UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

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

For the fiscal year ended December 31, 2009

OR

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

For the transition period from                      to      

Commission file number 1-13175

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

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

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

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

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

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

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for shorter period that the registrant was required to submit and post such files). Yes þ No o

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

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

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

The aggregate market value of the voting and non-voting common stock held by non-affiliates was approximately $9.5 billion based on the last sales price quoted as of June 30, 2009 on the New York Stock Exchange, the last business day of the registrant’s most recently completed second fiscal quarter.

As of January 31, 2010, 564,808,668 shares of the registrant’s common stock were issued and outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

We intend to file with the Securities and Exchange Commission a definitive Proxy Statement for our Annual Meeting of Stockholders scheduled for April 29, 2010, at which directors will be elected. Portions of the 2010 Proxy Statement are incorporated by reference in Part III of this Form 10-K and are deemed to be a part of this report.

 

 

 

CROSS-REFERENCE SHEET

The following table indicates the headings in the 2010 Proxy Statement where certain information required in Part III of Form 10-K may be found.

Form 10-K Item No. and Caption		Heading in 2010 Proxy Statement
10. Directors, Executive Officers and Corporate Governance		Information Regarding the Board of Directors, Independent Directors, Audit Committee, Governance Documents and Codes of Ethics, Proposal No. 1 Election of Directors , Information Concerning Nominees and Other Directors, and Section 16(a) Beneficial Ownership Reporting Compliance
11. Executive Compensation		Compensation Committee, Compensation Discussion and Analysis, Director Compensation, Executive Compensation, and Certain Relationships and Related Transactions
12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		Beneficial Ownership of Valero Securities and Equity Compensation Plan Information
13. Certain Relationships and Related Transactions, and Director Independence		Certain Relationships and Related Transactions and Independent Directors
14. Principal Accountant Fees and Services		KPMG Fees for Fiscal Year 2009, KPMG Fees for Fiscal Year 2008, and Audit Committee Pre-Approval Policy

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

CONTENTS

				PAGE
PART I
Items 1., 1A. & 2.		Business, Risk Factors and Properties			1
		Segments			2
		Valero’s Operations			3
		Risk Factors			13
		Environmental Matters			17
		Properties			17
		Executive Officers of the Registrant			18
Item 1B.		Unresolved Staff Comments			18
Item 3.		Legal Proceedings			19
Item 4.		Submission of Matters to a Vote of Security Holders			21
PART II
Item 5.		Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities			22
Item 6.		Selected Financial Data			25
Item 7.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			26
Item 7A.		Quantitative and Qualitative Disclosures About Market Risk			54
Item 8.		Financial Statements and Supplementary Data			60
Item 9.		Changes in and Disagreements with Accountants on Accounting and Financial Disclosure			144
Item 9A.		Controls and Procedures			144
Item 9B.		Other Information			144
PART III
Item 10.		Directors, Executive Officers and Corporate Governance			145
Item 11.		Executive Compensation			145
Item 12.		Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters			145
Item 13.		Certain Relationships and Related Transactions, and Director Independence			145
Item 14.		Principal Accountant Fees and Services			145
PART IV
Item 15.		Exhibits and Financial Statement Schedules			145
Signatures					150
EX-10.2
EX-10.5
EX-10.6
EX-10.7
EX-12.1
EX-21.1
EX-23.1
EX-31.1
EX-31.2
EX-32.1
EX-99.1
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT

PART I

The terms “Valero,” “we,” “our,” and “us,” as used in this report, may refer to Valero Energy Corporation, to one or more of our consolidated subsidiaries, or to all of them taken as a whole. In this Form 10-K, we make certain forward-looking statements, including statements regarding our plans, strategies, objectives, expectations, intentions, and resources, under the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. You should read our forward-looking statements together with our disclosures beginning on page 26 of this report under the heading: “ CAUTIONARY STATEMENT FOR THE PURPOSE OF SAFE HARBOR PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 .”

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

Overview . We are a Fortune 500 company based in San Antonio, Texas. Our corporate offices are at One Valero Way, San Antonio, Texas, 78249, and our telephone number is (210) 345-2000. Our common stock trades on the New York Stock Exchange under the symbol “VLO.” We were incorporated in Delaware in 1981 under the name Valero Refining and Marketing Company, and our name was changed to Valero Energy Corporation on August 1, 1997. On January 31, 2010, we had 20,920 employees.

We own 15 refineries located in the United States, Canada, and Aruba. Our refineries can produce conventional gasolines, distillates, jet fuel, asphalt, petrochemicals, lubricants, and other refined products as well as a slate of premium products including CBOB and RBOB ¹ , gasoline meeting the specifications of the California Air Resources Board (CARB), CARB diesel fuel, low-sulfur and ultra-low-sulfur diesel fuel, and oxygenates (liquid hydrocarbon compounds containing oxygen).

SEGMENTS

Our business is organized into three reportable segments: refining, ethanol, and retail. Prior to the second quarter of 2009, we had two reportable segments: refining and retail. As a result of our acquisition of several ethanol plants during the second quarter of 2009 (as discussed in Note 2 of Notes to Consolidated Financial Statements), we now present ethanol as a third reportable segment. The financial information about our segments in Note 20 of Notes to Consolidated Financial Statements is incorporated herein by reference.

	•		Our refining segment includes refining operations, wholesale marketing, product supply and distribution, and transportation operations. The refining segment is segregated geographically into the Gulf Coast, Mid-Continent, West Coast, and Northeast regions.
	•		Our ethanol segment includes sales of internally produced ethanol and distillers grains. Our ethanol operations are geographically located in the central plains region of the United States.
	•		Our retail segment includes company-operated convenience stores, Canadian dealers/jobbers, truckstop facilities, cardlock facilities, and home heating oil operations. The retail segment is segregated into two geographic regions. Our retail operations in eastern Canada are referred to as Retail – Canada. Our retail operations in the United States are referred to as Retail – U.S.

(a)		“Throughput capacity” represents estimated capacity for processing crude oil, intermediates, and other feedstocks. Total estimated crude oil capacity is approximately 2.4 million BPD.
(b)		Represents the combined capacities of two refineries – the Corpus Christi East and Corpus Christi West Refineries.
(c)		The Aruba Refinery has been idle since July 2009.
(d)		We permanently shut down our Delaware City, Delaware refinery in the fourth quarter of 2009, as described in Note 2 of Notes to Consolidated Financial Statements. Throughput capacity of this refinery was 210,000 BPD.

