10-Q/A

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q/A
(Amendment No. 1)

                  (Mark One)

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

For the quarterly period ended March 31, 2004

OR

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

For the transition period from ______________________ to ______________________________

Commission file number 1-13175

VALERO ENERGY CORPORATION (Exact name of registrant as specified in its charter)
Delaware		74-1828067
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)
	One Valero Place
	San Antonio, Texas
	(Address of principal executive offices)
	78212
	(Zip Code)
	(210) 370-2000
	(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes   X   No__

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

The number of shares of the registrant's only class of common stock, $0.01 par value, outstanding as of April 30, 2004 was 128,728,899.

 

Explanatory Note

This amendment to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2004 is being filed solely to include Exhibits 3.1, 31.1 and 32.1, which were inadvertently omitted from the Form 10-Q filed on May 7, 2004. No revisions have been made to the Registrant’s financial statements or any other disclosure contained in such Form 10-Q.

VALERO ENERGY CORPORATION AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION
	Page
Item 1. Financial Statements
Consolidated Balance Sheets as of March 31, 2004 and December 31, 2003		3
Consolidated Statements of Income for the Three Months
Ended March 31, 2004 and 2003		4
Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 2004 and 2003		5
Consolidated Statements of Comprehensive Income for the
Three Months Ended March 31, 2004 and 2003		6
Condensed Notes to Consolidated Financial Statements		7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations		21
Item 3. Quantitative and Qualitative Disclosures About Market Risk		34
Item 4. Controls and Procedures		38
PART II. OTHER INFORMATION
Item 1. Legal Proceedings		39
Item 2. Changes in Securities and Use of Proceeds		40
Item 6. Exhibits and Reports on Form 8-K		40
SIGNATURE		42

PART I - FINANCIAL INFORMATION
Item 1. Financial Statements

VALERO ENERGY CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Millions of Dollars, Except Par Value)
	March 31, 2004			December 31, 2003
	(Unaudited)
ASSETS
Current assets:
Cash and temporary cash investments	$	239.0		$	369.2
Restricted cash		34.5			43.7
Receivables, net		1,679.4			1,327.7
Inventories		2,444.3			1,913.1
Deferred income taxes		211.9			118.7
Prepaid expenses and other		58.7			44.9
Total current assets		4,667.8			3,817.3
Property, plant and equipment, at cost		11,004.5			9,748.1
Accumulated depreciation		(1,647.7	)		(1,553.0	)
Property, plant and equipment, net		9,356.8			8,195.1
Intangible assets, net		311.7			320.2
Goodwill		2,400.3			2,401.7
Investment in Valero L.P.		264.6			264.5
Deferred charges and other assets, net		778.0			665.4
Total assets	$	17,779.2		$	15,664.2
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt and capital lease obligations	$	201.6		$	-
Accounts payable		3,012.4			2,288.2
Accrued expenses		342.8			355.6
Taxes other than income taxes		374.0			364.8
Income taxes payable		27.9			55.7
Total current liabilities		3,958.7			3,064.3
Long-term debt, less current portion		4,673.1			4,239.1
Capital lease obligations, less current portion		8.6			6.0
Deferred income tax liabilities		1,774.8			1,604.6
Other long-term liabilities		925.1			1,015.0
Commitments and contingencies (Note 15)
Stockholders' equity:
Preferred stock, $0.01 par value; 20,000,000 shares authorized;
10,000,000 shares issued		202.4			200.5
Common stock, $0.01 par value; 300,000,000 shares authorized;
130,224,254 and 121,154,904 shares issued		1.3			1.2
Additional paid-in capital		4,357.1			3,922.6
Treasury stock, at cost; 5,174 and 888,467 shares		(0.3	)		(41.4	)
Retained earnings		1,712.2			1,482.7
Accumulated other comprehensive income		166.2			169.6
Total stockholders' equity		6,438.9			5,735.2
Total liabilities and stockholders' equity	$	17,779.2		$	15,664.2

See Condensed Notes to Consolidated Financial Statements.

3

VALERO ENERGY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Millions of Dollars, Except per Share Amounts) (Unaudited)
	Three Months Ended March 31,
	2004			2003
Operating revenues	$	11,081.5		$	9,693.1
Costs and expenses:
Cost of sales		9,758.9			8,582.7
Refining operating expenses		496.4			389.2
Retail selling expenses		165.1			171.2
Administrative expenses		83.2			74.8
Depreciation and amortization expense		140.7			117.1
Total costs and expenses		10,644.3			9,335.0
Operating income		437.2			358.1
Equity in earnings of Valero L.P.		9.8			1.5
Other income (expense), net		(0.1	)		0.3
Interest and debt expense:
Incurred		(71.1	)		(79.0	)
Capitalized		9.3			3.9
Minority interest in net income of Valero L.P.		-			(2.4	)
Distributions on preferred securities of
subsidiary trusts		-			(7.5	)
Income before income tax expense		385.1			274.9
Income tax expense		137.0			104.5
Net income		248.1			170.4
Preferred stock dividends		3.1			-
Net income applicable to common stock	$	245.0		$	170.4
Earnings per common share		$ 1.95			$ 1.58
Weighted-average common shares outstanding
(in millions)		125.8			107.7
Earnings per common share
- assuming dilution		$ 1.82			$ 1.51
Weighted-average common equivalent shares
outstanding (in millions)		136.1			112.8
Dividends per common share		$ 0.12			$ 0.10

See Condensed Notes to Consolidated Financial Statements.

4

VALERO ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Millions of Dollars)
(Unaudited)

	Three Months Ended March 31,
	2004			2003
Cash flows from operating activities:
Net income	$	248.1		$	170.4
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization expense		140.7			117.1
Equity in earnings of Valero L.P. in excess of distributions		(0.1	)		(1.5	)
Minority interest in net income of Valero L.P.		-			2.4
Noncash interest expense and other income, net		2.4			4.8
Deferred income tax expense		98.2			58.2
Changes in current assets and current liabilities		(81.8	)		135.0
Changes in deferred charges and credits and other, net		(77.9	)		16.8
Net cash provided by operating activities		329.6			503.2
Cash flows from investing activities:
Capital expenditures		(246.0	)		(127.9	)
Deferred turnaround and catalyst costs		(120.4	)		(27.3	)
Exercise of purchase options under structured lease arrangements		(567.1	)		-
Aruba Acquisition, net of cash acquired		(567.3	)		-
Proceeds from contribution and sale of assets to Valero L.P.		-			350.0
Contingent payments in connection with acquisitions		(8.7	)		-
Proceeds from dispositions of property, plant and equipment		6.6			-
Minor acquisitions and other investing activities, net		(1.6	)		(9.2	)
Net cash provided by (used in) investing activities		(1,504.5	)		185.6
Cash flows from financing activities:
Decrease in short-term debt, net		-			(153.0	)
Repayment of capital lease obligations		(0.1	)		(289.3	)
Long-term debt borrowings, net of issuance costs		2,520.1			449.6
Long-term debt repayments		(1,909.0	)		(456.5	)
Proceeds from the issuance of common units by Valero L.P.,
net of issuance costs		-			200.3
Cash distributions to minority interest in Valero L.P.		-			(3.6	)
Proceeds from the sale of common stock, net of issuance costs		405.9			250.2
Issuance of common stock in connection with employee benefit plans		60.6			30.5
Common stock dividends		(15.5	)		(10.7	)
Preferred stock dividends		(1.3	)		-
Purchase of treasury stock		(12.1	)		(4.3	)
Net cash provided by financing activities		1,048.6			13.2
Valero L.P.'s cash balance as of the date (March 18, 2003) that
Valero ceased consolidation of Valero L.P.		-			(336.1	)
Effect of foreign exchange rate changes on cash		(3.9	)		(3.9	)
Net increase (decrease) in cash and temporary cash investments		(130.2	)		362.0
Cash and temporary cash investments at beginning of period		369.2			378.9
Cash and temporary cash investments at end of period	$	239.0		$	740.9

See Condensed Notes to Consolidated Financial Statements.

5

VALERO ENERGY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Millions of Dollars) (Unaudited)
	Three Months Ended March 31,
	2004			2003
Net income		$ 248.1			$ 170.4
Other comprehensive income (loss):
Foreign currency translation adjustment		(11.1	)		50.1
Net gain on derivative instruments
designated and qualifying as cash flow hedges:
Net gain arising during the period,
net of income tax expense of $8.4 and $3.7		15.6			6.8
Net gain reclassified into income,
net of income tax expense of $4.3 and $0.7		(7.9	)		(1.3	)
Net gain on cash flow hedges		7.7			5.5
Other comprehensive income (loss)		(3.4	)		55.6
Comprehensive income		$ 244.7			$ 226.0

See Condensed Notes to Consolidated Financial Statements.

6

VALERO ENERGY CORPORATION AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

As used in this report, the term Valero may refer to Valero Energy Corporation, one or more of its consolidated subsidiaries, or all of them taken as a whole.

These unaudited consolidated financial statements include the accounts of Valero and subsidiaries in which it has a controlling interest. Intercompany balances and transactions have been eliminated in consolidation. Investments in 50% or less owned entities are accounted for using the equity method of accounting.

These unaudited consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X of the Securities Exchange Act of 1934. Accordingly, they do not include all of the information and notes required by United States generally accepted accounting principles (GAAP) for complete consolidated financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. Financial information for the three months ended March 31, 2004 and 2003 included in the Condensed Notes to Consolidated Financial Statements is derived from Valero's unaudited consolidated financial statements. Operating results for the three months ended March 31, 2004 are not necessarily indicative of the results that may be expected for the year ending December 31, 2004.

The consolidated balance sheet as of December 31, 2003 has been derived from the audited financial statements as of that date. For further information, refer to the consolidated financial statements and notes thereto included in Valero’s Annual Report on Form 10-K for the year ended December 31, 2003.

Certain previously reported amounts have been reclassified to conform to the 2004 presentation.

2. ACCOUNTING PRONOUNCEMENTS

FASB Staff Position 106-1
In January 2004, the Financial Accounting Standards Board (FASB) issued FASB Staff Position No. FAS 106-1, “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003,” which permits the sponsor of a postretirement health care plan that provides a prescription drug benefit to make a one-time election to defer accounting for the effects of the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the Act), including the effect of a federal subsidy provided for in the Act. The guidance of Staff Position No. FAS 106-1 is effective for interim or annual financial statements of fiscal years ending after December 7, 2003. Valero sponsors a postretirement health care plan that provides prescription drug benefits. As of December 31, 2003, Valero made the one-time election to defer recognition of the effects of the Act in accounting for its accumulated postretirement benefit obligation and net periodic postretirement benefit cost related to its postretirement health care plan. That election may not be changed, and the deferral continues to apply until authoritative guidance on accounting for the Act, including the federal subsidy, is issued, or until a significant event occurs that ordinarily would call for remeasurement of the Plan’s assets and obligations. Specific authoritative guidance on accounting for the Act, including the federal subsidy, is expected in the second quarter of 2004 and the guidance, when issued, could require Valero to revise previously reported information.

7

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

3. ACQUISITIONS

Aruba Acquisition
On March 5, 2004, Valero completed the purchase of El Paso Corporation’s 315,000 barrel-per-day refinery located on the island of Aruba in the Caribbean Sea (Aruba Refinery), and related marine, bunkering and marketing operations (collectively, Aruba Acquisition). The purchase price was $465 million plus $162 million for working capital, based on estimated amounts at closing that are subject to adjustment as set out in the purchase agreement. The working capital amount excluded certain inventories owned by a third-party marketing firm under an agreement in existence on the date of acquisition, which Valero acquired upon termination of the agreement on May 4, 2004 for $67.8 million. Consideration for the purchase was in the form of $200 million in cash, approximately $21 million in borrowings under Valero’s existing bank credit facilities and approximately $406 million in net proceeds from the sale of 7.8 million shares of Valero common stock through a public offering discussed in Note 8 under “Common Stock Offering.” The additional inventory purchased from the third-party marketing firm described above was funded through borrowings under Valero’s existing bank credit facilities. The results of operations of the Aruba Refinery are non-taxable through December 31, 2011.

Valero’s management believes that the acquisition of the Aruba Refinery strengthens Valero’s geographic and product diversification and will ensure a more secure supply of intermediate feedstocks and blendstocks to certain of its other refineries. Valero’s management also believes that the Aruba Acquisition increases Valero’s potential ability to take advantage of positive heavy sour crude oil fundamentals.

The purchase price was allocated based on estimated fair values of the assets acquired and the liabilities assumed at the date of acquisition, pending the completion of an independent appraisal and other evaluations. As of March 31, 2004, the preliminary purchase price allocation, including transaction costs related to the acquisition, was as follows (in millions):

Current assets	$ 297.0
Property, plant and equipment	469.0
Current liabilities	(135.4	)
Capital lease obligations, less current portion	(3.2	)
Total purchase price	627.4
Less unrestricted cash acquired	(60.1	)
Purchase price, excluding unrestricted
cash acquired	$ 567.3

St. Charles Acquisition
On July 1, 2003, Valero completed the acquisition of the St. Charles Refinery (St. Charles Acquisition) from Orion Refining Corporation. Total consideration for the purchase, including various transaction costs incurred, was $510.4 million and included the issuance of 10 million shares of mandatory convertible preferred stock with a fair value of $22 per share. The purchase agreement required 844,000 shares to be held in escrow pending the satisfaction of certain conditions. The purchase agreement also provided for the assumption of certain environmental and regulatory obligations as well as for potential earn-out payments as discussed in Note 15 under “Contingent Earn-Out Agreements.” As of December 31, 2003, the escrowed shares had been converted to cash which was held in escrow and was

8

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

reflected in “restricted cash” in the consolidated balance sheets. In January 2004, Valero released $8.7 million of the escrowed cash as prescribed by the purchase agreement.

In accordance with Statement No. 141, “Business Combinations,” the potential earn-out payments discussed above, or a portion of such potential payments, are required to be accrued as part of the business combination if the net fair value of the assets acquired and liabilities assumed exceeds the cost of the acquisition. Since the net fair value of the St. Charles Refinery will not be known until the completion of the pending independent appraisal and other evaluations, no potential earn-out payments have been recorded as of March 31, 2004.

Unaudited Pro Forma Financial Information
The following unaudited pro forma financial information assumes that the Aruba Acquisition occurred on January 1, 2004 and 2003 and the St. Charles Acquisition occurred on January 1, 2003. This pro forma information assumes:

o    7.8 million shares of common stock were sold and approximately $21 million of debt was incurred in connection with the Aruba Acquisition on January 1, 2004 and 2003, and

o    10 million shares of mandatory convertible preferred stock were issued in connection with the St. Charles Acquisition on January 1, 2003.

