
UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
FORM 10-Q

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

For the quarterly period ended September 30, 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 Way
	San Antonio, Texas
	(Address of principal executive offices)
	78249
	(Zip Code)

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

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

Indicate by check mark whether the registrant is 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 October 29, 2004 was 256,637,559.

VALERO ENERGY CORPORATION AND SUBSIDIARIES

INDEX


PART I - FINANCIAL INFORMATION
		Page
Item 1. Financial Statements

Consolidated Balance Sheets as of September 30, 2004 and December 31, 2003		3

Consolidated Statements of Income for the Three and Nine Months
Ended September 30, 2004 and 2003		4

Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 2004 and 2003		5

Consolidated Statements of Comprehensive Income for the
Three and Nine Months Ended September 30, 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		23

Item 3. Quantitative and Qualitative Disclosures About Market Risk		43

Item 4. Controls and Procedures		47

PART II - OTHER INFORMATION

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		48

Item 4. Submission of Matters to a Vote of Security Holders		49

Item 6. Exhibits		49

SIGNATURE		51

PART I — FINANCIAL INFORMATION
Item 1. Financial Statements

VALERO ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Millions of Dollars, Except Par Value)

	September 30,			December 31,
	2004			2003
	(Unaudited)
ASSETS
Current assets:
Cash and temporary cash investments	$	680.8		$	369.2
Restricted cash		24.8			43.7
Receivables, net		2,138.2			1,327.7
Inventories		2,737.0			1,913.1
Deferred income taxes		130.9			118.7
Prepaid expenses and other		49.8			44.9

Total current assets		5,761.5			3,817.3


Property, plant and equipment, at cost		11,770.4			9,748.1
Accumulated depreciation		(1,867.0	)		(1,553.0	)

Property, plant and equipment, net		9,903.4			8,195.1


Intangible assets, net		305.9			320.2
Goodwill		2,428.1			2,401.7
Investment in Valero L.P		264.2			264.5
Deferred charges and other assets, net		774.4			665.4

Total assets	$	19,437.5		$	15,664.2

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current portion of long-term debt and capital lease obligations	$	412.8		$	-
Accounts payable		3,364.8			2,288.2
Accrued expenses		825.2			355.6
Taxes other than income taxes		350.2			364.8
Income taxes payable		75.0			55.7

Total current liabilities		5,028.0			3,064.3


Long-term debt, less current portion		4,164.2			4,239.1

Capital lease obligations, less current portion		8.1			6.0

Deferred income tax liabilities		1,932.6			1,604.6

Other long-term liabilities		1,082.4			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		206.2			200.5
Common stock, $0.01 par value; 600,000,000 shares authorized;
261,188,614 and 242,309,808 shares issued		2.6			2.4
Additional paid-in capital		4,360.6			3,921.4
Treasury stock, at cost; 5,134,996 and 1,776,934 shares		(159.4	)		(41.4	)
Retained earnings		2,734.8			1,482.7
Accumulated other comprehensive income		77.4			169.6

Total stockholders’ equity		7,222.2			5,735.2

Total liabilities and stockholders’ equity	$	19,437.5		$	15,664.2

See Condensed Notes to Consolidated Financial Statements.

VALERO ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Millions of Dollars, Except per Share Amounts)
(Unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2004			2003			2004			2003
Operating revenues	$	14,339.3		$	9,922.3		$	39,228.4		$	28,459.2


Costs and expenses:
Cost of sales		12,683.4			8,749.9			34,260.3			25,163.5
Refining operating expenses		528.8			437.5			1,552.7			1,202.4
Retail selling expenses		176.8			176.0			518.6			518.9
General and administrative expenses		87.1			76.3			262.8			222.5
Depreciation and amortization expense		163.7			125.2			463.7			362.0

Total costs and expenses		13,639.8			9,564.9			37,058.1			27,469.3


Operating income		699.5			357.4			2,170.3			989.9
Equity in earnings of Valero L.P		9.6			9.7			29.0			20.4
Other income (expense), net		7.3			(0.3	)		4.4			(5.9	)
Interest and debt expense:
Incurred		(73.7	)		(70.2	)		(222.6	)		(217.7	)
Capitalized		10.2			7.1			27.0			16.3
Minority interest in net income of Valero L.P.		-			-			-			(2.4	)
Distributions on preferred securities of
subsidiary trusts		-			(1.8	)		-			(16.8	)

Income before income tax expense		652.9			301.9			2,008.1			783.8
Income tax expense		218.4			110.8			692.8			293.9


Net income		434.5			191.1			1,315.3			489.9
Preferred stock dividends		3.2			1.3			9.4			1.3


Net income applicable to common stock	$	431.3		$	189.8		$	1,305.9		$	488.6


Earnings per common share	$	1.69		$	0.81		$	5.13		$	2.16
Weighted-average common shares outstanding
(in millions)		255.7			233.8			254.7			226.0

Earnings per common share - assuming dilution	$	1.57		$	0.75		$	4.78		$	2.05
Weighted-average common equivalent shares
outstanding (in millions)		276.3			255.2			275.4			239.0

Dividends per common share	$	0.075		$	0.05		$	0.21		$	0.15

See Condensed Notes to Consolidated Financial Statements.

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

	Nine Months Ended September 30,
	2004			2003
Cash flows from operating activities:
Net income	$	1,315.3		$	489.9
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization expense		463.7			362.0
Distributions in excess of (less than) equity in earnings of Valero L.P.		0.2			(3.7	)
Minority interest in net income of Valero L.P		-			2.4
Noncash interest expense and other income, net		7.1			12.1
Deferred income tax expense		335.6			225.7
Changes in current assets and current liabilities		(141.2	)		192.8
Changes in deferred charges and credits and other, net		(101.3	)		(128.5	)

Net cash provided by operating activities		1,879.4			1,152.7


Cash flows from investing activities:
Capital expenditures		(820.7	)		(571.8	)
Deferred turnaround and catalyst costs		(180.2	)		(94.2	)
Buyout of assets under structured lease arrangements		(567.1	)		(238.3	)
Aruba Acquisition, net of cash acquired		(548.4	)		-
St. Charles Acquisition		-			(308.0	)
Proceeds from contribution and sale of assets to Valero L.P.		-			379.9
Contingent payments in connection with acquisitions		(53.4	)		(35.0	)
Investment in Cameron Highway Oil Pipeline Project		(4.9	)		(104.5	)
Proceeds from dispositions of property, plant and equipment
and certain home heating oil operations		58.2			63.3
Minor acquisitions and other investing activities, net		0.3			(14.1	)

Net cash used in investing activities		(2,116.2	)		(922.7	)


Cash flows from financing activities:
Decrease in short-term debt, net		-			(153.0	)
Repayment of capital lease obligations		(0.6	)		(289.3	)
Long-term debt borrowings, net of issuance costs		3,781.6			3,256.9
Long-term debt repayments		(3,449.0	)		(3,068.6	)
Proceeds from cash settlement of PEPS Unit purchase contracts		-			13.6
Redemption of company-obligated preferred securities of subsidiary trust		-			(200.0	)
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		405.8			250.2
Issuance of common stock in connection with employee benefit plans		111.5			61.6
Common stock dividends		(53.8	)		(33.7	)
Preferred stock dividends		(3.8	)		(1.3	)
Purchase of treasury stock		(245.2	)		(24.2	)

Net cash provided by financing activities		546.5			8.9


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		1.9			27.9

Net increase (decrease) in cash and temporary cash investments		311.6			(69.3	)
Cash and temporary cash investments at beginning of period		369.2			378.9

Cash and temporary cash investments at end of period	$	680.8		$	309.6

See Condensed Notes to Consolidated Financial Statements.

