287
9.50% (callable)		2013		–			350
Other debt	Various			100			6
Net unamortized discount, including fair value adjustments				(68	)		(42	)
Total debt				6,537			6,819
Capital lease obligations, including unamortized fair value adjustments of $3 and $4				39			43
Total debt and capital lease obligations				6,576			6,862
Less current portion, including net unamortized premium of $- and $31				(312	)		(392	)
Debt and capital lease obligations, less current portion			$	6,264		$	6,470

(a) The maturity dates reflected for the Series 1997A, 1997B, and 1997C tax-exempt revenue refunding bonds represent their final maturity dates; however, principal payments on these bonds commence in 2010.

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VALERO ENERGY CORPORATION AND SUBSIDIARIES
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Bank Credit Facilities
We have a $2.5 billion revolving credit facility (the Revolver) that has a maturity date of November 2012. Borrowings under the Revolver bear interest at LIBOR plus a margin, or an alternate base rate as defined under the agreement. We are also being charged various fees and expenses in connection with the Revolver, including facility fees and letter of credit fees. The interest rate and fees under the Revolver are subject to adjustment based upon the credit ratings assigned to our non-bank debt. The Revolver also includes certain restrictive covenants including a debt-to-capitalization ratio. During the years ended December 31, 2008 and 2006, we borrowed and repaid $296 million and $830 million, respectively, under the Revolver. There were no borrowings under the Revolver during the year ended December 31, 2007. As of December 31, 2008 and 2007, there were no borrowings outstanding under the Revolver and outstanding letters of credit issued under this facility totaled $199 million and $292 million, respectively.

In addition to the Revolver, one of our Canadian subsidiaries has a committed revolving credit facility under which it may borrow and obtain letters of credit up to Cdn. $115 million. In December 2007, the Canadian credit facility was amended to extend the maturity date from December 2010 to December 2012. As of December 31, 2008 and 2007, we had no borrowings outstanding under our Canadian credit facility and letters of credit issued under this credit facility totaled Cdn. $19 million and Cdn. $11 million, respectively.

In June 2008, we entered into a one-year committed revolving letter of credit facility under which we may obtain letters of credit of up to $300 million. In July 2008, we entered into another one-year committed revolving letter of credit facility under which we may obtain letters of credit of up to $275 million. Both of these credit facilities support certain of our crude oil purchases. We are being charged letter of credit issuance fees in connection with these letter of credit facilities. As of December 31, 2008, we had $232 million of outstanding letters of credit issued under these revolving credit facilities.

We also have various uncommitted short-term bank credit facilities. As of December 31, 2008 and 2007, we had no borrowings outstanding under our uncommitted short-term bank credit facilities; however, there were $201 million and $502 million, respectively, of letters of credit outstanding under such facilities for which we are charged letter of credit issuance fees. The uncommitted credit facilities have no commitment fees or compensating balance requirements.

During 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 14. 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 in June 2007 described below.

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VALERO ENERGY CORPORATION AND SUBSIDIARIES
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Non-Bank Debt
On February 1, 2008, we redeemed our 9.50% senior notes for $367 million, or 104.75% of stated value. These notes had a carrying amount of $381 million on the date of redemption, resulting in a gain of $14 million that was included in “other income, net” in the consolidated statement of income. In addition, in March 2008, we made a scheduled debt repayment of $7 million related to certain of our other debt.

In February 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, net” in the consolidated statement of income. In addition, we made scheduled debt repayments of $230 million in April 2007 related to our 6.125% notes and $50 million in November 2007 related to our 6.311% CORE notes.

In June 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 March 2006, we made a scheduled debt repayment of $220 million related to our 7.375% notes. In addition, during the year ended December 31, 2006, we made the following debt payments:

• $1 million during March 2006 related to our 7.75% notes due in February 2012,

• $14 million during July 2006 related to our 6.75% senior notes due in May 2014, and

• $14 million during July 2006 related to our 7.5% senior notes due in June 2015.

Other Disclosures
Our revolving bank credit facilities and other debt arrangements contain various customary restrictive covenants, including cross-default and cross-acceleration clauses.

Principal payments due on debt as of December 31, 2008 were as follows (in millions):

2009	$	309
2010		33
2011		418
2012		759
2013		489
Thereafter		4,597
Net unamortized discount and fair value adjustments		(68	)
Total	$	6,537

For payments due on capital lease obligations, see Note 23.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

As of December 31, 2008 and 2007, the estimated fair value of our debt, including current portion, was as follows (in millions):

	December 31,
	2008		2007
Carrying amount	$	6,537	$	6,819
Fair value		6,462		7,109

13. OTHER LONG-TERM LIABILITIES

Other long-term liabilities consisted of the following (in millions):

	December 31,
	2008		2007
Employee benefit plan liabilities	$	1,047	$	701
Environmental liabilities		255		230
Tax liabilities for uncertain income tax positions		226		160
Other tax liabilities		189		163
Deferred gain on sale of assets to NuStar Energy L.P.		92		114
Insurance liabilities		90		86
Asset retirement obligations		72		70
Unfavorable lease obligations		38		51
Other		152		235
Other long-term liabilities	$	2,161	$	1,810

Employee benefit plan liabilities include the long-term obligation for our pension and other postretirement benefit plans as discussed in Note 21. Environmental liabilities reflect the long-term portion of our estimated remediation costs for environmental matters as discussed in Note 24. Tax liabilities for uncertain income tax positions reflect obligations under FIN 48 as discussed in Note 19 .. Other tax liabilities include long-term liabilities for various taxes such as sales, franchise, and excise taxes as well as interest accrued on all tax-related liabilities, including income taxes. Deferred gain reflects the unamortized balance of the proceeds in excess of the carrying amount of assets we sold to NuStar Energy L.P., which we recognize in income over the term of certain throughput and handling agreements with NuStar Energy L.P. (see Note 9). Insurance liabilities reflect reserves established by our captive insurance subsidiary, self-insured liabilities, and obligations for losses related to our participation in certain mutual insurance companies.

Unfavorable lease obligations reflect the fair value of liabilities assumed in connection with the Premcor Acquisition related to lease agreements for closed retail facilities and the UDS Acquisition related to lease agreements for retail facilities and vessel charters. Included in “other” are liabilities for various matters including legal and regulatory liabilities and various contractual obligations.

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VALERO ENERGY CORPORATION AND SUBSIDIARIES
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The table below reflects the changes in our asset retirement obligations (in millions). See Note 1 under “Asset Retirement Obligations” for a discussion of the liability related to these obligations.

	Year Ended December 31,
	2008			2007			2006
Balance as of beginning of year	$	70		$	51		$	51
Additions to accrual		4			1			1
Accretion expense		3			2			2
Settlements		(4	)		(13	)		(5	)
Changes in timing and amount of estimated cash flows		–			28			2
Foreign currency translation		(1	)		1			–
Balance as of end of year	$	72		$	70		$	51

14. STOCKHOLDERS’ EQUITY

Share Activity
For the years ended December 31, 2008, 2007, and 2006, activity in the number of shares of preferred stock, common stock, and treasury stock was as follows (in millions):

	Preferred			Common		Treasury
	Stock			Stock		Stock
Balance as of December 31, 2005		3			621		(4	)
Conversion of preferred stock		(3	)		6		–
Shares repurchased, net of shares issued, in connection with employee stock plans and other		–			–		(20	)
Balance as of December 31, 2006		–			627		(24	)
Shares repurchased under $6 billion common stock purchase program		–			–		(70	)
Shares issued, net of shares repurchased, in connection with employee stock plans and other		–			–		3
Balance as of December 31, 2007		–			627		(91	)
Shares repurchased under $6 billion common stock purchase program		–			–		(18	)
Shares repurchased, net of shares issued, in connection with employee stock plans and other		–			–		(2	)
Balance as of December 31, 2008		–			627		(111	)

Preferred Stock
We have 20 million shares of preferred stock authorized with a par value of $.01 per share. As of December 31, 2008 and 2007, no shares of preferred stock were outstanding.

In connection with the acquisition of the St. Charles Refinery on July 1, 2003, we issued 10 million shares of 2% mandatory convertible preferred stock. Each share of convertible preferred stock was convertible, at the option of the holder, at any time before July 1, 2006 into 1.982 shares of our common stock. All mandatory convertible preferred stock not previously converted automatically converted to our common

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stock on July 1, 2006. Upon automatic conversion of the convertible preferred stock on July 1, 2006, 1.982 shares of common stock were issued for each share of convertible preferred stock based on the average closing price of our common stock over the 20-day trading period ending on the second trading day prior to July 1, 2006. During 2006, 3,164,151 shares of the preferred stock were converted into 6,271,327 shares of our common stock.

Prior to the issuance of shares of our common stock upon conversion of the convertible preferred stock, the number of shares of our common stock included in the calculation of “earnings per common share – assuming dilution” for each reporting period was based on the average closing price of our common stock over the 20-day trading period ending on the second trading day prior to the end of the reporting period.

Treasury Stock
We purchase shares of our common stock in open market transactions to meet our obligations under employee benefit plans. We also purchase shares of our common stock 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.

On October 19, 2006, our board of directors approved a $2 billion common stock purchase program. This authorization was in addition to our existing authorization to purchase shares to offset dilution created by our employee stock incentive programs. 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. Stock purchases under the program are made from time to time at prevailing prices as permitted by securities laws and other legal requirements, and are subject to market conditions and other factors. The program does not have a scheduled expiration date.

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 2007, 42.1 million shares were purchased under this agreement. As described in Note 12 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.

The accelerated share repurchase program was completed on July 23, 2007, and we elected to pay in cash an additional $94 million for the shares purchased. This cash payment was deducted from reported income from continuing operations in calculating earnings per common share from continuing operations assuming dilution for the year ended December 31, 2007 (see Note 15).

On February 28, 2008, our board of directors approved a new $3 billion common stock purchase program. This program is in addition to the remaining amount under the $6 billion program previously authorized. This new $3 billion program has no expiration date. As of December 31, 2008, we had made no purchases of our common stock under the new $3 billion program. As of December 31, 2008, we have approvals under these stock purchase programs to purchase approximately $3.5 billion of our common stock.

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

During the years ended December 31, 2008, 2007, and 2006, we purchased 23.0 million, 84.3 million, and 34.6 million shares of our common stock, respectively, at a cost of $955 million, $5.8 billion, and $2.0 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 above. During the years ended December 31, 2008, 2007, and 2006, we issued 2.5 million, 16.1 million, and 14.7 million shares from treasury, respectively, at an average cost of $65.85, $62.89, and $55.70 per share, respectively, for our employee benefit plans.

Common Stock Dividends
On January 20, 2009, our board of directors declared a quarterly cash dividend of $0.15 per common share payable March 11, 2009 to holders of record at the close of business on February 11, 2009.

Accumulated Other Comprehensive Income
Accumulated balances for each component of accumulated other comprehensive income (loss) were as follows (in millions):

	Foreign						Net Gain			Accumulated
	Currency			Pension/OPEB			(Loss) On			Other
	Translation			Liability			Cash Flow			Comprehensive
	Adjustment			Adjustment			Hedges			Income (Loss)
Balance as of December 31, 2005	$	341		$	(10	)	$	4		$	335
2006 change		(11	)		(100	)		41			(70	)
Balance as of December 31, 2006		330			(110	)		45			265
2007 change		250			86			(28	)		308
Balance as of December 31, 2007		580			(24	)		17			573
2008 change		(490	)		(411	)		152			(749	)
Balance as of December 31, 2008	$	90		$	(435	)	$	169		$	(176	)

Preferred Share Purchase Rights
Prior to June 30, 2007, each outstanding share of our common stock was accompanied by one preferred share purchase right (Right). With certain exceptions, each Right entitled the registered holder to purchase from us .0025 of a share of our Junior Participating Preferred Stock, Series I at a price of $100 per .0025 of a share, subject to adjustment for certain recapitalization events. These Rights expired on June 30, 2007.

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

15. EARNINGS (LOSS) PER SHARE

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

	Year Ended December 31,
	2008			2007		2006
Earnings (loss) per common share from continuing operations:
Income (loss) from continuing operations	$	(1,131	)	$	4,565	$	5,287
Less: Preferred stock dividends		–			–		2
Income (loss) from continuing operations applicable to common stock	$	(1,131	)	$	4,565	$	5,285
Weighted-average common shares outstanding		524			565		611
Earnings (loss) per common share from continuing operations	$	(2.16	)	$	8.08	$	8.65
Earnings (loss) per common share from continuing operations – assuming dilution:
Income (loss) from continuing operations	$	(1,131	)	$	4,565	$	5,287
Less: Cash paid in final settlement of accelerated share repurchase program		–			94		–
Income (loss) from continuing operations assuming dilution	$	(1,131	)	$	4,471	$	5,287
Weighted-average common shares outstanding		524			565		611
Effect of dilutive securities (1):
Stock options		–			13		18
Restricted stock and performance awards		–			1		1
Mandatory convertible preferred stock		–			–		2
Weighted-average common shares outstanding – assuming dilution		524			579		632
Earnings (loss) per common share from continuing operations – assuming dilution	$	(2.16	)	$	7.72	$	8.36

(1) Common equivalent shares were excluded from the computation of diluted earnings per share for the year ended December 31, 2008 because the effect of including such shares would be anti-dilutive.

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

The following table reflects potentially dilutive securities that were excluded from the calculation of “earnings (loss) per common share from continuing operations – assuming dilution” as the effect of including such securities would have been anti-dilutive (in millions). For the year ended December 31, 2008, the common equivalent shares presented represent potentially dilutive securities, primarily stock options, that were excluded as a result of the net loss reported for 2008. For 2008, 2007, and 2006, the stock option amounts presented represent outstanding stock options for which the exercise prices were greater than the average market price of the common shares during each respective reporting period.

	Year Ended December 31,
	2008		2007		2006
Common equivalent shares		7		–		–
Stock options		7		2		–

16. STATEMENTS OF CASH FLOWS

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

	Year Ended December 31,
	2008			2007			2006
Decrease (increase) in current assets:
Restricted cash	$	(100	)	$	–		$	(1	)
Receivables, net		4,815			(3,227	)		(837	)
Inventories		(705	)		(249	)		(405	)
Income taxes receivable		(197	)		32			38
Prepaid expenses and other		(190	)		(58	)		(81	)
Increase (decrease) in current liabilities:
Accounts payable		(4,985	)		2,557			1,362
Accrued expenses		182			(20	)		(54	)
Taxes other than income taxes		(4	)		15			(4	)
Income taxes payable		(446	)		481			(162	)
Changes in current assets and current liabilities	$	(1,630	)	$	(469	)	$	(144	)

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

• the amounts shown above exclude changes in cash and temporary cash investments, deferred income taxes, and current portion of debt and capital lease obligations, as well as the effect of certain noncash investing and financing activities discussed below;

• previously accrued capital expenditures, deferred turnaround and catalyst costs, and contingent earn-out payments are reflected in investing activities in the consolidated statements of cash flows;

• amounts accrued for common stock purchases in the open market that are not settled as of the balance sheet date are reflected in financing activities in the consolidated statements of cash flows when the purchases are settled and paid;

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

• changes in assets held for sale and liabilities related to assets held for sale pertaining to the operations of the Krotz Springs Refinery and the Lima Refinery prior to their sales are reflected in the line items to which the changes relate in the table above; 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.

Noncash investing activities for the year ended December 31, 2008 included the contingent consideration received in the form of the earn-out agreement related to the sale of the Krotz Springs Refinery discussed in Note 2. Noncash investing activities for the years ended December 31, 2008 and 2007 included adjustments to goodwill and certain noncurrent liabilities resulting from adjustments to the purchase price allocations related to the Premcor and UDS Acquisitions (as discussed in Note 8).

Noncash investing and financing activities for the year ended December 31, 2006 included:

• the recognition of $158 million (pre-tax) of SAB 51 credits related to our investment in NuStar Energy L.P. (as discussed in Note 9);

• adjustments to property, plant and equipment, goodwill, and certain current and noncurrent assets and liabilities resulting from adjustments to the purchase price allocations related to the Premcor and UDS Acquisitions;

• the conversion of 3,164,151 shares of preferred stock into 6,271,327 shares of our common stock as discussed in Note 14; and

• the recording of a $39 million capital lease obligation and related capital lease asset pertaining to certain facilities at the Lima Refinery.

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 statements of cash flows for the years ended December 31, 2007 and 2006. Cash provided by operating activities related to our discontinued operations was $260 million and $215 million for the years ended December 31, 2007 and 2006, respectively. Cash used in investing activities related to the Lima Refinery was $14 million and $133 million for the years ended December 31, 2007 and 2006, respectively.

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

	Year Ended December 31,
	2008		2007		2006
Interest paid (net of amount capitalized)	$	351	$	331	$	261
Income taxes paid, net of tax refunds received		1,428		2,014		2,349

17. FAIR VALUE MEASUREMENTS

As discussed in Note 1, we adopted Statement No. 159 effective January 1, 2008, but have not made any significant fair value elections with respect to any of our eligible assets or liabilities. Also as discussed in Note 1, effective January 1, 2008, we adopted Statement No. 157, which defines fair value, establishes a consistent framework for measuring fair value, establishes a fair value hierarchy (Level 1, Level 2, or Level 3) based on the quality of inputs used to measure fair value, and expands disclosure requirements for fair value measurements.

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

Pursuant to the provisions of Statement No. 157, fair values determined by Level 1 inputs utilize quoted prices in active markets for identical assets or liabilities. Fair values determined by Level 2 inputs are based on quoted prices for similar assets or liabilities in active markets, and inputs other than quoted prices that are observable for the asset or liability. Level 3 inputs are unobservable inputs for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability. We use appropriate valuation techniques based on the available inputs to measure the fair values of our applicable assets and liabilities. When available, we measure fair value using Level 1 inputs because they generally provide the most reliable evidence of fair value.

The table below presents information (dollars in millions) about our assets and liabilities measured and recorded at fair value on a recurring basis and indicates the fair value hierarchy of the inputs utilized by us to determine the fair values as of December 31, 2008. These assets and liabilities have previously been measured and recorded at fair value in accordance with existing GAAP, and our accounting for these assets and liabilities was not impacted by our adoption of Statement No. 157 and Statement No. 159.

	Fair Value Measurements Using
	Quoted Prices		Significant Other		Significant
	in Active		Observable		Unobservable		Total as of
	Markets		Inputs		Inputs		December 31,
	(Level 1)		(Level 2)		(Level 3)		2008
Assets:
Commodity derivative contracts	$	40	$	610	$	–	$	650
Nonqualified benefit plans		98		–		–		98
Alon earn-out agreement		–		–		13		13
Liabilities:
Commodity derivative contracts		–		7		–		7
Certain nonqualified benefit plans		26		–		–		26

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

• Commodity derivative contracts, consisting primarily of exchange-traded futures and swaps, are measured at fair value using the market approach pursuant to the provisions of Statement No. 157. Exchange-traded futures are valued based on quoted prices from the exchange and are categorized in Level 1 of the fair value hierarchy. Swaps are priced using third-party broker quotes, industry pricing services, and exchange-traded curves, but since they have contractual terms that are not identical to exchange-traded futures instruments with a comparable market price, these financial instruments are categorized in Level 2 of the fair value hierarchy.

• Nonqualified benefit plan assets and certain nonqualified benefit plan liabilities are measured at fair value using a market approach based on quotations from national securities exchanges and are categorized in Level 1 of the fair value hierarchy.

• The Alon earn-out agreement, which we received as partial consideration for the sale of our Krotz Springs Refinery as discussed in Note 2, is measured at fair value using a discounted cash flow model and is categorized in Level 3 of the fair value hierarchy. Significant inputs to the model include expected payments and discount rates that consider the effects of both credit risk and the time value of money.

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

An $86 million obligation to pay cash collateral to brokers under master netting arrangements is netted against the fair value of the commodity derivatives reflected in Level 1. Certain of our commodity derivative contracts under master netting arrangements include both asset and liability positions. Under the guidance of FASB Staff Position No. FIN 39-1, “Amendment of FASB Interpretation No. 39,” we have elected to offset the fair value amounts recognized for multiple derivative instruments executed with the same counterparty, including any related cash collateral asset or obligation.

The following is a reconciliation of the beginning and ending balances (in millions) for fair value measurements developed using significant unobservable inputs for the year ended December 31, 2008.

Beginning balance	$	–
Alon earn-out agreement (see Note 2)		171
Net unrealized losses included in earnings		(158	)
Transfers in and/or out of Level 3		–
Balance as of December 31, 2008	$	13

Unrealized losses for the year ended December 31, 2008, which relate to a Level 3 asset still held at the reporting date, are reported in “other income, net” in the consolidated statement of income. These unrealized losses were more than offset by the recognition in “other income, net” of gains on derivative instruments entered into to hedge the risk of changes in the fair value of the Alon earn-out agreement as discussed in Note 2. These derivative instruments are included in the “commodity derivative contracts” amounts reflected in the fair value table above.

18. PRICE RISK MANAGEMENT ACTIVITIES

Commodity Price Risk
We are exposed to market risks related to the volatility of crude oil and refined product prices, as well as volatility in the price of natural gas used in our refining operations. To reduce the impact of this price volatility, we use derivative commodity instruments (swaps, futures, and options) to manage our exposure to:

• changes in the fair value of a portion of our refinery feedstock and refined product inventories and a portion of our unrecognized firm commitments to purchase these inventories (fair value hedges);

• changes in cash flows of certain forecasted transactions such as forecasted feedstock and product purchases, natural gas purchases, and refined product sales (cash flow hedges); and

• price volatility on a portion of our refinery feedstock and refined product inventories and on certain forecasted feedstock and product purchases, refined product sales, and natural gas purchases that are not designated as either fair value or cash flow hedges (economic hedges).

In addition, we use derivative commodity instruments for trading purposes based on our fundamental and technical analysis of market conditions.

Interest Rate Risk
We are exposed to market risk for changes in interest rates related to certain of our debt obligations. We sometimes use interest rate swap agreements to manage our fixed to floating interest rate position by converting certain fixed-rate debt to floating-rate debt. As of December 31, 2008 and 2007, we did not have any interest rate swap agreements.

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

As of December 31, 2005, we had interest rate swap agreements with a notional amount of $1.0 billion and interest rates ranging from 5.6% to 6.0%. All of these swaps were accounted for as fair value hedges. During the first quarter of 2006, $125 million of these interest rate swaps were settled on their scheduled maturity date. Effective May 1, 2006, we terminated the remaining $875 million of interest rate swap contracts outstanding at that date for a payment of $54 million. Substantially all of this payment was deferred and is being amortized to interest expense over the remaining lives of the debt instruments that were being hedged.

Foreign Currency Risk
We are exposed to exchange rate fluctuations on transactions related to our Canadian operations. To manage our exposure to these exchange rate fluctuations, we use foreign currency exchange and purchase contracts. These contracts are not designated as hedging instruments. As of December 31, 2008, we had commitments to purchase $280 million of U.S. dollars. These commitments matured on or before January 30, 2009, resulting in a 2009 gain of $2 million.

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

	Year Ended December 31,
	2008			2007			2006
Fair value hedges	$	4		$	(17	)	$	(11	)
Cash flow hedges		(11	)		(18	)		8

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.

During 2008, 2007, and 2006, we recognized in “cost of sales” gains of $13 million, $37 million, and $4 million, respectively, associated with trading activities.

For cash flow hedges, gains and losses reported in “accumulated other comprehensive income (loss)” in the consolidated balance sheets are reclassified into “cost of sales” when the forecasted transactions affect income. During the years ended December 31, 2008, 2007, and 2006, we recognized in “other comprehensive income (loss)” unrealized after-tax gains (losses) of $85 million, $(11) million, and $70 million, respectively, on certain cash flow hedges, primarily related to forward sales of gasoline and distillates and associated forward purchases of crude oil, with $169 million, $17 million, and $45 million of cumulative after-tax gains on cash flow hedges remaining in “accumulated other comprehensive income (loss)” as of December 31, 2008, 2007, and 2006, respectively. We expect that substantially all of the deferred gains at December 31, 2008 will be reclassified into “cost of sales” over the next 12 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 years ended December 31, 2008, 2007, and 2006, there were no amounts reclassified from “accumulated other comprehensive income (loss)” into income as a result of the discontinuance of cash flow hedge accounting.

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

Market and Credit Risk
Our price risk management activities involve the receipt or payment of fixed price commitments into the future. These transactions give rise to market risk, the risk that future changes in market conditions may make an instrument less valuable. We closely monitor and manage our exposure to market risk on a daily basis in accordance with policies approved by our board of directors. Market risks are monitored by a risk control group to ensure compliance with our stated risk management policy. Concentrations of customers in the refining industry may impact our overall exposure to credit risk, in that these customers may be similarly affected by changes in economic or other conditions. In addition, financial services companies are the counterparties in certain of our price risk management activities, and such financial services companies may be adversely affected by periods of uncertainty and illiquidity in the credit and capital markets.

19. INCOME TAXES

Income (loss) from continuing operations before income tax expense from domestic and foreign operations was as follows (in millions):

	Year Ended December 31,
	2008			2007		2006
U.S. operations	$	(255	)	$	5,846	$	7,290
Canadian operations		605			458		289
Aruban operations		(14	)		422		319
Income from continuing operations before income tax expense	$	336		$	6,726	$	7,898

The following is a reconciliation of income tax expense related to continuing operations to income taxes computed by applying the statutory federal income tax rate (35% for all years presented) to income from continuing operations before income tax expense (in millions):

	Year Ended December 31,
	2008			2007			2006
Federal income tax expense at the U.S. statutory rate	$	118		$	2,354		$	2,764
U.S. state income tax expense, net of U.S. federal income tax effect		4			83			46
U.S. manufacturing deduction		(53	)		(88	)		(71	)
Canadian operations		(27	)		(48	)		(45	)
Aruban operations		7			(144	)		(108	)
Goodwill impairment		1,367			–			–
Permanent differences		26			16			9
Other, net		25			(12	)		16
Income tax expense	$	1,467		$	2,161		$	2,611

The Aruba Refinery’s profits are non-taxable in Aruba due to a tax holiday granted by the Government of Aruba (GOA) through December 31, 2010. The tax holiday had an immaterial effect on our consolidated results of operations for the years ended December 31, 2008, 2007, and 2006.

99

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

Components of income tax expense (benefit) related to continuing operations were as follows (in millions):

	Year Ended December 31,
	2008			2007			2006
Current:
U.S. federal	$	732		$	1,764		$	2,198
U.S. state		13			96			76
Canada		45			202			51
Aruba		2			3			3
Total current		792			2,065			2,328
Deferred:
U.S. federal		543			155			285
U.S. state		(8	)		31			(5	)
Canada		140			(90	)		3
Total deferred		675			96			283
Income tax expense	$	1,467		$	2,161		$	2,611

The tax effects of significant temporary differences representing deferred income tax assets and liabilities were as follows (in millions):

	December 31,
	2008			2007
Deferred income tax assets:
Tax credit carryforwards	$	91		$	95
Net operating losses (NOL)		78			36
Compensation and employee benefit liabilities		394			175
Environmental		93			86
Inventories		72			224
Other assets		298			360
Total deferred income tax assets		1,026			976
Less: Valuation allowance		(62	)		(54	)
Net deferred income tax assets		964			922
Deferred income tax liabilities:
Turnarounds		(250	)		(264	)
Property, plant and equipment		(4,530	)		(4,297	)
Inventories		(628	)		(302	)
Other		(106	)		(126	)
Total deferred income tax liabilities		(5,514	)		(4,989	)
Net deferred income tax liabilities	$	(4,550	)	$	(4,067	)

100

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

As of December 31, 2008, we had the following U.S. federal and state income tax credit and loss carryforwards (in millions):

	Amount		Expiration
U.S. state income tax credits	$	57	2009 through 2029
U.S. state income tax credits		36	Unlimited
Foreign tax credit		30	2011
U.S. state NOL		1,606	2009 through 2028

We have recorded a valuation allowance as of December 31, 2008 and 2007, due to uncertainties related to our ability to utilize some of our deferred income tax assets, primarily consisting of certain state net operating losses, state income tax credits, and foreign tax credits, before they expire. The valuation allowance is based on our estimates of taxable income in the various jurisdictions in which we operate and the period over which deferred income tax assets will be recoverable. The realization of net deferred income tax assets recorded as of December 31, 2008 is primarily dependent upon our ability to generate future taxable income in certain states and foreign source income in the United States.

Subsequently recognized tax benefits related to the valuation allowance for deferred income tax assets as of December 31, 2008 will be allocated as follows (in millions):

Income tax benefit in consolidated statement of income	$	57
Additional paid-in capital		5
Total	$	62

Deferred income taxes have not been provided on the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and the respective tax bases of our foreign subsidiaries based on the determination that such differences are essentially permanent in duration in that the earnings of these subsidiaries are expected to be indefinitely reinvested in foreign operations. As of December 31, 2008, the cumulative undistributed earnings of these subsidiaries were approximately $3.9 billion. If those earnings were not considered indefinitely reinvested, deferred income taxes would have been recorded after consideration of foreign tax credits. It is not practicable to estimate the amount of additional tax that might be payable on those earnings, if distributed.

As discussed in Note 1, we adopted the provisions of FIN 48 on January 1, 2007. 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-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.

101

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

The following is a reconciliation of the change in unrecognized tax benefits (in millions):

	Year Ended December 31,
	2008			2007
Balance as of beginning of year	$	164		$	160
Additions based on tax positions related to the current year		17			32
Additions for tax positions related to prior years		67			13
Reductions for tax positions related to prior years		(5	)		(36	)
Reductions for tax positions related to the lapse of applicable statute of limitations		(5	)		–
Settlements		–			(5	)
Balance as of end of year	$	238		$	164

Included in the balance as of December 31, 2008 and 2007 are $136 million and $65 million, respectively, of tax benefits that, if recognized, would reduce our annual effective tax rate. We do not expect our unrecognized tax benefits to change significantly over the next 12 months.

We have elected to classify any interest expense and penalties related to income taxes within income tax expense in our consolidated statements of income. During the years ended December 31, 2008, 2007, and 2006, we recognized approximately $22 million, $1 million, and $25 million in interest and penalties. We had accrued approximately $68 million and $46 million for the payment of interest and penalties as of December 31, 2008 and 2007, respectively.

Our tax years through 1999 and UDS’s tax years through 2001 are closed to adjustment by the Internal Revenue Service.  Valero’s separate tax years 2000 and 2001 (prior to the UDS Acquisition) have been settled with the exception of a depreciation method.  In addition, our tax years 2002 through 2005 are currently under examination and Premcor’s separate tax years 2004 through 2005 are also under examination.  During 2007, the Internal Revenue Service proposed adjustments to our 2002 and 2003 taxable income, including adjustments related to inventory and depreciation methods.  We are protesting the proposed adjustments and do not expect that the ultimate disposition of these findings will result in a material change to our financial position or results of operations. During 2008, Valero settled Premcor’s 2002-2003 separate tax year audit. We believe that adequate provisions for income taxes have been reflected in the consolidated financial statements.

20. SEGMENT INFORMATION

We have two reportable segments, refining and retail. Our refining segment includes refining operations, wholesale marketing, product supply and distribution, and transportation operations. The retail segment includes company-operated convenience stores, Canadian dealers/jobbers and truckstop facilities, cardlock facilities, and home heating oil operations. Operations that are not included in either of the two reportable segments are included in the corporate category.

The reportable segments are strategic business units that offer different products and services. They are managed separately as each business requires unique technology and marketing strategies. Performance is evaluated based on operating income. Intersegment sales are generally derived from transactions made at prevailing market rates.

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

	Refining		Retail		Corporate			Total
Year ended December 31, 2008:	(in millions)
Operating revenues from external customers	$	108,586	$	10,528	$	–		$	119,114
Intersegment revenues		7,703		–		–			7,703
Depreciation and amortization expense		1,327		105		44			1,476
Operating income (loss)		797		369		(603	)		563
Total expenditures for long-lived assets		2,957		104		141			3,202
Year ended December 31, 2007:
Operating revenues from external customers		86,443		8,884		–			95,327
Intersegment revenues		6,298		–		–			6,298
Depreciation and amortization expense		1,222		90		48			1,360
Operating income (loss)		7,355		249		(686	)		6,918
Total expenditures for long-lived assets		2,483		107		193			2,783
Year ended December 31, 2006:
Operating revenues from external customers		79,406		8,234		–			87,640
Intersegment revenues		5,729		–		–			5,729
Depreciation and amortization expense		985		87		44			1,116
Operating income (loss)		8,182		182		(642	)		7,722
Total expenditures for long-lived assets		3,637		101		57			3,795

Our principal products include conventional and CARB gasolines, RBOB, ultra-low-sulfur diesel, and oxygenates and other gasoline blendstocks. We also produce a substantial slate of middle distillates, jet fuel, and petrochemicals, in addition to lube oils and asphalt. Other product revenues include such products as gas oils, No. 6 fuel oil, and petroleum coke. Operating revenues from external customers for our principal products for the years ended December 31, 2008, 2007, and 2006 were as follows (in millions):

	Year Ended December 31,
	2008		2007		2006
Refining:
Gasolines and blendstocks	$	48,052	$	43,014	$	40,458
Distillates		45,672		31,552		28,524
Petrochemicals		4,221		3,797		3,254
Lubes and asphalts		2,770		1,837		1,863
Other product revenues		7,871		6,243		5,307
Total refining operating revenues		108,586		86,443		79,406
Retail:
Fuel sales (gasoline and diesel)		8,750		7,235		6,709
Merchandise sales and other		1,446		1,356		1,272
Home heating oil		332		293		253
Total retail operating revenues		10,528		8,884		8,234
Consolidated operating revenues	$	119,114	$	95,327	$	87,640

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Operating revenues by geographic area for the years ended December 31, 2008, 2007, and 2006 are shown in the table below (in millions). The geographic area is based on location of customer.

	Year Ended December 31,
	2008		2007		2006
United States	$	101,141	$	82,168	$	76,604
Canada		9,961		8,142		7,275
Other countries		8,012		5,017		3,761
Consolidated operating revenues	$	119,114	$	95,327	$	87,640

For the years ended December 31, 2008, 2007, and 2006, no customer accounted for more than 10% of our consolidated operating revenues.

Long-lived assets include property, plant and equipment, intangible assets subject to amortization, and certain long-lived assets included in “deferred charges and other assets, net.” Geographic information by country for long-lived assets consisted of the following (in millions):

	December 31,
	2008		2007
United States	$	21,327	$	19,438
Canada		1,999		2,412
Aruba		1,045		972
Consolidated long-lived assets	$	24,371	$	22,822

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

	December 31,
	2008		2007
Refining	$	30,801	$	37,703
Retail		1,818		2,098
Corporate		1,798		2,921
Total consolidated assets	$	34,417	$	42,722

The entire balance of goodwill as of December 31, 2007 was included in the total assets of the refining reportable segment. As of December 31, 2008, we no longer reflected any goodwill in our consolidated balance sheet due to the goodwill impairment loss in the fourth quarter of 2008 (see discussion in Note 8). Assets held for sale related to the Krotz Springs Refinery as of December 31, 2007 were included in the refining reportable segment.

21. EMPLOYEE BENEFIT PLANS

Pension Plans and Postretirement Benefits Other Than Pensions
We have several qualified non-contributory defined benefit pension plans (collectively, the Qualified Plans), some of which are subject to collective bargaining agreements. The Qualified Plans cover substantially all employees in the United States and generally provide eligible employees with retirement income based on years of service and compensation during specific periods.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

We also have several nonqualified supplemental executive retirement plans (Supplemental Plans), which provide additional pension benefits to executive officers and certain other employees. The Supplemental Plans and the Qualified Plans are collectively referred to as the Pension Plans.

We also provide certain health care and life insurance benefits for retired employees, referred to as other postretirement benefits. Substantially all of our employees may become eligible for these benefits if, while still working for us, they either reach normal retirement age or take early retirement. We offer health care benefits through a self-insured plan and, for certain locations, a health maintenance organization while life insurance benefits are provided through an insurance company. We fund our postretirement benefits other than pensions on a pay-as-you-go basis. Individuals who became our employees as a result of an acquisition became eligible for other postretirement benefits under our plan as determined by the terms of the relevant acquisition agreement.

The changes in benefit obligation, the changes in fair value of plan assets, and the funded status of our Pension Plans and other postretirement benefit plans as of and for the years ended December 31, 2008 and 2007 were as follows (in millions):

							Other Postretirement
	Pension Plans						Benefit Plans
	2008			2007			2008			2007
Change in benefit obligation:
Benefit obligation at beginning of year	$	1,292		$	1,252		$	477		$	477
Service cost		92			95			13			13
Interest cost		76			71			28			27
Participant contributions		–			–			7			7
Plan amendments		–			(1	)		–			–
Special termination benefits		–			14			–			1
Medicare subsidy for prescription drugs		–			–			2			1
Benefits paid		(75	)		(78	)		(27	)		(20	)
Actuarial (gain) loss		107			(61	)		26			(34	)
Foreign currency exchange rate changes		–			–			(6	)		5
Benefit obligation at end of year	$	1,492		$	1,292		$	520		$	477
Change in plan assets:
Fair value of plan assets at beginning of year	$	1,358		$	1,156		$	–		$	–
Actual return on plan assets		(400	)		125			–			–
Valero contributions		122			155			18			12
Participant contributions		–			–			7			7
Medicare subsidy for prescription drugs		–			–			2			1
Benefits paid		(75	)		(78	)		(27	)		(20	)
Fair value of plan assets at end of year	$	1,005		$	1,358		$	–		$	–
Reconciliation of funded status:
Fair value of plan assets at end of year	$	1,005		$	1,358		$	–		$	–
Less: Benefit obligation at end of year		1,492			1,292			520			477
Funded status at end of year	$	(487	)	$	66		$	(520	)	$	(477	)

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The pre-tax amounts related to our Pension Plans and other postretirement benefit plans recognized in our consolidated balance sheets as of December 31, 2008 and 2007 were as follows (in millions):

							Other Postretirement
	Pension Plans						Benefit Plans
	2008			2007			2008			2007
Deferred charges and other assets	$	–		$	239		$	–		$	–
Accrued expenses		(13	)		(13	)		(22	)		(18	)
Other long-term liabilities		(474	)		(160	)		(498	)		(459	)
Accumulated other comprehensive loss		645			38			43			13

The pre-tax amounts in “accumulated other comprehensive (income) loss” as of December 31, 2008 and 2007 that have not yet been recognized as components of net periodic benefit cost were as follows (in millions):

					Other Postretirement
	Pension Plans				Benefit Plans
	2008		2007		2008			2007
Prior service cost (credit)	$	19	$	22	$	(84	)	$	(93	)
Net actuarial loss		626		16		127			106
Total	$	645	$	38	$	43		$	13

The following amounts included in “accumulated other comprehensive income (loss)” as of December 31, 2008 are expected to be recognized as components of net periodic benefit cost during the year ending December 31, 2009 (in millions):

			Other
	Pension		Postretirement
	Plans		Benefit Plans
Amortization of prior service cost (credit)	$	3	$	(9	)
Amortization of loss		10		6
Total	$	13	$	(3	)

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

As of December 31, 2008 and 2007, the accumulated benefit obligation for our Pension Plans was $1.2 billion and $1.0 billion, respectively. With the exception of our main Qualified Plan as of December 31, 2007, which was overfunded at that date, the accumulated benefit obligation for each of our Pension Plans was in excess of the fair value of plan assets as of December 31, 2008 and 2007. The fair value of plan assets for our main Qualified Plan was in excess of the projected benefit obligation and the accumulated benefit obligation by $239 million and $464 million, respectively, as of December 31, 2007. However, due primarily to a significant decline in the fair value of the assets of the main Qualified Plan caused by unfavorable economic and market conditions during 2008, our main Qualified Plan was underfunded as of December 31, 2008, thus resulting in the increased amounts reflected in the table below. The aggregate projected benefit obligation, accumulated benefit obligation, and fair value of plan assets for our Pension Plans for which the accumulated benefit obligation exceeded the fair value of plan assets were as follows (in millions):

	December 31,
	2008		2007
Projected benefit obligation	$	1,492	$	232
Accumulated benefit obligation		1,201		192
Fair value of plan assets		1,005		59

The percentage of fair value of plan assets by asset category for the Qualified Plans as of December 31, 2008 and 2007 are shown below. There are no plan assets for other postretirement benefit plans.

	December 31,
	2008			2007
Equity securities		48	%		50	%
Mutual funds		11			22
Corporate debt securities		16			9
Government securities		17			8
Insurance contracts		2			1
Cash and cash equivalents		6			10
Total		100	%		100	%

Equity securities in the Qualified Plans include our common stock in the amounts of approximately $20 million (2% of total Qualified Plan assets) and $55 million (4% of total Qualified Plan assets) as of December 31, 2008 and 2007, respectively.

The investment policies and strategies for the assets of our Qualified Plans incorporate a diversified approach that is expected to earn long-term returns from capital appreciation and a growing stream of current income. This approach recognizes that assets are exposed to risk and the market value of the Qualified Plans’ assets may fluctuate from year to year. Risk tolerance is determined based on our financial ability to withstand risk within the investment program and the willingness to accept return volatility. In line with the investment return objective and risk parameters, the Qualified Plans’ mix of assets includes a diversified portfolio of equity and fixed-income investments. Equity investments include international stocks and a blend of domestic growth and value stocks of various sizes of capitalization. The aggregate asset allocation is reviewed on an annual basis.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The overall expected long-term rate of return on plan assets for the Qualified Plans is estimated using models of asset returns. Model assumptions are derived using historical data given the assumption that capital markets are informationally efficient. Three methods are used to derive the long-term expected returns for each asset class. Because each method has distinct advantages and disadvantages and differing results, an equal weighted average of the methods’ results is used.

Although we have only $8 million of minimum required contributions to our Qualified Plans during 2009 under the Employee Retirement Income Security Act, we plan to contribute approximately $130 million to our Qualified Plans during 2009. In January 2009, $50 million of this total expected contribution was contributed to our main Qualified Plan.

The following benefit payments, which reflect expected future service and anticipated Medicare subsidy, as appropriate, are expected to be paid (received) for the years ending December 31 (in millions):

	Pension		Other		Health Care
	Benefits		Benefits		Subsidy Receipts
2009	$	63	$	24	$	(2	)
2010		72		27		(3	)
2011		76		30		(3	)
2012		85		32		(3	)
2013		97		34		(4	)
Years 2014-2018		647		204		(27	)

The components of net periodic benefit cost were as follows for the years ended December 31, 2008, 2007, and 2006 (in millions):

										Other Postretirement
	Pension Plans									Benefit Plans
	2008			2007			2006			2008			2007			2006
Components of net periodic benefit cost:
Service cost	$	92		$	95		$	96		$	13		$	13		$	14
Interest cost		76			71			64			28			27			24
Expected return on plan assets		(105	)		(84	)		(57	)		–			–			–
Amortization of:
Prior service cost (credit)		3			3			3			(9	)		(9	)		(9	)
Net loss		2			9			13			3			6			6
Net periodic benefit cost before special charges		68			94			119			35			37			35
Charge for special termination benefits		–			14			–			–			1			–
Net periodic benefit cost	$	68		$	108		$	119		$	35		$	38		$	35

Amortization of prior service cost (credit) shown in the above table was based on the average remaining service period of employees expected to receive benefits under each respective plan.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Pre-tax amounts recognized in “other comprehensive (income) loss” for the years ended December 31, 2008 and 2007 were as follows (in millions):

							Other Postretirement
	Pension Plans						Benefit Plans
	2008			2007			2008			2007
Net (gain) loss arising during the year:
Net actuarial loss (gain)	$	612		$	(102	)	$	25		$	(33	)
Prior service cost (credit)		–			(1	)		–			–
Net gain (loss) reclassified into income:
Net actuarial (loss) gain		(2	)		(9	)		(3	)		(6	)
Prior service (cost) credit		(3	)		(3	)		9			9
Total recognized in other comprehensive (income) loss	$	607		$	(115	)	$	31		$	(30	)

The pre-tax increase in the additional minimum pension liability that was recognized in “other comprehensive income (loss)” was $1 million for the year ended December 31, 2006.

The weighted-average assumptions used to determine the benefit obligations as of December 31, 2008 and 2007 were as follows:

							Other Postretirement
	Pension Plans						Benefit Plans
	2008			2007			2008			2007
Discount rate		5.40	%		6.00	%		5.39	%		6.00	%
Rate of compensation increase		5.19	%		5.43	%		–			–

The discount rate assumptions used to determine the pension plan and other postretirement benefit plan obligations at December 31, 2008 were based on the Hewitt Bond Universe yield curve (HBU). The HBU was designed by Hewitt Associates LLC to provide a means for plan sponsors to value the liabilities of their pension plans and other postretirement benefit plans. The HBU is a hypothetical yield curve represented by a series of annualized individual discount rates for certain high-yield bonds. Each bond issue underlying the HBU is required to have a rating of Aa or better by Moody’s Investors Service or a rating of AA or better by Standard & Poor’s Ratings Services.

Prior to 2008, we selected the discount rate based on a review of long-term bonds that received one of the two highest ratings given by a recognized rating agency as of December 31 of each year. The average timing of benefit payments from our plans was compared to the average timing of cash flows from the long-term bonds to assess potential timing adjustments. Based on this analysis, there were no significant differences in the timing of the cash flows, and therefore no adjustments were necessary.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The weighted-average assumptions used to determine the net periodic benefit cost for the years ended December 31, 2008, 2007, and 2006 were as follows:

										Other Postretirement
	Pension Plans									Benefit Plans
	2008			2007			2006			2008			2007			2006
Discount rate		6.00	%		5.75	%		5.50	%		6.00	%		5.75	%		5.50	%
Expected long-term rate of return on plan assets		8.23	%		8.25	%		8.25	%		–			–			–
Rate of compensation increase		5.43	%		5.46	%		4.75	%		–			–			–

The assumed health care cost trend rates as of December 31, 2008 and 2007 were as follows:

	2008			2007
Health care cost trend rate assumed for next year		8.30	%		8.87	%
Rate to which the cost trend rate was assumed to decline (the ultimate trend rate)		5.00	%		5.00	%
Year that the rate reaches the ultimate trend rate		2015			2015

Assumed health care cost trend rates have a significant effect on the amounts reported for health care plans. A one percentage-point change in assumed health care cost trend rates would have the following effects on other postretirement benefits (in millions):

	1% Increase		1% Decrease
Effect on total of service and interest cost components	$	3	$	(3	)
Effect on accumulated postretirement benefit obligation		37		(32	)

Defined Contribution Plans
Valero Energy Corporation Thrift Plan
We are the sponsor of the Valero Energy Corporation Thrift Plan, which is a defined contribution plan. Participation in the Thrift Plan is voluntary. Through June 30, 2006, employees were eligible to participate in the plan upon the completion of one month of continuous service. Effective July 1, 2006, participants may participate in the plan as soon as practicable following enrollment.

Thrift Plan participants can make basic contributions up to 8% of their total annual salary, which includes overtime and cash bonuses. In addition, participants who make a basic contribution of 8% can also make a supplemental contribution of up to 22% of their total annual salary. We match 75% of each participant’s total basic contributions up to 8% based on the participant’s total annual salary, excluding cash bonuses.

Our contributions to the Thrift Plan for the years ended December 31, 2008, 2007, and 2006 were $38 million, $38 million, and $37 million, respectively.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Valero Savings Plan
The Valero Savings Plan is a defined contribution plan covering our retail store employees and certain other employees supporting the retail organization. Under the Valero Savings Plan, participants can contribute from 1% to 30% of their compensation. We contribute $0.60 for every $1.00 of the participant’s contribution up to 6% of compensation.

Our contributions to the Valero Savings Plan were $5 million for each of the years ended December 31, 2008, 2007, and 2006.

Premcor Retirement Savings Plan
The Premcor Retirement Savings Plan is a defined contribution plan covering former Premcor employees who became employees of Valero effective September 1, 2005. Under this plan, participants can contribute from 1% to 50% of their eligible compensation. We contribute 200% of the first 3% of a participant’s pre-tax contribution. In addition, we contribute 100% of a participant’s pre-tax contribution above 3% up to 6% for certain union participants who contribute to the plan.

Our contributions to the Premcor Retirement Savings Plan for the years ended December 31, 2008, 2007, and 2006 were $6 million, $7 million, and $9 million, respectively.

22. STOCK-BASED COMPENSATION

As discussed in Note 1, on January 1, 2006, we adopted Statement No. 123(R), which requires the expensing of the fair value of stock compensation awards.

We have various fixed and performance-based stock compensation plans under which awards have been granted, which are summarized as follows:

• The 2005 Omnibus Stock Incentive Plan (the OSIP) authorizes the grant of various stock and stock-based awards to our employees and our non-employee directors. Awards available under the OSIP include options to purchase shares of common stock, performance awards that vest upon the achievement of an objective performance goal, and restricted stock that vests over a period determined by our compensation committee. As of December 31, 2008, a total of 15,988,740 shares of our common stock remained available to be awarded under the OSIP.

• A non-employee director stock option plan provided our non-employee directors with grants of stock options to purchase our common stock. Effective January 1, 2007, each director was granted an option to purchase 10,000 shares of our common stock upon initial election to our board of directors. Prior to January 1, 2007, the plan provided automatic grants of stock options upon their election to our board of directors and annual grants of stock options upon their continued service on the board. These options expire seven years from the date of grant. Effective April 23, 2007, no further options may be granted under this plan; subsequent option grants are made under the OSIP.

• Through December 31, 2006, our restricted stock plan for non-employee directors provided non-employee directors, upon their election to the board of directors, a grant of our common stock valued at $60,000 that vested in three equal annual installments. Effective January 1, 2007, each non-employee director received an annual grant of our common stock valued at $80,000 that vested in three equal annual installments. Effective January 1, 2008, each non-employee director receives an annual grant of our common stock valued at $160,000. Vesting will occur based on the number of grants received as follows: (i) initial grants will vest in three equal annual

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

installments, (ii) second grants will vest one-third on the first anniversary of the grant date and the remaining two-thirds on the second anniversary of the grant date, and (iii) all grants thereafter will vest 100% on the first anniversary of the grant date. As of December 31, 2008, a total of 218,617 shares of our common stock remained available to be awarded under this plan.

•

The 2003 Employee Stock Incentive Plan authorizes the grant of various stock and stock-related awards to employees and prospective employees. Awards include options to purchase shares of common stock, performance awards that vest upon the achievement of an objective performance goal, stock appreciation rights, and restricted stock that vests over a period determined by our compensation committee. As of December 31, 2008, a total of 148,285 shares of our common stock remained available to be awarded under this plan.

In addition, we formerly maintained other stock option and incentive plans under which previously granted equity awards remain outstanding. No additional grants may be awarded under these plans.

Each of our current stock-based compensation arrangements is discussed below. The tax benefit realized for tax deductions resulting from exercises and vestings under all of our stock-based compensation arrangements totaled $17 million, $313 million, and $264 million for the years ended December 31, 2008, 2007, and 2006, respectively.

Stock Options
Under the terms of our various stock option plans, the exercise price of options granted is not less than the fair market value of our common stock on the date of grant. Stock options become exercisable pursuant to the individual written agreements between the participants and us, usually in three or five equal annual installments beginning one year after the date of grant, with unexercised options generally expiring seven or ten years from the date of grant.

The fair value of each stock option grant was estimated on the grant date using the Black-Scholes option-pricing model. The expected life of options granted is the period of time from the grant date to the date of expected exercise or other expected settlement. The expected life for each of the years in the table below was calculated using the safe harbor provisions of SEC Staff Accounting Bulletin No. 107 and No. 110 related to share-based payments. Because the vesting period for almost all of the stock options granted during the year ended December 31, 2008 was three years rather than five years as in the prior periods presented, historical exercise patterns do not provide a reasonable basis for estimating the expected life. Expected volatility is based on closing prices of our common stock for periods corresponding to the expected life of options granted. Expected dividend yield is based on annualized dividends at the date of grant. The risk-free interest rate used is the implied yield currently available from the U.S. Treasury zero-coupon issues with a remaining term equal to the expected life of the options at the grant date. A summary of the weighted-average assumptions used in our fair value measurements is presented in the table below:

	Year Ended December 31,
	2008			2007			2006
Expected life in years		4.5			5.0			5.0
Expected volatility		43.2	%		33.7	%		36.3	%
Expected dividend yield		3.5	%		0.7	%		0.6	%
Risk-free interest rate		2.8	%		4.0	%		4.7	%

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

A summary of the status of our stock option awards is presented in the table below.

				Weighted-		Weighted-
				Average		Average
	Number			Exercise		Remaining		Aggregate
	of Stock			Price		Contractual		Intrinsic
	Options			Per Share		Term		Value
						(in years)		(in millions)
Outstanding at January 1, 2008		23,178,212		$	25.41
Granted		3,752,075			17.17
Exercised		(1,506,387	)		10.93
Forfeited		(354,347	)		46.00
Outstanding at December 31, 2008		25,069,553			24.76		4.6	$	153
Exercisable at December 31, 2008		16,565,130			18.81		4.0		136

The weighted-average grant-date fair value of stock options granted during the years ended December 31, 2008, 2007, and 2006 was $5.03, $24.51, and $19.76 per stock option, respectively. The total intrinsic value of stock options exercised during the years ended December 31, 2008, 2007, and 2006 was $47 million, $881 million, and $385 million, respectively. Cash received from stock option exercises for the years ended December 31, 2008, 2007, and 2006 was $16 million, $130 million, and $77 million, respectively.

As of December 31, 2008, there was $58 million of unrecognized compensation cost related to outstanding unvested stock option awards, which is expected to be recognized over a weighted-average period of approximately three years.

Restricted Stock
Restricted stock is granted to employees and non-employee directors. Restricted stock granted to employees vests in accordance with individual written agreements between the participants and us, usually in equal annual installments over a period of five years beginning one year after the date of grant. Restricted stock granted to our non-employee directors vests from one to three years following the date of grant. A summary of the status of our restricted stock awards is presented in the table below.

				Weighted-
				Average
				Grant-Date
	Number of			Fair Value
	Shares			Per Share
Nonvested shares at January 1, 2008		1,394,075		$	49.63
Granted		989,491			18.14
Vested		(522,645	)		39.72
Forfeited		(31,626	)		51.09
Nonvested shares at December 31, 2008		1,829,295			35.41

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

As of December 31, 2008, there was $43 million of unrecognized compensation cost related to outstanding unvested restricted stock awards, which is expected to be recognized over a weighted-average period of approximately three years. The total fair value of restricted stock that vested during the years ended December 31, 2008, 2007, and 2006 was $12 million, $44 million, and $24 million, respectively.

Performance Awards
In 2007 and 2006, we issued to certain key employees performance awards, which represent rights to receive shares of Valero common stock only upon Valero’s achievement of an objective performance measure. Performance awards are subject to vesting in three annual amounts beginning approximately one year after the date of grant. The number of common shares earned each year is based on the vested award adjusted by a factor determined by our total shareholder return over a rolling three-year period compared to the total shareholder return of a defined peer group for the same time period.

During the year ended December 31, 2008, no performance awards were issued or forfeited. The fair value of performance awards subject to vesting for the year ended December 31, 2008 was based on an expected conversion to common shares at a rate of 100% and a weighted-average fair value of $70.97 per share, representing the market price of our common stock on the grant date reduced by expected dividends over the vesting period. The total fair value of performance awards that vested during the years ended December 31, 2008, 2007, and 2006 was $4 million, $11 million, and $263 million, respectively.

Restricted Stock Units
As of December 31, 2008, 98,688 unvested restricted stock units were outstanding. Restricted stock units vest in equal annual amounts over a three-year or five-year period beginning one year after the date of grant. These restricted stock units are payable in cash based on the price of our common stock on the date of vesting, and therefore they are accounted for as liability-based awards. For the years ended December 31, 2008, 2007, and 2006, cash payments of $1 million, $8 million, and $25 million, respectively, were made for vested restricted stock units. During the year ended December 31, 2008, 29,530 restricted stock units were granted, 31,218 units vested, and 436 units were forfeited. Based on the price of our common stock on December 31, 2008, there was $1 million of unrecognized compensation cost related to outstanding unvested restricted stock units, which is expected to be recognized over a weighted-average period of approximately four years.

23. COMMITMENTS AND CONTINGENCIES

Leases
We have long-term operating lease commitments for land, office facilities, retail facilities and related equipment, transportation equipment, time charters for ocean-going tankers and coastal vessels, dock facilities, and various facilities and equipment used in the storage, transportation, production, and sale of refinery feedstocks and refined products.

Certain leases for processing equipment and feedstock and refined product storage facilities provide for various contingent payments based on, among other things, throughput volumes in excess of a base amount. Certain leases for vessels contain renewal options and escalation clauses, which vary by charter, and provisions for the payment of chartering fees, which either vary based on usage or provide for payments, in addition to established minimums, that are contingent on usage. Leases for convenience stores may also include provisions for contingent rental payments based on sales volumes. In most cases, we expect that in the normal course of business, our leases will be renewed or replaced by other leases.

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As of December 31, 2008, our future minimum rentals and minimum rentals to be received under subleases for leases having initial or remaining noncancelable lease terms in excess of one year were as reflected in the following table (in millions).

	Operating			Capital
	Leases			Leases
2009	$	397		$	6
2010		282			6
2011		179			6
2012		90			6
2013		55			6
Remainder		270			22
Total minimum rental payments		1,273			52
Less minimum rentals to be received under subleases		(24	)		–
Net minimum rental payments	$	1,249			52
Less interest expense					(13	)
Capital lease obligations				$	39

Consolidated rental expense for all operating leases was as follows (in millions):

	Year Ended December 31,
	2008			2007			2006
Minimum rental expense	$	554		$	552		$	545
Contingent rental expense		23			24			22
Total rental expense		577			576			567
Less sublease rental income		(4	)		(4	)		(4	)
Net rental expense	$	573		$	572		$	563

Other Commitments
We have various purchase obligations under certain industrial gas and chemical supply arrangements (such as hydrogen supply arrangements), crude oil and other feedstock supply arrangements, and various throughput and terminalling agreements. We enter into these contracts to ensure an adequate supply of utilities and feedstock and adequate storage capacity to operate our refineries. Substantially all of our purchase obligations are based on market prices or adjustments based on market indices. Certain of these purchase obligations include fixed or minimum volume requirements, while others are based on our usage requirements. None of these obligations are associated with suppliers’ financing arrangements. These purchase obligations are not reflected in the consolidated balance sheets.

Contingent Earn-Out Agreements
In connection with our acquisitions of Basis Petroleum, Inc. in 1997 and the St. Charles Refinery in 2003, the sellers were entitled to receive payments in any of the ten and seven years, respectively, following these acquisitions if certain average refining margins during any of those years exceeded 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 (Motiva). Under this agreement, Motiva was entitled to receive two separate annual earn-out payments depending on (a) the amount of crude oil processed at the refinery and the level of

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refining margins through May 2007, and (b) the achievement of certain performance criteria at the gasification facility through May 2006. As described below, final payments under all of these agreements have been made, and, consequently, our obligations have been fulfilled under the agreements.

The following table summarizes the aggregate payments we had made through December 31, 2008 and payment limitations related to the following acquisitions (in millions). The amounts reflected for the Delaware City Refinery represent amounts applicable only to the throughput/margin earn-out contingency because the earn-out contingency related to the refinery’s gasification facility expired during the second quarter of 2006 with no payment required. The amounts reflected represent only amounts for which we were liable subsequent to the Premcor Acquisition.

	Basis				Delaware
	Petroleum,		St. Charles		City
	Inc.		Refinery		Refinery
Payments made during the year ended December 31:
2006	$	26	$	50	$	25
2007		–		50		25
2008		–		25		–
Aggregate payments made through 2008		200		175		50
Annual maximum limit		35		50		25
Aggregate limit		200		175		50

For the acquisition of Basis Petroleum, Inc., we accounted for payments under this arrangement as an additional cost of the acquisition when the payments were made. Of the aggregate payments made related to this acquisition, $47 million was attributed to “property, plant and equipment” and is being depreciated over the remaining lives of the assets to which the additional cost was allocated and $153 million was attributed to “goodwill.” A final payment under this agreement was made in May 2006.

As part of the purchase price allocation related to the acquisition of the St. Charles Refinery, a liability was accrued for the aggregate limit of potential earn-out payments totaling $175 million. The offsetting amount was reflected in “property, plant and equipment” and is being depreciated over the remaining lives of the assets to which the cost was allocated. In January 2008, we made a final earn-out payment of $25 million related to the acquisition of the St. Charles Refinery.

In connection with the Premcor Acquisition, a liability of $50 million was accrued as of September 1, 2005 as we believed it was probable that the maximum payments would be made related to the Delaware City Refinery margin contingency. The offsetting amount was recorded in “goodwill.” A final payment under this agreement was made in June 2007.

In July 2008, we received contingent consideration in the form of a three-year earn-out agreement from Alon related to the sale of our Krotz Springs Refinery (as discussed in Note 2 and Note 17).

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Insurance Recoveries
During the third quarter of 2005, certain of our refineries experienced property damage and business interruption losses associated with Hurricanes Katrina and Rita. As a result of these losses, we submitted claims to our insurance carriers under our insurance policies. During 2006, we reached a final business interruption settlement with our insurance carriers, the proceeds from which were recorded as a reduction to “cost of sales.” The amount received was immaterial to our results of operations and financial position.

During the first quarter of 2007, our McKee Refinery was shut down due to a fire originating in its propane deasphalting unit, resulting in business interruption losses for which we submitted claims to our insurance carriers under our insurance policies. We reached a settlement with the insurance carriers on our claims, resulting in pre-tax income of approximately $100 million in the first quarter of 2008 that was recorded as a reduction to “cost of sales.”

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. Many 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 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 as well as other reasons, we believe that exports by our Aruba Refinery should not be subject to this turnover tax. Accordingly, no expense or liability has been recognized in our consolidated financial statements with respect to this turnover tax on exports. We commenced arbitration proceedings with the Netherlands Arbitration Institute pursuant to which we are seeking to enforce our rights under the tax holiday and other agreements related to the refinery. The arbitration hearing was held on February 3-4, 2009. We anticipate a decision sometime later this year. We have also filed protests of these assessments through proceedings in Aruba. In April 2008, we entered into an escrow agreement with the GOA and Caribbean Mercantile Bank NV (CMB), pursuant to which we agreed to deposit an amount equal to the disputed turnover tax on exports into an escrow account with CMB, pending resolution of the tax protest proceedings in Aruba. Under this escrow agreement, we are required to continue to deposit an amount equal to the disputed tax on a monthly basis until the tax dispute is resolved through the Aruba proceedings. Amounts deposited under this escrow agreement, which totaled $102 million as of December 31, 2008, are reflected as “restricted cash” in our consolidated balance sheet.

In addition to the turnover tax described above, the GOA has also asserted other tax amounts aggregating approximately $25 million related to dividends and other tax items. The GOA, through the arbitration, is also now questioning the validity of the tax holiday generally, although the GOA has never issued any formal assessment for profit tax at any time during the tax holiday period. We believe that the provisions of our tax holiday agreement exempt us from all of these taxes and, accordingly, no expense or liability has been recognized in our consolidated financial statements. We are also challenging approximately $30 million in foreign exchange payments made to the Central Bank of Aruba as payments exempted

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under our tax holiday, as well as other reasons. These taxes and assessments are also being addressed in the arbitration proceedings discussed above.

Keystone Pipeline
In July 2008, we entered into an agreement to participate as a prospective shipper on the 500,000 barrel-per-day expansion of the Keystone crude oil pipeline system, which is expected to be completed by 2012. Once completed, the pipeline will enable crude oil to be transported from Western Canada to the U.S. Gulf Coast at Port Arthur, Texas. In addition to our commitment to ship crude oil through the pipeline, we have an option to acquire an equity interest in the Keystone partnerships. We have also secured commitments from several Canadian oil producers to sell to us heavy sour crude oil for shipment through the pipeline.