This pro forma financial information is not necessarily indicative of the results of future operations (in millions, except per share amounts):

	Three Months Ended March 31,
	2004		2003
Operating revenues	$	11,552.9	$	10,850.9
Operating income		421.8		316.2
Net income		231.4		150.8
Earnings per common share		1.77		1.29
Earnings per common share - assuming dilution		1.66		1.19

4. INVENTORIES

Inventories consisted of the following (in millions):

	March 31, 2004		December 31, 2003
Refinery feedstocks	$	1,164.1	$	738.2
Refined products and blendstocks		1,033.9		954.2
Convenience store merchandise		81.9		82.3
Materials and supplies		164.4		138.4
Inventories	$	2,444.3	$	1,913.1

As of March 31, 2004 and December 31, 2003, the replacement cost of LIFO inventories exceeded their LIFO carrying values by approximately $1.1 billion and $666 million, respectively.

9

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

5. INVESTMENT IN AND TRANSACTIONS WITH VALERO L.P.

As of March 31, 2004 and December 31, 2003, Valero owned approximately 45.6% and 45.7%, respectively, of Valero L.P., a limited partnership that owns and operates crude oil and refined product pipeline, terminalling and storage tank assets. Financial information reported by Valero L.P. is summarized below (in millions):

	Three Months Ended March 31,
	2004		2003
Revenues		$  52.3		$  31.8
Operating income		24.5		14.0
Net income		20.0		12.4

Valero provides Valero L.P. with the corporate functions of legal, accounting, treasury, engineering, information technology and other services for an annual fee (Administrative Fee) originally established at $5.2 million through July 2008. On March 11, 2004, an amendment to the Administrative Fee between Valero L.P. and Valero was approved. Under the amendment, which became effective on April 1, 2004, the new Administrative Fee is equal to the actual cost of Valero’s corporate employees dedicated to Valero L.P. matters (which is expected to total approximately $5.6 million annually and is charged directly to Valero L.P.) plus an annual fee of $1.2 million. The annual fee of $1.2 million will be increased by $1.2 million per year over the next four years. Also on March 11, 2004, the Board of Directors of Valero agreed that the general partner’s distribution provided for in Valero L.P.’s partnership agreement, including incentive distributions, would be capped at 25% for all distributions in excess of $0.66 per unit per quarter. Valero L.P. also amended its partnership agreement to reduce the minimum vote required to remove the general partner from 58% to a simple majority of Valero L.P.’s outstanding common and subordinated units, excluding the units held by affiliates of Valero.

6. LONG-TERM DEBT

On March 22, 2004, Valero issued $200 million of 3.50% Senior Notes due April 1, 2009 and $200 million of 4.75% Senior Notes due April 1, 2014 under its shelf registration statement. Interest is payable on April 1 and October 1 of each year beginning October 1, 2004. The notes are unsecured and are redeemable, in whole or in part, at Valero’s option. The net proceeds of this offering were used to repay borrowings under Valero’s revolving bank credit facilities.

On March 29, 2004, Valero borrowed $200 million under a five-year term loan, which matures March 31, 2009. The loan bears interest based on Valero’s debt rating, currently at LIBOR plus 75 basis points. Principal payments begin March 2007 with a $50.0 million principal payment due at that time and semi-annual payments of $37.5 million due thereafter until maturity. The net proceeds from this borrowing were used to repay borrowings under Valero’s revolving bank credit facilities.

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

7. OTHER LONG-TERM LIABILITIES

During the first quarter of 2004, other long-term liabilities decreased primarily as a result of the following:

o    In February 2004, Valero liquidated the outstanding amount of certain foreign currency exchange contracts for a net cash payment by Valero of approximately $34 million.

o    Valero contributed $25.0 million to its pension plans.

8. STOCKHOLDERS’ EQUITY

Common Stock Offering
On February 5, 2004, Valero sold in a public offering 7.8 million shares of its common stock, which included 1.0 million shares related to an overallotment option exercised by the underwriter, at a price of $53.25 per share and received proceeds, net of underwriter’s discount and commissions, of $405.9 million. These shares were issued under Valero’s shelf registration statement to partially fund the acquisition of the Aruba Refinery and related operations discussed in Note 3.

Cash Dividends
On April 29, 2004, Valero’s Board of Directors approved an increase in Valero’s quarterly cash dividend on common stock from $0.12 per share to $0.15 per share effective with the dividend payable on June 16, 2004 to holders of record at the close of business on May 19, 2004. Also on April 29, 2004, Valero’s Board of Directors declared a dividend on the mandatory convertible preferred stock of $0.125 per share payable on June 30, 2004 to holders of record on June 29, 2004.

Common Stock Purchases
Valero purchases shares of its common stock in open market transactions to meet its obligations under its employee benefit plans. Valero also purchases shares of its common stock from its employees and non-employee directors in connection with the exercise of stock options, the vesting of restricted stock and other stock compensation transactions. During the three months ended March 31, 2004 and 2003, Valero purchased 0.2 million and 0.1 million shares of its common stock at a cost of $12.1 million and $4.3 million, respectively. During April 2004, Valero purchased in the open market 2.6 million shares of its common stock at a cost of $154.3 million to be used to satisfy Valero’s obligations under its employee benefit plans.

11

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

9. EARNINGS PER COMMON SHARE

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

	Three Months Ended March 31,
	2004		2003
Earnings per Common Share:
Net income		$ 248.1		$ 170.4
Preferred stock dividends		3.1		-
Net income applicable to common stock		$ 245.0		$ 170.4
Weighted-average common shares outstanding		125.8		107.7
Earnings per common share		$ 1.95		$ 1.58
Earnings per Common Share - Assuming Dilution:
Net income applicable to common equivalent shares		$ 248.1		$ 170.4
Weighted-average common shares outstanding		125.8		107.7
Effect of dilutive securities:
Stock options		3.9		2.9
Performance awards and other benefit plans		1.4		1.5
PEPS Units		-		0.7
Mandatory convertible preferred stock		5.0		-
Weighted-average common equivalent
shares outstanding		136.1		112.8
Earnings per common share - assuming dilution		$ 1.82		$ 1.51

The following table reflects outstanding stock options that were not included in the computation of dilutive securities because the options’ exercise prices were greater than the average market price of the common shares during the reporting period, and therefore the effect of including such options would be anti-dilutive (in millions):

	Three Months Ended March 31,
	2004		2003
Stock options		-		0.3

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

10. STATEMENTS OF CASH FLOWS

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

	Three Months Ended March 31,
	2004			2003
Decrease (increase) in current assets:
Restricted cash	$	9.1		$	0.4
Receivables, net		(307.6	)		(129.0	)
Inventories		(344.8	)		(153.9	)
Prepaid expenses and other		(2.1	)		(26.8	)
Increase (decrease) in current liabilities:
Accounts payable		606.3			388.3
Accrued expenses		(26.0	)		11.9
Taxes other than income taxes		10.9			40.3
Income taxes payable		(27.6	)		3.8
Changes in current assets and current liabilities	$	(81.8	)	$	135.0

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:

o    The amounts shown above exclude changes in cash and temporary cash investments, deferred income taxes, and current portion of long-term debt and capital lease obligations.

o    The amounts shown above exclude the current assets and current liabilities acquired in connection with the Aruba Acquisition in 2004, which are reflected separately in the consolidated statement of cash flows, and the effect of certain noncash investing activities discussed below.

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

There were no significant noncash investing or financing activities for the three months ended March 31, 2004. For the three months ended March 31, 2003, noncash investing activities included:

o    the recognition of a $30.0 million asset retirement obligation and associated asset retirement cost in accordance with Statement No. 143, "Accounting for Asset Retirement Obligations," and

o    adjustments to property, plant and equipment, accumulated depreciation, and certain current and noncurrent assets and liabilities associated with the ceasing of consolidation of Valero L.P. and the use of the equity method to account for Valero's investment in Valero L.P. effective March 18, 2003.

13

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

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

	Three Months Ended March 31,
	2004		2003
Interest paid (net of amount capitalized)		$ 21.9		$ 31.1
Income taxes paid		73.2		43.6
Income tax refunds received		2.0		0.2

11. PRICE RISK MANAGEMENT ACTIVITIES

Interest Rate Risk
On March 25, 2004, Valero entered into additional interest rate swap contracts with a total notional amount of $200 million. These interest rate swap contracts currently have an estimated pay rate of 1.72% and hedge $200 million of debt with an interest rate of 4.75%.

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

	Three Months Ended March 31,
	2004			2003
Fair value hedges		$ 3.3			$ 3.8
Cash flow hedges		(6.8	)		0.7

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.

The estimated amount of existing net gain included in “accumulated other comprehensive income” as of March 31, 2004 that is expected to be reclassified into income within the next 12 months was $10.5 million. As of March 31, 2004, the maximum length of time over which Valero was hedging its exposure to the variability in future cash flows for forecasted transactions was 21 months, with the majority of the transactions maturing in less than one year. For the three months ended March 31, 2004 and 2003, there were no amounts reclassified from “accumulated other comprehensive income” into income as a result of the discontinuance of cash flow hedge accounting.

14

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

12. SEGMENT INFORMATION

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

	Refining		Retail		Corporate			Total
Three months ended March 31, 2004:
Operating revenues from external customers	$	9,655.1	$	1,426.4	$	-		$	11,081.5
Intersegment revenues		837.9		-		-			837.9
Operating income (loss)		494.8		34.7		(92.3	)		437.2
Three months ended March 31, 2003:
Operating revenues from external customers		8,208.4		1,484.7		-			9,693.1
Intersegment revenues		806.8		-		-			806.8
Operating income (loss)		390.7		46.8		(79.4	)		358.1

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

	March 31, 2004		December 31, 2003
Refining		$ 15,020.1		$ 13,013.1
Retail		1,590.6		1,548.2
Corporate		1,168.5		1,102.9
Total consolidated assets		$ 17,779.2		$ 15,664.2

The entire balance of goodwill as of March 31, 2004 and December 31, 2003 has been included in the total assets of the refining reportable segment.

13. STOCK-BASED COMPENSATION

Valero accounts for its employee stock compensation plans using the intrinsic value method of accounting set forth in APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations as permitted by Statement No. 123, “Accounting for Stock-Based Compensation.”

Because Valero accounts for its employee stock compensation plans using the intrinsic value method, compensation cost is not recognized in the consolidated statements of income for Valero’s fixed stock option plans as all options granted had an exercise price equal to the market value of the underlying common stock on the date of grant. Had compensation cost for Valero’s fixed stock option plans been determined based on the grant-date fair value of awards consistent with the method set forth in Statement No. 123, Valero’s net income applicable to common stock, net income and earnings per common share,

15

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

both with and without dilution, for the three months ended March 31, 2004 and 2003 would have been reduced to the pro forma amounts indicated below (in millions, except per share amounts):

	Three Months Ended March 31,
	2004			2003
Net income applicable to common stock, as reported		$ 245.0			$ 170.4
Deduct: Compensation expense on
stock options determined under
fair value method for all awards,
net of related tax effects		(4.3	)		(4.6	)
Pro forma net income applicable to common stock		$ 240.7			$ 165.8
Earnings per common share:
As reported		$ 1.95			$ 1.58
Pro forma		$ 1.91			$ 1.54
Net income, as reported		$ 248.1			$ 170.4
Deduct: Compensation expense on
stock options determined under
fair value method for all awards,
net of related tax effects		(4.3	)		(4.6	)
Pro forma net income		$ 243.8			$ 165.8
Earnings per common share - assuming dilution:
As reported		$ 1.82			$ 1.51
Pro forma		$ 1.79			$ 1.47

14. EMPLOYEE BENEFIT PLANS

The components of net periodic benefit cost related to Valero’s defined benefit plans were as follows for the three months ended March 31, 2004 and 2003 (in millions):

	Pension Plans						Other Postretirement Benefit Plans
	2004			2003			2004			2003
Components of net periodic benefit cost:
Service cost		$ 13.8			$ 11.7			$ 1.9			$ 2.8
Interest cost		12.2			11.3			4.0			4.7
Expected return on plan assets		(10.4	)		(9.4	)		-			-
Amortization of:
Prior service cost		0.6			0.7			(1.8	)		0.4
Net loss		1.2			0.9			1.8			1.1
Net periodic benefit cost		$ 17.4			$ 15.2			$ 5.9			$ 9.0

Valero’s anticipated contributions to its pension plans during 2004 have not changed significantly from amounts previously disclosed in Valero’s consolidated financial statements for the year ended

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

December 31, 2003. Valero has no minimum required contributions to its pension plans during 2004 under the Employee Retirement Income Security Act. For the three months ended March 31, 2004 and 2003, Valero contributed $25.0 million and $11.0 million, respectively, to its qualified pension plans.

15. COMMITMENTS AND CONTINGENCIES

Accounts Receivable Sales Facility
As of March 31, 2004, Valero had an accounts receivable sales facility with three third-party financial institutions to sell on a revolving basis up to $600 million of eligible trade and credit card receivables, which matures in October 2005. As of March 31, 2004 and December 31, 2003, the amount of eligible receivables sold to the third-party financial institutions was $600 million.

Structured Lease Arrangements
As of December 31, 2003, Valero had various long-term operating lease commitments that were funded through structured lease arrangements with non-consolidated third-party entities. For each lease, Valero had the option to purchase the leased assets at any time during the lease term for a price that approximated fair value. In March 2004, Valero exercised its option to purchase the leased properties under each of its four remaining structured lease arrangements. The leased properties, which totaled $567.1 million, were purchased through borrowings under Valero’s existing bank credit facilities.

Guarantees
In connection with the sale of the Golden Eagle Business in 2002, Valero guaranteed certain lease payment obligations related to a lease assumed by Tesoro Refining and Marketing Company, which totaled approximately $40 million as of March 31, 2004. This lease expires in 2010.

Contingent Earn-Out Agreements
In connection with Valero’s acquisitions of Basis Petroleum, Inc. in 1997 and the St. Charles Refinery in 2003, the sellers are entitled to receive payments in any of the ten years and seven years, respectively, following these acquisitions if certain average refining margins during any of those years exceed a specified level. No earn-out payments were made during the three months ended March 31, 2004 and 2003. The following table summarizes the payment limitations for these acquisitions (in millions):

	Basis Petroleum, Inc.		St. Charles Refinery
Aggregate payments made through
March 31, 2004	$	104.2	$	-
Annual maximum limit		35.0		50.0
Aggregate limit		200.0		175.0

Sale of Headquarters Facility
On January 20, 2004, Valero finalized an agreement to sell both of its current headquarters buildings for $27.3 million. Valero expects to complete the sale of the buildings by the end of the second quarter of 2004. Since the carrying value of these buildings was written down to their fair values less selling costs in the fourth quarter of 2003, no gain or loss is expected to be recognized in 2004 related to the disposition of these buildings.

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

Environmental Matters
The Environmental Protection Agency’s (EPA) Tier II Gasoline and Diesel Standards. The EPA’s Tier II standards, adopted under the Clean Air Act, phase in limitations on the sulfur content of gasoline beginning in 2004 and the sulfur content of diesel fuel sold to highway consumers beginning in 2006. Modifications will be required at most of Valero’s refineries as a result of the Tier II gasoline and diesel standards. Valero believes that capital expenditures of approximately $1.5 billion will be required through 2006 for Valero to meet the Tier II specifications, of which approximately $550 million was expended through March 31, 2004. The aggregate estimate of expenditures includes amounts related to projects at two Valero refineries to provide hydrogen as part of the process of removing sulfur from gasoline and diesel. Valero expects that such estimates will change as additional engineering is completed and progress is made toward construction of these various projects. Factors that will affect the impact of these regulations on Valero include its ultimate selection of specific technologies to meet the Tier II standards and uncertainties related to timing, permitting and construction of specific units. Valero expects to meet all Tier II gasoline and diesel standards by their respective effective dates.