VALERO ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Millions of Dollars)
(Unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2004			2003			2004			2003
Net income	$	434.5		$	191.1		$	1,315.3		$	489.9


Other comprehensive income (loss):
Foreign currency translation adjustment		71.4			(0.1	)		41.7			123.8


Net gain (loss) on derivative instruments
designated and qualifying as cash flow hedges:
Net gain (loss) arising during the period,
net of income tax (expense) benefit of
$32.5, $(5.0), $81.2 and $(13.7)		(60.4	)		9.3			(150.8	)		25.5
Net (gain) loss reclassified into income,
net of income tax expense (benefit) of
$(20.9), $6.8, $(9.1) and $8.0		38.7			(12.7	)		16.9			(14.9	)

Net gain (loss) on cash flow hedges		(21.7	)		(3.4	)		(133.9	)		10.6


Other comprehensive income (loss)		49.7			(3.5	)		(92.2	)		134.4


Comprehensive income	$	484.2		$	187.6		$	1,223.1		$	624.3

See Condensed Notes to Consolidated Financial Statements.

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 (GAAP) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X of the Securities Exchange Act of 1934. Accordingly, they do not include all of the information and notes required by GAAP for complete consolidated financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. All such adjustments are of a normal recurring nature unless disclosed otherwise. Financial information for the three and nine months ended September 30, 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 and nine months ended September 30, 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.

Share and per share data (except par value) presented for all periods reflect the effect of a two-for-one stock split, which was effected in the form of a common stock dividend distributed on October 7, 2004, as discussed in Note 8 under “Common Stock Split.”

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

2. ACCOUNTING PRONOUNCEMENTS

FASB Staff Position 106-2
In May 2004, the Financial Accounting Standards Board (FASB) issued Staff Position No. FAS 106-2, “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003,” which provides guidance on accounting for the effects of the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the Act) for sponsors of postretirement health care plans. Staff Position No. FAS 106-2 is effective for interim or annual financial statements for periods beginning after June 15, 2004, and supersedes the guidance of Staff Position No. FAS 106-1 on the same subject, which allowed employers to defer accounting for the effects of the Act, including the effect of a federal subsidy provided for in the Act. For sponsors of postretirement health care plans that provide prescription drug benefits, Staff Position No. FAS 106-2 requires the sponsor to determine whether those benefits are actuarially equivalent to the Medicare prescription drug benefit, and, if so, to remeasure the postretirement benefit obligation, and the effect of such remeasurement on the net periodic

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

postretirement benefit cost, on a retroactive or prospective basis at the election of the sponsor. Valero has concluded that the enactment of the Act does not constitute a significant event under FASB Statement No. 106, “Employers’ Accounting for Postretirement Benefits Other Than Pensions,” and therefore, in lieu of remeasuring plan obligations at the beginning of the third quarter, the effects of the Act will be incorporated into the next regular measurement of plan obligations as of December 31, 2004.

3. ACQUISITIONS

Aruba Acquisition
On March 5, 2004, Valero completed the purchase of El Paso Corporation’s 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 for the Aruba Acquisition was $465 million plus approximately $177 million for working capital, subject to final adjustment as set out in the purchase agreement. The working capital amount includes a preliminary post-closing adjustment and excludes amounts related to certain refined product inventories owned by a third-party marketing firm under an agreement in existence on the date of acquisition, pursuant to which Valero paid $67.8 million upon termination of the agreement on May 4, 2004. The Aruba Acquisition was funded with $200 million in existing cash, approximately $36 million in borrowings under Valero’s existing bank credit facilities and approximately $406 million in net proceeds from the sale of 15.6 million shares of Valero common stock through a public offering discussed in Note 8 under “ Common Stock Offering. ” The additional amount paid to the third-party marketing firm described above was funded through borrowings under Valero’s existing bank credit facilities. The results of the Aruba Refinery’s operations are non-taxable in Aruba through December 31, 2010.

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, which are currently expected to be completed by the end of the year. As of September 30, 2004, the preliminary purchase price allocation was as follows (in millions):


Current assets	$	321.0
Property, plant and equipment		479.0
Current liabilities		(151.4	)
Capital lease obligation, less current portion		(3.2	)
Other long-term liabilities		(3.6	)

Total purchase price		641.8
Less cash acquired		(93.4	)

Purchase price, excluding cash acquired	$	548.4

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

St. Charles Acquisition
On July 1, 2003, Valero completed the acquisition of the St. Charles Refinery (St. Charles Acquisition) from Orion Refining Corporation (Orion). Total consideration for the purchase, including various transaction costs incurred and the release of certain escrowed amounts discussed below, was $529.0 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 up to an aggregate of $175 million 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 reflected in “restricted cash” in the consolidated balance sheet. Through September 30, 2004, Valero has released a total of $17.3 million of the escrowed cash as prescribed by the purchase agreement.

In accordance with FASB Statement No. 141, “Business Combinations,” the total potential earn-out payments of $175 million discussed above were recognized in “property, plant and equipment” (with $50 million recorded as a current liability in “accrued expenses” and $125 million recorded in “other long-term liabilities”) as part of the purchase price allocation since the net fair value of the assets acquired and liabilities assumed exceeded the cost of the acquisition by an amount greater than the potential earn-out amount. During the second quarter of 2004, an independent appraisal was completed and the resulting final purchase price allocation for the St. Charles Acquisition is summarized below (in millions). The amounts reflected include the accrual of the potential earn-out payments.


Inventories	$	154.8
Property, plant and equipment		574.0
Accrued expenses		(50.5	)
Other long-term liabilities		(149.3	)

Total purchase price	$	529.0

Unaudited Pro Forma Financial Information
The consolidated statements of income include the results of operations of the St. Charles Acquisition and the Aruba Acquisition commencing on July 1, 2003 and March 5, 2004, respectively. As a result, information for the three months ended September 30, 2004 presented below represents actual results of operations. 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:

15.6 million shares of common stock were sold and approximately $36 million of debt was incurred in connection with the Aruba Acquisition on January 1, 2004 and 2003, and

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

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

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

	Three Months Ended September 30,				Nine Months Ended September 30,
	2004		2003		2004		2003
Operating revenues	$	14,339.3	$	10,235.1	$	39,699.8	$	30,899.7
Operating income		699.5		296.8		2,154.8		762.7
Net income		434.5		133.1		1,298.5		293.9
Earnings per common share		1.69		0.53		5.01		1.19
Earnings per common share - assuming dilution		1.57		0.49		4.67		1.12

4. INVENTORIES

Inventories consisted of the following (in millions):

	September 30, 2004		December 31, 2003
Refinery feedstocks	$	1,136.7	$	738.2
Refined products and blendstocks		1,358.2		954.2
Convenience store merchandise		83.3		82.3
Materials and supplies		158.8		138.4

Inventories	$	2,737.0	$	1,913.1

As of September 30, 2004 and December 31, 2003, the replacement cost of LIFO inventories exceeded their LIFO carrying values by approximately $1.9 billion and $666 million, respectively.