Corpus Christi East and West Refineries . Our Corpus Christi East and West Refineries are located on the Texas Gulf Coast along the Corpus Christi Ship Channel. The West Refinery specializes in processing primarily sour crude oil and resid into premium products such as RBOB. The East Refinery processes heavy, high-sulfur crude oil into conventional gasoline, diesel, jet fuel, asphalt, aromatics, and other light products. The East and West Refineries are substantially integrated allowing for the transfer of various feedstocks and blending components between the two refineries and the sharing of resources. The refineries typically receive and deliver feedstocks and products by tanker and barge via deepwater docking facilities along the Corpus Christi Ship Channel. Three truck racks with a total of 16 bays

service local markets for gasoline, diesel, jet fuels, liquefied petroleum gases, and asphalt. Finished products are distributed across the refinery docks into ships or barges, and are transported via third-party pipelines to the Colonial, Explorer, Valley, and other major pipelines.

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

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

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

Houston Refinery . Our Houston Refinery is located on the Houston Ship Channel. It processes a mix of crude oils and low-sulfur resid into reformulated gasoline and distillates. The refinery receives its feedstocks via tanker at deepwater docking facilities along the Houston Ship Channel and interconnecting pipelines with the Texas City Refinery. It delivers its products through major refined-product pipelines, including the Colonial, Explorer, Orion, and TEPPCO pipelines.

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

Aruba Refinery . Our Aruba Refinery is located on the island of Aruba in the Caribbean Sea. The refinery has been idle since July 2009. When in operation, it processes primarily heavy sour crude oil and produces primarily intermediate feedstocks and finished distillate products. Significant amounts of the refinery’s intermediate feedstock production are transported and further processed in our other refineries in the Gulf Coast, West Coast, and Northeast regions. The refinery receives crude oil by ship at its two deepwater marine docks, which can berth ultra-large crude carriers. The refinery’s products are delivered by ship primarily into markets in the United States, the Caribbean, Europe, and South America.

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

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

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

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

Ardmore Refinery . Our Ardmore Refinery is located in Ardmore, Oklahoma, approximately 100 miles south of Oklahoma City. It processes medium sour and light sweet crude oils into conventional gasoline, ultra-low-sulfur diesel, liquefied petroleum gas products, and asphalt. Local crude oil is gathered by TEPPCO’s crude oil gathering/trunkline systems and trucking operations, and then transported to the refinery through NuStar Energy L.P.’s crude oil pipeline systems. Foreign, mid-continent, and other domestic crude oils are received via third-party pipelines. Refined products are transported to market via railcars, trucks, and the Magellan pipeline system.

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

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

      Feedstock Supply

Approximately 55 percent of our current crude oil feedstock requirements are purchased through term contracts while the remaining requirements are generally purchased on the spot market. Our term supply agreements include arrangements to purchase feedstocks at market-related prices directly or indirectly from various foreign national oil companies (including feedstocks originating in the Middle East, Africa, Asia, Mexico, and South America) as well as international and domestic oil companies. The term contracts generally permit the parties to amend the contracts (or terminate them), effective as of the next scheduled renewal date, by giving the other party proper notice within a prescribed period of time ( e.g ., 60 days, 6 months) before expiration of the current term. The majority of the crude oil purchased under Valero’s term contracts is purchased at the producer’s official stated price ( i.e ., the “market” price established by the seller for all purchasers) and not at a negotiated price specific to Valero. About 75 percent of our crude oil feedstocks under term supply agreements are imported from foreign sources and about 25 percent are domestic. In the event we become unable to purchase crude oil from any one of these sources, we believe that adequate alternative supplies of crude oil would be available.

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

      Refining Segment Sales

Our refining segment includes sales of refined products in both the wholesale rack and bulk markets. These sales include refined products that are manufactured in our refining operations as well as refined products purchased or received on exchange from third parties. Most of our refineries have access to deepwater transportation facilities and interconnect with common-carrier pipeline systems, allowing us to sell products in most major geographic regions of the United States and eastern Canada. No customer accounted for more than 10 percent of our total operating revenues in 2009.

           Wholesale Marketing

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

The majority of our rack volume is sold through unbranded channels. The remainder is sold to distributors and dealers that are members of the Valero-brand family that operate approximately 4,000 branded sites. These sites are independently owned and are supplied by us under multi-year contracts. For wholesale branded sites, we promote our Valero ^® brand throughout the United States. In addition, we offer the Beacon ^® brand in California and the Shamrock ^® brand elsewhere in the United States.

           Bulk Sales and Trading

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

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

           Specialty Products

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

	•		We produce asphalt at six of our refineries. Our asphalt products are sold for use in road construction, road repair, and roofing applications through a network of refinery and terminal loading racks.
	•		We produce lube oils at two of our refineries. We produce and market paraffinic, naphthenic, and aromatic oils suitable for use in a wide variety of lubricant and process applications.
	•		NGLs produced at our refineries include butane, isobutane, and propane. These products can be used for gasoline blending, home heating, and petrochemical plant feedstocks.
	•		We are a significant producer of petroleum coke, supplying primarily power generation customers and cement manufacturers. Petroleum coke is used largely as a substitute for coal.
	•		We produce and market a number of commodity petrochemicals including aromatic solvents (benzene, toluene, and xylene) and two grades of propylene. Aromatic solvents and propylenes are sold to customers in the chemical industry for further processing into such products as paints, plastics, and adhesives.
	•		We are a large producer of sulfur with sales primarily to customers in the agricultural sector. Sulfur is used in manufacturing fertilizer.

ETHANOL

We own ten ethanol plants in the Midwest with a combined ethanol production capacity of about 1.1 billion gallons per year. Our ethanol plants are dry mill facilities ¹ that process corn to produce ethanol and distillers grains. ² We source our corn supply from local farmers and commercial elevators. Our facilities receive corn by rail and by truck. We publish a corn bid on our website that local farmers and cooperative dealers can use to facilitate corn supply transactions.