EPA’s Section 114 Initiative. In 2000, the EPA issued to a majority of refiners operating in the United States a series of information requests pursuant to Section 114 of the Clean Air Act as part of an enforcement initiative. Valero received a Section 114 information request pertaining to all of its refineries owned at that time. Valero has completed its response to the request. Several other refiners have reached settlements with the EPA regarding this enforcement initiative. Though Valero has not been named in any proceeding, it has been discussing the possibility of settlement with the EPA regarding this initiative. Based in part upon announced settlements and evaluation of its relative position, Valero expects to incur penalties and related expenses in connection with a potential settlement of this enforcement initiative. Valero believes that any potential settlement penalties will be immaterial to its results of operations and financial position. However, Valero believes that any potential settlement with the EPA in this matter will require various capital improvements or changes in operating parameters, or both, at some or all of its refineries which could be material in the aggregate.

Houston/Galveston SIP.     Valero’s Houston and Texas City Refineries are located in the Houston/Galveston area, which is classified as “severe nonattainment” for compliance with EPA air-quality standards for ozone. In October 2001, the EPA approved a State Implementation Plan (SIP) to bring the Houston/Galveston area into compliance with the EPA’s ozone standards by 2007. The EPA-approved plan was based on a requirement for industry sources to reduce emissions of nitrogen oxides (NOx) by 90% from a 1997-1999 average actual emissions baseline. Certain industry and business groups challenged the plan based on technical feasibility of the 90% NOx control and its effectiveness in meeting the ozone standard. In December 2002, the Texas Commission on Environmental Quality (TCEQ) adopted a revised approach for the Houston/Galveston SIP. This alternative plan requires an 80% reduction in NOx emissions and a 64% reduction in so-called highly reactive volatile organic compounds (HRVOC). This alternative plan is subject to EPA scrutiny and approval. Valero’s Texas City and Houston Refineries will be required to install NOx and HRVOC control and monitoring equipment and practices by 2007, at a cost estimated by Valero to be approximately $60 million based on the proposed TCEQ approach.

Litigation
Unocal
In 2002, Union Oil Company of California (Unocal) sued Valero alleging patent infringement. The complaint seeks a 5.75 cent per gallon royalty on all reformulated gasoline infringing on Unocal’s ’393

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

and ’126 patents. These patents cover certain compositions of cleaner-burning gasoline. The complaint seeks treble damages for Valero’s alleged willful infringement of Unocal’s patents and Valero’s alleged conduct to induce others to infringe the patents. In a previous lawsuit involving its ’393 patent, Unocal prevailed against five other major refiners.

In 2001, the Federal Trade Commission (FTC) began an antitrust investigation concerning Unocal’s misconduct with a joint industry research group and regulators during the time that Unocal was prosecuting its patents at the U.S. Patent and Trademark Office (PTO). In 2003, the FTC filed a complaint against Unocal for antitrust violations. The FTC’s complaint seeks an injunction against any future ’393 or ’126 patent enforcement activity by Unocal. In November 2003, an administrative law judge dismissed the FTC’s case against Unocal, which the FTC staff appealed to the full Commission. The Commission has not yet ruled on that appeal.

Each of the ’393 and ’126 patents is being reexamined by the PTO. The PTO has issued notices of rejection of all claims of each of these patents. These rejections are subject to additional proceedings, including administrative appeal by Unocal, followed by an appeal in federal district court or the court of appeals. Ultimate invalidation would preclude Unocal from pursuing claims based on the ’393 or ’126 patents.

Unocal’s patent lawsuit against Valero is indefinitely stayed as a result of the PTO reexamination proceedings. Notwithstanding the judgment against the other refiners in the previous litigation, Valero believes that it has several strong defenses to Unocal’s lawsuit, including those arising from Unocal’s misconduct, and Valero believes it will prevail in the lawsuit. However, due to the inherent uncertainty of litigation, it is reasonably possible (as defined in FASB Statement No. 5) that Valero will not prevail in the lawsuit, and an adverse result could have a material effect on Valero’s results of operations and financial position.

MTBE Litigation
Valero is a defendant in more than 60 cases pending in 16 states alleging MTBE contamination in groundwater. The plaintiffs are generally water providers, governmental authorities and private well owners alleging that refiners and suppliers of gasoline containing MTBE are liable for manufacturing or distributing a defective product. Almost all of these cases were filed on or after September 30, 2003 in anticipation of a pending federal energy bill that may contain provisions for MTBE liability protection. Valero is named in these suits together with many other refining industry companies. Valero is being sued primarily as a refiner, supplier and marketer of gasoline containing MTBE. Valero does not own or operate physical facilities in most of the states where the suits are filed. The suits generally seek individual, unquantified compensatory and punitive damages and attorneys’ fees. Valero believes that it has several strong defenses to these claims and intends to vigorously defend the lawsuits. Although an adverse result in one or more of these suits is reasonably possible (as defined in FASB Statement No. 5), Valero believes that such an outcome in any one of these suits would not have a material effect on its results of operations or financial position. However, Valero believes that an adverse result in all or a substantial number of these cases could have a material effect on Valero’s results of operations and financial position.

Other Litigation
Valero is also a party to additional claims and legal proceedings arising in the ordinary course of business. Valero believes it is unlikely that the final outcome of any of the claims or proceedings to which it is a

19

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

party would have a material adverse effect on its financial position, results of operations or liquidity; however, due to the inherent uncertainty of litigation, the range of possible loss, if any, cannot be estimated with a reasonable degree of precision and there can be no assurance that the resolution of any particular claim or proceeding would not have an adverse effect on Valero’s results of operations, financial position or liquidity.

20

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

FORWARD-LOOKING STATEMENTS

This Form 10-Q, including without limitation the discussion below under the heading “Results of Operations - Outlook,” contains certain estimates, predictions, projections, assumptions and other “forward-looking statements” (as defined in Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934) that involve various risks and uncertainties. While these forward-looking statements, and any assumptions upon which they are based, are made in good faith and reflect Valero’s current judgment regarding the direction of its business, actual results will almost always vary, sometimes materially, from any estimates, predictions, projections, assumptions or other future performance suggested in this report. These forward-looking statements can generally be identified by the words “anticipate,” “believe,” “expect,” “plan,” “intend,” “estimate,” “project,” “budget,” “forecast,” “will,” “could,” “should,” “may” and similar expressions. These forward-looking statements include, among other things, statements regarding:

o    future refining margins, including gasoline and heating oil margins;

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

o    expectations regarding feedstock costs, including crude oil discounts, and operating expenses;

o    anticipated levels of crude oil and refined product inventories;

o    Valero’s 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 Valero’s results of operations;

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

o    expectations regarding environmental and other regulatory initiatives; and

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

Valero’s forward-looking statements are based on its beliefs and assumptions derived from information available at the time the statements are made. Differences between actual results and any future performance suggested in these forward-looking statements could result from a variety of factors, including the following:

o    acts of terrorism aimed at either Valero’s facilities or other facilities that could impair Valero’s ability to produce and/or transport refined products or receive foreign feedstocks;

o    political conditions in crude oil producing regions, including the Middle East and South America;

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

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

o    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;

o    the level of consumer demand, including seasonal fluctuations;

o    refinery overcapacity or undercapacity;

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

o    environmental and other regulations at both the state and federal levels and in foreign countries;

o    the level of foreign imports of refined products;

o    accidents or other unscheduled shutdowns affecting Valero’s refineries, machinery, pipelines or equipment, or those of Valero’s suppliers or customers;

21

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

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

o    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;

o    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;

o    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;

o    the introduction or enactment of federal or state legislation which may adversely affect Valero's business or operations;

o    changes in the credit ratings assigned to Valero's debt securities and trade credit;

o    changes in the value of the Canadian dollar relative to the U.S. dollar; and

o    overall economic conditions.

Any one of these factors, or a combination of these factors, could materially affect Valero’s future results of operations and whether any forward-looking statements ultimately prove to be accurate. Valero’s 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. Valero does not intend to update these statements unless it is required by the securities laws to do so.

All subsequent written and oral forward-looking statements attributable to Valero or persons acting on its behalf are expressly qualified in their entirety by the foregoing. Valero undertakes 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.

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Overview
As of March 31, 2004, Valero, an independent refining and marketing company, owned and operated 15 refineries in the United States, Canada and Aruba with a combined throughput capacity, including crude oil and other feedstocks, of approximately 2.4 million barrels per day.

Valero markets refined products through an extensive bulk and rack marketing network and a network of more than 4,500 retail and wholesale branded outlets in the United States, Canada and Aruba under various brand names including Diamond Shamrock®, Shamrock®, Ultramar®, Valero®, and Beacon®. Valero’s operations are affected by:

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

o    seasonal factors, such as the demand for refined products; and

o    industry factors, such as movements in and the absolute price of crude oil, the demand for and prices of refined products, industry supply capacity and competitor refinery maintenance turnarounds.

Valero’s profitability is determined in large part by the spread between the price of refined products and the price of crude oil, referred to as the refined product margin. Additionally, since a significant percentage of Valero’s total throughput represents sour crude oil feedstocks, Valero’s profitability is also affected by the spread between sweet crude oil and sour crude oil prices, referred to as the sour crude oil discount. During the first quarter of 2004, refined product margins were at record levels and sour crude oil discounts were very favorable. Therefore, despite significant turnaround activity at several of Valero’s refineries, the results of operations reported for the first quarter of 2004 were very good. Valero expects the favorable industry fundamentals that resulted in the strong first quarter 2004 results to continue, as is more fully discussed in “Outlook” below.

During the first quarter of 2004, Valero continued its strategic growth through the acquisition of the Aruba Refinery, which has a throughput capacity of 315,000 barrels per day, and related marine, bunkering and marketing operations. The acquisition was partially funded through the sale of 7.8 million shares of Valero common stock in a public offering. The Aruba Refinery processes heavy, sour crude oil that generally sells at a discount to sweet crude oil. Valero believes that its acquisition of the Aruba Refinery will further enable Valero to benefit from expected wide sour crude oil discounts.

During the first quarter of 2004, Valero exercised its option to purchase the leased properties under each of the four structured lease arrangements that existed as of December 31, 2003. Valero purchased the leased properties for $567.1 million, using borrowings under its existing bank credit facilities. Valero issued $400 million of senior notes in March 2004 to refinance these borrowings under its existing bank credit facilities and to take advantage of favorable treasury rates. The notes comprise $200 million of five-year notes at a rate of 3.50% and $200 million of ten-year notes at a rate of 4.75%. Also in March 2004, Valero borrowed $200 million under a five-year term loan, which currently bears interest at LIBOR plus 75 basis points.

23

RESULTS OF OPERATIONS
 
First Quarter 2004 Compared to First Quarter 2003

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

	Three Months Ended March 31,
	2004 (a)			2003			Change
Operating revenues	$	11,081.5		$	9,693.1		$	1,388.4
Costs and expenses:
Cost of sales		9,758.9			8,582.7			1,176.2
Refining operating expenses		496.4			389.2			107.2
Retail selling expenses		165.1			171.2			(6.1	)
Administrative expenses		83.2			74.8			8.4
Depreciation and amortization expense:
Refining		117.0			100.0			17.0
Retail		14.6			12.5			2.1
Administrative		9.1			4.6			4.5
Total costs and expenses		10,644.3			9,335.0			1,309.3
Operating income		437.2			358.1			79.1
Equity in earnings of Valero L.P. (b)		9.8			1.5			8.3
Other income (expense), net		(0.1	)		0.3			(0.4	)
Interest and debt expense:
Incurred		(71.1	)		(79.0	)		7.9
Capitalized		9.3			3.9			5.4
Minority interest in net income of Valero L.P. (b)		-			(2.4	)		2.4
Distributions on preferred securities of
subsidiary trusts		-			(7.5	)		7.5
Income before income tax expense		385.1			274.9			110.2
Income tax expense		137.0			104.5			32.5
Net income		248.1			170.4			77.7
Preferred stock dividends		3.1			-			3.1
Net income applicable to common stock	$	245.0		$	170.4		$	74.6
Earnings per common share -
assuming dilution		$ 1.82			$ 1.51			$ 0.31
Earnings before interest, taxes, depreciation
and amortization (EBITDA) (c)		$ 587.6			$ 468.7			$ 118.9
Ratio of EBITDA to interest incurred (d)		8.3	x		5.9	x		2.4	x
__________
See the footnote references on page 27.