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

As of September 30, 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 September 30,				Nine Months Ended September 30,
	2004		2003		2004		2003
Revenues	$	58.1	$	51.7	$	166.1	$	131.1
Operating income		24.5		23.5		73.6		59.8
Net income		19.4		19.7		59.1		50.2

Valero provides Valero L.P. with legal, accounting, treasury, engineering, information technology and other services for an annual fee (Administrative Fee), which was originally established at $5.2 million. On March 11, 2004, an amendment to the Administrative Fee 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 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. The annual

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

fee may also be adjusted to account for changed service levels due to Valero L.P.’s acquisition, sale or construction of assets. The Administrative Fee is reflected by Valero as a reduction of general and administrative expenses. For the three and nine months ended September 30, 2004, the Administrative Fee charged to Valero L.P. was $2.9 million and $6.8 million, respectively. In addition, Valero L.P. amended its partnership agreement effective March 11, 2004 to cap the general partner’s distribution, including incentive distributions, 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.

As of September 30, 2004 and December 31, 2003, Valero’s “receivables, net” included $3.8 million and $9.8 million, respectively, from Valero L.P., representing amounts due for employee costs, insurance costs, operating expenses, administrative costs and rentals. As of September 30, 2004 and December 31, 2003, Valero’s “accounts payable” included $18.6 million and $15.8 million, respectively, to Valero L.P., representing amounts due for pipeline tariffs, terminalling fees and tank rentals and fees. The following table summarizes the results of transactions with Valero L.P.:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2004		2003		2004		2003
Expenses charged by Valero
to Valero L.P.	$	11.9	$	8.5	$	31.3	$	21.7
Fees and expenses charged to
Valero by Valero L.P.		57.3		50.7		163.5		129.5

See Note 16 for a discussion of a proposed merger of Valero L.P. with Kaneb Services LLC and Kaneb Pipe Line Partners, L.P.

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 (together, the Notes). Interest is payable on the Notes 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 from this offering were used to repay borrowings under Valero’s revolving bank credit facilities.

On March 25, 2004, Valero entered into additional interest rate swap contracts with a total notional amount of $200 million to hedge against changes in interest rates. These interest rate swap contracts have the effect of converting the $200 million of 4.75% Senior Notes from fixed rate to floating rate debt.

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. Valero used the net proceeds from this borrowing to repay borrowings under its revolving bank credit facilities.

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

7. OTHER LONG-TERM LIABILITIES

Changes in other long-term liabilities resulted primarily from the following:

the accrual of the $125 million long-term portion of the total potential earn-out payments related to the St. Charles Acquisition (as discussed in Note 3),

the liquidation in February 2004 of the outstanding amount of certain foreign currency exchange contracts resulting in a net cash payment by Valero of approximately $34 million, and

a decrease of $25 million representing a portion of contributions made to Valero’s qualified pension plans during the nine months ended September 30, 2004.

8. STOCKHOLDERS’ EQUITY

Common Stock Offering
On February 5, 2004, Valero sold in a public offering 15.6 million shares of its common stock, which included 2.0 million shares related to an overallotment option exercised by the underwriter, at a price of $26.63 per share and received proceeds, net of underwriter’s discount, commissions and other issuance costs, of $405.8 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.

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 nine months ended September 30, 2004 and 2003, Valero purchased 8.0 million and 1.3 million shares of its common stock at a cost of $245.2 million and $24.2 million, respectively.

Common Stock Split
On July 15, 2004, Valero’s Board of Directors approved a two-for-one split of Valero’s common stock, to be effected in the form of a stock dividend, subject to shareholder approval of an amendment to Valero’s certificate of incorporation to increase the number of authorized common shares from 300 million to 600 million. On September 13, 2004, Valero’s shareholders approved that amendment. The distribution of the stock dividend occurred on October 7, 2004 to stockholders of record on September 23, 2004.

In connection with the common stock split, the number of shares of common stock issuable upon conversion of the mandatory convertible preferred stock, the exercise of outstanding stock options and the vesting of other stock awards, as well as the number of shares of common stock reserved for issuance under Valero’s various employee benefit plans, were proportionately increased in accordance with the terms of those respective agreements and plans.

Cash Dividends
On October 21, 2004, Valero’s Board of Directors declared a regular quarterly cash dividend of $0.08 per common share payable December 15, 2004 to holders of record at the close of business on November 10, 2004. Also on October 21, 2004, Valero’s Board of Directors declared a dividend on the mandatory convertible preferred stock of $0.125 per share payable on December 31, 2004 to holders of record on December 30, 2004.

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 September 30,				Nine Months Ended September 30,
	2004		2003		2004		2003
Earnings per Common Share:
Net income	$	434.5	$	191.1	$	1,315.3	$	489.9
Preferred stock dividends		3.2		1.3		9.4		1.3

Net income applicable to common stock	$	431.3	$	189.8	$	1,305.9	$	488.6


Weighted-average common shares outstanding		255.7		233.8		254.7		226.0


Earnings per common share	$	1.69	$	0.81	$	5.13	$	2.16


Earnings per Common Share - Assuming Dilution:
Net income applicable to
common equivalent shares	$	434.5	$	191.1	$	1,315.3	$	489.9


Weighted-average common shares outstanding		255.7		233.8		254.7		226.0
Effect of dilutive securities:
Stock options		7.8		5.2		7.9		5.5
Performance awards and other benefit plans		2.9		2.7		2.9		2.7
PEPS Units		-		0.3		-		0.4
Mandatory convertible preferred stock		9.9		13.2		9.9		4.4

Weighted-average common equivalent
shares outstanding		276.3		255.2		275.4		239.0


Earnings per common share - assuming dilution	$	1.57	$	0.75	$	4.78	$	2.05

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 September 30,						Nine Months Ended September 30,
			2004			2003			2004			2003
Stock options				-			0.9			-			0.9

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):

	Nine Months Ended September 30,
	2004			2003
Decrease (increase) in current assets:
Restricted cash	$	18.9		$	4.8
Receivables, net		(742.2	)		398.2
Inventories		(647.4	)		(463.9	)
Prepaid expenses and other		(7.3	)		(12.8	)
Increase (decrease) in current liabilities:
Accounts payable		937.0			263.1
Accrued expenses		198.1			60.9
Taxes other than income taxes		(21.3	)		(83.0	)
Income taxes payable		123.0			25.5

Changes in current assets and current liabilities	$	(141.2	)	$	192.8

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

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

the amounts shown above exclude the current assets and current liabilities acquired in connection with the Aruba Acquisition in 2004 and the St. Charles Acquisition in 2003, which are reflected separately in the consolidated statement of cash flows, and the effect of certain noncash investing activities discussed below; and

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

Noncash investing activities for the nine months ended September 30, 2004 included various adjustments to property, plant and equipment and certain current and other noncurrent assets and liabilities resulting from adjustments to the purchase price allocations related to the Aruba and St. Charles Acquisitions discussed in Note 3 (including recognition of the $175 million of potential earn-out payments related to the St. Charles Acquisition).