After processing, the ethanol is held in storage tanks at our plant sites pending loading to truck and rail car transportation. We sell our ethanol (i) to large customers – primarily refiners and gasoline blenders – under term and spot contracts, and (ii) in bulk markets such as New York, Chicago, Dallas, and the West Coast. We also use our ethanol for our own needs in blending gasoline. We ship our dry distillers grains (DDG) by truck or rail primarily to animal feed customers in the U.S. and Mexico, with some sales into the Far East. We also sell modified distillers grains locally at our plant sites.

The following table presents the locations of our ethanol plants, their approximate ethanol and dry distillers grains production capacities, and their approximate corn processing capacities.

We acquired our Iowa, Minnesota, Nebraska, and South Dakota ethanol plants in the second quarter of 2009. Ethanol production from these seven plants in the fourth quarter of 2009 averaged 2.2 million gallons per day. We acquired our Indiana and Ohio plants in January 2010. The Indiana and Ohio plants were idle when acquired; however, we expect production at these plants to begin by the end of the first quarter of 2010. We acquired our Wisconsin plant in early February 2010. This plant was producing ethanol at the time of our acquisition, and ethanol production has continued under our ownership.

For additional information regarding these acquisitions, see Note 2 of Notes to Consolidated Financial Statements.

1		Ethanol is commercially produced using either the wet mill or dry mill process. Wet milling involves separating the grain kernel into its component parts (germ, fiber, protein, and starch) prior to fermentation. Our ethanol plants utilize the dry mill process, in which the entire grain kernel is ground into flour. The starch in the flour is converted to ethanol during the fermentation process, creating carbon dioxide and distillers grains.
2		In the fermentation process, nearly all of the starch in the grain is converted into ethanol and carbon dioxide, while the remaining nutrients (proteins, fats, minerals, and vitamins) undergo a concentration to yield modified distillers grains, or, after further drying, dried distillers grains. Distillers grains generally are an economical partial replacement for corn, soybean, and dicalcium phosphate in livestock, swine, and poultry feeds.

RETAIL

Our retail segment operations include the following:

	•		sales of transportation fuels at retail stores and unattended self-service cardlocks,
	•		sales of convenience store merchandise and services in retail stores, and
	•		sales of home heating oil to residential customers.

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

      Retail – U.S.

Sales in Retail – U.S. represent sales of transportation fuels and convenience store merchandise and services through our company-operated retail sites. For the year ended December 31, 2009, total sales of refined products through Retail – U.S.’s retail sites averaged approximately 118,600 BPD. In addition to transportation fuels, our company-operated convenience stores sell snacks, candy, beer, fast foods, cigarettes, and fountain drinks. Our stores also offer services such as ATM access, car wash facilities, money orders, lottery tickets, and video rentals. On December 31, 2009, we had 991 company-operated sites in Retail – U.S. (of which 79% were owned and 21% were leased). Our company-operated stores are operated primarily under the brand name Corner Store ^® . Transportation fuels sold in our Retail – U.S. stores are sold primarily under the Valero ^® brand.

      Retail – Canada

Sales in Retail – Canada include the following:

	•		sales of refined products and convenience store merchandise through our company-operated retail sites and cardlocks,
	•		sales of refined products through sites owned by independent dealers and jobbers, and
	•		sales of home heating oil to residential customers.

Retail – Canada includes retail operations in eastern Canada where we are a major supplier of refined products serving Quebec, Ontario, and the Atlantic Provinces of Newfoundland, Nova Scotia, New Brunswick, and Prince Edward Island. For the year ended December 31, 2009, total retail sales of refined products through Retail – Canada averaged approximately 75,200 BPD. Transportation fuels are sold under the Ultramar ^® brand through a network of 824 outlets throughout eastern Canada. On December 31, 2009, we owned or leased 396 retail stores in Retail – Canada and distributed gasoline to 428 dealers and independent jobbers. In addition, Retail – Canada operates 83 cardlocks, which are card- or key-activated, self-service, unattended stations that allow commercial, trucking, and governmental fleets to buy transportation fuel 24 hours a day. Retail – Canada operations also include a large home heating oil business that provides home heating oil to approximately 142,000 households in eastern Canada. Our home heating oil business tends to be seasonal to the extent of increased demand for home heating oil during the winter.

RISK FACTORS

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

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

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

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

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

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

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

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

funding sources could decrease. In addition, we may not be able to obtain favorable credit terms from our suppliers or they may require us to provide collateral, letters of credit, or other forms of security which would increase our operating costs. As a result, a downgrade in our credit ratings could have a material adverse impact on our future operations and financial position.

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

Compliance with and changes in environmental laws, including proposed climate change laws and regulations, could adversely affect our performance.

The principal environmental risks associated with our operations are emissions into the air and releases into the soil, surface water, or groundwater. Our operations are subject to extensive federal, state, and local environmental laws and regulations, including those relating to the discharge of materials into the environment, waste management, pollution prevention measures, greenhouse gas emissions, and characteristics and composition of gasoline and diesel fuels. If we violate or fail to comply with these laws and regulations, we could be fined or otherwise sanctioned. Because environmental laws and regulations are becoming more stringent and new environmental laws and regulations are continuously being enacted or proposed, such as those relating to greenhouse gas emissions and climate change ( e.g. , California’s AB-32 “Global Warming Solutions Act,” the U.S. House of Representatives’ “American Clean Energy and Security Act of 2009,” the U.S. Senate Committee on Environment and Public Works’ “Clean Energy Jobs and American Power Act of 2009,” initiatives and rulemaking following the EPA’s 2009 “Endangerment and Cause or Contribute Findings for Greenhouse Gases Under Section 202(a) of the Clean Air Act”), the level of expenditures required for environmental matters could increase in the future. Future legislative action and regulatory initiatives could result in changes to operating permits, additional remedial actions, material changes in operations, increased capital expenditures and operating costs, increased costs of the goods we sell, and decreased demand for our products that cannot be assessed with certainty at this time.

Some of the proposed federal “cap-and-trade” legislation would require businesses that emit greenhouse gases to buy emission credits from the government, other businesses, or through an auction process. In addition, refiners would be obligated to purchase emission credits associated with the transportation fuels (gasoline, diesel, and jet fuel) sold and consumed in the United States. As a result of such a program, we would be required to purchase emission credits for greenhouse gas emissions resulting from our own operations as well as from the fuels we sell. Although it is not possible at this time to predict the final form of a cap-and-trade bill (or whether such a bill will be passed by Congress), any new federal restrictions on greenhouse gas emissions – including a cap-and-trade program – could result in material increased compliance costs, additional operating restrictions for our business, and an increase in the cost of the products we produce, which could have a material adverse effect on our financial position, results of operations, and liquidity.