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

	Three Months Ended March 31,
	2004 (a)			2003			Change
Refining:
Operating income		$ 494.8			$ 390.7			$ 104.1
Throughput volumes (thousand barrels per day)		1,939			1,702			237
Throughput margin per barrel (e)		$ 6.28			$ 5.75			$ 0.53
Operating costs per barrel:
Refining operating expenses		$ 2.81			$ 2.54			$ 0.27
Depreciation and amortization		0.67			0.66			0.01
Total operating costs per barrel		$ 3.48			$ 3.20			$ 0.28
Charges:
Crude oils:
Sour		44	%		46	%		(2	)%
Sweet		34			35			(1	)
Total crude oils		78			81			(3	)
Residual fuel oil		5			4			1
Other feedstocks and blendstocks		17			15			2
Total charges		100	%		100	%		-	%
Yields:
Gasolines and blendstocks		50	%		53	%		(3	)%
Distillates		29			29			-
Petrochemicals		4			3			1
Lubes and asphalts		3			4			(1	)
Other products		14			11			3
Total yields		100	%		100	%		-	%
Retail - U.S.:
Operating income		$ 3.1			$ 7.5			$ (4.4	)
Company-operated fuel sites (average)		1,137			1,248			(111	)
Fuel volumes (gallons per day per site)		4,513			4,272			241
Fuel margin per gallon		$ 0.095			$ 0.121			$ (0.026	)
Merchandise sales		$ 216.8			$ 214.8			$ 2.0
Merchandise margin (percentage of sales)		28.8	%		28.7	%		0.1	%
Margin on miscellaneous sales		$ 23.1			$ 21.8			$ 1.3
Retail selling expenses		$ 118.1			$ 126.5			$ (8.4	)
Retail - Northeast:
Operating income		$ 31.6			$ 39.3			$ (7.7	)
Fuel volumes (thousand gallons per day)		3,392			3,706			(314	)
Fuel margin per gallon		$ 0.233			$ 0.237			$ (0.004	)
Merchandise sales		$ 30.6			$ 24.4			$ 6.2
Merchandise margin (percentage of sales)		23.5	%		21.5	%		2.0	%
Margin on miscellaneous sales		$ 5.0			$ 4.7			$ 0.3
Retail selling expenses		$ 47.0			$ 44.7			$ 2.3

______________
See the footnote references on page 27.

25

Refining Operating Highlights by Region (f)

	Three Months Ended March 31,
	2004 (a)		2003		Change
Gulf Coast:
Operating income		$ 272.8		$ 135.9		$ 136.9
Throughput volumes (thousand barrels per day)		1,007		765		242
Throughput margin per barrel (e)		$ 6.56		$ 5.39		$ 1.17
Operating costs per barrel:
Refining operating expenses		$ 2.91		$ 2.75		$ 0.16
Depreciation and amortization		0.67		0.67		-
Total operating costs per barrel		$ 3.58		$ 3.42		$ 0.16
Mid-Continent:
Operating income		$ 47.5		$ 39.5		$ 8.0
Throughput volumes (thousand barrels per day)		289		256		33
Throughput margin per barrel (e)		$ 4.99		$ 4.96		$ 0.03
Operating costs per barrel:
Refining operating expenses		$ 2.63		$ 2.63		$         -
Depreciation and amortization		0.55		0.61		(0.06	)
Total operating costs per barrel		$ 3.18		$ 3.24		$ (0.06	)
Northeast:
Operating income		$ 122.0		$ 119.2		$ 2.8
Throughput volumes (thousand barrels per day)		387		368		19
Throughput margin per barrel (e)		$ 5.78		$ 5.68		$ 0.10
Operating costs per barrel:
Refining operating expenses		$ 1.78		$ 1.58		$ 0.20
Depreciation and amortization		0.53		0.50		0.03
Total operating costs per barrel		$ 2.31		$ 2.08		$ 0.23
West Coast:
Operating income		$ 52.5		$ 96.1		$ (43.6	)
Throughput volumes (thousand barrels per day)		256		313		(57	)
Throughput margin per barrel (e)		$ 7.41		$ 7.34		$ 0.07
Operating costs per barrel:
Refining operating expenses		$ 4.18		$ 3.09		$ 1.09
Depreciation and amortization		0.98		0.83		0.15
Total operating costs per barrel		$ 5.16		$ 3.92		$ 1.24

______________
See the footnote references on page 27.

26

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

	Three Months Ended March 31,
	2004		2003		Change
Feedstocks:
West Texas Intermediate (WTI) crude oil		$ 35.24		$ 34.07		$ 1.17
WTI less sour crude oil at U.S. Gulf Coast (h)		3.73		3.28		0.45
WTI less Alaska North Slope (ANS) crude oil		1.09		0.82		0.27
WTI less Maya crude oil		9.38		7.64		1.74
Products:
U.S. Gulf Coast:
Conventional 87 gasoline less WTI		8.22		5.81		2.41
No. 2 fuel oil less WTI		2.65		5.20		(2.55	)
Propylene less WTI		9.15		1.93		7.22
U.S. Mid-Continent:
Conventional 87 gasoline less WTI		8.33		6.13		2.20
Low-sulfur diesel less WTI		4.09		6.04		(1.95	)
U.S. Northeast:
Conventional 87 gasoline less WTI		8.69		5.50		3.19
No. 2 fuel oil less WTI		4.02		8.10		(4.08	)
Lube oils less WTI		24.31		19.02		5.29
U.S. West Coast:
CARBOB 87 gasoline less ANS		16.55		14.37		2.18
Low-sulfur diesel less ANS		9.92		7.15		2.77
_________________________________________________

The following notes relate to references on pages 24 through 27.

   (a) Includes the operations related to the St. Charles and Aruba Acquisitions, which were acquired on July 1, 2003 and March 5, 2004, respectively.

   (b) On March 18, 2003, Valero’s ownership interest in Valero L.P. decreased from 73.6% to 49.5%. As a result of this decrease in ownership of Valero L.P. combined with certain other partnership governance changes, Valero ceased consolidating Valero L.P. as of that date and began using the equity method to account for its investment in the partnership.

   (c) EBITDA is a non-GAAP measure. The reconciliation of net income to EBITDA is included in “Results of Operations – Corporate Expenses and Other ” on page 30.

   (d) The ratio of EBITDA to interest incurred is a non-GAAP measure. The calculation for this ratio is included in "Results of Operations – Corporate Expenses and Other" on page 30.

   (e) Throughput margin per barrel represents operating revenues less cost of sales divided by throughput volumes.

   (f) The Gulf Coast refining region includes the Corpus Christi East, Corpus Christi West, Texas City, Houston, Three Rivers, Krotz Springs, St. Charles and Aruba Refineries; the Mid-Continent refining region includes the McKee, Ardmore and Denver Refineries; the Northeast refining region includes the Quebec and Paulsboro Refineries; and the West Coast refining region includes the Benicia and Wilmington Refineries.

   (g) The average market reference prices and differentials, with the exception of the propylene and lube oil differentials, are based on posted prices from Platt’s 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 CARBOB 87 gasoline differential for 2003 represents CARB 87 gasoline through October 31, 2003, which includes MTBE as a blending component. Prices for products meeting these specificiations ceased to be available after October 31, 2003. The average market prices and differentials are presented to provide users of the consolidated financial statements with economic indicators that significantly affect Valero’s operations and profitability.

   (h) The market reference differential for sour crude oil is based on 50% Arab Medium and 50% Arab Light posted prices.

27

General

Valero’s net income for the three months ended March 31, 2004 was $248.1 million, or $1.82 per share, compared to net income of $170.4 million, or $1.51 per share, for the three months ended March 31, 2003.

Operating revenues increased 14% for the first quarter of 2004 compared to the first quarter of 2003 primarily as a result of higher refined product prices combined with additional throughput volumes from refinery operations. Operating income increased $79.1 million from the first quarter of 2003 to the first quarter of 2004 due to a $104.1 million increase in the refining segment, offset by a $12.1 million decrease in the retail segment and a $12.9 million increase in administrative expenses (including related depreciation and amortization expense).

Refining

Operating income for Valero’s refining segment increased from $390.7 million for the first quarter of 2003 to $494.8 million for the first quarter of 2004, resulting from a 14% increase in throughput volumes and an increase in refining throughput margin of $0.53 per barrel, or 9%.

The increase in total throughput margin in 2004 was due to the following factors:

o    Gasoline margins increased in all of Valero’s refining regions in the first quarter of 2004 compared to the first quarter of 2003 due to strong gasoline demand and lower inventory levels. Gasoline demand is up significantly in 2004 primarily due to strong U.S. and global economic activity and the continued growth of SUV and light truck ownership. Inventory levels have declined due to the strong demand, industry-wide refinery turnaround activity and lower imports.

o    Discounts on Valero’s sour crude oil feedstocks during the first quarter of 2004 improved compared to the first quarter of 2003 due to ample supplies of sour crude oils and heavy sour residual fuel oils on the world market. In addition, the Tier II gasoline regulations have caused an increased demand for sweet crude oil by less complex refineries in order to lower the sulfur content of the gasoline they produce.

o    Petrochemical feedstock margins improved significantly in the first quarter of 2004 compared to the first quarter of 2003 due to increased demand for such feedstocks resulting from a stronger worldwide economy.

o    Throughput volumes increased in the first quarter of 2004 primarily due to the operations of the St. Charles and Aruba Refineries, which were acquired in July 2003 and March 2004, respectively.

Partially offsetting the above increases in throughput margin were lower distillate margins, an approximate $20 million reduction due to Valero ceasing consolidation of Valero L.P. in March 2003, and increased downtime resulting primarily from turnaround activity. Distillate margins declined in February and March 2004 primarily due to lower demand and above-average import levels. The downtime included both the completion of planned turnarounds at several Valero refineries, including the Wilmington, Benicia, Houston and St. Charles Refineries, and increased maintenance, which reduced throughput volumes during the quarter.

Refining operating expenses were 28% higher for the quarter ended March 31, 2004 compared to the quarter ended March 31, 2003 due primarily to the acquisition of the St. Charles and Aruba Refineries, higher maintenance expenses as discussed above and increases in employee compensation, including variable compensation. However, due to an increase in throughput volumes between the periods, the increase in operating costs on a per-barrel basis was 11%. Refining depreciation and amortization

28

expense increased 17% from the first quarter of 2003 to the first quarter of 2004 due to additional depreciation expense resulting from the acquisitions of the St. Charles and Aruba Refineries, capital additions and increased turnaround and catalyst amortization.

Retail

Retail operating income was $34.7 million for the quarter ended March 31, 2004 compared to $46.8 million for the quarter ended March 31, 2003. The decrease in retail operating income was due to lower retail fuel margins in the U.S. caused by a rapid rise in crude oil prices during the quarter which could not be fully passed through to consumers, as well as a decrease in fuel sales in the Northeast due mainly to the disposition of a portion of Valero’s home heating oil business in the second half of 2003.

Corporate Expenses and Other

Administrative expenses, including depreciation and amortization expense, increased $12.9 million for the quarter ended March 31, 2004 compared to the quarter ended March 31, 2003. Employee compensation and benefits, including variable compensation, increased approximately $11 million between the quarters.

Equity in earnings of Valero L.P. represents Valero’s equity interest in the earnings of Valero L.P. after March 18, 2003. On March 18, 2003, Valero’s ownership interest in Valero L.P. decreased from 73.6% to 49.5%. As a result of this decrease in ownership of Valero L.P. combined with certain other partnership governance changes, Valero ceased consolidating Valero L.P. as of that date and began using the equity method to account for its investment in Valero L.P. The minority interest in net income of Valero L.P. represented the minority unitholders’ share of the net income of Valero L.P. during the period that Valero consolidated such operations.

Net interest and debt expense decreased $13.3 million for the quarter ended March 31, 2004 compared to the quarter ended March 31, 2003 primarily due to:

o    a decrease in average borrowings outstanding during the quarter resulting in large part from the contribution and sale of assets to Valero L.P. during 2003,

o    a decrease in the average interest rate on borrowings, and

o    an increase in capitalized interest resulting from an increased amount of construction projects, including the Cameron Highway Oil Pipeline Project.

Distributions on preferred securities of subsidiary trusts decreased $7.5 million from the quarter ended March 31, 2003 to the quarter ended March 31, 2004 due to the redemption of the 8.32% Trust Originated Preferred Securities in June 2003 and the settlement of the Premium Equity Participating Security Units in August 2003.

Income tax expense increased $32.5 million from the first quarter of 2003 to the first quarter of 2004 mainly as a result of higher operating income. Valero’s effective tax rate for the quarter ended March 31, 2004 decreased from the quarter ended March 31, 2003 as the results of operations of the Aruba Refinery are non-taxable through December 31, 2011.

29

The following is a reconciliation of net income to EBITDA (in millions):

	Three Months Ended March 31,
	2004		2003
Net income		$ 248.1		$ 170.4
Income tax expense		137.0		104.5
Depreciation and amortization expense		140.7		117.1
Interest and debt expense, net		61.8		75.1
Other amortizations		-		1.6
EBITDA		$ 587.6		$ 468.7

The following is the computation of the ratio of EBITDA to interest incurred (in millions):

	Three Months Ended March 31,
	2004		2003
EBITDA		$ 587.6		$ 468.7
Divided by interest incurred		71.1		79.0
Ratio of EBITDA to interest incurred		8.3x		5.9x

Valero’s rationale for using the financial measures of EBITDA and the ratio of EBITDA to interest incurred, which are not defined under United States generally accepted accounting principles, are discussed in Valero’s Annual Report on Form 10-K for the year ended December 31, 2003 under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Results of Operations – 2003 Compared to 2002 – Corporate Expenses and Other.”

OUTLOOK

Since the end of the first quarter of 2004, refining industry fundamentals have continued to improve, resulting in higher refined product margins and wider sour crude oil discounts. Despite the increase in the retail price of gasoline, demand is at record levels due primarily to the growth in the U.S. economy and SUV and light truck ownership and is expected to remain strong throughout the upcoming summer driving season. Gasoline margins are also benefiting from lower-than-normal inventory levels, a condition that is expected to continue due to the limited availability of additional refining capacity in the United States as almost all existing refining capacity is being used to satisfy current demand. In addition, imports are expected to be limited due to increased foreign demand attributable to a strong global economy, a heavy turnaround season in Europe and Asia, and difficulty that foreign refiners are expected to encounter in meeting the lower summer vapor pressure requirements and low-sulfur specifications required in the United States. Distillate margins have also improved since March 2004 as a result of higher domestic and foreign demand.

In regard to refinery feedstocks, sour crude oil discounts were strong during April 2004 and are expected to remain favorable for an extended period of time, partly due to the increased demand for sweet crude oil by less complex refiners as a result of the requirements for lower sulfur fuels that are now in effect. In addition, the supply of sour crude oils is increasing due to an increasing percentage of sour crude oil production, which should also support strong discounts. Incremental crude oil processed to meet the increasing world demand for light products is generating excess by-product resid which should continue to support wide discounts for heavy, high-sulfur crude oils.

Operationally, Valero expects to benefit during 2004 from its St. Charles and Aruba Acquisitions and from the completion of several turnaround and capital improvement projects. For the second quarter of 2004, throughput volume is expected to be 2.2 million barrels per day, compared to 1.9 million barrels per

30

day during the first quarter of 2004. In addition, with the acquisition of the Aruba Refinery, the full-year operation of a coker unit at the Texas City Refinery and the expansion of the coker unit at the St. Charles Refinery, Valero has increased its coker capacity to 280,000 barrels per day. This will allow Valero to process more heavy sour crude oils and take advantage of the wider sour crude oil discounts.

LIQUIDITY AND CAPITAL RESOURCES

Cash Flows for the Three Months Ended March 31, 2004 and 2003
Net cash provided by operating activities for the three months ended March 31, 2004 was $329.6 million compared to $503.2 million for the three months ended March 31, 2003. The decrease in cash generated from operating activities was due primarily to increased working capital requirements and cash used for deferred charges and credits in 2004, as further discussed below, partially offset by a favorable change in operating results as discussed above under “Results of Operations.” Changes in cash provided by or used for working capital during the first quarter of 2004 and 2003 are shown in Note 10 of Condensed Notes to Consolidated Financial Statements. The primary changes for both quarters resulted from an increase in the level of Valero’s inventories and an increase in commodity prices during each respective quarter. The cash used for deferred items for the first quarter of 2004 was primarily attributable to:

o    the liquidation of the outstanding amount of certain foreign currency exchange contracts for a net cash payment of approximately $34 million, and

o    the contribution of $25 million to Valero's pension plans.

The net cash generated from operating activities, combined with approximately $406 million of proceeds from the sale of common stock, approximately $600 million of proceeds from the issuance of long-term debt, $60.6 million of proceeds from the issuance of common stock related to Valero’s benefit plans, and approximately $130 million of available cash on hand, were used to:

o    fund $366.4 million of capital expenditures and deferred turnaround and catalyst costs,

o    exercise options under structured lease arrangements to purchase $567.1 million of leased property,

o    fund the Aruba Acquisition of $567.3 million, net of cash acquired, and

o    pay common and preferred stock dividends of $16.8 million.