Noncash investing and financing activities for the nine months ended September 30, 2003 included:

the issuance of 9.1 million shares of common stock in exchange for the settlement of 6.36 million PEPS unit purchase contracts under the remarketing election;

the issuance of 2% mandatory convertible preferred stock with a fair value of $220 million as partial consideration for the acquisition of the St. Charles Refinery from Orion;

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

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

the accrual of an earn-out contingency amount of $15.6 million payable to Exxon Mobil Corporation in October 2003 in connection with Valero’s acquisition of the Paulsboro Refinery; and

adjustments to property, plant and equipment, goodwill, and certain current and noncurrent assets and liabilities associated with the change to cease consolidation of Valero L.P. and use the equity method to account for Valero’s investment in Valero L.P. effective March 18, 2003.

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

	Nine Months Ended September 30,
	2004		2003
Interest paid (net of amount capitalized)	$	141.1	$	159.6
Income taxes paid		239.8		84.8
Income tax refunds received		8.0		42.1

11. PRICE RISK MANAGEMENT ACTIVITIES

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

	Three Months Ended September 30,						Nine Months Ended September 30,
	2004			2003			2004			2003
Fair value hedges	$	(0.6	)	$	(1.1	)	$	3.2		$	(2.7	)
Cash flow hedges		(1.1	)		0.5			(8.6	)		4.5

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

During the nine months ended September 30, 2004, Valero recognized in “accumulated other comprehensive income” unrealized after-tax losses of $150.8 million on certain cash flow hedges, primarily related to forward sales of distillates, with $131.0 million of cumulative after-tax losses on cash flow hedges remaining in “accumulated other comprehensive income” as of September 30, 2004. Valero expects that $112.3 million of this amount will be reclassified into income over the next 12 months as a result of hedged transactions that are forecasted to occur over that period. The amount ultimately realized in income will differ as commodity prices change. As of September 30, 2004, the maximum length of time over which Valero was hedging its exposure to the variability in future cash flows for forecasted transactions was 15 months. For the nine months ended September 30, 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.

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 September 30, 2004:
Operating revenues from external customers	$	12,716.1	$	1,623.2	$	-		$	14,339.3
Intersegment revenues		971.6		-		-			971.6
Operating income (loss)		760.5		36.6		(97.6	)		699.5

Three months ended September 30, 2003:
Operating revenues from external customers		8,457.0		1,465.3		-			9,922.3
Intersegment revenues		758.2		-		-			758.2
Operating income (loss)		393.4		47.3		(83.3	)		357.4

Nine months ended September 30, 2004:
Operating revenues from external customers		34,595.8		4,632.6		-			39,228.4
Intersegment revenues		2,747.7		-		-			2,747.7
Operating income (loss)		2,340.9		122.6		(293.2	)		2,170.3

Nine months ended September 30, 2003:
Operating revenues from external customers		24,097.2		4,362.0		-			28,459.2
Intersegment revenues		2,241.8		-		-			2,241.8
Operating income (loss)		1,063.3		168.5		(241.9	)		989.9

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

	September 30, 2004		December 31, 2003
Refining	$	16,289.5	$	13,013.1
Retail		1,646.6		1,548.2
Corporate		1,501.4		1,102.9

Total consolidated assets	$	19,437.5	$	15,664.2

The entire balance of goodwill as of September 30, 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

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

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, both with and without dilution, for the three and nine months ended September 30, 2004 and 2003 would have been reduced to the pro forma amounts indicated below (in millions, except per share amounts):

	Three Months Ended September 30,						Nine Months Ended September 30,
	2004			2003			2004			2003
Net income applicable to common stock,
as reported	$	431.3		$	189.8		$	1,305.9		$	488.6
Deduct: Compensation expense on stock
options determined under fair value method
for all awards, net of related tax effects		(3.1	)		(3.7	)		(11.7	)		(12.5	)

Pro forma net income applicable to
common stock	$	428.2		$	186.1		$	1,294.2		$	476.1


Earnings per common share:
As reported	$	1.69		$	0.81		$	5.13		$	2.16
Pro forma	$	1.67		$	0.80		$	5.08		$	2.11


Net income, as reported	$	434.5		$	191.1		$	1,315.3		$	489.9
Deduct: Compensation expense on stock
options determined under fair value method
for all awards, net of related tax effects		(3.1	)		(3.7	)		(11.7	)		(12.5	)

Pro forma net income	$	431.4		$	187.4		$	1,303.6		$	477.4


Earnings per common share - assuming dilution:
As reported	$	1.57		$	0.75		$	4.78		$	2.05
Pro forma	$	1.56		$	0.73		$	4.73		$	2.00

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

14. EMPLOYEE BENEFIT PLANS

The components of net periodic benefit cost related to Valero’s defined benefit plans were as follows for the three and nine months ended September 30, 2004 and 2003 (in millions):

	Pension Plans						Other Postretirement Benefit Plans
	2004			2003			2004			2003
Three months ended September 30:
Components of net periodic benefit cost:
Service cost	$	13.8		$	12.6		$	1.9		$	3.0
Interest cost		12.2			11.3			4.0			4.8
Expected return on plan assets		(10.3	)		(9.3	)		-			-
Amortization of:
Transition obligation (asset)		(0.1	)		(0.1	)		-			-
Prior service cost		0.6			0.7			(1.8	)		0.4
Net loss		1.2			0.9			1.8			1.1
Other		-			1.4			-			-

Net periodic benefit cost	$	17.4		$	17.5		$	5.9		$	9.3


Nine months ended September 30:
Components of net periodic benefit cost:
Service cost	$	41.4		$	36.0		$	5.6		$	8.6
Interest cost		36.5			34.0			11.9			14.2
Expected return on plan assets		(31.1	)		(28.1	)		-			-
Amortization of:
Transition obligation (asset)		(0.1	)		(0.1	)		-			-
Prior service cost		1.9			2.0			(5.3	)		1.2
Net loss		3.5			2.7			5.4			3.4
Other		-			1.4			-			-

Net periodic benefit cost	$	52.1		$	47.9		$	17.6		$	27.4

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 December 31, 2003. Valero has no minimum required contributions to its pension plans during 2004 under the Employee Retirement Income Security Act. For the nine months ended September 30, 2004 and 2003, Valero contributed approximately $73 million and $121 million, respectively, to its qualified pension plans.

15. COMMITMENTS AND CONTINGENCIES

Accounts Receivable Sales Facility
As of September 30, 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 September 30, 2004 and December 31, 2003, the amount of eligible receivables sold to the third-party financial institutions was $600 million.

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

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 $34 million as of September 30, 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. In the second quarter of 2004 and 2003, Valero made earn-out contingency payments of $35.0 million each year to Salomon Inc in connection with Valero’s acquisition of Basis Petroleum, Inc., which were recorded as increases to “goodwill.” Any future earn-out contingency payments related to the acquisition of Basis Petroleum, Inc., if and when earned, would also be recorded as increases to “goodwill.” As discussed in Note 3, the total potential earn-out contingency payments related to the St. Charles Acquisition have been accrued as part of the final purchase price allocation. The following table summarizes the aggregate payments made and payment limitations for these acquisitions (in millions):

	Basis Petroleum, Inc.		St. Charles Refinery
Aggregate payments made through September 30, 2004	$	139.2	$	-
Annual maximum limit		35.0		50.0
Aggregate limit		200.0		175.0

Sale of Headquarters Facility
On June 30, 2004, Valero completed the sale of both of its prior headquarters buildings for $27.3 million. Since the carrying value of these buildings had been written down to an amount based on this selling price in the fourth quarter of 2003, the disposition of the buildings resulted in no significant gain or loss in 2004.