24. ENVIRONMENTAL MATTERS

Remediation Liabilities
Liabilities for future remediation costs are recorded when environmental assessments and/or remedial efforts are probable and the costs can be reasonably estimated. Other than for assessments, the timing and magnitude of these accruals generally are based on the completion of investigations or other studies or a commitment to a formal plan of action. Environmental liabilities are based on best estimates of probable undiscounted future costs using currently available technology and applying current regulations, as well as our own internal environmental policies.

The balance of and changes in the accruals for environmental matters, which are principally included in “other long-term liabilities” described in Note 13, were as follows (in millions):

	Year Ended December 31,
	2008			2007			2006
Balance as of beginning of year	$	285		$	298		$	294
Premcor Acquisition		–			–			7
Adjustments to estimates, net		72			36			53
Payments, net of third-party recoveries		(51	)		(55	)		(56	)
Foreign currency translation		(9	)		6			–
Balance as of end of year	$	297		$	285		$	298

The balance of accruals for environmental matters is included in the consolidated balance sheet as follows (in millions):

	December 31,
	2008		2007
Accrued expenses	$	42	$	55
Other long-term liabilities		255		230
Accruals for environmental matters	$	297	$	285

In connection with our various acquisitions, we assumed certain environmental liabilities including, but not limited to, certain remediation obligations, site restoration costs, and certain liabilities relating to soil and groundwater remediation.

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We believe that we have adequately provided for our environmental exposures with the accruals referred to above. These liabilities have not been reduced by potential future recoveries from third parties. Environmental liabilities are difficult to assess and estimate due to unknown factors such as the timing and extent of remediation, the determination of our obligation in proportion to other parties, improvements in remediation technologies, and the extent to which environmental laws and regulations may change in the future.

25. LITIGATION MATTERS

MTBE Litigation
As of February 1, 2009, we were named as a defendant in 29 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. Most of the cases are pending in federal court and are 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). Discovery is open in all cases. Three of the cases (City of New York, Village of Hempstead, and West Hempstead Water District) are set for trial on June 22, 2009. Two other cases, State of New Hampshire and People of the State of California, are pending in state court. We believe that we have strong defenses to all claims and are vigorously defending these cases.

We have recorded a loss contingency liability with respect to our MTBE litigation portfolio in accordance with FASB Statement No. 5, “Accounting for Contingencies.” However, due to the inherent uncertainty of litigation, we believe that it is reasonably possible (as defined in 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
As of February 1, 2009, we were named in 21 consumer class action lawsuits relating to fuel temperature. We have been named in these lawsuits together with several other defendants in the retail petroleum marketing business. 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 monetary relief. The federal lawsuits are consolidated into a multi-district 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). Discovery has commenced. The court is expected to rule on

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certain class certification issues within the first half of 2009. 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 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.

Rosolowski
Rosolowski v. Clark Refining & Marketing, Inc., et al., Judicial Circuit Court, Cook County, Illinois (Case No. 95-L 014703). We assumed this lawsuit in our acquisition of Premcor Inc. The lawsuit relates in part to a 1994 release to the atmosphere of spent catalyst from the now-closed Blue Island, Illinois refinery. The case was certified as a class action in 2000 with three classes, two of which received nominal or no damages, and one of which received a sizeable jury verdict. That class consisted of local residents who claimed property damage or loss of use and enjoyment of their property over a period of several years. In 2005, the jury returned a verdict for the plaintiffs of $80 million in compensatory damages and $40 million in punitive damages. However, following our motions for new trial and judgment notwithstanding the verdict (citing, among other things, misconduct by plaintiffs’ counsel and improper class certification), the trial judge in 2006 vacated the jury’s award and decertified the class. Plaintiffs appealed, and in June 2008 the state appeals court reversed the trial judge’s decision to decertify the class and set aside the judgment. Thereafter, the Illinois Supreme Court refused to hear the case and returned it to the trial court. We have submitted renewed motions for judgment notwithstanding the verdict or, alternatively, a new trial. While we do not believe that the ultimate resolution of this matter will have a material effect on our financial position or results of operations, we have recorded a loss contingency liability with respect to this matter in accordance with Statement No. 5.

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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26. CONDENSED CONSOLIDATING FINANCIAL INFORMATION

In conjunction with the Premcor Acquisition 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 December 31, 2008:

• 6.75% senior notes due February 2011,

• 6.125% senior notes due May 2011,

• 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.

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Condensed Consolidating Balance Sheet as of December 31, 2008
(in millions)

	Valero						Other Non-
	Energy						Guarantor
	Corporation			PRG			Subsidiaries			Eliminations			Consolidated
ASSETS
Current assets:
Cash and temporary cash investments	$	215		$	–		$	725		$	–		$	940
Restricted cash		23			2			106			–			131
Receivables, net		–			36			2,861			–			2,897
Inventories		–			360			4,277			–			4,637
Income taxes receivable		76			–			197			(76	)		197
Deferred income taxes		–			–			98			–			98
Prepaid expenses and other		–			8			542			–			550
Total current assets		314			406			8,806			(76	)		9,450
Property, plant and equipment, at cost		–			6,025			22,078			–			28,103
Accumulated depreciation		–			(483	)		(4,407	)		–			(4,890	)
Property, plant and equipment, net		–			5,542			17,671			–			23,213
Intangible assets, net		–			–			224			–			224
Investment in Valero Energy affiliates		6,300			2,718			65			(9,083	)		–
Long-term notes receivable from affiliates		15,354			–			–			(15,354	)		–
Deferred income tax receivable		883			–			–			(883	)		–
Deferred charges and other assets, net		121			136			1,273			–			1,530
Total assets	$	22,972		$	8,802		$	28,039		$	(25,396	)	$	34,417
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current portion of debt and capital lease obligations	$	209		$	–		$	103		$	–		$	312
Accounts payable		43			414			3,989			–			4,446
Accrued expenses		82			34			258			–			374
Taxes other than income taxes		–			23			569			–			592
Income taxes payable		–			6			70			(76	)		–
Deferred income taxes		485			–			–			–			485
Total current liabilities		819			477			4,989			(76	)		6,209
Debt and capital lease obligations, less current portion		5,329			899			36			–			6,264
Long-term notes payable to affiliates		–			5,966			9,388			(15,354	)		–
Deferred income taxes		–			1,200			3,846			(883	)		4,163
Other long-term liabilities		1,204			195			762			–			2,161
Stockholders’ equity:
Common stock		6			–			1			(1	)		6
Additional paid-in capital		7,190			1,598			4,349			(5,947	)		7,190
Treasury stock		(6,884	)		–			–			–			(6,884	)
Retained earnings		15,484			(1,523	)		4,507			(2,984	)		15,484
Accumulated other comprehensive income (loss)		(176	)		(10	)		161			(151	)		(176	)
Total stockholders’ equity		15,620			65			9,018			(9,083	)		15,620
Total liabilities and stockholders’ equity	$	22,972		$	8,802		$	28,039		$	(25,396	)	$	34,417

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Condensed Consolidating Balance Sheet as of December 31, 2007
(in millions)

	Valero						Other Non-
	Energy						Guarantor
	Corporation			PRG			Subsidiaries			Eliminations			Consolidated
ASSETS
Current assets:
Cash and temporary cash investments	$	1,414		$	–		$	1,050		$	–		$	2,464
Restricted cash		23			2			6			–			31
Receivables, net		1			119			7,571			–			7,691
Inventories		–			569			3,504			–			4,073
Deferred income taxes		–			–			247			–			247
Prepaid expenses and other		–			11			164			–			175
Assets held for sale		–			–			306			–			306
Total current assets		1,438			701			12,848			–			14,987
Property, plant and equipment, at cost		–			6,681			18,918			–			25,599
Accumulated depreciation		–			(420	)		(3,619	)		–			(4,039	)
Property, plant and equipment, net		–			6,261			15,299			–			21,560
Intangible assets, net		–			2			288			–			290
Goodwill		–			1,816			2,203			–			4,019
Investment in Valero Energy affiliates		7,080			1,183			73			(8,336	)		–
Long-term notes receivable from affiliates		17,321			–			–			(17,321	)		–
Deferred charges and other assets, net		386			165			1,315			–			1,866
Total assets	$	26,225		$	10,128		$	32,026		$	(25,657	)	$	42,722
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current portion of debt and capital lease obligations	$	7		$	382		$	3		$	–		$	392
Accounts payable		234			302			9,051			–			9,587
Accrued expenses		79			55			366			–			500
Taxes other than income taxes		–			25			607			–			632
Income taxes payable		227			115			157			–			499
Deferred income taxes		21			272			–			–			293
Liabilities related to assets held for sale		–			–			11			–			11
Total current liabilities		568			1,151			10,195			–			11,914
Debt and capital lease obligations, less current portion		5,527			903			40			–			6,470
Long-term notes payable to affiliates		–			7,763			9,558			(17,321	)		–
Deferred income taxes		852			57			3,112			–			4,021
Other long-term liabilities		771			181			858			–			1,810
Stockholders’ equity:
Common stock		6			–			2			(2	)		6
Additional paid-in capital		7,111			75			2,486			(2,561	)		7,111
Treasury stock		(6,097	)		–			–			–			(6,097	)
Retained earnings		16,914			–			5,764			(5,764	)		16,914
Accumulated other comprehensive income (loss)		573			(2	)		11			(9	)		573
Total stockholders’ equity		18,507			73			8,263			(8,336	)		18,507
Total liabilities and stockholders’ equity	$	26,225		$	10,128		$	32,026		$	(25,657	)	$	42,722

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Condensed Consolidating Statement of Income for the Year Ended December 31, 2008
(in millions)

	Valero						Other Non-
	Energy						Guarantor
	Corporation			PRG			Subsidiaries			Eliminations			Consolidated
Operating revenues	$	–		$	26,083		$	117,582		$	(24,551	)	$	119,114
Costs and expenses:
Cost of sales		–			25,282			106,698			(24,551	)		107,429
Refining operating expenses		–			909			3,646			–			4,555
Retail selling expenses		–			–			768			–			768
General and administrative expenses		(9	)		40			528			–			559
Depreciation and amortization expense		–			253			1,223			–			1,476
Gain on sale of Krotz Springs Refinery		–			–			(305	)		–			(305	)
Goodwill impairment loss		–			1,837			2,232			–			4,069
Total costs and expenses		(9	)		28,321			114,790			(24,551	)		118,551
Operating income (loss)		9			(2,238	)		2,792			–			563
Equity in earnings (losses) of subsidiaries		(1,436	)		882			(1,523	)		2,077			–
Other income (expense), net		1,083			(69	)		868			(1,769	)		113
Interest and debt expense:
Incurred		(577	)		(552	)		(1,091	)		1,769			(451	)
Capitalized		–			24			87			–			111
Income (loss) before income tax expense (benefit)		(921	)		(1,953	)		1,133			2,077			336
Income tax expense (benefit) (1)		210			(430	)		1,687			–			1,467
Net income (loss)	$	(1,131	)	$	(1,523	)	$	(554	)	$	2,077		$	(1,131	)

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

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Condensed Consolidating Statement of Income for the Year Ended December 31, 2007
(in millions)

	Valero						Other Non-
	Energy						Guarantor
	Corporation			PRG			Subsidiaries			Eliminations			Consolidated
Operating revenues	$	–		$	24,650		$	94,058		$	(23,381	)	$	95,327
Costs and expenses:
Cost of sales		–			22,280			82,746			(23,381	)		81,645
Refining operating expenses		–			874			3,142			–			4,016
Retail selling expenses		–			–			750			–			750
General and administrative expenses		(6	)		30			614			–			638
Depreciation and amortization expense		–			305			1,055			–			1,360
Total costs and expenses		(6	)		23,489			88,307			(23,381	)		88,409
Operating income		6			1,161			5,751			–			6,918
Equity in earnings of subsidiaries		4,556			668			1,320			(6,544	)		–
Other income (expense), net		1,446			(245	)		869			(1,903	)		167
Interest and debt expense:
Incurred		(520	)		(574	)		(1,275	)		1,903			(466	)
Capitalized		–			7			100			–			107
Income from continuing operations before income tax expense		5,488			1,017			6,765			(6,544	)		6,726
Income tax expense (1)		254			187			1,720			–			2,161
Income from continuing operations		5,234			830			5,045			(6,544	)		4,565
Income from discontinued operations, net of income tax expense		–			490			179			–			669
Net income	$	5,234		$	1,320		$	5,224		$	(6,544	)	$	5,234

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

125

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

Condensed Consolidating Statement of Income for the Year Ended December 31, 2006
(in millions)

	Valero						Other Non-
	Energy						Guarantor
	Corporation			PRG			Subsidiaries			Eliminations			Consolidated
Operating revenues	$	–		$	22,961		$	86,427		$	(21,748	)	$	87,640
Costs and expenses:
Cost of sales		–			21,233			74,378			(21,748	)		73,863
Refining operating expenses		–			770			2,852			–			3,622
Retail selling expenses		–			–			719			–			719
General and administrative expenses		8			39			551			–			598
Depreciation and amortization expense		–			254			862			–			1,116
Total costs and expenses		8			22,296			79,362			(21,748	)		79,918
Operating income (loss)		(8	)		665			7,065			–			7,722
Equity in earnings of subsidiaries		4,887			777			906			(6,570	)		–
Equity in earnings of NuStar Energy L.P.		–			–			45			–			45
Other income (expense), net		1,342			(136	)		1,357			(2,213	)		350
Interest and debt expense:
Incurred		(489	)		(703	)		(1,398	)		2,213			(377	)
Capitalized		–			57			108			–			165
Minority interest in net income of NuStar GP Holdings, LLC		–			–			(7	)		–			(7	)
Income from continuing operations before income tax expense (benefit)		5,732			660			8,076			(6,570	)		7,898
Income tax expense (benefit) (1)		269			(70	)		2,412			–			2,611
Income from continuing operations		5,463			730			5,664			(6,570	)		5,287
Income from discontinued operations, net of income tax expense		–			176			–			–			176
Net income		5,463			906			5,664			(6,570	)		5,463
Preferred stock dividends		2			–			–			–			2
Net income applicable to common stock	$	5,461		$	906		$	5,664		$	(6,570	)	$	5,461

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

126

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

Condensed Consolidating Statement of Cash Flows for the Year Ended December 31, 2008
(in millions)

	Valero						Other Non-
	Energy						Guarantor
	Corporation			PRG (1)			Subsidiaries (1)			Eliminations			Consolidated
Net cash provided by (used in) operating activities	$	46		$	(46	)	$	2,992		$	–		$	2,992
Cash flows from investing activities:
Capital expenditures		–			(593	)		(2,197	)		–			(2,790	)
Deferred turnaround and catalyst costs		–			(93	)		(315	)		–			(408	)
Proceeds from sale of Krotz Springs Refinery		–			–			463			–			463
Contingent payments in connection with acquisitions		–			–			(25	)		–			(25	)
Return of investment in Cameron Highway Oil Pipeline Company, net		–			–			24			–			24
Investments in subsidiaries		(1,235	)		–			(1,523	)		2,758			–
Return of investment		629			265			–			(894	)		–
Proceeds from minor dispositions of property, plant and equipment		–			–			25			–			25
Net intercompany loan repayments		596			–			–			(596	)		–
Minor acquisitions		–			–			(144	)		–			(144	)
Other investing activities, net		–			–			(7	)		–			(7	)
Net cash used in investing activities		(10	)		(421	)		(3,699	)		1,268			(2,862	)
Cash flows from financing activities:
Non-bank debt repayments		(6	)		(368	)		–			–			(374	)
Bank credit agreements:
Borrowings		296			–			–			–			296
Repayments		(296	)		–			–			–			(296	)
Purchase of common stock for treasury		(955	)		–			–			–			(955	)
Issuance of common stock in connection with employee benefit plans		16			–			–			–			16
Benefit from tax deduction in excess of recognized stock-based compensation cost		9			–			–			–			9
Common stock dividends		(299	)		–			–			–			(299	)
Net intercompany borrowings (repayments)		–			(688	)		92			596			–
Dividends to parent		–			–			(894	)		894			–
Capital contributions from parent		–			1,523			1,235			(2,758	)		–
Other financing activities		–			–			(4	)		–			(4	)
Net cash provided by (used in) financing activities		(1,235	)		467			429			(1,268	)		(1,607	)
Effect of foreign exchange rate changes on cash		–			–			(47	)		–			(47	)
Net decrease in cash and temporary cash investments		(1,199	)		–			(325	)		–			(1,524	)
Cash and temporary cash investments at beginning of year		1,414			–			1,050			–			2,464
Cash and temporary cash investments at end of year	$	215		$	–		$	725		$	–		$	940

(1) The information presented herein excludes a $918 million noncash capital contribution of property and other assets, net of certain liabilities, from PRG to Valero Refining Company-Tennessee, L.L.C. (included in “Other Non-Guarantor Subsidiaries”) on April 1, 2008.

127

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

Condensed Consolidating Statement of Cash Flows for the Year Ended December 31, 2007
(in millions)

	Valero						Other Non-
	Energy						Guarantor
	Corporation			PRG (1)			Subsidiaries (1)			Eliminations			Consolidated
Net cash provided by (used in) operating activities	$	736		$	(51	)	$	4,573		$	–		$	5,258
Cash flows from investing activities:
Capital expenditures		–			(293	)		(1,967	)		–			(2,260	)
Deferred turnaround and catalyst costs		–			(64	)		(454	)		–			(518	)
Proceeds from sale of Lima Refinery		–			1,873			555			–			2,428
Contingent payments in connection with acquisitions		–			(25	)		(50	)		–			(75	)
Investment in Cameron Highway Oil Pipeline Company, net		–			–			(209	)		–			(209	)
Investments in subsidiaries		(2,742	)		(58	)		–			2,800			–
Return of investment		2,383			–			1,346			(3,729	)		–
Proceeds from minor dispositions of property, plant and equipment		–			3			60			–			63
Net intercompany loan repayments		3,969			–			–			(3,969	)		–
Other investing activities, net		–			1			(12	)		–			(11	)
Net cash provided by (used in) investing activities		3,610			1,437			(731	)		(4,898	)		(582	)
Cash flows from financing activities:
Non-bank debt:
Borrowings		2,245			–			–			–			2,245
Repayments		(280	)		(183	)		–			–			(463	)
Bank credit agreements:
Borrowings		3,000			–			–			–			3,000
Repayments		(3,000	)		–			–			–			(3,000	)
Purchase of common stock for treasury		(5,788	)		–			–			–			(5,788	)
Issuance of common stock in connection with employee benefit plans		159			–			–			–			159
Benefit from tax deduction in excess of recognized stock-based compensation cost		311			–			–			–			311
Common stock dividends		(271	)		–			–			–			(271	)
Dividends to parent		–			(1,346	)		(2,383	)		3,729			–
Capital contributions from parent		–			–			2,800			(2,800	)		–
Net intercompany borrowings (loan repayments)		–			143			(4,112	)		3,969			–
Other financing activities		(20	)		–			(4	)		–			(24	)
Net cash used in financing activities		(3,644	)		(1,386	)		(3,699	)		4,898			(3,831	)
Effect of foreign exchange rate changes on cash		–			–			29			–			29
Net increase in cash and temporary cash investments		702			–			172			–			874
Cash and temporary cash investments at beginning of year		712			–			878			–			1,590
Cash and temporary cash investments at end of year	$	1,414		$	–		$	1,050		$	–		$	2,464

(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.

128

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

Condensed Consolidating Statement of Cash Flows for the Year Ended December 31, 2006
(in millions)

	Valero						Other Non-
	Energy						Guarantor
	Corporation			PRG			Subsidiaries			Eliminations			Consolidated
Net cash provided by operating activities	$	496		$	1,097		$	4,719		$	–		$	6,312
Cash flows from investing activities:
Capital expenditures		–			(1,074	)		(2,113	)		–			(3,187	)
Deferred turnaround and catalyst costs		–			(198	)		(371	)		–			(569	)
Proceeds from sale of NuStar GP Holdings, LLC		–			–			880			–			880
Contingent payments in connection with acquisitions		–			(25	)		(76	)		–			(101	)
Investment in Cameron Highway Oil Pipeline Company, net		–			–			(26	)		–			(26	)
Return of investment		4,912			777			906			(6,595	)		–
Proceeds from minor dispositions of property, plant and equipment		–			4			60			–			64
Net intercompany loans		(2,556	)		–			–			2,556			–
Other investing activities, net		–			(4	)		(28	)		–			(32	)
Net cash provided by (used in) investing activities		2,356			(520	)		(768	)		(4,039	)		(2,971	)
Cash flows from financing activities:
Non-bank debt repayments		(220	)		(29	)		–			–			(249	)
Bank credit agreements:
Borrowings		8			–			822			–			830
Repayments		(8	)		–			(822	)		–			(830	)
Termination of interest rate swaps		(54	)		–			–			–			(54	)
Purchase of common stock for treasury		(2,020	)		–			–			–			(2,020	)
Issuance of common stock in connection with employee benefit plans		122			–			–			–			122
Benefit from tax deduction in excess of recognized stock-based compensation cost		206			–			–			–			206
Common and preferred stock dividends		(184	)		–			–			–			(184	)
Dividends to parent		–			(906	)		(5,689	)		6,595			–
Net intercompany borrowings		–			354			2,202			(2,556	)		–
Other financing activities		(1	)		(1	)		(7	)		–			(9	)
Net cash used in financing activities		(2,151	)		(582	)		(3,494	)		4,039			(2,188	)
Effect of foreign exchange rate changes on cash		–			–			1			–			1
Net increase (decrease) in cash and temporary cash investments		701			(5	)		458			–			1,154
Cash and temporary cash investments at beginning of year		11			5			420			–			436
Cash and temporary cash investments at end of year	$	712		$	–		$	878		$	–		$	1,590

129

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

27. QUARTERLY RESULTS OF OPERATIONS (Unaudited)

Our results of operations by quarter for the years ended December 31, 2008 and 2007 were as follows (in millions, except per share amounts):

	2008 Quarter Ended
	March 31		June 30		September 30 (a)		December 31 (b)
Operating revenues	$	27,945	$	36,640	$	35,960	$	18,569
Operating income (loss)		472		1,158		1,840		(2,907	)
Net income (loss)		261		734		1,152		(3,278	)
Earnings (loss) per common share (c)		0.49		1.40		2.21		(6.36	)
Earnings (loss) per common share – assuming dilution (c)		0.48		1.37		2.18		(6.36	)
	2007 Quarter Ended
	March 31		June 30		September 30		December 31
Operating revenues (d)	$	18,755	$	24,202	$	23,699	$	28,671
Operating income (d)		1,673		3,193		1,168		884
Net income		1,144		2,249		1,274		567
Earnings per common share (c)		1.91		3.99		2.31		1.04
Earnings per common share – assuming dilution (c) (e)		1.86		3.89		2.09		1.02

(a)	Operating income and net income for the quarter ended September 30, 2008 include $305 million and $170 million, respectively, related to a gain on the sale of the Krotz Springs Refinery in July 2008, as discussed in Note 2.
(b)	Operating loss and net loss for the quarter ended December 31, 2008 include charges of $4.1 billion and $4.0 billion, respectively, resulting from a goodwill impairment loss, as discussed in Note 8.
(c)	Earnings per common share amounts are computed independently for each of the quarters presented. Therefore, the sum of the quarterly earnings per share may not equal the annual earnings per share.
(d)	Operating revenues and operating income for 2007 exclude the operations related to the Lima Refinery, which are reported as discontinued operations.
(e)	Earnings per common share assuming dilution for the quarter ended September 30, 2007 reflects a reduction resulting from a $94 million cash payment upon the completion of our accelerated share repurchase program, as discussed in Note 14.

28. SUBSEQUENT EVENT

On February 6, 2009, we entered into a binding agreement with VeraSun Energy Corporation (VeraSun) pursuant to which we offered to purchase from VeraSun five existing ethanol plants and a site currently under development for $280 million, plus inventory and certain other working capital. The existing ethanol plants included in the agreement are located in Charles City, Fort Dodge, and Hartley, Iowa;

130

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

Aurora, South Dakota; and Welcome, Minnesota, and the site under development is located in Reynolds, Indiana. VeraSun previously filed for relief under Chapter 11 of the U.S. Bankruptcy Code. Our offer to purchase these ethanol facilities is subject to the completion of an auction process by VeraSun, as well as subsequent bankruptcy court approval of the transaction. If our offer is successful, we expect to consummate the purchase late in the first quarter or early in the second quarter of 2009, subject to regulatory and other customary closing conditions. We would fund the acquisition either through the use of our revolving bank credit facility or with available cash.

131

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A. CONTROLS AND PROCEDURES

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 effective as of December 31, 2008.

Internal Control over Financial Reporting.

     (a) Management’s Report on Internal Control over Financial Reporting.

The management report on Valero’s internal control over financial reporting required by Item 9A appears in Item 8 on page 57 of this report, and is incorporated herein by reference.

     (b) Attestation Report of the Independent Registered Public Accounting Firm.

KPMG LLP’s report on Valero’s internal control over financial reporting appears in Item 8 beginning on page 59 of this report, and is incorporated herein by reference.

     (c) 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.

ITEM 9B. OTHER INFORMATION

None.

132

PART III

ITEMS 10-14.

The information required by Items 10 through 14 of Form 10-K is incorporated herein by reference to the definitive Proxy Statement for our 2009 Annual Meeting of Stockholders that we will file with the SEC before March 31, 2009. Certain information required by Item 401 of Regulation S-K concerning our executive officers appears in Part I of this report.

PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

  (a) 1. Financial Statements. The following consolidated financial statements of Valero Energy Corporation and its subsidiaries are included in Part II, Item 8 of this Form 10-K:

	Page
Management’s report on internal control over financial reporting		57
Reports of independent registered public accounting firm		58
Consolidated balance sheets as of December 31, 2008 and 2007		61
Consolidated statements of income for the years ended December 31, 2008, 2007, and 2006		62
Consolidated statements of stockholders’ equity for the years ended December 31, 2008, 2007, and 2006		63
Consolidated statements of cash flows for the years ended December 31, 2008, 2007, and 2006		64
Consolidated statements of comprehensive income for the years ended December 31, 2008, 2007, and 2006		65
Notes to consolidated financial statements		66

     2. Financial Statement Schedules and Other Financial Information. No financial statement schedules are submitted because either they are inapplicable or because the required information is included in the consolidated financial statements or notes thereto.

     3. Exhibits. Filed as part of this Form 10-K are the following exhibits:

2.01	–	Agreement and Plan of Merger dated as of April 24, 2005 by and among Valero Energy Corporation and Premcor Inc. – incorporated by reference to Exhibit 2.1 to Valero’s Current Report on Form 8-K dated April 24, 2005, and filed April 25, 2005 (SEC File No. 1-13175).
3.01	–	Amended and Restated Certificate of Incorporation of Valero Energy Corporation, formerly known as Valero Refining and Marketing Company – incorporated by reference to Exhibit 3.1 to Valero’s Registration Statement on Form S-1 (SEC File No. 333-27013) filed May 13, 1997.
3.02	–	Certificate of Amendment (effective July 31, 1997) to Restated Certificate of Incorporation of Valero Energy Corporation – incorporated by reference to Exhibit 3.02 to Valero’s Annual Report on Form 10-K for the year ended December 31, 2003 (SEC File No. 1-13175).
3.03	–	Certificate of Merger of Ultramar Diamond Shamrock Corporation with and into Valero Energy Corporation dated December 31, 2001 – incorporated by reference to Exhibit 3.03 to Valero’s Annual Report on Form 10-K for the year ended December 31, 2003 (SEC File No. 1-13175).

133

3.04	–	Amendment (effective December 31, 2001) to Restated Certificate of Incorporation of Valero Energy Corporation - - incorporated by reference to Exhibit 3.1 to Valero’s Current Report on Form 8-K dated December 31, 2001, and filed January 11, 2002 (SEC File No. 1-13175).
3.05	–	Second Certificate of Amendment (effective September 17, 2004) to Restated Certificate of Incorporation of Valero Energy Corporation – incorporated by reference to Exhibit 3.04 to Valero’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2004 (SEC File No. 1-13175).
3.06	–	Certificate of Merger of Premcor Inc. with and into Valero Energy Corporation effective September 1, 2005 - incorporated by reference to Exhibit 2.01 to Valero’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2005 (SEC File No. 1-13175).
3.07	–	Third Certificate of Amendment (effective December 2, 2005) to Restated Certificate of Incorporation of Valero Energy Corporation – incorporated by reference to Exhibit 3.07 to Valero’s Annual Report on Form 10-K for the year ended December 31, 2005 (SEC File No. 1-13175).
3.08	–	Amended and Restated Bylaws of Valero Energy Corporation (as of July 12, 2007) – incorporated by reference to Exhibit 3.01 to Valero’s Current Report on Form 8-K dated July 11, 2007, and filed July 17, 2007 (SEC File No. 1-13175).
4.01	–	Indenture dated as of December 12, 1997 between Valero Energy Corporation and The Bank of New York – incorporated by reference to Exhibit 3.4 to Valero’s Registration Statement on Form S-3 (SEC File No. 333-56599) filed June 11, 1998.
4.02	–	First Supplemental Indenture dated as of June 28, 2000 between Valero Energy Corporation and The Bank of New York (including Form of 7 3/4% Senior Deferrable Note due 2005) – incorporated by reference to Exhibit 4.6 to Valero’s Current Report on Form 8-K dated June 28, 2000, and filed June 30, 2000 (SEC File No. 1-13175).
4.03	–	Indenture (Senior Indenture) dated as of June 18, 2004 between Valero Energy Corporation and Bank of New York – incorporated by reference to Exhibit 4.7 to Valero’s Registration Statement on Form S-3 (SEC File No. 333-116668) filed June 21, 2004.
4.04	–	Form of Indenture related to subordinated debt securities – incorporated by reference to Exhibit 4.8 to Valero’s Registration Statement on Form S-3 (SEC File No. 333-116668) filed June 21, 2004.
4.05	–	Third Supplemental Indenture dated as of August 31, 2005 between The Premcor Refining Group Inc. and Deutsche Bank Trust Company Americas – incorporated by reference to Exhibit 4.09 to Valero’s Annual Report on Form 10-K for the year ended December 31, 2005 (SEC File No. 1-13175).
4.06	–	Fourth Supplemental Indenture dated as of September 1, 2005 among The Premcor Refining Group Inc., Valero Energy Corporation, and Deutsche Bank Trust Company Americas – incorporated by reference to Exhibit 4.10 to Valero’s Annual Report on Form 10-K for the year ended December 31, 2005 (SEC File No. 1-13175).
4.07	–	Guaranty dated September 2, 2005 of The Premcor Refining Group Inc. (guaranteeing certain Valero-heritage debt) – incorporated by reference to Exhibit 4.11 to Valero’s Annual Report on Form 10-K for the year ended December 31, 2005 (SEC File No. 1-13175).
4.08	–	Guaranty dated September 2, 2005 of Valero Energy Corporation (guaranteeing certain Premcor-heritage debt) – incorporated by reference to Exhibit 4.12 to Valero’s Annual Report on Form 10-K for the year ended December 31, 2005 (SEC File No. 1-13175).
4.09	–	Specimen Certificate of Common Stock – incorporated by reference to Exhibit 4.1 to Valero’s Registration Statement on Form S-3 (SEC File No. 333-116668) filed June 21, 2004.
*+10.01	–	Valero Energy Corporation Annual Bonus Plan, amended and restated as of October 15, 2008.

134

+10.02	–	Valero Energy Corporation 2005 Omnibus Stock Incentive Plan, amended and restated as of October 1, 2005 – incorporated by reference to Exhibit 10.01 to Valero’s Current Report on Form 8-K dated October 20, 2005, and filed October 26, 2005 (SEC File No. 1-13175).
+10.03	–	Valero Energy Corporation 2001 Executive Stock Incentive Plan, amended and restated as of October 1, 2005 – incorporated by reference to Exhibit 10.04 to Valero’s Annual Report on Form 10-K for the year ended December 31, 2005 (SEC File No. 1-13175).
*+10.04	–	Valero Energy Corporation Deferred Compensation Plan, amended and restated as of January 1, 2008.
*+10.05	–	Form of 2009 Elective Deferral Agreement pursuant to the Valero Energy Corporation Deferred Compensation Plan.
*+10.06	–	Form of Investment Election Form pursuant to the Valero Energy Corporation Deferred Compensation Plan.
*+10.07	–	Form of 2009 Distribution Election Form pursuant to the Valero Energy Corporation Deferred Compensation Plan.
*+10.08	–	Valero Energy Corporation Amended and Restated Supplemental Executive Retirement Plan, amended and restated as of November 10, 2008.
+10.09	–	Valero Energy Corporation 2003 Employee Stock Incentive Plan, as amended and restated effective October 1, 2005 – incorporated by reference to Exhibit 10.11 to Valero’s Annual Report on Form 10-K for the year ended December 31, 2005 (SEC File No. 1-13175).
*+10.10	–	Valero Energy Corporation Stock Option Plan, as amended and restated effective January 1, 2009.
+10.11	–	Valero Energy Corporation Restricted Stock Plan for Non-Employee Directors, as amended and restated July 11, 2007 – incorporated by reference to Exhibit 10.02 to Valero’s Current Report on Form 8-K/A dated July 11, 2007, and filed September 18, 2007 (SEC File No. 1-13175).
+10.12	–	Valero Energy Corporation Non-Employee Director Stock Option Plan, as amended and restated effective January 1, 2007 – incorporated by reference to Exhibit 10.02 to Valero’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2006 (SEC File No. 1-13175).
+10.13	–	Form of Indemnity Agreement between Valero Energy Corporation (formerly known as Valero Refining and Marketing Company) and certain officers and directors – incorporated by reference to Exhibit 10.8 to Valero’s Registration Statement on Form S-1 (SEC File No. 333-27013) filed May 13, 1997.
+10.14	–	Schedule of Indemnity Agreements – incorporated by reference to Exhibit 10.9 to Valero’s Registration Statement on Form S-1 (SEC File No. 333-27013) filed May 13, 1997.
+10.15	–	Change of Control Agreement (Tier I) dated January 18, 2007 between Valero Energy Corporation and William R. Klesse – incorporated by reference to Exhibit 10.01 to Valero’s Current Report on Form 8-K dated January 17, 2007 and filed January 19, 2007 (SEC File No. 1-13175).
*+10.16	–	Schedule of Change of Control Agreements (Tier I).
*+10.17	–	Change of Control Agreement (Tier II) dated March 15, 2007 between Valero Energy Corporation and Kimberly S. Bowers.
+10.18	–	Form of Performance Award Agreement pursuant to the Valero Energy Corporation 2005 Omnibus Stock Incentive Plan – incorporated by reference to Exhibit 10.02 to Valero’s Current Report on Form 8-K dated January 18, 2006, and filed January 20, 2006 (SEC File No. 1-13175).

135

+10.19	–	Form of Stock Option Agreement pursuant to the Valero Energy Corporation 2005 Omnibus Stock Incentive Plan – incorporated by reference to Exhibit 10.03 to Valero’s Current Report on Form 8-K dated October 20, 2005, and filed October 26, 2005 (SEC File No. 1-13175).
+10.20	–	Form of Stock Option Agreement pursuant to the Valero Energy Corporation Non-Employee Director Stock Option Plan – incorporated by reference to Exhibit 10.04 to Valero’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2006 (SEC File No. 1-13175).
+10.21	–	Form of Restricted Stock Agreement pursuant to the Valero Energy Corporation 2005 Omnibus Stock Incentive Plan – incorporated by reference to Exhibit 10.02 to Valero’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2005 (SEC File No. 1-13175).
+10.22	–	Form of Restricted Stock Agreement pursuant to the Valero Energy Corporation Restricted Stock Plan for Non-Employee Directors – incorporated by reference to Exhibit 10.03 to Valero’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2006 (SEC File No. 1-13175).
*10.23	–	$2,500,000,000 5-Year Revolving Credit Agreement, dated as of August 17, 2005, among Valero Energy Corporation, as Borrower; JPMorgan Chase Bank, N.A., as Administrative Agent and Global Administrative Agent; and the lenders named therein.
*10.24	–	First Amendment to $2,500,000,000 5-Year Revolving Credit Agreement, dated as of July 24, 2006.
*10.25	–	Second Amendment to $2,500,000,000 5-Year Revolving Credit Agreement, dated as of November 9, 2007.
*12.01	–	Statements of Computations of Ratios of Earnings to Fixed Charges and Ratios of Earnings to Fixed Charges and Preferred Stock Dividends.
14.01	–	Code of Ethics for Senior Financial Officers – incorporated by reference to Exhibit 14.01 to Valero’s Annual Report on Form 10-K for the year ended December 31, 2003 (SEC File No. 1-13175).
*21.01	–	Valero Energy Corporation subsidiaries.
*23.01	–	Consent of KPMG LLP dated February 26, 2009.
*24.01	–	Power of Attorney dated February 26, 2009 (on the signature page of this Form 10-K).
*31.01	–	Rule 13a-14(a) Certification (under Section 302 of the Sarbanes-Oxley Act of 2002) of principal executive officer.
*31.02	–	Rule 13a-14(a) Certification (under Section 302 of the Sarbanes-Oxley Act of 2002) of principal financial officer.
*32.01	–	Section 1350 Certifications (under Section 906 of the Sarbanes-Oxley Act of 2002).
*99.01	–	Audit Committee Pre-Approval Policy.

*	Filed herewith.
+	Identifies management contracts or compensatory plans or arrangements required to be filed as an exhibit hereto.

Copies of exhibits filed as a part of this Form 10-K may be obtained by stockholders of record at a charge of $0.15 per page, minimum $5.00 each request. Direct inquiries to Jay D. Browning, Senior Vice President-Corporate Law and Secretary, Valero Energy Corporation, P.O. Box 696000, San Antonio, Texas 78269-6000.

Pursuant to paragraph 601(b)(4)(iii)(A) of Regulation S-K, the registrant has omitted from the foregoing listing of exhibits, and hereby agrees to furnish to the SEC upon its request, copies of certain instruments, each relating to debt not exceeding 10% of the total assets of the registrant and its subsidiaries on a consolidated basis.

136

Disclosures Required by Section 303A.12 of the NYSE Listed Company Manual. Section 303A.12 of the NYSE Listed Company Manual requires the chief executive officer (“CEO”) of each listed company to certify to the NYSE each year that he or she is not aware of any violation by the listed company of any of the NYSE corporate governance listing standards. The CEO of Valero submitted the required certification without qualification to the NYSE on May 15, 2008. In addition, the CEO certification and the chief financial officer’s certification required by Section 302 of the Sarbanes-Oxley Act of 2002 (the “SOX 302 Certifications”) with respect to our disclosures in our Form 10-K for the year ended December 31, 2007 were filed as Exhibit 31.01 to our Form 10-K for the year ended December 31, 2007. The SOX 302 Certifications with respect to our disclosures in our Form 10-K for the year ended December 31, 2008 are being filed as Exhibits 31.01 and 31.02 to this Form 10-K.

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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/ William R. Klesse
	(William R. Klesse)
	Chief Executive Officer, President, and      Chairman of the Board

Date: February 27, 2009

138

POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below hereby constitutes and appoints William R. Klesse, Michael S. Ciskowski, and Jay D. Browning, or any of them, each with power to act without the other, his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any or all subsequent amendments and supplements to this Annual Report on Form 10-K, and to file the same, or cause to be filed the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto each said attorney-in-fact and agent full power to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby qualifying and confirming all that said attorney-in-fact and agent or his substitute or substitutes may lawfully do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Signature	Title	Date
/s/ William R. Klesse (William R. Klesse)	Chief Executive Officer, President, and Chairman of the Board (Principal Executive Officer)	February 26, 2009
/s/ Michael S. Ciskowski (Michael S. Ciskowski)	Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)	February 26, 2009
/s/ W.E. Bradford (W.E. Bradford)	Director	February 26, 2009
/s/ Ronald K. Calgaard (Ronald K. Calgaard)	Director	February 26, 2009
/s/ Jerry D. Choate (Jerry D. Choate)	Director	February 26, 2009
/s/ Irl F. Engelhardt (Irl F. Engelhardt)	Director	February 26, 2009
/s/ Ruben M. Escobedo (Ruben M. Escobedo)	Director	February 26, 2009
/s/ Bob Marbut (Bob Marbut)	Director	February 26, 2009
/s/ Donald L. Nickles (Donald L. Nickles)	Director	February 26, 2009
/s/ Robert A. Profusek (Robert A. Profusek)	Director	February 26, 2009
/s/ Susan Kaufman Purcell (Susan Kaufman Purcell)	Director	February 26, 2009
/s/ Stephen M. Waters (Stephen M. Waters)	Director	February 26, 2009

139

EX-10.01

Exhibit 10.01

Annual Bonus Plan

(as amended and restated through
October 15, 2008)

Valero Energy Corporation
Annual Bonus Plan

Table of Contents

Article		Topic	Page
	1	Definitions		2
	2	Administration		3
	3	Participation		4
	4	Determination of Bonus Awards		4
	5	Bonus Targets		5
	6	Form of Payment		5
	7	Miscellaneous Terms and Provisions	6

1

INTRODUCTION

The Valero Energy Corporation Annual Bonus Plan (hereinafter referred to as the “Plan”) has been established for the purpose of providing bonus compensation to eligible employees of Valero Energy Corporation and its Affiliates (hereinafter collectively referred to as the “Company”). The Company intends and desires to create individual performance incentive by providing bonus compensation awards based upon individual contributions to Company profitability. Such bonus compensation is intended to encourage levels of individual performance that will assure focus by employees on continued Company profitability. It is further intended that when added to other forms of compensation the bonus compensation awards will result in total compensation to employees in amounts that are competitive when Company performance is compared to peer organizations.

Article 1 — Definitions

For purposes of the Plan, unless the context requires otherwise, the following terms should have the meanings set forth below.

1.1	“Affiliate” means (a) any entity that, directly or indirectly through one or more intermediaries, is controlled by the Company and (b) any entity in which the Company has a significant equity interest, in each case determined by the Committee.
1.2	“Board” means the Board of Directors of the Company.
1.3	“Bonus Target” means a percentage established to represent a normal or average bonus percentage determined through competitive survey analysis and based on each position’s relative importance to the overall financial success of the Company.
1.4	“Committee” means the Compensation Committee of the Board.
1.5	“Company” means Valero Energy Corporation and its Affiliates.
1.6	“Discretionary Adjustment Factor” means the authority of the Committee:

(i) to determine whether to award a bonus to an individual;

(ii) to adjust the Company’s total calculated bonus awards upward or downward by up to a maximum 25 percentage points or 25 percent of the amount of the Bonus Target earned, whichever is higher.

(iii) to adjust or award the bonus amounts payable to subgroups of Participants (e.g., retail Participants, refining Participants) in greater or lesser percentages than amounts to be paid to other Participants;

all such discretion to be based upon such factors as the Committee deems appropriate.

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1.7	“Employee” means an employee of the Company.
1.8	“Fair Market Value” means, with respect to any property (including, without limitation, any shares, units or other securities), the fair market value of such property determined by such methods or procedures as shall be established from time to time by the Committee. Notwithstanding the foregoing, unless otherwise determined by the Committee, the Fair Market Value of Company shares on a given date for purposes of the Plan shall be the mean of the high and low sales prices of the shares on the New York Stock Exchange Consolidated Exchange as reported in the consolidation transaction reporting system on such date or, if such Exchange is not open for trading on such date, on the next following date when such Exchange is open for trading.
1.9	“Participant” means an Employee who is selected by the Committee to participate in the Plan.
1.10	“Peer Group” means those companies in the petroleum and energy services industry sector designated by the Committee as comparator companies which will be benchmarked for determining the Company’s performance as measured by selected Performance Criteria.
1.11	“Performance Criteria” means those performance measures approved by the Compensation Committee that determine the level of Bonus Target to be earned, subject to the Discretionary Adjustment Factor.
1.12	“Plan Year” means the Company’s fiscal year.
1.13	“Plan” means the Valero Energy Corporation Annual Bonus Plan.

Article 2 — Administration

2.1

The Plan shall be administered by the Committee. The Committee shall consist of no less than three “Non-Employee Directors” (as defined in Rule 16b-3 under the Securities Exchange Act of 1934, as amended from time to time). In the event the Committee fails to meet the foregoing criteria, then additional non-employee 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 three or more Non-Employee Directors.

2.2

The Committee is empowered to:

2.21	Review and approve all determinations relating to the eligibility of Participants;
2.22	Make rules and regulations for the administration of the Plan which are not inconsistent with the terms and provisions hereof;
2.23	Construe all terms, provisions, conditions, and limitations of the Plan in good faith. All such determinations shall be final and conclusive on all parties of interest;

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2.24	Review and approve determinations and computations concerning the amounts to which any Participant or his beneficiary is entitled under the Plan;
2.25	Select, employ, and compensate from time to time consultants, accountants, attorneys and other agents as the Committee may deem necessary or advisable for the proper and efficient administration of the Plan.

2.3	The foregoing list of express powers is not intended to be either complete or exclusive, but the Committee shall, in addition, have such powers, whether or not expressly authorized, that it may deem necessary, desirable, advisable, or proper for the supervision and administration of the Plan. Except as otherwise specifically provided herein, the decision or judgment of the Committee on any question arising hereunder in connection with the exercise of any of its powers shall be final, binding, and conclusive upon all parties concerned.
2.4	The Committee shall have the responsibility of authorizing payment to each eligible Participant and directing that such payment be disbursed by the Company.
2.5	The Board or the Committee may, at any time, amend or terminate the Plan. Such amendments or terminations may be made without the consent of the Participants.

Article 3 — Participation

3.1 The designation of Employees of the Company as Participants under the Plan shall be approved by the Committee, and no Employee of the Company will have the right to require the Committee to make him or her a Participant or to allow him or her to remain a Participant under the Plan.

Article 4 — Determination of Bonus Awards

4.1

During the course of the Plan Year, the Committee shall review and approve those Performance Criteria which the Committee believes will measure the Company’s financial, shareholder, and/or operational performance for the applicable Plan Year. The Performance Criteria will be developed by Company management and submitted to the Committee for review and discussion. The Committee may request Company management to provide threshold, target, and maximum levels of performance for each Performance Criteria considered.

4.2

The Company’s performance may be evaluated on an absolute basis by determining the Company’s achievement versus a budgeted or pre-established level of performance approved by the Committee. Likewise, the Company’s performance may be evaluated by comparing the Company’s performance against a Peer Group’s performance achievement for the same Performance Criteria.

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4.3	When the Performance Criteria are established and approved during the course of the Plan Year, the Committee may elect to weight each of the Performance Criteria based upon the strategic importance of the respective Performance Criteria in consideration of the Company’s annual business plan. The weightings of the Performance Criteria may change from one Plan Year to the next.
4.4	In determining the Company’s performance during a measurement period, Performance Criteria will be utilized. These Performance Criteria may be modified, deleted, or added to from one Plan Year to the next as determined by the Committee in its judgment and discretion.
4.5	Following the close of the Plan Year, the Committee will evaluate the Company’s performance compared to the Performance Criteria. The results of this evaluation will serve as the basis for the determination of the amount of Bonus Target earned, which may range from 0 percent to as much as 200 percent of Participants’ Bonus Targets. At this time, the Committee has the authority to consider an addition to or subtraction from the bonus by applying a Discretionary Adjustment Factor (as defined in Article 1.6) as the Committee may determine.
4.6	The Committee will normally authorize the payment of bonus awards within two and one-half months (75 days) after the close of the Plan Year. However, the Committee reserves the right to accelerate the determination and payment of bonus awards prior to the completion of the Plan Year based on the estimated or expected performance of the Company for such Plan Year.

Article 5 — Bonus Targets

5.1	Bonus Targets for each position are established based upon competitive survey data and the position’s relative importance to the overall financial success of the Company. The Committee shall review and approve a Bonus Target for each officer.
5.2	Each bonus award shall be calculated by using the established Bonus Target for Participants in the Plan, adjusted by the results of the Performance Criteria and the Discretionary Adjustment Factor. A qualitative evaluation of a Participant’s performance may also be used to adjust a Participant’s bonus award.

Article 6 — Form of Payment

6.1 Bonuses payable under the Plan shall be paid in the form of cash in whole or in part or, if permitted under applicable NYSE and SEC rules and regulations, in the form of common stock of the Company in whole or in part. Under the Plan, if permitted under applicable NYSE and SEC rules and regulations, certain Participants may also be provided with an election to purchase, at Fair Market Value, common stock of the Company utilizing a pre-determined portion of their bonus.

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6.2

With respect to Plan bonuses payable in part or in whole in shares of common stock of the Company, a Participant may pay all or part of the amount of any taxes required to be collected or withheld by the Company upon payment of the Participant’s bonus by electing, before an established date prior to the time of payment of the bonus, to have the Company withhold from the number of common shares otherwise deliverable under the bonus a number of common shares having a Fair Market Value on the established date not exceeding the amount of the tax payment. However, for this purpose, federal income tax may be withheld at the highest personal tax rate then in effect.

6.3

The Committee may approve a deferral of the payment of bonuses with payment in whole at a later date or in installments over a period of time. The length of time of deferral or installment period will be determined at the discretion of the Committee in accordance with applicable laws and regulations.

Article 7 — Miscellaneous Terms and Provisions

7.1	No Employee shall have any claim or right to be paid a bonus or any form of award, and the award of a bonus will not be construed as giving a Participant the right to be retained in the employ of the Company. Further, the Company expressly reserves the right at any time to terminate the employment of any Participant free from any liability under the Plan.
7.2	The validity, construction, and effect of the Plan and any actions taken or relating to the Plan shall be determined in accordance with the laws of the State of Texas and applicable Federal law.
7.3	The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation, or otherwise) to all or substantially all of the business and/or assets of the Company, expressly to assume and agree to perform the Company’s obligations under this Plan in the same manner and to the same extent that the Company would be required to perform them if no such succession had taken place. As used herein, the “Company” shall mean the Company as hereinbefore defined and any aforesaid successor to its business and/or assets.
7.4	No member of the Board or the Committee, nor any officer or Employee of the Company acting on behalf of the Board or the Committee, shall be personally liable for any action, determination, or interpretation taken or made in good faith with respect to the Plan, and all members of the Board or the Committee and each and any officer or Employee of the Company acting on their behalf shall, to the extent permitted by law, be fully indemnified and protected by the Company in respect of any such action, determination, or interpretation.
7.5	Notwithstanding anything in this Plan to the contrary, if any Plan provision or bonus award under the Plan would result in the imposition of an applicable tax under Section 409A of the Internal Revenue Code of 1986, as amended, and related regulations and Treasury pronouncements (“Section 409A”), that Plan provision or bonus award may be reformed to avoid imposition of the applicable tax and no action taken to comply with Section 409A shall be deemed to adversely affect the Participant’s rights to an award.

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EX-10.04

EXHIBIT 10.04

VALERO ENERGY CORPORATION

DEFERRED COMPENSATION PLAN

     WHEREAS, Valero Energy Corporation (the “Company” or “Valero”) established the Valero Energy Corporation Deferred Compensation Plan effective as of March 1, 1998, and as thereafter amended (“Plan”); and

     WHEREAS, the Company now desires to further amend and to restate the Plan, effective as of January 1, 2008, in order to effect and evidence certain changes to comply with the requirements of Code § 409A, and the regulations and other guidance promulgated thereunder; and

     WHEREAS, the portion of Participants’ Accounts which had been deferred hereunder and had vested prior to December 31, 2004 (together with earnings on such deferred and vested amounts), shall be considered “grandfathered” and shall be governed by the terms of the Plan in effect on October 3, 2004 (the provisions of which continue in effect for purposes of such “grandfathered” benefits, and are incorporated herein by reference), and for the convenience of the Plan Administrator, certain of such “grandfathered” provisions are set forth on Exhibit “A” attached hereto; and

     NOW, THEREFORE, the Company hereby amends and restates the Plan effective as of January 1, 2008 as follows:

ARTICLE I

DEFINITIONS

     1.1 Account. “Account” means a Participant’s Account maintained under this Plan which reflects the benefits a Participant is entitled to under this Plan as a result of his/her deferral of Salary and/or Bonuses under the Plan, as well as any Discretionary Awards and all earnings on all deferrals hereunder.

     1.2 Affiliate. “Affiliate” means any subsidiary business entity of the Company. The term “subsidiary business entity” means any entity in an unbroken chain of entities beginning with the Company if, at the time of the action or transaction, each of the entities other than the last entity in the unbroken chain owns equity securities possessing 50 percent or more of the total combined voting power of all classes of equity securities in one of the other entities in such chain.

     1.3 Beneficiary. “Beneficiary” means a person or entity designated by the Participant under the terms of this Plan to receive any amounts distributed under the Plan upon the death of the Participant.

     1.4 Board of Directors. “Board of Directors” means the Board of Directors of the Company.

     1.5 Bonus. “Bonus” or “Bonuses” shall include all bonuses paid to a Participant, regardless of whether or not said bonuses are discretionary, mandatory or determined by formula or specified performance criteria.

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

     (a) Change in Ownership of the Company. 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 the Company 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 the Company.

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

     (1) 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 the Company comprising thirty percent (30%) or more of the total voting power of the stock of the Company; or

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     (2) 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 the Company’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 the Company 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 the Company immediately before such acquisition or acquisitions. For purposes of this provision, “gross fair market value” means the value of the assets of the Company, or the value of the assets being disposed of, determined without regard to any liabilities associated with such assets.

     The provisions of this Plan relating to a Change in Control shall be interpreted and administered in a manner consistent with Code § 409A and the regulations and additional guidance thereunder.

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

     1.8 Committee. “Committee” means the committee administering this Plan, comprised of those directors of the Company serving as the Company’s Compensation Committee.

     1.9 Company. “Company” means Valero Energy Corporation, sponsor of the Plan, and any successor thereof.

     1.10 Discretionary Credit. “Discretionary Credit” means a discretionary credit to a Participant’s Account under the Plan granted by the Company pursuant to Section 4.3.

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     1.11 Elective Deferral. “Elective Deferral” means the amount of Salary and/or Bonuses the Participant elects to defer under the terms of this Plan.

     1.12 Elective Deferral Agreement. “Elective Deferral Agreement” means the agreement entered into by the Participant from time to time setting forth his/her Elective Deferrals under this Plan. Elective Deferral Agreements shall be in a form prescribed by the Committee from time to time.

     1.13 Employee. “Employee” means an individual who is employed by the Employer.

     1.14 Employer. “Employer” means the Company or any Affiliate which adopts this Plan.

     1.15 Fund. “Fund” means the investment fund or funds, or portfolio or portfolios selected by the Committee, which shall be used to measure the earnings (losses) on deferrals under this Plan.

     1.16 Grandfathered Amounts. “Grandfathered Amounts” means all amounts which had been deferred under this Plan and were vested as of December 31, 2004, together with all earnings on such deferred and vested amounts.

     1.17 Insider. “Insider” means an officer or director of the Company subject to Section 16(b) of the Securities Exchange Act of 1934.

     1.18 Other Termination. “Other Termination” means a “separation from service” (within the meaning of Code § 409A) of a Participant from the Employer, other than a separation from service upon death or Retirement.

     1.19 Participant. “Participant” means a member of a select group of management or highly compensated Employees, determined by the Committee to be eligible to participant in this Plan in accordance with Article II.

     1.20 Plan. “Plan” means the Valero Energy Corporation Deferred Compensation Plan set forth in this document, as amended from time to time.

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     1.21 Plan Administrator. “Plan Administrator” means, as appropriate for the particular context, the Committee, its designees and/or the individuals responsible for the day-to-day administration of the Plan.

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

     1.23 Prior Plan. “Prior Plan” means the Plan as in effect on October 3, 2004. The Prior Plan shall remain in effect only with respect to, and shall govern, the Grandfathered Amounts.

     1.24 Retirement. “Retirement” means the separation from service (within the meaning of Code § 409A) of a Participant from the Employer after attaining age 55 and at least 5 years of service with the Company and its Affiliates.

     1.25 Salary. “Salary” means the regular rate of pay of a Participant during a Plan Year; provided, however, in the event a Participant has Elective Deferrals under Article III, or elective deferrals under a plan maintained by the Employer pursuant to Code § 401(k), or salary reductions under Code § 125, then the Participant’s Salary shall be deemed to include the amounts so deferred by the Participant.

     1.26 Stock Fund. “Stock Fund” means a Fund deemed to be invested in the common stock of the Company.

     1.27 Trust. “Trust” means the Valero Energy Corporation Deferred Compensation Trust, a grantor trust established by the Company and the Trustee, pursuant to Revenue Procedure 92-64, which is intended to constitute a model “rabbi trust” for the purpose of establishing a funding vehicle for the payment of benefits under this Plan.

     1.28 Trustee. “Trustee” means Frost National Bank, or any successor Trustee that may be appointed by the Company from time to time.

     1.29 Unforeseeable Emergency. “Unforeseeable Emergency” means: (a) a severe financial hardship to the Participant resulting from an illness or accident of the Participant, the Participant’s spouse, the Participant’s beneficiary, or the Participant’s dependent (as defined in

5

Code § 152, without regard to Code §§ 152(b)(1), (b)(2) and (d)(1)(B)); (b) a loss of the Participant’s property due to casualty (including the need to rebuild a home following damage to a home not otherwise covered by insurance); or (c) another similar extraordinary and unforeseeable circumstances arising as a result of events beyond the control of the Participant, as contemplated in Code § 409A and the regulations and other guidance promulgated thereunder.

ARTICLE II

ELIGIBILITY

     2.1 Initial Eligibility. The individuals who shall be eligible to participate in the Plan shall be such Employees as the Committee shall determine from time to time. Such Employees shall in all events constitute a select group of management or highly compensated individuals within the meaning of Sections 201(2), 301(a)(3) and 401(a)(1) or ERISA.

ARTICLE III

DEFERRAL

     3.1 Deferral Election. A Participant may elect, within 30 days after first becoming eligible to participate in this Plan, and not later than the 30-day period preceding the beginning of any future Plan Year (or such other election period ending prior to the beginning of a Plan Year as may be prescribed by the Committee), by properly and timely completing an Elective Deferral Agreement, as to what, if any, percentage of his/her Salary and/or Bonuses to be earned during the ensuing Plan Year (or for the remainder of the Plan Year in the case of a Participant’s initial eligibility deferral election) are to be deferred under this Plan during such ensuing Plan Year (or remainder of the Plan Year in the case of a Participant’s initial eligibility deferral election). Once an election has been made under an Elective Deferral Agreement, it shall be irrevocable. The election to participate in the Plan for a given Plan Year will be

6

effective only upon timely receipt by the Plan Administrator of the Participant’s Elective Deferral Agreement. Notwithstanding any other provision of this Plan, if the Plan Administrator fails to receive a Participant’s Elective Deferral Agreement prior to the beginning of a Plan Year, that Participant will be deemed to have elected not to defer any part of his/her Salary and/or Bonuses for that Plan Year.

     3.2 Deferral Amount. A Participant who makes an election to defer a percentage of his/her Salary and/or Bonuses may defer a maximum of 30% of his/her Salary and/or 50% of the cash portion of any Bonuses, or any lesser percentage (in minimum 1% increments) as he/she may elect on the Elective Deferral Agreement.

ARTICLE IV

ACCOUNTS

     4.1 Establishing a Participant’s Account. The Committee will establish an Account for each Participant in a special deferred compensation ledger which will be maintained by the Company. The Account will reflect the amount of the Company’s obligation to pay benefits to the Participant hereunder at any given time.

     4.2 Credit of the Participant’s Deferral. The Committee will credit the amount of a Participant’s deferral to the Participant’s Account in the deferred compensation ledger as it would have been paid during the Plan Year but for the deferral which was elected.

     4.3 Discretionary Credits. The Company may, from time to time, credit to a Participant’s Account a Discretionary Credit on behalf of such Participant in such amount, if any, as shall be determined, or determinable under a formula, and announced to such Participant. Subject to the terms of this Plan, the Bylaws of the Company and applicable law, the making of Discretionary Credits, or the cancellation, modification or waiver of rights with respect to, or the amendment, suspension or termination of, Discretionary Credits, to:

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     (a) the Chief Executive Officer or President of the Company, shall be upon recommendation by the Committee and approval of the Board of Directors.

     (b) any “executive officer” of the Company (i.e., one designated by the Company’s Board of Directors as an “officer” for purposes of Section 16 of the Securities Exchange Act of 1934, as amended (“Exchange Act”), and as an “executive officer” for purposes of Regulation 14A under the Exchange Act), other than the Chief Executive Officer or the President, shall be upon recommendation of the Chief Executive Officer and approval of the Committee; and

     (c) any other Employee, shall be upon approval of the Chief Executive Officer.

     4.4 Gauge for Determining Benefits. The Salary and/or Bonuses deferred pursuant to the Elective Deferral Agreement, and any Discretionary Credits, when allocated to the Account of the Participant, shall be treated as if they were invested in the Fund as of the date of allocation. The amounts entered in the Account shall then begin accruing gains and losses at the rate set forth under the Fund as if those amounts were actually invested in the Fund and shall be entered as of the last day of each calendar month of each Plan Year, and shall continue to accrue such gains and losses at the rate set forth under the Fund until distributed as provided for herein. If permitted by the Committee, each Participant shall have the right to select the particular Fund or Funds for the deemed investment of his/her Account in accordance with the procedures established by the Committee, which may include the Stock Fund; provided that any such selection shall be solely for the purpose of determining gains and losses on the Participant’s Account, and under no circumstances will any Participant have any ownership interest in any Fund. No election of a conversion designation by an Insider which has the effect of increasing the total amount allocated to the Stock Fund may be made on a date which is less than six months following (i) the date of any prior election of a conversion designation by such Insider which had the effect of decreasing the total amount allocated to the

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Stock Fund or (ii) the date of any election by such Insider with respect to any other plan of the Company or any subsidiary thereof which had the effect (directly or indirectly) of making a disposition on behalf of such Insider of the same class of equity security as that which is the subject of the Stock Fund. No election of a conversion designation by an Insider which has the effect of decreasing the total amount allocated to the Stock Fund may be made on a date which is less than six months following (i) the date of any prior election of a conversion designation by such Insider which had the effect of increasing the total amount allocated to the Stock Fund or (ii) the date of any election by such Insider with respect to any other plan of the Company or any Affiliate which had the effect (directly or indirectly) of making an acquisition on behalf of the Insider of the same class of equity security as that which is the subject of the Stock Fund. The restrictions contained herein regarding investment conversions by Insiders respecting the Stock Fund are intended to comply with, and enable Insiders to rely upon, the exemption provided by Rule 16b-3 under the Securities Exchange Act of 1934. Any future amendment to Rule 16b-3 or any successor rule promulgated by the Securities and Exchange Commission affecting the investment by Insiders in the Stock Fund shall be incorporated by reference herein and be deemed to be an amendment to the Plan in order that Insiders shall continue to be entitled to rely upon the exemption provided by such rule without any interruption. Notwithstanding the foregoing, the Committee may alter the conversion restrictions applicable to an Insider, as set forth herein, as a result of changes in Rule 16b-3 under the Securities Exchange Act of 1934.

ARTICLE V

VESTING

     5.1 Vesting of Elective Deferrals. All amounts deferred under this Plan (including earnings on such deferrals), other than any Discretionary Credits and earnings on such Discretionary Credits, shall be deemed to be 100% vested at all times.

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     5.2 Vesting of Discretionary Credits. Any Discretionary Credits made pursuant to Section 4.3 shall be subject to such vesting schedule as determined by the Committee and announced to Participants prior to, or contemporaneously with, the granting of said Discretionary Credits.