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

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

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

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

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

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

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

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

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

Our refining and marketing operations are subject to various hazards common to the industry, including explosions, fires, toxic emissions, maritime hazards, and natural catastrophes. As protection against these

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

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

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

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

ENVIRONMENTAL MATTERS

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

	•		Item 1 under the caption “Risk Factors – Compliance with and changes in environmental laws, including proposed climate change laws and regulations, could adversely affect our performance,”
	•		Item 3 “Legal Proceedings” under the caption “Environmental Enforcement Matters,” and
	•		Item 8 “Financial Statements and Supplementary Data” in Note 24 of Notes to Consolidated Financial Statements under the caption “Environmental Matters.”

Capital Expenditures Attributable to Compliance with Environmental Regulations . In 2009, our capital expenditures attributable to compliance with environmental regulations were approximately $390 million, and are currently estimated to be approximately $795 million for 2010 and approximately $225 million for 2011. The estimates for 2010 and 2011 do not include amounts related to capital investments at our facilities that management has deemed to be strategic investments rather than expenditures relating to environmental regulatory compliance.

		*  on January 31, 2010

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

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

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

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

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

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

ITEM 3. LEGAL PROCEEDINGS

           Litigation

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

	•		MTBE Litigation
	•		Retail Fuel Temperature Litigation
	•		Rosolowski
	•		Other Litigation

           Environmental Enforcement Matters

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

United States Environmental Protection Agency (EPA) (Paulsboro Refinery). In September 2009, the EPA issued a proposed penalty of $211,000 in connection with an alleged unit leak of chlorinated fluorocarbons at our Paulsboro Refinery. The EPA recently agreed to reduce the proposed penalty to an amount less than $100,000.

Bay Area Air Quality Management District (BAAQMD) (Benicia Refinery). We have 78 violation notices (VNs) issued by the BAAQMD from 2007 to 2009 for various alleged air regulation and air permit violations at our Benicia Refinery and asphalt plant. No penalties have been specified in these VNs. We are pursuing settlement of all VNs.

Delaware Department of Natural Resources and Environmental Control (DDNREC) (Delaware City Refinery). Our Delaware City Refinery is subject to 20 outstanding notices of violation (NOVs) issued by the DDNREC. Sixteen of the NOVs allege unauthorized air emission events at the refinery. Three NOVs allege solid waste violations. One NOV alleges violation of a wastewater permit. We are pursuing settlement of these NOVs.

DDNREC (Delaware City Refinery). Our Delaware City Refinery received a stipulated penalty demand from the DDNREC in August 2009 for $200,000, and another in October 2009 for $100,000, for our alleged failure to complete construction of a coke storage and handling system on a timely basis. We have filed dispute resolutions at the DDNREC in connection with each of these stipulated penalty demands, and we are negotiating with the DDNREC to resolve these matters. The refinery received a stipulated penalty demand in October 2009 for $250,000 for our alleged failure to timely complete construction on certain FCCU NOx controls. This penalty was paid in the fourth quarter of 2009. In January 2010, the DDNREC demanded a quarterly stipulated penalty of $250,000 for alleged excess NOx emissions during the three months from August to October of 2009 and an additional stipulated penalty demand of $250,000 for alleged excess NOx emissions from November 2009 to January 2010. Settlement discussions with the DDNREC continue on these matters.

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

NJDEP (Paulsboro Refinery). In the first quarter of 2009, the NJDEP issued two Notices to our Paulsboro Refinery. The first alleges excess air emissions at the refinery for the third quarter of 2008, and assesses a penalty of $338,800. The other assesses a penalty of $278,800 relating to alleged Title V permit deviations. We are pursuing settlement of these Notices.

NJDEP (Paulsboro Refinery). In March 2009 and August 2009, the NJDEP issued Notices to our Paulsboro Refinery. The first Notice relates to an FCC stack test conducted in 2007. The second Notice relates to an FCC stack test conducted in February 2009. The Notices assess penalties of $40,000 and $285,000, respectively, and direct the refinery to either perform a new stack test or submit an application to modify the permit limits. We have commenced discussions with the NJDEP to resolve this matter, and we continue to work with the NJDEP on additional stack testing. Appeals and requests for a stay on both Notices have been filed. The stay on the first Notice has been granted, and the request for stay on the second Notice has yet to be ruled on.

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

South Coast Air Quality Management District (SCAQMD) (Wilmington Refinery). We have 29 outstanding NOVs issued by the SCAQMD from 2008 to 2009 for various alleged air regulation and air permit violations at our Wilmington Refinery and asphalt plant. No penalties have been specified in these NOVs. We are pursuing settlement of all NOVs.

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

Texas Commission on Environmental Quality (TCEQ) (Corpus Christi West Refinery). In the second quarter of 2009, the TCEQ issued a notice of enforcement (NOE) to our Corpus Christi West Refinery. The NOE alleges excess air emissions relating to two cooling tower leaks that occurred in 2008. The penalty demanded in the TCEQ’s Preliminary Report and Petition was $1,100,424. On July 27, 2009, we filed a response and request for hearing on this matter. Settlement discussions continue on this matter.

TCEQ (Corpus Christi West Refinery). We are also negotiating with the TCEQ regarding a collection of enforcement actions pertaining to our Corpus Christi West Refinery having a potential total penalty of $337,809. These actions collectively allege excess air emissions, reporting errors, unauthorized tank emissions, and waste violations. Settlement discussions continue for these matters.

TCEQ (McKee Refinery). In August 2009, our McKee Refinery received an agreed order from the TCEQ with a proposed administrative penalty of $469,251 for a number of self-reported Title V permit deviations that occurred in 2008 and several emission events that occurred in 2009. We have commenced discussions with the TCEQ to resolve this matter.

TCEQ (Port Arthur Refinery). In October 2009, our Port Arthur Refinery received a proposed Agreed Order from the TCEQ for $155,825 relating to alleged multiple emissions events in 2008 and early 2009. We are reviewing the proposed order and evaluating our options for response.

PART II

The following table discloses purchases of shares of Valero’s common stock made by us or on our behalf during the fourth quarter of 2009.