As discussed above, net cash provided by operating activities during the first quarter of 2003 was $503.2 million. The net cash generated from operating activities combined with approximately $250 million of proceeds from the sale of common stock in March 2003, $350 million of proceeds from the contribution and sale of certain assets to Valero L.P., and $30.5 million of proceeds from the issuance of common stock related to Valero’s benefit plans, were used to:

o    repay capital lease obligations of $289.3 million,

o    fund capital investments of $155.2 million and acquisitions of $15.1 million, and

o    pay common stock dividends of $10.7 million.

The remaining proceeds were used primarily to reduce borrowings under Valero’s committed and uncommitted bank credit facilities, with the remainder increasing Valero’s cash balance.

Aruba Acquisition
On March 5, 2004, Valero completed the purchase of El Paso Corporation’s Aruba Refinery and related marine, bunkering and marketing operations. Consideration for the purchase, including various transaction costs incurred, consisted of $200 million in cash, approximately $21 million in borrowings under Valero’s existing bank credit facilities and approximately $406 million in net proceeds from the sale of 7.8 million shares of Valero common stock.

31

Capital Investments
During the three months ended March 31, 2004, Valero expended $246.0  million for capital expenditures and $120.4 million for deferred turnaround and catalyst costs. Capital expenditures for the three months ended March 31, 2004 included $63.5 million to fund construction of gasoline desulfurization units at the Paulsboro, Quebec and Corpus Christi West Refineries in response to new low-sulfur regulations. In addition, $567.1 million was expended for the purchase of various leased properties, which were previously subject to structured lease arrangements (see Note 15 of Condensed Notes to Consolidated Financial Statements).

In connection with Valero’s acquisitions of Basis Petroleum, Inc. in 1997 and the St. Charles Refinery in 2003, the sellers are entitled to receive payments in any of the ten years and seven years, respectively, following these acquisitions if certain average refining margins during any of those years exceed a specified level. Any payments due under these earn-out arrangements are limited based on annual and aggregate limits. Based on actual margin levels through April 2004 and estimated margin levels through December 2004, the annual maximum limits of $35 million and $50 million, respectively, would be due for the applicable period ending in 2004, with $35 million to be paid in May 2004 and $50 million payable in early 2005.

For 2004, Valero expects to incur approximately $1.6 billion for capital investments, including approximately $1.3 billion for capital expenditures (approximately $670 million of which is for environmental projects) and approximately $285 million for deferred turnaround and catalyst costs. The capital expenditure estimate excludes the purchase of properties previously leased under four structured lease arrangements, as previously discussed. The capital expenditure estimate also excludes anticipated expenditures related to the earn-out contingency agreements discussed above and strategic acquisitions. Valero continuously evaluates its capital budget and makes changes as economic conditions warrant.

Contractual Obligations
As of March 31, 2004, Valero’s contractual obligations included long-term debt, capital lease obligations, operating leases and purchase obligations. Except as discussed below, there were no significant changes to Valero’s contractual obligations during the quarter ended March 31, 2004.

On March 22, 2004, Valero issued $200 million of 3.50% Senior Notes due April 1, 2009 and $200 million of 4.75% Senior Notes due April 1, 2014 under its shelf registration statement. The net proceeds of this offering were used to repay borrowings under Valero’s revolving bank credit facilities.

On March 29, 2004, Valero borrowed $200 million under a five-year term loan, which matures March 31, 2009. The loan bears interest based on Valero’s debt rating, currently at LIBOR plus 75 basis points. Principal payments begin March 2007 with a $50.0 million principal payment due at that time and semi-annual payments of $37.5 million due thereafter until maturity. The net proceeds from this borrowing were used to repay borrowings under Valero’s revolving bank credit facilities.

None of Valero’s agreements have rating agency triggers that would automatically require Valero to post additional collateral. However, in the event of certain downgrades of Valero’s senior unsecured debt to below investment grade ratings by Moody’s Investors Service and Standard & Poor’s Ratings Services, borrowings under some of Valero’s bank credit facilities and other arrangements would become more expensive.

32

Other Commercial Commitments
As of March 31, 2004, Valero’s committed lines of credit included (in millions):

		Borrowing Capacity		Expiration
3-year revolving credit facility			$ 750.0		December 2006
5-year revolving credit facility			$ 750.0		December 2006
Canadian revolving credit facility	Cdn.		$ 115.0		July 2005

As of March 31, 2004, Valero had $256.1 million of letters of credit outstanding under its uncommitted short-term bank credit facilities, $196.0 million of letters of credit outstanding under its committed facilities and Cdn. $7.8 million of letters of credit outstanding under its Canadian facility.

Under Valero’s revolving bank credit facilities, its debt-to-capitalization ratio (net of cash) was approximately 42% as of March 31, 2004.

Valero believes it has sufficient funds from operations, and to the extent necessary, from the public and private capital markets and bank markets, to fund its ongoing operating requirements. Valero expects that, to the extent necessary, it can raise additional funds from time to time through equity or debt financings. However, there can be no assurances regarding the availability of any future financings or whether such financings can be made available on terms acceptable to Valero.

Pension Plan Funded Status
Valero expects to contribute approximately $75 million to its pension plans during 2004, although no minimum contributions are required under the Employee Retirement Income Security Act. During the first three months of 2004, Valero contributed $25.0 million to its qualified pension plans.

Environmental Matters
Valero is 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 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 Valero’s refineries could require material additional expenditures to comply with environmental laws and regulations. For additional information regarding Valero’s environmental matters, see Condensed Note 15 of Notes to Consolidated Financial Statements.

OFF-BALANCE SHEET ARRANGEMENTS

Accounts Receivable Sales Facility
As of March 31, 2004, Valero had an accounts receivable sales facility with three third-party financial institutions to sell on a revolving basis up to $600 million of eligible trade and credit card receivables, which matures in October 2005. As of March 31, 2004, the amount of eligible receivables sold to the third-party financial institutions was $600 million.

Guarantees
In connection with the sale of the Golden Eagle Business in 2002, Valero guaranteed certain lease payment obligations related to a lease assumed by Tesoro Refining and Marketing Company, which totaled approximately $40 million as of March 31, 2004. This lease expires in 2010.

33

CRITICAL ACCOUNTING POLICIES

The preparation of financial statements in accordance with United States generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. Valero’s critical accounting policies are disclosed in its Annual Report on Form 10-K for the year ended December 31, 2003.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

COMMODITY PRICE RISK

The following tables provide information about Valero’s derivative commodity instruments as of March 31, 2004 and December 31, 2003 (dollars in millions, except for the weighted-average pay and receive prices as described below), including:

o    fair value hedges held to hedge refining inventories and unrecognized firm commitments,

o    cash flow hedges held to hedge forecasted feedstock or product purchases and refined product sales, and forecasted natural gas purchases,

o    economic hedges held to:

      o    manage price volatility in refining inventories, and

      o    manage price volatility in forecasted feedstock or product purchases and refined product sales, and forecasted natural gas purchases, and

o    trading activities held or issued for trading purposes.

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. The gain (loss) on swaps is equal to the fair value amount and represents the excess of the receive price over the pay price times the notional contract volumes. For futures and options, the gain (loss) represents (i) the excess of the fair value amount over the contract amount for long positions, or (ii) the excess of the contract amount over the fair 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.

34

	March 31, 2004
	Contract Volumes		Wtd Avg Pay Price		Wtd Avg Receive Price		Contract Value			Fair Value			Gain (Loss)
Fair Value Hedges:
Futures - long:
2004 (crude oil and refined products)		32,874	$	36.60		N/A	$	1,203.2		$	1,198.8		$	(4.4	)
2005 (crude oil and refined products)		9		33.60		N/A		-			-			-
Futures - short:
2004 (crude oil and refined products)		43,705		N/A	$	36.95		1,614.9			1,623.3			(8.4	)
2005 (crude oil and refined products)		2		N/A		33.13		-			-			-
Cash Flow Hedges:
Swaps - long:
2004 (crude oil and refined products)		72,155		29.15		33.76		N/A			332.6			332.6
2005 (crude oil and refined products)		5,250		31.23		30.81		N/A			(2.2	)		(2.2	)
Swaps - short:
2004 (crude oil and refined products)		72,230		37.44		33.02		N/A			(318.9	)		(318.9	)
2005 (crude oil and refined products)		5,250		34.94		35.39		N/A			2.3			2.3
Futures - long:
2004 (crude oil and refined products)		22,233		35.82		N/A		796.4			834.2			37.8
2005 (crude oil and refined products)		200		31.68		N/A		6.3			6.2			(0.1	)
Futures - short:
2004 (crude oil and refined products)		19,279		N/A		36.09		695.7			732.9			(37.2	)
2005 (crude oil and refined products)		200		N/A		34.44		6.9			6.8			0.1
Economic Hedges:
Swaps - long:
2004 (crude oil and refined products)		1,839		14.74		15.53		N/A			1.5			1.5
Swaps - short:
2004 (crude oil and refined products)		5,663		7.56		7.22		N/A			(1.9	)		(1.9	)
Futures - long:
2004 (crude oil and refined products)		14,933		36.97		N/A		552.1			544.5			(7.6	)
Futures - short:
2004 (crude oil and refined products)		23,535		N/A		37.58		884.5			872.6			11.9
Options - long:
2004 (crude oil and refined products)		25,622		14.33		N/A		(0.6	)		-			0.6
Options - short:
2004 (crude oil and refined products)		34,163		N/A		16.69		9.9			9.1			0.8
2005 (crude oil and refined products)		2,400		N/A		4.20		0.9			1.1			(0.2	)
Trading Activities:
Swaps - long:
2004 (crude oil and refined products)		7,490		20.33		23.02		N/A			20.1			20.1
2005 (crude oil and refined products)		1,200		21.48		22.34		N/A			1.0			1.0
Swaps - short:
2004 (crude oil and refined products)		8,790		20.65		18.39		N/A			(19.9	)		(19.9	)
2005 (crude oil and refined products)		1,200		23.16		22.66		N/A			(0.6	)		(0.6	)
Futures - long:
2004 (crude oil and refined products)		24,971		35.47		N/A		885.7			933.7			48.0
2005 (crude oil and refined products)		463		32.64		N/A		15.1			16.1			1.0
Futures - short:
2004 (crude oil and refined products)		24,788		N/A		35.33		875.7			920.6			(44.9	)
2005 (crude oil and refined products)		203		N/A		31.75		6.4			7.7			(1.3	)
Options - long:
2004 (crude oil and refined products)		10,452		10.19		N/A		5.3			14.5			9.2
Options - short:
2004 (crude oil and refined products)		9,765		N/A		10.69		(9.2	)		(1.1	)		(8.1	)

35

	December 31, 2003
	Contract Volumes		Wtd Avg Pay Price		Wtd Avg Receive Price		Contract Value			Fair Value			Gain (Loss)
Fair Value Hedges:
Futures - long:
2004 (crude oil and refined products)		26,464	$	31.72		N/A	$	839.4		$	860.1		$	20.7
2005 (crude oil and refined products)		2		29.84		N/A		-			-			-
Futures - short:
2004 (crude oil and refined products)		36,110		N/A	$	31.59		1,140.7			1,180.5			(39.8	)
Cash Flow Hedges:
Swaps - long:
2004 (crude oil and refined products)		61,020		27.89		30.38		N/A			152.0			152.0
2004 (natural gas)		915		5.66		6.08		N/A			0.4			0.4
Swaps - short:
2004 (crude oil and refined products)		61,520		34.01		31.62		N/A			(147.3	)		(147.3	)
2004 (natural gas)		458		6.08		5.61		N/A			(0.2	)		(0.2	)
Futures - long:
2004 (crude oil and refined products)		17,266		32.05		N/A		553.5			567.2			13.7
Futures - short:
2004 (crude oil and refined products)		14,600		N/A		33.35		487.0			502.1			(15.1	)
2004 (natural gas)		540		N/A		5.24		2.8			3.3			(0.5	)
Economic Hedges:
Swaps - long:
2004 (crude oil and refined products)		2,658		10.73		10.97		N/A			0.6			0.6
Swaps - short:
2004 (crude oil and refined products)		7,428		1.66		2.02		N/A			2.6			2.6
Futures - long:
2004 (crude oil and refined products)		16,604		37.25		N/A		618.5			622.9			4.4
Futures - short:
2004 (crude oil and refined products)		19,788		N/A		36.32		718.7			730.1			(11.4	)
Options - long:
2004 (crude oil and refined products)		24,719		9.72		N/A		7.0			12.5			5.5
2004 (natural gas)		913		N/A		5.05		0.5			0.9			0.4
Options - short:
2004 (crude oil and refined products)		34,269		N/A		9.68		(13.7	)		(13.2	)		(0.5	)
Trading Activities:
Swaps - long:
2004 (crude oil and refined products)		8,330		17.09		18.43		N/A			11.2			11.2
Swaps - short:
2004 (crude oil and refined products)		8,675		18.99		17.75		N/A			(10.7	)		(10.7	)
Futures - long:
2004 (crude oil and refined products)		22,396		31.21		N/A		699.1			724.2			25.1
2005 (crude oil and refined products)		200		26.46		N/A		5.3			5.7			0.4
2004 (natural gas)		300		5.08		N/A		1.5			1.7			0.2
Futures - short:
2004 (crude oil and refined products)		21,416		N/A		31.79		680.8			703.6			(22.8	)
2005 (crude oil and refined products)		200		N/A		31.71		6.3			6.7			(0.4	)
2004 (natural gas)		300		N/A		5.75		1.7			1.8			(0.1	)
Options - long:
2004 (crude oil and refined products)		12,671		13.62		N/A		3.7			8.0			4.3
Options - short:
2004 (crude oil and refined products)		7,647		N/A		8.56		(3.0	)		(0.7	)		(2.3	)

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INTEREST RATE RISK

The following table provides information about Valero’s long-term debt and interest rate derivative instruments (in millions, except interest rates), all of which are sensitive to changes in interest rates. For long-term debt, principal cash flows and related weighted-average interest rates by expected maturity dates are presented. For interest rate swaps, the table presents notional amounts and weighted-average interest rates by expected (contractual) maturity dates. Notional amounts are used to calculate the contractual payments to be exchanged under the contract. Weighted-average floating rates are based on implied forward rates in the yield curve at the reporting date.