ARTICLE VI

DISTRIBUTIONS

     6.1 Distribution Events and Elections Relating to Elective Deferrals. Distribution of a Participant’s Elective Deferrals (including earnings thereon) shall occur upon the earlier of:

     (a) A specified date, as provided for in Section 6.4, if and to the extent elected by the Participant on the Elective Deferral Agreement relating to such Elective Deferrals pursuant to the distribution election procedures hereunder; or

     (b) An Unforeseeable Emergency, as provided for, and subject to the provisions of, Section 6.5; or

     (c) The first to occur of the Participant’s death, Retirement or Other Termination, as provided for, and subject to the provisions of Section 6.2 or 6.3, as the case may be.

Each Participant, at the time of entering into an Elective Deferral Agreement, shall elect:

     (a) Whether all or any portion of the applicable Elective Deferrals shall be distributed in a lump sum cash payment on a specified date under Section 6.4; and

     (b) The manner of payment of such Elective Deferrals in the event of a distribution upon Retirement or an Other Termination among the distribution options provided for in Section 6.3. In the event that a Participant fails to make a timely distribution election with respect to such Elective Deferrals, and the deferrals become distributable upon Retirement or Other Termination, such deferrals and all earnings thereon shall be distributed pursuant to the default distribution provisions of Section 6.3.

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Distribution of a Participant’s Discretionary Credits, if any, shall be made in accordance with the provisions of Section 6.6 hereof.

     6.2 Death; Beneficiary Designation. Upon the death of a Participant, the Participant’s Beneficiary or Beneficiaries will receive the vested balance then credited to the Participant’s Account in one lump sum cash payment. The payment will be made as soon as reasonably practical following the Participant’s death and, in any event, within 90 days thereafter.

     Each Participant, at the time of entering into his/her initial Elective Deferral Agreement, must file with the Committee a designation of one or more Beneficiaries to whom distributions otherwise due the Participant will be made in the event of his/her death prior to the complete distribution of the amount credited to his/her Account. The designation will be effective upon receipt by the Committee of a properly executed form which the Committee has approved for that purpose. The Participant may from time to time revoke or change any Beneficiary designation by filing another approved Beneficiary designation form with the Committee. If there is no valid designation of Beneficiary on file with the Committee at the time of the Participant’s death, or if all of the Beneficiaries designated in the last Beneficiary designation have predeceased the Participant or otherwise ceased to exist at the time of the Participant’s death, the Beneficiary will be the Participant’s spouse, if the spouse survives the Participant, or otherwise the Participant’s estate. If any Beneficiary survives the Participant but dies or otherwise ceases to exist before receiving all amounts due the Beneficiary from the Participant’s Account, the balance of the amount which would have been paid to that Beneficiary will, unless the Participant’s designation provides otherwise, be distributed to the individual deceased Beneficiary’s estate or to the Participant’s estate in the case of a Beneficiary which is not an individual.

     6.3 Retirement or Other Termination.

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     (a) Upon a Participant’s Retirement or Other Termination, the Participant shall receive the value of the Elective Deferrals credited to his/her Account as of the date of his/her Retirement or Other Termination (including earnings on such deferrals and earnings on Elective Deferrals previously distributed on a specified date pursuant to Section 6.4 at the time and in the manner elected by the Participant in his/her Deferral Election Agreement, or as otherwise described in paragraph (b) below.

     (b) A Participant may elect, at the time of executing his/her Elective Deferral Agreement for a particular Plan Year, to receive a distribution of his/her Account applicable to Elective Deferrals for such Plan Year: (a) in the case of a distribution upon Retirement, in a single lump sum cash payment, or in five (5), ten (10) or fifteen (15) annual installments (recalculated annually for each installment); and (b) in the case of a distribution upon an Other Termination, in a single lump sum cash payment, or in five (5) annual installments (recalculated annually for each installment). Additionally, in connection with, and at the time of, such election, the Participant may elect to have such distribution commence (or be made) upon his/her Retirement or Other Termination, or on the January 1 following his/her Retirement or Other Termination. In the absence of such an election, the Participant shall receive a distribution of his/her Account in fifteen (15) annual installments (recalculated annually for each installment) in the case of Retirement, and in a single lump sum cash payment in the case of an Other Termination, and in either case, commencing upon Retirement or Other Termination, as the case may be. Any such payment provided for under this Section 6.3 shall be made as soon as reasonably practical following the designated or default date provided for above, and in any event within 90 days thereof.

     6.4 Payment on Specified Date. Upon election by the Participant in his/her Elective Deferral Agreement for a particular Plan Year the Participant may receive, in one lump-sum payment, that portion of his/her Elective Deferrals for such Plan Year on the date specified in

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his/her Elective Deferral Agreement (provided such date is at least 5 years after the year of the Elective Deferral) or the balance of his/her Account relating to such Elective Deferrals, if less. Any amounts distributed under his/her Elective Deferral Agreement pursuant to this Section shall:

     (a) be made to the Participant as soon as reasonably practical following the specified date, and in any event within 90 days thereof; and

     (b) immediately reduce the Participant’s Account by the amount of such distribution for purposes of any further income accrual and for subsequent distributions.

     6.5 Payment Upon Unforeseeable Emergency. Notwithstanding any other provision of this Plan, in the event of an Unforeseeable Emergency, the Participant may, upon approval by the Committee, receive a distribution from his/her Account, or receive acceleration of a payment that had previously commenced, in an amount not to exceed the lesser of (a) the amount in the Participant’s Account at the time of the Unforeseeable Emergency; or (b) the amount reasonably necessary to satisfy the Unforeseeable Emergency (which may include amounts necessary to pay any Federal, state, local or foreign income taxes or penalties reasonably anticipated to result from the distribution).

     6.6 Distribution of Discretionary Credits. The vested amount of any Discretionary Credits granted hereunder (including earnings thereon) shall be distributed to a Participant (or the Participant’s Beneficiary in the event of the Participant’s death) in the form elected by the Participant under Section 6.3(b) during the annual election period applicable to the year in which the Discretionary Credit is granted (or in the form of a single lump sum payment if no such election was made). Such payment will be made or commence as soon as reasonably practical following the earlier of Participant’s Retirement, Other Termination or death, and in any event within 90 days thereof.

     6.7 Responsibility for Distributions and Withholding of Taxes. The Committee will furnish information to the Company concerning the amount and form of distribution to any

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Participant so that the Company may make, or cause the Trust to make, the distribution required. The Company shall have the right to deduct from all payments made under the Plan any federal, state or local taxes required by law to be withheld with respect to such payments. However, any and all taxes payable with respect to any distribution or benefit 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 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 the 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 for any reason, including (a) upon any payment hereunder which may be deemed to constitute an “excess parachute payment” pursuant to Code section 4999, (b) based upon a theory that any additional or excise tax is required under Code section 409A, or (c) based upon any theory of “constructive receipt” of any lump sum or other amount hereunder.

     6.8 Forfeiture Upon Termination for Cause. In the event, and at the time of, a distribution upon Retirement or Other Termination, if the Committee finds, after full consideration of the facts presented on behalf of both the Employer and the former Participant, that the Participant was discharged by the Employer for fraud, embezzlement, theft, commission of a felony or proven dishonesty in the course of his/her employment by the Employer which damaged the Employer or an Affiliate, or disclosing trade secrets of an Employer or an Affiliate, the Participant shall forfeit all rights to receive any benefits hereunder. The decision of the Committee as to the cause of a Participant’s termination shall be final and binding. Notwithstanding the foregoing, the forfeiture provisions of this Section 6.8 shall not affect any other rights or remedies available to the Employer or any Affiliate under common-law or under any other agreement with respect to the Participant’s conduct.

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     6.9 Changes in Distribution Elections. A distribution election made under this Plan may be changed only if: (a) such change is made pursuant to a written election on a form prescribed by the Committee; (b) such change is made at least 12 months prior to the date that the distribution would have occurred or commenced pursuant to the prior election, and such change does not take effect for at least 12 months following the date it is made; and (c) the first payment made pursuant to the new election is deferred for a period of at least five years from the date such payment would otherwise have been made. The Committee may, in its discretion, refuse to accept any such distribution election change if the Committee determines that such change fails to meet any of the above requirements, or is otherwise not permitted under applicable legal requirements.

     6.10 Lump Sum Cash Out. Notwithstanding any other provision of this Plan or any distribution election made by a Participant, upon the Retirement or Other Termination of a Participant whose total vested Account balance is not greater than the applicable dollar amount under Code § 402(g)(1)(B), the entire vested portion of such Participant’s Account balance shall be distributed to the Participant in a single lump sum payment. Such lump distribution shall result in the termination and liquidation of the Participant’s entire interest under the Plan, and shall be made as soon as reasonably practical after the Participant’s Retirement or Other Termination, and in any event, within 90 days thereafter.

     6.11 Delay of Payments for Specified Employees. Notwithstanding any other provision of this Plan, in the event that a Participant is a “specified employee” within the meaning of Code § 409A and the regulations promulgated thereunder, any distribution upon Retirement or Other Termination shall be delayed for six months from the date of such Retirement or Other Termination (except to the extent that the payment of such benefit is not subject to Code § 409A, or is subject to an exception to such delay in payment). The initial payment following such delay shall include all payments that would have been made prior thereto but for such delay. The provisions of this Section 6.11 shall not apply (a) with respect to

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any benefit that becomes payable for reasons other than Retirement or Other Termination, or (b) if, at the time of such Participant’s Retirement or Other Termination, no stock of the Company is publicly traded on an established securities market or otherwise.

ARTICLE VII

ADMINISTRATION

     7.1 Powers of the Committee. The Committee will have the exclusive responsibility for the general administration of the Plan according to the terms and provisions of the 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 the Plan;

     (b) to construe all terms, provisions, conditions and limitations of the Plan, and adopt amendments to the Plan;

     (c) to correct any defect, supply any omission, reconcile any inconsistency that may appear in the Plan, make equitable adjustments deemed necessary or advisable as the result of any unusual situation or any ambiguity in the Plan, in the manner and to the extent it deems expedient to carry the Plan into effect for the greatest benefit of all parties at interest;

     (d) to designate the persons eligible to become Participants;

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

     (1) the differences of opinion arising between the Company and a Participant; and

     (2) any question it deems advisable to determine in order to promote the uniform administration of the Plan for the benefit of all parties at interest.

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     (f) to delegate by written notice those clerical and recordation duties of the Committee, as it deems necessary or advisable for the proper and efficient administration of the Plan including delegation of its powers to the officers of the Company; and

     (g) to select, employ and compensate consultants, accountants, attorneys and other agents as the Committee may deem necessary or advisable for administering the Plan.

     7.2 Committee Discretion. The foregoing list of powers granted to the Committee is not exclusive and the Committee shall have such additional powers that it may deem necessary or advisable for administering the Plan. The Committee in exercising any power or authority granted under the Plan or in making any determination under this Plan shall perform or refrain from performing those acts using its sole discretion and judgment. Any decision made by the Committee, its designees or others exercising a power designated to them pursuant to this Plan, to act or refrain not to act or any act taken in good faith shall be final and binding on all parties; and no such decision shall ever be subject to de novo review. Notwithstanding the foregoing, the Committee’s or such others’ decisions, refraining to act, or acting is to be subject to arbitration pursuant to Article XI for those incidents occurring during the Plan Year in which a Change in Control occurs and during the Plan Year following a Change in Control.

     7.3 Delegation. Subject to the terms of the Plan, the Bylaws of the Company and applicable law, the Committee may delegate to one or more officers or managers of the Company or any Affiliate, or to a committee of such officers or managers, the authority, subject to the terms and limitations the Committee shall determine, to administer this Plan. Subject to review by the Committee, the Chief Executive Officer of the Company is authorized to exercise all powers of the Committee with respect to determinations regarding Accounts of Employees who are not “executive officers” of the Company (i.e., those not deemed “officers” or “directors” of the Company for purposes of Section 16 of the Securities Exchange Act of 1934). The Chief

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Executive Officer is also authorized to determine, approve and cause to be placed into effect amendments to this Plan deemed necessary or appropriate in order to comply with any applicable federal or state statute or regulation, or as otherwise deemed advisable by the Chief Executive Officer, provided however, that each such amendment or related series of amendments so approved shall involve costs to the Company not exceeding the expenditure approval authority of the Chief Executive Officer as established from time to time by the Board of Directors of the Company, and provided further, that the Chief Executive Officer shall not have the authority to approve any such amendment if such amendment would (a) materially increase the benefits accruing to Participants under this Plan, (b) materially modify the requirements for eligibility for participation in this Plan, or (c) require stockholder approval under any provision of the Restated Certificate of Incorporation of the Company, the By-Laws of the Company, or any federal or state statute or regulation or the rules of the New York Stock Exchange.

     7.4 Annual Statements. The Committee will cause each Participant to receive an annual (or more frequent, as determined by the Committee) statement as soon as administratively practicable after the conclusion of each Plan Year (or other more frequent reporting period, as applicable) containing the amounts deferred through the Plan Year (or other more frequent reporting period, as applicable) and the gains or losses and income applicable to the deferred amounts.

     7.5 Reimbursement of Expenses. The Committee will serve without additional compensation for their services but will be reimbursed by the Company for all expenses properly and actually incurred in the performance of their duties under the Plan.

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ARTICLE VIII

AMENDMENT AND/OR TERMINATION

     8.1 Amendment or Termination of the Plan. This Plan may be amended or terminated as set forth in the Plan without approval of the Participants, at any time by an instrument in writing.

     8.2 No Retroactive Effect on Account. No amendment will affect the rights of any Participant to the amounts then standing to his/her credit in his/her Account, to change the method of calculating the rate of earnings under the Fund already accrued on amounts deferred by him/her prior to the date of the amendment. Further, no amendment will affect a Participant’s rights under any provision relating to a Change in Control after a Change in Control has previously occurred without his/her consent. However, the Committee shall retain the right at any time to change in any manner the method of calculating the rate of earnings under the Fund on all amounts deferred by a Participant after the date of the amendment if it has been announced to the Participants.

     8.3 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 the Company which must be aggregated with the Plan under Code § 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

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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.

     8.4 Effect of Termination. If the Plan is terminated under circumstances other than those provided for under Section 8.3 above, all accounts deferred by Participants or credited as Discretionary Credits and credited to a Participant’s Account shall become fully vested, and earnings under the Fund will continue to be applied to the Account in accordance with Section 4.4. Following such Plan termination, distribution of Participant Accounts shall be made at such time as provided for under the Plan as if the Plan had not been terminated. Except as provided under Section 8.3 above, no payment hereunder will be accelerated by virtue of Plan termination.

ARTICLE IX

FUNDING

     9.1 Payments Under This Agreement are the Obligation of the Company. The Company will pay the benefits due the Participants under this Plan; however should it fail to do so when a benefit is due, the benefit will be paid by the trustee of the Trust entered by and between the Company and the Trustee, should such a Trust be established. In any event, if the Trust fails to pay any benefit hereunder for any reason, the Company shall remain liable for the payment of all benefits provided by this Plan.

     9.2 Agreement May Be Funded Through Rabbi Trust. Except in the event of a Change in Control, it is specifically recognized by both the Company and the Participants that the Company may, but is not required to, contribute any amount it finds desirable to a so-called “Rabbi Trust”, established to accumulate assets sufficient to fund the obligations of the Company under this Plan. In the event of a Change in Control, however, the Company agrees that it shall establish the so-called “Rabbi Trust” if none has been established or, in the event one has been established contribute cash or other assets sufficient to place in the Trust assets

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equaling or exceeding the total of all liabilities under the Plan to all Participants and their beneficiaries as of such date. Notwithstanding the foregoing, contributions shall not be made to the Trust to the extent that such contributions would be prohibited by law, or would result in any unintended tax or other adverse consequences as determined by the Committee in its sole discretion. Plan liabilities to Participants and their beneficiaries shall be determined based on the Account balances as of a given date. Under all circumstances, the rights of the Participants to the assets held in the Trust will be no greater than the rights expressed in this Plan. Nothing contained in any trust agreement which creates any funding trust or trusts will constitute a guarantee by a Company that assets of the Company transferred to that trust or those trusts will be sufficient to pay any benefits under this Plan or would place the Participant in a secured position ahead of general creditors should the Company become insolvent or bankrupt. Any trust agreement prepared to fund the Company’s obligations under this Plan must specifically set out these principles so it is clear in that trust agreement that the Participants in this Plan are only unsecured general creditors of the Company in relation to their benefits under this Plan, and have no right or interest in any specific Trust assets.

     9.3 Participants Must Rely Only on General Credit of the Company. The benefits provided for in this Plan constitute only a general corporate commitment of the Company. Each Participant must rely upon the general credit of the Company for the fulfillment of its obligations hereunder. Under all circumstances the rights of Participants to any asset held by the Company will be no greater than the rights expressed in this Plan. Nothing contained in this Plan will constitute a guarantee by the Company that the assets of the Company will be sufficient to pay any benefits under this Plan or would place the Participant in a secured position ahead of general creditors of the Company. Though the Company may establish and may fund a Rabbi Trust, as indicated in Section 9.2, to accumulate assets to fulfill its obligations, the Plan and any such Trust will not create any lien, claim, encumbrance, right, title or other interest of any kind whatsoever in any Participant in any asset held by the Company, contributed to any

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such Trust or otherwise designated to be used for payment of any of its obligations created in this Plan. No specific assets of the Company have been or will be set aside, or will in any way be transferred to any Trust or will be pledged in any way for the performance of the Company’s obligations under this Plan which would remove such assets from being subject to the general creditors of the Company.

ARTICLE X

ADOPTION BY AFFILIATED EMPLOYERS

     10.1 Procedures for and Status After Adoption. Any Affiliate may, with the approval of the Committee, adopt this Plan by appropriate action of its board of directors. The terms of the Plan will apply separately to each Affiliate adopting the Plan and its Participants in the same manner as is expressly provided for the Company and its Participants except that the powers of the Board of Directors and the Committee under the Plan will be exercised by the Board of Directors of the Company alone. The Company and each Affiliate adopting the Plan will bear the cost of providing plan benefits for its own Participants. It is intended that the obligation of the Company and each Affiliate with respect to its Participants will be the sole obligation of the Employer that is employing the Participant and will not bind any other Employer.

     10.2 Guaranty. Plan provisions to the contrary notwithstanding, in the event of any Affiliate that adopts the Plan pursuant to Article X fails to make payment of the benefits due under the Plan on behalf of its Participants, whether directly or through the Trust, the Company shall be liable for and shall make payment of such benefits due as a guarantor or such entity’s obligations hereunder. The guaranty obligations provided herein shall be satisfied directly and not through the Trust.

     10.3 Termination of Participation By Adopting Affiliate. Any Affiliate adopting the Plan may, by appropriate action of its board of directors, terminate its participation in the Plan.

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The Committee may, in its discretion, also terminate an Affiliate’s participation in the Plan at any time. The termination of the participation in this Plan by an Affiliate will not, however, affect the rights of any Participant who is working or has worked for the Affiliate as to benefits previously accrued by the Participant under the Plan without his/her consent.

ARTICLE XI

CLAIMS; ARBITRATION OF DISPUTES

     11.1 Filing of Claims. A Participant or other person claiming to have been denied any benefit or right provided under this Plan shall have the right to file a written claim with the Committee. All claims shall be submitted on a form provided or approved by the Committee, which shall be signed by the claimant and shall be considered filed on the date the claim is received by the Committee. The claim will be reviewed and a written decision will be rendered by a member of the Committee designated by the Committee for such purpose within 90 days following receipt of the claim. In the event that the Committee does not act within such 90 day period, the claim shall be deemed to have been denied as of the expiration of such 90 day period.

     11.2 Review of Denial. Within 90 days after receipt of a notice of any denial of benefits, the claimant or his/her authorized representative may request, in writing, to appear before the full Committee for a review of his/her or her claim. The Committee in its discretion may elect to grant the Participant’s request to personally appear before the Committee. Any decision of the Committee thereafter to deny a benefit or right shall be in writing and shall include the specific reasons for the decision and references to relevant Plan provisions on which the decision is based. The decision of the Committee shall be final, conclusive and binding upon the Participant or other claimant and all persons claiming by, through or under such claiming.

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     11.3 Arbitration of Disputes. Upon the exhaustion of the claims review procedure described in Sections 11.1 and 11.2, any controversy of any nature whatsoever arising out of or related to this Plan, shall be submitted to, and settled by, mandatory and final arbitration in accordance with the provisions of the Valero Energy Corporation Dialogue dispute resolution program.

ARTICLE XII

MISCELLANEOUS

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

     (a) to give any Employee the right to be designated a Participant in the Plan;

     (b) to give a Participant any right with respect to the fee or compensation deferred or the gains or losses and income credited in the Account, except in accordance with the terms of this Plan;

     (c) to limit in any way the right of the Company to terminate a Participant from the employment of the Employer;

     (d) to evidence any agreement or understanding, expressed or implied, that the Company will retain a Participant as an employee for any particular remuneration or for any particular period of time; or

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

     12.2 Distributions to Incompetents or Minors. Should a Participant become incompetent or should a Participant designate a Beneficiary who is a minor or incompetent, the Committee is authorized to pay benefits due hereunder to the parent of the minor or to the guardian of the minor or incompetent or directly to the minor or to apply those benefits for the

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benefit of the minor or incompetent in any manner the Committee determines in its sole discretion.

     12.3 Non-alienation of Benefits. No right or benefit provided in this Plan will be transferable by the Participant except, upon his/her death, to a named Beneficiary 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 subject to any debts, contracts, liabilities or torts of the person entitled to such benefits. If any Participant or any Beneficiary 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 the Company hold or apply the right or benefit or any part of it to the benefit of the Participant or Beneficiary, his/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.

     12.4 Reliance Upon Information. The Committee will not be liable for any decision or action taken in good faith in connection with the administration of the 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 Company’s independent accounts or other advisors in connection with the administration of this Plan will be deemed to have been taken in good faith.

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

     12.6 Notice. Any notice or filing required or permitted to be given to the Committee or a Participant will be sufficient if in writing and hand delivered or sent by U.S. mail to the principal

25

office of the Company 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.

     12.7 Gender and Number. Words used in this Plan of one gender are to be construed as though they were also used in another gender in all cases where they would so apply and likewise words in the singular or plural are to be construed as though they also included the other in all cases where they would so apply.

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

     12.9 Grandfathered Amounts; Incorporation of Prior Plan. Notwithstanding any other provision of this Plan, the Grandfathered Amounts shall be subject to, and governed by the provisions of, the Prior Plan, which said provisions, with respect to the Grandfathered Amounts:

     (a) remain in effect;

     (b) are hereby incorporated by reference herein; and

     (c) are not amended by this Plan restatement.

     For the convenience of the Plan Administrator, certain provisions of the Prior Plan are attached to this Plan as Exhibit “A”. The inclusion of said Exhibit “A” is not intended and shall not be deemed, to amend the Prior Plan in any respect.

     IN WITNESS WHEREOF, the Company has executed this amended and restated Plan effective as of January 1, 2008.

VALERO ENERGY CORPORATION

By:

26

TABLE OF CONTENTS

	Page
ARTICLE I DEFINITIONS		1
1.1 Account		1
1.2 Affiliate		2
1.3 Beneficiary		2
1.4 Board of Directors		2
1.5 Bonus		2
1.6 Change in Control		2
1.7 Code		3
1.8 Committee		3
1.9 Company		3
1.10 Discretionary Credit		3
1.11 Elective Deferral		4
1.12 Elective Deferral Agreement		4
1.13 Employee		4
1.14 Employer		4
1.15 Fund		4
1.16 Grandfathered Amounts		4
1.17 Insider		4
1.18 Other Termination		4
1.19 Participant		4
1.20 Plan		4
1.21 Plan Administrator		5
1.22 Plan Year		5
1.23 Prior Plan		5
1.24 Retirement		5
1.25 Salary		5
1.26 Stock Fund		5
1.27 Trust		5
1.28 Trustee		5
1.29 Unforeseeable Emergency		5
ARTICLE II ELIGIBILITY		6
2.1 Initial Eligibility		6
ARTICLE III DEFERRAL		6
3.1 Deferral Election		6
3.2 Deferral Amount		7
ARTICLE IV ACCOUNTS		7
4.1 Establishing a Participant’s Account		7
4.2 Credit of the Participant’s Deferral		7
4.3 Discretionary Credits		7
4.4 Gauge for Determining Benefits		8

i

	Page
ARTICLE V VESTING		9
5.1 Vesting of Elective Deferrals		9
5.2 Vesting of Discretionary Credits		10
ARTICLE VI DISTRIBUTIONS		10
6.1 Distribution Events and Elections Relating to Elective Deferrals		10
6.2 Death; Beneficiary Designation		11
6.3 Retirement or Other Termination		11
6.4 Payment on Specified Date		12
6.5 Payment Upon Unforeseeable Emergency		13
6.6 Distribution of Discretionary Credits		13
6.7 Responsibility for Distributions and Withholding of Taxes		13
6.8 Forfeiture Upon Termination for Cause		14
6.9 Changes in Distribution Elections		15
6.10 Lump Sum Cash Out		15
6.11 Delay of Payments for Specified Employees		15
ARTICLE VII ADMINISTRATION		16
7.1 Powers of the Committee		16
7.2 Committee Discretion		17
7.3 Delegation		17
7.4 Annual Statements		18
7.5 Reimbursement of Expenses		18
ARTICLE VIII AMENDMENT AND/OR TERMINATION		19
8.1 Amendment or Termination of the Plan		19
8.2 No Retroactive Effect on Account		19
8.3 Effect of Change in Control		19
8.4 Effect of Termination		20
ARTICLE IX FUNDING		20
9.1 Payments Under This Agreement are the Obligation of the Company		20
9.2 Agreement May Be Funded Through Rabbi Trust		20
9.3 Participants Must Rely Only on General Credit of the Company		21
ARTICLE X ADOPTION BY AFFILIATED EMPLOYERS		22
10.1 Procedures for and Status After Adoption		22
10.2 Guaranty		22
10.3 Termination of Participation By Adopting Affiliate		22
ARTICLE XI CLAIMS; ARBITRATION OF DISPUTES		23
11.1 Filing of Claims		23
11.2 Review of Denial		23
11.3 Arbitration of Disputes		24
ARTICLE XII MISCELLANEOUS		24
12.1 Limitation of Rights		24
12.2 Distributions to Incompetents or Minors		24

ii

	Page
12.3 Non-alienation of Benefits		25
12.4 Reliance Upon Information		25
12.5 Severability		25
12.6 Notice		25
12.7 Gender and Number		26
12.8 Governing Law		26
12.9 Grandfathered Amounts; Incorporation of Prior Plan		26

iii

EXHIBIT A

TO

VALERO ENERGY CORPORATION
DEFERRED COMPENSATION PLAN

Grandfathered Provisions Summary

     As provided for in the Valero Energy Corporation Deferred Compensation Plan (“Plan”), the portion of Participants’ Accounts which had been deferred and were vested prior to December 31, 2004 (and all earnings on such deferred and vested amounts), are Grandfathered Amounts, and shall continue to be governed by, and administered in accordance with, the terms of the Prior Plan. The Prior Plan continues in effect in its entirety with respect to such Grandfathered Amounts, and is incorporated by reference in the Plan for such purposes. Set forth below are certain Prior Plan provisions, which are set forth in this Exhibit purely as a matter of convenience for the Plan Administrator, and are not intended, and shall not be deemed, to amend the Prior Plan in any respect with respect to the Grandfathered Amounts.

* * * * * * * * * * * * * *

ARTICLE XIII
ARTICLE VI
DISTRIBUTIONS

     6.1 Death/Beneficiary Designation.

     (a) Upon the death of a Participant, the Participant’s Beneficiary or Beneficiaries will receive the balance then credited to the Participant’s Account in the Deferred Compensation Ledger in one lump sum payment. The payment will be made within 90 days after the Participant’s death.

     (b) Each Participant, at the time of entering into his initial Elective Deferral Agreement, must file with the Committee a designation of one or more Beneficiaries to whom distributions otherwise due the Participant will be made in the event of his death prior to the complete distribution of the amount credited to his Account in the Deferred Compensation Ledger. The designation will be effective upon receipt by the Committee

iv

of a properly executed form which the Committee has approved for that purpose. The Participant may from time to time revoke or change any designation of Beneficiary by filing another approved Beneficiary designation form with the Committee. If there is no valid designation of Beneficiary on file with the Committee at the time of the Participant’s death, or if all of the Beneficiaries designated in the last Beneficiary designation have predeceased the Participant or otherwise ceased to exist, the Beneficiary will be the Participant’s spouse, if the spouse survives the Participant, or otherwise the Participant’s estate. A Beneficiary must survive the Participant by 60 days in order to be considered to be living on the date of the Participant’s death. If any Beneficiary survives the Participant but dies or otherwise ceases to exist before receiving all amounts due the Beneficiary from the Participant’s Account, the balance of the amount which would have been paid to that Beneficiary will, unless the Participant’s designation provides otherwise, be distributed to the individual deceased Beneficiary’s estate or to the Participant’s estate in the case of a Beneficiary which is not an individual. Any Beneficiary designation which designates any person or entity other than the Participant’s spouse must be consented to in writing in a form acceptable to the Committee in order to be effective.

     6.2 Disability. Upon the Disability of the Participant, the Participant shall receive in fifteen annual installments (recalculated annually for each installment) the value of the amounts credited to his Account at the date of Disability. Distribution shall commence as determined by the Committee, and if no determination is made within 90 days of the date of Disability, then within 90 days after the earlier of (i) the date Participant reaches his normal retirement age under the then prevailing retirement policies in effect at the Company or (ii) in the case of a Participant who remains Disabled, the earlier of (x) the date long-term disability payments (if any) made to the Participant under a long-term disability program maintained by the Company

v

have ceased because of the Participant’s attainment of a stated age or (y) within 90 days of the date of determination by the Committee that no long-term disability payments are payable. Upon the death of the Participant prior to receipt of all of the annual installments, the remaining installments shall be paid to the Participant’s Beneficiary in one lump sum payment in accordance with Section 6.1.

     6.3 Retirement. Upon the retirement of the Participant, the Participant shall, unless otherwise elected in accordance with Section 6.10 below, receive in fifteen annual installments (recalculated annually for each installment) the value of the amounts credited to his Account at the date of his Retirement. Distribution shall commence within 90 days after the Participant’s Retirement. Upon the death of the Participant prior to receipt of all of the annual installments, the remaining installments shall be paid to the Participant’s Beneficiary in one lump sum payment in accordance with Section 6.1.

     6.4 Termination Prior to Death, Disability or Retirement. Upon the Participant’s termination from the employ of the Employer, or, in the case of a Director, cessation of service as a Director, prior to Death, Disability or Retirement, the Participant shall receive in one lump-sum the value of the amounts credited his Account as of the last day of the calendar month which includes such termination from the employment or cessation of service as a Director. Distribution shall be made within 90 days after the Participant’s termination from employment or cessation of services as a Director, as the case may be.

     6.5 Payment on Specified Event. Upon election by the Participant on forms provided by the Committee, the Participant may elect at the time of executing his Elective Deferral Agreement for a particular Plan Year to receive in one lump-sum that portion of his Elective Deferrals on the date or dates specified in his Elective Deferral Agreement (provided such date is at least 5 years after the year of the Elective Deferral) or the balance of his Account, if less. Any amounts distributed under his Elective Deferral Agreement pursuant to

vi

this Section shall immediately reduce the Participant’s Account for purposes of any further income accrual and for distributions on or after that date.

     6.6 Payment Upon Unforeseeable Emergency. In the event of an unforeseeable emergency that is caused by an event beyond the control of the Participant, and that would result in severe financial hardship to the Participant if early withdrawal or acceleration of payment were not permitted, the Participant may, notwithstanding the preceding provisions of this Article VI of the Plan, upon approval by the Committee, receive a distribution from his Account or receive acceleration of payment in an amount not to exceed the lesser of (i) the amount in the Participant’s Account at the time of the unforeseeable emergency or (ii) the amount necessary to meet the emergency. It is the intent of the Company that this Section be interpreted in a manner consistent with Internal Revenue Service Revenue Procedure 92-65, as it may be amended or superseded from time to time.

     6.7 Responsibility for Distributions and Withholding of Taxes. The committee will furnish information to the Company concerning the amount and form of distribution to any Participant entitled to a distribution so that the Company may make or cause the Trust to make the distribution required. The Committee will also calculate the deductions from the amount of the benefit paid under the Plan for any taxes required to be withheld by federal, state or local government and will cause them to be withheld.

     6.8 Forfeiture for Cause. If the Committee finds, after full consideration of the facts presented on behalf of both the Employer and the former Participant that the Participant was discharged by the Employer for fraud, embezzlement, theft, commission of a felony or proven dishonesty in the course of his employment by the Employer, his Account shall be forfeited to the extent necessary to recoup any loss to the Employer resulting from such fraud, embezzlement, theft, felony or dishonesty, even though is may have previously vested. The decision of the Committee as to the cause of a Participant’s discharge shall be final.

vii

Notwithstanding the foregoing, the right to set-off as provided herein shall not affect any other rights or set-off available to the Employer under common-law or under any other agreement.

     6.9 Right to Demand Accelerated Payment. The Committee, acting upon the request of a Participant, shall permit the Participant to receive an immediate lump sum payment of the amount credited to his Account. Payment of such accelerated lump sum benefit at the demand of a Participant shall be reduced by a ten percent (10%) forfeiture. Such lump sum distribution shall be paid as soon as administratively practicable, but in any event within 90 days following receipt of written demand by a Participant (or his Beneficiary) eligible for an accelerated lump sum distribution. The amount of the lump sum distribution to be made to the Participant (or his Beneficiary), as well as the ten percent (10%) forfeiture to be applied against the amount distributable to the Participant (or his Beneficiary), shall be based on the last valuation of the Participant’s Account preceding the Participant’s (or his Beneficiary’s) written demand for an accelerated lump sum distribution. No demand for accelerated payment of an amount allocated to the Stock Fund may be made by an Insider on a date which is less than six months following (i) the date of any prior election to convert such Insider’s deemed investment designation which had the effect of increasing the total amount allocated to the Stock fund or (ii) the date of any election by such Insider with respect to any other plan of the Company or any subsidiary thereof which had the effect (directly or indirectly) of making an acquisition on behalf of such Insider of the same class of equity security as that which is the subject of the Stock Fund.

     6.10 Election of Five or Ten Year Installment Payment. A Participant may, at least on year prior to his Retirement, elect to receive the value of the amounts credited to his Account in either five or ten annual installments (recalculated annually for each installment) in lieu of the fifteen year installment method normally provided for under Section 6.3. Such election by the Participant shall be made in such manner as may be directed by the Committee and must in all

viii

circumstances be elected at least one year prior to the Participant’s Retirement from the employment of the Employer. In the absence of any such conforming election, the Participant’s Account shall be paid in the normal fifteen year installment method set forth in Section 6.3 herein.

ARTICLE XIVARTICLE VIII
AMENDMENT AND/OR TERMINATION

     14.1 8.1 Amendment or Termination of the Plan. This Plan may be amended or terminated as set forth in the Plan without approval of the Participants, at any time by an instrument in writing.

     14.2 8.2 No Retroactive Effect on Account. No amendment will affect the rights of any Participant to the amounts then standing to his credit in his Account in the Deferred Compensation Ledger, to change the method of calculating the rate of earnings under the Fund already accrued on amounts deferred by him prior to the date of the amendment. Further, no amendment will affect a Participant’s rights under any provision relating to a Change of Control after a Change of Control has previously occurred without his consent. However, the Committee shall retain the right at any time to change in any manner the method of calculating the rate of earnings under the Fund on all amounts deferred by a Participant after the date of the amendment if it has been announced to the Participants.

     14.3 8.3 Effect of Change of Control. In the event of a Change of Control of the Company, this Plan shall not automatically terminate effective as of the Change of Control. Rather, Accounts of each Participant shall (i) become fully vested (if not already vested), and (ii) be paid out in accordance with the provisions of Article VI of this Plan.

     14.4 8.4 Effect of Termination. If the Plan is terminated, all accounts deferred by Participants or credited as Discretionary Credits and credited to a Participant’s

ix

Account shall become fully vested under Article V (if not already fully vested), and earnings under the Fund will be applied to the Account in accordance with Section 4.4 as if the Participant were entitled to and did retire on the date the Plan terminated. At the sole discretion of the Board of Directors, following Plan termination, either (i) distribution will commence in accordance with Section 6.3 as soon as conveniently practicable following Plan termination and earnings under the Fund during the distribution period would be calculated and credited in accordance with Section 4.4 or (ii) distribution shall be made at such time as provided for under the Plan if the Plan were not terminated.

x

EX-10.05

Exhibit 10.05

2009 ELECTIVE DEFERRAL AGREEMENT
VALERO ENERGY CORPORATION
DEFERRED COMPENSATION PLAN

Pursuant to the Valero Energy Corporation Deferred Compensation Plan (the “Plan”):

o	I elect not to participate in the Plan during 2009.
o	I hereby elect to defer a portion of my compensation for the period commencing January 1, 2009 and ending December 31, 2009 (the “Plan Year”) as follows:
	Salary (elect either 1 or 2)

1.	% (in even 1% increments not to exceed 30%) of the regular salary to which I may become entitled during the Plan Year;
2.	$                     per pay period of the regular salary to which I may become entitled with respect to (check either (a) or (b) below):

(a)	all pay periods during the Plan Year
(b)	the following pay periods (specify):

 Bonues (elect either 3 or 4 for bonus earned in 2009 and payable in 2010)

3.	% (in even 1% increments not to exceed 50%) of any cash bonuses to which I may become entitled;
4.	$                     of any cash bonuses to which I may become entitled.

NOTE: In order to be effective, this form must be completed, signed, and returned to Financial Benefits (San Antonio/Mailstation E1N) on or before December 19, 2008. If your form is not timely submitted, you will not be eligible to participate in the Plan for the 2009 Plan Year.

The Company has taken measures to design the Plan in a manner that conforms to current tax law. However, it is possible that new legislation could affect your deferral elections. Your 2009 Plan Year deferral elections are irrevocable and are governed by the terms and conditions of the Plan as well as any modifications made to the Plan in order to conform to legal requirements.

ACKNOWLEDGED AND AGREED:

I hereby authorize the above amounts to be deducted and deferred through payroll deduction/reduction by the Company.

Participant’s Signature	Date
«First Name» «Last Name»	«Emplid»
Participant’s Name	Participant’s Employee ID Number

EX-10.06

Exhibit 10.06

2009 INVESTMENT ELECTION FORM
VALERO ENERGY CORPORATION
DEFERRED COMPENSATION PLAN

Direction of Investments

The undersigned Participant hereby directs that the measurement of the Participant’s account be determined as if it were invested in the fund options as indicated below.

DEFERRALS OF SALARY AND/OR BONUSES BEGINNING 1/1/2009
WILL BE TREATED AS IF INVESTED AS INDICATED BELOW.

Enter your investment elections: 5% minimum/increments of 5%.
The total of the percentages must equal 100%.
You may invest in any one or more (including all) of the fund options.

% Dreyfus Appreciation (DGAGX)	% Columbia Income Z (SRINX)
% Fidelity Intermediate Gov’t (FSTGX)	% Vanguard Asset Allocation (VAAPX)
% Janus Worldwide (JAWWX)	% Vanguard Index Extended Market (VEXMX)
% Oakmark I (OAKMX)	% Vanguard Index 500 (VFINX)
% Price Mid-Cap Growth (RPMGX)	% Vanguard Growth and Income (VQNPX)
	% Vanguard Treasury Money Market Fund                (VMPXX)

I understand that the elections I have chosen on this form shall remain in effect until I make a directive to change.

Participant’s Signature	Date
«First Name» «Last Name»	«Emplid»
Participant’s Name	Participant’s Employee ID Number

EX-10.07

Exhibit 10.07

2009 DISTRIBUTION ELECTION FORM
VALERO ENERGY CORPORATION
DEFERRED COMPENSATION PLAN

Payment Election	DEFAULT PAYMENT IF NO ELECTION IS MADE:
Upon Retirement	Fifteen annual installments commencing at date of retirement

I elect that, upon retirement, the value of my Plan account related to deferrals made for the 2009 Plan Year will be paid at the time and in the manner elected below:

Payment Commencement (choose one):

o As soon as administratively possible following retirement (this is the default if no election is made)

o January 1 after the year of retirement

AND

Form of Distribution (choose one):

o Lump sum payment

o Five annual installments

o Ten annual installments

o Fifteen annual installments (this is the default payment if no election is made)

 

Payment Election	DEFAULT PAYMENT IF NO ELECTION IS MADE:
Upon Other Separation	Immediate lump sum payable upon separation

I elect that, upon my separation from employment for a reason other than retirement, the value of my Plan account related to deferrals made for the 2009 Plan Year will be paid at the time and in the manner elected below:

Payment Commencement (choose one):

o As soon as administratively possible following separation (this is the default if no election is made)

o January 1 after the year of separation

AND

Form of Distribution (choose one):

o Lump sum (this is the default payment if no election is made)

o Five annual installments

«First_Name» «Last_Name»

Distribution on Specified Date

In accordance with Section 6.5 of the Plan, I hereby elect to receive in one lump sum payment my Account derived from deferrals made during the 2009 Plan Year on the date or dates specified below, or the balance of the Account, if less. Any amounts distributed pursuant to this election shall immediately reduce my Account accordingly.

	Amount of Elective Deferral or
Specified Date	Total Amount of the Account (Whichever is Less)

NOTE: In order to be effective, this form must be completed, signed and returned to Financial Benefits (San Antonio/Mailstation E1N) on or before December 19, 2008. If your form is not timely submitted, your Plan deferral will be subject to the default distributions noted above.

The Company has taken measures to design the Plan in a manner that conforms to current tax law. However, it is possible that new legislation could affect your distribution elections, including delaying your distributions, in order to comply with legal requirements. Distribution elections submitted pursuant to the Plan will be governed by the terms and conditions of the Plan and governing law, and your elections will be subject to modifications made to the Plan in order to conform to legal requirements.

ACKNOWLEDGED AND AGREED:
Participant’s Signature	Date
«First Name» «Last Name»	«Emplid»
Participant’s Name	Participant’s Employee ID Number

EX-10.08

Exhibit 10.08

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 Covered Compensation		2
1.9 Credited Service		3
1.10 Eligible Earnings		3
1.11 Final Average Compensation		3
1.12 Monthly Covered Compensation		3
1.13 Monthly FICA Amount		3
1.14 Normal Retirement Date		4
1.15 NuStar		4
1.16 NuStar Excess Pension Plan		4
1.17 NuStar SERP		4
1.18 Participant		4
1.19 Plan		4
1.20 Plan of Deferred Compensation		4
1.21 Plan Year		4
1.22 Retirement		4
1.23 Rules		4
1.24 Securities Act		4
1.25 Separation from Service		4
1.26 Subsidiary		4
1.27 Surviving Spouse		5
1.28 Trust		5
1.29 Trustee		5
1.30 Valero		5
1.31 Valero Pension Plan		5
1.32 Valero Pension Plan Benefit		5
ARTICLE II ELIGIBILITY		5
2.1 Eligibility		5
2.2 Frozen Participation		5
2.3 Renewed Eligibility		6
ARTICLE III VESTING		6
ARTICLE IV RETIREMENT BENEFIT		6

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	Page
4.1 Calculation of Retirement Benefit		6
4.2 Form and Time of Payment		7
4.3 Modification of Pension		7
4.4 Delay of Certain Payments		7
4.5 Application of Code Section 409A Transition Relief Provisions		7
ARTICLE V PRERETIREMENT SPOUSAL DEATH BENEFIT		8
5.1 Death Prior to Retirement		8
5.2 Beneficiary Designation Prohibited		8
ARTICLE VI PROVISIONS RELATING TO ALL BENEFITS		8
6.1 Effect of This Article		8
6.2 No Duplication of Benefits		8
6.3 Forfeiture Upon Termination for Cause		8
6.4 Forfeiture for Competition		8
6.5 Expenses Incurred in Enforcing the Plan		9
6.6 No Restrictions on any Portion of Benefits Determined to be Excess Parachute Payments		9
ARTICLE VII ADMINISTRATION		9
7.1 Committee Appointment		9
7.2 Committee Organization and Voting		9
7.3 Powers of the Committee		9
7.4 Committee Discretion		10
7.5 Reliance Upon Information		10
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		11
8.3 Spinoff Plan		11
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		12
9.4 Effect of Change in Control		12
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		14
10.6 Repurchase of Valero Stock		14
10.7 Participants Must Rely Only on General Credit of the Companies		14
ARTICLE XI MISCELLANEOUS		15
11.1 Responsibility for Distributions and Withholding of Taxes		15
11.2 Limitation of Rights		15
11.3 Arbitration of Disputes		15
11.4 Distributions to Incompetents		17
11.5 Nonalienation of Benefits		17

ii

	Page
11.6 Severability		18
11.7 Notice		18
11.8 Gender and Number		18
11.9 Administration and Interpretation Consistent with Code Section 409A		18
11.10 Governing Law		18
11.11 Effective Date

iii

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:

1

     (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.

The provisions of this Plan relating to a Change in Control shall be interpreted and administered in a manner consistent with Code section 409A.

     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 Covered Compensation. “Covered Compensation” means the average (without indexing) of the Taxable Wage Base for the 35 calendar years ending with the calendar year in which a Participant attains social security retirement age (as defined in Section 415(b)(8) of the Code). A 35-year period shall be used for all Participants regardless of the year of birth of such Participant. In determining a Participant’s Covered Compensation prior to the Participant attaining social security retirement age, it shall be assumed that the Taxable Wage Base in effect at the beginning of the Plan Year in which such determination is made will remain constant for all future years.

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     1.9 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 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. Notwithstanding any other provision of this Plan, for purposes of calculating a Participant’s benefit hereunder, Credited Service shall not include any period of service with a Company for which a Participant has received a payment hereunder, or under the Excess Pension Plan, the NuStar SERP, the NuStar Excess Pension Plan, the Ultramar Diamond Shamrock Corporation Supplemental Executive Retirement Plan, or a lump sum payment made prior to January 1, 2002 under the Ultramar Diamond Shamrock Corporation Employees’ Retirement Plan.

     1.10 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 performance related 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.

     1.11 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.

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

     1.13 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).

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     1.14 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.

     1.15 NuStar. “NuStar” means NuStar GP, LLC, formerly known as Valero GP, LLC.

     1.16 NuStar Excess Pension Plan. “NuStar Excess Pension Plan” means the NuStar Excess Pension Plan, as amended from time to time, or any successor plan.

     1.17 NuStar SERP. “NuStar SERP” means the NuStar Supplemental Executive Retirement Plan, as amended from time to time, or any successor plan.

     1.18 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.

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

     1.20 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.

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

     1.22 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.

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

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

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

     1.26 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.

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     1.27 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.

     1.28 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.

     1.29 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.

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

     1.31 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.

     1.32 Valero Pension Plan Benefit. “Valero Pension Plan Benefit” means the amount of monthly benefit payable from the Valero Pension Plan which is based on a lifetime annuity payable to the Participant pursuant to the provisions of Article 4 of the Valero Pension Plan, or any successor provision.

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

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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 only upon the Participant’s death, disability or Retirement. The foregoing notwithstanding, a Participant’s Accrued Benefit 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 lump sum of the Accrued Benefit payable for life from Normal Retirement Date where the Accrued Benefit is equal to 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.

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     4.2 Form and Time of Payment. Except as otherwise specifically provided herein, 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 Participant’s Retirement. Such lump sum amount shall be calculated as of the Participant’s Retirement by the actuary for the Pension Plan applying actuarial factors used under the Pension Plan, and shall be made as soon as practical following the Participant’s Retirement and, in any event, within ninety (90) days thereafter.

     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 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 (except to the extent that the payment of such benefit is not subject to Code section 409A, or is subject to an exception to such delay in payment). Such delayed payment shall be made in a single lump sum payment as soon as practical following the expiration of such 6-month delay period (and in any event with ninety (90) days thereof) and shall be calculated as of the Participant’s Separation from Service by the actuary for the Pension Plan applying actuarial factors used under the Pension Plan. 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.

     4.5 Application of Code Section 409A Transition Relief Provisions. Notwithstanding any other provision of this Plan, between January 1, 2005 and December 31, 2007, the Plan was administered in compliance with the applicable transition relief provided by the U.S. Treasury Department and the Internal Revenue Service under applicable guidance, including Notice 2005-1, the Temporary Regulations issued under Code section 409A, Notice 2007-78 and Notice 2007-86. Specifically, but without limitation, Participants whose Retirement occurred between January 1, 2005 and December 31, 2007, received or commenced their benefits under this Plan at the time and in the form provided for under the Plan as in effect on October 3, 2004, or pursuant to a special form and time of payment election permitted under such transition relief.

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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 equal to fifty percent (50%) of the amount the Participant would have received under Section 4.1 if he had Retired on the date of his death. Such death benefit shall be paid in the form of a single lump sum payment as soon as administratively practical following the Participant’s death (and in any event within ninety (90) days thereof), and shall be calculated by the actuary for the Pension Plan applying actuarial assumptions used under the Pension Plan.

     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 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

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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. Any such fees and expenses shall be paid to the Participant as soon as reasonably practical after they are incurred by the Participant and, in any event, by no later than the end of the year following the year in which they are incurred by the Participant.

     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.

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 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;

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          (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 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

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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 were spun off into the NuStar SERP. In this regard, effective as of July 1, 2006, NuStar established what is now known as the NuStar 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 NuStar 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

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Control after a Change in 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.

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. Except to the extent prohibited by law or to the extent the Committee determines that making any contribution to the Trust may result in any unintended tax or other adverse consequences, 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

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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, except to the extent prohibited by law or to the extent the Committee determines that making any contribution to the Trust may result in any unintended tax or other adverse consequences, 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 ensure 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. Upon request, a Participant 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.

     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

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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. Additionally, Valero may direct the Trustee to return to Valero any assets of the Trust in order to comply with any legal requirement or to avoid any unintended tax or other adverse consequences as determined by the Committee. 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 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.

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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;

     (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.

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     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.

     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.

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     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 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.

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     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 Administration and Interpretation Consistent with Code Section 409A. The Plan, as amended and restated, is intended to satisfy the requirements of Code section 409A and the rules and regulations issued thereunder, and shall be construed, interpreted and administered consistent with such intent.

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

     11.11 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 Supplemental Executive Retirement Plan on November 10, 2008, to be effective as of January 1, 2008.

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

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EX-10.10

Exhibit 10.10

VALERO ENERGY CORPORATION

STOCK OPTION PLAN

AMENDED AND RESTATED
as of
January 1, 2009

VALERO ENERGY CORPORATION
AMENDED AND RESTATED STOCK OPTION PLAN

The original Stock Option Plan (the “Original Plan”) was adopted April 23, 1997 and amended as of July 30, 1997; October 29, 1997; May 19, 1999; December 3, 2002; December 31, 2004; October 1, 2005; and January 1, 2009. The plan is hereby amended and restated as of January 1, 2009 to fully incorporate all of the amendments to the Original Plan to date.

1. Introduction and Statement of Purpose.

     This Stock Option Plan (the “Plan”) of Valero Energy Corporation is established for the purpose of giving additional incentive to Key Employees of the Company by creating an opportunity for capital accumulation. It is intended that the benefits available under this Plan, when added to other benefits payable to these Key Employees, will furnish total compensation that is competitive in the industries in which the Company conducts its business and in which the Company competes for employees. This Plan sets forth the basis for the eligibility of Employees to participate in the Plan and the terms and conditions regulating participation. The Plan provides for the grant of Options to purchase Common Stock of Valero and stock appreciation rights (“SARs”) which are automatically exercised upon the exercise of an Option. The Options granted under the Plan are and are intended to be “non-qualified” options under the Internal Revenue Code of 1986, as amended.

2. Definitions.

     For the purposes of this Plan, the following terms shall have the meanings stated below unless a different meaning is plainly required by the context or such term is otherwise defined herein.

(a)	“Affiliate” shall mean (i) any entity that, directly or through one or more intermediaries, is controlled by the Company and (ii) any entity in which the Company has a significant equity interest, as determined by the Committee.
(b)	“Board of Directors” shall mean the Board of Directors of Valero.
(c)	“Cause” shall mean the (i) conviction of the Participant by a state or federal court of a felony involving moral turpitude, (ii) conviction of the Participant by a state or federal court of embezzlement or misappropriation of funds of the Company, (iii) the Company’s (or applicable Affiliate’s) reasonable determination that the Participant has committed an act of fraud, embezzlement, theft, or misappropriation of funds in connection with such Participant’s duties in the course of his or her employment with the Company (or applicable Affiliate), (iv) the Company’s (or its applicable Affiliate’s) reasonable determination that the Participant has engaged in gross mismanagement, negligence or misconduct which causes or could potentially cause material loss, damage or injury to the Company, any of its Affiliates or their respective employees, or (v) the Company’s (or applicable Affiliate’s) reasonable determination that (a) the Participant has violated any policy of the Company (or applicable Affiliate), including but not limited to, policies regarding sexual harassment, insider trading, confidentiality, substance abuse and/or conflicts of interest, which violation could result in the termination of the Participant’s employment, or (b) the Participant has failed to satisfactorily perform the material duties of Participant’s position with the Company or any of its Affiliates.
(d)	“Change of Control” shall have the meaning specified in Paragraph 4.12.
(e)	“Committee” shall mean the persons administering this Plan from time to time pursuant to Paragraph 6.1.
(f)	“Common Stock” shall mean the common stock, par value $0.01 per share, of Valero.
(g)	“Company” shall mean Valero and its subsidiaries, and any successor or successors to such entities.

(h)	“Distribution Agreement” shall mean the Agreement and Plan of Distribution, entered into between VEC and Valero, in connection with the transactions contemplated by the Merger Agreement. “Distribution” and “Time of Distribution” shall have the meanings specified in the Distribution Agreement.
(i)	“EBA” shall mean the Employee Benefits Agreement, entered into between Valero and VEC, in connection with the transactions contemplated by the Merger Agreement.
(j)	“Employee” shall mean any person employed by the Company, including officers and directors of the Company within the meaning of Section 16(a) of the Exchange Act, but shall include a director only if also employed by the Company on a full-time basis.
(k)	“Exchange Act” shall mean the Securities Exchange Act of 1934, as amended and in effect from time to time.
(l)	“Exercise Date” — see Paragraph 4.3.
(m)	“Expiration Date” — see Paragraph 3.5.
(n)	“Exercise Notice” — see Paragraph 4.3.
(o)	“Key Employee” shall mean any key Employee or prospective Employee of the Company having responsibility for planning the Company’s operations, controlling or managing its business activities, or advising the management of the Company with respect to its operations and business activities. The determination of “Key Employees” for purposes of determining eligibility for participation in this Plan, and the determination of “key employees” for purposes of applying any New York Stock Exchange Rule or determining eligibility for participation in any other stock option plan of the Company, need not be consistent.
(p)	“Merger Agreement” shall mean the Agreement and Plan of Merger, dated as of January 31, 1997, between VEC, PG&E Corporation and PG&E Acquisition Corporation.
(q)	“Option” or “Options” shall mean an option or options granted pursuant to this Plan to purchase shares of Common Stock.
(r)	“Option Agreement” shall mean a written agreement entered into between Valero and a Participant pursuant to Paragraph 3.9.
(s)	“Option Price” — see Paragraph 3.5.
(t)	“Option Share” shall mean one share of Common Stock purchased or which may be purchased pursuant to an Option.
(u)	“Participant” shall mean a Key Employee who is eligible to be granted an Option under this Plan.
(v)	“Plan” — see Paragraph 1.
(w)	“Preference Share Purchase Right” shall mean one of the rights distributed pursuant to the Rights Agreement to purchase 1/100 share of the Junior Participating Preferred Stock, Series I, of Valero.
(x)	“Ratio” shall mean the amount obtained by dividing the average of the daily high and low trading prices per share of VEC Common Stock as reported on the NYSE Composite Tape (the “NYSE Tape”) on each of the last 15 consecutive full NYSE trading days (the “Averaging Period”) ending on and including the trading day preceding the Distribution Date (as defined in the Distribution Agreement) (the “Company Price”) by the difference between (a) the Company Price and (b) the product of (1) the Per Share Merger Consideration (as defined in the Merger Agreement) and (2) the average of the daily high and low prices per share of Acquiror Common Stock (as defined in the Merger Agreement) as reported on the NYSE Tape during the Averaging Period.
(y)	“Rights Agreement” shall mean that certain Rights Agreement, dated as of June 18, 1997, between Valero and Harris Trust and Savings Bank, as Rights Agent, as amended and in effect from time to time.

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(z)	“Restricted Optionee” shall mean any person who is a “director” or “officer” of Valero within the meaning of Section 16(a) of the Exchange Act, together with any person who is the beneficial owner of more than 10 percent of any class of equity security of Valero registered under Section 12 of the Exchange Act.
(aa)	“SAR” or “stock appreciation right” shall mean the right, subject to the provisions of this Plan, to receive a payment in cash equal to the difference between the specified Strike Price of the SAR and the price of one share of the Common Stock at the time specified in Paragraph 4.2.
(bb)	“SEC” shall mean the Securities and Exchange Commission.
(cc)	“Settlement Date” — see Paragraph 4.3.
(dd)	“Strike Price” shall mean the price per share of the Common Stock, determined pursuant to Paragraph 3.7, from which the appreciation (if any) with respect to an SAR shall be calculated.
(ee)	“Tax Payment” — see Paragraph 4.3.
(ff)	“Time of Distribution” — see “Distribution Agreement.”
(gg)	“Valero” shall mean Valero Energy Corporation, a Delaware corporation formerly known as Valero Refining and Marketing Company, incorporated in 1981 under the name Saber Energy, Inc.
(hh)	“VEC” shall mean PG&E Gas Transmission, Texas Corporation, a Delaware corporation formerly known as Valero Energy Corporation, incorporated in 1955 under the name Coastal States Oil and Gas Company.
(ii)	“VEC Common Stock” shall mean the Common Stock, $1.00 par value, of VEC.
(jj)	“VEC Option Plans” shall mean the following stock option plans previously adopted by VEC: the VEC Stock Option Plan No. 3, the VEC Stock Option Plan No. 4, and the VEC Stock Option Plan No. 5.
(kk)	“VRM Participant” shall have the same meaning as given in the EBA.

3. Granting of Options and SARs to Employees.

     3.1. Selection of Participants. The Committee may grant Options to purchase a specified number of Option Shares to Key Employees of the Company selected by the Committee in its sole and absolute discretion to become Participants. At or subsequent to the time that an Option is granted to a Key Employee by the Committee, the Committee may grant to that Key Employee a number of SARs not exceeding the number of Option Shares that may be purchased pursuant to such Option, provided, that no SARs shall be granted with respect to Option Shares that have theretofore been purchased by a Participant or to any Participant who, subsequent to the date of grant of such Option, is no longer an Employee. Subject to the full and final authority of the Committee to administer the Plan and select Participants, the granting of Options and SARs and the selection of Participants may be based on recommendations made by the Chief Executive Officer of Valero.

     3.2. Exclusion of Committee Members. No member of the Committee, while so serving, may be granted Options or SARs. However, a Participant who has been granted an Option or SARs under this Plan prior to serving on the Committee may, during such term of service, continue to hold any Options and SARs and may exercise any such Options and SARs and hold the Option Shares acquired upon the exercise of any such Options, subject to the provisions of this Plan.

     3.3. No Right to Participate. No Employee or prospective Employee of the Company shall have the right to require the Company or the Committee to make him or her a Participant under this Plan.

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     3.4. Certain Options Granted Under Prior VEC Stock Option Plans. Pursuant to the terms of the Merger Agreement, the EBA and the VEC Option Plans, certain stock options previously awarded by VEC under the VEC Option Plans will be automatically converted at the Time of Distribution into Options to purchase Options Shares under this Plan. Each such VEC option that is outstanding and unexercised immediately prior to the Time of Distribution and is held by a person who, immediately before the Time of Distribution, is a VRM Participant, or their respective beneficiaries and dependents, shall be converted in accordance with the EBA into Options to purchase Option Shares under this Plan. Each such VEC option eligible to be replaced by an Option under this Plan shall be replaced with an Option with respect to a number of Option Shares equal to the number of shares of VEC Common Stock subject to such VEC option immediately before such replacement, multiplied by the Ratio, rounded up to the nearest whole share as necessary, and having a per-share exercise price equal to the per-share exercise price of such VEC option immediately before such replacement, divided by the Ratio (rounded down to the nearest whole cent as necessary). The other terms and conditions of any such VEC option, including the vesting and termination dates thereof, shall remain unchanged, except as may be necessary to conform to the provisions of the Plan or as otherwise may be determined by the Committee.

     3.5. Determination of Option Provisions. When granting Options, the Committee shall designate the number of Option Shares the Employee may purchase under the Option, a date upon which the Option will automatically expire (unless an earlier termination date is established pursuant to Paragraph 8.3; the earlier of such dates being referred to herein as the “Expiration Date”), the price per share at which the Option Shares may be purchased (the “Option Price”), and the remaining terms and conditions of the Option. If the Committee determines to grant SARs to the grantee or holder of an Option, the Committee shall designate the number of SARs granted and any terms and conditions pertaining thereto.

     3.6. Option Shares and SARs Available for Grant. (A) Subject to the provisions of Paragraphs 4.7 and 5, the maximum number of shares of Common Stock that may be optioned under this Plan shall be 2,000,000 shares. In addition, the number of shares available to be optioned under this Plan may from time to time be increased by such number of additional shares as the Committee may deem necessary. However, in no event shall the total number of shares optioned and sold under this Plan equal or exceed 20 percent of the “voting power outstanding,” as defined in the NYSE’s Company Manual, Paragraph 312. Shares of Common Stock optioned and sold under this Plan (and any rights or other securities sold or delivered in accordance with Paragraph 5.1) may be either authorized but unissued securities or reacquired (treasury) securities.

          (B) Subject to the provisions of Paragraphs 4.7 and 5, the maximum number of SARs that may be granted under this Plan shall be equal to the maximum number of shares of Common Stock that may be optioned and sold under this Plan.

          (C) During the term of this Plan, Valero will at all times reserve and keep available, or have authorized but unissued, shares of Common Stock sufficient to satisfy the requirements of this Plan. The inability of Valero to obtain, from any regulatory body having jurisdiction, any authority deemed by Valero’s counsel to be necessary to the lawful issuance and sale of Common Stock hereunder, shall relieve the Company of any liability in respect of the nonissuance or sale of such Common Stock as to which such requisite authority shall not have been obtained.

     3.7. Limitations Regarding Option Price and Strike Price. The Option Price for any Option Share shall be as specified by the Committee in its sole discretion, but shall not be less than (a) the average of the “high” and “low” reported sales price per share of Common Stock on the date of grant as reported in the New York Stock Exchange — Composite Transactions listing or such other listing or quotation medium as the Committee may later designate, or if there are no sales on such date, on the next following day on which there are sales, or (b) in the event that the Common Stock is not listed for trading on the NYSE, an amount determined in accordance with standards adopted by the Committee. The Strike Price at which an SAR is granted shall be equal to the Option Price of the Option Shares to which such SAR is related.

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     3.8. Limitation Regarding Option Period. The Plan shall continue indefinitely. However, no Option granted under this Plan shall have a stated Expiration Date that is more than 10 years and 30 days following its date of grant. Subject to the provisions of Paragraph 4.11, an Option and any associated SARs shall lapse and be automatically forfeited upon the earlier of the Expiration Date (i) as set forth in the Option Agreement pursuant to which such Option and any associated SARs are granted, or (ii) as established pursuant to Paragraph 8.3, unless an Exercise Notice is delivered to Valero on or before the Expiration Date.