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 made at most of Valero’s refineries to comply with the Tier II gasoline and diesel standards. Valero believes that capital expenditures of approximately $1.8 billion will be required through 2008 for Valero to meet the Tier II specifications, of which approximately $697 million was expended through September 30, 2004. The aggregate estimate of expenditures includes amounts related to projects at three Valero refineries to provide hydrogen as part of the process of removing sulfur from

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

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.

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 completed its response to the request, and it has not been named in any enforcement proceeding by the EPA. Several other refiners, however, have either reached global settlements with the EPA regarding this enforcement initiative or have been subject to enforcement proceedings by the EPA. Valero believes that it will be able to reach a settlement with the EPA in the fourth quarter of 2004 applicable to all of its U.S. refineries. Valero expects to incur penalties and related expenses in connection with a potential settlement, but Valero believes that any settlement penalties will be immaterial to its results of operations and financial position. In addition, Valero expects that a settlement of this matter will require significant capital improvements or changes in operating parameters, or both, at most of Valero’s refineries. However, Valero expects that most of the required capital improvements or changes in operating parameters will be consistent with many of Valero’s existing or forecasted strategic capital projects or emission reduction projects already planned for the next several years.

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 the EPA’s one-hour air-quality standard for ozone. In October 2001, the EPA approved a State Implementation Plan (SIP) to bring the Houston/Galveston area into compliance with the one-hour ozone standard 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 will be required to install NOx and HRVOC control and monitoring equipment and implement certain operating practices by 2007 at its Houston and Texas City Refineries at a cost estimated by Valero to be approximately $68 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 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.

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

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 future '393 or '126 patent enforcement activity by Unocal against any person or entity with respect to gasoline to be sold in California. The trial for the FTC’s antitrust charges against Unocal began before an administrative law judge on October 19, 2004.

The '393 and '126 patents are 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 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 approximately 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. Most of these cases were filed on or after September 30, 2003 in anticipation of a pending federal energy bill that was expected to 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. Valero believes that an adverse result 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 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.

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

16. SUBSEQUENT EVENT

On November 1, 2004, Valero L.P. announced a proposed merger with Kaneb Services LLC (Kaneb Services) and Kaneb Pipe Line Partners, L.P. (Kaneb Partners). The transaction is valued at approximately $2.8 billion. The boards of directors of the respective entities have approved the terms of the proposed transaction. Completion of the merger is subject to the approval of the unitholders of Valero L.P. and Kaneb Partners and the shareholders of Kaneb Services as well as customary regulatory approvals.

Under the terms of the merger, Valero L.P. will acquire all of the equity securities of Kaneb Services for $525 million in cash. In addition, the unitholders of Kaneb Partners will exchange their common units for a number of newly issued Valero L.P. common units based on an exchange ratio measured over a period prior to closing.

Valero expects to contribute approximately $28 million to Valero L.P. to maintain Valero’s 2% general partner interest in Valero L.P., and Valero’s ownership interest in Valero L.P. is anticipated to be reduced to approximately 23% as a result of the merger. Valero L.P. furnished a copy of its press release together with additional investor information for the proposed transaction in its Current Report on Form 8-K dated November 1, 2004.

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:

future refining margins, including gasoline and distillate margins;

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

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

anticipated levels of crude oil and refined product inventories;

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;

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

expectations regarding environmental and other regulatory initiatives; and

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:

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 feedstocks;

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

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

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

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

the level of consumer demand, including seasonal fluctuations;

refinery overcapacity or undercapacity;

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

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

the level of foreign imports of refined products;

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

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

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

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

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

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

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

overall economic conditions.

Any one of these factors, or a combination of these factors, could materially affect 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.

Overview
As of September 30, 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:

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

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

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. The third quarter of 2004 continued to reflect the positive fundamentals experienced in the first six months of 2004, resulting in refined product margins and sour crude oil discounts which were very favorable. These positive fundamentals, combined with reliable operations at Valero’s refineries, resulted in reported earnings for the three months ended September 30, 2004 that were far in excess of the strong results of operations reported in the third quarter of 2003. Those results, combined with Valero’s strong results for the first six months of 2004 despite significant turnaround activity at several of its refineries during the first quarter, resulted in earnings per share of $4.78 reported by Valero for the nine months ended September 30, 2004, as adjusted to reflect the effect of a two-for-one stock split discussed below.

Operationally, Valero’s refineries had no major turnarounds and no significant unplanned downtime during the third quarter of 2004, thereby enabling Valero to benefit from the positive industry fundamentals discussed above. In addition, Valero continued to benefit from the operations of its Aruba Refinery, which was acquired on March 5, 2004 and has performed well since its acquisition.

On July 15, 2004, Valero’s Board of Directors approved a two-for-one split of Valero’s common stock, to be effected in the form of a stock dividend. The stock dividend was distributed on October 7, 2004 to stockholders of record on September 23, 2004. All share and per share data (except par value) in this Form 10-Q have been adjusted to reflect the effect of the stock split for all periods presented.

As a result of Valero’s recent strong operating results and its expectations of continuing favorable industry fundamentals, Valero increased the dividend on its common stock from $0.075 per share (after adjustment for the stock split) to $0.08 per share in the fourth quarter of 2004.

RESULTS OF OPERATIONS

Third Quarter 2004 Compared to Third Quarter 2003

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

	Three Months Ended September 30,
	2004 (a)			2003			Change
Operating revenues	$	14,339.3		$	9,922.3		$	4,417.0


Costs and expenses:
Cost of sales		12,683.4			8,749.9			3,933.5
Refining operating expenses		528.8			437.5			91.3
Retail selling expenses		176.8			176.0			0.8
General and administrative expenses		87.1			76.3			10.8
Depreciation and amortization expense:
Refining		139.2			106.7			32.5
Retail		14.0			11.5			2.5
Corporate		10.5			7.0			3.5

Total costs and expenses		13,639.8			9,564.9			4,074.9


Operating income		699.5			357.4			342.1
Equity in earnings of Valero L.P.		9.6			9.7			(0.1	)
Other income (expense), net		7.3			(0.3	)		7.6
Interest and debt expense:
Incurred		(73.7	)		(70.2	)		(3.5	)
Capitalized		10.2			7.1			3.1
Distributions on preferred securities of
subsidiary trusts		-			(1.8	)		1.8

Income before income tax expense		652.9			301.9			351.0
Income tax expense		218.4			110.8			107.6


Net income		434.5			191.1			243.4
Preferred stock dividends		3.2			1.3			1.9


Net income applicable to common stock	$	431.3		$	189.8		$	241.5


Earnings per common share -
assuming dilution	$	1.57		$	0.75		$	0.82

Earnings before interest, taxes, depreciation
and amortization (EBITDA) (b)	$	880.1		$	489.1		$	391.0

Ratio of EBITDA to interest incurred (c)		11.9	x		7.0	x		4.9	x

____________________ See the footnote references on page 29.

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

	Three Months Ended September 30,
	2004 (a)			2003			Change
Refining:
Operating income	$	760.5		$	393.4		$	367.1
Throughput volumes (thousand barrels per day) (d)		2,243			1,911			332
Throughput margin per barrel (e)	$	6.92		$	5.33		$	1.59
Operating costs per barrel:
Refining operating expenses	$	2.56		$	2.49		$	0.07
Depreciation and amortization		0.68			0.61			0.07