Period

Total

Average

Total Number of

Total Number of

Approximate Dollar

Number of

Price

Shares Not

Shares Purchased

Value of Shares that

Shares

Paid per

Purchased as Part

as Part of

May Yet Be Purchased

Purchased

Share

of Publicly

Publicly

Under the Plans or

Announced Plans

Announced Plans

Programs (2)

or Programs (1)

or Programs

October 2009

147,075

$

20.12

147,075

–

$ 3.46 billion

November 2009

8,147

$

19.45

8,147

–

$ 3.46 billion

December 2009

3,723

$

16.67

3,723

–

$ 3.46 billion

Total

158,945

$

20.00

158,945

–

$ 3.46 billion

(1)		The shares reported in this column represent purchases settled in the fourth quarter of 2009 relating to (a) our purchases of shares in open-market transactions to meet our obligations under employee benefit plans, and (b) our purchases of shares from our employees and non-employee directors in connection with the exercise of stock options, the vesting of restricted stock, and other stock compensation transactions in accordance with the terms of our incentive compensation plans.
(2)		On April 26, 2007, we publicly announced an increase in our common stock purchase program from $2 billion to $6 billion, as authorized by our board of directors on April 25, 2007. The $6 billion common stock purchase program has no expiration date. On February 28, 2008, we announced that our board of directors approved a $3 billion common stock purchase program, which is in addition to the $6 billion program. This $3 billion program has no expiration date. Our stock purchase programs are more fully described in Note 14 of Notes to Consolidated Financial Statements, and we hereby incorporate by reference into this Item our disclosures made in Note 14.

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

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

The following line graph compares the cumulative total return* on an investment in our common stock against the cumulative total return of the S&P 500 Composite Index and an index of peer companies (selected by us) for the five-year period commencing December 31, 2004 and ending December 31, 2009. Our Peer Group consists of the following 13 companies that are engaged in domestic refining operations: Alon USA Energy, Inc., Chevron Corporation, ConocoPhillips, CVR Energy, Inc., Exxon Mobil Corporation, Frontier Oil Corporation, Hess Corporation, Holly Corporation, Marathon Oil Corporation, Murphy Oil Corporation, Sunoco, Inc., Tesoro Corporation, and Western Refining, Inc.

*		Assumes that an investment in Valero common stock and each index was $100 on December 31, 2004. “Cumulative total return” is based on share price appreciation plus reinvestment of dividends from December 31, 2004 through December 31, 2009.

ITEM 6. SELECTED FINANCIAL DATA

The selected financial data for the five-year period ended December 31, 2009 was derived from our audited consolidated financial statements. The following table should be read together with the historical consolidated financial statements and accompanying notes included in Item 8, “Financial Statements and Supplementary Data,” and with Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

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

(a)		The information presented in this table for all years excludes the results of operations related to the Delaware City Refinery, which have been reclassified as discontinued operations due to the shutdown of that facility on November 20, 2009. In addition, the assets related to the Delaware City Refinery have been reclassified as assets related to discontinued operations for all years presented herein, and as a result, the property, plant and equipment and goodwill amounts reflected herein have changed from the amounts presented in our annual report on Form 10-K for the year ended December 31, 2008.
(b)		The information presented for 2009 includes the operations related to certain ethanol plants acquired from VeraSun Energy Corporation (VeraSun, with the acquisition referred to as the VeraSun Acquisition) during 2009. On April 1, 2009, we closed on the acquisition of ethanol plants located in Charles City, Fort Dodge, and Hartley, Iowa; Aurora, South Dakota; and Welcome, Minnesota; and through subsequent closings on April 9, 2009 and May 8, 2009, we acquired ethanol plants in Albert City, Iowa and Albion, Nebraska.
(c)		Effective July 1, 2007, we sold our Lima Refinery to Husky Refining Company. The results of operations of the Lima Refinery are reported as discontinued operations in the consolidated statements of income for the years ended December 31, 2007, 2006, and 2005 and therefore are not included in the statement of income information presented in this table, and the property, plant and equipment and goodwill amounts as of December 31, 2006 and 2005 do not include amounts applicable to the Lima Refinery.
(d)		Includes the operations related to the acquisition of Premcor Inc. beginning September 1, 2005.
(e)		Operating revenues reported for 2005 include approximately $7.8 billion related to crude oil buy/sell arrangements.

(f)		For the years ended December 31, 2009 and 2008, the loss per common share amounts were calculated using basic weighted average shares outstanding as the effect of including common stock equivalents would have been anti-dilutive.

	•		domestic and foreign demand for, and supplies of, refined products such as gasoline, diesel fuel, jet fuel, home heating oil, and petrochemicals;
	•		domestic and foreign demand for, and supplies of, crude oil and other feedstocks;
	•		the ability of the members of the Organization of Petroleum Exporting Countries (OPEC) to agree on and to maintain crude oil price and production controls;
	•		the level of consumer demand, including seasonal fluctuations;
	•		refinery overcapacity or undercapacity;
	•		the actions taken by competitors, including both pricing and adjustments to refining capacity in response to market conditions;
	•		environmental, tax, and other regulations at the municipal, state, and federal levels and in foreign countries;
	•		the level of foreign imports of refined products;
	•		accidents or other unscheduled shutdowns affecting our refineries, machinery, pipelines, or equipment, or those of our suppliers or customers;
	•		changes in the cost or availability of transportation for feedstocks and refined products;
	•		the price, availability, and acceptance of alternative fuels and alternative-fuel vehicles;
	•		delay of, cancellation of, or failure to implement planned capital projects and realize the various assumptions and benefits projected for such projects or cost overruns in constructing such planned capital projects;
	•		ethanol margins may be lower than expected;
	•		earthquakes, hurricanes, tornadoes, and irregular weather, which can unforeseeably affect the price or availability of natural gas, crude oil and other feedstocks, and refined products;
	•		rulings, judgments, or settlements in litigation or other legal or regulatory matters, including unexpected environmental remediation costs, in excess of any reserves or insurance coverage;
	•		legislative or regulatory action, including the introduction or enactment of federal, state, municipal, or foreign legislation or rulemakings, which may adversely affect our business or operations;
	•		changes in the credit ratings assigned to our debt securities and trade credit;
	•		changes in currency exchange rates, including the value of the Canadian dollar relative to the U.S. dollar;
	•		overall economic conditions, including the stability and liquidity of financial markets; and
	•		other factors generally described in the “Risk Factors” section included in Items 1, 1A and 2, “Business, Risk Factors and Properties” in this report.