     3.9. Option Agreements. Options and SARs shall be evidenced by Option Agreements having such terms and provisions, not inconsistent with this Plan, as the Committee deems advisable. Option Agreements need not be uniform. Promptly following each determination by the Committee to grant an Option or SARs to a Key Employee, the Committee shall cause Valero to enter into an appropriate Option Agreement (or, in the case of a grant only of SARs, an amendment to an existing Option Agreement) with such Key Employee. No Key Employee or other person claiming by, through or under a Key Employee shall be entitled to exercise any Option or SAR until an appropriate Option Agreement (or amendment thereto) shall have been executed by Valero and the Key Employee. In the event that a Key Employee of the Company is granted an Option or SARs by the Committee but for any reason, including but not limited to death or disability, does not actually enter into a fully executed Option Agreement (or appropriate amendment thereto) with Valero, such Key Employee shall not be deemed a Participant with respect to such Option or SARs and neither such Key Employee nor any person claiming by, through or under such Key Employee shall be entitled under any circumstances to exercise such Option or SARs.

     3.10 Provisions Regarding Prospective Employees. If a prospective Employee of the Company is granted an Option or SARs pursuant to this Plan prior to actually commencing employment with the Company but for any reason, including, but not limited to, death or total and permanent disability, does not actually commence employment with the Company, such person shall not be deemed a Participant for any purpose of this Plan and neither such person nor any person claiming by, through or under such person shall be entitled under any circumstances to exercise such Option or SARs. Upon actually commencing employment with the Company, such a prospective Key Employee will then be deemed a Participant for all purposes of this Plan, and will then, but only then, be deemed solely for purposes of this Plan to have been continually employed by the Company from the date of grant of the Option to the date of commencement of employment.

4. Exercise of Options and SARs.

     4.1. Exercise of Options. Any Option and any associated SARs shall be exercisable at such time and in such amounts, either as to all of the Option Shares covered thereby or in installments, as is provided in the Participant’s Option Agreement or as may otherwise be provided in this Plan. An installment option may allow the purchase of all or any part of the Option Shares on a specified installment date or dates, and the subsequent purchase of any unpurchased Option Shares after such installment date(s) and through the Expiration Date. However, no Option may be exercised with respect to a fractional share.

     4.2. Automatic Exercise of SARs, Settlement Price for SARs. SARs may not be exercised except simultaneously with the exercise of an Option. A Participant or other person exercising an Option shall be deemed to have automatically exercised on the Exercise Date that number of related SARs equal to the number of Option Shares purchased, not exceeding the lesser of (a) the number of related SARs held by the Participant, or (b) the number of SARs then permitted to be exercised under the Participant’s Option

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Agreement. When a Participant holds fewer related SARs than the number of Option Shares to which his or her Option pertains, the Committee may adopt policies, or include terms in the Participant’s Option Agreement, that permit or require the Participant to exercise such SARs during or after specified periods, or in conjunction with the exercise of a certain portion of an Option, or that permit the Participant to determine, with any restrictions as the Committee may prescribe, the timing of exercise of the SARs. SARs shall be settled on the basis of the daily average sales price of the Common Stock on the Exercise Date.

     4.3. Exercise Procedure. Options and SARs may be exercised only by written notice of exercise (the “Exercise Notice”), in such form as the Committee may prescribe, delivered to Valero’s Stock Benefit Plan Administration department at Valero’s principal business office and signed by the Participant or other person specified herein as being entitled to exercise the same. The date on which the Exercise Notice is delivered to Valero shall be the “Exercise Date.” The Exercise Notice for Options Shares shall specify a date (the “Settlement Date”), not less than five business days nor more than ten business days following the Exercise Date, upon which the Option Shares shall be issued to the Participant (or other person entitled to exercise the Option) and the Option Price shall be paid to Valero. Subject to the provisions of Paragraph 3.6(A), on the Settlement Date the person exercising an Option shall tender to Valero full payment for the Option Shares with respect to which the Option is exercised, together with an additional amount equal to the amount of all taxes required to be collected or withheld by the Company in connection with the exercise of the Option (the “Tax Payment”); provided, however, that when related SARs are exercised at the same time an Option is exercised, the Tax Payment shall be reduced by withholding the amount thereof, to the extent possible, from the cash payment otherwise payable by the Company to the Participant as the result of the exercise of such SARs. Subject to the prior approval or disapproval of the Committee, and to such rules and limitations as it may adopt, if no related SARs are exercised the Tax Payment may also be made in whole or in part by (a) withholding from the number of shares otherwise deliverable to the person exercising the Option a number of shares whose fair market value equals the Tax Payment or (b) delivering certificates for other shares of Common Stock owned by the person exercising the Option, endorsed in blank with appropriate signature guarantee, having a fair market value equal to the amount otherwise to be collected or withheld. Any calculation with respect to a Participant’s income, required tax withholding or other matters required to be made by the Company upon the exercise of an Option shall be made using the average of the high and low reported sales price per share of the Common Stock on the Exercise Date, whether or not the Exercise Notice is delivered to the Company before or after the close of trading on that date, unless otherwise specified by the Committee. Notwithstanding the foregoing, for Option exercises using the Company’s “same-day-sale for cash method” or “broker sale for stock method,” a Participant’s taxable gain and related tax withholding on the exercise will be calculated using the actual market price at which shares of Common Stock were sold in the transaction. All calculations made with respect to a Participant’s income, required tax withholding or other matters made upon exercise of an SAR shall be made using the price at which such SAR is settled, unless otherwise specified by the Committee.

     4.4. Payment for SARs. SARs shall be paid or settled only in cash. Payment for SARs shall be made on the Settlement Date.

     4.5. Payment with Common Stock. Subject to any rules and limitations as the Committee may adopt or as may be set forth in any Option Agreement, a person exercising an Option for the receipt of Option Shares may pay for the Option Shares with other shares of Common Stock legally and beneficially owned by that person at the time of the exercise of an Option.

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     4.6. Rights as Stockholder. Until the issuance of the stock certificate(s) for Option Shares purchased hereunder (as evidenced by the appropriate entry on the books of Valero or of a duly authorized transfer agent of Valero), no right to vote or receive dividends or any other rights as a stockholder of Valero shall exist with respect to such Option Shares, notwithstanding the exercise of any Option. No adjustment will be made for a dividend or other rights for which the record date is prior to the date that stock certificates evidencing such shares of Common Stock are issued, except as otherwise provided under Paragraph 5.

     4.7 Effect of Termination and Forfeiture. (A) Except as otherwise expressly provided in this Paragraph 4.7 and Paragraphs 4.11 and 4.12, or as otherwise determined by the Committee on the date of grant and included in the Option Agreement, an Option (and any associated SARs) (collectively, “Exercisable Award”) may be exercised by a Participant only while he or she is and has continually been, since the date of the grant of the Option, an Employee of the Company. In the event a Participant’s employment with the Company is voluntarily terminated by the Participant (other than through retirement, death or disability), then: (i) that portion of any Exercisable Award that has not vested on or prior to such date of termination shall automatically lapse and be forfeited, and (ii) all vested but unexercised Exercisable Awards previously granted to that Participant under the Plan shall automatically lapse and be forfeited at the close of business on the 30th day following that date of such Participant’s termination, unless an Exercisable Award expires earlier according to its original terms. If a Participant’s employment is involuntarily terminated by the Company for Cause: (i) that portion of any Exercisable Award that has not vested on or prior to such date of termination shall automatically lapse and be forfeited, and (ii) all vested but unexercised Exercisable Awards previously granted to that Participant under the Plan shall automatically lapse and be forfeited at the close of business on the 30th day following that date of such Participant’s termination, unless an Exercisable Award expires earlier according to its original terms. If a Participant’s employment is terminated by the Company other than for Cause, then (i) those Exercisable Awards previously awarded to the Participant hereunder and not yet vested shall automatically lapse and be forfeited as of the date of the Participant’s termination and (ii) those Exercisable Awards previously awarded to the Participant hereunder which are vested but unexercised as of the date of the Participant’s termination shall automatically lapse and be forfeited at the close of business on the last business day of the twelfth month following the month during which Participant’s termination occurs, unless such vested Options (and any associated SARs) sooner expire according to their original term. If a Participant’s employment is terminated by retirement, death or disability, the provisions of Paragraph 4.11 shall apply. If a Participant shall forfeit, voluntarily surrender or otherwise permanently lose his right to exercise an Option or SAR under any provision of this Plan or otherwise, or if any Option shall terminate or expire pursuant to its terms, the Option Shares subject to such Option shall once more be available to be optioned and sold under this Plan pursuant to a new Option granted hereunder, and any associated SARs shall again be available for grant hereunder.

          (B) In the case of any termination of employment (whether voluntary or involuntary, disability related, or upon retirement or otherwise), the Committee or the Chief Executive Officer of Valero may, in connection with any Participant’s termination of employment with the Company, (i) authorize any existing Option Agreement of such Participant to remain in full force and effect under its existing terms and conditions (including its existing vesting schedule) or such amended terms and conditions as the Committee or the Chief Executive Officer shall approve, and/or (ii) authorize amendments to any existing Option Agreement (or a new Option Agreement superseding any prior Option Agreement) between Valero and such Participant removing and/or modifying any or all of the then present or future restrictions, conditions and/or limitations (whether arising under such Option Agreement or this Plan) on the exercise of the Options (and any associated SARs) previously granted to such Participant; provided that no authorization or amendment (or new Option Agreement) shall increase the aggregate number of Options granted to any Participant; and provided that, in accordance with Article II. Section 4 of Valero’s Bylaws, any such action with respect to the Chief Executive Officer or

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the President must be approved by the Board of Directors and any such action with respect to a Restricted Optionee must be approved by the Committee. Any action referred to in the preceding sentence shall be taken by Valero, if at all, not later than six months following the Participant’s effective date of termination.

          (C) In cases of ambiguity in connection with the termination of any Participant from employment with the Company, the Chief Executive Officer of the Company is authorized to determine which, if any, of the provisions of this Article 4 shall apply to such termination of employment, such determination to be binding upon the Company.

     4.8 Effect of Leave of Absence. The Committee may, in its sole and absolute discretion, change or modify the exercise dates or other terms of any Option or SARs held by a Participant who commences a leave of absence which were not vested at the commencement of such leave of absence.

     4.9 Effect of Disability. The total and permanent disability of a Participant shall terminate the participation of such Participant in this Plan subject to the conditions set forth in Paragraph 4.11. The Committee shall determine whether a Participant is totally and permanently disabled for purposes of this Plan and when such disability (if any) commenced, and such determinations by the Committee shall be conclusive and binding on the Participant and all persons claiming by, through or under such Participant. These determinations shall be made on the basis of medical reports and other evidence satisfactory to the Committee and in accordance with a uniform, nondiscriminatory policy applied by the Committee, but such determinations shall not be binding on the Company or any Participant with respect to any other employee benefit or other plan or insurance policy, and need not be consistent with any determinations made under any such plan or insurance policy.

     4.10 Effect of Retirement or Death. The retirement or death of a Participant shall terminate, effective on the date of such retirement or death, the participation of such Participant in this Plan subject to the conditions set forth in Paragraph 4.11. For purposes of this Plan, a Participant shall be deemed to have retired when the Participant retires under the provisions of the pension plan for Employees of Valero or any other, similar pension plan of the Company providing benefits to such Participant. In the case of a Participant who is not a participant in such a plan, retirement shall be deemed to occur when the Participant retires from the service of the Company.

     4.11 Exercise Following Termination, Retirement, Disability or Death. If a Participant’s employ-ment is terminated because of retirement, death or disability (with the determination of disability to be made within the sole discretion of the Committee), any unexercised Option or SAR held by the Participant shall remain outstanding according to its original terms; alternatively, the Committee or, except with respect to a Participant subject to Section 16 under the Exchange Act, the Chief Executive Officer of the Company, may prescribe new or additional terms for the vesting, exercise or realization of the Option or SAR. Absent any determination by the Committee or the Chief Executive Officer to the contrary, any unexercised Option or SAR held by a Participant whose employment is terminated because of retirement, death or disability shall vest or become exercisable according to the Option or SAR’s original terms.

     4.12 Effect of Change of Control. (A) As used herein, the term “Change of Control” shall mean each occurrence of any one or more of the following events:

     (i) the stockholders of Valero 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

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assets to any other Person (other than a wholly owned subsidiary of the Company); or (c) the Company will be liquidated or dissolved; or

     (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 (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 30% or more of the shares of Common Stock then outstanding, or for any number or amount of Common Stock 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 Common Stock then outstanding; or

     (iv) individuals who, as of any date, constitute the Board of Directors (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 Valero’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 of Directors or the Committee to constitute a “Change of Control” hereunder.

          (B) Notwithstanding the provisions of Paragraph 4.7, in the event that a Change of Control shall occur, each Option (and any SARs) held by a Participant pursuant to the Plan shall remain exercisable until the earlier of (i) the Expiration Date of the Option, or (ii) 90 days following the Participant’s date of termination of employment.

5. Adjustments Upon Changes In Capitalization.

     5.1. Securities Received Upon Exercise. If all or any portion of an Option or SAR is exercised subsequent to any stock dividend, rights distribution, split-up, recapitalization, exchange of shares, merger, consolidation, spin-off, reorganization, or liquidation, as a result of which shares or other securities of any class or rights shall be issued in respect of outstanding shares of Common Stock or shares of Common Stock shall be changed into the same or a different number of shares of the same or another class or other securities (hereafter “Reorganization Event”), the person exercising such Option or SAR shall receive, (a) for the aggregate price payable upon such exercise of such Option, (i) the aggregate number and class of shares, rights or other securities for which a recognized market exists, and (ii) a cash amount equal to the fair market value on such date, as reasonably determined by the Committee, of any other property (other than regular cash dividend payments) and of any shares, rights or

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other securities for which no recognized market exists, which, if shares of Common Stock (as authorized at the date of the granting of such Option) had been purchased at the date of granting of the Option for the same aggregate price (on the basis of the price per share provided in the Option) and had not been disposed of, such person or persons would be holding at the time of such exercise as a result of such purchase and any such Reorganization Event, and (b) a cash amount upon the exercise of the SARs equal to the difference between the aggregate Strike Price of such SAR and the aggregate of (i) the average sales price, on the date provided in Paragraph 4.2 hereof, as the case may be, of any whole shares or units of Common Stock, rights or other securities for which a recognized market exists, and (ii) the fair market value on such date, as reasonably determined by the Committee, of any other property (other than regular cash dividend payments) which the holder of a number of shares of Common Stock equal to the number of such SARs, if such shares had been purchased at the date of granting of such SARs and not otherwise disposed of, would be holding at the time of exercise of such SARs as a result of such purchase and any such Reorganization Event; provided, however, that no fractional share of Common Stock, fractional right or other fractional security shall be issued upon any such exercise, and the aggregate price paid shall be appropriately reduced to reflect any fractional share of Common Stock, fractional right or other fractional security not issued; and provided further, however, that if the exercise of any Option subsequent to any Reorganization Event would, pursuant to clause (a) of this Paragraph 5.1, require the delivery of shares, rights or other securities that Valero is not then authorized to issue or that in the sole judgment of the Committee cannot be issued without undue effort or expense, the person exercising the Option shall receive, in lieu of such shares, rights or other securities, a cash payment equal to the fair market value on the Exercise Date, as reasonably determined by the Committee, of such shares, rights or other securities. For purposes of applying the provisions of this Plan, the Preference Share Purchase Rights distributed pursuant to the Rights Agreement shall be deemed not to have been distributed until the Distribution Date (as defined in the Rights Agreement).

     5.2. Adjustment of Option Shares Available. In the event of any change in the number of shares of Common Stock outstanding resulting from a Reorganization Event, (a) the aggregate number and class of shares of Common Stock remaining available to be optioned under this Plan shall be that number and class which a person, to whom an Option had been granted for all of the available shares of Common Stock under this Plan on the date preceding such change, would be entitled to receive as provided in Paragraph 5, and (b) the aggregate number of SARs remaining available under this Plan shall be determined pursuant to the formula b/a (c) wherein:

a = the number of Option Shares available to be optioned under this Plan immediately prior to such change,

b = the number of Option Shares available to be optioned under this Plan immediately following such change, and

c = the number of SARs available for grant under this Plan immediately prior to such change.

Upon the occurrence of any Reorganization Event, the Committee shall be entitled (but shall not be required) to determine that new Option Agreements shall be entered into with Participants reflecting the Reorganization Event.

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6. Administration.

     6.1. Plan Administered by Committee. This Plan shall be administered by a committee composed solely of two or more “Non-Employee Directors” (as defined in Rule 16b-3 under the Exchange Act) of Valero, which committee shall, except as hereinafter set forth, be the Compensation Committee, as appointed and constituted from time to time by the Board of Directors. In the event that the membership of the Compensation Committee shall fail to meet the foregoing criteria, then additional or different members of the Board of Directors shall be appointed by the Board of Directors to act for purposes of administering this Plan so that the Committee administering this Plan shall consist solely of two or more “Non-Employee Directors.”

     6.2. Powers of the Committee. In connection with its administration of this Plan, the Committee is empowered to:

(a)	Make all determinations and computations concerning the selection of Participants, the granting of Options and SARs, the pricing thereof and the number of Option Shares to be optioned, and SARs to be granted, to each Participant;
(b)	Cause Valero to enter into Option Agreements with Participants;
(c)	With the consent of the Participant, enter into agreements amending any Option Agreement to grant SARs thereunder, change the Option Price or Expiration Date of any Option, the Strike Price of any SAR or any other term or condition thereof, or to terminate any such Option Agreement;
(d)	Make rules and regulations for the administration of the Plan not inconsistent with the terms and provisions of this Plan, including rules providing for the accelerated exercise of Options and SARs in such circumstances as the Committee may deem appropriate;
(e)	Construe all terms, provisions, conditions and limitations of the Plan in good faith, and adopt amendments to the Plan;
(f)	Make equitable adjustments for any mistakes or errors in the administration of this Plan or deemed by the Committee to be necessary as the result of any unusual situation or any ambiguity in the Plan;
(g)	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.

     6.3. Express Powers not Exclusive. The foregoing list of express powers granted to the Committee upon the adoption of this Plan is not intended to be either complete or exclusive, but the Committee shall have, in addition to the specific powers granted by this Plan, such powers that it may deem necessary, desirable, convenient or appropriate for the supervision and administration of this Plan. Except as otherwise specifically provided herein, the decisions or judgment of the 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.

7. Miscellaneous Provisions.

     7.1. Nonassignability. Without prior written approval from the Committee, no Options, SARs, or any other security, right or interest granted under this Plan shall be transferable by the Participant, except upon Participant’s death and then the same shall be transferred to the Participant’s beneficiary designated under the Valero Energy Corporation Beneficiary Designation Form, or if there is no such designation, then the same shall be transferred pursuant to the will of the Participant

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and if there is no will, then pursuant to the applicable laws of descent and distribution, and no Participant or other person claiming by, through or under a Participant shall have any right to sell, assign, transfer, pledge, anticipate, mortgage or otherwise encumber, transfer, hypothecate or convey in advance of actual receipt any Option Shares, SARs, or any cash amounts or other shares, rights or securities (if any) payable hereunder, or any part thereof, all of which are, and all rights in and to which are, hereby expressly declared to be nonassignable and nontransferable; any such purported sale, assignment or conveyance without the Committee’s prior approval shall be void and of no force or effect. No Option Shares, SARs, and no part of any cash amounts or other shares, rights or securities payable hereunder (if any) shall, prior to actual payment or delivery, be subject to seizure or sequestration for the payment of any debts, judgments, alimony or separate maintenance owed by a Participant, or other person claiming by, through or under a Participant, or be transferable by operation of law in the event of bankruptcy or insolvency.

     7.2. Investment Letter. As a condition to the exercise of any portion of an Option, the Committee, the General Counsel or the Corporate Secretary may require the person exercising such Option to represent and warrant to Valero at the time of any such exercise that the Option Shares are being purchased only for investment and without any present intention to sell or distribute such Option Shares, if, in the opinion of counsel for Valero, such representation is required or desirable under the Securities Act of 1933 or any other applicable state, federal or local law, regulation or rule of any governmental agency. The Committee, the General Counsel or the Corporate Secretary may require such person to execute and deliver to Valero an appropriate investment letter containing representations and warranties of the type generally described above.

     7.3. Representatives of the Participant. Neither the Company, its officers, directors, employees, or agents, nor any member of the Committee shall bear any liability to the estate of, or to any spouse, beneficiary, legatee or heir of a Participant, or to the Participant, or to any other person, for authorizing an heir, beneficiary, executor, legatee, administrator, guardian or legal representative of a Participant, or an individual or entity who is represented as such, to exercise an Option or SAR or for issuing the Option Shares purchased pursuant to the exercise of any Option, or for making any cash payment (or for withholding any Tax Payment from any cash payment) relating to any SAR granted under this Plan.

     7.4. Responsibility for Taxes. All taxes payable with respect to income to a Participant resulting from the exercise of an Option or SARs granted hereunder shall be the sole responsibility of the Participant, not of the Company or Valero, whether or not Valero or the Company shall have withheld or collected from the Participant any sums required to be withheld or collected in respect of such income, and whether or not any sums withheld or collected shall be sufficient to provide for any such taxes.

     7.5. Employment Not Guaranteed. Nothing contained in this Plan nor any action taken hereunder shall be construed to create a contract of employment or to give any Participant any right to be retained in the employ of the Company or to serve or continue to serve as an officer or director of Valero or any subsidiary of Valero.

     7.6. Gender, Singular and Plural. All pronouns and any variations thereof shall be deemed to refer to the masculine, feminine, or neuter, as the identity of the person or persons may require. As the context may require, the singular may be read as the plural and the plural as the singular.

     7.7. Captions. The captions of the Paragraphs of this Plan are for convenience only and shall not control or affect the meaning or construction of any of its provisions.

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     7.8. Validity. In the event any provision of this Plan is held invalid, void, or unenforceable, the same shall not affect, in any respect whatsoever, the validity of any other provision of this Plan.

     7.9. Notice. Any notice, statement, decision or communication required or permitted to be given under this Plan shall be sufficient if in writing and hand delivered, or sent by registered or certified mail, if to the Company, to the principal office of Valero, directed to the attention of the Corporate Secretary of Valero, and if to a Participant or other person, to the address of the Participant or other person as it shall appear on the books of the Company. Any such notice shall be deemed given as of the date of delivery or, if delivery is made by mail, as of the third day following the date shown on the postmark on receipt for registration or certification.

     7.10 NYSE Listing. Notwithstanding anything to the contrary contained in this Plan, in any Option grant, or any agreement entered into hereunder, any grant made under this Plan shall be conditional and shall be entered into or granted, as the case may be, subject to acceptance of the Option Shares for listing on the NYSE. No such agreement entered into under this Plan or any Option grant made under this Plan shall create any obligation in the Company prior to such acceptance. If the Option Shares ultimately are not accepted for such listing, then any and all such agreements theretofore entered into shall thereupon terminate and shall be void and of no force or effect, no Option Shares shall be required to be issued thereunder.

     7.11 Inconsistency. In the event of any conflict or inconsistency between the provisions of this Plan and the provisions of any Option Agreement, the provisions of this Plan shall control.

     7.12 Delegation. Subject to the terms of the Plan and applicable law, the Committee may delegate to one or more officers or managers of the Company or any Affiliate, or to a committee of such officers or managers, the authority, subject to the terms and limitations the Committee shall determine, to grant Awards to, or to cancel, modify or waive rights with respect to, or to amend, suspend, or terminate Awards held by, Employees who are not deemed “officers” or “directors” of the Company for purposes of Section 16 of the Exchange Act, or who are otherwise not subject to Section 16.

8. Amendment and Termination of Plan and Option Agreements.

     8.1. Amendments and Termination. The Board of Directors or the Committee, without approval of the Participants but subject to Paragraph 8.2, may amend this Plan from time to time. The Board of Directors or the Committee, without approval of the Participants but subject to Paragraph 8.2, may at any time terminate this Plan.

     8.2. Effect of Amendment or Termination. Any amendment or termination of this Plan may not materially adversely affect Options or SARs already granted. If any termination or amendment materially adversely affects Options or SARs already granted, then such Options and SARs shall, subject to Paragraph 8.3, remain in full force and effect as if this Plan had not been so amended or terminated. If the Board of Directors or the Committee deems it appropriate or is advised by counsel that stockholder approval is required, the amendment or termination of this Plan shall be submitted to the stockholders of Valero for approval.

     8.3 Cancellation of Options. Any other provision of this Plan to the contrary notwithstanding, if either (a) the Option Price of any Option shall on any NYSE trading day equal or exceed 125 percent of the closing sales price per share of the Common Stock (determined as provided in Paragraph 3.7), or (b) out of any period of 120 consecutive NYSE trading days the Option Price of any Option shall exceed the

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closing sales price per share of the Common Stock (determined as provided in Paragraph 3.7) on any 80 or more of such days, then the Committee, in its sole discretion, may unilaterally cancel and terminate such Option, the related Option Agreement and any associated SARs. Upon such Committee determination, the Expiration Date of such Option, Option Agreement, and SARs shall be at the close of business on the date of such determination. The Committee shall cause notification of cancellation to be sent to the Participant (or other person entitled to exercise such Option), but failure to send or any delay in sending notice shall not nullify, delay, or otherwise affect cancellation. No compensation shall be paid or payable to any Participant (or other person entitled to exercise such Option), or other person claiming by, through or under a Participant, in respect of any cancellation. If an Option, the related Option Agreement, and any associated SARs, shall be terminated and canceled pursuant to the provisions of this Paragraph 8.3, the Option Shares and any associated SARs subject to such Option (to the extent not theretofore exercised) shall once more be available to be optioned and sold under this Plan pursuant to a new Option granted hereunder. No Participant with respect to whom an Option and any associated SARs has been canceled pursuant to this Paragraph 8.3 shall have any right, whether by virtue of such cancellation or otherwise, to require the Company or the Committee to grant a new Option to him under this Plan or any other stock option plan of the Company.

9. Claims.

     9.1. Filing of Claims. A Participant or other person claiming to have been denied any benefit or right provided under this Plan shall have the right to file a written claim with the Committee. All claims shall be submitted on a form provided by the Committee, which shall be signed by the claimant and shall be considered filed on the date the claim is received by the Committee. The claim will be reviewed and a written decision will be rendered by a member of the Committee designated by the Committee for such purpose within 90 days following receipt of the claim.

     9.2. Review of Denial. Within 90 days after receipt of a notice of any denial of benefits, the claimant or his authorized representative may request, in writing, to appear before the full Committee for a review of his or her claim. The Committee in its discretion may elect to grant the Participant’s request to personally appear before the Committee. Any decision of the Committee thereafter to deny benefits shall be in writing and shall include the specific reasons for the decision and references to relevant Plan provisions on which the decision is based. The decision of the Committee shall be final, conclusive and binding upon the Participant or other claimant and all persons claiming by, through or under such claimant.

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EX-10.16

Exhibit 10.16

SCHEDULE OF CHANGE OF CONTROL AGREEMENTS

The following have executed Change of Control Agreements substantially in the form of the agreement attached as to Exhibit 10.01 to Valero’s Current Report on Form 8-K dated January 17, 2007 and filed January 19, 2007 (SEC File No. 1-13175).

Michael S. Ciskowski
S. Eugene Edwards
Joseph W. Gorder
Richard J. Marcogliese

EX-10.17

Exhibit 10.17

CHANGE OF CONTROL
SEVERANCE AGREEMENT

     AGREEMENT, dated as of the 15th day of March, 2007 (this “Agreement”), by and between Valero Energy Corporation, a Delaware corporation (the “Company”), and Kimberly S. Bowers (the “Executive”).

     WHEREAS, the Board of Directors of the Company (the “Board”), has determined that it is in the best interests of the Company and its stockholders to assure that the Company will have the continued dedication of the Executive, notwithstanding the possibility, threat or occurrence of a Change of Control (as defined herein). The Board believes it is imperative to diminish the inevitable distraction of the Executive by virtue of the personal uncertainties and risks created by a pending or threatened Change of Control and to encourage the Executive’s full attention and dedication to the current Company in the event of any threatened or pending Change of Control, and to provide the Executive with compensation and benefits arrangements upon a Change of Control that ensure that the compensation and benefits expectations of the Executive will be satisfied and that are competitive with those of other corporations. Therefore, in order to accomplish these objectives, the Board has caused the Company to enter into this Agreement.

     NOW, THEREFORE, IT IS HEREBY AGREED AS FOLLOWS:

     Section 1. Certain Definitions. (a) “Effective Date” means the first date during the Change of Control Period (as defined herein) on which a Change of Control occurs. Notwithstanding anything in this Agreement to the contrary, if a Change of Control occurs and if the Executive’s employment with the Company is terminated prior to the date on which the Change of Control occurs, and if it is reasonably demonstrated by the Executive that such termination of employment (1) was at the request of a third party that has taken steps reasonably calculated to effect a Change of Control or (2) otherwise arose in connection with or anticipation of a Change of Control, then “Effective Date” means the date immediately prior to the date of such termination of employment.

     (b) “Change of Control Period” means the period commencing on the date hereof and ending on the third anniversary of the date hereof; provided, however, that, commencing on the date one year after the date hereof, and on each annual anniversary of such date (such date and each annual anniversary thereof, the “Renewal Date”), unless previously terminated, the Change of Control Period shall be automatically extended so as to terminate three years from such Renewal Date, unless, at least 60 days prior to the Renewal Date, the Company shall give notice to the Executive that the Change of Control Period shall not be so extended.

     (c) “Affiliated Company” means any company controlled by, controlling or under common control with the Company.

     (d) “Change of Control” means:

     (1) The acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”))

(a “Person”) of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of either (A) the then-outstanding shares of common stock of the Company (the “Outstanding Company Common Stock”) or (B) the combined voting power of the then-outstanding voting securities of the Company entitled to vote generally in the election of directors (the “Outstanding Company Voting Securities”); provided, however, that, for purposes of this Section 1(d)(1), the following acquisitions of Outstanding Company Common Stock or of Outstanding Company Voting Securities shall not constitute a Change of Control: (i) any acquisition directly from the Company, (ii) any acquisition by the Company, (iii) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any Affiliated Company or (iv) any acquisition by any corporation pursuant to a transaction that complies with Sections 1(d)(3)(A), 1(d)(3)(B) and 1(d)(3)(C);

     (2) Individuals who, as of the date hereof, constitute the Board (the “Incumbent Board”) cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the date hereof 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 other than the Board;

     (3) Consummation of a reorganization, merger, statutory share exchange or consolidation or similar corporate transaction involving the Company or any of its subsidiaries, a sale or other disposition of all or substantially all of the assets of the Company (each, a “Business Combination”), in each case unless, following such Business Combination, (A) all or substantially all of the individuals and entities that were the beneficial owners of the Outstanding Company Common Stock and the Outstanding Company Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 50% of the then-outstanding shares of common stock and the combined voting power of the then-outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation that, as a result of such transaction, owns the Company or all or substantially all of the Company’s assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership immediately prior to such Business Combination of the Outstanding Company Common Stock and the Outstanding Company Voting Securities, as the case may be, (B) no Person (excluding any corporation resulting from such Business Combination or any employee benefit plan (or related trust) of the Company or such corporation resulting from such Business Combination) beneficially owns, directly or indirectly, 20% or more of, respectively, the then-outstanding shares of common stock of the corporation resulting from such Business Combination or the combined voting power of the then-outstanding voting securities of such corporation, except to the extent that such ownership existed prior to the Business Combination, and (C) at least a majority of the members of the board of directors of the corporation resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement or of the action of the Board providing for such Business Combination; or

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     (4) Approval by the stockholders of the Company of a complete liquidation or dissolution of the Company.

     Section 2. Employment Period. The Company hereby agrees to continue the Executive in its employ, subject to the terms and conditions of this Agreement, for the period commencing on the Effective Date and ending on the third anniversary of the Effective Date (the “Employment Period”). The Employment Period shall terminate upon the Executive’s termination of employment for any reason.

     Section 3. Terms of Employment. (a) Position and Duties. (1) During the Employment Period, (A) the Executive’s position (including status, offices, titles and reporting requirements), authority, duties and responsibilities shall be at least commensurate in all material respects with the most significant of those held, exercised and assigned at any time during the 120-day period immediately preceding the Effective Date and (B) the Executive’s services shall be performed at the office where the Executive was employed immediately preceding the Effective Date or at any other location less than 35 miles from such office.

     (2) During the Employment Period, and excluding any periods of vacation and sick leave to which the Executive is entitled, the Executive agrees to devote reasonable attention and time during normal business hours to the business and affairs of the Company and, to the extent necessary to discharge the responsibilities assigned to the Executive hereunder, to use the Executive’s reasonable best efforts to perform faithfully and efficiently such responsibilities. During the Employment Period, it shall not be a violation of this Agreement for the Executive to (A) serve on corporate, civic or charitable boards or committees, (B) deliver lectures, fulfill speaking engagements or teach at educational institutions and (C) manage personal investments, so long as such activities do not significantly interfere with the performance of the Executive’s responsibilities as an employee of the Company in accordance with this Agreement. It is expressly understood and agreed that, to the extent that any such activities have been conducted by the Executive prior to the Effective Date, the continued conduct of such activities (or the conduct of activities similar in nature and scope thereto) subsequent to the Effective Date shall not thereafter be deemed to interfere with the performance of the Executive’s responsibilities to the Company.

     (b) Compensation. (1) Base Salary. During the Employment Period, the Executive shall receive an annual base salary (the “Annual Base Salary”) at an annual rate at least equal to 12 times the highest monthly base salary paid or payable, including any base salary that has been earned but deferred, to the Executive by the Company and the Affiliated Companies in respect of the 12-month period immediately preceding the month in which the Effective Date occurs. The Annual Base Salary shall be paid at such intervals as the Company pays executive salaries generally. During the Employment Period, the Annual Base Salary shall be reviewed at least annually, beginning no more than 12 months after the last salary increase awarded to the Executive prior to the Effective Date. Any increase in the Annual Base Salary shall not serve to limit or reduce any other obligation to the Executive under this Agreement. The Annual Base Salary shall not be reduced after any such increase and the term “Annual Base Salary” shall refer to the Annual Base Salary as so increased.

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     (2) Annual Bonus. In addition to the Annual Base Salary, the Executive shall be awarded, for each fiscal year ending during the Employment Period, an annual bonus (the “Annual Bonus”) in cash at least equal to the Executive’s highest bonus earned under the Company’s annual incentive bonus plans, or any comparable bonus under any predecessor or successor plan or plans, for the last three full fiscal years prior to the Effective Date (or for such lesser number of full fiscal years prior to the Effective Date for which the Executive was eligible to earn such a bonus, and annualized in the case of any bonus earned for a partial fiscal year) (the “Recent Annual Bonus”). (If the Executive has not been eligible to earn such a bonus for any period prior to the Effective Date, the “Recent Annual Bonus” shall mean the Executive’s target annual bonus for the year in which the Effective Date occurs.) Each such Annual Bonus shall be paid no later than the end of the third month of the fiscal year next following the fiscal year for which the Annual Bonus is awarded, unless the Executive shall elect to defer the receipt of such Annual Bonus.

     (3) Incentive, Savings and Retirement Plans. During the Employment Period, the Executive shall be entitled to participate in all incentive, savings and retirement plans, practices, policies, and programs applicable generally to other peer executives of the Company and the Affiliated Companies, but in no event shall such plans, practices, policies and programs provide the Executive with incentive opportunities (measured with respect to both regular and special incentive opportunities, to the extent, if any, that such distinction is applicable), savings opportunities and retirement benefit opportunities, in each case, less favorable, in the aggregate, than the most favorable of those provided by the Company and the Affiliated Companies for the Executive under such plans, practices, policies and programs as in effect at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive, those provided generally at any time after the Effective Date to other peer executives of the Company and the Affiliated Companies.

     (4) Welfare Benefit Plans. During the Employment Period, the Executive and/or the Executive’s family, as the case may be, shall be eligible for participation in and shall receive all benefits under welfare benefit plans, practices, policies and programs provided by the Company and the Affiliated Companies (including, without limitation, medical, prescription, dental, vision, disability, employee life, group life, accidental death and travel accident insurance plans and programs) to the extent applicable generally to other peer executives of the Company and the Affiliated Companies, but in no event shall such plans, practices, policies and programs provide the Executive with benefits that are less favorable, in the aggregate, than the most favorable of such plans, practices, policies and programs in effect for the Executive at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive, those provided generally at any time after the Effective Date to other peer executives of the Company and the Affiliated Companies.

     (5) Expenses. During the Employment Period, the Executive shall be entitled to receive prompt reimbursement for all reasonable expenses incurred by the Executive in accordance with the most favorable policies, practices and procedures of the Company and the Affiliated Companies in effect for the Executive at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and the Affiliated Companies.

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     (6) Fringe Benefits. During the Employment Period, the Executive shall be entitled to fringe benefits, including, without limitation, tax and financial planning services, payment of club dues, and, if applicable, use of an automobile and payment of related expenses, in accordance with the most favorable plans, practices, programs and policies of the Company and the Affiliated Companies in effect for the Executive at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and the Affiliated Companies.

     (7) Office and Support Staff. During the Employment Period, the Executive shall be entitled to an office or offices of a size and with furnishings and other appointments, and to exclusive personal secretarial and other assistance, at least equal to the most favorable of the foregoing provided to the Executive by the Company and the Affiliated Companies at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive, as provided generally at any time thereafter with respect to other peer executives of the Company and the Affiliated Companies.

     (8) Vacation. During the Employment Period, the Executive shall be entitled to paid vacation in accordance with the most favorable plans, policies, programs and practices of the Company and the Affiliated Companies as in effect for the Executive at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and the Affiliated Companies.

     (9) Immediate Vesting of Outstanding Equity Incentive Awards. Notwithstanding any provision in the Company’s stock incentive plans or the award agreements thereunder, effective immediately upon the occurrence of a Change of Control, (A) all stock options (incentive or non-qualified) outstanding as of the date of such Change of Control, which are not then exercisable and vested, shall become fully exercisable and vested to the full extent of the original grant and, following the Executive’s termination of employment for any reason, shall remain exercisable for the shorter of (x) five years from the Executive’s date of termination of employment and (y) the remainder of the original option term; (B) all restrictions and deferral limitations applicable to any restricted stock awards outstanding as of the date of such Change of Control shall lapse, and such restricted stock awards shall become free of all restrictions and become fully vested and transferable to the full extent of the original grant; and (C) all performance share awards outstanding as of the date of such Change of Control for any outstanding performance periods shall fully vest and be earned and payable in full based on the deemed achievement of performance at 200% of target level for the entire performance period.

     Section 4. Termination of Employment. (a) Death or Disability. The Executive’s employment shall terminate automatically if the Executive dies during the Employment Period. If the Company determines in good faith that the Executive has a Disability (as defined herein) that has occurred during the Employment Period (pursuant to the definition of “Disability”), it may give to the Executive written notice in accordance with Section 11(b) of its intention to terminate the Executive’s employment. In such event, the Executive’s employment with the Company shall terminate effective on the 30th day after receipt of such notice by the Executive (the “Disability Effective Date”), provided that, within the 30 days after such receipt, the

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Executive shall not have returned to full-time performance of the Executive’s duties. “Disability” means the absence of the Executive from the Executive’s duties with the Company on a full-time basis for 180 consecutive business days as a result of incapacity due to mental or physical illness that is determined to be total and permanent by a physician selected by the Company or its insurers and acceptable to the Executive or the Executive’s legal representative.

     (b) Cause. The Company may terminate the Executive’s employment during the Employment Period for Cause. “Cause” means:

     (1) the willful and continued failure of the Executive to perform substantially the Executive’s duties (as contemplated by Section 3(a)(1)(A)) with the Company or any Affiliated Company (other than any such failure resulting from incapacity due to physical or mental illness or following the Executive’s delivery of a Notice of Termination for Good Reason), after a written demand for substantial performance is delivered to the Executive by the Board or the Chief Executive Officer of the Company that specifically identifies the manner in which the Board or the Chief Executive Officer of the Company believes that the Executive has not substantially performed the Executive’s duties, or

     (2) the willful engaging by the Executive in illegal conduct or gross misconduct that is materially and demonstrably injurious to the Company.

     For purposes of this Section 4(b), no act, or failure to act, on the part of the Executive shall be considered “willful” unless it is done, or omitted to be done, by the Executive in bad faith or without reasonable belief that the Executive’s action or omission was in the best interests of the Company. Any act, or failure to act, based upon authority given pursuant to a resolution duly adopted by the Board or upon the instructions of the Chief Executive Officer of the Company or a senior officer of the Company or based upon the advice of counsel for the Company shall be conclusively presumed to be done, or omitted to be done, by the Executive in good faith and in the best interests of the Company. The cessation of employment of the Executive shall not be deemed to be for Cause unless and until there shall have been delivered to the Executive a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters of the entire membership of the Board at a meeting of the Board called and held for such purpose (after reasonable notice is provided to the Executive and the Executive is given an opportunity, together with counsel for the Executive, to be heard before the Board), finding that, in the good faith opinion of the Board, the Executive is guilty of the conduct described in Section 4(b)(1) or 4(b)(2), and specifying the particulars thereof in detail.

     (c) Good Reason. The Executive’s employment may be terminated by the Executive for Good Reason or by the Executive voluntarily without Good Reason. “Good Reason” means:

     (1) the assignment to the Executive of any duties inconsistent in any respect with the Executive’s position (including status, offices, titles and reporting requirements), authority, duties or responsibilities as contemplated by Section 3(a)(1)(A), or any other action by the Company that results in a diminution in such position, authority, duties or responsibilities, excluding for this purpose an isolated, insubstantial and inadvertent action not taken in bad faith and that is remedied by the Company promptly after receipt of notice thereof given by the Executive;

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     (2) any failure by the Company to comply with any of the provisions of Section 3(b), other than an isolated, insubstantial and inadvertent failure not occurring in bad faith and that is remedied by the Company promptly after receipt of notice thereof given by the Executive;

     (3) the Company’s requiring the Executive (i) to be based at any office or location other than as provided in Section 3(a)(1)(B), (ii) to be based at a location other than the principal executive offices of the Company if the Executive was employed at such location immediately preceding the Effective Date, or (iii) to travel on Company business to a substantially greater extent than required immediately prior to the Effective Date;

     (4) any purported termination by the Company of the Executive’s employment otherwise than as expressly permitted by this Agreement; or

     (5) any failure by the Company to comply with and satisfy Section 10(c).

     For purposes of this Section 4(c), any good faith determination of Good Reason made by the Executive shall be conclusive. The Executive’s mental or physical incapacity following the occurrence of an event described above in clauses (1) through (5) shall not affect the Executive’s ability to terminate employment for Good Reason.

     (d) Notice of Termination. Any termination by the Company for Cause, or by the Executive for Good Reason, shall be communicated by Notice of Termination to the other party hereto given in accordance with Section 11(b). “Notice of Termination” means a written notice that (1) indicates the specific termination provision in this Agreement relied upon, (2) to the extent applicable, sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive’s employment under the provision so indicated, and (3) if the Date of Termination (as defined herein) is other than the date of receipt of such notice, specifies the Date of Termination (which Date of Termination shall be not more than 30 days after the giving of such notice). The failure by the Executive or the Company to set forth in the Notice of Termination any fact or circumstance that contributes to a showing of Good Reason or Cause shall not waive any right of the Executive or the Company, respectively, hereunder or preclude the Executive or the Company, respectively, from asserting such fact or circumstance in enforcing the Executive’s or the Company’s respective rights hereunder.

     (e) Date of Termination. “Date of Termination” means (1) if the Executive’s employment is terminated by the Company for Cause, or by the Executive for Good Reason, the date of receipt of the Notice of Termination or any later date specified in the Notice of Termination, as the case may be, (2) if the Executive’s employment is terminated by the Company other than for Cause or Disability, the Date of Termination shall be the date on which the Company notifies the Executive of such termination, and (3) if the Executive’s employment is terminated by reason of death or Disability, the Date of Termination shall be the date of death of the Executive or the Disability Effective Date, as the case may be.

     Section 5. Obligations of the Company upon Termination. (a) Good Reason; Other Than for Cause, Death or Disability. If, during the Employment Period, the Company

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terminates the Executive’s employment other than for Cause or Disability or the Executive terminates employment for Good Reason:

     (1) the Company shall pay to the Executive, in a lump sum in cash within 30 days after the Date of Termination, the aggregate of the following amounts:

     (A) the sum of (i) the Executive’s Annual Base Salary through the Date of Termination, (ii) the product of (x) the Recent Annual Bonus and (y) a fraction, the numerator of which is the number of days in the current fiscal year through the Date of Termination and the denominator of which is 365, and (iii) any accrued vacation pay, in each case, to the extent not theretofore paid (the sum of the amounts described in subclauses (i), (ii) and (iii), the “Accrued Obligations”);

     (B) the amount equal to the product of (i) two and (ii) the sum of (x) the Executive’s Annual Base Salary and (y) the Recent Annual Bonus;

     (C) an amount equal to the excess of (i) the actuarial equivalent of the benefit under the Company’s qualified defined benefit retirement plan (the “Retirement Plan”) (utilizing actuarial assumptions no less favorable to the Executive than those in effect under the Retirement Plan immediately prior to the Effective Date) and any excess or supplemental retirement plan in which the Executive participates (collectively, the “SERP”) that the Executive would receive if the Executive’s employment continued for two years after the Date of Termination, assuming for this purpose that (x) the Executive’s age and service credit increase during the two-year period, (y) all accrued benefits are fully vested and (z) the Executive’s compensation in each of the two years is that required by Sections 3(b)(1) and 3(b)(2), over (ii) the actuarial equivalent of the Executive’s actual benefit (paid or payable), if any, under the Retirement Plan and the SERP as of the Date of Termination; and

     (D) an amount equal to the sum of the Company matching or other Company contributions under the Company’s qualified defined contribution plans and any excess or supplemental defined contribution plans in which the Executive participates that the Executive would receive if the Executive’s employment continued for two years after the Date of Termination, assuming for this purpose that (x) the Executive’s benefits under such plans are fully vested, (y) the Executive’s compensation in each of the two years is that required by Sections 3(b)(1) and 3(b)(2) and (z) to the extent that the Company contributions are determined based on the contributions or deferrals of the Executive, that the Executive’s contribution or deferral elections, as appropriate, are those in effect immediately prior the Date of Termination; and

     (2) for two years after the Executive’s Date of Termination, or such longer period as may be provided by the terms of the appropriate plan, program, practice or policy, the Company shall continue benefits to the Executive and/or the Executive’s family at least equal to those that would have been provided to them in accordance with

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the plans, programs, practices and policies described in Section 3(b)(4) if the Executive’s employment had not been terminated or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and the Affiliated Companies and their families, provided, however, that, if the Executive becomes reemployed with another employer and is eligible to receive such benefits under another employer provided plan, the medical and other welfare benefits described herein shall be secondary to those provided under such other plan during such applicable period of eligibility. For purposes of determining eligibility (but not the time of commencement of benefits) of the Executive for retiree benefits pursuant to such plans, practices, programs and policies, the Executive shall be considered to have remained employed (for purposes of both age and service credit) until two years after the Date of Termination and to have retired on the last day of such period;

          (3) during the 12-month period following the Date of Termination, the Company shall, at its sole expense as incurred, provide the Executive with outplacement services the scope and provider of which shall be selected by the Executive in the Executive’s sole discretion, provided that, the cost of such outplacement shall not exceed $25,000 (as adjusted for inflation based on the Consumer Price Index or another nationally recognized published inflation index); and

          (4) to the extent not theretofore paid or provided, the Company shall timely pay or provide to the Executive any other amounts or benefits required to be paid or provided or that the Executive is eligible to receive under any plan, program, policy or practice or contract or agreement of the Company and the Affiliated Companies (such other amounts and benefits, the “Other Benefits”).

     (b) Death. If the Executive’s employment is terminated by reason of the Executive’s death during the Employment Period, the Company shall provide the Executive’s estate or beneficiaries with the Accrued Obligations and the timely payment or delivery of the Other Benefits, and shall have no other severance obligations under this Agreement. The Accrued Obligations shall be paid to the Executive’s estate or beneficiary, as applicable, in a lump sum in cash within 30 days of the Date of Termination. With respect to the provision of the Other Benefits, the term “Other Benefits” as utilized in this Section 5(b) shall include, without limitation, and the Executive’s estate and/or beneficiaries shall be entitled to receive, benefits at least equal to the most favorable benefits provided by the Company and the Affiliated Companies to the estates and beneficiaries of peer executives of the Company and the Affiliated Companies under such plans, programs, practices and policies relating to death benefits, if any, as in effect with respect to other peer executives and their beneficiaries at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive’s estate and/or the Executive’s beneficiaries, as in effect on the date of the Executive’s death with respect to other peer executives of the Company and the Affiliated Companies and their beneficiaries.

     (c) Disability. If the Executive’s employment is terminated by reason of the Executive’s Disability during the Employment Period, the Company shall provide the Executive with the Accrued Obligations and the timely payment or delivery of the Other Benefits, and shall have no other severance obligations under this Agreement. The Accrued Obligations shall be

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paid to the Executive in a lump sum in cash within 30 days of the Date of Termination. With respect to the provision of the Other Benefits, the term “Other Benefits” as utilized in this Section 5(c) shall include, and the Executive shall be entitled after the Disability Effective Date to receive, disability and other benefits at least equal to the most favorable of those generally provided by the Company and the Affiliated Companies to disabled executives and/or their families in accordance with such plans, programs, practices and policies relating to disability, if any, as in effect generally with respect to other peer executives and their families at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive and/or the Executive’s family, as in effect at any time thereafter generally with respect to other peer executives of the Company and the Affiliated Companies and their families.

     (d) Cause; Other Than for Good Reason. If the Executive’s employment is terminated for Cause during the Employment Period, the Company shall provide to the Executive (1) the Executive’s Annual Base Salary through the Date of Termination, (2) any accrued vacation pay, and (3) the Other Benefits, in each case, to the extent theretofore unpaid, and shall have no other severance obligations under this Agreement. If the Executive voluntarily terminates employment during the Employment Period, excluding a termination for Good Reason, the Company shall provide to the Executive the Accrued Obligations and the timely payment or delivery of the Other Benefits, and shall have no other severance obligations under this Agreement. In such case, all the Accrued Obligations shall be paid to the Executive in a lump sum in cash within 30 days of the Date of Termination.

     Section 6. Non-exclusivity of Rights. Nothing in this Agreement shall prevent or limit the Executive’s continuing or future participation in any plan, program, policy or practice provided by the Company or the Affiliated Companies and for which the Executive may qualify, nor, subject to Section 11(f), shall anything herein limit or otherwise affect such rights as the Executive may have under any other contract or agreement with the Company or the Affiliated Companies. Amounts that are vested benefits or that the Executive is otherwise entitled to receive under any plan, policy, practice or program of or any other contract or agreement with the Company or the Affiliated Companies at or subsequent to the Date of Termination shall be payable in accordance with such plan, policy, practice or program or contract or agreement, except as explicitly modified by this Agreement. Notwithstanding the foregoing, if the Executive receives payments and benefits pursuant to Section 5(a) of this Agreement, the Executive shall not be entitled to any severance pay or benefits under any severance plan, program or policy of the Company and the Affiliated Companies, unless otherwise specifically provided therein by a specific reference to this Agreement.

     Section 7. Full Settlement. The Company’s obligation to make the payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any set-off, counterclaim, recoupment, defense, or other claim, right or action that the Company may have against the Executive or others. In no event shall the Executive be obligated to seek other employment or take any other action by way of mitigation of the amounts payable to the Executive under any of the provisions of this Agreement, and such amounts shall not be reduced whether or not the Executive obtains other employment. The Company agrees to pay as incurred, to the full extent permitted by law, all legal fees and expenses that the Executive may reasonably incur as a result of any contest (regardless of the outcome thereof) by the Company, the Executive or others of the validity or enforceability of, or liability under, any

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provision of this Agreement or any guarantee of performance thereof (including as a result of any contest by the Executive about the amount of any payment pursuant to this Agreement), plus, in each case, interest on any delayed payment at the applicable federal rate provided for in Section 7872(f)(2)(A) of the Internal Revenue Code of 1986, as amended (the “Code”).

     Section 8. Certain Additional Payments by the Company.

     (a) Anything in this Agreement to the contrary notwithstanding, in the event it shall be determined that any payment or distribution by the Company or its Affiliated Companies to or for the benefit of the Executive (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise, but determined without regard to any additional payments required under this Section 8) (a “Payment”) would be subject to the excise tax imposed by Section 4999 of the Code or any interest or penalties are incurred by the Executive with respect to such excise tax (such excise tax, together with any such interest and penalties, collectively the “Excise Tax”), then the Executive shall be entitled to receive an additional payment (the “Gross-Up Payment”) in an amount such that, after payment by the Executive of all taxes (including any interest or penalties imposed with respect to such taxes), including, without limitation, any income taxes (and any interest and penalties imposed with respect thereto) and Excise Tax imposed upon the Gross-Up Payment, the Executive retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payments.

     (b) Subject to the provisions of Section 8(c), all determinations required to be made under this Section 8, including whether and when a Gross-Up Payment is required, the amount of such Gross-Up Payment and the assumptions to be utilized in arriving at such determination, shall be made by Ernst & Young, LLP, or such other nationally recognized certified public accounting firm as may be designated by the Executive, subject to the Company’s approval which will not be unreasonably withheld (the “Accounting Firm”). The Accounting Firm shall provide detailed supporting calculations both to the Company and the Executive within 15 business days of the receipt of notice from the Executive that there has been a Payment or such earlier time as is requested by the Company. In the event that the Accounting Firm is serving as accountant or auditor for the individual, entity or group effecting the Change of Control, the Executive, subject to the Company’s approval which will not be unreasonably withheld, may appoint another nationally recognized accounting firm to make the determinations required hereunder (which accounting firm shall then be referred to as the Accounting Firm hereunder). All fees and expenses of the Accounting Firm shall be borne solely by the Company. Any Gross-Up Payment, as determined pursuant to this Section 8, shall be paid by the Company to the Executive within 5 days of the receipt of the Accounting Firm’s determination. Any determination by the Accounting Firm shall be binding upon the Company and the Executive. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that Gross-Up Payments that will not have been made by the Company should have been made (the “Underpayment”), consistent with the calculations required to be made hereunder. In the event the Company exhausts its remedies pursuant to Section 8(c) and the Executive thereafter is required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by the Company to or for the benefit of the Executive.

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     (c) The Executive shall notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Company of the Gross-Up Payment. Such notification shall be given as soon as practicable, but no later than 10 business days after the Executive is informed in writing of such claim. The Executive shall apprise the Company of the nature of such claim and the date on which such claim is requested to be paid. The Executive shall not pay such claim prior to the expiration of the 30-day period following the date on which the Executive gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies the Executive in writing prior to the expiration of such period that the Company desires to contest such claim, the Executive shall:

     (1) give the Company any information reasonably requested by the Company relating to such claim,

     (2) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company,

     (3) cooperate with the Company in good faith in order effectively to contest such claim, and

     (4) permit the Company to participate in any proceedings relating to such claim;

     provided, however, that the Company shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest, and shall indemnify and hold the Executive harmless, on an after-tax basis, for any Excise Tax or income tax (including interest and penalties) imposed as a result of such representation and payment of costs and expenses. Without limitation on the foregoing provisions of this Section 8(c), the Company shall control all proceedings taken in connection with such contest, and, at its sole discretion, may pursue or forgo any and all administrative appeals, proceedings, hearings and conferences with the applicable taxing authority in respect of such claim and may, at its sole discretion, either pay the tax claimed to the appropriate taxing authority on behalf of the Executive and direct the Executive to sue for a refund or contest the claim in any permissible manner, and the Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; provided, however, that, if the Company pays such claim and directs the Executive to sue for a refund, the Company shall indemnify and hold the Executive harmless, on an after-tax basis, from any Excise Tax or income tax (including interest or penalties) imposed with respect to such payment or with respect to any imputed income in connection with such payment; and provided, further, that any extension of the statute of limitations relating to payment of taxes for the taxable year of the Executive with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Company’s control of the contest shall be limited to issues with respect to which the Gross-Up Payment would be payable hereunder, and the Executive shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority.

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     (d) If, after the receipt by the Executive of a Gross-Up Payment or payment by the Company of an amount on the Executive’s behalf pursuant to Section 8(c), the Executive becomes entitled to receive any refund with respect to the Excise Tax to which such Gross-Up Payment relates or with respect to such claim, the Executive shall (subject to the Company’s complying with the requirements of Section 8(c), if applicable) promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after payment by the Company of an amount on the Executive’s behalf pursuant to Section 8(c), a determination is made that the Executive shall not be entitled to any refund with respect to such claim and the Company does not notify the Executive in writing of its intent to contest such denial of refund prior to the expiration of 30 days after such determination, then the amount of such payment shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid.

     (e) Notwithstanding any other provision of this Section 8, the Company may, in its sole discretion, withhold and pay to the Internal Revenue Service or any other applicable taxing authority, for the benefit of the Executive, all or any portion of any Gross-Up Payment, and the Executive hereby consents to such withholding.

     Section 9. Confidential Information. The Executive shall hold in a fiduciary capacity for the benefit of the Company all secret or confidential information, knowledge or data relating to the Company or the Affiliated Companies, and their respective businesses, which information, knowledge or data shall have been obtained by the Executive during the Executive’s employment by the Company or the Affiliated Companies and which information, knowledge or data shall not be or become public knowledge (other than by acts by the Executive or representatives of the Executive in violation of this Agreement). After termination of the Executive’s employment with the Company, the Executive shall not, without the prior written consent of the Company or as may otherwise be required by law or legal process, communicate or divulge any such information, knowledge or data to anyone other than the Company and those persons designated by the Company. In no event shall an asserted violation of the provisions of this Section 9 constitute a basis for deferring or withholding any amounts otherwise payable to the Executive under this Agreement.

     Section 10. Successors. (a) This Agreement is personal to the Executive, and, without the prior written consent of the Company, shall not be assignable by the Executive other than by will or the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by the Executive’s legal representatives.

     (b) This Agreement shall inure to the benefit of and be binding upon the Company and its successors and assigns. Except as provided in Section 10(c), without the prior written consent of the Executive, this Agreement shall not be assignable by the Company.

     (c) The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to assume expressly and agree to perform this Agreement in the same manner and to

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the same extent that the Company would be required to perform it if no such succession had taken place. “Company” means the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid that assumes and agrees to perform this Agreement by operation of law or otherwise.

     Section 11. Miscellaneous. (a) This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware, without reference to principles of conflict of laws. The captions of this Agreement are not part of the provisions hereof and shall have no force or effect. This Agreement may not be amended or modified other than by a written agreement executed by the parties hereto or their respective successors and legal representatives.

     (b) All notices and other communications hereunder shall be in writing and shall be given by hand delivery to the other party or by registered or certified mail, return receipt requested, postage prepaid, addressed as follows:

if to the Executive:	At the most recent address on file in the Company’s records
if to the Company:	Valero Energy Corporation
	One Valero Way
	San Antonio, Texas 78249
	Attention:   Corporate Secretary

or to such other address as either party shall have furnished to the other in writing in accordance herewith. Notice and communications shall be effective when actually received by the addressee.

     (c) The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement.

     (d) The Company may withhold from any amounts payable under this Agreement such United States federal, state or local or foreign taxes as shall be required to be withheld pursuant to any applicable law or regulation.

     (e) The Executive’s or the Company’s failure to insist upon strict compliance with any provision of this Agreement or the failure to assert any right the Executive or the Company may have hereunder, including, without limitation, the right of the Executive to terminate employment for Good Reason pursuant to Sections 4(c)(1) through 4(c)(5), shall not be deemed to be a waiver of such provision or right or any other provision or right of this Agreement.

     (f) The Executive and the Company acknowledge that, except as may otherwise be provided under any other written agreement between the Executive and the Company, the employment of the Executive by the Company is “at will” and, subject to Section 1(a), prior to the Effective Date, the Executive’s employment may be terminated by either the Executive or the Company at any time prior to the Effective Date, in which case the Executive shall have no further rights under this Agreement. From and after the Effective Date, except as specifically provided herein, this Agreement shall supersede any other agreement between the parties with respect to the subject matter hereof.

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     IN WITNESS WHEREOF, the Executive has hereunto set the Executive’s hand and, pursuant to the authorization from the Board, the Company has caused these presents to be executed in its name on its behalf, all as of the day and year first above written.

Kimberly S. Bowers
VALERO ENERGY CORPORATION
By:
Name:	Gregory C. King
Title:	President

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EX-10.23

EXHIBIT 10.23

$2,500,000,000 5-YEAR REVOLVING CREDIT AGREEMENT

dated as of August 17, 2005

among

VALERO ENERGY CORPORATION

The Lenders Party Hereto

and

JPMORGAN CHASE BANK, N.A.,
as Administrative Agent and Global Administrative Agent

RBC CAPITAL MARKETS,
as Syndication Agent

and

BARCLAYS BANK PLC,
MIZUHO CORPORATE BANK, LTD.,

and

THE ROYAL BANK OF SCOTLAND PLC,
as Co-Documentation Agents

JPMORGAN SECURITIES INC. and RBC CAPITAL MARKETS,
as Co-Lead Arrangers and Joint Bookrunners

TABLE OF CONTENTS

ARTICLE I
DEFINITIONS

Section 1.01	Defined Terms	1
Section 1.02	Classification of Loans and Borrowings	17
Section 1.03	Terms Generally	17
Section 1.04	Accounting Terms; GAAP	18
Section 1.05	Letter of Credit Amounts	18
ARTICLE II THE CREDITS
Section 2.01	Commitments	18
Section 2.02	Commitment Increase	18
Section 2.03	Acquisition Effective Date Commitment Increase	20
Section 2.04	Loans and Borrowings	20
Section 2.05	Requests for Borrowings	21
Section 2.06	Letters of Credit	22
Section 2.07	Funding of Borrowings	27
Section 2.08	Interest Elections	28
Section 2.09	Termination and Reduction of Commitments	29
Section 2.10	Repayment of Loans; Evidence of Debt	29
Section 2.11	Prepayment of Loans	30
Section 2.12	Fees	30
Section 2.13	Interest	32
Section 2.14	Alternate Rate of Interest	32
Section 2.15	Increased Costs	33
Section 2.16	Break Funding Payments	34
Section 2.17	Taxes	35
Section 2.18	Payments Generally; Pro Rata Treatment; Sharing of Set-offs	36
Section 2.19	Mitigation Obligations; Replacement of Lenders	37
Section 2.20	Illegality	38
ARTICLE III REPRESENTATIONS AND WARRANTIES
Section 3.01	Organization; Powers	39
Section 3.02	Authorization; Enforceability	39
Section 3.03	Governmental Approvals; No Conflicts	39
Section 3.04	Financial Condition	39
Section 3.05	Environmental Matters	39
Section 3.06	No Default	40
Section 3.07	Investment and Holding Company Status	40
Section 3.08	Taxes	40
Section 3.09	ERISA	40
Section 3.10	Disclosure	40

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ARTICLE IV CONDITIONS
Section 4.01	Revolving Effective Date	41
Section 4.02	Acquisition Effective Date	42
Section 4.03	Each Credit Event	44
ARTICLE V AFFIRMATIVE COVENANTS
Section 5.01	Financial Statements and Other Information	45
Section 5.02	Notices of Material Events	46
Section 5.03	Existence; Conduct of Business	47
Section 5.04	Payment of Obligations	47
Section 5.05	Maintenance of Properties; Insurance	47
Section 5.06	Books and Records; Inspection Rights	47
Section 5.07	Compliance with Laws	48
Section 5.08	Use of Proceeds	48
ARTICLE VI NEGATIVE COVENANTS
Section 6.01	Indebtedness	48
Section 6.02	Liens	48
Section 6.03	Fundamental Changes	49
Section 6.04	Hedging Agreements	50
Section 6.05	Transactions with Affiliates	50
Section 6.06	Subsidiary Indebtedness	51
Section 6.07	Consolidated Interest Coverage Ratio	51
Section 6.08	Project Financing Indebtedness	51
ARTICLE VII EVENTS OF DEFAULT
ARTICLE VIII THE ADMINISTRATIVE AGENT AND THE GLOBAL ADMINISTRATIVE AGENT
ARTICLE IX MISCELLANEOUS
Section 9.01	Notices	56
Section 9.02	Waivers; Amendments	58
Section 9.03	Expenses; Indemnity; Damage Waiver	59
Section 9.04	Successors and Assigns	60
Section 9.05	Survival	63
Section 9.06	Counterparts; Integration; Effectiveness	63
Section 9.07	Severability	64
Section 9.08	Right of Setoff	64
Section 9.09	Governing Law; Jurisdiction; Consent to Service of Process	64
Section 9.10	Waiver Of Jury Trial	65
Section 9.11	Headings	65
Section 9.12	Confidentiality	65

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Section 9.13	Interest Rate Limitation	66
Section 9.14	USA PATRIOT Act	66
Section 9.15	Waiver of Notice of Termination	66

Pricing Schedule

Schedule 2.01 — Commitments
Schedule 2.03 — Acquisition Effective Date Commitment Increase
Schedule 2.06 — Outstanding Letters of Credit
Schedule 6.06 — Existing Subsidiary Indebtedness

EXHIBITS:

Exhibit A — Form of Assignment and Assumption
Exhibit B — Notice of Commitment Increase
Exhibit C — Form of Borrowing Request
Exhibit D — Form of Promissory Note
Exhibit E — Form of Opinion of Jay Browning, Borrower’s In-house Counsel
Exhibit F — Form of Opinion of Baker Botts L.L.P., Borrower’s Counsel

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          $2,500,000,000 5-YEAR REVOLVING CREDIT AGREEMENT dated as of August 17, 2005, among VALERO ENERGY CORPORATION, the LENDERS party hereto, JPMORGAN CHASE BANK, N.A., as Administrative Agent and Global Administrative Agent, RBC CAPITAL MARKETS, the global brand name for the corporation and investment banking businesses of Royal Bank of Canada and its affiliates, as Syndication Agent, and BARCLAYS BANK PLC, MIZUHO CORPORATE BANK, LTD., and THE ROYAL BANK OF SCOTLAND PLC, as Co-Documentation Agents.