	March 31, 2004
	Expected Maturity Dates
	2004			2005			2006			2007			2008			There- after			Total			Fair Value
Long-term Debt:
Fixed rate	$	-		$	409.6		$	300.0		$	356.9		$	6.5		$	3,372.0		$	4,445.0		$	4,977.3
Average interest rate		-	%		8.1	%		7.4	%		6.1	%		6.0	%		6.6	%		6.8	%
Floating rate	$	-		$	-		$	278.0		$	87.5		$	75.0		$	37.5		$	478.0		$	478.0
Average interest rate		-	%		-	%		2.5	%		1.9	%		1.9	%		1.9	%		2.3	%
Interest Rate Swaps
Fixed to Floating:
Notional amount	$	-		$	-		$	125.0		$	225.0		$	-		$	650.0		$	1,000.0		$	8.0
Average pay rate		3.0	%		3.9	%		4.9	%		5.4	%		5.6	%		6.4	%		5.5	%
Average receive rate		6.0	%		6.0	%		6.0	%		5.8	%		5.7	%		5.6	%		5.7	%
	December 31, 2003
	Expected Maturity Dates
	2004			2005			2006			2007			2008			There- after			Total			Fair Value
Long-term Debt:
Fixed rate	$	-		$	409.6		$	300.0		$	356.9		$	6.5		$	2,972.0		$	4,045.0		$	4,452.4
Average interest rate		-	%		8.1	%		7.4	%		6.1	%		6.0	%		7.0	%		7.0	%
Floating rate	$	-		$	-		$	260.0		$	-		$	-		$	-		$	260.0		$	260.0
Average interest rate		-	%		-	%		3.0	%		-	%		-	%		-	%		3.0	%
Interest Rate Swaps
Fixed to Floating:
Notional amount	$	-		$	-		$	125.0		$	225.0		$	-		$	450.0		$	800.0		$	(10.8	)
Average pay rate		3.7	%		5.1	%		6.1	%		6.6	%		6.6	%		6.8	%		6.2	%
Average receive rate		6.3	%		6.3	%		6.3	%		6.1	%		6.1	%		5.8	%		6.0	%

On March 25, 2004, Valero entered into additional interest rate swap contracts with a total notional amount of $200 million. These interest rate swap contracts currently have an estimated pay rate of 1.72% and hedge $200 million of debt with an interest rate of 4.75%.

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FOREIGN CURRENCY RISK

During May 2002, Valero entered into foreign currency exchange contracts to hedge its exposure to exchange rate fluctuations on an investment in its Canadian operations that Valero intended to redeem in the future. In February 2004, Valero redeemed its remaining balance of this investment in its Canadian operations and, as a result, liquidated the outstanding amount of these foreign currency exchange contracts, as discussed further in “Liquidity and Capital Resources-Cash Flows for the Three Months Ended March 31, 2004 and 2003.”

Item 4. Controls and Procedures

(a)     Evaluation of disclosure controls and procedures.

Valero’s management has evaluated, with the participation of Valero’s principal executive and principal financial officers, the effectiveness of Valero’s 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 Valero’s disclosure controls and procedures are effective in ensuring that information required to be disclosed by Valero in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms.

(b)     Changes in internal control over financial reporting.

There has been no change in Valero’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that occurred during Valero’s last fiscal quarter that has materially affected, or is reasonably likely to materially affect, Valero’s internal control over financial reporting.

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PART II – OTHER INFORMATION

Item 1. Legal Proceedings

McAdam, on behalf of the general public, and Communities for a Better Environment, a California non-profit organization v. Tosco Corporation, Ultramar Inc., et al., Superior Court of the State of California for the County of San Francisco, Case No. 300595 (filed January 19, 1999) (this matter was last reported in Valero’s Annual Report on Form 10-K for the year ended December 31, 2003). Communities for a Better Environment (CBE) is a non-profit organization that brought this lawsuit under California’s Safe Drinking Water and Toxic Enforcement Act of 1986, also known as California Proposition 65. CBE sued several energy companies, including Valero, alleging violations of the Safe Drinking Water and Toxic Enforcement Act of 1986 at several sites in California, including alleged releases of benzene and toluene into groundwater. Valero recently settled this matter on terms immaterial to Valero.

New Mexico Environment Department (Tucumcari terminal) (this matter was last reported in Valero’s Annual Report on Form 10-K for the year ended December 31, 2003). Valero had received a notice of violation from the New Mexico Environment Department (NMED) concerning an alleged violation of Title V of the Clean Air Act at Valero L.P.’s refined products terminal in Tucumcari, New Mexico. NMED alleged that the terminal operated as a Title V source from December 14, 1994 through September 6, 1998, and that the terminal failed to apply for a Title V permit during that time period. Valero recently settled this matter on terms immaterial to Valero.

South Coast Air Quality Management District (SCAQMD) (Wilmington Refinery). The SCAQMD has issued 11 violations to Valero’s Wilmington Refinery for alleged excess emissions and one permitting discrepancy. No penalties have been assessed for the alleged violations. Valero plans to negotiate with the SCAQMD to resolve these issues and expects to settle all of the alleged violations for an amount immaterial to Valero, but in excess of $100,000.

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Item 2. Changes in Securities and Use of Proceeds

    (e)        Purchases of Equity Securities by the Issuer. The following table discloses purchases of shares of Valero’s common stock made by or on behalf of Valero during the quarterly period covered by this report.

Period		Total Number of Shares Purchased (1)		Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (2)		Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs
	January 2004		0		N/A		0		$ 361 million
	February 2004		0		N/A		0		$ 361 million
	March 2004		105,000		$ 57.89		0		$ 361 million
	Total		105,000		$ 57.89		0		$ 361 million

(1)   All of the reported shares were purchased other than through a publicly announced stock purchase plan or program. The reported shares were purchased in open-market transactions to satisfy Valero’s obligations under its employee benefit plans.

(2)   Valero’s existing stock repurchase program was publicly announced on December 3, 2001. The program authorizes Valero to purchase up to $400 million aggregate purchase price of shares of Valero’s common stock. The program has no expiration date.

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits.

                   Exhibit  3.1 Amended and Restated Bylaws of Valero Energy Corporation (amended and restated
as of April 29, 2004)

                   Exhibit  12.1 Statements of Computations of Ratios of Earnings to Fixed Charges and
Ratios of Earnings to Fixed Charges and Preferred Stock Dividends

                   Exhibit   31.1 Rule 13a-14(a) Certifications (under Section 302 of the Sarbanes-Oxley Act
of 2002)

                   Exhibit   32.1 Section 1350 Certifications (under Section 906 of the Sarbanes-Oxley Act
of 2002)

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(b) Reports on Form 8-K.

       (i)   On January 27, 2004, Valero furnished a Current Report on Form 8-K dated January 27, 2004 reporting Item 12 (Results of Operations and Financial Condition) and furnishing a copy of Valero’s press release relating to its earnings announcement for the fourth quarter of 2003. Financial statements were not filed with this report. The information in this report is not incorporated by reference into any registration statement filed by Valero under the Securities Act of 1933 unless specifically identified in the registration statement as being incorporated by reference.

       (ii)   On February 5, 2004, Valero filed a Current Report on Form 8-K dated February 4, 2004 reporting Item 5 (Other Events) in connection with Valero’s execution of an agreement to purchase El Paso Corporation’s refinery and related businesses located on the island of Aruba (the Aruba operations). With this Current Report, Valero also furnished a press release under Item 9 (Regulation FD Disclosure) relating to Valero’s announcement of its agreement to purchase the Aruba operations. Financial statements were not filed with this report. The information in the press release furnished under Item 9 of this Current Report is not incorporated by reference into any registration statement filed by Valero under the Securities Act of 1933 unless specifically identified in the registration statement as being incorporated by reference.

       (iii)   On February 11, 2004, Valero filed a Current Report on Form 8-K dated February 5, 2004 reporting Item 5 (Other Events) in connection with Valero’s execution of an underwriting agreement for the public offering of an aggregate of up to 7,820,000 shares of Valero’s common stock, par value $.01 per share (the Shares). The Shares were registered under the Securities Act of 1933, as amended, pursuant to the shelf registration statement (Registration No. 333-84820) of Valero. Financial statements were not filed with this report.

       (iv)   On March 9, 2004, Valero filed a Current Report on Form 8-K dated March 5, 2004 reporting Item 2 (Acquisition of Assets) in connection with Valero’s completion of its purchase of the Aruba refinery and related marine, bunkering and marketing operations from El Paso Corporation. Financial statements were not filed with this report.

       (v)   On March 12, 2004, Valero filed a Current Report on Form 8-K dated March 10, 2004 reporting Item 4 (Changes in Registrant’s Certifying Accountant) in connection with Valero’s dismissal on March 10, 2004 of Ernst & Young LLP and retention of KPMG LLP as Valero’s independent auditors for the fiscal year ending December 31, 2004. Financial statements were not filed with this report.

       (vi)   On March 25, 2004, Valero filed a Current Report on Form 8-K dated March 22, 2004 reporting Item 5 (Other Events) in connection with Valero’s execution of an underwriting agreement for the public offering of $200,000,000 aggregate principal amount of its 3.50% Notes due 2009, and $200,000,000 aggregate principal amount of its 4.75% Notes due 2014 (collectively, the Notes). The Notes were registered under the Securities Act of 1933, as amended, pursuant to the shelf registration statement (Registration No. 333-84820) of Valero. Financial statements were not filed with this report.

       (vii)   On March 30, 2004, Valero furnished a Current Report on Form 8-K dated March 30, 2004 reporting Item 9 (Regulation FD Disclosure) and furnishing a copy of the slide presentation made by executives of Valero to certain investors at the Howard Weil Energy Conference. Financial statements were not filed with this report.

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SIGNATURE

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

	VALERO ENERGY CORPORATION
	(Registrant)
	By: /s/ Michael S. Ciskowski
	Michael S. Ciskowski
	Executive Vice President and
	Chief Financial Officer
	(Duly Authorized Officer and Principal
	Financial and Accounting Officer)
Date: May 10, 2004

42

EX-3.1

Exhibit 3.1
VALERO ENERGY CORPORATION
BYLAWS

(Amended and Restated effective as of April 29, 2004)

ARTICLE I.
MEETINGS OF STOCKHOLDERS

Section 1. The annual meeting of stockholders shall be held at such date and time and at such place as shall be designated from time to time by the Board of Directors and stated in the notice of the meeting, for the purposes of electing directors and of transacting such other business as may properly come before the meeting. At least ten days’ notice shall be given to the stockholders of the date, time and place so fixed. Any previously scheduled annual meeting of the stockholders may be postponed by resolution of the Board of Directors upon public notice given on or prior to the date previously scheduled for such annual meeting of stockholders.

Section 2. Except as otherwise provided by law or by the Restated Certificate of Incorporation of the Corporation, as from time to time amended (the “Restated Certificate of Incorporation”), special meetings of the stockholders may be called only by the Chief Executive Officer or by the Board of Directors pursuant to a resolution adopted by a majority of the directors which the Corporation would have if there were no vacancies. Upon written request of any person or persons who have duly called a special meeting, it shall be the duty of the Secretary to fix the date and time of the special meeting (which date shall be not less than ten nor more than sixty days after receipt of the request) and to give due notice thereof. If the Secretary shall neglect or refuse to fix the date or time of the meeting or to give notice thereof, the person or persons calling the meeting may do so. Any such notice shall include a statement of the purpose or purposes for which the special meeting is called. Any previously scheduled special meeting of the stockholders may be postponed by resolution of the Board of Directors upon public notice given on or prior to the date previously scheduled for such special meeting of stockholders.

Section 3. Every special meeting of the stockholders shall be held at such place within or without the State of Delaware as the Board of Directors may designate, or, in the absence of such designation, at the registered office of the Corporation in the State of Delaware.

Section 4. Written notice of every meeting of the stockholders shall be given by the Secretary to each stockholder of record entitled to vote at the meeting, by placing such notice in the mail at least ten days, but not more than sixty days, prior to the date fixed for the meeting addressed to each stockholder at his address appearing on the books of the Corporation or supplied by him to the Corporation for the purpose of notice.

Section 5. The Board of Directors may fix a date, which date shall not precede the date upon which the resolution fixing such record date is adopted by the Board of Directors, and which date shall be not less than ten nor more than sixty days preceding the date of any meeting of stockholders, as a record date for the determination of stockholders entitled to notice of, or to vote at, any such meeting. The Board of Directors shall not close the books of the Corporation against transfers of shares during the whole or any part of such period.

Section 6. The notice of every meeting of the stockholders may be accompanied by a form of proxy approved by the Board of Directors in favor of such person or persons as the Board of Directors may select.

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Section 7. (a) Except as otherwise provided by law or by the Restated Certificate of Incorporation or by these Bylaws, at any meeting of stockholders the presence in person or by proxy of the holders of the outstanding shares of stock of the Corporation entitled to vote thereat and having a majority of the voting power with respect to a subject matter shall constitute a quorum for the transaction of business as to that subject matter, and all questions with respect to a subject matter, except the election of directors, shall be decided by vote of the shares having a majority of the voting power so represented in person or by proxy at the meeting and entitled to vote thereat. Election of directors shall be determined by a plurality vote of the shares present in person or by proxy and entitled to vote on the election of directors. The stockholders present at any duly organized meeting may continue to do business until adjournment, notwithstanding the withdrawal of enough stockholders to leave less than a quorum.

    (b)        Every stockholder having the right to vote shall be entitled to vote in person, or by proxy appointed by an instrument in writing subscribed by such stockholder (which for purposes hereof may include a signature and form of proxy pursuant to a facsimile or telegraphic form of proxy or any other instrument acceptable to the duly appointed inspector or inspectors of such election), bearing a date not more than three years prior to voting, unless such instrument provides for a longer period, and filed with the Secretary of the Corporation before, or at the time of, the meeting, or by such other method as may be permitted under the General Corporation Law of the State of Delaware, as the same exists or may hereafter be amended (the “DGCL”), and approved by the Board of Directors. If such instrument shall designate two or more persons to act as proxies, unless such instrument shall provide to the contrary, a majority of such persons present at any meeting at which their powers thereunder are to be exercised shall have and may exercise all the powers of voting thereby conferred, or if only one be present, then such powers may be exercised by that one; or, if an even number attend and a majority do not agree on any particular issue, each proxy so attending shall be entitled to exercise such powers in respect of the same portion of the shares as he is of the proxies representing such shares.

    (c)        Any other corporation owning voting shares in the Corporation may vote the same by its President or by proxy appointed by him, unless some other person shall be appointed to vote such shares by resolution of the Board of Directors of such shareholder corporation. A partnership holding shares of the Corporation may vote such shares by any general partner or by proxy appointed by any general partner.

    (d)        Shares standing in the name of a deceased person may be voted by the executor or administrator of such deceased person, either in person or by proxy. Shares standing in the name of a guardian, conservator or trustee may be voted by such fiduciary, either in person or by proxy, but no such fiduciary shall be entitled to vote shares held in such fiduciary capacity without a transfer of such shares into the name of such fiduciary. Shares standing in the name of a receiver may be voted by such receiver. A stockholder whose shares are pledged shall be entitled to vote such shares, unless in the transfer by the pledgor on the books of the Corporation, he has expressly empowered the pledgee to vote thereon, in which case only the pledgee, or his proxy, may represent the stock and vote thereon.

Section 8. Except as otherwise provided by law or by the Restated Certificate of Incorporation, the presiding officer of any meeting or the holders of a majority of the shares of stock of the Corporation entitled to vote at such meeting, present in person or represented by proxy, whether a quorum is present, shall have the power to adjourn the meeting from time to time, without notice other than announcement at the meeting. At any such adjourned meeting at which a quorum shall be present any action may be taken that could have been taken at the meeting originally called; provided, that if the adjournment is for more than thirty days or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the adjourned meeting.