Total operating costs per barrel	$	3.24		$	3.10		$	0.14


Charges:
Crude oils:
Sour		51	%		42	%		9	%
Sweet		27			35			(8	)

Total crude oils		78			77			1
Residual fuel oil		8			5			3
Other feedstocks and blendstocks		14			18			(4	)

Total charges		100	%		100	%		-	%


Yields:
Gasolines and blendstocks		47	%		53	%		(6	)%
Distillates		30			28			2
Petrochemicals		3			3			-
Lubes, asphalts and No. 6 oil		7			4			3
Other products		13			12			1

Total yields		100	%		100	%		-	%


Retail - U.S.:
Operating income	$	21.4		$	33.3		$	(11.9	)
Company-operated fuel sites (average)		1,103			1,164			(61	)
Fuel volumes (gallons per day per site)		4,787			4,773			14
Fuel margin per gallon	$	0.128		$	0.159		$	(0.031	)
Merchandise sales	$	247.8		$	251.3		$	(3.5	)
Merchandise margin (percentage of sales)		27.8	%		27.3	%		0.5	%
Margin on miscellaneous sales	$	25.5		$	22.4		$	3.1
Retail selling expenses	$	127.3		$	130.5		$	(3.2	)

Retail - Northeast:
Operating income	$	15.2		$	14.0		$	1.2
Fuel volumes (thousand gallons per day)		3,148			3,132			16
Fuel margin per gallon	$	0.190		$	0.174		$	0.016
Merchandise sales	$	37.9		$	33.8		$	4.1
Merchandise margin (percentage of sales)		23.9	%		23.6	%		0.3	%
Margin on miscellaneous sales	$	6.9		$	4.7		$	2.2
Retail selling expenses	$	49.5		$	45.5		$	4.0

____________________ See the footnote references on page 29.

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

	Three Months Ended September 30,
	2004 (a)		2003		Change
Gulf Coast:
Operating income	$	488.6	$	112.6	$	376.0
Throughput volumes (thousand barrels per day) (d)		1,273		933		340
Throughput margin per barrel (e)	$	7.34	$	4.62	$	2.72
Operating costs per barrel:
Refining operating expenses	$	2.54	$	2.68	$	(0.14	)
Depreciation and amortization		0.63		0.63		-

Total operating costs per barrel	$	3.17	$	3.31	$	(0.14	)


Mid-Continent:
Operating income	$	37.9	$	82.1	$	(44.2	)
Throughput volumes (thousand barrels per day)		291		292		(1	)
Throughput margin per barrel (e)	$	4.77	$	5.67	$	(0.90	)
Operating costs per barrel:
Refining operating expenses	$	2.71	$	2.18	$	0.53
Depreciation and amortization		0.64		0.43		0.21

Total operating costs per barrel	$	3.35	$	2.61	$	0.74


Northeast:
Operating income	$	99.7	$	105.4	$	(5.7	)
Throughput volumes (thousand barrels per day)		381		368		13
Throughput margin per barrel (e)	$	5.33	$	5.31	$	0.02
Operating costs per barrel:
Refining operating expenses	$	1.89	$	1.69	$	0.20
Depreciation and amortization		0.59		0.51		0.08

Total operating costs per barrel	$	2.48	$	2.20	$	0.28


West Coast:
Operating income	$	134.3	$	93.3	$	41.0
Throughput volumes (thousand barrels per day)		298		318		(20	)
Throughput margin per barrel (e)	$	9.29	$	7.15	$	2.14
Operating costs per barrel:
Refining operating expenses	$	3.40	$	3.15	$	0.25
Depreciation and amortization		1.00		0.81		0.19

Total operating costs per barrel	$	4.40	$	3.96	$	0.44


____________________ See the footnote references on page 29.

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

	Three Months Ended September 30,
	2004		2003			Change
Feedstocks:
West Texas Intermediate (WTI) crude oil	$	43.82	$	30.18		$	13.64
WTI less sour crude oil at U.S. Gulf Coast (h)		4.95		3.15			1.80
WTI less Alaska North Slope (ANS) crude oil		2.06		1.36			0.70
WTI less Maya crude oil		11.65		5.82			5.83

Products:
U.S. Gulf Coast:
Conventional 87 gasoline less WTI		7.24		7.28			(0.04	)
No. 2 fuel oil less WTI		4.42		1.59			2.83
Propylene less WTI		10.24		(2.76	)		13.00
U.S. Mid-Continent:
Conventional 87 gasoline less WTI		8.18		10.03			(1.85	)
Low-sulfur diesel less WTI		7.89		4.92			2.97
U.S. Northeast:
Conventional 87 gasoline less WTI		7.83		8.65			(0.82	)
No. 2 fuel oil less WTI		5.29		2.50			2.79
Lube oils less WTI		21.40		26.78			(5.38	)
U.S. West Coast:
CARBOB 87 gasoline less ANS		18.84		17.26			1.58
Low-sulfur diesel less ANS		15.77		8.05			7.72

The following notes relate to references on pages 26 through 29.

(a)

Includes a full quarter of operations related to the Aruba Acquisition, which was consummated on March 5, 2004.

(b)

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 31.

(c)

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 31.

(d)

Total throughput volumes and throughput volumes for the Gulf Coast region for the three months ended September 30, 2004 include throughput volumes for the Aruba Refinery, which averaged 220,000 barrels per day.

(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, which includes MTBE as a blending component. Prices for products meeting these specifications ceased to be available after October 31, 2003. The average market reference 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.

General

Valero’s net income for the three months ended September 30, 2004 was $434.5 million, or $1.57 per share, compared to net income of $191.1 million, or $0.75 per share, for the three months ended September 30, 2003.

Operating revenues increased 45% for the third quarter of 2004 compared to the third quarter of 2003 primarily as a result of significantly higher refined product prices combined with additional throughput volumes from refinery operations. Operating income increased $342.1 million from the third quarter of 2003 to the third quarter of 2004 due to a $367.1 million increase in the refining segment, partially offset by a $10.7 million decrease in the retail segment and a $14.3 million increase in general and administrative expenses (including corporate depreciation and amortization expense).

Refining

Operating income for Valero’s refining segment increased from $393.4 million for the third quarter of 2003 to $760.5 million for the third quarter of 2004, resulting from an increase in refining throughput margin of $1.59 per barrel, or 30%, and a 17% increase in throughput volumes.

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

Average distillate margins increased significantly in all of Valero’s refining regions in the third quarter of 2004 compared to the third quarter of 2003 due to increased foreign and U.S. demand, which resulted from improved economies and higher demand for on-road diesel, combined with low distillate inventory levels.

Discounts on Valero’s sour crude oil feedstocks during the third quarter of 2004 improved significantly compared to the third quarter of 2003 due to ample supplies of sour crude oils and heavy sour residual fuel oils on the world market. In addition, the global movement to cleaner fuels has caused an increased demand for sweet crude oil by refineries in order to lower the sulfur content of the gasoline they produce. A global increase in refined product demand, particularly in Asia, has also increased the demand for sweet versus sour crude oil due to the higher gasoline content of sweet crude oil and the inability of many foreign refineries to process sour crude oils effectively.