          The parties hereto agree as follows:

ARTICLE I
Definitions

     Section 1.01 Defined Terms. As used in this Agreement, the following terms have the meanings specified below:

     “ABR”, when used in reference to any Loan or Borrowing, refers to whether such Loan, or the Loans comprising such Borrowing, are bearing interest at a rate determined by reference to the Alternate Base Rate.

     “Acquisition” means the merger of Premcor Inc. into the Borrower pursuant to the terms and conditions of the Acquisition Document.

     “Acquisition Document” means Agreement and Plan of Merger dated as of April 24, 2005 by and between the Borrower and Premcor Inc.

     “Acquisition Effective Date” means the date on which the conditions specified in Section 4.02 are satisfied (or waived in accordance with Section 9.02).

     “Adjusted LIBO Rate” means, with respect to any Eurodollar Borrowing for any Interest Period, an interest rate per annum (rounded upwards, if necessary, to the next 1/16 of 1%) equal to (a) the LIBO Rate for such Interest Period multiplied by (b) the Statutory Reserve Rate.

     “Administrative Agent” means JPMorgan Chase Bank, N.A., in its capacity as administrative agent for the Lenders hereunder.

     “Administrative Questionnaire” means an Administrative Questionnaire in a form supplied by the Administrative Agent.

     “Affiliate” means, with respect to a specified Person, another Person that directly, or indirectly through one or more intermediaries, Controls or is Controlled by or is under common Control with the Person specified.

     “Agreement” means this $2,500,000,000 5-Year Revolving Credit Agreement, as the same may from time to time be amended, modified, supplemented or restated.

     “Alternate Base Rate” means, for any day, a rate per annum equal to the greater of (a) the Prime Rate in effect on such day, and (b) the Federal Funds Effective Rate in effect on such day

1

plus ¹/2 of 1%. Any change in the Alternate Base Rate due to a change in the Prime Rate or the Federal Funds Effective Rate shall be effective from and including the effective date of such change in the Prime Rate or the Federal Funds Effective Rate, respectively.

     “Applicable Percentage” means, with respect to any Lender, the percentage of the total Commitments represented by such Lender’s Commitment. If the Commitments have terminated or expired, the Applicable Percentages shall be determined based upon the Commitments most recently in effect, giving effect to any assignments.

     “Applicable Rate” means, for any day, with respect to any ABR Loan or Eurodollar Loan, or with respect to the facility fees payable hereunder, as the case may be, the applicable rate per annum set forth on the Pricing Schedule under the caption “ABR Margin,” “LIBOR Margin” or “Facility Fee”, as the case may be, based upon the ratings by Moody’s and S&P, respectively, applicable on such date to the Index Debt.

     “Approved Fund” has the meaning set forth in Section 9.04(b).

     “Arrangers” means, collectively, JPMorgan Securities Inc. and RBC Capital Markets, the global brand name for the corporation and investment banking businesses of Royal Bank of Canada and its affiliates, each in its capacities as co-lead arranger and joint bookrunner hereunder.

     “Assignment and Assumption” means an assignment and assumption entered into by a Lender and an assignee (with the consent of any party whose consent is required by Section 9.04), and accepted by the Administrative Agent, substantially in the form of Exhibit A or any other form approved by the Administrative Agent.

     “Availability Period” means the period from and including the Revolving Effective Date to but excluding the earlier of the Maturity Date and the date of termination of the Commitments.

     “Benefit Arrangement” means at any time an employee benefit plan within the meaning of Section 3(3) of ERISA which is not a Plan or a Multiemployer Plan and which is maintained or otherwise contributed to by any ERISA Affiliate.

     “Board” means the Board of Governors of the Federal Reserve System of the United States of America.

     “Borrower” means Valero Energy Corporation, a Delaware corporation.

     “Borrowing” means Loans of the same Type, made, converted or continued on the same date and, in the case of Eurodollar Loans, as to which a single Interest Period is in effect.

     “Borrowing Request” means a request by the Borrower for a Borrowing in accordance with Section 2.05.

     “Business Day” means any day that is not a Saturday, Sunday or other day on which commercial banks in New York City are authorized or required by law to remain closed; provided that, when used in connection with a Eurodollar Loan, the term “Business Day” shall also exclude any day on which banks are not open for dealings in dollar deposits in the London interbank market.

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     “Capital Lease Obligations” of any Person means the obligations of such Person to pay rent or other amounts under any lease of (or other arrangement conveying the right to use) real or personal property, or a combination thereof, which obligations are required to be classified and accounted for as capital leases on a balance sheet of such Person under GAAP, and the amount of such obligations shall be the capitalized amount thereof determined in accordance with GAAP.

     “Cash Equivalents” means (a) marketable direct obligations issued by, or unconditionally guaranteed by, the United States Government or issued by any agency thereof and backed by the full faith and credit of the United States, in each case maturing within one year from the date of acquisition; (b) certificates of deposit, time deposits, eurodollar time deposits or overnight bank deposits having maturities of six months or less from the date of acquisition issued by any Lender or by any commercial bank organized under the laws of the United States of America or any state thereof having combined capital and surplus of not less than $250,000,000; (c) commercial paper of an issuer rated at least A-2 by Standard & Poor’s Ratings Services or P-2 by Moody’s Investors Service, Inc., or carrying an equivalent rating by a nationally recognized rating agency, if both of the two named rating agencies cease publishing ratings of commercial paper issuers generally, and maturing within six months from the date of acquisition; (d) money market accounts or funds with or issued by Qualified Issuers; (e) short term debt obligations of an issuer rated at least BBB by Standard & Poor’s Ratings Services or Baa2 by Moody’s Investor Service, Inc., and maturing within thirty days from the date of acquisition; (f) repurchase obligations with a term of not more than 90 days for underlying securities of the types described in clause (a) above entered into with any bank meeting the qualifications specified in clause (b) above; and (g) solely with respect to a Subsidiary which is incorporated or organized under the laws of a jurisdiction outside of the United States, in addition to the investments described in clauses (a) through (f) of this definition, substantially similar investments denominated in foreign currencies (including similarly capitalized foreign banks).

     “Change in Control” means (a) the acquisition of ownership, directly or indirectly, beneficially or of record, by any Person or group (within the meaning of the Securities Exchange Act of 1934 and the rules of the Securities and Exchange Commission thereunder as in effect on the date hereof) of shares representing more than 25% of the aggregate ordinary voting power represented by the issued and outstanding capital stock of the Borrower (excluding, however, any such person or group entitled to report such ownership on Schedule 13G in accordance with Rule 13d-1(b)(1) or(2)); or (b) occupation of a majority of the seats (other than vacant seats) on the board of directors of the Borrower by Persons who were neither (i) nominated by the board of directors of the Borrower nor (ii) appointed by directors so nominated.

     “Change in Law” means (a) the adoption of any law, rule or regulation after the date of this Agreement, (b) any change in any law, rule or regulation or in the interpretation or application thereof by any Governmental Authority after the date of this Agreement or (c) compliance by any Lender or any Issuing Bank (or, for purposes of Section 2.15(b), by any lending office of such Lender or by such Lender’s or such Issuing Bank’s holding company, if

3

any) with any request, guideline or directive (whether or not having the force of law) of any Governmental Authority made or issued after the date of this Agreement.

     “CI Lender” has the meaning set forth in Section 2.02(a).

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

     “Co-Documentation Agents” means, collectively, Barclays Bank PLC, Mizuho Corporate Bank, Ltd., and The Royal Bank of Scotland plc, each in its capacity as co-documentation agent for the Lenders hereunder.

     “Combined Commitment” means, with respect to each Combined Lender, the commitment(s) of such Combined Lender to make Combined Loans under the Combined Credit Agreements and to acquire participations in Letters of Credit under this Agreement, expressed as an amount representing the maximum potential aggregate amount of such Combined Lender’s Combined Credit Exposure under the Combined Credit Agreements, as such commitment(s) may be increased or reduced from time to time pursuant to the terms of the Combined Credit Agreements or pursuant to assignments by or to such Combined Lender pursuant to the provisions of the Combined Credit Agreements. The initial amount of each Combined Lender’s Commitment is set forth on Schedule 2.01 to the applicable Combined Credit Agreement, or in an Assignment and Assumption (as defined in each Combined Credit Agreement) pursuant to which such Combined Lender shall have assumed its Combined Commitment, as applicable. Notwithstanding the foregoing, until the Acquisition Effective Date has occurred, the total “Combined Commitments” of the Combined Lenders shall not include the commitments of the Term Lenders under the Term Credit Agreement. The initial aggregate amount of the Combined Lenders’ Combined Commitments is $1,500,000,000.

     “Combined Credit Agreements” means this Agreement and the Term Credit Agreement.

     “Combined Credit Exposure” means, with respect to any Combined Lender at any time, the sum of the outstanding principal amount of such Combined Lender’s Combined Loans and its LC Exposure at such time.

     “Combined Lenders” means the Lenders hereunder and the Term Lenders.

     “Combined Loans” means the loans made by the Combined Lenders to the Borrower pursuant to the Combined Credit Agreements.

     “Combined Required Lenders” means, at any time, Combined Lenders having Combined Credit Exposures and unused Combined Commitments representing more than 50% of the sum of the total Combined Credit Exposures and unused Combined Commitments under the Combined Credit Agreements at such time.

     “Commitment” means, with respect to each Lender, the commitment of such Lender to make Loans and to acquire participations in Letters of Credit hereunder, expressed as an amount representing the maximum potential aggregate amount of such Lender’s Credit Exposure hereunder, as such commitment may be (a) increased from time to time pursuant to Section 2.02, (b) increased on the Acquisition Effective Date pursuant to Section 2.03, (c) reduced from time

4

to time pursuant to Section 2.09, or (d) reduced or increased from time to time pursuant to assignments by or to such Lender pursuant to Section 9.04. The initial amount of each Lender’s Commitment is set forth on Schedule 2.01, or in the Assignment and Assumption pursuant to which such Lender shall have assumed its Commitment, as applicable. The initial aggregate amount of the Lenders’ Commitments is $1,500,000,000.

     “Commitment Increase” has the meaning set forth in Section 2.02(a).

     “Commitment Increase Effective Date” has the meaning set forth in Section 2.02(b).

     “Competitor” means (a) any Person who is primarily engaged in businesses of the type primarily conducted by the Borrower and its Subsidiaries and (b) any Affiliate of a Person identified in clause (a) above (it being agreed that an investment firm or other financial institution shall not be deemed to Control a Person described in clause (a) above merely as a result of owning a minority interest in such Person if it does not otherwise Control such Person).

     “Consolidated EBITDA” means, for any period, Consolidated Net Income for such period plus, without duplication and to the extent deducted in determining Consolidated Net Income for such period, the sum of (a) total income tax expense, (b) Consolidated Interest Expense, amortization or writeoff of debt discount and debt issuance costs and commissions, discounts and other fees and charges associated with Indebtedness (including the Loans), (c) depreciation, depletion and amortization expense, (d) amortization of intangibles (including, but not limited to, goodwill) and organization costs, (e) any extraordinary expenses or losses (including, whether or not otherwise includable as a separate item in the statement of such Consolidated Net Income for such period, losses on sales of assets other than inventory sold in the ordinary course of business) and (f) any other non-cash charges, and minus, to the extent included in the statement of such Consolidated Net Income for such period, the sum of (x) any extraordinary income or gains (including, whether or not otherwise includable as a separate item in the statement of such Consolidated Net Income for such period, gains on the sales of assets other than inventory sold in the ordinary course of business) and (y) any other non-cash income, all as determined for the Borrower and its Subsidiaries on a consolidated basis. Consolidated EBITDA will be adjusted on a pro forma basis (determined in a manner consistent with GAAP) to give effect during applicable historical periods to each material acquisition or material Transfer, otherwise permitted by the terms hereof, by the Borrower or its Subsidiaries of assets, including, without limitation, investments in other Persons, as if such acquisition or Transfer had been made at the beginning of the applicable period.

     “Consolidated Interest Coverage Ratio” means, on any day, the ratio of (i) Consolidated EBITDA for the Rolling Period ending on the last day of the then most recent Fiscal Quarter to (ii) Consolidated Interest Expense for such period.

     “Consolidated Interest Expense” means, with respect to the Borrower and its Subsidiaries on a consolidated basis, for each Rolling Period, the total cash interest expense (including that interest expense attributable to Capital Lease Obligations).

     “Consolidated Net Debt” means, at any date, the Indebtedness of the Borrower and its Subsidiaries less the aggregate amount of (a) cash and Cash Equivalents held by the Borrower

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and its Subsidiaries at such date and (b) cash and Cash Equivalents that have been deposited in a trust account or account created or pledged for the sole benefit of the holders of any Indebtedness of the Borrower or its Subsidiaries that has been defeased pursuant to such deposit and the other applicable terms of the instrument governing such Indebtedness, in each case determined on a consolidated basis in accordance with GAAP.

     “Consolidated Net Tangible Assets” means, on any date, the aggregate amount of assets (less applicable accumulated depreciation, depletion and amortization and other reserves and other properly deductible items) of the Borrower and the Subsidiaries, minus (a) all current liabilities of the Borrower and its Subsidiaries (excluding current maturities of long-term debt) and (b) all goodwill of the Borrower and the Subsidiaries, all determined on a consolidated basis in accordance with GAAP.

     “Consolidated Net Income” means, for any Person for any period, the net income of such Person and its subsidiaries for such period determined on a consolidated basis in accordance with GAAP.

     “Consolidated Net Worth” means for the Borrower at any date the sum of (i) the Net Worth of the Borrower and its Subsidiaries as of such date determined on a consolidated basis in accordance with GAAP and (ii) the Borrower’s indirect minority interest in Valero, L.P.

     “Consolidated Total Assets” means, at any date, the aggregate total assets of the Borrower and its Subsidiaries, determined on a consolidated basis as of such date in accordance with GAAP.

     “Control” means the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of a Person, whether through the ability to exercise voting power, by contract or otherwise. “Controlling” and “Controlled” have meanings correlative thereto.

     “Credit Exposure” means, with respect to any Lender at any time, the sum of the outstanding principal amount of such Lender’s Loans and its LC Exposure at such time.

     “Default” means any event or condition which constitutes an Event of Default or which upon notice, lapse of time or both would, unless cured or waived, become an Event of Default.

     “Defaulting Lender” means any Lender that (a) has failed to fund any portion of the Loans or participations in LC Disbursements required to be funded by it hereunder within one Business Day of the date required to be funded by it hereunder, (b) has otherwise failed to pay over to the Administrative Agent or any other Lender any other amount required to be paid by it hereunder within one Business Day of the date when due, unless the subject of a good faith dispute, or (c) has been deemed insolvent or become the subject of a bankruptcy or insolvency proceeding.

     “Derivatives Obligations” of any Person means all obligations of such Person in respect of any Hedging Agreement.

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     “Disclosed Matters” means the actions, suits and proceedings and the environmental and intellectual property matters (a) disclosed in (i) the Borrower’s report on Form 10-K for the fiscal year ended December 31, 2004, (ii) the Borrower’s report on Form 10-Q for the fiscal period ended June 30, 2005, and (iii) the Borrower’s reports on Form 8-K filed during the period from and including July 1, 2005 to but excluding the date that is two Business Days prior to the Revolving Effective Date, in each case as filed with the Securities and Exchange Commission, or (b) otherwise disclosed in writing to the Administrative Agent for the benefit of the Lenders prior to the execution and delivery of this Agreement. In addition, from and after the Acquisition Effective Date, the term “Disclosed Matters” shall also include the actions, suits and proceedings and the environmental and intellectual property matters disclosed in (x) Premcor Inc.’s report on Form 10-K for the fiscal year ended December 31, 2004, (y) Premcor Inc.’s report on Form 10-Q for the fiscal period ended June 30, 2005, and (z) Premcor Inc.’s reports on Form 8-K filed during the period from and including July 1, 2005 to but excluding the date that is two Business Days prior to the Revolving Effective Date, in each case as filed with the Securities and Exchange Commission.

     “dollars” or “$” refers to lawful money of the United States of America.

     “Environmental Laws” means all laws, rules, regulations, codes, ordinances, orders, decrees, judgments, injunctions, notices or binding agreements issued, promulgated or entered into by any Governmental Authority, relating in any way to the environment, preservation or reclamation of natural resources, the management, release or threatened release of any Hazardous Materials or to health and safety matters.

     “Environmental Liability” means any liability, contingent or otherwise (including any liability for damages, costs of environmental remediation, fines, penalties or indemnities), of the Borrower or any Subsidiary directly or indirectly resulting from or based upon (a) violation of any Environmental Law, (b) the generation, use, handling, transportation, storage, treatment or disposal of any Hazardous Materials, (c) exposure to any Hazardous Materials, (d) the release or threatened release of any Hazardous Materials into the environment or (e) any contract, agreement or other consensual arrangement pursuant to which liability is assumed or imposed with respect to any of the foregoing.

     “Equity Interests” means shares of capital stock, partnership interests, membership interests in a limited liability company, beneficial interests in a trust or other equity ownership interests in a Person, and any warrants, options or other rights entitling the holder thereof to purchase or acquire any such equity interest.

     “ERISA” means the Employee Retirement Income Security Act of 1974, as amended from time to time.

     “ERISA Affiliate” means any trade or business (whether or not incorporated) that, together with the Borrower, is treated as a single employer under Section 414(b) or (c) of the Code or, solely for purposes of Section 302 of ERISA and Section 412 of the Code, is treated as a single employer under Section 414 of the Code.

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     “ERISA Event” means (a) any “reportable event”, as defined in Section 4043 of ERISA or the regulations issued thereunder with respect to a Plan (other than an event for which the 30-day notice period is waived); (b) the existence with respect to any Plan of an “accumulated funding deficiency” (as defined in Section 412 of the Code or Section 302 of ERISA), whether or not waived; (c) the filing pursuant to Section 412(d) of the Code or Section 303(d) of ERISA of an application for a waiver of the minimum funding standard with respect to any Plan; (d) the incurrence by the Borrower or any of its ERISA Affiliates of any liability under Title IV of ERISA with respect to the termination of any Plan; (e) the receipt by the Borrower or any ERISA Affiliate from the PBGC or a plan administrator of any notice relating to an intention to terminate any Plan or Plans or to appoint a trustee to administer any Plan; (f) the incurrence by the Borrower or any of its ERISA Affiliates of any liability with respect to the withdrawal or partial withdrawal from any Plan or Multiemployer Plan; or (g) the receipt by the Borrower or any ERISA Affiliate of any notice, or the receipt by any Multiemployer Plan from the Borrower or any ERISA Affiliate of any notice, concerning the imposition of Withdrawal Liability or a determination that a Multiemployer Plan is, or is expected to be, insolvent or in reorganization, within the meaning of Title IV of ERISA.

     “Eurodollar”, when used in reference to any Loan or Borrowing, refers to whether such Loan, or the Loans comprising such Borrowing, are bearing interest at a rate determined by reference to the Adjusted LIBO Rate.

     “Event of Default” has the meaning assigned to such term in Article VII.

     “Excluded Taxes” means, with respect to the Administrative Agent, any Lender, any Issuing Bank or any other recipient of any payment to be made by or on account of any obligation of the Borrower hereunder, (a) income or franchise taxes imposed on (or measured by) its net income and/or net worth by the United States of America, or by the jurisdiction under the laws of which such recipient is organized or in which its principal office is located or, in the case of any Lender, in which its applicable lending office is located, (b) any branch profits taxes imposed by the United States of America or any similar tax imposed by any other jurisdiction in which the Borrower is located and (c) in the case of a Foreign Lender (other than an assignee pursuant to a request by the Borrower under Section 2.19(b)), any withholding tax that is imposed on amounts payable to such Foreign Lender at the time such Foreign Lender becomes a party to this Agreement (or designates a new lending office), but only to the extent that such Lender is subject to United States withholding tax at the time such Lender first becomes party to this Agreement, or is attributable to such Foreign Lender’s failure to comply with Section 2.17(e), except to the extent that such Foreign Lender (or its assignor, if any) was entitled, at the time of designation of a new lending office (or assignment), to receive additional amounts from the Borrower with respect to such withholding tax pursuant to Section 2.17(a) and (d) in the case of each Lender, any United States withholding tax imposed on any payment made or to be made by the Borrower, but only to the extent that such Lender is subject to United States withholding tax at the time such Lender first becomes party to this Agreement.

     “Existing Agreements” means, collectively, (a) the $750,000,000 3-Year Revolving Credit Agreement dated as of November 21, 2003 among Valero Energy Corporation, JPMorgan Chase Bank, as administrative agent, Bank of America, N.A., as syndication agent, and the lenders party thereto and (b) the $750,000,000 5-Year Revolving Credit Agreement dated as of

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December 14, 2001 among Valero Energy Corporation, JPMorgan Chase Bank, as administrative agent, and the lenders and other agents party thereto, in each case, as heretofore amended, modified, supplemented or restated.

     “Federal Funds Effective Rate” means, for any day, the weighted average (rounded upwards, if necessary, to the next 1/100 of 1%) of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers, as published on the next succeeding Business Day by the Federal Reserve Bank of New York, or, if such rate is not so published for any day that is a Business Day, the average (rounded upwards, if necessary, to the next 1/100 of 1%) of the quotations for such day for such transactions received by the Administrative Agent from three Federal funds brokers of recognized standing selected by it.

     “Financial Officer” means the chief financial officer, principal accounting officer, financial vice president, treasurer or controller of the Borrower.

     “Fiscal Quarter” means a fiscal quarter of the Borrower, ending on the last day of March, June, September or December of each year.

     “Foreign Lender” means any Lender that is organized under the laws of a jurisdiction other than that in which the Borrower is located. For purposes of this definition, the United States of America, each State thereof and the District of Columbia shall be deemed to constitute a single jurisdiction.

     “GAAP” means generally accepted accounting principles in the United States of America.

     “Global Administrative Agent” means JPMorgan Chase Bank, N.A., in its capacity as global administrative agent for the Combined Lenders.

     “Governmental Authority” means the government of the United States of America, any other nation or any political subdivision thereof, whether state or local, and any agency, authority, instrumentality, regulatory body, court, central bank or other entity exercising executive, legislative, judicial, taxing, regulatory or administrative powers or functions of or pertaining to government.

     “Guarantee” of or by any Person (the “guarantor”) means any obligation, contingent or otherwise, of the guarantor guaranteeing or having the economic effect of guaranteeing any Indebtedness of any other Person (the “primary obligor”) in any manner, whether directly or indirectly, and including any obligation of the guarantor, direct or indirect, (a) to purchase or pay (or advance or supply funds for the purchase or payment of) such Indebtedness or to purchase (or to advance or supply funds for the purchase of) any security for the payment thereof, (b) to purchase or lease property, securities or services for the purpose of assuring the owner of such Indebtedness of the payment thereof, (c) to maintain working capital, equity capital or any other financial statement condition or liquidity of the primary obligor so as to enable the primary obligor to pay such Indebtedness or (d) as an account party in respect of any letter of credit or letter of guaranty issued to support such Indebtedness or obligation; provided, that the term Guarantee shall not include endorsements for collection or deposit in the ordinary course of business.

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     “Hazardous Materials” means all explosive or radioactive substances or wastes and all hazardous or toxic substances, wastes or other pollutants, including petroleum or petroleum distillates, asbestos or asbestos containing materials, polychlorinated biphenyls, radon gas, infectious or medical wastes and all other substances or wastes of any nature regulated pursuant to any Environmental Law.

     “Hedging Agreement” means any rate swap transaction, basis swap, forward rate transaction, commodity swap, commodity option, equity or equity index swap, equity or equity index option, bond option, interest rate option, cap transaction, floor transaction, collar transaction, currency swap transaction, cross-currency rate swap transaction, currency option or any other similar transaction (including any option with respect to any of the foregoing transactions) or any combination of the foregoing transactions.

     “Indebtedness” of any Person means, without duplication, (a) all obligations of such Person for borrowed money, (b) all obligations of such Person evidenced by bonds, debentures, notes or similar instruments, (c) all obligations of such Person in respect of the deferred purchase price of property or services (excluding current accounts payable incurred in the ordinary course of business), (d) all Indebtedness of others secured by (or for which the holder of such Indebtedness has an existing right, contingent or otherwise, to be secured by) any Lien on property owned or acquired by such Person, whether or not the Indebtedness secured thereby has been assumed, provided that the amount of any Indebtedness of such Person which constitutes Indebtedness of such Person solely by reason of this clause (d) shall not for purposes of this Agreement exceed the greater of the book value or the fair market value of the properties subject to such Lien, (e) all Guarantees by such Person of Indebtedness of others, (f) all Capital Lease Obligations of such Person, (g) all obligations of such Person in respect of bankers’ acceptances, and (h) all non-contingent obligations (and, for purposes of Section 6.02, all contingent obligations) of such Person to reimburse any bank or other Person in respect of amounts paid under a letter of credit or similar instrument. The Indebtedness of any Person shall include the Indebtedness of any other entity (including any partnership in which such Person is a general partner) to the extent such Person is liable therefor as a result of such Person’s ownership interest in or other relationship with such entity, except to the extent the terms of such Indebtedness provide that such Person is not liable therefor.

     “Indemnified Taxes” means Taxes other than Excluded Taxes.

     “Indemnitee” has the meaning set forth in Section 9.03(b).

     “Index Debt” means senior, unsecured, long-term indebtedness for borrowed money of the Borrower that is not guaranteed by any other Person or subject to any other credit enhancement.

     “Information Memorandum” means the Confidential Information Memorandum dated July 2005 relating to the Borrower and the Transactions.

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     “Interest Election Request” means a request by the Borrower to convert or continue a Borrowing in accordance with Section 2.08.

     “Interest Payment Date” means (a) with respect to any ABR Loan, the last day of each March, June, September and December and (b) with respect to any Eurodollar Loan, the last day of the Interest Period applicable to the Borrowing of which such Loan is a part and, in the case of a Eurodollar Borrowing with an Interest Period of more than three months’ duration each day prior to the last day of such Interest Period that occurs at intervals of three months’ duration after the first day of such Interest Period.

     “Interest Period” means with respect to any Eurodollar Borrowing, the period commencing on the date of such Borrowing and ending on the numerically corresponding day in the calendar month that is one, two, three or six months thereafter (or, with the consent of each Lender, such other periods for which LIBO Rates are available at the time the Borrowing Request for such Eurodollar Borrowing is made), as the Borrower may elect; provided, that (i) if any Interest Period would end on a day other than a Business Day, such Interest Period shall be extended to the next succeeding Business Day unless such next succeeding Business Day would fall in the next calendar month, in which case such Interest Period shall end on the next preceding Business Day and (ii) any Interest Period that commences on the last Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the last calendar month of such Interest Period) shall end on the last Business Day of the last calendar month of such Interest Period. For purposes hereof, the date of a Borrowing initially shall be the date on which such Borrowing is made, and thereafter shall be the effective date of the most recent conversion or continuation of such Borrowing.

     “Investment Grade Rating” means a rating of senior long-term unsecured debt securities of the Borrower without any third-party credit enhancement of (i) BBB- or higher by S&P or (ii) Baa3 or higher by Moody’s.

     “ISP” means, with respect to any Letter of Credit, the “International Standby Practices 1998” published by the Institute of International Banking Law & Practice (or such later version thereof as may be in effect at the time of issuance of such Letter of Credit).

     “Issuing Bank” means each of JPMorgan Chase Bank, N.A., Bank of America, N.A., BNP Paribas, Royal Bank of Canada, and Mizuho Corporate Bank, Ltd., in its capacity as an issuer of Letters of Credit hereunder, and its successors in such capacity as provided in Section 2.06(i). In addition, “Issuing Bank” means Citibank, N.A., in its capacity as the issuer of the Letters of Credit issued by it hereunder described in Section 2.06(k)(ii), and its respective successors in such capacity as provided in Section 2.06(i). Each Issuing Bank may, in its discretion, arrange for one or more Letters of Credit to be issued by Affiliates of such Issuing Bank, in which case the term “Issuing Bank” shall include any such Affiliate with respect to Letters of Credit issued by such Affiliate.

     “LC Disbursement” means a payment made by an Issuing Bank pursuant to a Letter of Credit.

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     “LC Exposure” means, at any time, the sum of (a) the aggregate undrawn amount of all outstanding Letters of Credit at such time plus (b) the aggregate amount of all LC Disbursements that have not yet been reimbursed by or on behalf of the Borrower at such time. The LC Exposure of any Lender at any time shall be its Applicable Percentage of the total LC Exposure at such time. For purposes of computing the amount available to be drawn under any Letter of Credit, the amount of such Letter of Credit shall be determined in accordance with Section 1.05. For all purposes of this Agreement, if on any date of determination a Letter of Credit has expired by its terms but any amount may still be drawn thereunder by reason of the operation of Rule 3.14 of the ISP, such Letter of Credit shall be deemed to be “outstanding” in the amount so remaining available to be drawn.

     “Lenders” means the Persons listed on Schedule 2.01 and any other Person that shall have become a party hereto pursuant to Section 2.02 or pursuant to an Assignment and Assumption, other than any such Person that ceases to be a party hereto pursuant to an Assignment and Assumption.

     “Letter of Credit” means any letter of credit issued pursuant to this Agreement.

     “LIBO Rate” means, with respect to any Eurodollar Borrowing for any Interest Period, the rate appearing on Page 3750 of the Telerate Service (or on any successor or substitute page of such Service, or any successor to or substitute for such Service, providing rate quotations comparable to those currently provided on such page of such Service, as determined by the Administrative Agent from time to time for purposes of providing quotations of interest rates applicable to dollar deposits in the London interbank market) at approximately 11:00 a.m., London time, two Business Days prior to the commencement of such Interest Period, as the rate for dollar deposits with a maturity comparable to such Interest Period. In the event that such rate is not available at such time for any reason, then the “LIBO Rate” with respect to such Eurodollar Borrowing for such Interest Period shall be the rate at which dollar deposits of $5,000,000 and for a maturity comparable to such Interest Period are offered by the principal London office of the Administrative Agent in immediately available funds in the London interbank market at approximately 11:00 a.m., London time, two Business Days prior to the commencement of such Interest Period.

     “Lien” means, with respect to any asset, (a) any mortgage, deed of trust, lien, pledge, hypothecation, encumbrance, charge or security interest in, on or of such asset, (b) the interest of a vendor or a lessor under any conditional sale agreement, capital lease or title retention agreement (or any financing lease having substantially the same economic effect as any of the foregoing) relating to such asset and (c) in the case of securities, any purchase option, call or similar right of a third party with respect to such securities.

     “Loan Documents” means this Agreement and the Notes, if any.

     “Loans” means the loans made by the Lenders to the Borrower pursuant to this Agreement.

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     “Material Adverse Effect” means a material adverse effect on (a) the business, assets, operations or condition, financial or otherwise, of the Borrower and the Subsidiaries taken as a whole, or (b) the ability of the Borrower to perform any of its obligations under this Agreement.

     “Material Indebtedness” means Indebtedness (other than the Loans, Letters of Credit and Indebtedness that constitutes Project Financing), or obligations in respect of one or more Hedging Agreements, of any one or more of the Borrower and its Subsidiaries in an aggregate principal amount exceeding $100,000,000. For purposes of determining Material Indebtedness, the “principal amount” of the obligations of the Borrower or any Subsidiary in respect of any Hedging Agreement at any time shall be the maximum aggregate amount (giving effect to any netting agreements) that the Borrower or such Subsidiary would be required to pay if such Hedging Agreement were terminated at such time.

     “Material Subsidiary” means, at any time, each Subsidiary other than (a) any Project Financing Subsidiary and (b) any Subsidiary (i) the Net Tangible Assets of which do not represent 5% or more of Consolidated Net Tangible Assets for the period of four fiscal quarters most recently ended and (ii) that does not own Equity Interests of any Material Subsidiary.

     “Maturity Date” means the fifth anniversary of the Revolving Effective Date.

     “Moody’s” means Moody’s Investors Service, Inc.

     “Multiemployer Plan” means a multiemployer plan as defined in Section 4001(a)(3) of ERISA.

     “Net Tangible Assets” means, on any date, with respect to any Subsidiary, the aggregate amount of assets (less applicable accumulated depreciation, depletion and amortization and other reserves and other properly deductible items) of such Subsidiary, minus (a) all current liabilities of such Subsidiary (excluding current maturities of long-term debt) and (b) all goodwill of such Subsidiary, all determined in accordance with GAAP.

     “Net Worth” of the Borrower means at any time, without duplication, the sum of its capital stock, additional paid in capital, retained earnings, and any other account which, in accordance with GAAP, constitutes stockholders’ equity, less treasury stock; provided that “Net Worth” shall not include the liquidation value of any Preferred Equity Interests.

     “New Funds Amount” has the meaning set forth in Section 2.02(d).

     “Notice of Commitment Increase” has the meaning set forth in Section 2.02(b).

     “Note” has the meaning assigned to such term in Section 2.10(e).

     “Other Taxes” means any and all present or future stamp or documentary taxes or any other excise or property taxes, charges or similar levies arising from any payment made hereunder or from the execution, delivery or enforcement of, or otherwise with respect to, this Agreement.

     “Participant” has the meaning set forth in Section 9.04.

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     “PBGC” means the Pension Benefit Guaranty Corporation referred to and defined in ERISA and any successor entity performing similar functions.

     “Person” means any natural person, corporation, limited liability company, trust, joint venture, association, company, partnership, Governmental Authority or other entity.

     “Plan” means any employee pension benefit plan (other than a Multiemployer Plan) subject to the provisions of Title IV of ERISA or Section 412 of the Code or Section 302 of ERISA, and in respect of which the Borrower or any ERISA Affiliate is (or, if such plan were terminated, would under Section 4069 of ERISA be deemed to be) an “employer” as defined in Section 3(5) of ERISA.

     “Preferred Equity Interest” means any Equity Interest that, by its terms (or the terms of any security into which it is convertible or for which it is exchangeable) or upon the happening of any event or circumstance either (a) matures, (b) is redeemable (whether mandatorily or otherwise) at the option of the holder thereof for any consideration other than shares of common stock or (c) is convertible or exchangeable for Indebtedness or other Preferred Equity Interests, in each case, in whole or in part, on or prior to the date that is one year after the earlier of (i) the Maturity Date or (ii) the date on which the Combined Loans have been paid in full, the Combined Commitments have terminated, all Letters of Credit have expired or terminated and all LC Disbursements have been reimbursed.

     “Premcor Credit Agreement” means the $1,000,000,000 Credit Agreement dated as of April 13, 2004 among The Premcor Refining Group Inc., as borrower, Citicorp North America, Inc., as administrative agent, Fleet National Bank, as syndication agent, Bank One, N.A. and SunTrust Bank, as co-documentation agents, and the lenders and issuers party thereto, as amended.

     “Premcor Inc.” means Premcor Inc., a Delaware corporation.

     “Pricing Schedule” means the Pricing Schedule attached hereto.

     “Prime Rate” means the rate of interest per annum publicly announced from time to time by JPMorgan Chase Bank, N.A. as its prime rate in effect at its principal office in New York City; each change in the Prime Rate shall be effective from and including the date such change is publicly announced as being effective.

     “Project Financing” means any Indebtedness that is incurred to finance or refinance the acquisition, improvement, installation, design, engineering, construction, development, completion, maintenance, operation, securitization or monetization, in respect of all or any portion of any project, any group of projects, or any asset related thereto, and any guaranty with respect thereto, other than such portion of such Indebtedness or guaranty (contingent or otherwise) that is at any time recourse to or obligates the Borrower or any Subsidiary (other than a Project Financing Subsidiary) in any way, or subjects any property or asset of the Borrower or any Subsidiary (other than a Project Financing Subsidiary), directly or indirectly, contingently or otherwise, to the satisfaction thereof (excluding any obligation to make a capital contribution to a Project Financing Subsidiary to the extent not otherwise prohibited hereunder).

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     “Project Financing Subsidiary” means any Subsidiary of the Borrower whose principal purpose is to incur Project Financing and own and operate its permitted assets or to become a direct or indirect partner, member or other equity participant or owner in a Person so created, and substantially all the assets of such Subsidiary are limited to (a) those assets for which the acquisition, improvement, installation, design, engineering, construction, development, completion, maintenance, operation, securitization or monetization is being financed in whole or in part by one or more Project Financings, or (b) the equity in, Indebtedness or other obligations of, one or more other such Subsidiaries or Persons, or (c) proceeds of a substantially concurrent offering of capital stock of the Borrower, or assets acquired with such proceeds, or (d) capital contributions from minority shareholders other than the Borrower or a Subsidiary, or assets acquired with such capital contributions.

     “Property” means any interest in any kind of property or asset, whether real, personal or mixed, or tangible or intangible, including, without limitation, cash, securities, accounts and contract rights.

     “Qualified Issuer” means any commercial bank (a) which has capital and surplus in excess of $250,000,000 and (b) the outstanding long-term debt securities of which are rated at least A by Standard & Poor’s Ratings Services or at least A2 by Moody’s Investors Service, Inc., or carry an equivalent rating by a nationally recognized rating agency if both of the two named rating agencies cease publishing ratings of investments.

     “Reducing Percentage Lender” has the meaning set forth in Section 2.02(d).

     “Reduction Amount” has the meaning set forth in Section 2.02(d).

     “Register” has the meaning set forth in Section 9.04.

     “Related Parties” means, with respect to any specified Person, such Person’s Affiliates and the respective directors, officers, employees, agents and advisors of such Person and such Person’s Affiliates.

     “Required Lenders” means, at any time, Lenders having Credit Exposures and unused Commitments representing more than 50% of the sum of the total Credit Exposures and unused Commitments at such time.

     “Responsible Officer” means the Chief Executive Officer, President, Executive Vice President and Chief Administrative Officer, Executive Vice President and Chief Financial Officer, Executive Vice President and Chief Operating Officer or Chief Legal Officer of the Borrower.

     “Revolving Effective Date” means the date on which the conditions specified in Section 4.01 are satisfied (or waived in accordance with Section 9.02).

     “Rolling Period” means any period of four consecutive Fiscal Quarters.

     “S&P” means Standard & Poor’s Rating Services, a division of McGraw-Hill Companies, Inc.

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     “Securitization Transaction” means any transaction in which the Borrower or a Subsidiary sells or otherwise transfers any accounts receivable (whether now existing or arising in the future) and any assets related thereto including, without limitation, all books and records relating to such accounts receivable, all collateral securing such accounts receivable, all contracts and all Guarantees or other obligations in respect of such accounts receivable, rights with respect to returned goods the sale or lease of which gave rise to such accounts receivable, insurance thereon, proceeds of all of the foregoing and lockboxes and bank accounts into which collections thereon are deposited, and other assets which are customarily transferred or in respect of which security interests are customarily granted in connection with asset securitization transactions involving accounts receivable (a) to one or more third party purchasers or (b) to a special purpose entity that borrows against such accounts receivable (or undivided interests therein) and related assets or issues securities payable from (or representing interests in) payments in respect of such accounts receivable and related assets or sells such accounts receivable (or undivided interests therein) and related assets to one or more third party purchasers, but only to the extent that amounts received in connection with the sale or other transfer of such accounts receivable and related assets to an entity referred to in clause (a) or (b) above would not under GAAP be accounted for as liabilities on a consolidated balance sheet of the Borrower. The amount of any Securitization Transaction shall be deemed at any time to be the aggregate outstanding principal or stated amount of the borrowings, securities or residual obligations under a sale, in each case referred to in clause (b) of the preceding sentence, or if there shall be no such principal or stated amount, the uncollected amount of the accounts receivable transferred to such third party purchaser(s) pursuant to such Securitization Transaction net of any such accounts receivable that have been written off as uncollectible.

     “Statutory Reserve Rate” means a fraction (expressed as a decimal), the numerator of which is the number one and the denominator of which is the number one minus the aggregate of the maximum reserve percentages (including any marginal, special, emergency or supplemental reserves) expressed as a decimal established by the Board to which the Administrative Agent is subject, with respect to the Adjusted LIBO Rate, for eurocurrency funding (currently referred to as “Eurocurrency Liabilities” in Regulation D of the Board). Such reserve percentages shall include those imposed pursuant to such Regulation D. Eurodollar Loans shall be deemed to constitute eurocurrency funding and to be subject to such reserve requirements without benefit of or credit for proration, exemptions or offsets that may be available from time to time to any Lender under such Regulation D or any comparable regulation. The Statutory Reserve Rate shall be adjusted automatically on and as of the effective date of any change in any reserve percentage.

     “subsidiary” means, with respect to any Person (the “parent”) at any date, any corporation, limited liability company, partnership, association or other entity the accounts of which would be consolidated with those of the parent in the parent’s consolidated financial statements if such financial statements were prepared in accordance with GAAP as of such date, as well as any other corporation, limited liability company, partnership, association or other entity of which securities or other ownership interests representing more than 50% of the equity or more than 50% of the ordinary voting power or, in the case of a partnership, more than 50% of the general partnership interests are, as of such date, owned by the parent or one or more subsidiaries of the parent or by the parent and one or more subsidiaries of the parent. Notwithstanding anything to the contrary contained herein, it is understood and agreed that

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Valero L.P. shall not be a subsidiary of the Borrower so long as its accounts are not consolidated with those of the Borrower in the Borrower’s consolidated financial statements if such financial statements are prepared in accordance with GAAP.

     “Subsidiary” means any subsidiary of the Borrower.

     “Syndication Agent” means RBC Capital Markets, the global brand name for the corporation and investment banking businesses of Royal Bank of Canada and its affiliates, in its capacity as syndication agent for the Lenders hereunder.

     “Taxes” means any and all present or future taxes, levies, imposts, duties, deductions, charges or withholdings imposed by any Governmental Authority.

     “Term Credit Agreement” means the $2,000,000,000 5-Year Term Credit Agreement dated as of August 17, 2005 among the Borrower, Bank of America, N.A., as administrative agent, and the lenders and other agents from time to time party thereto, as the same may from time to time be amended, modified, supplemented or restated.

     “Term Lenders” means the “Lenders” under (and as defined in) the Term Credit Agreement.

     “Ticking Fee Commencement Date” has the meaning set forth in Section 2.12(d).

     “Ticking Fee Termination Date” has the meaning set forth in Section 2.12(d).

     “Transactions” means the execution, delivery and performance by the Borrower of the Loan Documents, the borrowing of Loans, and the issuance of Letters of Credit hereunder.

     “Transfer” means, with respect to any assets or property, any sale, lease, transfer or other disposition thereof.

     “Type”, when used in reference to any Loan or Borrowing, refers to whether the rate of interest on such Loan, or on the Loans comprising such Borrowing, is determined by reference to the Adjusted LIBO Rate or the Alternate Base Rate.

     “Withdrawal Liability” means liability to a Multiemployer Plan as a result of a complete or partial withdrawal from such Multiemployer Plan, as such terms are defined in Part I of Subtitle E of Title IV of ERISA.

     Section 1.02 Classification of Loans and Borrowings. For purposes of this Agreement, Loans may be classified and referred to by Type (e.g., a “Eurodollar Loan”). Borrowings also may be classified and referred to by Type (e.g., a “Eurodollar Borrowing”).

     Section 1.03 Terms Generally. The definitions of terms herein shall apply equally to the singular and plural forms of the terms defined. Whenever the context may require, any pronoun shall include the corresponding masculine, feminine and neuter forms. The words “include”, “includes” and “including” shall be deemed to be followed by the phrase “without limitation”. The word “will” shall be construed to have the same meaning and effect as the word

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“shall”. Unless the context requires otherwise (a) any definition of or reference to any agreement, instrument or other document herein shall be construed as referring to such agreement, instrument or other document as from time to time amended, supplemented or otherwise modified (subject to any restrictions on such amendments, supplements or modifications set forth herein), (b) any reference herein to any Person shall be construed to include such Person’s successors and assigns, (c) the words “herein”, “hereof” and “hereunder”, and words of similar import, shall be construed to refer to this Agreement in its entirety and not to any particular provision hereof, (d) all references herein to Articles, Sections, Exhibits and Schedules shall be construed to refer to Articles and Sections of, and Exhibits and Schedules to, this Agreement and (e) the words “asset” and “property” shall be construed to have the same meaning and effect and to refer to any and all tangible and intangible assets and properties, including cash, securities, accounts and contract rights.

     Section 1.04 Accounting Terms; GAAP. Except as otherwise expressly provided herein, all terms of an accounting or financial nature shall be construed in accordance with GAAP, as in effect from time to time; provided that, if the Borrower notifies the Administrative Agent that the Borrower requests an amendment to any provision hereof to eliminate the effect of any change occurring after the date hereof in GAAP or in the application thereof on the operation of such provision (or if the Administrative Agent notifies the Borrower that the Required Lenders request an amendment to any provision hereof for such purpose), regardless of whether any such notice is given before or after such change in GAAP or in the application thereof, then such provision shall be interpreted on the basis of GAAP as in effect and applied immediately before such change shall have become effective until such notice shall have been withdrawn or such provision amended in accordance herewith.

     Section 1.05 Letter of Credit Amounts. Unless otherwise specified herein, the amount of a Letter of Credit at any time shall be deemed to be the stated amount of such Letter of Credit in effect at such time; provided, however, that with respect to any Letter of Credit that, by its terms, provides for one or more automatic increases in the stated amount thereof, the amount of such Letter of Credit shall be deemed to be the maximum stated amount of such Letter of Credit after giving effect to all such increases, whether or not such maximum stated amount is in effect at such time.

ARTICLE II
The Credits

     Section 2.01 Commitments. Subject to the terms and conditions set forth herein, each Lender agrees to make Loans to the Borrower from time to time during the Availability Period in an aggregate principal amount that will not result in (a) such Lender’s Credit Exposure exceeding such Lender’s Commitment or (b) the sum of the total Credit Exposures exceeding the total Commitments. Within the foregoing limits and subject to the terms and conditions set forth herein, the Borrower may borrow, prepay and reborrow Loans.

     Section 2.02 Commitment Increase.

          (a) Subject to the terms and conditions set forth herein, the Borrower shall have the right, without the consent of the Lenders, to cause, but no more than five times, an

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increase in the Commitments of the Lenders (a “Commitment Increase”) by adding to this Agreement one or more additional lenders that are not already Lenders hereunder and that are reasonably satisfactory to the Administrative Agent and each Issuing Bank (each, a “CI Lender”) or by allowing one or more existing Lenders to increase their respective Commitments; provided that (i) no Event of Default shall have occurred and be continuing as of the relevant Commitment Increase Effective Date, (ii) no such Commitment Increase shall be less than $50,000,000, (iii) the aggregate amount of all such Commitment Increases shall not exceed $500,000,000, (iv) no Lender’s Commitment shall be increased without such Lender’s prior written consent (which consent may be given or withheld in such Lender’s sole and absolute discretion) and (v) if, on the effective date of such increase, any Loans have been funded, then the Borrower shall be obligated to pay any breakage fees or costs that are payable pursuant to Section 2.16 in connection with the reallocation of such outstanding Loans.

          (b) The Borrower shall provide the Administrative Agent with written notice (a “Notice of Commitment Increase”) in the form of Exhibit B attached hereto of its intention to increase the Commitments pursuant to this Section 2.02. Each such Notice of Commitment Increase shall specify (i) the proposed effective date of such Commitment Increase (each such date, a “Commitment Increase Effective Date”), which date shall be no earlier than five (5) Business Days after receipt by the Administrative Agent of such Notice of Commitment Increase, (ii) the amount of the requested Commitment Increase (provided that after giving effect to such requested Commitment Increase, the aggregate amount of all Commitment Increases does not exceed the amount set forth in subsection (a)(iii) above), (iii) the identity of each CI Lender or Lender that has agreed in writing to increase its Commitment hereunder, and (iv) the amount of the respective Commitments of the then existing Lenders and the CI Lenders from and after the Commitment Increase Effective Date (as defined below).

          (c) On each Commitment Increase Effective Date, to the extent that there are Loans outstanding as of such date, (i) each CI Lender shall, by wire transfer of immediately available funds, deliver to the Administrative Agent such CI Lender’s New Funds Amount, which amount, for each such CI Lender, shall constitute Loans made by such CI Lender to the Borrower pursuant to this Agreement on such Commitment Increase Effective Date, (ii) each existing Lender that has agreed to increase its Commitment shall, by wire transfer of immediately available funds, deliver to the Administrative Agent such Lender’s New Funds Amount, which amount, for each such Lender, shall constitute Loans made by such Lender to the Borrower pursuant to this Agreement on such Commitment Increase Effective Date, (iii) the Administrative Agent shall, by wire transfer of immediately available funds, pay to each then Reducing Percentage Lender its Reduction Amount, which amount, for each such Reducing Percentage Lender, shall constitute a prepayment by the Borrower pursuant to Section 2.11, ratably in accordance with the respective principal amounts thereof, of the principal amounts of all then outstanding Loans of such Reducing Percentage Lender, and (iv) the Borrower shall be responsible to pay to each Lender any breakage fees or costs that are payable pursuant to Section 2.16 in connection with the reallocation of any outstanding Loans.

          (d) For purposes of this Section 2.02 and Exhibit B, the following defined terms shall have the following meanings: (i) “New Funds Amount” means the amount equal to the product of a Lender’s increased Commitment or a CI Lender’s Commitment (as applicable) represented as a percentage of the aggregate Commitments after giving effect to any

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Commitment Increase, times the aggregate principal amount of the outstanding Loans immediately prior to giving effect to such Commitment Increase, if any, as of any Commitment Increase Effective Date (without regard to any increase in the aggregate principal amount of Loans as a result of borrowings made after giving effect to such Commitment Increase on such Commitment Increase Effective Date); (ii) “Reducing Percentage Lender” means each then existing Lender immediately prior to giving effect to any Commitment Increase that does not increase its respective Commitment as a result of such Commitment Increase and whose relative percentage of the Commitments shall be reduced after giving effect to such Commitment Increase; and (iii) “Reduction Amount” means the amount by which a Reducing Percentage Lender’s outstanding Loans decrease as of any Commitment Increase Effective Date (without regard to the effect of any borrowings made on such Commitment Increase Effective Date after giving effect to the Commitment Increase occurring on such Commitment Increase Effective Date).

          (e) Each Commitment Increase shall become effective on its Commitment Increase Effective Date and upon such effectiveness (i) the Administrative Agent shall record in the register each then CI Lender’s information as provided in the applicable Notice of Commitment Increase and pursuant to an Administrative Questionnaire that shall be executed and delivered by each CI Lender to the Administrative Agent on or before such Commitment Increase Effective Date, (ii) Schedule 2.01 hereof shall be amended and restated to set forth all Lenders (including any CI Lenders) that will be Lenders hereunder after giving effect to such Commitment Increase (which amended and restated Schedule 2.01 shall be set forth in Annex I to the applicable Notice of Commitment Increase) and the Administrative Agent shall distribute to each Lender (including each CI Lender) a copy of such amended and restated Schedule 2.01, and (iii) each CI Lender identified on the Notice of Commitment Increase for such Commitment Increase shall be a “Lender” for all purposes under this Agreement.

          (f) Each Commitment Increase shall be deemed to constitute a representation and warranty by the Borrower on the applicable Commitment Increase Effective Date that (i) the representations and warranties of the Borrower set forth in this Agreement and in the other Loan Documents are true and correct on and as of such Commitment Increase Effective Date, except to the extent any such representations and warranties are expressly limited to an earlier date, in which case, on and as of such Commitment Increase Effective Date, such representations and warranties shall continue to be true and correct as of such specified earlier date, and (ii) at the time of and immediately after giving effect to such Commitment Increase, no Default shall have occurred and be continuing.

     Section 2.03 Acquisition Effective Date Commitment Increase. On the Acquisition Effective Date, the Commitment of each Lender, without any further action, shall automatically be increased by the amount specified for such Lender on Schedule 2.03 (which increases shall total $1,000,000,000 in the aggregate for all Lenders). Upon such increase, Schedule 2.01 shall be automatically amended and restated to set forth the Commitment of each Lender hereunder after giving effect to such increase and the Administrative Agent shall promptly distribute to the Borrower and each Lender a copy of such amended and restated Schedule 2.01.

     Section 2.04 Loans and Borrowings. (a) Each Loan shall be made as part of a Borrowing consisting of Loans made by the Lenders ratably in accordance with their respective

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Commitments. The failure of any Lender to make any Loan required to be made by it shall not relieve any other Lender of its obligations hereunder; provided that the Commitments of the Lenders are several and no Lender shall be responsible for any other Lender’s failure to make Loans as required.

          (b) Subject to Section 2.14, each Borrowing shall be comprised entirely of ABR Loans or Eurodollar Loans as the Borrower may request in accordance herewith. Each Lender at its option may make any Eurodollar Loan by causing any domestic or foreign branch or Affiliate of such Lender to make such Loan; provided that any exercise of such option shall not affect the obligation of the Borrower to repay such Loan in accordance with the terms of this Agreement.

          (c) At the commencement of each Interest Period for any Eurodollar Borrowing, such Borrowing shall be in an aggregate amount that is an integral multiple of $1,000,000 and not less than $5,000,000. At the time that each ABR Borrowing is made, such Borrowing shall be in an aggregate amount that is an integral multiple of $1,000,000 and not less than $1,000,000; provided that an ABR Borrowing may be in an aggregate amount that is equal to the entire unused balance of the total Commitments or that is required to finance the reimbursement of an LC Disbursement as contemplated by Section 2.06(e). Borrowings of more than one Type may be outstanding at the same time; provided that there shall not at any time be more than a total of ten Eurodollar Borrowings outstanding.

          (d) Notwithstanding any other provision of this Agreement, the Borrower shall not be entitled to request, or to elect to convert or continue, any Borrowing if the Interest Period requested with respect thereto would end after the Maturity Date.

     Section 2.05 Requests for Borrowings. To request a Borrowing, the Borrower shall notify the Administrative Agent of such request by telephone (a) in the case of a Eurodollar Borrowing, not later than 12:00 p.m., New York City time, three Business Days before the date of the proposed Borrowing or (b) in the case of an ABR Borrowing, not later than 12:00 p.m., New York City time, on the date of the proposed Borrowing. Each such telephonic Borrowing Request shall be irrevocable and shall be confirmed promptly by hand delivery or telecopy to the Administrative Agent of a written Borrowing Request in substantially the form of Exhibit C. Each such telephonic and written Borrowing Request shall specify the following information in compliance with Section 2.04:

               (i) the aggregate amount of the requested Borrowing;

               (ii) the date of such Borrowing, which shall be a Business Day;

               (iii) whether such Borrowing is to be an ABR Borrowing or a Eurodollar Borrowing;

               (iv) in the case of a Eurodollar Borrowing, the initial Interest Period to be applicable thereto, which shall be a period contemplated by the definition of the term “Interest Period”; and

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               (v) the location and number of the Borrower’s account to which funds are to be disbursed, which shall comply with the requirements of Section 2.07(a).

If no election as to the Type of Borrowing is specified, then the requested Borrowing shall be an ABR Borrowing. If no Interest Period is specified with respect to any requested Eurodollar Borrowing, then the Borrower shall be deemed to have selected an Interest Period of one month’s duration. Promptly following receipt of a telephonic or written Borrowing Request in accordance with this Section, the Administrative Agent shall advise each Lender of the details thereof and of the amount of such Lender’s Loan to be made as part of the requested Borrowing.

     Section 2.06 Letters of Credit.

          (a) General. Subject to the terms and conditions set forth herein, the Borrower may request the issuance of dollar-denominated, standby Letters of Credit, in a form reasonably acceptable to the Administrative Agent and the relevant Issuing Bank, at any time and from time to time during the Availability Period; provided that the aggregate LC Exposure shall not exceed the lesser of (i) the total Commitments (not to exceed $2,500,000,000) or (ii) the excess of the total Commitments (not to exceed $2,500,000,000) over the aggregate amount of the Loans then outstanding; and provided further that, subject to limitations set forth above, no Issuing Bank shall be obligated to front Letters of Credit to extent that the LC Exposure associated with Letters of Credit issued by it would exceed the lesser of (A) an amount equal to one-fifth of the total Commitments (not to exceed $2,500,000,000) and (B) $500,000,000 (it being understood that, as to Bank of America, N.A., as Issuing Bank, the LC Exposure associated with Letters of Credit deemed issued by it pursuant to Section 2.06(k)(ii) shall be taken into account for the purpose of such $500,000,000 limit, but such $500,000,000 limit shall not be deemed exceeded as a result of the deemed issuance of such Letters of Credit by it pursuant to Section 2.06(k)(ii) to the extent that the LC Exposure associated with such Letters of Credit exceeds $500,000,000). In the event of any inconsistency between the terms and conditions of this Agreement and the terms and conditions of any form of letter of credit application or other agreement submitted by the Borrower to, or entered into by the Borrower with, the relevant Issuing Bank relating to any Letter of Credit, the terms and conditions of this Agreement shall control.

          (b) Notice of Issuance, Amendment, Extension; Certain Conditions. To request the issuance of a Letter of Credit (or the amendment or extension of an outstanding Letter of Credit), the Borrower shall hand deliver or telecopy (or transmit by electronic communication, if arrangements for doing so have been approved by the relevant Issuing Bank) to the relevant Issuing Bank and the Administrative Agent (reasonably in advance of the requested date of issuance, amendment or extension) a notice requesting the issuance of a Letter of Credit, or identifying the Letter of Credit to be amended or extended, and specifying the date of issuance, amendment or extension (which shall be a Business Day), the date on which such Letter of Credit is to expire (which shall comply with paragraph (c) of this Section), the amount of such Letter of Credit (which must be a fixed amount), the name and address of the beneficiary thereof and such other information as shall be necessary to prepare, amend or extend such Letter of Credit. If requested by the relevant Issuing Bank, the Borrower also shall submit a letter of credit application on its standard form in connection with any request for a Letter of Credit; provided that no provision in such application shall be deemed effective to the extent such

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provision contains, provides for, or requires, representations, warranties, covenants, security interests, Liens, indemnities, reimbursements of costs or expenses, events of default, remedies, or standards of care or to the extent such provision conflicts or is inconsistent with this Agreement (provided that, for the avoidance of doubt, nothing in this sentence shall be construed to relieve any account party in respect of any Letter of Credit deemed issued pursuant to Section 2.06(k)(ii) of its reimbursement obligations under any letter of credit application or other agreement related thereto). Following receipt of a notice requesting the issuance of a Letter of Credit (or the amendment or extension of an outstanding Letter of Credit) in accordance with this Section, the Administrative Agent shall advise each Lender of the details thereof. A Letter of Credit shall be issued, amended or extended only if (and upon issuance, amendment or extension of each Letter of Credit the Borrower shall be deemed to represent and warrant that), after giving effect to such issuance, amendment or extension, (i) the LC Exposure shall not exceed the total Commitments (not to exceed $2,500,000,000) and (ii) the total Credit Exposures shall not exceed the total Commitments. Notwithstanding the foregoing or anything else to the contrary contained herein, no Issuing Bank shall be under any obligation to issue any Letter of Credit if: (A) any order, judgment or decree of any Governmental Authority or arbitrator shall by its terms purport to enjoin or restrain such Issuing Bank from issuing such Letter of Credit, or any law applicable to such Issuing Bank or any request or directive (whether or not having the force of law) from any Governmental Authority with jurisdiction over such Issuing Bank (x) shall prohibit, or request that such Issuing Bank refrain from, the issuance of letters of credit generally or such Letter of Credit in particular, (y) shall impose upon such Issuing Bank with respect to such Letter of Credit any restriction, reserve or capital requirement (for which such Issuing Bank is not otherwise compensated hereunder) not in effect on the Revolving Effective Date, or (z) shall impose upon such Issuing Bank any unreimbursed loss, cost or expense which was not applicable on the Revolving Effective Date and which such Issuing Bank in good faith deems material to it; provided that, in the cases of clauses (y) and (z), such Issuing Bank shall have provided written notice to the Borrower of its refusal to issue any Letter of Credit and the specific reasons therefor and the Borrower shall not have compensated such Issuing Bank for the imposition of such restriction, reserve or capital requirement or reimbursed such Issuing Bank for such loss, cost or expense, as applicable; (B) the issuance of such Letter of Credit would violate one or more polices of such Issuing Bank (as consistently applied); or (C) such Letter of Credit is to be denominated in a currency other than dollars.

          (c) Expiration Date. Each Letter of Credit shall expire at or prior to the close of business on the earlier of (i) the date one year after the date of the issuance of such Letter of Credit (or, in the case of any renewal or extension thereof, one year after such renewal or extension) and (ii) the date that is five Business Days prior to the Maturity Date.

          (d) Participation. By the issuance of a Letter of Credit (or an amendment to a Letter of Credit increasing the amount thereof) and without any further action on the part of the Issuing Bank that issues such Letter of Credit or the Lenders, such Issuing Bank hereby grants to each Lender, and each Lender hereby acquires from such Issuing Bank, a participation in such Letter of Credit equal to such Lender’s Applicable Percentage of the aggregate amount available to be drawn under such Letter of Credit. In consideration and in furtherance of the foregoing, each Lender hereby absolutely and unconditionally agrees to pay to the Administrative Agent, for the account of the relevant Issuing Bank, such Lender’s Applicable Percentage of each LC Disbursement made by such Issuing Bank and not reimbursed by the Borrower on the date due as

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provided in paragraph (e) of this Section, or of any reimbursement payment required to be refunded to the Borrower for any reason. Each Lender acknowledges and agrees that its obligation to acquire participations pursuant to this paragraph in respect of Letters of Credit is absolute and unconditional and shall not be affected by any circumstance whatsoever, including any amendment, renewal or extension of any Letter of Credit in accordance with this Agreement or the occurrence and continuance of a Default or reduction or termination of the Commitments, and that each such payment shall be made without any offset, abatement, withholding or reduction whatsoever.