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

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

OVERVIEW

In this overview, we describe some of the primary factors that we believe affected our results of operations during the year ended December 31, 2009. We reported a loss from continuing operations of $352 million, or $0.65 per share, for the year ended December 31, 2009 compared to a loss from continuing operations of $1.0 billion, or $1.93 per share, for the year ended December 31, 2008. The results of continuing operations for 2009 were unfavorably impacted by asset impairment losses of $230 million ($150 million after tax), which are discussed further below, as well as a $140 million loss contingency accrual (including interest) related to our dispute of a turnover tax on export sales and other tax matters involving the Government of Aruba. The 2008 results included a before-tax and after-tax loss of $4.0 billion resulting from the impairment of goodwill, which is further discussed in Note 3 of Notes to Consolidated Financial Statements. In addition, 2008 results included $86 million of pre-tax asset impairment losses ($56 million after tax) and a $305 million pre-tax gain ($170 million after tax) on the sale of our Krotz Springs Refinery.

In November 2009, we announced the permanent shutdown of our Delaware City Refinery due to financial losses caused by poor economic conditions, significant capital spending requirements, and high operating costs. As a result of the shutdown, we recorded a pre-tax loss of $1.9 billion, which is discussed in Note 2 of Notes to Consolidated Financial Statements. The results of operations of the Delaware City Refinery, which include this loss and other asset impairment losses, are reflected as discontinued operations in the consolidated statements of income for all periods presented.

Due to the impact of the continuing economic slowdown on refining industry fundamentals during 2009, we continued to assess our refining segment assets for potential impairment. This evaluation included an assessment of our operating assets as well as an evaluation of our capital projects classified as “construction in progress.” As a result of this analysis, certain capital projects were permanently cancelled, resulting in pre-tax write-offs of $230 million of project costs relating to continuing operations for the year ended December 31, 2009. Additionally during 2009, we wrote off pre-tax project costs of $178 million related to our Delaware City Refinery, which are reported in discontinued operations as discussed above.

Also due to these poor industry conditions, in June 2009, we announced our plan to shut down the Aruba Refinery temporarily as narrow heavy sour crude oil differentials made the refinery uneconomical to operate. The Aruba Refinery was shut down in July 2009 and is expected to continue to be shut down until market conditions improve.

Our profitability from our operations is substantially determined by the spread between the price of refined products and the price of crude oil, referred to as the “refined product margin.” The economic slowdown that existed throughout 2009 caused a continuing weakness in demand for refined products, which put pressure on refined product margins during 2009. This reduced demand, combined with increased inventory levels, caused a significant decline in diesel and jet fuel margins during 2009 compared to 2008. However, gasoline margins improved in 2009 compared to 2008. In addition, lower costs of crude oil and other feedstocks significantly improved margins on certain secondary products, such as asphalt, fuel oils, and petroleum coke, during 2009 compared to 2008.

Because more than 60% of our total crude oil throughput generally consists of sour crude oil and acidic sweet crude oil feedstocks that historically have been purchased at prices less than sweet crude oil, our profitability is also significantly affected by the spread between sweet crude oil and sour crude oil prices, referred to as the “sour crude oil differential.” Sour crude oil differentials for the year ended December 31, 2009 were substantially lower than the 2008 differentials. We believe that this decline in sour crude oil differentials was partially caused by a reduction in sour crude oil production by OPEC and

other producers, which reduced the supply of sour crude oil and increased the price of sour crude oils relative to sweet crude oils. In addition, high prices of residual fuel oil relative to sweet crude oil prices caused a significant reduction in discounts realized on residual fuel oil that we processed during 2009. These higher residual fuel oil prices also contributed to the decrease in sour crude oil differentials because sour crude oil competes with residual fuel oil as a refinery feedstock.

In March 2009, we issued $750 million of 10-year notes and $250 million of 30-year notes. Proceeds from these notes were used to make $209 million of scheduled debt payments in April 2009, fund our acquisition of certain ethanol plants from VeraSun, and maintain our capital investment program.

In April and May of 2009, we acquired seven ethanol plants and a site under development from VeraSun for $477 million, plus $79 million primarily for inventory and certain other working capital. The new ethanol business reported $165 million of operating income for the year ended December 31, 2009.

In June 2009, we sold in a public offering 46 million shares of our common stock at a price of $18.00 per share and received proceeds, net of underwriting discounts and commissions and other issuance costs, of $799 million.

RESULTS OF OPERATIONS

See the footnote references on pages 34 and 35.

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

		Year Ended December 31,
		2009				2008				Change
Refining (b) (c):
Operating income (d) (e) (i)		$	105			$	995			$	(890	)
Throughput margin per barrel (e) (f) (i)		$	5.85			$	11.10			$	(5.25	)
Operating costs per barrel (d):
Refining operating expenses		$	3.79			$	4.46			$	(0.67	)
Depreciation and amortization			1.52				1.34				0.18
Total operating costs per barrel		$	5.31			$	5.80			$	(0.49	)
Throughput volumes (thousand barrels per day):
Feedstocks:
Heavy sour crude			458				588				(130	)
Medium/light sour crude			516				586				(70	)
Acidic sweet crude			65				79				(14	)
Sweet crude			632				604				28
Residuals			171				197				(26	)
Other feedstocks			153				140				13
Total feedstocks			1,995				2,194				(199	)
Blendstocks and other			277				283				(6	)
Total throughput volumes			2,272				2,477				(205	)
Yields (thousand barrels per day):
Gasolines and blendstocks			1,101				1,102				(1	)
Distillates			748				871				(123	)
Petrochemicals			68				70				(2	)
Other products (g)			364				436				(72	)
Total yields			2,281				2,479				(198	)
Retail – U.S.:
Operating income		$	170			$	260			$	(90	)
Company-operated fuel sites (average)			999				973				26
Fuel volumes (gallons per day per site)			4,983				5,000				(17	)
Fuel margin per gallon		$	0.154			$	0.229			$	(0.075	)
Merchandise sales		$	1,171			$	1,097			$	74
Merchandise margin (percentage of sales)			28.9	%			29.9	%			(1.0	%)
Margin on miscellaneous sales		$	87			$	99			$	(12	)
Retail selling expenses		$	464			$	505			$	(41	)
Depreciation and amortization expense		$	70			$	70			$	–
Retail – Canada:
Operating income		$	123			$	109			$	14
Fuel volumes (thousand gallons per day)			3,159				3,193				(34	)
Fuel margin per gallon		$	0.260			$	0.268			$	(0.008	)
Merchandise sales		$	201			$	200			$	1
Merchandise margin (percentage of sales)			29.0	%			28.5	%			0.5	%
Margin on miscellaneous sales		$	33			$	36			$	(3	)
Retail selling expenses		$	238			$	263			$	(25	)
Depreciation and amortization expense		$	31			$	35			$	(4	)

See the footnote references on pages 34 and 35.