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Section 9. (a) Nominations of persons for election to the Board of Directors of the Corporation and the proposal of business to be considered by the stockholders may be made at an annual meeting of stockholders (i) pursuant to the Corporation’s notice of meeting, (ii) by or at the direction of the Board of Directors or (iii) by any stockholder of the Corporation who was a stockholder of record at the time of giving of the notice provided for in this Section 9, who is entitled to vote with respect to such matter at the meeting and who complies with the notice procedures set forth in this Section 9. At any annual meeting of stockholders, the presiding officer of such meeting may announce the nominations and other business to be considered which are set forth in the Corporation’s notice of meeting and proxy statement and, by virtue thereof, such nominations and other business so announced shall be properly before such meeting and may be considered and voted upon by the stockholders of the Corporation entitled to vote thereat without further requirement of nomination, motion or second.

    (b)        In order for nominations or other business to be properly brought before an annual meeting by a stockholder pursuant to clause (iii) of Paragraph (a) of this Section 9, the stockholder making such nominations or proposing such other business must theretofore have given timely notice thereof in writing to the Secretary of the Corporation and such other business must otherwise be a proper matter for stockholder action. To be timely, a stockholder’s notice shall be delivered to the Secretary at the principal executive offices of the Corporation not later than the close of business on the 60th day nor earlier than the close of business on the 90th day prior to the first anniversary of the preceding year’s annual meeting; provided, however, that in the event that the date of the annual meeting is more than 30 days before or more than 60 days after such anniversary date, notice by the stockholder to be timely must be so delivered not earlier than the close of business on the 90th day prior to such annual meeting and not later than the close of business on the later of the 60th day prior to such annual meeting or the 10th day following the day on which public announcement of the date of such meeting is first made by the Corporation. In no event shall the public announcement of an adjournment of an annual meeting commence a new time period for the giving of a stockholder’s notice as described above. Such stockholder’s notice shall set forth (i) a description of any arrangements or understandings that exist with respect to the election or reelection of directors of the Corporation between such stockholder or the beneficial owner, if any, on whose behalf such notice is given and any other person (or, if no such arrangements or understandings exist, a statement to such effect), together with, as to each person whom the stockholder proposes to nominate at the meeting for election or reelection as a director, all information relating to such person that is required to be disclosed in solicitations of proxies for election of directors in an election contest, or is otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and Rule 14a-11 thereunder (including such person’s written consent to serving as a director if elected); (ii) as to any other business that the stockholder proposes to bring before the meeting, a brief description of the business desired to be brought before the meeting, the reasons for conducting such business at the meeting and any material interest in such business of such stockholder and the beneficial owner, if any, on whose behalf the proposal is made; and (iii) as to the stockholder giving the notice and the beneficial owner, if any, on whose behalf the nomination or proposal is made (A) the name and address of such stockholder, as they appear on the Corporation’s books, and of such beneficial owner, and (B) the class and number of shares of the Corporation which are owned beneficially and of record by such stockholder and such beneficial owner.

    (c)        Notwithstanding anything in the second sentence of Paragraph (b) of this Section 9 to the contrary, in the event that the number of directors to be elected to the Board of Directors of the Corporation at an annual meeting is increased, whether by increase in the size of the Board of Directors, or by any vacancy in the Board of Directors to be filled at such annual meeting, and there is no public announcement by the Corporation naming all of the nominees for director or specifying the size of the increased Board of Directors made by the Corporation at least 70 days prior to the first anniversary of the preceding year’s annual meeting, a stockholder’s notice required by this Section 9 shall also be considered timely, but only with respect to nominees for such vacant positions and for any new positions created by such increase, if it shall be delivered

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to the Secretary at the principal executive offices of the Corporation not later than the close of business on the 10th day following the day on which such public announcement is first made by the Corporation.

Section 10. Only such business shall be conducted at a special meeting of stockholders as shall have been brought before the meeting pursuant to the Corporation’s notice of meeting. Nominations of persons for election to the Board of Directors may be made at a special meeting of stockholders at which directors are to be elected pursuant to the Corporation’s notice of meeting (a) by or at the direction of the Board of Directors or (b) provided that the Board of Directors has determined that directors shall be elected at such meeting, by any stockholder of the Corporation who is a stockholder of record at the time of giving of notice provided for in this Section 10, who shall be entitled to vote at the meeting and who complies with the notice procedures set forth in this Section 10. In the event the Corporation calls a special meeting of stockholders for the purpose of electing one or more directors to the Board of Directors, any such stockholder may nominate a person or persons (as the case may be), for election to such position(s) as specified in the Corporation’s notice of meeting, if the stockholder’s notice required by Paragraph (b) of Section 9 of this Article I shall be delivered to the Secretary at the principal executive offices of the Corporation not earlier than the close of business on the 90th day prior to such special meeting and not later than the close of business on the later of the 60th day prior to such special meeting or the 10th day following the day on which public announcement is first made of the date of the special meeting and of the nominees proposed by the Board of Directors to be elected at such meeting. In no event shall the public announcement of an adjournment of a special meeting commence a new time period for the giving of a stockholder’s notice as described above.

Section 11. (a) Only such persons who are nominated in accordance with the procedures set forth in Sections 9 and 10 of this Article I shall be eligible to serve as directors and only such business shall be conducted at a meeting of stockholders as shall have been brought before the meeting in accordance with the procedures set forth in such Sections. The presiding officer of the meeting shall have the power and duty to determine whether a nomination or any business proposed to be brought before the meeting was made or proposed, as the case may be, in accordance with the procedures set forth in these Bylaws, and if any proposed nomination or business is not in compliance with these Bylaws, to declare that such defective proposal shall be disregarded.

    (b)        For purposes of Sections 9 and 10 of this Article I, “public announcement” shall mean disclosure in a press release reported by the Dow Jones News Services, Associated Press, Reuters or comparable national news service or in a document publicly filed by the Corporation with the Securities and Exchange Commission pursuant to Section 13, 14 or 15(d) of the Exchange Act.

    (c)        Notwithstanding the provisions of Sections 9, 10 and 11 of this Article I, a stockholder shall also comply with all applicable requirements of the Exchange Act and the rules and regulations thereunder with respect to the matters set forth herein. Nothing in these Bylaws shall be deemed to affect any rights (i) of stockholders to request inclusion of proposals in the Corporation’s proxy statement pursuant to Rule 14a-8 under the Exchange Act or (ii) of the holders of any class or series of Preferred Stock of the Corporation to elect directors under specified circumstances.

Section 12. In accordance with Article VI of the Restated Certificate of Incorporation, the stockholders shall not be entitled to consent to corporate action in writing without a meeting.

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ARTICLE II.
BOARD OF DIRECTORS

Section 1. The business and affairs of the Corporation shall be managed by or under the direction of the Board of Directors. Except as otherwise fixed pursuant to the provisions of the Restated Certificate of Incorporation relating to the rights of the holders of any class or series of stock having a preference over the Common Stock as to dividends or upon liquidation to elect additional directors under specified circumstances, the number of directors shall be as fixed in such manner as may be determined by the vote of not less than a majority of the directors then in office, but shall not be less than five nor more than thirteen directors. The Board of Directors, excluding however, directors elected pursuant to the provisions of the Restated Certificate of Incorporation relating to the rights of holders of any class or series of stock having a preference over the Common Stock as to dividends or upon liquidation to elect additional directors under specified circumstances, shall be divided into three classes as provided in the Restated Certificate of Incorporation. The directors shall be elected as provided in the Restated Certificate of Incorporation at the annual meeting of stockholders, except as provided in Section 2 of this Article II. Each director shall hold office for the full term to which he shall have been elected and until his successor is duly elected and shall qualify, or until his earlier death, resignation or removal. A director need not be a resident of the State of Delaware or a stockholder of the Corporation.

Section 2. Any vacancy in the Board of Directors, including vacancies resulting from an increase in the number of directors, shall be filled by a majority of the remaining members of the Board, though less than a quorum. When newly created directorships are filled by the Board of Directors, such additional directors shall not be assigned to a director class until the next annual meeting of stockholders. Subject to the foregoing, directors elected to fill a vacancy shall hold office for a term expiring at the annual meeting at which the term of the class to which they shall have been elected expires.

Section 3. Any director may resign at any time by written notice to the Corporation. Any such resignation shall take effect at the date of receipt of such notice or at any later time specified therein, and, unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective.

Section 4. Regular meetings of the Board of Directors shall be held at such place or places within or without the State of Delaware, at such hour and on such day as may be fixed by resolution of the Board of Directors, without further notice of such meetings. The time or place of holding regular meetings of the Board of Directors may be changed by the Chairman of the Board or the Chief Executive Officer by giving written notice thereof as provided in Section 6 of this Article II.

Section 5. Special meetings of the Board of Directors shall be held, whenever called by the Chairman of the Board or the Chief Executive Officer, by a majority of the Board of Directors or by resolution adopted by the Board of Directors, at such place or places within or without the State of Delaware as may be stated in the notice of the meeting.

Section 6. Written notice of the time and place of all special meetings of the Board of Directors, and written notice of any change in the time or place of holding the regular meetings of the Board of Directors, shall be given to each director either personally or by mail, telephone, express delivery service, facsimile, telex or similar means of communication at least one day before the date of the meeting; provided, however, that notice of any meeting need not be given to any director if waived by him in writing, or if he shall be present at such meeting.

Section 7. A majority of the directors in office shall constitute a quorum of the Board of Directors for the transaction of business; but a lesser number may adjourn from day to day until a quorum is present. The directors present at a duly organized meeting may continue to transact business until adjournment, notwithstanding the withdrawal of enough directors to leave less than a quorum, provided however, that such

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remaining directors constitute not less than one-third of the total number of directors. Except as otherwise provided by law or in these Bylaws, all questions shall be decided by the vote of a majority of the directors present. Directors may participate in any meeting of the directors, and members of any committee of directors may participate in any meeting of such committee, by means of conference telephone or similar communications equipment by means of which all persons participating in such meeting can hear each other, and such participation shall constitute presence in person at any such meeting.

Section 8. Any action which may be taken at a meeting of the directors or members of any committee of directors may be taken without a meeting if a consent in writing setting forth the action so taken shall be signed by all of the directors or members of such committee of directors, as the case may be, and shall be filed with the Secretary.

Section 9. Directors shall be entitled to such compensation for their services as may be approved by the Board of Directors, including, if so approved by resolution of the Board of Directors, a fixed sum and expenses of attendance, if any, for attendance at each regular or special meeting of the Board of Directors or any meeting of a committee of directors. No provision of these Bylaws shall be construed to preclude any director from serving the Corporation in any other capacity and receiving compensation therefor.

Section 10. Subject to the rights of the holders of any series of Preferred Stock with respect to such series of Preferred Stock, any director, or the entire Board of Directors, may be removed from office at any time, but only for cause and only by the affirmative vote of the holders of at least 60 percent of the voting power of all of the then-outstanding shares of voting stock, voting together as a single class.

ARTICLE III.
COMMITTEES OF DIRECTORS

Section 1. The Board of Directors may, by resolution adopted by a majority of the whole Board, designate one or more committees of the Board as they shall so determine. The Board, by resolution adopted by a majority of the whole Board, shall designate an Executive Committee, an Audit Committee, a Compensation Committee and a Nominating/Governance Committee. Each of the Executive Committee, Audit Committee, Compensation Committee, Nominating/Governance Committee, and any other committee created by the Board shall adopt and publish a written charter describing the committee’s duties and responsibilities in accordance with applicable securities laws, the requirements of any exchange on which the Corporation’s common stock is listed and the resolutions adopted by the Board applicable to such committee. Any committee of the Board designated by the Board of Directors shall consist of one or more of the directors of the Corporation.

Section 2. Any committee of the Board designated by the Board of Directors shall have and may, except as otherwise limited by statute, the Restated Certificate of Incorporation or these Bylaws, exercise such powers and authority of the Board of Directors in the management of the business of the Corporation as may be provided in the resolution adopted by the Board of Directors designating such committee of the Board of Directors and in the committee’s charter (if the committee has adopted a charter). Each committee of the Board of Directors may authorize the seal of the Corporation to be affixed to all papers that may require it. The Board of Directors may designate one or more directors as alternate members of any committee of the Board of Directors who may replace any absent or disqualified member at any meeting of such committee. In the absence or disqualification of any member of such committee or committees, the member or members thereof present at any meeting and not disqualified from voting, whether or not such member or members constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of any such absent or disqualified member.

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Section 3. The Executive Committee, during intervals between meetings of the Board of Directors and while the Board is not in session, shall have and exercise all the powers and authority of the Board of Directors in the management of the business and affairs of the Corporation (except as such powers and authority may be limited by law, regulation, the Restated Certificate of Incorporation, these Bylaws or the rules of any exchange on which the Corporation’s common stock is traded), and shall otherwise have the powers, duties and responsibilities set forth in its charter.

Section 4. The Audit Committee shall have the powers, duties and responsibilities set forth in its charter.

Section 5. The Compensation Committee shall review the Corporation’s compensation policies and programs and assist the Board with its responsibilities relating to compensation of the Corporation’s executives and directors, and shall otherwise have the powers, duties and responsibilities set forth in its charter. The Compensation Committee may also delegate to the Chief Executive Officer or such other executive officer as the Compensation Committee may determine the authority to approve and cause to be placed into effect amendments to employee benefit plans deemed necessary or appropriate in order to comply with any applicable federal or state statute or regulation or otherwise deemed advisable by the Chief Executive Officer or such other executive officer as the Compensation Committee may determine, provided however, that each such amendment or related series of amendments so approved shall involve costs to the Corporation not exceeding the expenditure approval authority of the Chief Executive Officer as established from time to time by the Board, and provided further, that neither the Chief Executive Officer nor any such other executive officer shall have the authority to approve any such amendment if such amendment would (a) materially increase the benefits accruing to participants under such plan, (b) materially modify the requirements for eligibility for participation in such plan, (c) increase the securities issuable under such plan or (d) require stockholder approval under any provision of the Restated Certificate of Incorporation, these Bylaws, or any federal or state statute or regulation or the rules of the New York Stock Exchange.

Section 6. The Nominating/Governance Committee shall have the powers, duties and responsibilities set forth in its charter.

Section 7. Each committee of directors shall keep regular minutes of its proceedings and report the same to the Board of Directors when required.

Section 8. Members of special or standing committees of the Board shall be entitled to receive such compensation for serving on such committees as the Board of Directors shall determine.

ARTICLE IV.
CHAIRMAN OF THE BOARD

The Chairman of the Board of Directors, if there be one, shall be elected from among the directors, shall have the power to preside at all meetings of the Board of Directors and to sign (together with the Secretary or an Assistant Secretary) certificates for shares of the Corporation, and shall have such other powers and shall be subject to such other duties as the Board of Directors may from time to time prescribe.