          (e) Reimbursement. If an Issuing Bank shall make any LC Disbursement in respect of a Letter of Credit, the Borrower shall reimburse such LC Disbursement by paying to the Administrative Agent an amount equal to such LC Disbursement not later than 2:00 p.m., New York City time, on the date that such LC Disbursement is made, if the Borrower shall have received notice of such LC Disbursement prior to 11:00 a.m., New York City time, on such date, or, if such notice has not been received by the Borrower prior to such time on such date, then not later than 2:00 p.m., New York City time, on (i) the Business Day that the Borrower receives such notice, if such notice is received prior to 11:00 a.m., New York City time, on the day of receipt, or (ii) the Business Day immediately following the day that the Borrower receives such notice, if such notice is not received prior to such time on the day of receipt; provided that, if such LC Disbursement is not less than $1,000,000, the Borrower may, subject to the conditions to borrowing set forth herein, request in accordance with Section 2.05 that such payment be financed with an ABR Borrowing in an equivalent amount and, to the extent so financed, the Borrower’s obligation to make such payment shall be discharged and replaced by the resulting ABR Borrowing. If the Borrower fails to make such payment when due, the Administrative Agent shall notify each Lender of the applicable LC Disbursement, the payment then due from the Borrower in respect thereof and such Lender’s Applicable Percentage thereof. Promptly following receipt of such notice, each Lender shall pay to the Administrative Agent its Applicable Percentage of the payment then due from the Borrower, in the same manner as provided in Section 2.07 with respect to Loans made by such Lender (and Section 2.07 shall apply, mutatis mutandis, to the payment obligations of the Lenders), and the Administrative Agent shall promptly pay to the relevant Issuing Bank the amounts so received by it from the Lenders. Promptly following receipt by the Administrative Agent of any payment from the Borrower pursuant to this paragraph, the Administrative Agent shall distribute such payment to the relevant Issuing Bank or, to the extent that Lenders have made payments pursuant to this paragraph to reimburse such Issuing Bank, then to such Lenders and such Issuing Bank as its interests may appear. Any payment made by a Lender pursuant to this paragraph to reimburse an Issuing Bank for any LC Disbursement (other than the funding of ABR Loans as contemplated above) shall not constitute a Loan and shall not relieve the Borrower of its obligation to reimburse such LC Disbursement.

          (f) Obligations Absolute. The Borrower’s obligation to reimburse LC Disbursements as provided in paragraph (e) of this Section shall be absolute, unconditional and irrevocable, and shall be performed strictly in accordance with the terms of this Agreement under any and all circumstances whatsoever and irrespective of (i) any lack of validity or enforceability of any Letter of Credit or this Agreement, or any term or provision therein, (ii) any draft or other document presented under a Letter of Credit proving to be forged, fraudulent or invalid in any respect or any statement therein being untrue or inaccurate in any respect, (iii) payment by any

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Issuing Bank under a Letter of Credit against presentation of a draft or other document that does not comply with the terms of such Letter of Credit, or (iv) any other event or circumstance whatsoever, whether or not similar to any of the foregoing, that might, but for the provisions of this Section, constitute a legal or equitable discharge of, or provide a right of setoff against, the Borrower’s obligations hereunder. Neither the Administrative Agent, the Lenders nor the Issuing Banks, nor any of their Related Parties, shall have any liability or responsibility by reason of or in connection with the issuance or transfer of any Letter of Credit or any payment or failure to make any payment thereunder (irrespective of any of the circumstances referred to in the preceding sentence), or any error, omission, interruption, loss or delay in transmission or delivery of any draft, notice or other communication under or relating to any Letter of Credit (including any document required to make a drawing thereunder), any error in interpretation of technical terms or any consequence arising from causes beyond the control of any Issuing Bank; provided that the foregoing shall not be construed to excuse the relevant Issuing Bank from liability to the Borrower to the extent of any direct damages (as opposed to consequential damages, claims in respect of which are hereby waived by the Borrower to the extent permitted by applicable law) suffered by the Borrower that are caused by such Issuing Bank’s failure to exercise care when determining whether drafts and other documents presented under a Letter of Credit comply with the terms thereof. The parties hereto expressly agree that, in the absence of gross negligence or willful misconduct on the part of an Issuing Bank (as finally determined by a court of competent jurisdiction), such Issuing Bank shall be deemed to have exercised care in each such determination. In furtherance of the foregoing and without limiting the generality thereof, the parties agree that, with respect to documents presented which appear on their face to be in substantial compliance with the terms of a Letter of Credit, an Issuing Bank may, in its sole discretion, either accept and make payment upon such documents without responsibility for further investigation, regardless of any notice or information to the contrary, or refuse to accept and make payment upon such documents if such documents are not in strict compliance with the terms of such Letter of Credit.

          (g) Disbursement Procedures. The relevant Issuing Bank shall, promptly following its receipt thereof, examine all documents purporting to represent a demand for payment under a Letter of Credit. The relevant Issuing Bank shall promptly notify the Administrative Agent and the Borrower by telephone (confirmed by telecopy) of such demand for payment and whether it has made or will make an LC Disbursement thereunder; provided that any failure to give or delay in giving such notice shall not relieve the Borrower of its obligation to reimburse such Issuing Bank and the Lenders with respect to any such LC Disbursement.

          (h) Interim Interest. If an Issuing Bank shall make any LC Disbursement, then, unless the Borrower shall reimburse such LC Disbursement in full on the date such LC Disbursement is made, the unpaid amount thereof shall bear interest, for each day from and including the date such LC Disbursement is made to but excluding the date that the Borrower reimburses such LC Disbursement, at the rate per annum then applicable to ABR Loans; provided that, if the Borrower fails to reimburse such LC Disbursement when due pursuant to paragraph (e) of this Section, then Section 2.13(c) shall apply. Interest accrued pursuant to this paragraph shall be for the account of the relevant Issuing Bank, except that interest accrued on and after the date of payment by a Lender pursuant to paragraph (e) of this Section to reimburse such Issuing Bank shall be for the account of such Lender to the extent of such payment.

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          (i) Replacement of an Issuing Bank. An Issuing Bank may be replaced at any time by written agreement among the Borrower, the Administrative Agent, the replaced Issuing Bank and the successor Issuing Bank. The Administrative Agent shall notify the Lenders of any such replacement of an Issuing Bank. At the time any such replacement shall become effective, the Borrower shall pay all unpaid fees accrued for the account of the replaced Issuing Bank pursuant to Section 2.12(c). From and after the effective date of any such replacement, (i) the successor Issuing Bank shall have all the rights and obligations of an Issuing Bank under this Agreement with respect to Letters of Credit to be issued thereafter and (ii) references herein to the term “Issuing Bank” shall be deemed to refer to such successor or to any previous Issuing Bank, or to such successor and all previous Issuing Banks, as the context shall require. After the replacement of an Issuing Bank hereunder, the replaced Issuing Bank shall remain a party hereto and shall continue to have all the rights and obligations of an Issuing Bank under this Agreement with respect to Letters of Credit issued by it prior to such replacement, but shall not be required to issue additional Letters of Credit.

          (j) Cash Collateralization. If any Event of Default shall occur and be continuing, then on the Business Day that the Borrower receives notice from the Administrative Agent or the Required Lenders (or, if the maturity of the Loans has been accelerated, Lenders with LC Exposures representing greater than 50% of the total LC Exposure) demanding the deposit of cash collateral pursuant to this paragraph, the Borrower shall deposit in an account with the Administrative Agent, in the name of the Administrative Agent and for the benefit of the Lenders, an amount in cash equal to the LC Exposure as of such date plus any accrued and unpaid interest and fees thereon; provided that the obligation to deposit such cash collateral shall become effective immediately, and such deposit shall become immediately due and payable, without demand or other notice of any kind, upon the occurrence of any Event of Default with respect to the Borrower described in clause (h) or (i) of Article VII. As collateral security for the payment and performance of the obligations of the Borrower under this Agreement, the Borrower hereby grants to the Administrative Agent, for the benefit of each Issuing Bank and the Lenders, a first priority security interest in such account and all amounts and other property from time to time deposited or held in such account, and all proceeds thereof, and any substitutions and replacements therefor. The Administrative Agent shall have exclusive dominion and control, including the exclusive right of withdrawal, over such account. Other than any interest earned on the investment of such deposits, which investments shall be made at the option and sole discretion of the Administrative Agent and at the Borrower’s risk and expense, such deposits shall not bear interest. Interest or profits, if any, on such investments shall accumulate in such account. Moneys in such account shall be applied by the Administrative Agent to reimburse ratably the Issuing Banks for LC Disbursements for which they have not been reimbursed and, to the extent not so applied, shall be held for the satisfaction of the reimbursement obligations of the Borrower for the LC Exposure at such time or, if the maturity of the Loans has been accelerated (but subject to the consent of Lenders with LC Exposure representing greater than 50% of the total LC Exposure), be applied to satisfy other obligations of the Borrower under this Agreement. If the Borrower is required to provide an amount of cash collateral hereunder as a result of the occurrence of an Event of Default, such amount (to the extent not applied as aforesaid) shall be returned to the Borrower within three Business Days after all Events of Default have been cured or waived.

          (k) Outstanding Letters of Credit.

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               (i) On the Revolving Effective Date, each of the letters of credit listed on Schedule 2.06 shall be deemed to have been issued as Letters of Credit under this Agreement by the Issuing Bank specified on Schedule 2.06, without payment of any fees otherwise due upon the issuance of a Letter of Credit, and such Issuing Bank shall be deemed, without further action by any party hereto, to have sold to each Lender, and each Lender shall be deemed, without further action by any party hereto, to have purchased from such Issuing Bank, a participation, to the extent of such Lender’s Applicable Percentage, in such Letter of Credit.

               (ii) On the Acquisition Effective Date, the letters of credit issued by Bank of America, N.A. and/or Bank of America, N.A., as successor by merger to Fleet National Bank, and Citibank, N.A., that are outstanding on the Acquisition Effective Date and specified in the certificate delivered by the Borrower pursuant to Section 4.02(f) shall be deemed to have been issued as Letters of Credit under this Agreement by Bank of America, N.A., as Issuing Bank, or Citibank, N.A., as Issuing Bank, as applicable, without payment of any fees otherwise due upon the issuance of a Letter of Credit, and each such Issuing Bank shall be deemed, without further action by any party hereto, to have sold to each Lender, and each Lender shall be deemed, without further action by any party hereto, to have purchased from such Issuing Bank, a participation, to the extent of such Lender’s Applicable Percentage, in such Letter of Credit. The Borrower covenants and agrees to cause the Letters of Credit deemed issued by Citibank, N.A. pursuant to this Section 2.06(k)(ii) to be cancelled, terminated or replaced no later than 90 days after the Acquisition Effective Date.

     Section 2.07 Funding of Borrowings. (a) Each Lender shall make each Loan to be made by it hereunder on the proposed date thereof by wire transfer of immediately available funds by 2:00 p.m., New York City time, to the account of the Administrative Agent most recently designated by it for such purpose by notice to the Lenders. The Administrative Agent will make such Loans available to the Borrower by promptly crediting the amounts so received, in like funds, to an account of the Borrower designated by the Borrower in the applicable Borrowing Request; provided that ABR Loans made to finance the reimbursement of an LC Disbursement as provided in Section 2.06(e) shall be remitted by the Administrative Agent to the relevant Issuing Bank.

          (b) Unless the Administrative Agent shall have received notice from a Lender prior to the proposed date of any Borrowing that such Lender will not make available to the Administrative Agent such Lender’s share of such Borrowing, the Administrative Agent may assume that such Lender has made such share available on such date in accordance with paragraph (a) of this Section and may, in reliance upon such assumption, make available to the Borrower a corresponding amount. In such event, if a Lender has not in fact made its share of the applicable Borrowing available to the Administrative Agent, then the applicable Lender and the Borrower severally agree to pay to the Administrative Agent forthwith on demand such corresponding amount with interest thereon, for each day from and including the date such amount is made available to the Borrower to but excluding the date of payment to the Administrative Agent, at (i) in the case of such Lender, the greater of the Federal Funds Effective Rate and a rate determined by the Administrative Agent in accordance with banking industry rules on interbank compensation or (ii) in the case of the Borrower, the interest rate applicable to such Borrowing. If such Lender pays such amount to the Administrative Agent, then such amount shall constitute such Lender’s Loan included in such Borrowing.

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     Section 2.08 Interest Elections. (a) Each Borrowing initially shall be of the Type specified in the applicable Borrowing Request and, in the case of a Eurodollar Borrowing, shall have an initial Interest Period as specified in such Borrowing Request. Thereafter, the Borrower may elect to convert such Borrowing to a different Type or to continue such Borrowing and, in the case of a Eurodollar Borrowing, may elect Interest Periods therefor, all as provided in this Section. The Borrower may elect different options with respect to different portions of the affected Borrowing, in which case each such portion shall be allocated ratably among the Lenders holding the Loans comprising such Borrowing, and the Loans comprising each such portion shall be considered a separate Borrowing.

          (b) To make an election pursuant to this Section, the Borrower shall notify the Administrative Agent of such election by telephone by the time that a Borrowing Request would be required under Section 2.05 if the Borrower were requesting a Borrowing of the Type resulting from such election to be made on the effective date of such election. Each such telephonic Interest Election Request shall be irrevocable and shall be confirmed promptly by hand delivery or telecopy to the Administrative Agent of a written Interest Election Request in a form approved by the Administrative Agent and signed by the Borrower.

          (c) Each telephonic and written Interest Election Request shall specify the following information in compliance with Section 2.04:

               (i) the Borrowing to which such Interest Election Request applies and, if different options are being elected with respect to different portions thereof, the portions thereof to be allocated to each resulting Borrowing (in which case the information to be specified pursuant to clauses (iii) and (iv) below shall be specified for each resulting Borrowing);

               (ii) the effective date of the election made pursuant to such Interest Election Request, which shall be a Business Day;

               (iii) whether the resulting Borrowing is to be an ABR Borrowing or a Eurodollar Borrowing; and

               (iv) if the resulting Borrowing is a Eurodollar Borrowing, the Interest Period to be applicable thereto after giving effect to such election, which shall be a period contemplated by the definition of the term “Interest Period”.

If any such Interest Election Request requests a Eurodollar Borrowing but does not specify an Interest Period, then the Borrower shall be deemed to have selected an Interest Period of one month’s duration.

          (d) Promptly following receipt of an Interest Election Request, the Administrative Agent shall advise each Lender of the details thereof and of such Lender’s portion of each resulting Borrowing.

          (e) If the Borrower fails to deliver a timely Interest Election Request with respect to a Eurodollar Borrowing prior to the end of the Interest Period applicable thereto, then, unless such Borrowing is repaid as provided herein, at the end of such Interest Period such Borrowing shall be converted to an ABR Borrowing. Notwithstanding any contrary provision

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hereof, if an Event of Default has occurred and is continuing and the Administrative Agent, at the request of the Required Lenders, so notifies the Borrower, then, so long as an Event of Default is continuing (i) no outstanding Borrowing may be converted to or continued as a Eurodollar Borrowing and (ii) unless repaid, each Eurodollar Borrowing shall be converted to an ABR Borrowing at the end of the Interest Period applicable thereto.

     Section 2.09 Termination and Reduction of Commitments. (a) Unless previously terminated, the Commitments shall terminate on the Maturity Date.

          (b) The Borrower may at any time terminate, or from time to time reduce, the Commitments; provided that (i) each reduction of the Commitments shall be in an amount that is an integral multiple of $1,000,000 and not less than $5,000,000 and (ii) the Borrower shall not terminate or reduce the Commitments if, after giving effect to any concurrent prepayment of the Loans in accordance with Section 2.11, the sum of the Credit Exposures would exceed the total Commitments.

          (c) The Borrower shall notify the Administrative Agent of any election to terminate or reduce the Commitments under paragraph (b) of this Section at least three Business Days prior to the effective date of such termination or reduction, specifying such election and the effective date thereof. Promptly following receipt of any notice, the Administrative Agent shall advise the Lenders of the contents thereof. Each notice delivered by the Borrower pursuant to this Section shall be irrevocable; provided that a notice of termination of the Commitments delivered by the Borrower may state that such notice is conditioned upon the occurrence of identified events, in which case such notice may be revoked by the Borrower (by notice to the Administrative Agent on or prior to the specified effective date) if such condition is not satisfied. Any termination or reduction of the Commitments shall be permanent and may not be reinstated except pursuant to Section 2.02. Each reduction of the Commitments shall be made ratably among the Lenders in accordance with their respective Commitments.

     Section 2.10 Repayment of Loans; Evidence of Debt. (a) The Borrower hereby unconditionally promises to pay to the Administrative Agent for the account of each Lender the then unpaid principal amount of each Loan on the Maturity Date.

          (b) Each Lender shall maintain in accordance with its usual practice an account or accounts evidencing the indebtedness of the Borrower to such Lender resulting from each Loan made by such Lender, including the amounts of principal and interest payable and paid to such Lender from time to time hereunder.

          (c) The Administrative Agent shall maintain accounts in which it shall record (i) the amount of each Loan made hereunder, the Type thereof and the Interest Period applicable thereto, (ii) the amount of any principal or interest due and payable or to become due and payable from the Borrower to each Lender hereunder and (iii) the amount of any sum received by the Administrative Agent hereunder for the account of the Lenders and each Lender’s share thereof.

          (d) The entries made in the accounts maintained pursuant to paragraph (b) or (c) of this Section shall be prima facie evidence of the existence and amounts of the

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obligations recorded therein; provided that the failure of any Lender or the Administrative Agent to maintain such accounts or any error therein shall not in any manner affect the obligation of the Borrower to repay the Loans in accordance with the terms of this Agreement.

          (e) Any Lender may request that Loans made by it be evidenced by a promissory note. In such event, the Borrower shall prepare, execute and deliver to such Lender a promissory note payable to the order of such Lender (or, if requested by such Lender, to such Lender and its registered assigns) and otherwise substantially in the form of Exhibit D hereto (a “Note”). Thereafter, the Loans evidenced by such promissory note and interest thereon shall at all times (including after assignment pursuant to Section 9.04) be represented by one or more promissory notes in such form payable to the order of the payee named therein (or, if such promissory note is a registered note, to such payee and its registered assigns).

     Section 2.11 Prepayment of Loans. (a) The Borrower shall have the right at any time and from time to time to prepay any Borrowing in whole or in part, subject to prior notice in accordance with paragraph (b) of this Section.

          (b) The Borrower shall notify the Administrative Agent by telephone (confirmed by telecopy) of any prepayment hereunder (i) in the case of prepayment of a Eurodollar Borrowing, not later than 12:00 p.m., New York City time, three Business Days before the date of prepayment or (ii) in the case of prepayment of an ABR Borrowing, not later than 12:00 p.m., New York City time, on the date of prepayment. Each such notice shall be irrevocable and shall specify the prepayment date and the principal amount of each Borrowing or portion thereof to be prepaid; provided that, if a notice of prepayment is given in connection with a conditional notice of termination of the Commitments as contemplated by Section 2.09, then such notice of prepayment may be revoked if such notice of termination is revoked in accordance with Section 2.09. Promptly following receipt of any such notice relating to a Borrowing, the Administrative Agent shall advise the Lenders of the contents thereof. Each partial prepayment of any ABR Borrowing shall be in a minimum amount of $1,000,000 with additional increments of $1,000,000. Each partial prepayment of any Eurodollar Borrowing shall be in a minimum amount of $5,000,000 with additional increments of $1,000,000. Each prepayment of any Borrowing shall be applied ratably to the Loans included in the prepaid Borrowing. Prepayments shall be accompanied by accrued interest to the extent required by Section 2.13 and any break funding costs pursuant to Section 2.16.

     Section 2.12 Fees. (a) The Borrower agrees to pay to the Administrative Agent for the account of each Lender a facility fee, which shall accrue at the Applicable Rate on the daily amount of the Commitment of such Lender (whether used or unused) during the period from and including the Revolving Effective Date to but excluding the date on which such Commitment terminates; provided that, if such Lender continues to have any Credit Exposure after its Commitment terminates, then such facility fee shall continue to accrue on the daily amount of such Lender’s Credit Exposure from and including the date on which its Commitment terminates to but excluding the date on which such Lender ceases to have any Credit Exposure. Accrued facility fees shall be payable in arrears on the last day of March, June, September and December of each year and on the date on which the Commitments terminate, commencing on the first such date to occur after the date hereof; provided that any facility fees accruing after the date on which the Commitments terminate shall be payable on demand. All facility fees shall be

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computed on the basis of a year of 360 days and shall be payable for the actual number of days elapsed (including the first day but excluding the last day).

          (b) The Borrower agrees to pay to the Administrative Agent for the account of each Lender a utilization fee which shall accrue at a per annum rate equal to 0.125% on the daily amount of such Lender’s Credit Exposure during the time the sum of the total Credit Exposures equals or exceeds 50% of the total Commitments. Utilization fees shall be computed on the basis of a year of 360 days and shall be payable in arrears on the last day of March, June, September and December of each year.

          (c) The Borrower agrees to pay (i) to the Administrative Agent for the account of each Lender a participation fee with respect to such Lender’s participations in Letters of Credit, which shall accrue at the same Applicable Rate used to determine the interest rate applicable to Eurodollar Loans on the average daily amount of such Lender’s LC Exposure (excluding any portion thereof attributable to unreimbursed LC Disbursements) during the period from and including the Revolving Effective Date to but excluding the later of the date on which such Lender’s Commitment terminates and the date on which such Lender ceases to have any LC Exposure, and (ii) to each Issuing Bank a fronting fee, which shall accrue at the rate of 0.125% per annum on the average daily amount (except in the case of Letters of Credit issued by Bank of America, N.A., as Issuing Bank, which rate shall accrue on the daily amount) of the LC Exposure associated with Letters of Credit issued by such Issuing Bank (excluding any portion thereof attributable to unreimbursed LC Disbursements) during the period from and including the Revolving Effective Date to but excluding the later of the date of termination of the Commitments and the date on which there ceases to be any LC Exposure, as well as such Issuing Bank’s standard fees with respect to the issuance, amendment, renewal or extension of any Letter of Credit or processing of drawings thereunder. Participation fees and fronting fees accrued through and including the last day of March, June, September and December of each year shall be payable on the third Business Day following such last day, commencing on the first such date to occur after the Revolving Effective Date; provided that all such fees shall be payable on the date on which the Commitments terminate and any such fees accruing after the date on which the Commitments terminate shall be payable on demand. Any other fees payable to any Issuing Bank pursuant to this paragraph shall be payable within 10 days after demand. All participation fees and fronting fees shall be computed on the basis of a year of 360 days and shall be payable for the actual number of days elapsed (including the first day but excluding the last day).

          (d) If the Acquisition Effective Date has not occurred on or prior to the date that is sixty (60) days after the Revolving Effective Date (such date, the “Ticking Fee Commencement Date”), then the Borrower agrees to pay to the Administrative Agent for the account of each Lender a ticking fee, which shall accrue on such Lender’s “Commitment Increase Amount” as specified on Schedule 2.03, at a rate per annum equal to one-half of the rate per annum set forth on the Pricing Schedule under the caption “Facility Fee”, based upon the ratings by Moody’s and S&P, respectively, applicable on the Ticking Fee Commencement Date to the Index Debt, during the period from and including the Ticking Fee Commencement Date to but excluding the earliest to occur of (i) the Acquisition Effective Date, (ii) the date on which the Borrower delivers written notice to the Administrative Agent that the Acquisition will not be consummated or (iii) January 31, 2006 (such earliest date, the “Ticking Fee Termination Date”). Accrued ticking fees shall be payable in arrears on the Ticking Fee Termination Date. All

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ticking fees shall be computed on the basis of a year of 360 days and shall be payable for the actual number of days elapsed (including the first day but excluding the last).

          (e) The Borrower agrees to pay to the Administrative Agent, for its own account, fees payable in the amounts and at the times separately agreed upon between the Borrower and the Administrative Agent.

          (f) All fees payable hereunder shall be paid on the dates due, in immediately available funds, to the Administrative Agent (or to each Issuing Bank, in the case of fees payable to it) for distribution, in the case of facility fees, utilization fees and participation fees, to the Lenders. Fees payable that have been paid shall not be refundable under any circumstances.

     Section 2.13 Interest. (a) The Loans comprising each ABR Borrowing shall bear interest at the Alternate Base Rate plus the Applicable Rate.

          (b) The Loans comprising each Eurodollar Borrowing shall bear interest at the Adjusted LIBO Rate for the Interest Period in effect for such Borrowing plus the Applicable Rate.

          (c) Notwithstanding the foregoing, if any principal of or interest on any Loan or any fee or other amount payable by the Borrower hereunder is not paid when due, whether at stated maturity, upon acceleration or otherwise, such overdue amount shall bear interest, after as well as before judgment, at a rate per annum equal to (i) in the case of overdue principal of any Loan, 2% plus the rate otherwise applicable to such Loan as provided in the preceding paragraphs of this Section or (ii) in the case of any other amount, 2% plus the rate applicable to ABR Loans as provided in paragraph (a) of this Section.

          (d) Accrued interest on each Loan shall be payable in arrears on each Interest Payment Date for such Loan and upon termination of the Commitments; provided that (i) interest accrued pursuant to paragraph (c) of this Section shall be payable on demand, (ii) in the event of any repayment or prepayment of any Loan (other than a prepayment of an ABR Loan prior to the end of the Availability Period), accrued interest on the principal amount repaid or prepaid shall be payable on the date of such repayment or prepayment and (iii) in the event of any conversion of any Eurodollar Loan prior to the end of the current Interest Period therefor, accrued interest on such Loan shall be payable on the effective date of such conversion.

          (e) All interest hereunder shall be computed on the basis of a year of 360 days, except that interest computed by reference to the Alternate Base Rate at times when the Alternate Base Rate is based on the Prime Rate shall be computed on the basis of a year of 365 days (or 366 days in a leap year), and in each case shall be payable for the actual number of days elapsed (including the first day but excluding the last day). The applicable Alternate Base Rate, Adjusted LIBO Rate or LIBO Rate shall be determined by the Administrative Agent, and such determination shall be conclusive absent manifest error.

     Section 2.14 Alternate Rate of Interest. If prior to the commencement of any Interest Period for a Eurodollar Borrowing:

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          (a) the Administrative Agent determines (which determination shall be conclusive absent manifest error) that adequate and reasonable means do not exist for ascertaining the Adjusted LIBO Rate or the LIBO Rate, as applicable, for such Interest Period; or

          (b) the Administrative Agent is advised by the Required Lenders that the Adjusted LIBO Rate or the LIBO Rate, as applicable, for such Interest Period will not adequately and fairly reflect the cost to such Lenders of making or maintaining their Loans included in such Borrowing for such Interest Period;

then the Administrative Agent shall give notice thereof to the Borrower and the Lenders by telephone or telecopy as promptly as practicable thereafter and, until the Administrative Agent notifies the Borrower and the Lenders that the circumstances giving rise to such notice no longer exist, (i) any Interest Election Request that requests the conversion of any Borrowing to, or continuation of any Borrowing as, a Eurodollar Borrowing shall be ineffective, and (ii) if any Borrowing Request requests a Eurodollar Borrowing, such Borrowing shall be made as an ABR Borrowing; provided that if the circumstances giving rise to such notice affect only one Type of Borrowings, then the other Type of Borrowings shall be permitted.

     Section 2.15 Increased Costs. (a) If any Change in Law shall:

               (i) impose, modify or deem applicable any reserve, special deposit or similar requirement against assets of, deposits with or for the account of, or credit extended by, any Lender (except any such reserve requirement reflected in the Adjusted LIBO Rate) or any Issuing Bank; or

               (ii) impose on any Lender or any Issuing Bank or the London interbank market any other condition affecting this Agreement or Eurodollar Loans made by such Lender or any Letter of Credit or participation therein (excluding for purposes of this subsection (ii) any Indemnified Taxes or Other Taxes as to which Section 2.17 shall apply);

and the result of any of the foregoing shall be to increase the cost to such Lender of making or maintaining any Eurodollar Loan (or of maintaining its obligation to make any such Loan) or to increase the cost to such Lender or such Issuing Bank of participating in, issuing or maintaining any Letter of Credit or to reduce the amount of any sum received or receivable by such Lender or such Issuing Bank hereunder (whether of principal, interest or otherwise), then the Borrower will pay to such Lender or such Issuing Bank, as the case may be, such additional amount or amounts as will compensate such Lender or such Issuing Bank, as the case may be, for such additional costs incurred or reduction suffered.

          (b) If any Lender or any Issuing Bank determines that any Change in Law regarding capital requirements has or would have the effect of reducing the rate of return on such Lender’s or such Issuing Bank’s capital or on the capital of such Lender’s or such Issuing Bank’s holding company, if any, as a consequence of this Agreement or the Loans made by, or participations in Letters of Credit held by, such Lender, or the Letters of Credit issued by such Issuing Bank, to a level below that which such Lender or such Issuing Bank or such Lender’s or such Issuing Bank’s holding company could have achieved but for such Change in Law (taking into consideration such Lender’s or such Issuing Bank’s policies and the policies of such Lender’s

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or such Issuing Bank’s holding company with respect to capital adequacy), then from time to time the Borrower will pay to such Lender or such Issuing Bank, as the case may be, such additional amount or amounts as will compensate such Lender or such Issuing Bank or such Lender’s or such Issuing Bank’s holding company for any such reduction suffered.

          (c) A certificate of a Lender or an Issuing Bank setting forth in reasonable detail the basis for, the calculation of and the amount or amounts necessary to compensate such Lender or such Issuing Bank or its holding company, as the case may be, as specified in paragraph (a) or (b) of this Section shall be delivered to the Borrower and shall be conclusive absent manifest error. The Borrower shall pay to such Lender or such Issuing Bank, as the case may be, the amount shown as due on any such certificate within 10 days after receipt thereof. In determining such amount, such Lender agrees to act in good faith and to use reasonable averaging and attribution methods.

          (d) Failure or delay on the part of any Lender or any Issuing Bank to demand compensation pursuant to this Section shall not constitute a waiver of such Lender’s or such Issuing Bank’s right to demand such compensation; provided that the Borrower shall not be required to compensate a Lender or an Issuing Bank pursuant to this Section for any increased costs or reductions incurred more than 180 days prior to the date that such Lender or such Issuing Bank, as the case may be, notifies the Borrower of the Change in Law giving rise to such increased costs or reductions and of such Lender’s or such Issuing Bank’s intention to claim compensation therefor; provided further that, if the Change in Law giving rise to such increased costs or reductions is retroactive, then the 180-day period referred to above shall be extended to include the period of retroactive effect thereof.

     Section 2.16 Break Funding Payments. In the event of (a) the payment of any principal of any Eurodollar Loan other than on the last day of an Interest Period applicable thereto (including as a result of an Event of Default), (b) the conversion of any Eurodollar Loan other than on the last day of the Interest Period applicable thereto, (c) the failure to borrow, convert, continue or prepay any Loan on the date specified in any notice delivered pursuant hereto (regardless of whether such notice may be revoked under Section 2.11(b) and is revoked in accordance therewith), or (d) the assignment of any Eurodollar Loan other than on the last day of the Interest Period applicable thereto as a result of a request by the Borrower pursuant to Section 2.19, then, in any such event, the Borrower shall compensate each Lender (other than, in the case of a claim for compensation based on the failure to borrow as specified in clause (c) above, any Lender whose failure to make a Loan required to be made by it hereunder has resulted in such failure to borrow) for the loss, cost and expense attributable to such event. In the case of a Eurodollar Loan, such loss, cost or expense to any Lender shall be deemed to include an amount determined by such Lender to be the excess, if any, of (i) the amount of interest which would have accrued on the principal amount of such Loan had such event not occurred, at the Adjusted LIBO Rate that would have been applicable to such Loan, for the period from the date of such event to the last day of the then current Interest Period therefor (or, in the case of a failure to borrow, convert or continue, for the period that would have been the Interest Period for such Loan), over (ii) the amount of interest which would accrue on such principal amount for such period at the interest rate which such Lender would bid were it to bid, at the commencement of such period, for dollar deposits of a comparable amount and period from other banks in the eurodollar market. A certificate of any Lender setting forth in reasonable detail the basis for and

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any amount or amounts that such Lender is entitled to receive pursuant to this Section shall be delivered to the Borrower and shall be conclusive absent manifest error. The Borrower shall pay such Lender the amount shown as due on any such certificate within 10 days after receipt thereof.

     Section 2.17 Taxes. (a) Any and all payments by or on account of any obligation of the Borrower hereunder shall be made free and clear of and without deduction for any Indemnified Taxes or Other Taxes; provided that if the Borrower shall be required to deduct any Indemnified Taxes or Other Taxes from such payments, then (i) the sum payable shall be increased as necessary so that after making all required deductions (including deductions applicable to additional sums payable under this Section) the Administrative Agent, Lender or Issuing Bank (as the case may be) receives an amount equal to the sum it would have received had no such deductions been made, (ii) the Borrower shall make such deductions and (iii) the Borrower shall pay the full amount deducted to the relevant Governmental Authority in accordance with applicable law.

          (b) In addition, the Borrower shall pay any Other Taxes to the relevant Governmental Authority in accordance with applicable law.

          (c) The Borrower shall indemnify the Administrative Agent, each Lender, and each Issuing Bank, within 15 days after written demand therefor, for the full amount of any Indemnified Taxes or Other Taxes paid by the Administrative Agent, such Lender, or such Issuing Bank, as the case may be, on or with respect to any payment by or on account of any obligation of the Borrower hereunder (including Indemnified Taxes or Other Taxes imposed or asserted on or attributable to amounts payable under this Section) and any penalties, interest and reasonable expenses arising therefrom or with respect thereto, whether or not such Indemnified Taxes or Other Taxes were correctly or legally imposed or asserted by the relevant Governmental Authority. A certificate setting forth in reasonable detail the basis for and the amount of such payment or liability delivered to the Borrower by a Lender or an Issuing Bank, or by the Administrative Agent on its own behalf or on behalf of a Lender or an Issuing Bank, shall be conclusive absent manifest error.

          (d) As soon as practicable after any payment of Indemnified Taxes or Other Taxes by the Borrower to a Governmental Authority, the Borrower shall deliver to the Administrative Agent the original or a certified copy of a receipt issued by such Governmental Authority evidencing such payment, a copy of the return reporting such payment or other evidence of such payment reasonably satisfactory to the Administrative Agent.

          (e) Any Foreign Lender that is entitled to an exemption from or reduction of withholding tax under the law of the jurisdiction(s) in which the Borrower is located, or any treaty to which such jurisdiction(s) is a party, with respect to payments under this Agreement shall deliver to the Borrower (with a copy to the Administrative Agent), at the time or times prescribed by applicable law, such properly completed and executed documentation prescribed by applicable law or reasonably requested by the Borrower as will permit such payments to be made without withholding or at a reduced rate.

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          (f) If the Administrative Agent or a Lender determines, in its sole discretion, that it has received a refund of any Taxes or Other Taxes as to which it has been indemnified by the Borrower or with respect to which the Borrower has paid additional amounts pursuant to this Section 2.17, it shall pay over such refund to the Borrower (but only to the extent of indemnity payments made, or additional amounts paid, by the Borrower under this Section 2.17 with respect to the Taxes or Other Taxes giving rise to such refund), net of all out-of-pocket expenses of the Administrative Agent or such Lender and without interest (other than any interest paid by the relevant Governmental Authority with respect to such refund); provided, that the Borrower, upon the request of the Administrative Agent or such Lender, agrees to repay the amount paid over to the Borrower (plus any penalties, interest or other charges imposed by the relevant Governmental Authority) to the Administrative Agent or such Lender in the event the Administrative Agent or such Lender is required to repay such refund to such Governmental Authority. This Section shall not be construed to require the Administrative Agent or any Lender to make available its tax returns (or any other information relating to its taxes which it deems confidential) to the Borrower or any other Person.

     Section 2.18 Payments Generally; Pro Rata Treatment; Sharing of Set-offs. (a) The Borrower shall make each payment required to be made by it hereunder (whether of principal, interest, fees or reimbursement of LC Disbursements, or of amounts payable under Section 2.15, Section 2.16 or Section 2.17, or otherwise) prior to 2:00 p.m., New York City time, on the date when due, in immediately available funds, without deduction, set-off or counterclaim. Any amounts received after such time on any date may, in the discretion of the Administrative Agent, be deemed to have been received on the next succeeding Business Day for purposes of calculating interest thereon. All such payments shall be made to the Administrative Agent at its offices at 270 Park Avenue, New York, New York, except payments to be made directly to each Issuing Bank as expressly provided herein and except that payments pursuant to Section 2.15, Section 2.16, Section 2.17 and Section 9.03 shall be made directly to the Persons entitled thereto. The Administrative Agent shall distribute any such payments received by it for the account of any other Person to the appropriate recipient promptly following receipt thereof. If any payment hereunder shall be due on a day that is not a Business Day, the date for payment shall be extended to the next succeeding Business Day, and, in the case of any payment accruing interest, interest thereon shall be payable for the period of such extension. All payments hereunder shall be made in dollars.

          (b) If at any time insufficient funds are received by and available to the Administrative Agent to pay fully all amounts of principal, unreimbursed LC Disbursements, interest and fees then due hereunder, such funds shall be applied (i) first, towards payment of interest and fees then due hereunder, ratably among the parties entitled thereto in accordance with the amounts of interest and fees then due to such parties, and (ii) second, towards payment of principal and unreimbursed LC Disbursements then due hereunder, ratably among the parties entitled thereto in accordance with the amounts of principal and unreimbursed LC Disbursements then due to such parties.

          (c) If any Lender shall, by exercising any right of set-off or counterclaim or otherwise, obtain payment in respect of any principal of or interest on any of its Loans or participations in LC Disbursements resulting in such Lender receiving payment of a greater proportion of the aggregate amount of its Loans and participations in LC Disbursements and

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accrued interest thereon than the proportion received by any other Lender, then the Lender receiving such greater proportion shall purchase (for cash at face value) participations in the Loans and participations in LC Disbursements of other Lenders to the extent necessary so that the benefit of all such payments shall be shared by the Lenders ratably in accordance with the aggregate amount of principal of and accrued interest on their respective Loans and participations in LC Disbursements; provided that (i)if any such participations are purchased and all or any portion of the payment giving rise thereto is recovered, such participations shall be rescinded and the purchase price restored to the extent of such recovery, without interest, and (ii) the provisions of this paragraph shall not be construed to apply to any payment made by the Borrower pursuant to and in accordance with the express terms of this Agreement or any payment obtained by a Lender as consideration for the assignment of or sale of a participation in any of its Loans or participations in LC Disbursements to any assignee or participant, other than to the Borrower or any Subsidiary or Affiliate thereof (as to which the provisions of this paragraph shall apply). The Borrower consents to the foregoing and agrees, to the extent it may effectively do so under applicable law, that any Lender acquiring a participation pursuant to the foregoing arrangements may exercise against the Borrower rights of set-off and counterclaim with respect to such participation as fully as if such Lender were a direct creditor of the Borrower in the amount of such participation.

          (d) Unless the Administrative Agent shall have received notice from the Borrower prior to the date on which any payment is due to the Administrative Agent for the account of the Lenders or the Issuing Banks hereunder that the Borrower will not make such payment, the Administrative Agent may assume that the Borrower has made such payment on such date in accordance herewith and may, in reliance upon such assumption, distribute to the Lenders or the Issuing Banks, as the case may be, the amount due. In such event, if the Borrower has not in fact made such payment, then each of the Lenders or the Issuing Banks, as the case may be, severally agrees to repay to the Administrative Agent forthwith on demand the amount so distributed to such Lender or Issuing Bank with interest thereon, for each day from and including the date such amount is distributed to it to but excluding the date of payment to the Administrative Agent, at the greater of the Federal Funds Effective Rate and a rate determined by the Administrative Agent in accordance with banking industry rules on interbank compensation.

          (e) If any Lender shall fail to make any payment required to be made by it pursuant to Section 2.06(d) or (e), Section 2.07(b), Section 2.18(d) or Section 9.03(c), then the Administrative Agent may, in its discretion (notwithstanding any contrary provision hereof), apply any amounts thereafter received by the Administrative Agent for the account of such Lender to satisfy such Lender’s obligations under such Sections until all such unsatisfied obligations are fully paid.

     Section 2.19 Mitigation Obligations; Replacement of Lenders. (a) If any Lender requests compensation under Section 2.15, or if the Borrower is required to pay any additional amount to any Lender or any Governmental Authority for the account of any Lender pursuant to Section 2.17, then such Lender shall use reasonable efforts to designate a different lending office for funding or booking its Loans hereunder or to assign its rights and obligations hereunder to another of its offices, branches or affiliates, if, in the judgment of such Lender, such designation or assignment (i) would eliminate or reduce amounts payable pursuant to Section 2.15 or Section

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2.17, as the case may be, in the future and (ii) would not subject such Lender to any unreimbursed cost or expense and would not otherwise be disadvantageous to such Lender. The Borrower hereby agrees to pay all reasonable costs and expenses incurred by any Lender in connection with any such designation or assignment.

          (b) If any Lender requests compensation under Section 2.15, or if the Borrower is required to pay any additional amount to any Lender or any Governmental Authority for the account of any Lender pursuant to Section 2.17, or if any Lender is a Defaulting Lender, or if any Lender fails to execute and deliver any amendment, consent or waiver to any Loan Document requested by the Borrower by the date specified by the Borrower (or gives the Borrower or the Administrative Agent written notice prior to such date of its intention not to do so), or if any Lender delivers a notice to the Borrower and/or the Administrative Agent pursuant to Section 2.20, then the Borrower may, at its sole expense and effort, upon notice to such Lender and the Administrative Agent, require such Lender to assign and delegate, without recourse (in accordance with and subject to the restrictions contained in Section 9.04), all its interests, rights and obligations under this Agreement to an assignee that shall assume such obligations (which assignee may be another Lender, if a Lender accepts such assignment); provided that (i) the Borrower shall have received the prior written consent of the Administrative Agent (and, if a Commitment is being assigned, each Issuing Bank), which consent (or consents) shall not unreasonably be withheld or delayed, (ii) such Lender shall have received payment of an amount equal to the outstanding principal of its Loans and participations in LC Disbursements, accrued interest thereon, accrued fees and all other amounts payable to it hereunder, from the assignee or the Borrower, as applicable, and (iii) in the case of any such assignment resulting from a claim for compensation under Section 2.15 or payments required to be made pursuant to Section 2.17, such assignment will result in a reduction in such compensation or payments.

     Section 2.20 Illegality. Notwithstanding any other provision of this Agreement, in the event that it becomes unlawful for any Lender or its applicable lending office to honor its obligation to make or maintain Eurodollar Loans either generally or having a particular Interest Period hereunder, then (a) such Lender shall promptly notify the Borrower and the Administrative Agent thereof and such Lender’s obligation to make such Eurodollar Loans shall be suspended (the “Affected Loans”) until such time as such Lender may again make and maintain such Eurodollar Loans and (b) all Affected Loans which would otherwise be made by such Lender shall be made instead as ABR Loans (and, if such Lender so requests by notice to the Borrower and the Administrative Agent, all Affected Loans of such Lender then outstanding shall be automatically converted into ABR Loans on the date specified by such Lender in such notice) and, to the extent that Affected Loans are so made as (or converted into) ABR Loans, all payments of principal which would otherwise be applied to such Lender’s Affected Loans shall be applied instead to its ABR Loans.

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ARTICLE III
Representations and Warranties

          The Borrower represents and warrants to the Lenders that:

     Section 3.01 Organization; Powers. Each of the Borrower and its Subsidiaries is duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization, has all requisite power and authority to carry on its business as now conducted and is qualified to do business in, and is in good standing in, every jurisdiction where such qualification is required, except where the failure to do so, individually or in the aggregate, could not reasonably be expected to result in a Material Adverse Effect.

     Section 3.02 Authorization; Enforceability. The Transactions are within the Borrower’s corporate powers and have been duly authorized by all necessary corporate and, if required, stockholder action. The Loan Documents have been duly executed and delivered by the Borrower and constitute legal, valid and binding obligations of the Borrower, enforceable in accordance with their terms, subject to applicable bankruptcy, insolvency, reorganization, moratorium or other laws affecting creditors’ rights generally and subject to general principles of equity, regardless of whether considered in a proceeding in equity or at law.

     Section 3.03 Governmental Approvals; No Conflicts. The Transactions (a) do not require the Borrower or any Subsidiary to obtain any consent or approval of, or make any registration or filing with, or request any other action by, any Governmental Authority, except such as have been obtained or made and are in full force and effect (except for any reports required to be filed by the Borrower with the Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934), (b) will not result in a violation by the Borrower or any Subsidiary of any law or regulation or the charter, by-laws or other organizational documents of the Borrower or any of its Subsidiaries or any order of any Governmental Authority, (c) will not violate or result in a default under any material indenture, agreement or other instrument binding upon the Borrower or any of its Subsidiaries or its assets, or give rise to a right thereunder to require any material payment to be made by the Borrower or any of its Subsidiaries, and (d) will not result in the creation or imposition of any Lien on any asset of the Borrower or any of its Subsidiaries.

     Section 3.04 Financial Condition. The Borrower has heretofore furnished to the Lenders its consolidated balance sheet and statements of income, stockholder’s equity and cash flows (i) as of and for the fiscal year ended December 31, 2004, reported on by KPMG LLP, independent public accountants, and (ii) as of and for the Fiscal Quarter and the portion of the fiscal year ended June 30, 2005, certified by its chief financial officer. Such financial statements present fairly, in all material respects, the financial position and results of operations and cash flows of the Borrower and its consolidated Subsidiaries as of such dates and for such periods in accordance with GAAP, subject to year-end audit adjustments and the absence of footnotes in the case of the statements referred to in clause (ii) above.

     Section 3.05 Environmental Matters. Except for the Disclosed Matters and except with respect to any other matters that, individually or in the aggregate, could not reasonably be expected to result in a Material Adverse Effect, neither the Borrower nor any of its Subsidiaries

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(a) has failed to comply with any applicable Environmental Law or to obtain, maintain or comply with any permit, license or other approval required under any applicable Environmental Law, (b) has become subject to any Environmental Liability, (c) has received notice of any claim with respect to any Environmental Liability or (d) knows of any basis for any Environmental Liability.

     Section 3.06 No Default. No Default has occurred and is continuing.

     Section 3.07 Investment and Holding Company Status. Neither the Borrower nor any of its Subsidiaries is (a) an “investment company” as defined in, or subject to regulation under, the Investment Company Act of 1940, as amended or (b) a “holding company” as defined in, or subject to regulation under, the Public Utility Holding Company Act of 1935, as amended.

     Section 3.08 Taxes. Each of the Borrower and its Subsidiaries has timely filed or caused to be filed all Tax returns and reports required to have been filed and has paid or caused to be paid all Taxes required to have been paid by it, except (a) Taxes that are being contested in good faith by appropriate proceedings and for which the Borrower or such Subsidiary, as applicable, has set aside on its books adequate reserves with respect thereto in accordance with GAAP or (b) to the extent that the failure to do so could not reasonably be expected to result in a Material Adverse Effect.

     Section 3.09 ERISA. Each ERISA Affiliate has fulfilled its obligations under the minimum funding standards of ERISA and the Code with respect to each Plan and is in compliance in all material respects with the presently applicable provisions of ERISA and the Code with respect to each Plan. No ERISA Affiliate has (i) sought a waiver of the minimum funding standard under Section 412 of the Code in respect of any Plan, (ii) failed to make any contribution or payment to any Plan or Multiemployer Plan or in respect of any Benefit Arrangement, or made any amendment to any Plan or Benefit Arrangement, which has resulted or could reasonably be expected to result in the imposition of a Lien or the posting of a bond or other security under ERISA or the Code or (iii) incurred any liability under Title IV of ERISA other than a liability to the PBGC for premiums under Section 4007 of ERISA.

     Section 3.10 Disclosure. Neither the Information Memorandum nor any of the other reports, financial statements, certificates or other written information furnished by or on behalf of the Borrower to the Administrative Agent or any Lender in connection with the negotiation of this Agreement or delivered hereunder (as modified or supplemented by other written information so furnished) contained as of the date such reports, financial statements, certificates or other written information were so furnished, any untrue statement of a material fact or omitted to state any material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided that, with respect to (i) projections, estimates, pro forma financial information, engineering reports and 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) contained in the materials referenced above, the Borrower represents only that such information was prepared in good faith based upon assumptions believed to be reasonable at the time, (ii) financial statements, the Borrower represents only that such financial statements were prepared as represented in Section 3.04 and as required by Sections 5.01(a) and (b), as applicable, and (iii) prior to the Acquisition Effective Date, no representation is made as to (x) information prepared by or on behalf of Premcor Inc. or (y) any information that is necessarily based upon such information provided by or on behalf of Premcor Inc.

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ARTICLE IV
Conditions

     Section 4.01 Revolving Effective Date. The obligations of the Lenders to make Loans and of the Issuing Banks to issue Letters of Credit hereunder shall not become effective until the date on which each of the following conditions is satisfied (or waived in accordance with Section 9.02):

          (a) The Administrative Agent (or its counsel) shall have received from each party hereto either (i) a counterpart of this Agreement signed on behalf of such party or (ii) written evidence satisfactory to the Administrative Agent (which may include telecopy transmission of a signed signature page of this Agreement) that such party has signed a counterpart of this Agreement.

          (b) The Administrative Agent shall have received a favorable written opinion (addressed to the Administrative Agent and the Lenders and dated the Revolving Effective Date) of (i) Jay Browning, in-house counsel of the Borrower, providing the opinions set forth in Exhibit E and (ii) Baker Botts L.L.P., counsel for the Borrower, providing the opinions set forth in Exhibit F, and each such opinion covering such other matters relating to the Borrower or the Transactions as the Required Lenders shall reasonably request. The Borrower hereby requests each such counsel to deliver its applicable opinion to the Administrative Agent and the Lenders.

          (c) The Administrative Agent shall have received such documents and certificates as the Administrative Agent may reasonably request relating to the organization, existence and good standing of the Borrower, the authorization of the Transactions and any other legal matters relating to the Borrower, this Agreement or the Transactions, all in form and substance satisfactory to the Administrative Agent.

          (d) The Administrative Agent shall have received the financial statements referred to in Section 3.04.

          (e) The Administrative Agent shall have received a certificate, dated the Revolving Effective Date and signed by a Responsible Officer of the Borrower, certifying (which statements shall constitute a representation and warranty made by the Borrower to the Lenders hereunder on the Revolving Effective Date) that, as of the Revolving Effective Date, (i) there are no actions, suits or proceedings by or before any arbitrator or Governmental Authority pending against or, to the knowledge of any Responsible Officer of the Borrower, threatened against or affecting the Borrower or any of its Subsidiaries (A) as to which there is a reasonable possibility of an adverse determination and that, if adversely determined, could reasonably be expected, individually or in the aggregate, to result in a Material Adverse Effect (other than the Disclosed Matters) or (B) that involve the Loan Documents or the Transactions; and (ii) since December 31, 2004, there has been no material adverse change in the business, financial position, or results of operations of the Borrower together with its Subsidiaries on a consolidated basis.

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          (f) The Administrative Agent shall have received a certificate, dated the Revolving Effective Date and signed by a Responsible Officer of the Borrower, confirming compliance, as of the Revolving Effective Date, with the conditions set forth in paragraphs (a) and (b) of Section 4.03.

          (g) The Administrative Agent shall have received all fees and other amounts due and payable on or prior to the Revolving Effective Date, including, to the extent invoiced, reimbursement or payment of all out-of-pocket expenses required to be reimbursed or paid by the Borrower hereunder.

          (h) The Administrative Agent shall have received evidence satisfactory to it that all outstanding obligations owing pursuant to the Existing Agreements shall have been or are concurrently being repaid in full, and all commitments thereunder shall have been or are concurrently being terminated.

The Administrative Agent shall notify the Borrower and the Lenders of the Revolving Effective Date, and such notice shall be conclusive and binding. Notwithstanding the foregoing, the obligations of the Lenders to make Loans and of the Issuing Banks to issue Letters of Credit hereunder shall not become effective unless each of the foregoing conditions contained in this Section 4.01 is satisfied (or waived pursuant to Section 9.02) at or prior to 5:00 p.m., New York City time, on October 1, 2005 (and, in the event such conditions are not so satisfied or waived, the Commitments shall terminate at such time).

     Section 4.02 Acquisition Effective Date. The Commitment increase referred to in Section 2.03 shall not become effective until the date on which each of the following conditions is satisfied (or waived in accordance with Section 9.02):

          (a) The Administrative Agent shall have received evidence satisfactory to it that the Acquisition has been or is being concurrently consummated substantially in accordance with the terms of the Acquisition Document (with all of the material conditions precedent thereto having been satisfied in all material respects by the parties thereto other than as consented to by the Lenders).

          (b) The Administrative Agent shall have received a certificate of the President or a Vice President of the Borrower certifying (which statements shall constitute a representation and warranty made by the Borrower to the Lenders hereunder on the Acquisition Effective Date) as of the Acquisition Effective Date: (A) that the Acquisition has been or is concurrently being consummated substantially in accordance with the terms of the Acquisition Document (with all of the material conditions precedent thereto having been satisfied in all material respects by the parties thereto other than as consented to by the Lenders); and (B) that attached thereto is a true and complete executed copy of the Acquisition Document (including all exhibits, schedules and supplements) and that the Acquisition Document has not been amended since April 24, 2005 in any material respect except as otherwise consented to by the Administrative Agent and the Lenders (which consent will not be unreasonably withheld).

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          (c) The Administrative Agent shall have received a certificate, dated the Acquisition Effective Date and signed by a Responsible Officer of the Borrower, certifying (which statements shall constitute a representation and warranty made by the Borrower to the Lenders hereunder on the Acquisition Effective Date), as of the Acquisition Effective Date, that (i) there are no actions, suits or proceedings by or before any arbitrator or Governmental Authority pending against or, to the knowledge of any Responsible Officer of the Borrower, threatened against or affecting the Borrower or any of its Subsidiaries (A) as to which there is a reasonable possibility of an adverse determination and that, if adversely determined, could reasonably be expected, individually or in the aggregate, to result in a Material Adverse Effect (other than the Disclosed Matters) or (B) that involve the Loan Documents or the Transactions; and (ii) since December 31, 2004, there has been no material adverse change in the business, financial position, or results of operations of the Borrower together with its Subsidiaries on a consolidated basis (provided that, with respect to Premcor Inc. and its subsidiaries, the Borrower certifies, represents and warrants only as to its knowledge).

          (d) The Administrative Agent shall have received (i) the consolidated balance sheet and statements of income, stockholder’s equity and cash flows of Premcor Inc. (A) as of and for the fiscal year ended December 31, 2004, reported on by Deloitte & Touche LLP, independent public accountants, and (B) as of and for the fiscal quarter and the portion of the fiscal year ended June 30, 2005, certified by its chief financial officer; (ii) the selected unaudited pro forma condensed combined financial data set forth in the joint proxy statement/prospectus included in the Registration Statement on Form S-4 filed with the Securities and Exchange Commission on May 19, 2005 in connection with the Acquisition; and (iii) a certificate, dated the Acquisition Effective Date and signed by a Responsible Officer of the Borrower, certifying (which statements shall constitute a representation and warranty made by the Borrower to the Lenders hereunder) that the financial statements referred to in clause (i) above present fairly, in all material respects, the financial position and results of operations and cash flows of Premcor Inc. and its consolidated subsidiaries as of the dates and for the periods referred to in such clause (i) in accordance with GAAP, subject to year-end audit adjustments and the absence of footnotes. It is understood that, with respect to the financial data referred to in clause (ii) above, (A) such financial data was prepared for illustrative purposes only and is based on available information and assumptions that are believed to be reasonable as of the Revolving Effective Date, (B) the financial results reflected in such financial data may have been different had the Borrower and Premcor Inc. always been combined due to certain factors, (C) the unaudited pro forma combined statements of income do not reflect anticipated synergies or costs and charges that may result from the Acquisition, (D) such pro forma financial information does not reflect any actions the Borrower and Premcor Inc. may be required to take in connection with obtaining the necessary regulatory approvals for the Acquisition, and (E) such financial data should not be relied upon as being indicative of the historical results that would have been achieved had the Borrower and Premcor Inc. always been combined or the future results that the Borrower will experience after the Acquisition Effective Date.

          (e) The Administrative Agent shall have received a certificate, dated the Acquisition Effective Date and signed by a Responsible Officer of the Borrower, confirming compliance, as of the Acquisition Effective Date, with the conditions set forth in paragraphs (a) and (b) of Section 4.03.

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          (f) The Administrative Agent shall have received (i) evidence satisfactory to it that all outstanding obligations owing pursuant to the Premcor Credit Agreement shall have been or are concurrently being repaid in full, and all commitments thereunder shall have been or are concurrently being terminated and (ii) a certificate, satisfactory to the Administrative Agent, Bank of America, N.A. and Citibank N.A., dated the Acquisition Date, and signed by a Responsible Officer, setting forth all outstanding letters of credit on the Acquisition Effective Date that are to be issued hereunder pursuant to Section 2.06(k)(ii) (including the name of the applicable Issuing Bank, the letter of credit reference number, the issue date, the expiration date, the amount thereof, the name of the beneficiary, and such other pertinent information as the Administrative Agent may reasonably require).

The Administrative Agent shall notify the Borrower and the Lenders of the Acquisition Effective Date, and such notice shall be conclusive and binding. Notwithstanding the foregoing, the Commitment increase referred to in Section 2.03 shall not become effective unless each of the foregoing conditions contained in this Section 4.02 is satisfied (or waived pursuant to Section 9.02) at or prior to 5:00 p.m., New York City time, on January 31, 2006 (and, in the event such conditions are not so satisfied or waived, the availability of the Commitment increase referred to in Section 2.03 shall terminate at such time).

     Section 4.03 Each Credit Event. The obligation of each Lender to make a Loan on the occasion of any Borrowing, and of each Issuing Bank to issue, amend or extend any Letter of Credit, is subject to the satisfaction of the following conditions:

          (a) The representations and warranties of the Borrower set forth in this Agreement and in the other Loan Documents shall be true and correct on and as of the date of such Borrowing or the date of issuance, amendment or extension of such Letter of Credit, as applicable, except to the extent any such representations and warranties are expressly limited to an earlier date, in which case, on and as of the date of such Borrowing or the date of issuance, amendment or extension of such Letter of Credit, as applicable, such representations and warranties shall continue to be true and correct as of such specified earlier date.

          (b) At the time of and immediately after giving effect to such Borrowing or the issuance, amendment or extension of such Letter of Credit, as applicable, no Default shall have occurred and be continuing.

          (c) The Administrative Agent shall have received a Borrowing Request in accordance with Section 2.05.

Each Borrowing and each issuance, amendment or extension of a Letter of Credit shall be deemed to constitute a representation and warranty by the Borrower on the date thereof as to the matters specified in paragraphs (a) and (b) of this Section.

ARTICLE V
Affirmative Covenants

          Until the Commitments have expired or been terminated and the principal of and interest on each Loan and all fees payable hereunder shall have been paid in full and all Letters of Credit shall have expired or terminated and all LC Disbursements shall have been reimbursed, the Borrower covenants and agrees with the Lenders that:

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     Section 5.01 Financial Statements and Other Information. The Borrower will furnish to the Administrative Agent:

          (a) within 65 days after the end of each fiscal year of the Borrower, its audited consolidated balance sheet and related statements of income, stockholders’ equity and cash flows as of the end of and for such year, setting forth in each case in comparative form the figures for the previous fiscal year, all reported on by KPMG LLP or other independent public accountants of recognized national standing (without a “going concern” or like qualification or exception and without any qualification or exception as to the scope of such audit) to the effect that such consolidated financial statements present fairly in all material respects the financial condition and results of operations of the Borrower and its consolidated Subsidiaries on a consolidated basis in accordance with GAAP consistently applied, except for deviations from the application of GAAP concurred with by the Borrower’s independent public accountants;

          (b) within 45 days after the end of each of the first three Fiscal Quarters of each fiscal year of the Borrower, its consolidated balance sheet and related statements of income, stockholders’ equity and cash flows as of the end of and for such Fiscal Quarter and the then elapsed portion of the fiscal year, setting forth in each case in comparative form the figures for the corresponding period or periods of (or, in the case of the balance sheet, as of the end of) the previous fiscal year, all certified by one of its Financial Officers as presenting fairly in all material respects the financial condition and results of operations of the Borrower and its consolidated Subsidiaries on a consolidated basis in accordance with GAAP consistently applied, except for deviations from the application of GAAP concurred with by the Borrower’s independent public accountants, subject to normal year-end audit adjustments and the absence of footnotes;

          (c) concurrently with any delivery of financial statements under clause (a) or (b) above, a certificate of a Financial Officer of the Borrower (i) certifying as to whether a Default has occurred and is continuing and, if a Default has occurred and is continuing, specifying the details thereof and any action taken or proposed to be taken with respect thereto, and (ii) setting forth reasonably detailed calculations demonstrating compliance with Section 6.01 and Section 6.07;

          (d) promptly after the same become publicly available, notice of all registration statements or reports filed by the Borrower or any Subsidiary with the Securities and Exchange Commission, or any Governmental Authority succeeding to any or all of the functions of said Commission, on Form S-1, S-3, S-4, 10-K, 10-Q, 8-K or 12b-25, and notice of any financial statements, reports, notices or proxy statements distributed by the Borrower to its shareholders generally, as the case may be; and

          (e) promptly following any request therefor, such other information regarding the operations, business affairs and financial condition of the Borrower or any Subsidiary, or compliance with the terms of this Agreement, as the Administrative Agent or any Lender through the Administrative Agent may reasonably request.

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Documents required to be delivered pursuant to Section 5.01(a), Section 5.01(b) or Section 5.01(d) (to the extent any such documents are included in materials otherwise filed with the Securities and Exchange Commission) may be delivered electronically and if so delivered, shall be deemed to have been delivered on the date (i) on which the Borrower posts such documents, or provides a link thereto on the Borrower’s website on the Internet at www.valero.com; or (ii) on which such documents are posted on the Borrower’s behalf on the website of the Securities and Exchange Commission or any other Internet or intranet website, if any, to which each Lender and the Administrative Agent have access (whether a commercial, third-party website or whether sponsored by the Administrative Agent); provided that the Borrower shall notify the Administrative Agent, which shall then promptly notify each Lender (by telecopier or electronic mail) of the posting of any such documents, and the Borrower shall provide to the Administrative Agent by electronic mail electronic versions (i.e., soft copies) of such documents. Notwithstanding anything contained herein, in every instance the Borrower shall be required to provide paper copies of the compliance certificate required by Section 5.01(c) to the Administrative Agent, which shall then promptly furnish such compliance certificate to the Lenders. Except for such compliance certificates, the Administrative Agent shall have no obligation to request the delivery or to maintain copies of the documents referred to above, and in any event shall have no responsibility to monitor compliance by the Borrower with any such request for delivery, and each Lender shall be solely responsible for requesting delivery to it or maintaining its copies of such documents.