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

		Year Ended December 31,
		2009				2008				Change
Ethanol (a):
Operating income		$	165				N/A			$	165
Ethanol production (thousand gallons per day)			1,479				N/A				1,479
Gross margin per gallon of ethanol production		$	0.65				N/A			$	0.65
Operating costs per gallon of ethanol production:
Ethanol operating expenses		$	0.31				N/A			$	0.31
Depreciation and amortization			0.03				N/A				0.03
Total operating costs per gallon of ethanol production		$	0.34				N/A			$	0.34

See the footnote references on pages 34 and 35.

See the footnote references on pages 34 and 35.

The following notes relate to references on pages 30 through 34.
(a)		The information presented for 2009 includes the operations related to certain ethanol plants acquired from VeraSun during 2009. On April 1, 2009, we closed on the acquisition of ethanol plants located in Charles City, Fort Dodge, and Hartley, Iowa; Aurora, South Dakota; and Welcome, Minnesota; and through subsequent closings on April 9, 2009 and May 8, 2009, we acquired ethanol plants in Albert City, Iowa and Albion, Nebraska. The ethanol production volumes reflected for the year ended December 31, 2009 are based on 365 calendar days rather than the actual daily production, which varied by facility.
(b)		Due to the permanent shutdown of our Delaware City Refinery during the fourth quarter of 2009, the results of operations of the Delaware City Refinery, as well as costs associated with the shutdown, are reported as discontinued operations for 2009 and 2008, and all refining operating highlights, both consolidated and for the Northeast Region, exclude the Delaware City Refinery for both years.
(c)		Effective July 1, 2008, we sold our Krotz Springs Refinery to Alon Refining Krotz Springs, Inc. (Alon). The nature and significance of our post-closing participation in an offtake agreement with Alon represents a continuation of activities with the Krotz Springs Refinery for accounting purposes, and as such the results of operations related to the Krotz Springs Refinery have not been presented as discontinued operations, and all refining operating highlights, both consolidated and for the Gulf Coast region, include the Krotz Springs Refinery for the year ended December 31, 2008. The pre-tax gain of $305 million on the sale of the Krotz Springs Refinery is included in the Gulf Coast operating income for the year ended December 31, 2008 but is excluded from the per-barrel operating highlights.
(d)		The asset impairment loss for 2009 relates primarily to the permanent cancellation of certain capital projects classified as “construction in progress” as a result of the unfavorable impact of the continuing economic slowdown on refining industry fundamentals. Losses resulting from the permanent cancellation of certain capital projects in 2008 have been reclassified from operating expenses and presented separately for comparability with the 2009 presentation. The asset impairment loss amounts are included in the refining segment operating income but are excluded from the regional operating income amounts and the consolidated and regional operating costs per barrel, resulting in an adjustment to the operating costs per barrel previously reported in 2008.
(e)		Upon applying the goodwill impairment testing criteria under existing accounting rules during the fourth quarter of 2008, we determined that the goodwill in all four of our refining segment reporting units was impaired, which resulted in a pre-tax and

		after-tax goodwill impairment loss of $4.0 billion related to continuing operations. This goodwill impairment loss is included in the refining segment operating income but is excluded from the consolidated and regional throughput margins per barrel and the regional operating income amounts presented for the year ended December 31, 2008 in order to make that information comparable between periods.
(f)		Throughput margin per barrel represents operating revenues less cost of sales divided by throughput volumes.
(g)		Other products primarily include gas oils, No. 6 fuel oil, petroleum coke, and asphalt.
(h)		The regions reflected herein contain the following refineries: the Gulf Coast refining region includes the Corpus Christi East, Corpus Christi West, Texas City, Houston, Three Rivers, Krotz Springs (for periods prior to its sale effective July 1, 2008), St. Charles, Aruba, and Port Arthur Refineries; the Mid-Continent refining region includes the McKee, Ardmore, and Memphis Refineries; the Northeast refining region includes the Quebec City and Paulsboro Refineries; and the West Coast refining region includes the Benicia and Wilmington Refineries.
(i)		A loss contingency accrual of $140 million, including interest, was recorded in the third quarter of 2009 related to our dispute with the Government of Aruba regarding a turnover tax on export sales as well as other tax matters. The portion of the loss contingency accrual that relates to the turnover tax of $114 million was recorded in cost of sales for the year ended December 31, 2009, and therefore is included in refining operating income (loss) but has been excluded in determining throughput margin per barrel.
(j)		The average market reference prices and differentials, with the exception of the propylene and lube oil differentials and the corn crush, are based on posted prices from Platts Oilgram. The propylene differential is based on posted propylene prices in Chemical Market Associates, Inc. and the lube oil differential is based on Exxon Mobil Corporation postings provided by Independent Commodity Information Services – London Oil Reports. The corn crush represents the posted New York Harbor ethanol price from Oil Price Information Services less the posted corn price from the Chicago Board of Trade and assumes a yield of 2.75 gallons of ethanol per bushel of corn. The average market reference prices and differentials are presented to provide users of the consolidated financial statements with economic indicators that significantly affect our operations and profitability.
(k)		The market reference differential for sour crude oil is based on 50% Arab Medium and 50% Arab Light posted prices.

General

Operating revenues decreased 40% for the year ended December 31, 2009 compared to the year ended December 31, 2008 primarily as a result of lower average refined product prices between the two periods. Operating income declined $819 million for the year ended December 31, 2009 compared to the amount for the year ended December 31, 2008 primarily due to an $890 million decrease in refining segment operating income discussed below. Despite the decline in operating income, our income from continuing operations increased from 2008 to 2009 due to a $1.6 billion reduction in income tax expense, largely attributable to the nondeductibility of almost all of the goodwill impairment loss that is included in the 2008 operating income, as discussed further below.