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

Throughput volumes increased 332,000 barrels per day in the third quarter of 2004 compared to the third quarter of 2003 primarily due to 220,000 barrels per day of throughput at the Aruba Refinery, which was acquired in March 2004.

Partially offsetting the above increases in throughput margin were lower margins on gasoline and other refined products such as petroleum coke, sulfur, No. 6 oil and asphalt due to a significant increase in the price of crude oil from the third quarter of 2003 to the third quarter of 2004.

Refining operating expenses were 21% higher for the quarter ended September 30, 2004 compared to the quarter ended September 30, 2003, due primarily to the acquisition of the Aruba Refinery and increases in energy costs, maintenance expense and employee compensation expense, 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 3%. Refining depreciation and amortization expense increased 30% from the third quarter of 2003 to the third quarter of 2004 due to additional depreciation expense

resulting from the acquisition of the Aruba Refinery, capital additions and increased turnaround and catalyst amortization.

Retail

Retail operating income was $36.6 million for the quarter ended September 30, 2004 compared to $47.3 million for the quarter ended September 30, 2003. The decrease was attributable to U.S. operations and was due primarily to lower retail fuel margins caused by higher crude oil prices and lower volumes due to fewer stores.

Corporate Expenses and Other

General and administrative expenses, including corporate depreciation and amortization expense, increased $14.3 million for the quarter ended September 30, 2004 compared to the quarter ended September 30, 2003. Employee compensation and benefits increased approximately $9 million between the quarters, of which approximately $6 million related to the recognition of increased variable compensation expense as a result of improved financial performance in 2004 compared to 2003.

Income tax expense increased $107.6 million from the third quarter of 2003 to the third quarter of 2004 mainly as a result of higher operating income. Valero’s effective tax rate for the quarter ended September 30, 2004 decreased from the quarter ended September 30, 2003 due to the addition of the Aruba Refinery, whose results of operations are non-taxable in Aruba through December 31, 2010.

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

	Three Months Ended September 30,
	2004		2003
Net income	$	434.5	$	191.1
Income tax expense		218.4		110.8
Depreciation and amortization expense		163.7		125.2
Interest and debt expense, net		63.5		63.1
Other amortizations		-		(1.1	)

EBITDA	$	880.1	$	489.1

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

	Three Months Ended September 30,
	2004			2003
EBITDA	$	880.1		$	489.1
Interest incurred		73.7			70.2
Ratio of EBITDA to interest incurred		11.9	x		7.0	x

Valero’s rationale for using the financial measures of EBITDA and the ratio of EBITDA to interest incurred, which are not defined under GAAP, is 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.”

Nine Months Ended September 30, 2004 Compared to Nine Months Ended September 30, 2003

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

	Nine Months Ended September 30,
	2004 (a)			2003 (b)			Change
Operating revenues	$	39,228.4		$	28,459.2		$	10,769.2


Costs and expenses:
Cost of sales		34,260.3			25,163.5			9,096.8
Refining operating expenses		1,552.7			1,202.4			350.3
Retail selling expenses		518.6			518.9			(0.3	)
General and administrative expenses		262.8			222.5			40.3
Depreciation and amortization expense:
Refining		391.4			308.5			82.9
Retail		41.9			34.1			7.8
Corporate		30.4			19.4			11.0

Total costs and expenses		37,058.1			27,469.3			9,588.8


Operating income		2,170.3			989.9			1,180.4
Equity in earnings of Valero L.P. (c)		29.0			20.4			8.6
Other income (expense), net		4.4			(5.9	)		10.3
Interest and debt expense:
Incurred		(222.6	)		(217.7	)		(4.9	)
Capitalized		27.0			16.3			10.7
Minority interest in net income of Valero L.P. (c)		-			(2.4	)		2.4
Distributions on preferred securities of
subsidiary trusts		-			(16.8	)		16.8

Income before income tax expense		2,008.1			783.8			1,224.3
Income tax expense		692.8			293.9			398.9


Net income		1,315.3			489.9			825.4
Preferred stock dividends		9.4			1.3			8.1


Net income applicable to common stock	$	1,305.9		$	488.6		$	817.3


Earnings per common share -
assuming dilution	$	4.78		$	2.05		$	2.73

EBITDA (d)	$	2,667.4		$	1,345.3		$	1,322.1

Ratio of EBITDA to interest incurred (e)		12.0	x		6.2	x		5.8	x

____________________ See the footnote references on page 35.

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

	Nine Months Ended September 30,
	2004 (a)			2003 (b)			Change
Refining:
Operating income	$	2,340.9		$	1,063.3		$	1,277.6
Throughput volumes (thousand barrels per day) (f)		2,138			1,792			346
Throughput margin per barrel (g)	$	7.31		$	5.26		$	2.05
Operating costs per barrel:
Refining operating expenses	$	2.65		$	2.46		$	0.19
Depreciation and amortization		0.67			0.63			0.04

Total operating costs per barrel	$	3.32		$	3.09		$	0.23


Charges:
Crude oils:
Sour		48	%		44	%		4	%
Sweet		30			36			(6	)

Total crude oils		78			80			(2	)
Residual fuel oil		6			5			1
Other feedstocks and blendstocks		16			15			1

Total charges		100	%		100	%		-	%


Yields:
Gasolines and blendstocks		48	%		54	%		(6	)%
Distillates		30			28			2
Petrochemicals		3			3			-
Lubes, asphalts and No. 6 oil		7			4			3
Other products		12			11			1

Total yields		100	%		100	%		-	%


Retail - U.S.:
Operating income	$	55.7		$	93.9		$	(38.2	)
Company-operated fuel sites (average)		1,123			1,207			(84	)
Fuel volumes (gallons per day per site)		4,640			4,535			105
Fuel margin per gallon	$	0.128		$	0.154		$	(0.026	)
Merchandise sales	$	705.4		$	713.1		$	(7.7	)
Merchandise margin (percentage of sales)		28.3	%		27.9	%		0.4	%
Margin on miscellaneous sales	$	73.3		$	67.4		$	5.9
Retail selling expenses	$	374.2		$	382.3		$	(8.1	)

Retail - Northeast:
Operating income	$	66.9		$	74.6		$	(7.7	)
Fuel volumes (thousand gallons per day)		3,234			3,338			(104	)
Fuel margin per gallon	$	0.209		$	0.209		$	-
Merchandise sales	$	102.5		$	89.0		$	13.5
Merchandise margin (percentage of sales)		24.1	%		22.7	%		1.4	%
Margin on miscellaneous sales	$	17.2		$	14.9		$	2.3
Retail selling expenses	$	144.4		$	136.6		$	7.8

____________________ See the footnote references on page 35.

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

	Nine Months Ended September 30,
	2004 (a)		2003 (b)		Change
Gulf Coast:
Operating income	$	1,337.1	$	320.0	$	1,017.1
Throughput volumes (thousand barrels per day) (f)		1,185		829		356
Throughput margin per barrel (g)	$	7.40	$	4.71	$	2.69
Operating costs per barrel:
Refining operating expenses	$	2.65	$	2.65	$	-
Depreciation and amortization		0.64		0.64		-

Total operating costs per barrel	$	3.29	$	3.29	$	-


Mid-Continent:
Operating income	$	212.1	$	162.2	$	49.9
Throughput volumes (thousand barrels per day)		292		274		18
Throughput margin per barrel (g)	$	5.88	$	5.04	$	0.84
Operating costs per barrel:
Refining operating expenses	$	2.65	$	2.36	$	0.29
Depreciation and amortization		0.58		0.51		0.07