     Section 5.02 Notices of Material Events. The Borrower will furnish to the Administrative Agent, which shall then promptly furnish to each Lender, prompt written notice of the following:

          (a) the occurrence of any Default of which any Responsible Officer of the Borrower obtains knowledge; and

          (b) if and when any ERISA Affiliate (i) gives or is required to give notice to the PBGC of any “reportable event” (as defined in Section 4043 of ERISA) with respect to any Plan which could reasonably be expected to constitute grounds for a termination of such Plan under Title IV of ERISA, or knows that the plan administrator of any Plan has given or is required to give notice of any such reportable event, a copy of the notice of such reportable event given or required to be given to the PBGC; (ii) receives notice of complete or partial withdrawal liability under Title IV of ERISA or notice that any Multiemployer Plan is in reorganization, is insolvent or has been terminated, a copy of such notice; (iii) receives notice from the PBGC under Title IV of ERISA of an intent to terminate, impose liability (other than for premiums under Section 4007 of ERISA) in respect of, or appoint a trustee to administer any Plan, a copy of such notice; (iv) applies for a waiver of the minimum funding standard under Section 412 of the Code, a copy of such application; (v) gives notice of intent to terminate any Plan under Section 4041(c) of ERISA, a copy of such notice and other information filed with the PBGC; (vi) gives notice of withdrawal from any Plan pursuant to Section 4063 of ERISA, a copy of such notice; or (vii) fails to make any payment or contribution to any Plan or Multi-employer Plan or in respect of any Benefit Arrangement or makes any amendment to any Plan or Benefit Arrangement which has resulted or could reasonably be expected to result in the imposition of a Lien or the posting of a bond or other security, a certificate of a Financial Officer of the

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Borrower setting forth details as to such occurrence and action, if any, which the Borrower or applicable ERISA Affiliate is required or proposes to take.

Each notice delivered under this Section shall be accompanied by a statement of a Financial Officer or other executive officer of the Borrower setting forth the details of the event or development requiring such notice and any action taken or proposed to be taken with respect thereto.

     Section 5.03 Existence; Conduct of Business. The Borrower will, and will cause each of its Material Subsidiaries to, do or cause to be done all things necessary to preserve, renew and keep in full force and effect its legal existence and the rights, licenses, permits, privileges and franchises necessary or desirable in the normal conduct of its business; provided that the foregoing shall not prohibit any merger or consolidation of the Borrower permitted under Section 6.03 or any merger, consolidation, liquidation or dissolution of any Subsidiary that is not otherwise prohibited by the terms of this Agreement; and provided further that neither the Borrower nor any of its Subsidiaries shall be required to preserve, renew or keep in full force and effect any right, license, permit, privilege or franchise to the extent that the failure to do so would not reasonably be expected to have a Material Adverse Effect.

     Section 5.04 Payment of Obligations. The Borrower will, and will cause each of its Subsidiaries to, pay or discharge, before the same shall become delinquent or in default, its obligations, including liabilities for Taxes, that, if not paid, could reasonably be expected to result in a Material Adverse Effect, except where (a) the validity or amount thereof is being contested in good faith by appropriate proceedings, and (b) the Borrower or such Subsidiary has set aside on its books adequate reserves with respect thereto in accordance with GAAP.

     Section 5.05 Maintenance of Properties; Insurance. The Borrower will, and will cause each of its Material Subsidiaries to, (a) keep and maintain all property material to the conduct of its business in good working order and condition, ordinary wear and tear excepted, and (b) maintain, with financially sound and reputable insurance companies, insurance in such amounts and against such risks as are customarily maintained by companies engaged in the same or similar businesses operating in the same or similar locations (including, without limitation, by the maintenance of adequate self-insurance reserves to the extent customary among such companies).

     Section 5.06 Books and Records; Inspection Rights. The Borrower will, and will cause each of its Subsidiaries to, keep proper books of record and account in which complete and accurate entries are made of its financial and business transactions to the extent required by GAAP and applicable law. The Borrower will, and will cause each of its Subsidiaries to, permit any representatives designated by the Administrative Agent or any Lender, at such Administrative Agent’s or Lender’s expense, upon reasonable prior notice and subject to any applicable restrictions or limitations on access to any facility or information that is classified or restricted by contract or by law, regulation or governmental guidelines, to visit and inspect its properties, to examine and make extracts from its books and records, and to discuss its affairs, finances and condition with its officers and independent accountants, all at such reasonable times and as often as reasonably requested; provided that advance notice of any discussion with such independent accountants shall be given to the Borrower and, so long as no Event of Default shall

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have occurred and be continuing, the Borrower shall have the opportunity to be present at any such discussion. The Administrative Agent and each Lender agree to keep all information obtained by them pursuant to this Section confidential in accordance with Section 9.12.

     Section 5.07 Compliance with Laws. The Borrower will, and will cause each of its Subsidiaries to, comply, in all material respects with all applicable laws, ordinances, rules, regulations, and requirements of Governmental Authorities (including, without limitation, applicable Environmental Laws and ERISA and the rules and regulations thereunder), except where the failure to do so, individually or in the aggregate, could not reasonably be expected to result in a Material Adverse Effect.

     Section 5.08 Use of Proceeds. The proceeds of the Loans will be used for general corporate purposes, including the refinancing of existing Indebtedness of (a) the Borrower and (b) subject to consummation of the Acquisition, Premcor Inc. in connection with the Acquisition. No part of the proceeds of any Loan will be used, whether directly or indirectly, for any purpose that entails a violation of any of the Regulations of the Board, including Regulations T, U and X. Letters of Credit will be issued only for general corporate purposes.

ARTICLE VI
Negative Covenants

     Until the Commitments have expired or terminated and the principal of and interest on each Loan and all fees payable hereunder have been paid in full and all Letters of Credit have expired or terminated and all LC Disbursements shall have been reimbursed, the Borrower covenants and agrees with the Lenders that:

     Section 6.01 Indebtedness. The Borrower will not permit Consolidated Net Debt at any time to exceed 60% of the sum of Consolidated Net Debt plus the Consolidated Net Worth of the Borrower plus the involuntary liquidation value of any Preferred Equity Interests.

     Section 6.02 Liens. The Borrower will not, and will not permit any of its Subsidiaries to, create, assume or suffer to exist any Lien to secure payment of any Indebtedness or any Derivatives Obligations on any asset now owned or hereafter acquired by it, except for:

          (a) Liens in favor of the Administrative Agent securing Indebtedness or other obligations existing pursuant to this Agreement;

          (b) Liens created by Capital Lease Obligations, provided that the Liens created by any such Capital Lease Obligations attach only to the Property leased to the Borrower or one of its Subsidiaries pursuant thereto and general intangibles and proceeds related thereto, and improvements, accessories and upgrades to the property leased pursuant thereto;

          (c) purchase money Liens and Liens on property acquired, constructed or improved by the Borrower or any Subsidiary (including such Liens securing Indebtedness incurred within 180 days of the date on which such Property was acquired or the date of completion of such construction or improvement), provided that all such Liens attach only to the Property purchased, constructed or improved with the proceeds of the Indebtedness secured thereby and improvements, accessions, general intangibles and proceeds related thereto;

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          (d) Liens on Property of a Person which exist at the time such Person becomes a Subsidiary of the Borrower as a result of an acquisition, merger or other combination, or at the time such Person is merged or consolidated with or into, or otherwise acquired by, the Borrower or a Subsidiary (including improvements, accessions, general intangibles and proceeds related thereto), which Liens were not granted in contemplation of such acquisition, merger, or other combination;

          (e) any Lien existing on any asset prior to the acquisition thereof by the Borrower or a Subsidiary (including improvements, accessions, general intangibles and proceeds related thereto), which Liens were not granted in contemplation of such acquisition;

          (f) Liens on property of a non wholly-owned Subsidiary to secure obligations of such Subsidiary to the Borrower or to a wholly-owned Subsidiary; provided, however, that the obligations so secured may not be assigned, sold or otherwise transferred to a Person other than the Borrower or another wholly-owned Subsidiary unless such Liens are otherwise permitted hereunder;

          (g) Liens arising in connection with statutory or contractual set-off provisions granted or arising in the ordinary course of business in favor of banks, brokers, or other creditors;

          (h) to the extent (i) Securitization Transactions are determined pursuant to a change in GAAP or a change in the interpretation of GAAP after the Revolving Effective Date to constitute Indebtedness or (ii) the Borrower elects to treat Securitization Transactions as Indebtedness after the Revolving Effective Date (it being understood that, as of the Revolving Effective Date, Securitization Transactions do not constitute Indebtedness), Liens customarily granted on accounts receivable and related assets in connection with Securitization Transactions in an aggregate amount at any time not to exceed $1,000,000,000;

          (i) any Lien arising out of refinancing, extending, renewing or refunding (or successively refinancing, extending, renewing or refunding) any Indebtedness secured by any Lien permitted by any of the foregoing clauses of this Section, provided that the principal amount of such Indebtedness is not increased and such Indebtedness is not secured by any additional assets;

          (j) Liens securing any Indebtedness that constitutes Project Financing in an aggregate amount at any time not to exceed $1,000,000,000; and

          (k) (i) Liens securing Derivatives Obligations and (ii) Liens not otherwise permitted by the foregoing clauses of this Section securing Indebtedness; provided that the sum of (x) the aggregate amount of assets subject to Liens described in clause (i) of this Section 6.02(k) (excluding Liens arising as a result of customary netting and offset provisions in Hedging Agreements) and (y) the aggregate principal or face amount of Indebtedness secured by Liens described in clause (ii) of this Section 6.02(k) shall at no time exceed 10% of Consolidated Net Worth.

     Section 6.03 Fundamental Changes. (a) The Borrower will not merge into or consolidate with any other Person, or permit any other Person to merge into or consolidate with the Borrower, or sell, transfer, lease or otherwise dispose of (in one transaction or in a series of

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transactions) all or substantially all of the Borrower’s assets, whether now owned or hereafter acquired (including stock of its Subsidiaries), or liquidate or dissolve, except that, if at the time thereof and immediately after giving effect thereto no Default shall have occurred and be continuing (i) any Person may merge into the Borrower in a transaction in which the Borrower is the surviving corporation, and (ii) any Person may merge with the Borrower as long as the surviving entity, if other than the Borrower, is of an Investment Grade Rating equal to or higher than the Borrower’s rating and so long as the surviving entity assumes, pursuant to the terms of such transaction, each of the obligations of the Borrower under the Transactions and such assumption is evidenced by an agreement executed and delivered to the Lenders within 30 days of such transaction in a form reasonably satisfactory to the Required Lenders. Without limiting the generality of the foregoing, the transfer of more than 50% of the Borrower’s Consolidated Total Assets shall be deemed, for the purposes of this Section 6.03(a), a transfer of all or substantially all of the assets of the Borrower.

          (b) The Borrower will not, and will not permit any of its Material Subsidiaries to, engage to any material extent in any business other than businesses of the type conducted by the Borrower, Premcor Inc. and their respective subsidiaries on the Revolving Effective Date and businesses reasonably related thereto.

     Section 6.04 Hedging Agreements. The Borrower will not, and will not permit any of its Subsidiaries to, enter into any Hedging Agreement, other than Hedging Agreements entered into in the ordinary course of business.

     Section 6.05 Transactions with Affiliates. The Borrower will not, and will not permit any of its Subsidiaries to, sell, lease or otherwise transfer any property or assets to, or purchase, lease or otherwise acquire any property or assets from, or otherwise engage in any other transactions with, any of its Affiliates, except in the ordinary course of business at prices and on terms and conditions not less favorable to the Borrower or such Subsidiary than could be obtained on an arm’s-length basis from unrelated third parties, provided that the foregoing restriction shall not apply to:

          (a) transactions between or among the Borrower and its Subsidiaries or between or among Subsidiaries;

          (b) transactions pursuant to any contract or agreement in effect on the date hereof, as the same may be amended, modified or replaced from time to time, so long as any such contract or agreement as so amended, modified or replaced is, taken as a whole, no less favorable to the Borrower and its Subsidiaries in any material respect than the contract or agreement in effect on the date hereof;

          (c) transactions between Controlled Affiliates of Valero GP, LLC and the Borrower or its Subsidiaries conforming to agreements described in Registration Statement No. 333-43668 filed with the Securities and Exchange Commission on Form S-1; and

          (d) transactions pursuant to which (i) taxes are allocated among the Borrower and its Affiliates in any manner consistent with Section 1552 (or any successor provision) of the Code, (ii) general and administrative expenses are allocated among the Borrower and its

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Affiliates in any manner consistent with Section 482 (or any successor provision) of the Code, and (iii) interest is charged or credited to Affiliates in any reasonable manner not inconsistent with the Code.

     Section 6.06 Subsidiary Indebtedness. The Borrower will not permit the aggregate principal amount of Indebtedness of its Subsidiaries (excluding (a) Indebtedness of Subsidiaries existing on the Revolving Effective Date and described on Schedule 6.06, (b) Indebtedness existing at the time such Person becomes a Subsidiary or at the time such Person is merged or consolidated with or into, or otherwise acquired by, a Subsidiary and not created in contemplation of such event, (c) refinancings, extensions, renewals, or refundings of any Indebtedness permitted by clauses (a) and (b) above, (d) to the extent (i) Securitization Transactions are determined pursuant to a change in GAAP or a change in the interpretation of GAAP after the Revolving Effective Date to constitute Indebtedness or (ii) the Borrower elects to treat Securitization Transactions as Indebtedness after the Revolving Effective Date (it being understood that, as of the Revolving Effective Date, Securitization Transactions do not constitute Indebtedness), Indebtedness of Subsidiaries in respect of Securitization Transactions in an aggregate amount at any time not to exceed $1,000,000,000, (e) any Indebtedness of a Subsidiary owed to the Borrower or another wholly-owned Subsidiary, (f) any Indebtedness owing by the Controlled Affiliates of Valero GP, LLC, (g) any Indebtedness not otherwise permitted by this Section 6.06 owed by a Subsidiary organized under the laws of Canada or any province thereof not to exceed C$1,000,000,000 in the aggregate at any time, (h) any Indebtedness that constitutes Project Financing in an aggregate amount at any time not to exceed $1,000,000,000 and (i) any Guarantees by The Premcor Refining Group Inc. of Indebtedness of the Borrower) at any time to exceed 5% of Borrower’s Consolidated Net Worth; including in any case (subject to the exceptions contained in clause (i) above) any Guarantee by a Subsidiary of Indebtedness of the Borrower other than Indebtedness owing to the Lenders or the Administrative Agent.

     Section 6.07 Consolidated Interest Coverage Ratio. The Borrower will not permit at any time its Consolidated Interest Coverage Ratio for any Rolling Period to be less than 2.75 to 1.00.

     Section 6.08 Project Financing Indebtedness. The Borrower will not permit the aggregate principal amount of Indebtedness of the Borrower and its Subsidiaries that constitutes Project Financing at any time to exceed $1,000,000,000.

ARTICLE VII
Events of Default

     If any of the following events (“Events of Default”) shall occur:

          (a) the Borrower shall fail to pay any principal of any Loan or any reimbursement obligation in respect of any LC Disbursement when and as the same shall become due and payable, whether at the due date thereof or at a date fixed for prepayment thereof or otherwise;

          (b) the Borrower shall fail to pay any interest on any Loan or any fee or any other amount (other than an amount referred to in clause (a) of this Article) payable under the

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Loan Documents, when and as the same shall become due and payable, and such failure shall continue unremedied for a period of five Business Days;

          (c) any representation or warranty made or deemed made by or on behalf of the Borrower or any Subsidiary in or in connection with the Loan Documents or any amendment or modification thereof or waiver thereunder, or in any report, certificate, financial statement or other document furnished pursuant to or in connection with the Loan Documents or any amendment or modification thereof or waiver thereunder, shall prove to have been incorrect in any material respect when made or deemed made;

          (d) the Borrower shall fail to observe or perform any covenant, condition or agreement contained in Section 5.02, Section 5.03 (with respect to the Borrower’s existence) or Section 5.08 or in Article VI;

          (e) the Borrower shall fail to observe or perform any covenant, condition or agreement contained in the Loan Documents (other than those specified in clause (a), (b) or (d) of this Article), and such failure shall continue unremedied for a period of 30 days after notice thereof from the Administrative Agent to the Borrower (which notice will be given at the request of any Lender);

          (f) the Borrower or any Subsidiary shall fail to make any payment (whether of principal or interest and regardless of amount) in respect of any Material Indebtedness, when and as the same shall become due and payable (after giving effect to any applicable notice requirement or grace period);

          (g) any event or condition occurs that results in any Material Indebtedness becoming due prior to its scheduled maturity or that enables or permits (any condition requiring the giving of notice, the lapse of time, or both, having been satisfied) the holder or holders of any Material Indebtedness or any trustee or agent on its or their behalf to cause any Material Indebtedness to become due, or to require the prepayment, repurchase, redemption or defeasance thereof, prior to its scheduled maturity; provided that this clause (g) shall not apply to secured Indebtedness that becomes due as a result of the voluntary sale or transfer of the property or assets securing such Indebtedness;

          (h) an involuntary proceeding shall be commenced or an involuntary petition shall be filed seeking (i) liquidation, reorganization or other similar relief in respect of the Borrower or any Material Subsidiary or its debts, or of a substantial part of its assets, under any Federal, state or foreign bankruptcy, insolvency, receivership or similar law now or hereafter in effect or (ii) the appointment of a receiver, trustee, custodian, sequestrator, conservator or similar official for the Borrower or any Material Subsidiary or for a substantial part of its assets, and, in any such case, such proceeding or petition shall continue undismissed for 60 days or an order or decree approving or ordering any of the foregoing shall be entered;

          (i) the Borrower or any Material Subsidiary shall (i) voluntarily commence any proceeding or file any petition seeking liquidation, reorganization or other relief with respect to itself or its debts under any Federal, state or foreign bankruptcy, insolvency, receivership or similar law now or hereafter in effect, (ii) consent to the institution of, or fail to contest in a

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timely and appropriate manner, any proceeding or petition described in clause (h) of this Article, (iii) apply for or consent to the appointment of a receiver, trustee, custodian, sequestrator, conservator or similar official for the Borrower or any Material Subsidiary or for a substantial part of its assets, (iv) file an answer admitting the material allegations of a petition filed against it in any such proceeding provided such petition on its face is sufficient such that admission of the material allegations therein provides a basis for granting the relief requested, (v) make a general assignment for the benefit of creditors or (vi) take any corporate action to authorize any of the foregoing;

          (j) the Borrower or any Material Subsidiary shall become unable, admit in writing its inability or fail generally to pay its debts as they become due;

          (k) one or more judgments for the payment of money in an aggregate amount in excess of $100,000,000 (to the extent not covered by independent third party insurance as to which the respective insurer does not dispute coverage and is not subject to an insolvency proceeding) shall be rendered against the Borrower, any Subsidiary or any combination thereof and the same shall remain undischarged for a period of 60 consecutive days during which execution shall not be effectively stayed, or any action shall be legally taken by a judgment creditor to attach or levy upon any assets of the Borrower or any Subsidiary to enforce any such judgment;

          (l) an ERISA Event shall have occurred that, when taken together with all other ERISA Events that have occurred, could reasonably be expected to result in a Material Adverse Effect; or

          (m) a Change in Control shall occur;

then, and in every such event (other than an event with respect to the Borrower described in clause (h) or (i) of this Article), and at any time thereafter during the continuance of such event, the Administrative Agent may, and at the request of the Required Lenders shall, by notice to the Borrower, take either or both of the following actions, at the same or different times: (i)terminate the Commitments, and thereupon the Commitments shall terminate immediately, and (ii) declare the Loans then outstanding to be due and payable in whole (or in part, in which case any principal not so declared to be due and payable may thereafter be declared to be due and payable), and thereupon the principal of the Loans so declared to be due and payable, together with accrued interest thereon and all fees and other obligations of the Borrower accrued hereunder, shall become due and payable immediately, without presentment, demand, protest or other notice of any kind, all of which are hereby waived by the Borrower; and in case of any event with respect to the Borrower described in clause (h) or (i) of this Article, the Commitments shall automatically terminate and the principal of the Loans then outstanding, together with accrued interest thereon and all fees and other obligations of the Borrower accrued hereunder, shall automatically become due and payable, without presentment, demand, protest or other notice of any kind, all of which are hereby waived by the Borrower.

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ARTICLE VIII
The Administrative Agent and the Global Administrative Agent

          Each of the Lenders and the Issuing Banks hereby irrevocably appoints the Administrative Agent as its agent and authorizes the Administrative Agent to take such actions on its behalf and to exercise such powers as are delegated to the Administrative Agent by the terms hereof, together with such actions and powers as are reasonably incidental thereto.

          The bank serving as the Administrative Agent hereunder shall have the same rights and powers in its capacity as a Lender as any other Lender and may exercise the same as though it were not the Administrative Agent, and such bank and its Affiliates may accept deposits from, lend money to and generally engage in any kind of business with the Borrower or any Subsidiary or other Affiliate thereof as if it were not the Administrative Agent hereunder.

          The Administrative Agent shall not have any duties or obligations except those expressly set forth herein. Without limiting the generality of the foregoing, (a) the Administrative Agent shall not be subject to any fiduciary or other implied duties, regardless of whether a Default has occurred and is continuing, (b) the Administrative Agent shall not have any duty to take any discretionary action or exercise any discretionary powers, except discretionary rights and powers expressly contemplated hereby that the Administrative Agent is required to exercise as directed in writing by the Required Lenders (or such other number or percentage of the Lenders as shall be necessary under the circumstances as provided in Section 9.02), and (c) except as expressly set forth herein, the Administrative Agent shall not have any duty to disclose, and shall not be liable for the failure to disclose, any information relating to the Borrower or any of its Subsidiaries that is communicated to or obtained by the bank serving as Administrative Agent or any of its Affiliates in any capacity. The Administrative Agent shall not be liable for any action taken or not taken by it with the consent or at the request of the Required Lenders (or such other number or percentage of the Lenders as shall be necessary under the circumstances as provided in Section 9.02) or in the absence of its own gross negligence or willful misconduct. The Administrative Agent shall be deemed not to have knowledge of any Default unless and until written notice thereof is given to the Administrative Agent by the Borrower or a Lender, and the Administrative Agent shall not be responsible for or have any duty to ascertain or inquire into (i) any statement, warranty or representation made in or in connection with this Agreement, (ii) the contents of any certificate, report or other document delivered hereunder or in connection herewith, (iii) the performance or observance of any of the covenants, agreements or other terms or conditions set forth herein, (iv) the validity, enforceability, effectiveness or genuineness of this Agreement or any other agreement, instrument or document, or (v) the satisfaction of any condition set forth in Article IV or elsewhere herein, other than to confirm receipt of items expressly required to be delivered to the Administrative Agent.

          The Administrative Agent shall be entitled to rely upon, and shall not incur any liability for relying upon, any notice, request, certificate, consent, statement, instrument, document or other writing believed by it to be genuine and to have been signed or sent by the proper Person. The Administrative Agent also may rely upon any statement made to it orally or by telephone and believed by it to be made by the proper Person, and shall not incur any liability for relying thereon. The Administrative Agent may consult with legal counsel (who may be

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counsel for the Borrower), independent accountants and other experts selected by it, and shall not be liable for any action taken or not taken by it in accordance with the advice of any such counsel, accountants or experts.

          The Administrative Agent may perform any and all its duties and exercise its rights and powers by or through any one or more sub-agents appointed by the Administrative Agent. The Administrative Agent and any such sub-agent may perform any and all its duties and exercise its rights and powers through their respective Related Parties. The exculpatory provisions of the preceding paragraphs shall apply to any such sub-agent and to the Related Parties of the Administrative Agent and any such sub-agent, and shall apply to their respective activities in connection with the syndication of the credit facilities provided for herein as well as activities as Administrative Agent.

          Subject to the appointment and acceptance of a successor Administrative Agent as provided in this paragraph, the Administrative Agent may resign at any time by notifying the Lenders, the Issuing Banks and the Borrower. Upon any such resignation, the Required Lenders shall have the right, in consultation with the Borrower, to appoint a successor. If no successor shall have been so appointed by the Required Lenders and shall have accepted such appointment within 30 days after the retiring Administrative Agent gives notice of its resignation, then the retiring Administrative Agent may, on behalf of the Lenders and the Issuing Banks, appoint a successor Administrative Agent which shall be a bank with an office in New York, New York, or an Affiliate of any such bank. Upon the acceptance of its appointment as Administrative Agent hereunder by a successor, such successor shall succeed to and become vested with all the rights, powers, privileges and duties of the retiring Administrative Agent, and the retiring Administrative Agent shall be discharged from its duties and obligations hereunder. The fees payable by the Borrower to a successor Administrative Agent shall be the same as those payable to its predecessor unless otherwise agreed between the Borrower and such successor. After the Administrative Agent’s resignation hereunder, the provisions of this Article and Section 9.03 shall continue in effect for the benefit of such retiring Administrative Agent, its sub-agents and their respective Related Parties in respect of any actions taken or omitted to be taken by any of them while it was acting as Administrative Agent.

          None of the Arrangers, Syndication Agent and Co-Documentation Agents shall have any duties, responsibilities or liabilities under this Agreement and the other Loan Documents other than their duties, responsibilities and liabilities in their capacity as Lenders (or Issuing Banks, if applicable) hereunder.

          Each of the Lenders and the Issuing Banks hereby irrevocably appoints the Global Administrative Agent as its agent and authorizes the Global Administrative Agent to take such actions on its behalf and to exercise such powers as are delegated to the Global Administrative Agent by the terms hereof, together with such actions and powers as are reasonably incidental thereto. Except for acting as agent for the Combined Lenders in connection with waivers, amendments and modifications as specified in Section 9.02(b), the Global Administrative Agent shall have no duties, responsibilities or liabilities under this Agreement or any other Loan Document. Subject to the appointment and acceptance of a successor Global Administrative Agent as provided in this paragraph, the Global Administrative Agent may resign at any time by notifying the Combined Required Lenders, the Issuing Banks and the Borrower. Upon any such

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resignation, the Combined Required Lenders shall have the right, in consultation with the Borrower, to appoint a successor. If no successor shall have been so appointed by the Combined Required Lenders and shall have accepted such appointment within 30 days after the retiring Global Administrative Agent gives notice of its resignation, then the retiring Global Administrative Agent may, on behalf of the Combined Lenders and the Issuing Banks, appoint a successor Global Administrative Agent which shall be a bank with an office in New York, New York, or an Affiliate of any such bank. Upon the acceptance of its appointment as Global Administrative Agent hereunder by a successor, such successor shall succeed to and become vested with all the rights, powers, privileges and duties of the retiring Global Administrative Agent, and the retiring Global Administrative Agent shall be discharged from its duties and obligations hereunder. The fees payable by the Borrower to a successor Global Administrative Agent shall be the same as those payable to its predecessor unless otherwise agreed between the Borrower and such successor. After the Global Administrative Agent’s resignation hereunder, the provisions of this Article and Section 9.03 shall continue in effect for the benefit of such retiring Global Administrative Agent, its sub-agents and their respective Related Parties in respect of any actions taken or omitted to be taken by any of them while it was acting as Global Administrative Agent.

          Each Lender acknowledges that it has, independently and without reliance upon the Administrative Agent, the Global Administrative Agent or any other Lender and based on such documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement. Each Lender also acknowledges that it will, independently and without reliance upon the Administrative Agent, the Global Administrative Agent or any other Lender and based on such documents and information as it shall from time to time deem appropriate, continue to make its own decisions in taking or not taking action under or based upon this Agreement, any related agreement or any document furnished hereunder or thereunder.

ARTICLE IX
Miscellaneous

     Section 9.01 Notices. (a)  Notices Generally. Except in the case of notices and other communications expressly permitted to be given by telephone (and subject to paragraph (b) below), all notices and other communications provided for herein shall be in writing and shall be delivered by hand or overnight courier service, mailed by certified or registered mail or sent by facsimile, as follows:

                  (i) if to the Borrower, to it at Valero Energy Corporation, One Valero Way, San Antonio, Texas 78249, Attention of Donna M. Titzman, Treasurer (Facsimile No. (210) 345-2267);

                  (ii) if to the Administrative Agent, the Global Administrative Agent or to JPMorgan Chase Bank, N.A., as an Issuing Bank, to JPMorgan Chase Bank, N.A., Loan and Agency Services, 1111 Fannin Street, 10th Floor, Houston, Texas 77002, Attention of Claudette Reid (Facsimile No. (713) 427-6307), with a copy to JPMorgan Chase Bank, N.A., 600 Travis,

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20th Floor, Houston, Texas 77002, Attention of Bob Mertensotto (Facsimile No. (713) 216-8870);

               (iii) if to Bank of America, N.A., as an Issuing Bank, to Bank of America, N.A., Trade Services, Mail Code — CA9-703-19-23, 333 S. Beaudry Avenue, Los Angeles, California 90017-1466, Attention of Stella Rosales (Facsimile No. (213) 345-6684), with a copy to Bank of America, N.A., 700 Louisiana Street, 8th Floor, Houston, Texas 77002, Attention of Pamela Rodgers (Facsimile No. (713) 247-7278);

               (iv) if to BNP Paribas, as an Issuing Bank, to BNP Paribas, 919 Third Avenue, New York, New York 10022, Attention of Luasanne Chin (Facsimile No. (212) 471-699l) with a copy to the attention of Lucrece Francois (Facsimile No. (212) 471-6991);

               (v) if to Royal Bank of Canada, as an Issuing Bank, to Royal Bank of Canada, New York Branch, One Liberty Plaza, New York, New York, 10006-1404, Attention of Chandran Panicker (Facsimile No. (212) 428-3015);

               (vi) if to Mizuho Corporate Bank, Ltd., as an Issuing Bank, to Mizuho Corporate Bank, Ltd., 1800 Plaza Ten, Jersey City, New Jersey 07311, Attention of Hema Divatia (Facsimile No. (201) 626-9142); and

               (vii) if to any other Lender, to it at its address (or telecopy number) set forth in its Administrative Questionnaire.

          (b) Electronic Communications. Notices and other communications to the Lenders hereunder may be delivered or furnished by electronic communication (including email and Internet or intranet websites) pursuant to procedures approved by the Administrative Agent, provided that the foregoing shall not apply to notices to any Lender pursuant to Article II if such Lender has notified the Administrative Agent that it is incapable of receiving notices under such Article II by electronic communication. The Administrative Agent or the Borrower may, in its discretion, agree to accept notices and other communications to it hereunder by electronic communications pursuant to procedures approved by it, provided that approval of such procedures may be limited to particular notices or communications.

     Unless the Administrative Agent otherwise prescribes, (i) notices and other communications sent to an email address shall be deemed received upon the sender’s receipt of an acknowledgement from the intended recipient (such as by the “return receipt requested” function, as available, return e-mail or other written acknowledgement), provided that if such notice or other communication is not sent during the normal business hours of the recipient, such notice or communication shall be deemed to have been sent at the opening of business on the next business day for the recipient, and (ii) notices or communications posted to an Internet or intranet website shall be deemed received upon the deemed receipt by the intended recipient at its email address as described in the foregoing clause (i) of notification that such notice or communication is available and identifying the website address therefor.

          (c) Change of Address. Any party hereto may change its address or telecopy number for notices and other communications hereunder by notice to the other parties hereto.

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All notices and other communications given to any party hereto in accordance with the provisions of this Agreement shall be deemed to have been given on the date of receipt.

     Section 9.02 Waivers; Amendments.

          (a) No failure or delay by the Administrative Agent, any Issuing Bank or any Lender in exercising any right or power hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such right or power, or any abandonment or discontinuance of steps to enforce such a right or power, preclude any other or further exercise thereof or the exercise of any other right or power. The rights and remedies of the Administrative Agent, the Issuing Banks and the Lenders hereunder are cumulative and are not exclusive of any rights or remedies that they would otherwise have. No waiver of any provision of this Agreement or consent to any departure by the Borrower therefrom shall in any event be effective unless the same shall be permitted by paragraph (b) or (c) of this Section, and then such waiver or consent shall be effective only in the specific instance and for the purpose for which given. Without limiting the generality of the foregoing, the making of a Loan or issuance of a Letter of Credit shall not be construed as a waiver of any Default, regardless of whether the Administrative Agent, any Lender or any Issuing Bank may have had notice or knowledge of such Default at the time.

          (b) No provision contained in Article III, V, VI or VII hereof, and none of the definitions of any defined terms related to such provisions, may be waived, amended or modified except pursuant to an agreement or agreements in writing entered into by the Borrower and the Combined Required Lenders or by the Borrower and the Global Administrative Agent with the consent of the Combined Required Lenders; provided that the same waiver, amendment or modification is requested by the Borrower in connection with the Term Credit Agreement.

          (c) Except as provided for in Section 9.02(b), neither this Agreement nor any provision hereof may be waived, amended or modified except pursuant to an agreement or agreements in writing entered into by the Borrower and the Required Lenders or by the Borrower and the Administrative Agent with the consent of the Required Lenders.

          (d) Notwithstanding anything to the contrary contained in paragraphs (b) and (c) above, no such agreement or agreements referred to in such paragraphs shall (i) increase or extend the Commitment of any Lender without the written consent of such Lender, (ii) reduce the principal amount of any Loan or LC Disbursement or reduce the rate of interest thereon, or reduce any fees payable hereunder, without the written consent of each Lender affected thereby, (iii) postpone the scheduled date of payment of the principal amount of any Loan or LC Disbursement, or any interest thereon, or any fees payable hereunder, or reduce the amount of, waive or excuse any such payment, or postpone the scheduled date of expiration or termination of any Commitment, without the written consent of each Lender affected thereby, (iv) change Section 2.18(b) or Section 2.18(c) in a manner that would alter the pro rata treatment of Lenders or pro rata sharing of payments required thereby, without the written consent of each Lender, or (vi) change Section 2.12(d), Section 4.01, Section 4.02 or any of the provisions of this Section or the definition of “Required Lenders”, “Combined Required Lenders” or any other provision hereof specifying the number or percentage of Lenders or Combined Lenders required to waive, amend or modify any rights hereunder or make any determination or grant any consent

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hereunder, without the written consent of each Lender. In addition, no such agreement shall amend, modify or otherwise affect the rights or duties of the Administrative Agent, the Global Administrative Agent or any Issuing Bank hereunder without the prior written consent of the Administrative Agent, the Global Administrative Agent or such Issuing Bank, as the case may be.

     Section 9.03 Expenses; Indemnity; Damage Waiver.

          (a) The Borrower shall pay (i) all reasonable out of pocket expenses incurred by the Administrative Agent, the Global Administrative Agent and their Affiliates, including the reasonable fees, charges and disbursements of a single law firm, as counsel for the Administrative Agent and the Global Administrative Agent, in connection with the syndication of the credit facilities provided for herein and the preparation and administration of this Agreement, (ii) all reasonable out-of-pocket expenses incurred by the Administrative Agent, the Global Administrative Agent and their Affiliates, including the reasonable fees, charges and disbursements of a single law firm, as counsel for the Administrative Agent and the Global Administrative Agent, in connection with any amendments, modifications or waivers of the provisions hereof (in the case of clauses (i) and (ii), whether or not the transactions contemplated hereby or thereby shall be consummated), (iii) all reasonable out-of-pocket expenses incurred by each Issuing Bank in connection with the issuance, amendment, renewal or extension of any Letter of Credit issued by it or any demand for payment thereunder and (iv) all out-of-pocket expenses incurred by the Administrative Agent, the Global Administrative Agent, any Issuing Bank or any Lender, including the reasonable fees, charges and disbursements of any counsel for the Administrative Agent, the Global Administrative Agent, any Issuing Bank or any Lender, in connection with the enforcement or protection of its rights in connection with this Agreement, including its rights under this Section, or in connection with the Loans made or Letters of Credit issued hereunder, including all such out-of pocket expenses incurred during any workout, restructuring or negotiations in respect of such Loans or Letters of Credit.

          (b) The Borrower shall indemnify the Administrative Agent, the Global Administrative Agent, the Arrangers, each Issuing Bank and each Lender, and each Related Party of any of the foregoing Persons (each such Person being called an “Indemnitee”) against, and hold each Indemnitee harmless from, any and all losses, claims, damages, liabilities and related expenses, including settlement costs and the reasonable fees, charges and disbursements of any counsel for any Indemnitee, incurred by or asserted against any Indemnitee arising out of, in connection with, or as a result of (i) the execution or delivery of this Agreement or any agreement or instrument contemplated hereby, the performance by the parties hereto of their respective obligations hereunder or the consummation of the Transactions or any other transactions contemplated hereby, (ii) any Loan or Letter of Credit or the use of the proceeds therefrom (including any refusal by any Issuing Bank to honor a demand for payment under a Letter of Credit if the documents presented in connection with such demand do not strictly comply with the terms of such Letter of Credit), (iii) any actual or alleged presence or release of Hazardous Materials on or from any property owned or operated by the Borrower or any of its Subsidiaries, or any Environmental Liability related in any way to the Borrower or any of its Subsidiaries, or (iv) any actual or prospective claim, litigation, investigation or proceeding relating to any of the foregoing, whether based on contract, tort or any other theory and regardless of whether any Indemnitee is a party thereto; provided that such indemnity shall not,

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as to any Indemnitee, be available to the extent that such losses, claims, damages, liabilities or related expenses are determined by a court of competent jurisdiction by final and nonappealable judgment to have resulted from the gross negligence, bad faith or willful misconduct of such Indemnitee.

          (c) To the extent that the Borrower fails to pay any amount required to be paid by it to the Administrative Agent, the Global Administrative Agent, any Arranger or any Issuing Bank under paragraph (a) or (b) of this Section, each Lender severally agrees to pay to the Administrative Agent, the Global Administrative Agent, such Arranger or such Issuing Bank, as the case may be, such Lender’s Applicable Percentage (determined as of the time that the applicable unreimbursed expense or indemnity payment is sought) of such unpaid amount; provided that the unreimbursed expense or indemnified loss, claim, damage, liability or related expense, as the case may be, was incurred by or asserted against the Administrative Agent, the Global Administrative Agent, such Arranger or such Issuing Bank in its capacity as such.

          (d) To the extent permitted by applicable law, the Borrower shall not assert, and hereby waives, any claim against any Indemnitee, on any theory of liability, for special, indirect, consequential or punitive damages (as opposed to direct or actual damages) arising out of, in connection with, or as a result of, this Agreement or any agreement or instrument contemplated hereby, the Transactions, any Loan or Letter of Credit or the use of the proceeds thereof.

          (e) All amounts due under this Section shall be payable promptly after written demand therefor.

     Section 9.04 Successors and Assigns.

          (a) The provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns permitted hereby (including any Affiliate of any Issuing Bank that issues any Letter of Credit), except that, other than as permitted in Section 6.03, (i) the Borrower may not assign or otherwise transfer any of its rights or obligations hereunder without the prior written consent of each Lender (and any attempted assignment or transfer by the Borrower without such consent shall be null and void) and (ii) no Lender may assign or otherwise transfer its rights or obligations hereunder except in accordance with this Section. Nothing in this Agreement, expressed or implied, shall be construed to confer upon any Person (other than the parties hereto, their respective successors and assigns permitted hereby (including any Affiliate of any Issuing Bank that issues any Letter of Credit), Participants (to the extent provided in paragraph (c) of this Section) and, to the extent expressly contemplated hereby, the Related Parties of each of the Administrative Agent, the Issuing Banks and the Lenders) any legal or equitable right, remedy or claim under or by reason of this Agreement.

          (b)

               (i) Subject to the conditions set forth in paragraph (b)(ii) below, any Lender may assign to one or more assignees all or a portion of its rights and obligations under

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this Agreement (including all or a portion of its Commitment and the Loans at the time owing to it) with the prior written consent (such consent not to be unreasonably withheld) of:

                    A. the Borrower, provided that no consent of the Borrower shall be required for an assignment to a Lender, an Affiliate of a Lender, an Approved Fund or, if an Event of Default has occurred and is continuing, any other assignee;

                    B. the Administrative Agent, provided that no consent of the Administrative Agent shall be required for an assignment of any Commitment to an assignee that is a Lender with a Commitment immediately prior to giving effect to such assignment; and

                    C. each Issuing Bank.

               (ii) Assignments shall be subject to the following additional conditions:

                    A. except in the case of an assignment to a Lender or an Affiliate of a Lender or an assignment of the entire remaining amount of the assigning Lender’s Commitment or Loans, the amount of the Commitment or Loans of the assigning Lender subject to each such assignment (determined as of the date the Assignment and Assumption with respect to such assignment is delivered to the Administrative Agent) shall not be less than $5,000,000 unless each of the Borrower and the Administrative Agent otherwise consent, provided that no such consent of the Borrower shall be required if an Event of Default has occurred and is continuing;

                    B. each partial assignment shall be made as an assignment of a proportionate part of all the assigning Lender’s rights and obligations under this Agreement;

                    C. the parties to each assignment shall execute and deliver to the Administrative Agent an Assignment and Assumption, together with a processing and recordation fee of $3,500 (which, for the avoidance of doubt, shall not be for the account of the Borrower, other than in respect of an assignment initiated by the Borrower pursuant to Section 2.19(b)); and

                    D. the assignee, if it shall not be a Lender, shall deliver to the Administrative Agent an Administrative Questionnaire.

          For the purposes of this Section 9.04(b), the term “Approved Fund” has the following meaning:

          “Approved Fund” means any Person (other than a natural person) that is engaged in making, purchasing, holding or investing in bank loans and similar extensions of credit in the ordinary course of its business and that is administered or managed by (a) a Lender, (b) an Affiliate of a Lender or (c) an entity or an Affiliate of an entity that administers or manages a Lender.

               (iii) Subject to acceptance and recording thereof pursuant to paragraph (b)(iv) of this Section, from and after the effective date specified in each Assignment and

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Assumption the assignee thereunder shall be a party hereto and, to the extent of the interest assigned by such Assignment and Assumption, have the rights and obligations of a Lender under this Agreement, and the assigning Lender thereunder shall, to the extent of the interest assigned by such Assignment and Assumption, be released from its obligations under this Agreement (and, in the case of an Assignment and Assumption covering all of the assigning Lender’s rights and obligations under this Agreement, such Lender shall cease to be a party hereto but shall continue to be entitled to the benefits of Section 2.15, Section 2.16, Section 2.17 and Section 9.03). Any assignment or transfer by a Lender of rights or obligations under this Agreement that does not comply with this Section 9.04 shall be treated for purposes of this Agreement as a sale by such Lender of a participation in such rights and obligations in accordance with paragraph (c) of this Section.

               (iv) The Administrative Agent, acting for this purpose as an agent of the Borrower, shall maintain at one of its offices a copy of each Assignment and Assumption delivered to it and a register for the recordation of the names and addresses of the Lenders, and the Commitment of, and principal amount of the Loans and LC Disbursements owing to, each Lender pursuant to the terms hereof from time to time (the “Register”). The entries in the Register shall be conclusive, and the Borrower, the Administrative Agent, the Issuing Banks and the Lenders may treat each Person whose name is recorded in the Register pursuant to the terms hereof as a Lender hereunder for all purposes of this Agreement, notwithstanding notice to the contrary. The Register shall be available for inspection by the Borrower, any Issuing Bank and any Lender, at any reasonable time and from time to time upon reasonable prior notice.

                (v) Upon its receipt of a duly completed Assignment and Assumption executed by an assigning Lender and an assignee, the assignee’s completed Administrative Questionnaire (unless the assignee shall already be a Lender hereunder), the processing and recordation fee referred to in paragraph (b) of this Section and any written consent to such assignment required by paragraph (b) of this Section, the Administrative Agent shall accept such Assignment and Assumption and record the information contained therein in the Register; provided that if either the assigning Lender or the assignee shall have failed to make any payment required to be made by it pursuant to Section 2.06(d) or (e), Section 2.07(b), Section 2.18(d) or Section 9.03(c), the Administrative Agent shall have no obligation to accept such Assignment and Assumption and record the information therein in the Register unless and until such payment shall have been made in full, together with all accrued interest thereon. No assignment shall be effective for purposes of this Agreement unless it has been recorded in the Register as provided in this paragraph.

          (c)

                (i) Any Lender may, without the consent of the Borrower, the Administrative Agent or any Issuing Bank, sell participations to one or more banks or other entities (other than Competitors) (a “Participant”) in all or a portion of such Lender’s rights and obligations under this Agreement (including all or a portion of its Commitment and the Loans owing to it); provided that (A) such Lender’s obligations under this Agreement shall remain unchanged, (B) such Lender shall remain solely responsible to the other parties hereto for the performance of such obligations and (C) the Borrower, the Administrative Agent, the Issuing Banks and the other Lenders shall continue to deal solely and directly with such Lender in

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connection with such Lender’s rights and obligations under this Agreement. Any agreement or instrument pursuant to which a Lender sells such a participation shall provide that such Lender shall retain the sole right to enforce this Agreement and to approve any amendment, modification or waiver of any provision of this Agreement; provided that such agreement or instrument may provide that such Lender will not, without the consent of the Participant, agree to any amendment, modification or waiver described in the first sentence of Section 9.02(d) that affects such Participant. Subject to paragraph (c)(ii) of this Section, the Borrower agrees that each Participant shall be entitled to the benefits of Section 2.15, Section 2.16 and Section 2.17 to the same extent as if it were a Lender and had acquired its interest by assignment pursuant to paragraph (b) of this Section.

                    (ii) A Participant shall not be entitled to receive any greater payment under Section 2.15 or Section 2.17 than the applicable Lender would have been entitled to receive with respect to the participation sold to such Participant, unless the sale of the participation to such Participant is made with the Borrower’s prior written consent. A Participant that would be a Foreign Lender if it were a Lender shall not be entitled to the benefits of Section 2.17 unless the Borrower is notified of the participation sold to such Participant and such Participant agrees, for the benefit of the Borrower, to comply with Section 2.17(e) as though it were a Lender.

          (d) Any Lender may at any time pledge or assign a security interest in all or any portion of its rights under this Agreement to secure obligations of such Lender, including without limitation any pledge or assignment to secure obligations to a Federal Reserve Bank, and this Section shall not apply to any such pledge or assignment of a security interest; provided that no such pledge or assignment of a security interest shall release a Lender from any of its obligations hereunder or substitute any such pledgee or assignee for such Lender as a party hereto.

     Section 9.05 Survival. All covenants, agreements, representations and warranties made by the Borrower herein and in the certificates or other instruments delivered in connection with or pursuant to this Agreement shall be considered to have been relied upon by the other parties hereto and shall survive the execution and delivery of this Agreement and the making of any Loans and the issuance of any Letters of Credit, regardless of any investigation made by any such other party or on its behalf and notwithstanding that the Administrative Agent, any Issuing Bank or any Lender may have had notice or knowledge of any Default or incorrect representation or warranty at the time any credit is extended hereunder, and shall continue in full force and effect as long as the principal of or any accrued interest on any Loan or any fee or any other amount payable under this Agreement is outstanding and unpaid or any Letter of Credit is outstanding and so long as the Commitments have not expired or terminated. The provisions of Section 2.15, Section 2.16, Section 2.17 and Section 9.03 and Article VIII shall survive and remain in full force and effect regardless of the consummation of the transactions contemplated hereby, the repayment of the Loans, the expiration or termination of the Letters of Credit and the Commitments or the termination of this Agreement or any provision hereof.

     Section 9.06 Counterparts; Integration; Effectiveness. This Agreement may be executed in counterparts (and by different parties hereto on different counterparts), each of which shall constitute an original, but all of which when taken together shall constitute a single

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contract. This Agreement and any separate letter agreements with respect to fees payable to the Administrative Agent constitute the entire contract among the parties relating to the subject matter hereof and supersede any and all previous agreements and understandings, oral or written, relating to the subject matter hereof. Except as provided in Section 4.01, this Agreement shall become effective when it shall have been executed by the Administrative Agent and when the Administrative Agent shall have received counterparts hereof which, when taken together, bear the signatures of each of the other parties hereto, and thereafter shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns. Delivery of an executed counterpart of a signature page of this Agreement by telecopy shall be effective as delivery of a manually executed counterpart of this Agreement.

     Section 9.07 Severability. Any provision of this Agreement held to be invalid, illegal or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such invalidity, illegality or unenforceability without affecting the validity, legality and enforceability of the remaining provisions hereof; and the invalidity of a particular provision in a particular jurisdiction shall not invalidate such provision in any other jurisdiction.

     Section 9.08 Right of Setoff. If an Event of Default shall have occurred and be continuing, each Lender and each of its Affiliates is hereby authorized at any time and from time to time, to the fullest extent permitted by law, to set off and apply any and all deposits (general or special, time or demand, provisional or final) at any time held and other obligations at any time owing by such Lender or Affiliate to or for the credit or the account of the Borrower against any of and all the obligations of the Borrower that are due and payable at such time held by such Lender, irrespective of whether or not such Lender shall have made any demand under this Agreement. Each Lender agrees to promptly notify the Borrower after any such setoff and application by it or any of its Affiliates, provided that the failure to give such notice shall not affect the validity of such setoff and application. The rights of each Lender under this Section are in addition to and shall not be affected by any other rights and remedies (including other rights of setoff) which such Lender may have.

     Section 9.09 Governing Law; Jurisdiction; Consent to Service of Process. (a) This Agreement shall be construed in accordance with and governed by the law of the State of New York.

          (b) The Borrower hereby irrevocably and unconditionally submits, for itself and its property, to the nonexclusive jurisdiction of the Supreme Court of the State of New York sitting in New York County and of the United States District Court of the Southern District of New York, and any appellate court from any thereof, in any action or proceeding arising out of or relating to this Agreement, or for recognition or enforcement of any judgment, and each of the parties hereto hereby irrevocably and unconditionally agrees that all claims in respect of any such action or proceeding may be heard and determined in such New York State court or, to the extent permitted by law, in such Federal court. Each of the parties hereto agrees that a final judgment in any such action or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law. Nothing in this Section is intended to waive the right of any party to remove any such action or proceeding commenced in any such New York State court to an appropriate New York Federal court to the extent the basis for such removal exists under applicable law. Nothing in this Agreement shall

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affect any right that the Administrative Agent, any Issuing Bank or any Lender may otherwise have to bring any action or proceeding relating to this Agreement against the Borrower or its properties in the courts of any jurisdiction.

          (c) The Borrower hereby irrevocably and unconditionally waives, to the fullest extent it may legally and effectively do so, any objection which it may now or hereafter have to the laying of venue of any suit, action or proceeding arising out of or relating to this Agreement in any court referred to in paragraph (b) of this Section. Each of the parties hereto hereby irrevocably waives, to the fullest extent permitted by law, the defense of an inconvenient forum to the maintenance of such action or proceeding in any such court.

          (d) Each party to this Agreement irrevocably consents to service of process in the manner provided for notices in Section 9.01. Nothing in this Agreement will affect the right of any party to this Agreement to serve process in any other manner permitted by law.

     Section 9.10 Waiver Of Jury Trial. Each Party hereto hereby waives, to the fullest extent permitted by applicable law, any right it may have to a trial by jury in any legal proceeding directly or indirectly arising out of or relating to this Agreement or the transactions contemplated hereby (whether based on contract, tort or any other theory). Each Party hereto (A) certifies that no representative, agent or attorney of any other Party has represented, expressly or otherwise, that such other Party would not, in the event of litigation, seek to enforce the foregoing waiver and (B) acknowledges that it and the other Parties hereto have been induced to enter into this Agreement by, among other things, the mutual waivers and certifications in this Section.

     Section 9.11 Headings. Article and Section headings and the Table of Contents used herein are for convenience of reference only, are not part of this Agreement and shall not affect the construction of, or be taken into consideration in interpreting, this Agreement.

     Section 9.12 Confidentiality. Each of the Administrative Agent, the Global Administrative Agent, the Issuing Banks and the Lenders agrees to maintain the confidentiality of the Information (as defined below), except that Information may be disclosed (a) to its and its Affiliates’ directors, officers, employees and agents, including accountants, legal counsel and other advisors (it being understood that the Persons to whom such disclosure is made will be informed of the confidential nature of such Information and instructed to keep such Information confidential), (b) to the extent requested by any regulatory authority or self-regulatory authority, (c) to the extent required by applicable laws or regulations or by any subpoena or similar legal process, (d) to any other party to this Agreement, (e) in connection with the exercise of any remedies hereunder or any suit, action or proceeding relating to this Agreement or the enforcement of rights hereunder, (f) subject to an agreement containing provisions substantially the same as those of this Section, to (i) any assignee of or Participant in, or any prospective assignee of or prospective Participant in, any of its rights or obligations under this Agreement or (ii) any actual or prospective counterparty (or its advisors) to any swap, securitization or derivative transaction relating to the Borrower and its obligations under this Agreement, (g) with the consent of the Borrower or (h) to the extent such Information (i) becomes publicly available other than as a result of a breach of this Section or (ii) becomes available to the Administrative

65

Agent, the Global Administrative Agent, any Issuing Bank or any Lender on a nonconfidential basis from a source other than the Borrower. For the purposes of this Section, “Information” means all information received from or on behalf of the Borrower relating to the Borrower, Premcor Inc., their respective subsidiaries or their respective businesses, other than any such information that is available to the Administrative Agent, the Global Administrative Agent, any Issuing Bank or any Lender on a nonconfidential basis prior to disclosure by or on behalf of the Borrower. Any Person required to maintain the confidentiality of Information as provided in this Section shall be considered to have complied with its obligation to do so if such Person has exercised the same degree of care to maintain the confidentiality of such Information as such Person would accord to its own confidential information.

     Section 9.13 Interest Rate Limitation. Notwithstanding anything herein to the contrary, if at any time the interest rate applicable to any Loan, together with all fees, charges and other amounts which are treated as interest on such Loan under applicable law (collectively the “Charges”), shall exceed the maximum lawful rate (the “Maximum Rate”) which may be contracted for, charged, taken, received or reserved by the Lender holding such Loan in accordance with applicable law, the rate of interest payable in respect of such Loan hereunder, together with all Charges payable in respect thereof, shall be limited to the Maximum Rate and, to the extent lawful, the interest and Charges that would have been payable in respect of such Loan but were not payable as a result of the operation of this Section shall be cumulated and the interest and Charges payable to such Lender in respect of other Loans or periods shall be increased (but not above the Maximum Rate therefor) until such cumulated amount, together with interest thereon at the Federal Funds Effective Rate to the date of repayment, shall have been received by such Lender.

     Section 9.14 USA PATRIOT Act. Each Lender that is subject to the requirements of the USA Patriot Act (Title III of Pub. L. 107-56 (signed into law October 26, 2001)) (the “Act”) hereby notifies the Borrower that pursuant to the requirements of the Act, it is required to obtain, verify and record information that identifies the Borrower, which information includes the name and address of the Borrower and other information that will allow such Lender to identify the Borrower in accordance with the Act.

     Section 9.15 Waiver of Notice of Termination. Contemporaneously with the Revolving Effective Date, the commitments under each Existing Agreement will be terminated. Each Lender that is a party to either of the Existing Agreements hereby consents to such termination and waives any notice it might be entitled to in connection therewith pursuant to the terms of the Existing Agreements.

[SIGNATURE PAGES BEGIN NEXT PAGE]

66

     IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective authorized officers as of the day and year first above written.

VALERO ENERGY CORPORATION
By:	/s/ Michael S. Ciskowski
	Michael S. Ciskowski
	Executive Vice President and Chief Financial Officer

Signature Page to
$2,500,000,000 5-Year Revolving Credit Agreement

S- 1

JPMORGAN CHASE BANK, N.A., individually and as Administrative Agent and as Global Administrative Agent
By:	/s/ Robert C. Mertensotto
	Robert C. Mertensotto
	Managing Director

Signature Page to
$2,500,000,000 5-Year Revolving Credit Agreement

     We have omitted the “Pricing Schedule” and “Commitment Schedule” from this Exhibit. We will furnish a copy of these schedules to the Commission upon request.

S- 2

EXHIBIT A

FORM OF
ASSIGNMENT AND ASSUMPTION

     This Assignment and Assumption (the “Assignment and Assumption”) is dated as of the Effective Date set forth below (the “Effective Date”) and is entered into by and between [Insert name of Assignor] (the “Assignor”) and [Insert name of Assignee] (the “Assignee”). Capitalized terms used but not defined herein shall have the meanings given to them in the Credit Agreement identified below (as amended, the “Credit Agreement”), receipt of a copy of which is hereby acknowledged by the Assignee. The Standard Terms and Conditions set forth in Annex 1 attached hereto are hereby agreed to and incorporated herein by reference and made a part of this Assignment and Assumption as if set forth herein in full.

     For an agreed consideration, the Assignor hereby irrevocably sells and assigns to the Assignee, and the Assignee hereby irrevocably purchases and assumes from the Assignor, subject to and in accordance with the Standard Terms and Conditions and the Credit Agreement, as of the Effective Date inserted by the Administrative Agent as contemplated below (i) all of the Assignor’s rights and obligations in its capacity as a Lender under the Credit Agreement and any other documents or instruments delivered pursuant thereto to the extent related to the amount and percentage interest identified below of all of such outstanding rights and obligations of the Assignor under the respective facilities identified below (including any letters of credit and guarantees included in such facilities) and (ii) to the extent permitted to be assigned under applicable law, all claims, suits, causes of action and any other right of the Assignor (in its capacity as a Lender) against any Person, whether known or unknown, arising under or in connection with the Credit Agreement, any other documents or instruments delivered pursuant thereto or the loan transactions governed thereby or in any way based on or related to any of the foregoing, including contract claims, tort claims, malpractice claims, statutory claims and all other claims at law or in equity related to the rights and obligations sold and assigned pursuant to clause (i) above (the rights and obligations sold and assigned pursuant to clauses (i) and (ii) above being referred to herein collectively as the “Assigned Interest”). Such sale and assignment is without recourse to the Assignor and, except as expressly provided in this Assignment and Assumption, without representation or warranty by the Assignor.

1.	Assignor:
2.	Assignee:
		[and is an Affiliate/Approved Fund of [identify Lender]1]
3.	Credit Agreement:	The $2,500,000,000 5-Year Credit Agreement dated as of August 17, 2005 among Valero Energy Corporation, the Lenders parties thereto, JPMorgan Chase Bank, N.A., as Administrative Agent, and the other agents parties thereto.

¹ Select as applicable.

Exhibit A-1

6. Assigned Interest:

Aggregate Amount of	Amount of	Percentage Assigned
Commitment/Loans	Commitment/Loans	of
for all Lenders	Assigned	Commitment/Loans2
$	$	%
$	$	%
$	$	%

Effective Date:                      ___, 20___ [TO BE INSERTED BY ADMINISTRATIVE AGENT AND WHICH SHALL BE THE EFFECTIVE DATE OF RECORDATION OF TRANSFER IN THE REGISTER THEREFOR.]

The terms set forth in this Assignment and Assumption are hereby agreed to:

ASSIGNOR [NAME OF ASSIGNOR]
By:
	Title:

ASSIGNEE [NAME OF ASSIGNEE]
By:
	Title:

² Set forth, to at least 9 decimals, as a percentage of the Commitment/Loans of all Lenders thereunder.

Exhibit A-2

[Consented to and]³ Accepted:

JPMORGAN CHASE BANK, N.A., as
    Administrative Agent and Issuing Bank

By
    Title:

[other issuing banks]

³ To be added only if the consent of the Administrative Agent is required by the terms of the Credit Agreement.

Exhibit A-3

[Consented to:]⁴

VALERO ENERGY CORPORATION, as
Borrower

By
    Title:

⁴ To be added only if the consent of the Borrower is required by the terms of the Credit Agreement.

Exhibit A-4

ANNEX 1

STANDARD TERMS AND CONDITIONS FOR
ASSIGNMENT AND ASSUMPTION

     1. Representations and Warranties.

     1.1 Assignor. The Assignor (a) represents and warrants that (i) it is the legal and beneficial owner of the Assigned Interest, (ii) the Assigned Interest is free and clear of any lien, encumbrance or other adverse claim and (iii) it has full power and authority, and has taken all action necessary, to execute and deliver this Assignment and Assumption and to consummate the transactions contemplated hereby; and (b) assumes no responsibility with respect to (i) any statements, warranties or representations made in or in connection with the Credit Agreement or any other Loan Document, (ii) the execution, legality, validity, enforceability, genuineness, sufficiency or value of the Loan Documents or any collateral thereunder, (iii) the financial condition of the Borrower, any of its Subsidiaries or Affiliates or any other Person obligated in respect of any Loan Document or (iv) the performance or observance by the Borrower, any of its Subsidiaries or Affiliates or any other Person of any of their respective obligations under any Loan Document.

     1.2. Assignee. The Assignee (a) represents and warrants that (i) it has full power and authority, and has taken all action necessary, to execute and deliver this Assignment and Assumption and to consummate the transactions contemplated hereby and to become a Lender under the Credit Agreement, (ii) it satisfies the requirements, if any, specified in the Credit Agreement that are required to be satisfied by it in order to acquire the Assigned Interest and become a Lender, (iii) from and after the Effective Date, it shall be bound by the provisions of the Credit Agreement as a Lender thereunder and, to the extent of the Assigned Interest, shall have the obligations of a Lender thereunder, (iv) it has received a copy of the Credit Agreement, together with copies of the most recent financial statements delivered pursuant to Section 5.01 thereof, and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into this Assignment and Assumption and to purchase the Assigned Interest on the basis of which it has made such analysis and decision independently and without reliance on the Administrative Agent or any other Lender, and (v) if it is a Foreign Lender, attached to the Assignment and Assumption is any documentation required to be delivered by it pursuant to the terms of the Credit Agreement, duly completed and executed by the Assignee; and (b) agrees that (i) it will, independently and without reliance on the Administrative Agent, the Assignor or any other Lender, and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under the Loan Documents, and (ii) it will perform in accordance with their terms all of the obligations which by the terms of the Loan Documents are required to be performed by it as a Lender.

     2. Payments. From and after the Effective Date, the Administrative Agent shall make all payments in respect of the Assigned Interest (including payments of principal, interest, fees and other amounts) to the Assignor for amounts which have accrued to but excluding the Effective Date and to the Assignee for amounts which have accrued from and after the Effective Date.

Exhibit A-5

     3. General Provisions. This Assignment and Assumption shall be binding upon, and inure to the benefit of, the parties hereto and their respective successors and assigns. This Assignment and Assumption may be executed in any number of counterparts, which together shall constitute one instrument. Delivery of an executed counterpart of a signature page of this Assignment and Assumption by telecopy shall be effective as delivery of a manually executed counterpart of this Assignment and Assumption. This Assignment and Assumption shall be governed by, and construed in accordance with, the law of the State of New York.

Exhibit A-6

EXHIBIT B

FORM OF
NOTICE OF COMMITMENT INCREASE

[Date]

JPMorgan Chase Bank, N.A.
1111 Fannin Street, 10th Floor
Houston, Texas, 77002
Attention:                                         

Ladies and Gentlemen:

The undersigned, Valero Energy Corporation (the “Borrower”), refers to the $2,500,000,000 5-Year Revolving Credit Agreement dated as of August 17, 2005 (as amended, supplemented or otherwise modified from time to time, the “Credit Agreement”, with terms defined in the Credit Agreement and not otherwise defined herein being used herein as therein defined) among the Borrower, JPMorgan Chase Bank, N.A., as Administrative Agent, and the Lenders and other agents party thereto. The Borrower hereby notifies you, pursuant to Section 2.02 of the Credit Agreement, that it has arranged for the aggregate amount of the Commitments under the Credit Agreement to be increased by adding to the Credit Agreement the CI Lenders referenced below and/or by allowing one ore more existing Lenders to increase their respective Commitments. In that connection, the Borrower sets forth below the information relating to such proposed Commitment Increase as required by Section 2.02(b) of the Credit Agreement:

(a) the effective date of such increase of aggregate amount of the Lenders’ Commitments is                                         ;

(b) the amount of the requested increase of the Commitments is $                                        ;

(c) the CI Lenders that have agreed with the Borrower to provide their respective Commitments are                                          [INSERT NAMES OF THE CI LENDERS];

(d) the existing Lenders that have agreed with the Borrower to increase their respective Commitments are                                          [INSERT NAMES OF THE LENDERS]; and

(e) set forth on Annex I attached hereto is the amount of the respective Commitments of all Reducing Percentage Lenders, all CI Lenders and all existing Lenders increasing their respective Commitments as of effective date of such Commitment Increase.