Refining

Operating income for our refining segment decreased from $995 million for the year ended December 31, 2008 to $105 million for the year ended December 31, 2009. The decrease in operating income was attributable primarily to a $305 million gain on the sale of the Krotz Springs Refinery in the third quarter of 2008 (as further discussed in Note 2 of Notes to Consolidated Financial Statements), a $143 million increase in asset impairment losses (as further discussed in Note 3 of Notes to Consolidated Financial Statements), a $114 million loss contingency accrual in 2009 related to our dispute of a turnover tax on export sales in Aruba (as further discussed in Note 23 of Notes to Consolidated Financial Statements), a 47% decrease in throughput margin per barrel, and an 8% decline in throughput volumes. These decreases were partially offset by a $4.0 billion goodwill impairment loss recorded in the fourth quarter of 2008 (as further discussed in Note 3 of Notes to Consolidated Financial Statements) and a 16% decrease in refining operating expenses (including depreciation and amortization expense).

Total refining throughput margins for 2009 compared to 2008 were impacted by the following factors:

•

Distillate margins in 2009 decreased significantly in all of our refining regions from the margins in 2008. The decrease in distillate margins was primarily due to increased inventory levels and reduced demand attributable to the global slowdown in economic activity.

	•		Sour crude oil and residual fuel oil feedstock differentials to WTI crude oil during 2009 declined significantly compared to the differentials in 2008. The unfavorable sour crude oil differentials were attributable mainly to reduced production of sour crude oil by OPEC and other producers as well as high relative prices for residual fuel oil with which sour crude oil competes as a refinery feedstock.
	•		Gasoline margins increased in all of our refining regions in 2009 compared to 2008 primarily due to a better balance of supply and demand.
	•		Margins on various secondary refined products such as asphalt, fuel oils, and petroleum coke improved significantly from 2008 to 2009 as prices for these products did not decrease in proportion to the large decrease in the costs of the feedstocks used to produce them. The price of WTI crude oil declined by approximately $38 per barrel, or 38%, from the year ended December 31, 2008 to the year ended December 31, 2009.
	•		Throughput margin for 2008 included approximately $100 million related to the McKee Refinery business interruption insurance settlement discussed in Note 23 of Notes to Consolidated Financial Statements.
	•		Throughput volumes decreased 205,000 barrels per day during 2009 compared to 2008 primarily due to (i) the temporary shutdown of our Aruba Refinery commencing in July 2009, (ii) the sale of our Krotz Springs Refinery in July 2008, (iii) unplanned downtime at our St. Charles Refinery, (iv) planned downtime for maintenance at our Corpus Christi West, Texas City, Paulsboro, and Three Rivers Refineries, and (v) economic decisions to reduce throughput at certain of our refineries as a result of unfavorable market conditions.

Refining operating expenses, excluding depreciation and amortization expense, were 22% lower for the year ended December 31, 2009 compared to the year ended December 31, 2008 primarily due to a decrease in energy costs, lower maintenance expenses, a reduction in sales and use taxes, and $43 million of operating expenses related to the Krotz Springs Refinery prior to its sale effective July 1, 2008. Refining depreciation and amortization expense increased 4% from the year ended December 31, 2008 to the year ended December 31, 2009 primarily due to the completion of new capital projects and increased turnaround and catalyst amortization.

Retail

Retail operating income was $293 million for the year ended December 31, 2009 compared to $369 million for the year ended December 31, 2008. This 21% decrease was primarily due to decreased retail fuel margins, partially offset by lower selling expenses, in our U.S. retail operations.

Ethanol

Ethanol operating income was $165 million for the year ended December 31, 2009, which represents the operations of the seven ethanol plants acquired in the VeraSun Acquisition subsequent to their acquisition in the second quarter of 2009, as described in Note 2 of Notes to Consolidated Financial Statements.

Corporate Expenses and Other

General and administrative expenses, including depreciation and amortization expense, increased $17 million for the year ended December 31, 2009 compared to the year ended December 31, 2008 mainly due to increases in litigation costs, severance expenses, and acquisition costs, partially offset by reductions in environmental costs and professional fees.

Other income for the year ended December 31, 2009 decreased from the year ended December 31, 2008 primarily due to a $128 million unfavorable change in fair value adjustments related to the Alon earn-out agreement and associated derivative instruments (as discussed in Notes 2, 17, and 18 of Notes to Consolidated Financial Statements), reduced interest income resulting from lower cash balances and interest rates, and the nonrecurrence of a $14 million gain recognized in 2008 on the redemption of our 9.5% senior notes as discussed in Note 12 of Notes to Consolidated Financial Statements. These decreases were partially offset by a $55 million increase in the fair value of certain nonqualified benefit plan assets and $27 million of income in 2009 resulting from the reversal of an accrual for potential payments related to the UDS Acquisition due to the expiration of the statute of limitations.

Interest and debt expense increased mainly due to interest incurred on $1 billion of debt issued in March 2009.

Income tax expense decreased $1.6 billion from $1.5 billion of expense in 2008 to a $97 million benefit in 2009 mainly as a result of lower operating income in 2009 and the nondeductibility of almost all of the $4.0 billion goodwill impairment loss included in the 2008 results of operations, as discussed above. Excluding the effect of the goodwill impairment loss on the effective tax rate for 2008, our 2009 effective tax rate was lower than 2008 primarily due to a higher percentage of the pre-tax loss being attributable to the Aruba Refinery in 2009, the profits or losses of which are not taxed through December 31, 2010.

“Loss from discontinued operations, net of income taxes” increased $1.5 billion from the year ended December 31, 2008 to the year ended December 31, 2009 primarily due to the after-tax effect of the following changes in the results of operations related to the Delaware City Refinery: (i) a $1.9 billion loss related to the permanent shutdown of the Delaware City Refinery in the fourth quarter of 2009, (ii) a $360 million increase in asset impairment losses, and (iii) a $260 million increase in operating losses. The shutdown of the Delaware City Refinery is discussed in Note 2 of Notes to Consolidated Financial Statements.