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ARTICLE V.
OFFICERS

Section 1. The officers of the Corporation shall consist of a Chief Executive Officer, a President, one or more Vice Presidents, any one or more of which may be designated an Executive Vice President or a Senior Vice President, a Chief Financial Officer, a Secretary, a Treasurer and a Controller. The Board of Directors may appoint such other officers and agents, including Assistant Vice Presidents, Assistant Secretaries and Assistant Treasurers, as it shall deem necessary, who shall hold their offices for such terms and shall exercise such powers and perform such duties as shall be determined by the Board of Directors. Any two or more offices may be held by the same person.

Section 2. The officers of the Corporation shall be elected annually by the Board of Directors at a regular meeting of the Board of Directors held immediately prior to, or immediately following, the annual meeting of stockholders, or as soon thereafter as conveniently possible. Each officer shall hold office until his successor shall have been chosen and shall have qualified or until his death or the effective date of his resignation or removal.

Section 3. Any officer or agent elected or appointed by the Board of Directors or the Executive Committee may be removed without cause by the Board of Directors whenever, in its judgment, the best interests of the Corporation shall be served thereby, but such removal shall be without prejudice to the contractual rights, if any, of the person so removed. Any officer may resign at any time by giving written notice to the Corporation. Any such resignation shall take effect at the date of the receipt of such notice or at any later time specified therein, and unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective.

Section 4. Any vacancy occurring in any office of the Corporation by death, resignation, removal or otherwise, may be filled by the Board of Directors for the unexpired portion of the term.

Section 5. The salaries of all officers and agents of the Corporation shall be fixed by the Board of Directors or pursuant to its direction; and no officer shall be prevented from receiving such salary by reason of his also being a director.

Section 6. The Chief Executive Officer, the President and each Vice President shall have authority to sign any deeds, bonds, mortgages, guarantees, indemnities, contracts, checks, notes, drafts or other instruments authorized to be executed by the Board of Directors or any duly authorized committee thereof, or if so authorized in any approval authority policy or procedure adopted by or at the direction of the Board of Directors, or if not inconsistent with the Restated Certificate of Incorporation, these Bylaws, any action of the Board of Directors or any duly authorized committee thereof or any such policy or procedure, and, together with the Secretary or any other officer of the Corporation thereunto authorized by the Board or the Executive Committee, may sign any certificates for shares of the Corporation which the Board of Directors or the Executive Committee has authorized to be issued, except in cases where the signing and execution of any such instrument or certificate has been expressly delegated by these Bylaws or by the Board or the Executive Committee to some other officer or agent of the Corporation or shall be required by law to be otherwise executed.

Section 7. The Chief Executive Officer shall serve as general manager of the business and affairs of the Corporation and shall report directly to the Board of Directors, with all other officers, officials, employees and agents reporting directly or indirectly to him. The Chief Executive Officer shall preside at all meetings of the stockholders. In the absence of the Chairman of the Board, or if there is no Chairman of the Board, the Chief Executive Officer shall also preside at all meetings of the Board of Directors unless the Board of Directors shall have chosen another presiding officer. The Chief Executive Officer shall formulate and submit to the

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Board of Directors or the Executive Committee matters of general policy for the Corporation; he shall keep the Board of Directors and Executive Committee fully informed and shall consult with them concerning the business of the Corporation. Subject to the supervision, approval and review of his actions by the Board of Directors, the Chief Executive Officer shall have authority to cause the employment or appointment of and the discharge of assistant officers, employees and agents of the Corporation, and to fix their compensation; and to suspend for cause, pending final action by the Board of Directors or Executive Committee, any officer subordinate to the Chief Executive Officer. The Chief Executive Officer shall vote, or give a proxy to any other officer of the Corporation to vote, all shares of stock of any other corporation (or any partnership or other interest in any partnership or other enterprise) standing in the name of the Corporation, and in general he shall perform all other duties normally incident to such office and such other duties as may be prescribed from time to time by the Board of Directors or the Executive Committee. The Chief Executive Officer shall designate the person or persons who shall exercise his powers and perform his duties in his absence or disability and the absence or disability of the President.

Section 8. The President shall in general supervise and control the business operations of the Corporation subject to the control of the Board of Directors and Chief Executive Officer. In the absence of the Chairman of the Board and the Chief Executive Officer, the President shall preside at all meetings of the Board of Directors and, in the absence of the Chief Executive Officer, he shall preside at all meetings of the stockholders of the Corporation, unless in either case the Board of Directors shall have chosen another presiding officer. He shall keep the Chief Executive Officer fully informed and shall consult with him concerning the business of the Corporation. He shall perform all other duties normally incident to such office and such other duties as may be prescribed from time to time by the Board of Directors, the Executive Committee or the Chief Executive Officer. In the absence or disability of the Chief Executive Officer, the President shall exercise the powers and perform the duties of the Chief Executive Officer, unless such authority shall have been designated by the Board of Directors, Executive Committee or Chief Executive Officer to another person.

Section 9. The Vice Presidents shall perform all duties normally incident to such office and such other duties as may be prescribed from time to time by the Board of Directors, the Executive Committee, the Chief Executive Officer or the President.

Section 10. The Chief Executive Officer shall appoint a general counsel or chief legal officer of the Corporation, who shall have charge of all matters of legal importance to the Corporation and shall keep the Board of Directors, the Executive Committee, the Chief Executive Officer and the President advised of the character and progress of all legal proceedings and claims by and against the Corporation, or in which it is interested by reason of its ownership of or affiliation with other corporations or entities; when requested by the Board of Directors, the Executive Committee, the Chief Executive Officer or the President, render his opinion upon any subjects of interest to the Corporation which may be referred to him; monitor activities of the Corporation to assure that the Corporation complies with the laws applicable to the Corporation and in general perform all other duties normally incident to such office and such other duties as may be prescribed from time to time by the Board of Directors, the Executive Committee, the Chief Executive Officer or the President.

Section 11. The Chief Financial Officer shall be the principal financial officer of the Corporation and, unless the Board of Directors shall so designate another officer, shall also be the principal accounting officer of the Corporation. The Chief Financial Officer shall in general supervise and control the keeping and maintaining of proper and correct accounts of the Corporation’s assets, liabilities, receipts, disbursements, gains, losses, capital, surplus, shares, properties and business transactions, as well as all funds, securities, evidences of indebtedness and other valuable documents of the Corporation. He shall keep the Chief Executive Officer fully informed and shall consult with him concerning financial matters affecting the Corporation and shall render such reports to the Board of Directors, the Executive Committee, the Chief Executive Officer or the President as they may request. He shall perform all other duties normally incident to such office and such other

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duties as may be prescribed from time to time by the Board of Directors, the Executive Committee, the Chief Executive Officer or the President.

Section 12. The Secretary shall attend, and record and have custody of, the minutes of the meetings of the stockholders, the Board of Directors and committees of directors; see that all notices are duly given in accordance with the provisions of these Bylaws and as required by law; be custodian of the corporate records and of the seal of the Corporation; sign with the Chairman of the Board, the President or a Vice President, certificates for shares of the Corporation, the issue of which shall have been authorized by resolution of the Board of Directors or the Executive Committee; and in general, perform all duties normally incident to such office and such other duties as may be prescribed from time to time by the Board of Directors, the Executive Committee, the Chief Executive Officer or the President.

Section 13. The Treasurer shall have charge and custody of and be responsible for all funds of the Corporation; and in general, perform all the duties incident to such office and such other duties as may be prescribed from time to time by the Board of Directors, the Executive Committee, the Chief Executive Officer or the President.

Section 14. The Controller shall have charge and supervision of and be responsible for the accounting function of the Corporation and, in general perform all duties incident to such office and such other duties as may be prescribed from time to time by the Board of Directors, the Executive Committee, Chief Executive Officer or the President.

ARTICLE VI.
SEAL

The seal of the Corporation shall be in such form as the Board of Directors shall prescribe.

ARTICLE VII.
CERTIFICATES OF STOCK

The shares of stock of the Corporation shall be represented by certificates of stock, provided, however, that the Board of Directors may provide by resolution or resolutions that some or all of any or all classes or series of the Corporation’s stock may be uncertificated shares. Owners of shares of the stock of the Corporation shall be recorded in the share transfer records of the Corporation and ownership of such shares shall be evidenced by a certificate or book entry notation in the share transfer records of the Corporation. Any certificates representing shares of stock of the Corporation shall be signed by the Chairman of the Board, the President or such Vice President or other officer as may be designated by the Board of Directors or the Executive Committee, and countersigned by the Secretary or an Assistant Secretary, and if such certificates of stock are signed or countersigned by a transfer agent other than the Corporation, or by a registrar other than the Corporation, such signature of the Chairman of the Board, President, Vice President, or other officer, and such countersignature of the Secretary or an Assistant Secretary, or any of them, may be executed in facsimile, engraved or printed. In case any officer who has signed or whose facsimile signature has been placed upon any share certificate shall have ceased to be such officer because of death, resignation or otherwise before the certificate is issued, it may be issued by the Corporation with the same effect as if the officer had not ceased to be such at the date of its issuance. Said certificate of stock shall be in such form as the Board of Directors may from time to time prescribe.

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ARTICLE VIII.
INDEMNIFICATION

Section 1. Each director or officer of the Corporation who was or is made a party or is threatened to be made a party to or is involved in any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (hereinafter a “proceeding”), by reason of the fact that he, or a person of whom he is the legal representative, is or was a director or officer of the Corporation or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation or of a partnership, joint venture, trust, non-profit or charitable organization, or other enterprise, including service with respect to employee benefit plans, whether the basis of such proceeding is alleged action in an official capacity while serving as a director, officer, employee or agent, shall be indemnified and held harmless by the Corporation to the fullest extent authorized by the DGCL (but, in the case of any amendment thereto, only to the extent that such amendment permits the Corporation to provide broader indemnification rights than said law permitted the Corporation to provide prior to such amendment), against all expenses (including attorneys’ fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by such person in connection therewith and such indemnification shall continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of his heirs, executors and administrators. The right to indemnification conferred in this Section shall be a contract right and shall include the right to be paid by the Corporation the expenses incurred in defending any such proceeding in advance of its final disposition; provided, however, that, if the DGCL requires, the payment of such expenses incurred by a director or officer in his capacity as a director or officer (but not in any other capacity in which service was or is rendered by such person while a director or officer, including, without limitation, service with respect to an employee benefit plan) in advance of the final disposition of a proceeding shall be made only upon delivery to the Corporation of an undertaking, by or on behalf of such director or officer, to repay all amounts so advanced if it shall ultimately be determined that such director or officer is not entitled to be indemnified under the applicable provisions of the DGCL. The Corporation may, by action of its Board of Directors or as required pursuant to the Restated Certificate of Incorporation, provide indemnification to employees and agents of the Corporation with the same scope and effect as the foregoing indemnification of directors and officers.

Section 2. The indemnification and advancement of expenses provided herein shall not be deemed exclusive of any other rights to which those seeking indemnification or advancement of expenses may be entitled under any agreement, vote of stockholders, vote of disinterested directors, insurance arrangement or otherwise, both as to action in his official capacity and as to action in another capacity or holding such office.

ARTICLE IX.
AMENDMENTS

These Bylaws may be altered, amended, added to or repealed by the Board of Directors, acting by a majority vote of the members of the Board of Directors in office, or by the stockholders having voting power with respect thereto, provided that in the case of amendments by stockholders, the affirmative vote of the holders of at least 80 percent of the voting power of the then outstanding voting stock, voting together as a single class, shall be required to alter, amend or repeal any provision of the Bylaws.

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EX-12

Exhibit 12.1

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, Except Ratios)
				Year Ended December 31,
	Three Months Ended March 31, 2004			2003			2002			2001			2000			1999
Ratio of Earnings to Fixed Charges:
Earnings:
Income from continuing operations
before income tax expense,
minority interest in net income of
Valero L.P., distributions on preferred
securities of subsidiary trusts and
income from equity investees	$	376.5		$	980.8		$	191.5		$	913.0		$	530.4		$	17.9
Add:
Fixed charges		97.7			395.5			408.9			143.2			114.6			80.2
Amortization of capitalized interest		1.6			6.2			5.7			5.3			5.1			5.2
Distributions from equity investees		9.7			26.5			4.8			2.8			9.2			4.0
Less:
Interest capitalized		(9.3	)		(26.3	)		(16.2	)		(10.6	)		(7.4	)		(5.8	)
Distributions on preferred securities
of subsidiary trusts		-			(16.8	)		(30.0	)		(13.4	)		(6.8	)		-
Minority interest in net income of
Valero L.P.		-			(2.4	)		(14.1	)		-			-			-
Total earnings	$	476.2		$	1,363.5		$	550.6		$	1,040.3		$	645.1		$	101.5
Fixed charges:
Interest expense, net	$	61.8		$	261.3		$	285.7		$	88.5		$	76.3		$	55.4
Interest capitalized		9.3			26.3			16.2			10.6			7.4			5.8
Rental expense interest factor (1)		26.6			91.1			77.0			30.7			24.1			19.0
Distributions on preferred securities
of subsidiary trusts		-			16.8			30.0			13.4			6.8			-
Total fixed charges	$	97.7		$	395.5		$	408.9		$	143.2		$	114.6		$	80.2
Ratio of earnings to fixed charges		4.9	x		3.4	x		1.3	x		7.3	x		5.6	x		1.3	x
Ratio of Earnings to Fixed Charges
and Preferred Stock Dividends:
Total earnings	$	476.2		$	1,363.5		$	550.6		$	1,040.3		$	645.1		$	101.5
Total fixed charges	$	97.7		$	395.5		$	408.9		$	143.2		$	114.6		$	80.2
Preferred stock dividends		4.8			6.8			-			-			-			-
Total fixed charges and
preferred stock dividends	$	102.5		$	402.3		$	408.9		$	143.2		$	114.6		$	80.2
Ratio of earnings to fixed charges
and preferred stock dividends		4.6	x		3.4	x		1.3	x		7.3	x		5.6	x		1.3	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-31.1

Exhibit 31.1

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

        I, William E. Greehey, the principal executive officer of Valero Energy Corporation, certify that:

    1.        I have reviewed this quarterly report on Form 10-Q/A 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)) 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)        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

    (c)        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: May 10, 2004


            /s/ William E. Greehey            
            William E. Greehey
            Chief Executive Officer

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

        I, Michael S. Ciskowski, the principal financial officer of Valero Energy Corporation, certify that:

    1.        I have reviewed this quarterly report on Form 10-Q/A 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)) 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)        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

    (c)        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: May 10, 2004


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

EX-32.1

Exhibit 32.1

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

In connection with the Quarterly Report of Valero Energy Corporation (the Company) on Form 10-Q/A for the quarter ending March 31, 2004, as filed with the Securities and Exchange Commission on the date hereof (the Report), I, William E. Greehey, Chief Executive Officer of the Company, hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 


            /s/William E. Greehey             
            William E. Greehey
            Chief Executive Officer
            May 10, 2004

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 TO18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Valero Energy Corporation (the Company) on Form 10-Q/A for the quarter ending March 31, 2004, 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
            May 10, 2004

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.