Exhibit B-1

Delivery of an executed counterpart of this Notice of Commitment Increase by telecopier shall be effective as delivery of an original executed counterpart of this Notice of Commitment Increase.

Very truly yours,

VALERO ENERGY CORPORATION

By:

Name:

Title:

Acknowledged by:

JPMORGAN CHASE BANK, N.A.,
    as Administrative Agent

By:

Name:

Title:

Exhibit B-2

EXHIBIT C

FORM OF
BORROWING REQUEST

JPMorgan Chase Bank, N.A., as Administrative Agent
   for the Lenders parties
   to the Credit Agreement
   referred to below
270 Park Avenue
New York, New York 10017

[Date]

Reference: Valero Energy Corporation

Ladies and Gentlemen:

          The undersigned, VALERO ENERGY CORPORATION, refers to the $2,500,000,000 5-Year Revolving Credit Agreement, dated as of August 17, 2005 (the “Credit Agreement,” the terms defined therein being used herein as therein defined), among the undersigned, the Lenders parties thereto, JPMorgan Chase Bank, N.A., as Administrative Agent, and the other agents party thereto, and hereby gives you notice, irrevocably, pursuant to Section 2.05 of the Credit Agreement, that the undersigned hereby requests a Borrowing under the Credit Agreement, and in that connection sets forth below the information relating to such Borrowing (the “Proposed Borrowing”) as required by Section 2.05 of the Credit Agreement:

     (i) The aggregate amount of the Proposed Borrowing is $                                        .

     (ii) The Business Day of the Proposed Borrowing is                                         , 200_.

     (iii) The Type of the Proposed Borrowing is [an ABR Borrowing] [a Eurodollar Borrowing].

     (iv) The Interest Period for each Eurodollar Borrowing made as part of the Proposed Borrowing is [                     month[s]].

     (v) The Borrower’s transit routing and bank account for loan funding is                                         .

Very truly yours, VALERO ENERGY CORPORATION
By:
	Title:

Exhibit C-1

EXHIBIT D

FORM OF PROMISSORY NOTE

$	New York, New York
	August 17, 2005

     FOR VALUE RECEIVED, the undersigned, VALERO ENERGY CORPORATION, a Delaware corporation (the “Borrower”), hereby unconditionally promises to pay to the order of                                          (the “Lender”) at the office of JPMorgan Chase Bank, N.A., located at 270 Park Avenue, New York, New York 10017, in lawful money of the United States of America and in same day funds, on the Maturity Date the principal amount of (a)                      DOLLARS ($                    ), or, if less, (b) the aggregate unpaid principal amount of all Loans made by the Lender to the Borrower pursuant to the Credit Agreement, as hereinafter defined. The Borrower further agrees to pay interest in like money at such office on the unpaid principal amount hereof from time to time outstanding at the rates and on the dates specified in the Credit Agreement.

     The holder of this Note is authorized to, and prior to any transfer hereof shall, endorse on the schedules attached hereto and made a part hereof or on a continuation thereof which shall be attached hereto and made a part hereof the date, Type and amount of each Loan made pursuant to the Credit Agreement and the date and amount of each payment or prepayment of principal thereof, each continuation thereof, each conversion of all or a portion thereof to another Type and, in the case of a Eurodollar Loan, the length of each Interest Period with respect thereto. The failure to make any such endorsement shall not affect the obligations of the Borrower in respect of such Loan.

     This Note (a) is one of the Notes referred to in the $2,500,000,000 5-Year Revolving Credit Agreement, dated as of August 17, 2005 (as amended, supplemented or otherwise modified from time to time, the “Credit Agreement”), among Valero Energy Corporation, the Lenders named therein, JPMorgan Chase Bank, N.A., as Administrative Agent for the Lenders, and the other agents party thereto, (b) is subject to the provisions of the Credit Agreement and (c) is subject to optional and mandatory prepayment in whole or in part as provided in the Credit Agreement.

     Reference is made to the Credit Agreement for provisions for the acceleration of the maturity hereof.

     All parties now and hereafter liable with respect to this Note, whether maker, principal, surety, guarantor, endorser or otherwise, hereby waive presentment, demand, protest, notice of intent to accelerate, notice of acceleration and all other notices of any kind except those expressly required under the Credit Agreement.

     Unless otherwise defined herein, terms defined in the Credit Agreement and used herein shall have the meanings given to them in the Credit Agreement.

Exhibit D-1

     THIS NOTE SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK.

VALERO ENERGY CORPORATION
By:
	Title:

Exhibit D-2

SCHEDULE A
to
Promissory Note

LOANS, CONTINUATIONS, CONVERSIONS AND REPAYMENTS OF EURODOLLAR LOANS

			Interest Period and		Amount of
		Amount Continued or	Eurodollar Rate	Amount of Principal	Eurodollar Loans	Unpaid Principal
	Amount of	Converted to	with Respect	of Eurodollar Loans	Converted to ABR	Balance of	Notation Made
Date	Eurodollar Loans	Eurodollar Loans	Thereto	Repaid	Loans	Eurodollar Loans	By

Exhibit D-3

SCHEDULE B
to
Promissory Note

LOANS, CONVERSIONS AND REPAYMENTS OF ABR LOANS

				Amount of ABR Loans
	Amount of ABR	Amount Converted	Amount of Principal of	Converted to Eurodollar	Unpaid Principal	Notation
Date	Loans	to ABR Loans	ABR Loans Repaid	Loans	Balance of ABR Loans	Made By

Exhibit D-4

EXHIBIT E

OPINION OF IN-HOUSE COUNSEL FOR THE BORROWER

August 17, 2005

To the Lenders and the Administrative
   Agent Referred to Below
c/o JPMorgan Chase Bank, N.A., as
   Administrative Agent
270 Park Avenue
New York, New York 10017

Ladies and Gentlemen:

     I am Vice President — Corporate Law and Secretary of Valero Energy Corporation, a Delaware corporation (the “Borrower”) and have acted as counsel for Borrower in connection with the $2,500,000,000 5-Year Revolving Credit Agreement dated as of August 17, 2005 (the “Credit Agreement”), among the Borrower, the banks and other financial institutions identified therein as Lenders, JPMorgan Chase Bank, N.A., as Administrative Agent, and the other agents party thereto. Terms defined in the Credit Agreement are used herein with the same meanings.

     I, or individuals under my direction, have examined originals or copies, certified or otherwise identified to my satisfaction, of such documents, corporate records, certificates of public officials and other instruments and have conducted such other investigations of fact and law as I have deemed necessary or advisable for purposes of this opinion.

     As to matters of fact material to this opinion, I have relied on certificates of public officials and certificates of officers of the Borrower and I have made such inquiry of officers of the Borrower as I have deemed necessary or appropriate in connection with the matters set forth in this opinion.

     As a basis for this opinion, I have assumed that (i) each of the Loan Documents and all other documents and certificates examined by me have been duly authorized, executed and delivered by each party thereto, other than the Borrower, (ii) all signatures other than those of the Borrower are authentic, all documents submitted to me as originals are authentic, and all documents submitted to me as certified or photostatic copies conform to authentic or original documents, (iii) each party to the Loan Documents, other than the Borrower, has been duly formed, and is validly existing and in good standing under the laws of the jurisdiction in which it is formed, (iv) each party to the Loan Documents, other than the Borrower, has all requisite power and authority to enter into and perform each of the Loan Documents to which it is a party and (v) each such document is or evidences the legal, valid and binding obligation of such parties thereto (other than the Borrower).

     Upon the basis of the foregoing, I am of the opinion that:

     1. Each of the Borrower and its Material Subsidiaries (a) is a corporation or partnership duly organized or formed, as applicable, validly existing and in good standing under

Exhibit E-1

the laws of the jurisdiction in which it was organized or formed, as applicable, (b) has all corporate or partnership, as applicable, power and authority to carry on its business as now conducted and (c) except where the failure to do so, individually or in the aggregate, could not reasonably be expected to result in a Material Adverse Effect, is qualified to do business in, and is in good standing in, every jurisdiction where such qualification is required.

     2. The Transactions are within the Borrower’s corporate powers and have been duly authorized by all necessary corporate and, if required, stockholder action. The Loan Documents have been duly executed and delivered by the Borrower and constitute legal, valid and binding obligations of the Borrower, enforceable in accordance with their terms, subject to bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium or other laws affecting creditors’ rights generally, general principles of equity, regardless of whether considered in a proceeding in equity or at law, and an implied covenant of good faith and fair dealing.

     3. In any action or proceeding arising out of or relating to the Credit Agreement in any court of the State of Texas or in any federal court sitting in the State of Texas, such court would recognize and give effect to the provisions of Section 9.09(a) of the Credit Agreement wherein the parties thereto agree that the Credit Agreement shall be governed by the laws of the State of New York.

     4. The Transactions (a) do not require the Borrower or any Subsidiary to obtain any consent or approval of, or make any registration or filing with, or request any other action by, any Governmental Authority, except such as have been obtained or made and are in full force and effect (except for any reports required to be filed by the Borrower with the Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934), (b) will not result in a violation by the Borrower or any Subsidiary of any applicable law or regulation or the charter, by-laws or other organizational documents of the Borrower or any of its Subsidiaries or any order of any Governmental Authority, (c) will not violate or result in a default under any material indenture, agreement or other instrument binding upon the Borrower or any of its Subsidiaries or its assets, and (d) will not result in the creation or imposition of any Lien on any asset of the Borrower or any of its Subsidiaries.

     5. There are no actions, suits or proceedings by or before any arbitrator or Governmental Authority pending against or, to my knowledge, threatened against or affecting the Borrower or any of its Subsidiaries (a) as to which there is a reasonable possibility of an adverse determination and that, if adversely determined, could reasonably be expected, individually or in the aggregate, to have a Material Adverse Effect (other than the Disclosed Matters) or (b) that involve the Loan Documents or the Transactions.

     6. Neither the Borrower nor any of its Subsidiaries is an “investment company” as defined in, or subject to regulation under, the Investment Company Act of 1940, as amended.

     7. Each of the Borrower and its Subsidiaries is not subject to, or is exempt from, regulation as a “holding company” under the Public Utility Holding Company Act of 1935, as amended.

Exhibit E-2

     I am a member of the Bar of the State of Texas and the foregoing opinions are limited to the laws of the State of Texas, the statutory laws and regulations of the United States of America and the General Corporation Law of the State of Delaware, and in each case, exclusive of municipal, local and county ordinances, laws, rules and regulations. The foregoing opinions are limited in all respects to such laws in existence as of the date hereof, and I undertake no obligation or responsibility to update or supplement this opinion in response to subsequent changes in the law or future events affecting the transactions contemplated by the Credit Agreement.

     The opinions expressed herein are subject to the following further assumptions, qualifications, limitations and comments:

     a. For purposes of the opinions herein expressed, except for the opinion given in paragraph 3 regarding the enforceability of the choice of law provision of the Credit Agreement, I have assumed that the laws of the State of New York are the same as the laws of the State of Texas in all relevant respects.

     b. No opinion is expressed as to whether a court would grant specific performance or any other equitable remedy with respect to the Credit Agreement, or whether a court would grant a particular remedy sought under the Credit Agreement as opposed to another remedy provided therein or at law or in equity.

     c. No opinion is expressed as to the validity, binding effect, enforceability or legality of any provision of the Credit Agreement which purports to grant the Administrative Agent the right to accelerate the obligations owned by any non-consenting Lender.

     d. No opinion is expressed as to the enforceability of provisions in the Credit Agreement, if any, that purport to: (i) grant rights of indemnification; (ii) provide that any provision therein is severable from any other provision; (iii) restrict access to legal or equitable remedies; (iv) establish evidentiary standards for suits or proceedings to enforce any agreements or evidentiary standards relating to any powers granted thereunder; (v) waive or affect any rights or demands or notices; (vi) waive either illegality as a defense to the performance of contract obligations or any other defense to such performance which cannot, as a matter of law, be effectively waived; (vii) ratify actions to be taken in the future; (viii) provide for self-help, subrogation, delay or omission to enforce rights or remedies; (ix) provide rights or remedies to third parties; (x) bestow subject matter or in personam jurisdiction on any court or to determine the sufficiency or effectiveness of any service of process or similar judicial procedure; or (xi) provide rights of set-off.

     This opinion is rendered solely to you in connection with the above matter, and may not be relied on by you for any other purpose or relied upon by any other Person (other than your successors who are not Governmental Authorities and your permitted assigns who become Lenders) without my prior written consent, and is not to be used, circulated, quoted, relied upon, published or otherwise referred to or disseminated (other than to any permitted assign, or any prospective assignee under the Credit Agreement) for any other purpose without my prior written consent; provided that, copies of this opinion may be included with copies of documents to be furnished to Participants or prospective Participants and may be furnished to the regulatory

Exhibit E-3

authorities having supervisory authority over the addressees hereof, for the purpose of confirming the existence of this opinion, as may be expressly required by law or court proceedings, and as otherwise expressly permitted pursuant to Section 9.12 of the Credit Agreement.

Very truly yours,

Jay D. Browning

Exhibit E-4

EXHIBIT F

OPINION OF BAKER BOTTS L.L.P., COUNSEL FOR THE BORROWER

August 17, 2005

To:    The Lenders party to the Credit Agreement referred to below

     JPMorgan Chase Bank, N.A., as Administrative Agent under said Credit Agreement

     We have acted as special counsel to Valero Energy Corporation, a Delaware corporation (the “Borrower”), in connection with the preparation, execution and delivery of the $2,500,000,000 5-Year Revolving Credit Agreement, dated as of August 17, 2005 (the “Credit Agreement”), among the Borrower, the Lenders party thereto, JPMorgan Chase Bank, N.A., as Administrative Agent (“Agent”), and others as agents, and in connection with the execution and delivery pursuant thereto of the Notes dated the date hereof.

     This opinion is delivered to you pursuant to Section 4.01(b)(ii) of the Credit Agreement. Unless otherwise defined herein, terms defined in the Credit Agreement and used herein shall have the meanings given to them in the Credit Agreement.

     In arriving at the opinion expressed below, we have examined the following documents:

     (a) a counterpart of the Credit Agreement signed by the Borrower, the Administrative Agent and the Lenders;

     (b) Notes signed by the Borrower dated the date hereof payable to the order of each Lender party to the Credit Agreement that has requested a Note; and

     (c) a copy of the opinion letter of Jay D. Browning, internal counsel for the Borrower, addressed to you and dated the date hereof.

     In rendering the opinion expressed below, we have assumed, with your permission, without independent investigation or inquiry, (a) the authenticity of all documents submitted to us as originals, (b) the genuineness of all signatures on all documents that we examined and (c) the conformity to authentic originals of documents submitted to us as certified, conformed or photostatic copies.

     Insofar as our opinion expressed below relates to the matters set forth in the above-mentioned opinion letter of Jay D. Browning, we have assumed without independent investigation the correctness of the matters set forth in such opinions, and our opinion is subject to the assumptions, qualifications and limitations set forth in such opinion letter.

     Based upon the foregoing, and subject to the qualifications and comments set forth below, we are of the opinion that, insofar as the law of the State of New York is concerned, each of the Credit Agreement and the Notes dated the date hereof constitutes a legal, valid and binding obligation of the Borrower, enforceable against the Borrower in accordance with its terms, except as affected by bankruptcy, insolvency, fraudulent conveyance, reorganization,

moratorium and other similar laws relating to or affecting creditors’ rights generally, general equitable principles (whether considered in a proceeding in equity or at law) and an implied covenant of good faith and fair dealing.

     Our opinion is subject to the following qualifications:

     1. We express no opinion as to Section 9.09 of the Credit Agreement insofar as it relates to methods of service of process or to an action brought in the United States District Court for the Southern District of New York and note that such matters may be raised by such court.

     2. We express no opinion as to any indemnification obligations under the Credit Agreement to the extent such obligations might be deemed to be inconsistent with public policy.

     3. We express no opinion as to Section 9.08 of the Credit Agreement purporting to grant to Participants a right to set-off.

     4. We express no opinion as to any provision of the Credit Agreement that purports to establish an evidentiary standard for determinations by the Lenders or the Agent.

     5. We express no opinion with respect to the validity or enforceability of the following provisions to the extent that they are contained in the Loan Documents: (i) provisions releasing, exculpating or exempting a party from, or requiring indemnification or contribution of a party for, liability for its own negligence or to the extent that the same are inconsistent with the public policy underlying any law, rule or regulation; (ii) provisions purporting to waive, subordinate, or not give effect to rights to notice, demands, legal defenses or other rights or benefits that cannot be waived, subordinated, or rendered ineffective under applicable law; (iii) provisions purporting to waive remedies inconsistent with applicable law; (iv) provisions purporting to render void and of no effect any transfers of the Company’s rights in any collateral in violation of the terms of the Loan Documents; (v) provisions relating to powers of attorney, severability or set-offs; (vi) provisions stating that a guarantee will not be affected by a modification of the obligation guaranteed in cases in which that modification materially changes the nature or amount of such obligation; (vii) provisions restricting access to courts or purporting to affect the jurisdiction or venue of courts (other than the courts of the State of New York with respect to Loan Documents governed by the State of New York); (viii) provisions relating to waiver of jury trial; (ix) provisions purporting to exclude all conflicts-of-law rules; (x) provisions setting out methods or procedures for service of process; (xi) provisions pursuant to which a party agrees that a judgment rendered by a court or other tribunal in one jurisdiction may be enforced in any other jurisdiction and (xii) provisions providing that decisions by a party are conclusive or may be made in its sole discretion.

     6. Insofar as our opinion above relates to the enforceability under New York law of the provisions in the Loan Documents choosing New York law as the governing law thereof, such opinion is rendered solely in reliance upon the Act of July 19, 1984, ch. 421, 1984 McKinney’s Sess. Law of NY 1406 (codified as N.Y. Gen. Oblig. Law §§ 5-1401 (McKinney 1989)) (the “Act”) and is subject to the qualifications that such enforceability (i) may be limited by public policy considerations of any jurisdictions in which enforcement of such provisions, or

of a judgment upon an agreement containing such provisions, is sought and (ii) as specified in the Act, does not apply to the extent provided to the contrary in subsection two of Section 1-105 of the New York Uniform Commercial Code.

     We are members of the Bar of the State of New York and we do not express any opinion herein concerning any law other than the law of the State of New York.

     This opinion letter is rendered as of the date set forth above and we expressly disclaim any obligation to update this letter after the date hereof.

     This opinion has been rendered solely for your benefit in connection with the Credit Agreement and the transactions contemplated thereby and may not be relied upon by you for any other purpose, or relied upon by any other Person, firm or corporation without our prior written consent.

Very truly yours,

Baker Botts L.L.P.

EX-10.24

Exhibit 10.24

FIRST AMENDMENT

TO

$2,500,000,000 5-YEAR REVOLVING CREDIT AGREEMENT

dated as of

July 24, 2006

among

VALERO ENERGY CORPORATION,
as Borrower,

JPMORGAN CHASE BANK, N.A.,
as Administrative Agent and Global Administrative Agent,

and

The Lenders Party Hereto

FIRST AMENDMENT TO
$2,500,000,000 5-YEAR REVOLVING CREDIT AGREEMENT

     THIS FIRST AMENDMENT TO $2,5000,000,000 5-YEAR REVOLVING CREDIT AGREEMENT (this “First Amendment”) dated as of July 24, 2006, is among VALERO ENERGY CORPORATION, a Delaware corporation (the “Borrower”); JPMORGAN CHASE BANK, N.A., as administrative agent (in such capacity, together with its successors in such capacity, the “Administrative Agent”) and global administrative agent (in such capacity, together with its successors in such capacity, the “Global Administrative Agent”) for the lenders party to the Credit Agreement referred to below (collectively, the “Lenders”); and the undersigned Lenders.

R E C I T A L S

     A. The Borrower, the Administrative Agent, the Global Administrative Agent and the Lenders are parties to that certain $2,500,000,000 5-Year Revolving Credit Agreement dated as of August 17, 2005 (the “Credit Agreement”), pursuant to which the Lenders have made certain extensions of credit available to the Borrower.

     B. The Borrower has requested and the Administrative Agent and the Lenders have agreed to amend certain provisions of the Credit Agreement.

     C. NOW, THEREFORE, in consideration of the premises and the mutual covenants herein contained, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:

     Section 1. Defined Terms. Each capitalized term used herein but not otherwise defined herein has the meaning given such term in the Credit Agreement. Unless otherwise indicated, all references to Sections in this First Amendment refer to Sections of the Credit Agreement.

     Section 2. Amendments to Credit Agreement.

     2.1 Amendments to Section 1.01.

     (a) The definition of “Agreement” is hereby amended in its entirety to read as follows:

     “Agreement” means this $2,500,000,000 5-Year Revolving Credit Agreement, as amended by the First Amendment, as the same may from time to time be amended, modified, supplemented or restated.

     (b) The definition of “Arrangers” is hereby amended in its entirety to read as follows:

     “Arrangers” means, collectively, J.P. Morgan Securities Inc. and Banc of America Securities LLC, each in its capacities as co-lead arranger and joint bookrunner hereunder.

     (c) The definition of “Maturity Date” is hereby amended in its entirety to read as follows:

     “Maturity Date” means August 17, 2011.

     (d) The following definition is hereby added where alphabetically appropriate to read as follows:

     “First Amendment” means the First Amendment to $2,500,000,000 5-Year Revolving Credit Agreement dated as of July 24, 2006 among the Borrower, the Administrative Agent, the Global Administrative Agent and the Lenders party thereto.

     (e) The definitions of “Consolidated EBITDA”, “Consolidated Interest Coverage Ratio”, “Consolidated Interest Expense”, “Consolidated Net Income”, “Rolling Period” and “Transfer” are hereby deleted.

     2.2 Amendment to Section 2.06(c). Section 2.06(c) is hereby amended in its entirety to read as follows:

     “(c) Expiration Date. Each Letter of Credit shall expire at or prior to the close of business on the date that is five Business Days prior to the Maturity Date.”

     2.3 Amendment to Section 2.12(b). Section 2.12(b) is hereby amended in its entirety to read as follows:

     “(b) The Borrower agrees to pay to the Administrative Agent for the account of each Lender a utilization fee which shall accrue at a per annum rate equal to the rate per annum set forth on the Pricing Schedule under the caption “Utilization Fee” on the daily amount of such Lender’s Credit Exposure during the time the sum of the total Credit Exposures equals or exceeds 50% of the total Commitments. Utilization fees shall be computed on the basis of a year of 360 days and shall be payable in arrears on the last day of March, June, September and December of each year.”

     2.4 Amendment to Section 6.07. Section 6.07 is hereby amended in its entirety to read as follows:

“Section 6.07. Reserved.”

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     2.5 Amendment to Pricing Schedule. The grid in the Pricing Schedule is hereby amended in its entirety to read as follows: [Pricing details have been omitted from this Exhibit. We will furnish such information to the Commission upon request.]

     2.6 References to Co-Lead Arrangers and Joint Bookrunners. The words “RBC Capital Markets,” before the words “as Co-Lead Arrangers and Joint Bookrunners” in the title page of the Credit Agreement are hereby deleted and replaced with the words “Banc of America Securities LLC,”. BNP Paribas and RBC Capital Markets, the global brand name for the corporation and investment banking businesses of Royal Bank of Canada and its affiliates, are each hereby added as a joint bookrunner under the Credit Agreement.

     2.7 Commitments. On the Effective Date, the Commitment of each Lender shall, without any further action (including, without the execution of any Assignment and Assumption or the payment of any processing and recordation fee to the Administrative Agent), be the Commitment specified for such Lender on the attached Schedule 2.01, and Schedule 2.01 of the Credit Agreement is hereby amended and restated to read as set forth on the attached Schedule 2.01.

     Section 3. Conditions Precedent. This First Amendment shall not become effective until the date on which each of the following conditions is satisfied (or waived in accordance with Section 9.02 of the Credit Agreement) (the “Effective Date”):

     3.1 The Administrative Agent and the Lenders shall have received all fees and other amounts due and payable, if any, in connection with this First Amendment on or prior to the Effective Date.

     3.2 The Administrative Agent shall have received from all of the Lenders and the Borrower, counterparts (in such number as may be requested by the Administrative Agent) of this First Amendment signed on behalf of such Persons.

     3.3 The Administrative Agent shall have received such other documents as the Administrative Agent or special counsel to the Administrative Agent may reasonably request.

     3.4 No Default shall have occurred and be continuing, after giving effect to the terms of this First Amendment.

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     Section 4. Miscellaneous.

     4.1 Confirmation. The provisions of the Credit Agreement, as amended by this First Amendment, shall remain in full force and effect following the effectiveness of this First Amendment.

     4.2 Ratification and Affirmation; Representations and Warranties. The Borrower hereby (a) acknowledges the terms of this First Amendment; (b) ratifies and affirms its obligations under, and acknowledges, renews and extends its continued liability under, each Loan Document to which it is a party and agrees that each Loan Document to which it is a party remains in full force and effect, except as expressly amended hereby, notwithstanding the amendments contained herein and (c) represents and warrants to the Lenders that as of the date hereof, after giving effect to the terms of this First Amendment: (i) all of the representations and warranties contained in each Loan Document to which it is a party are true and correct, unless such representations and warranties are stated to relate to a specific earlier date, in which case, such representations and warranties shall continue to be true and correct as of such earlier date and (ii) no Default has occurred and is continuing.

     4.3 Loan Document. This First Amendment is a “Loan Document” as defined and described in the Credit Agreement and all of the terms and provisions of the Credit Agreement relating to Loan Documents shall apply hereto.

     4.4 Counterparts. This First Amendment may be executed by one or more of the parties hereto in any number of separate counterparts, and all of such counterparts taken together shall be deemed to constitute one and the same instrument. Delivery of this First Amendment by facsimile transmission shall be effective as delivery of a manually executed counterpart hereof.

     4.5 NO ORAL AGREEMENT. THIS FIRST AMENDMENT, THE CREDIT AGREEMENT AND THE OTHER LOAN DOCUMENTS EXECUTED IN CONNECTION HEREWITH AND THEREWITH REPRESENT THE FINAL AGREEMENT AMONG THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR UNWRITTEN ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO ORAL AGREEMENTS BETWEEN THE PARTIES.

     4.6 GOVERNING LAW. THIS FIRST AMENDMENT (INCLUDING, BUT NOT LIMITED TO, THE VALIDITY AND ENFORCEABILITY HEREOF) SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK.

[SIGNATURES BEGIN NEXT PAGE]

4

     IN WITNESS WHEREOF, the parties hereto have caused this First Amendment to be duly executed as of the date first written above.

VALERO ENERGY CORPORATION
By:	/S/ Donna M. Titzman
	Donna Titzman
	Treasurer

First Amendment to $2,5000,000,000
5-Year Revolving Credit Agreement

S-1

JPMORGAN CHASE BANK, N.A., individually and as Administrative Agent and as Global Administrative Agent
By:	/s/ Robert W. Traband
	Robert W. Traband
	Vice President

First Amendment to $2,5000,000,000
5-Year Revolving Credit Agreement

We have omitted the “Commitment Schedule” from this Exhibit. We will furnish a copy of this schedule to the Commission upon request.

S-2

EX-10.25

EXHIBIT 10.25

SECOND AMENDMENT

TO

$2,500,000,000 5-YEAR REVOLVING CREDIT AGREEMENT

dated as of

November 9, 2007

among

VALERO ENERGY CORPORATION,
as Borrower,

JPMORGAN CHASE BANK, N.A.,
as Administrative Agent and Global Administrative Agent,

and

The Lenders Party Hereto

SECOND AMENDMENT TO
$2,500,000,000 5-YEAR REVOLVING CREDIT AGREEMENT

     THIS SECOND AMENDMENT TO $2,5000,000,000 5-YEAR REVOLVING CREDIT AGREEMENT (this “Second Amendment”) dated as of November 9, 2007, is among VALERO ENERGY CORPORATION, a Delaware corporation (the “Borrower”); JPMORGAN CHASE BANK, N.A., as administrative agent (in such capacity, together with its successors in such capacity, the “Administrative Agent”) and global administrative agent (in such capacity, together with its successors in such capacity, the “Global Administrative Agent”) for the lenders party to the Credit Agreement referred to below (collectively, the “Lenders”); and the undersigned Lenders.

R E C I T A L S

     A. The Borrower, the Administrative Agent, the Global Administrative Agent and the Lenders are parties to that certain $2,500,000,000 5-Year Revolving Credit Agreement dated as of August 17, 2005 (as amended by that certain First Amendment to $2,500,000,000 5-Year Revolving Credit Agreement dated as of July 24, 2006, the “Credit Agreement”), pursuant to which the Lenders have made certain extensions of credit available to the Borrower.

     B. The Borrower has requested and the Administrative Agent and the Lenders have agreed to amend certain provisions of the Credit Agreement.

     C. NOW, THEREFORE, in consideration of the premises and the mutual covenants herein contained, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:

     Section 1. Defined Terms. Each capitalized term used herein but not otherwise defined herein has the meaning given such term in the Credit Agreement. Unless otherwise indicated, all references to Sections in this Second Amendment refer to Sections of the Credit Agreement.

     Section 2. Amendments to Credit Agreement.

     2.1 Amendments to Section 1.01.

     (a) The definition of “Agreement” is hereby amended in its entirety to read as follows:

     “Agreement” means this $2,500,000,000 5-Year Revolving Credit Agreement, as amended by the First Amendment and the Second Amendment, as the same may from time to time be amended, modified, supplemented or restated.

     (b) The definition of “Maturity Date” is hereby amended in its entirety to read as follows:

     “Maturity Date” means November 9, 2012, and for any Lender agreeing to extend its Maturity Date pursuant to Section 2.21 (and for the purposes of Section

2.04(d) and Section 2.06(c)), the date on November 9 in each year thereafter pursuant to which the Maturity Date has been extended.

     (c) The following definitions are hereby added where alphabetically appropriate to read as follows:

     “Adjusted Consolidated Net Debt” means, at any date, Consolidated Net Debt less the principal amount of Hybrid Equity Securities in an aggregate amount not to exceed 15% of Total Capitalization.

     “Consenting Lenders” has the meaning set forth in Section 2.21(b).

     “Extension Confirmation Date” has the meaning set forth in Section 2.21(b).

     “Extension Effective Date” has the meaning set forth in Section 2.21(b).

     “Hybrid Equity Securities” mean, on any date (the “determination date”), any securities issued by the Borrower or any of its Subsidiaries or a financing vehicle of the Borrower or any of its Subsidiaries, other than common stock, that meet the following criteria: (a) (i) the Borrower demonstrates that such securities are classified, at the time they are issued, as possessing a minimum of “intermediate equity content” by S&P and “Basket C equity credit” by Moody’s (or the equivalent classifications then in effect by such agencies) and (ii) on such determination date such securities are classified as possessing a minimum of “intermediate equity content” by S&P or “Basket C equity credit” by Moody’s (or the equivalent classifications then in effect by such agencies) and (b) such securities require no repayments or prepayments and no mandatory redemptions or repurchases, in each case, prior to at least 91 days after the later of the termination of the Commitments and the repayment in full of the obligations of the Borrower under this Agreement. As used in this definition, “mandatory redemption” shall not include conversion of a security into common stock.

     “Non-Consenting Lenders” has the meaning set forth in Section 2.21(b).

     “Second Amendment” means the Second Amendment to $2,500,000,000 5-Year Revolving Credit Agreement dated as of November 9, 2007 among the Borrower, the Administrative Agent, the Global Administrative Agent and the Lenders party thereto.

     “Total Capitalization” means, at the date of any determination thereof, the sum of (a) Consolidated Net Debt plus (b) Consolidated New Worth of the Borrower plus (c) the involuntary liquidation value of any Preferred Equity Interests.

     2.2 Amendment to Section 2.02(a). Section 2.02(a) is hereby amended by replacing “$500,000,000” in the ninth line thereof with “1,250,000,000”.

2

     2.3 Amendment to Section 2.06(c). Section 2.02(c) is hereby amended by adding the following proviso at the end thereof:

“; provided that, notwithstanding the foregoing, no Letter of Credit may expire beyond the close of business on the date that is five Business Days prior to the earliest Maturity Date applicable to any Lender, unless the amount of such Letter of Credit on the date of issuance, renewal or extension, as applicable, together with the outstanding LC Exposure at such time, is less than or equal to the total commitments of all Lenders having a later Maturity Date”

     2.4 Amendment to Section 2.06(j). Section 2.06(j) is hereby amended in its entirety to read as follows:

     “(j) Cash Collateralization. If (i) any Event of Default shall occur and be continuing, then on the Business Day that the Borrower receives notice from the Administrative Agent or the Required Lenders (or, if the maturity of the Loans has been accelerated, Lenders with LC Exposures representing greater than 50% of the total LC Exposure) demanding the deposit of cash collateral pursuant to this paragraph or (ii) the Borrower is required to pay to the Administrative Agent the excess attributable to an LC Exposure pursuant to Section 2.21, then the Borrower shall deposit in an account with the Administrative Agent, in the name of the Administrative Agent and for the benefit of the Lenders, an amount in cash equal to the LC Exposure as of such date plus any accrued and unpaid interest and fees thereon; provided that the obligation to deposit such cash collateral shall become effective immediately, and such deposit shall become immediately due and payable, without demand or other notice of any kind, upon the occurrence of any Event of Default with respect to the Borrower described in clause (h) or (i) of Article VII. As collateral security for the payment and performance of the obligations of the Borrower under this Agreement, the Borrower hereby grants to the Administrative Agent, for the benefit of each Issuing Bank and the Lenders, a first priority security interest in such account and all amounts and other property from time to time deposited or held in such account, and all proceeds thereof, and any substitutions and replacements therefor. The Administrative Agent shall have exclusive dominion and control, including the exclusive right of withdrawal, over such account. Other than any interest earned on the investment of such deposits, which investments shall be made at the option and sole discretion of the Administrative Agent and at the Borrower’s risk and expense, such deposits shall not bear interest. Interest or profits, if any, on such investments shall accumulate in such account. Moneys in such account shall be applied by the Administrative Agent to reimburse ratably the Issuing Banks for LC Disbursements for which they have not been reimbursed and, to the extent not so applied, shall be held for the satisfaction of the reimbursement obligations of the Borrower for the LC Exposure at such time or, if the maturity of the Loans has been accelerated (but subject to the consent of Lenders with LC Exposure representing greater than 50% of the total LC Exposure), be applied to satisfy other obligations of the Borrower under this Agreement. If the Borrower is required to provide an amount of cash collateral hereunder as a result of the occurrence of an Event of Default, and the Borrower is not otherwise required to pay to the Administrative Agent the excess attributable to an LC Exposure pursuant to Section 2.21, such amount (to the extent not applied as aforesaid)

3

shall be returned to the Borrower within three Business Days after all Events of Default have been cured or waived.”

     2.5 Amendment to Section 2.19(b). Section 2.19(b) is hereby amended by inserting the words “, or if any Lender shall fail to agree to extend the Maturity Date pursuant to Section 2.21,” after the reference to “Section 2.20,” and before the word “then” in the eight line thereof.

     2.6 Amendment to Article II. Article II is hereby amended to add the following new Section 2.21 to read as follows:

     “Section 2.21. Extension of Maturity Date.

     (a) Not earlier than 75 days prior to, nor later than 30 days prior to, each anniversary of November 9, 2007, the Borrower may, upon notice to the Administrative Agent (which shall promptly notify the Lenders), request a one-year extension of the Maturity Date then in effect. Within 15 days of delivery of such notice, each Lender shall notify the Administrative Agent whether or not it consents to such extension (which consent may be given or withheld in such Lender’s sole and absolute discretion). Any Lender not responding within the above time period shall be deemed not to have consented to such extension. The Administrative Agent shall promptly notify the Borrower and the Lenders of the Lenders’ responses.

     (b) The Maturity Date shall be extended only if the Required Lenders (calculated excluding any Lender in default in its obligation to fund Loans hereunder and after giving effect to any replacements of Lenders permitted herein) have consented thereto (the Lenders that so consent being the “Consenting Lenders” and the Lenders that do not consent being the “Non-Consenting Lenders”). If so extended, the Maturity Date, as to the Consenting Lenders, shall be extended to the same date in the year following the Maturity Date then in effect (such existing Maturity Date being the “Extension Effective Date”). The Administrative Agent and the Borrower shall promptly confirm to the Lenders such extension, specifying the date of such confirmation (the “Extension Confirmation Date”), the Extension Effective Date, and the new Maturity Date (after giving effect to such extension). As a condition precedent to such extension, the Borrower shall deliver to the Administrative Agent a certificate of the Borrower dated as of the Extension Confirmation Date signed by a Responsible Officer of the Borrower (i) certifying and attaching the resolutions adopted by the Borrower approving or consenting to such extension and (ii) certifying that, (A) before and after giving effect to such extension, the representations and warranties contained in Article III made by it are true and correct on and as of the Extension Confirmation Date, except to the extent that such representations and warranties specifically refer to an earlier date, (B) before and after giving effect to such extension to Default exists or will exist as of the Extension Confirmation Date, and (C) since December 31, 2006, no event, development or circumstance that has had or could reasonably be excepted to have a Material Adverse Effect has occurred. The Borrower shall repay any Loans outstanding on the Extension Effective Date (and pay and additional amounts required pursuant to Section 2.16) to the extent necessary to keep outstanding Loans ratable with any revised and new Applicable

4

Percentages of all the Lenders effective as of the Extension Effective Date; and if after giving effect to such prepayment, the total Credit Exposures exceeds the total Commitments then in effect as a result of an LC Exposure, then the Borrower will pay to the Administrative Agent on behalf of the Lenders an amount equal to such excess to be held as cash collateral as provided in Section 2.06(j). In addition, each Consenting Lender shall automatically (without any further action) and ratably acquire on the Extension Effective Date the Non-Consenting Lenders’ participations in Letters of Credit, in an amount equal to such Consenting Lender’s Applicable Percentage of the amount of such participants.”

     2.7 Amendment to Section 6.01. Section 6.01 is hereby amended in its entirety to read as follows:

     “Section 6.01 Indebtedness. The Borrower will not permit Adjusted Consolidated Net Debt at any time to exceed 60% of Total Capitalization.”

     2.8 Amendment to Section 9.02(d). Clause (vi) of Section 9.02(d) is hereby amended by inserting the words “Section 2.21,” after the words “Section 2.12(d),” in the first line of such clause (vi).

     2.9 Global Amendments. References to “Valero L.P.” wherever they appear in the Credit Agreement are hereby changed to “NuStar L.P.” and references to “Valero GP, LLC” wherever they appear in the Credit Agreement are hereby changed to “NuStar GP, LLC”.

     2.10 Commitments. On the Effective Date, the Commitment of each Lender shall, without any further action (including, without the execution of any Assignment and Assumption or the payment of any processing and recordation fee to the Administrative Agent), be the Commitment specified for such Lender on the attached Schedule 2.01, and Schedule 2.01 of the Credit Agreement is hereby amended and restated to read as set forth on the attached Schedule 2.01.

     Section 3. Conditions Precedent. This Second Amendment shall not become effective until the date on which each of the following conditions is satisfied (or waived in accordance with Section 9.02 of the Credit Agreement) (the “Effective Date”):

     3.1 The Administrative Agent and the Lenders shall have received all fees and other amounts due and payable, if any, in connection with this Second Amendment on or prior to the Effective Date.

     3.2 The Administrative Agent shall have received from all of the Lenders and the Borrower, counterparts (in such number as may be requested by the Administrative Agent) of this Second Amendment signed on behalf of such Persons.

     3.3 The Administrative Agent shall have received such other documents as the Administrative Agent or special counsel to the Administrative Agent may reasonably request.

     3.4 No Default shall have occurred and be continuing, after giving effect to the terms of this Second Amendment.

5

     Section 4. Miscellaneous.

     4.1 Confirmation. The provisions of the Credit Agreement, as amended by this Second Amendment, shall remain in full force and effect following the effectiveness of this Second Amendment.

     4.2 Ratification and Affirmation; Representations and Warranties. The Borrower hereby (a) acknowledges the terms of this Second Amendment; (b) ratifies and affirms its obligations under, and acknowledges, renews and extends its continued liability under, each Loan Document to which it is a party and agrees that each Loan Document to which it is a party remains in full force and effect, except as expressly amended hereby, notwithstanding the amendments contained herein; and (c) represents and warrants to the Lenders that as of the date hereof, after giving effect to the terms of this Second Amendment: (i) all of the representations and warranties contained in each Loan Document to which it is a party are true and correct, unless such representations and warranties are stated to relate to a specific earlier date, in which case, such representations and warranties shall continue to be true and correct as of such earlier date and (ii) no Default has occurred and is continuing.

     4.3 Loan Document. This Second Amendment is a “Loan Document” as defined and described in the Credit Agreement and all of the terms and provisions of the Credit Agreement relating to Loan Documents shall apply hereto.

     4.4 Counterparts. This Second Amendment may be executed by one or more of the parties hereto in any number of separate counterparts, and all of such counterparts taken together shall be deemed to constitute one and the same instrument. Delivery of this Second Amendment by facsimile transmission shall be effective as delivery of a manually executed counterpart hereof.

     4.5 NO ORAL AGREEMENT. THIS SECOND AMENDMENT, THE CREDIT AGREEMENT AND THE OTHER LOAN DOCUMENTS EXECUTED IN CONNECTION HEREWITH AND THEREWITH REPRESENT THE FINAL AGREEMENT AMONG THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR UNWRITTEN ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO ORAL AGREEMENTS BETWEEN THE PARTIES.

     4.6 GOVERNING LAW. THIS SECOND AMENDMENT (INCLUDING, BUT NOT LIMITED TO, THE VALIDITY AND ENFORCEABILITY HEREOF) SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK.

[SIGNATURES BEGIN NEXT PAGE]

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     IN WITNESS WHEREOF, the parties hereto have caused this Second Amendment to be duly executed as of the date first written above.

VALERO ENERGY CORPORATION
By:	/s/ Donna M. Titzman
	Donna Titzman
	Treasurer

Second Amendment to $2,500,000,000
5-Year Revolving Credit Agreement

S-1

JPMORGAN CHASE BANK, N.A., individually and as Administrative Agent and as Global Administrative Agent
By:	/s/ Robert W. Traband
	Robert W. Traband
	Vice President

Second Amendment to $2,500,000,000
5-Year Revolving Credit Agreement

We have omitted the “Commitment Schedule” from this Exhibit. We will furnish a copy of this schedule to the Commission upon request.

S-2

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)

	Year Ended December 31,
	2008			2007			2006			2005			2004
Ratio of Earnings to Fixed Charges:
Earnings:
Income from continuing operations before income tax expense, minority interest in net income of consolidated subsidiaries, and income from equity investees	$	320		$	6,743		$	7,872		$	5,013		$	2,726
Add:
Fixed charges		643			658			566			474			410
Amortization of capitalized interest		18			15			9			8			7
Distributions from equity investees		—			—			47			50			42
Less:
Interest capitalized		(111	)		(107	)		(165	)		(66	)		(37	)
Total earnings	$	870		$	7,309		$	8,329		$	5,479		$	3,148
Fixed charges:
Interest expense, net	$	340		$	359		$	212		$	268		$	260
Interest capitalized		111			107			165			66			37
Rental expense interest factor (1)		192			192			189			140			113
Total fixed charges	$	643		$	658		$	566		$	474		$	410
Ratio of earnings to fixed charges		1.4	x		11.1	x		14.7	x		11.6	x		7.7	x
Ratio of Earnings to Fixed Charges and Preferred Stock Dividends:
Total earnings	$	870		$	7,309		$	8,329		$	5,479		$	3,148
Total fixed charges	$	643		$	658		$	566		$	474		$	410
Preferred stock dividends		—			—			3			20			19
Total fixed charges and preferred stock dividends	$	643		$	658		$	569		$	494		$	429
Ratio of earnings to fixed charges and preferred stock dividends		1.4	x		11.1	x		14.6	x		11.1	x		7.3	x

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

EX-21.01

Exhibit 21.01

Valero Energy Corporation and Subsidiaries
as of February 17, 2009

Name of Entity	State of Incorporation/Organization
AUTOTRONIC SYSTEMS, INC.	Delaware
BIG DIAMOND, INC.	Texas
BIG DIAMOND NUMBER 1, INC.	Texas
CANADIAN ULTRAMAR COMPANY	Nova Scotia
CANALUX L.P.	Newfoundland and Labrador
COLONNADE VERMONT INSURANCE COMPANY	Vermont
DIAMOND ALTERNATIVE ENERGY, LLC	Delaware
DIAMOND OMEGA COMPANY, L.L.C.	Delaware
DIAMOND SHAMROCK ARIZONA, INC.	Delaware
DIAMOND SHAMROCK REFINING COMPANY, L.P.	Delaware
DIAMOND SHAMROCK STATIONS, INC.	Delaware
DIAMOND UNIT INVESTMENTS, L.L.C.	Delaware
DSRM NATIONAL BANK	U.S.A.
EMERALD MARKETING, INC.	Texas
HUNTWAY REFINING COMPANY	Delaware
MICHIGAN REDEVELOPMENT GP, LLC	Delaware
MICHIGAN REDEVELOPMENT, L.P.	Delaware
MRP PROPERTIES COMPANY, LLC	Michigan
NATIONAL CONVENIENCE STORES INCORPORATED	Delaware
NECHES RIVER HOLDING CORP.	Delaware
OCEANIC TANKERS AGENCY LIMITED	Quebec
PORT ARTHUR COKER COMPANY L.P.	Delaware
PREMCOR USA INC.	Delaware
PROPERTY RESTORATION, L.P.	Delaware
ROBINSON OIL COMPANY (1987) LIMITED	Nova Scotia
SABINE RIVER HOLDING CORP.	Delaware
SABINE RIVER LLC	Delaware
SIGMOR BEVERAGE, INC.	Texas
SIGMOR CORPORATION	Delaware
SIGMOR NUMBER 5, INC.	Texas
SIGMOR NUMBER 43, INC.	Texas
SIGMOR NUMBER 79, INC.	Texas
SIGMOR NUMBER 80, INC.	Texas
SIGMOR NUMBER 103, INC.	Texas
SIGMOR NUMBER 105, INC.	Texas
SIGMOR NUMBER 119, INC.	Texas
SIGMOR NUMBER 178, INC.	Texas
SIGMOR NUMBER 196, INC.	Texas
SIGMOR NUMBER 238, INC.	Texas
SIGMOR NUMBER 259, INC.	Texas
SIGMOR NUMBER 422, INC.	Texas
SKIPPER BEVERAGE COMPANY, INC.	Texas
SUNBELT REFINING COMPANY, L.P.	Delaware
SUNRAY WIND, LLC	Texas
SUNSHINE BEVERAGE CO.	Texas
THE PREMCOR PIPELINE CO.	Delaware
THE PREMCOR REFINING GROUP INC.	Delaware
THE SHAMROCK PIPE LINE CORPORATION	Delaware

Page 1

Name of Entity	State of Incorporation/Organization
TOC-DS COMPANY	Delaware
ULTRAMAR ACCEPTANCE INC.	Canada
ULTRAMAR ENERGY INC.	Delaware
ULTRAMAR INC.	Nevada
ULTRAMAR LTD.	Canada
ULTRAMAR SERVICES INC.	Canada
VALERO ARUBA ACQUISITION COMPANY I, LTD.	Virgin Islands (U.K.)
VALERO ARUBA FINANCE INTERNATIONAL, LTD.	Virgin Islands (U.K.)
VALERO ARUBA HOLDING COMPANY N.V.	Aruba
VALERO ARUBA HOLDINGS INTERNATIONAL, LTD.	Virgin Islands (U.K.)
VALERO ARUBA MAINTENANCE/OPERATIONS COMPANY N.V.	Aruba
VALERO BONAIRE FUELS COMPANY N.V.	Bonaire
VALERO CALIFORNIA RETAIL COMPANY	Delaware
VALERO CANADA FINANCE, INC.	Delaware
VALERO CANADA L.P.	Newfoundland
VALERO CAPITAL CORPORATION	Delaware
VALERO CARIBBEAN SERVICES COMPANY	Delaware
VALERO CHOPS GP, L.L.C.	Delaware
VALERO CHOPS I, L.P.	Delaware
VALERO CHOPS II, L.P.	Delaware
VALERO CLAIMS MANAGEMENT, INC.	Texas
VALERO COKER CORPORATION ARUBA N.V.	Aruba
VALERO CUSTOMS & TRADE SERVICES, INC.	Delaware
VALERO DIAMOND, L.P.	Texas
VALERO DIAMOND METRO, INC.	Michigan
VALERO ENERGY ARUBA II COMPANY	Cayman Islands
VALERO ENERGY CORPORATION (parent)	Delaware
VALERO FINANCE L.P. I	Newfoundland
VALERO FINANCE L.P. II	Newfoundland
VALERO FINANCE L.P. III	Newfoundland
VALERO HOLDINGS, INC.	Delaware
VALERO JAVELINA, INC.	Delaware
VALERO JAVELINA, L.P.	Delaware
VALERO LUX COMPANY I S.à r.l.	Luxembourg
VALERO LUX COMPANY II S.à r.l.	Luxembourg
VALERO MARKETING & SUPPLY-ARUBA N.V.	Aruba
VALERO MARKETING AND SUPPLY COMPANY	Delaware
VALERO MARKETING AND SUPPY INTERNATIONAL LTD.	Cayman Islands
VALERO MKS LOGISTICS, L.L.C.	Delaware
VALERO NATURAL GAS PIPELINE COMPANY	Delaware
VALERO OMEGA COMPANY, L.L.C.	Delaware
VALERO PAYMENT SERVICES COMPANY	Delaware
VALERO POWER MARKETING COMPANY	Delaware
VALERO REFINING AND MARKETING COMPANY	Delaware
VALERO REFINING COMPANY-ARUBA N.V.	Aruba
VALERO REFINING COMPANY-CALIFORNIA	Delaware
VALERO REFINING COMPANY-NEW JERSEY	Delaware
VALERO REFINING COMPANY-OKLAHOMA	Michigan
VALERO REFINING COMPANY-TENNESSEE, L.L.C.	Delaware
VALERO REFINING-NEW ORLEANS, L.L.C.	Delaware
VALERO REFINING-TEXAS, L.P.	Texas
VALERO RENEWABLE FUELS COMPANY, LLC	Texas
VALERO RETAIL HOLDINGS, INC.	Delaware
VALERO SECURITY SYSTEMS, INC.	Delaware

Page 2

Name of Entity	State of Incorporation/Organization
VALERO SERVICES, INC.	Delaware
VALERO TERMINALING AND DISTRIBUTION COMPANY	Delaware
VALERO TEXAS POWER MARKETING, INC.	Delaware
VALERO UK LTD	United Kingdom
VALERO ULTRAMAR HOLDINGS INC.	Delaware
VALERO UNIT INVESTMENTS, L.L.C.	Delaware
VALLEY SHAMROCK, INC.	Texas
VEC TRUST I	Delaware
VEC TRUST III	Delaware
VEC TRUST IV	Delaware
VRG PROPERTIES COMPANY	Delaware
VTD PROPERTIES COMPANY	Delaware

Page 3

EX-23.01

Exhibit 23.01

Consent of Independent Registered Public Accounting Firm

The Board of Directors
of Valero Energy Corporation and subsidiaries:

We consent to the incorporation by reference in the registration statements, as amended, on Form S-3 (Registration No. 333-116668) and Form S-8 (Registration Nos. 333-31709, 333-31721, 333-31723, 333-31727, 333-81858, 333-106620, 333-118731, 333-125082, 333-129032 and 333-136333) of Valero Energy Corporation and subsidiaries, of our reports dated February 26, 2009, with respect to the consolidated balance sheets of Valero Energy Corporation and subsidiaries as of December 31, 2008 and 2007, and the related consolidated statements of income, stockholders’ equity, cash flows, and comprehensive income for each of the years in the three-year period ended December 31, 2008, and the effectiveness of internal control over financial reporting as of December 31, 2008, which reports appear in the December 31, 2008 annual report on Form 10-K of Valero Energy Corporation and subsidiaries.

/s/ KPMG LLP  

San Antonio, Texas
February 26, 2009

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 annual report on Form 10-K 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: February 27, 2009

     /s/ William R. Klesse

William R. Klesse

Chief Executive Officer and President

EX-31.02

Exhibit 31.02

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

     I, Michael S. Ciskowski, certify that:

     1. I have reviewed this annual report on Form 10-K 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: February 27, 2009

     /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 Annual Report of Valero Energy Corporation (the Company) on Form 10-K for the year ended December 31, 2008, as filed with the Securities and Exchange Commission on the date hereof (the Report), I, William R. Klesse, Chief Executive Officer and President 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 and President

February 27, 2009

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 Annual Report of Valero Energy Corporation (the Company) on Form 10-K for the year ended December 31, 2008, 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

February 27, 2009

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.

EX-99.01

Exhibit 99.01

VALERO ENERGY CORPORATION

Audit Committee Pre-Approval Policy

I.

Statement of Principles

Pursuant to Section 10A of the Securities Exchange Act of 1934, as amended by Section 202 of the Sarbanes-Oxley Act of 2002 (“SOX Act”), the Audit Committee of the board of directors (the “Audit Committee”) of Valero Energy Corporation (the “Company”) is required to pre-approve the audit and non-audit services performed by the Company’s independent auditor to assure that the provision of such services does not impair the auditor’s independence. The SEC’s rules establish two approaches for pre-approving services. The two approaches are not mutually exclusive:

• the Audit Committee may pre-approve each particular service on a case-by-case basis (“separate pre-approval”), and

• the Audit Committee may adopt a pre-approval policy that is detailed as to the particular types of services that may be provided by the independent auditor without consideration by the Audit Committee on a case-by-case basis (“policy-based pre-approval”).

The Audit Committee believes that a combination of these approaches will provide an effective and efficient procedure to pre-approve services performed by the independent auditor. Therefore, unless a type of service has received policy-based pre-approval (as specifically identified in the appendices to this policy), it will require separate pre-approval by the Audit Committee.

The appendices to this policy contain lists of services that have received policy-based pre-approval of this Audit Committee in the following categories (categorized in accordance with the SEC’s rules):

• Audit Services

• Audit-Related Services

• Tax Services

• All Other Services

II.

Term of Pre-Approvals

The term of the policy-based pre-approvals stated in the appendices to this policy is the period from January 1, 2009 to January 31, 2010, unless the Audit Committee specifically provides for a different period. The Audit Committee will review and pre-approve, at least annually, the services that may be provided by the independent auditor. The Audit Committee will revise the list of policy-based pre-approved services from time to time as the Committee deems necessary or appropriate.

Page 1

III.	Delegation
	In accordance with the SOX Act and SEC rules, the Audit Committee hereby delegates to its Chairman the authority to grant separate pre-approvals of services and fees in accordance with this policy. The Audit Committee may further delegate pre-approval authority from time to time to one or more of its other members in its discretion. Any committee member to whom pre-approval authority is delegated shall report any pre-approval decisions to the full Audit Committee at its next meeting. The Audit Committee does not delegate its responsibilities to pre-approve services to any member of the Company’s management.
IV.	Services for which Separate Pre-Approval is Required
	The terms and fees for the following services of the independent auditor require separate pre-approval by the Audit Committee:

• the annual financial statement audit, including all audits, reviews, procedures and other services required to be performed by the independent auditor to form an opinion on the Company’s consolidated financial statements, and

• the annual audit of the Company’s internal control over financial reporting, including all services required to be performed by the independent auditor to issue its report on the effectiveness of the Company’s internal control over financial reporting.

The Audit Committee will monitor these engagements as it deems appropriate, and will approve, if necessary, any changes in terms, conditions and fees resulting from changes in engagement scope, changes in the Company’s structure or other matters.

V. Services for which Policy-Based Pre-Approval is Available

A. Audit Services

The Audit Committee may grant policy-based pre-approval for Audit Services other than the services described in Section IV above. These Audit Services are generally services that only the Company’s independent auditor reasonably can provide, and include:

• services associated with SEC registration statements (e.g., comfort letters, consents), periodic reports and other documents filed with the SEC or other documents issued in connection with securities offerings,

• statutory audits or financial audits for subsidiaries or affiliates of the Company.

The Audit Committee has given policy-based pre-approval for the Audit Services listed in Appendix A. All other Audit Services must be separately pre-approved by the Audit Committee.

Page 2

B.	Audit-Related Services
	Audit-Related Services are assurance and related services that are reasonably related to the performance of the annual audit or quarterly review of the Company’s financial statements or that are traditionally performed by the independent auditor. The Audit Committee may grant policy-based pre-approval for Audit-Related Services. These services would include:

• employee benefit plan audits, and

• due diligence services related to proposed mergers and acquisitions.

	The Audit Committee believes that the provision of the Audit-Related Services listed in Appendix B does not impair the independence of the auditor, and has given policy-based pre-approval for the Audit-Related Services listed in Appendix B. All other Audit-Related Services must be separately pre-approved by the Audit Committee.
C.	Tax Services
	The Audit Committee believes that the independent auditor can provide Tax Services to the Company such as tax compliance, tax planning and tax advice without impairing the auditor’s independence. However, the Audit Committee will not permit the retention of the independent auditor in connection with a transaction initially recommended by the independent auditor, the purpose of which may be tax avoidance and the tax treatment of which may not be supported in the U.S. Internal Revenue Code and related regulations or in the tax laws and regulations of any jurisdiction in which the Company is subject to taxation. In addition, the independent auditor may not provide any tax services to the Company that are deemed to be incompatible with auditor independence per standards promulgated by the Public Company Accounting Oversight Board (“PCAOB”).
	The Audit Committee has given policy-based pre-approval for the Tax Services listed in Appendix C. All other Tax Services must be separately pre-approved by the Audit Committee, including Tax Services related to large and complex transactions and Tax Services proposed to be provided by the independent auditor to any executive officer or director of the Company, in his or her individual capacity, when such services are paid for by the Company.
D.	All Other Services
	The Audit Committee may grant policy-based pre-approval for those permissible non-audit services classified as All Other Services that it believes are routine, recurring services that would not impair the independence of the auditor. The Audit Committee has given policy-based pre-approval for the All Other Services listed in Appendix D. Any permissible All Other Services that are not listed in Appendix D must be separately pre-approved by the Audit Committee.

Page 3

VI.	Prohibited Services
	A list of the SEC’s prohibited non-audit services is attached to this policy as Appendix E. The list sets forth the several services that the SOX Act and the SEC have specifically identified as services that may not be performed by the Company’s independent auditor. The Audit Committee will consult the SEC’s rules and relevant guidance, with the assistance of counsel when necessary or appropriate, to determine whether any proposed service by the independent auditor falls within any category of prohibited non-audit services.
	In addition, the independent auditor may not provide any service or product to the Company for a contingent fee (as defined and interpreted by the SEC pursuant to Rule 2-01(c)(5) of Regulation S-X) or a commission, or pursuant to an agreement (written or otherwise) by the Company to pay a “value added” fee based on the results of the independent auditor’s performance of a service.
VII.	Pre-Approval Fee Levels and Budgeted Amounts
	Pre-approval fee levels or budgeted amounts for all services to be provided by the independent auditor will be established at least annually by the Audit Committee. All services that have received policy-based pre-approval are subject to the pre-approval fee levels or budgeted amounts set forth in the appendices to this policy. Any proposed services exceeding these amounts will require separate pre-approval by the Audit Committee or by any person to whom pre-approval authority is granted under Section III above.
VIII.	Procedures
	Requests or applications to provide services that require separate approval by the Audit Committee must be submitted to the Audit Committee by both the independent auditor and the Company’s Chief Financial Officer (or his designee), and must include a joint statement as to whether, in their view, the request or application is consistent with the SEC’s rules on auditor independence. In connection with the Audit Committee’s consideration of any proposed service, the independent auditor, at the Committee’s request, will provide to the Audit Committee detailed documentation regarding the specific services to be provided so that the Committee can make a well-reasoned assessment of the impact of the service on the auditor’s independence.
	The Audit Committee hereby designates the Company’s Vice President of Internal Audit (the “Monitor”) to monitor the performance of all services provided by the independent auditor and to determine whether such services are in compliance with this policy. The Monitor will report to the Audit Committee on a periodic basis the results of his monitoring.

Page 4

Appendix A

Pre-Approved AUDIT SERVICES

Service

assistance with and review of documents filed with the SEC including registration statements, reports on Forms 10-K and 10-Q, and other documents

services associated with other documents issued in connection with securities offerings (e.g., comfort letters, consents)

assistance in responding to SEC comment letters

statutory audits (e.g., FERC and insurance audits) and financial audits for subsidiaries of the Company, to include services normally provided by the Company’s independent auditor in connection with statutory and regulatory filings

certificates, letters and opinions issued to regulators, agencies and other third-parties (e.g., insurance, banking, environmental) regarding the Company’s assets and/or operations that only the Company’s independent auditors reasonably can provide

consultations concerning principles of accounting and/or financial reporting treatment under standards or interpretations by the SEC, PCAOB, FASB or other regulatory or standard-setting bodies necessary to reach an audit judgment and/or opinion on the Company’s financial statements

Pre-approval fee limit for Audit Services (other than services pertaining to registration statements or prospectuses in connection with securities offerings)

$250,000

Pre-approval fee limit for Audit Services pertaining to registration statements or prospectuses in connection with securities offerings

$250,000 per registration statement or prospectus

Appendix B

Pre-Approved AUDIT-RELATED SERVICES

Service

due diligence services pertaining to potential business acquisitions or dispositions

financial statement audits of employee benefit plans

accounting consultations and audits in connection with acquisitions

consultations concerning principles of accounting and/or financial reporting treatment under standards or interpretations by the SEC, PCAOB, FASB or other regulatory or standard-setting bodies outside those consultations necessary to perform an audit or review of Valero’s financial statements in accordance with generally accepted auditing standards

Pre-approval fee limit for Audit-Related Services

$500,000

Appendix C

Pre-Approved TAX SERVICES

Service

Note: The following are subject to the terms of subsection C. of Section V. of this policy.

U.S. federal, state and local tax compliance, including the preparation of original and amended tax returns and claims for refunds

U.S. federal, state and local tax planning and advice, including assistance with tax audits and appeals (but expressly excluding advocacy or litigation services), tax advice related to mergers and acquisitions, tax advice relating to employee benefit plans, and requests for rulings or technical advice from taxing authorities

review of Canadian federal and provincial income tax returns

Canadian federal and provincial tax planning and advice, including assistance with tax audits and appeals (but expressly excluding advocacy or litigation services), and advice relating to the tax effects of certain employee benefit arrangements

review of federal, state, local and international income, franchise, and other tax returns

Pre-approval fee limit for Tax Services

$750,000

Appendix D

Pre-Approved ALL OTHER SERVICES

Services

none

Pre-approval fee limit for All Other Services

$0

Appendix E

Prohibited Non-Audit Services

• Bookkeeping or other services related to the accounting records or financial statements of the audit client*

• Financial information systems design and implementation*

• Appraisal or valuation services, fairness opinions or contribution-in-kind reports*

• Actuarial services*

• Internal audit outsourcing services*

• Management functions

• Human resources

• Broker-dealer, investment adviser or investment banking services

• Legal services

• Expert services unrelated to the audit

* Provision of these non-audit services may be permitted if it is reasonable to conclude that the results of these services will not be subject to audit procedures. Materiality is not an appropriate basis upon which to overcome the rebuttable presumption that prohibited services will be subject to audit procedures.