Total operating costs per barrel	$	3.23	$	2.87	$	0.36


Northeast:
Operating income	$	358.0	$	323.0	$	35.0
Throughput volumes (thousand barrels per day)		377		371		6
Throughput margin per barrel (g)	$	5.92	$	5.27	$	0.65
Operating costs per barrel:
Refining operating expenses	$	1.87	$	1.58	$	0.29
Depreciation and amortization		0.58		0.51		0.07

Total operating costs per barrel	$	2.45	$	2.09	$	0.36


West Coast:
Operating income	$	433.7	$	258.1	$	175.6
Throughput volumes (thousand barrels per day)		284		318		(34	)
Throughput margin per barrel (g)	$	10.25	$	6.89	$	3.36
Operating costs per barrel:
Refining operating expenses	$	3.69	$	3.08	$	0.61
Depreciation and amortization		1.00		0.83		0.17

Total operating costs per barrel	$	4.69	$	3.91	$	0.78


____________________ See the footnote references on page 35.

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

	Nine Months Ended September 30,
	2004		2003		Change
Feedstocks:
WTI crude oil	$	39.13	$	31.10	$	8.03
WTI less sour crude oil at U.S. Gulf Coast (j)		4.54		3.44		1.10
WTI less ANS crude oil		1.49		1.39		0.10
WTI less Maya crude oil		9.91		6.88		3.03

Products:
U.S. Gulf Coast:
Conventional 87 gasoline less WTI		9.47		5.99		3.48
No. 2 fuel oil less WTI		2.89		2.65		0.24
Propylene less WTI		9.70		2.34		7.36
U.S. Mid-Continent:
Conventional 87 gasoline less WTI		10.29		8.10		2.19
Low-sulfur diesel less WTI		6.07		5.18		0.89
U.S. Northeast:
Conventional 87 gasoline less WTI		9.62		6.06		3.56
No. 2 fuel oil less WTI		4.01		4.52		(0.51	)
Lube oils less WTI		23.27		24.13		(0.86	)
U.S. West Coast:
CARBOB 87 gasoline less ANS		20.44		15.54		4.90
Low-sulfur diesel less ANS		14.90		7.03		7.87

The following notes relate to references on pages 32 through 35.

(a)

Includes operations related to the St. Charles Refinery, which was acquired on July 1, 2003, for the full nine months of 2004 and operations related to the Aruba Acquisition commencing on its acquisition date of March 5, 2004.

(b)

Includes the operations of the St. Charles Refinery commencing on July 1, 2003.

(c)

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.

(d)

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 38.

(e)

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 38.

(f)

Total throughput volumes and throughput volumes for the Gulf Coast region for the nine months ended September 30, 2004 are based on a 274-day period, which results in 170,000 and 208,000 barrels per day being included for the Aruba Refinery and the St. Charles Refinery, respectively. Throughput volumes for the Aruba Refinery for the 210 days of its operations during the nine months ended September 30, 2004 averaged 222,000 barrels per day. Total throughput volumes and throughput volumes for the Gulf Coast region for the nine months ended September 30, 2003 are based on a 273-day period, which results in 64,000 barrels per day being included for the St. Charles Refinery. Throughput volumes for the St. Charles Refinery for the 92 days of its operations during the nine months ended September 30, 2003 averaged 191,000 barrels per day.

(g)

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

(h)

(i)

available after October 31, 2003. The average market reference prices and differentials are presented to provide users of the consolidated financial statements with economic indicators that significantly affect Valero’s operations and profitability.

(j)

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

General

Valero’s net income for the nine months ended September 30, 2004 was $1.3 billion, or $4.78 per share, compared to net income of $489.9 million, or $2.05 per share, for the nine months ended September 30, 2003.

Operating revenues increased 38% for the nine months ended September 30, 2004 compared to the nine months ended September 30, 2003 primarily as a result of higher refined product prices combined with additional throughput volumes from refinery operations. Operating income increased $1.2 billion from the first nine months of 2003 to the first nine months of 2004 due to a $1.3 billion increase in the refining segment, partially offset by a $45.9 million decrease in the retail segment and a $51.3 million increase in general and administrative expenses (including corporate depreciation and amortization expense).

Refining

Operating income for Valero’s refining segment increased from $1.1 billion for the nine months ended September 30, 2003 to $2.3 billion for the nine months ended September 30, 2004, resulting from an increase in refining throughput margin of $2.05 per barrel, or 39%, and a 19% increase in throughput volumes.

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

Gasoline margins increased in all of Valero’s refining regions in the first nine months of 2004 compared to the first nine months of 2003 due to strong gasoline demand and lower inventory levels for much of the first nine months of 2004. 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.

Overall, distillate margins also increased during the first nine months of 2004 compared to the first nine months of 2003 due to increased foreign and U.S. demand resulting from improved economies and lower inventory levels.

Discounts on Valero’s sour crude oil feedstocks during the first nine months of 2004 improved compared to the first nine months of 2003 due to ample supplies of sour crude oils and heavy sour residual fuel oils on the world market. In addition, discounts on sour crude oil feedstocks have benefited from increased demand for sweet crude oil by refineries resulting from several factors, including (i) the global movement to cleaner fuels which has required refineries to lower the sulfur content of the gasoline they produce, (ii) high gasoline margins which have increased the demand for sweet versus sour crude oil due to the higher gasoline content of sweet crude oil, and (iii) a global increase in refined product demand, particularly in Asia, which has resulted in more gasoline production by less complex foreign refineries that require sweet crude oil as feedstock.

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

Throughput volumes increased 346,000 barrels per day in the first nine months of 2004 compared to the same period in 2003 primarily due to increased throughput of 144,000 barrels per day during the first nine months of 2004 at the St. Charles Refinery, which was acquired in July 2003, and 170,000 barrels per day of throughput at the Aruba Refinery during the partial period commencing on its acquisition date of March 5, 2004.

Partially offsetting the above increases in throughput margin were lower margins on products such as asphalt, No. 6 oil, sulfur and petroleum coke due to an increase in the price of crude oil from the first nine months of 2003 to the first nine months of 2004, an approximate $20 million reduction due to Valero ceasing consolidation of Valero L.P. in March 2003, and a higher-than-normal level of turnaround activity in the first quarter of 2004.

Refining operating expenses were 29% higher for the nine months ended September 30, 2004 compared to the nine months ended September 30, 2003, due primarily to the acquisition of the St. Charles and Aruba Refineries and increases in energy costs, maintenance expense and 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 8%. Refining depreciation and amortization expense increased 27% from the nine months ended September 30, 2003 to the nine months ended September 30, 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 $122.6 million for the nine months ended September 30, 2004 compared to $168.5 million for the nine months ended September 30, 2003. The decrease in retail operating income was due primarily to lower retail fuel margins in the U.S. caused by a rapid rise in crude oil prices during the first nine months of 2004 which could not be fully passed through to consumers, lower fuel sales in the U.S. due to fewer stores, and 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

General and administrative expenses, including corporate depreciation and amortization expense, increased $51.3 million for the nine months ended September 30, 2004 compared to the nine months ended September 30, 2003. Employee compensation and benefits increased approximately $41 million between the periods, including the recognition of increased variable compensation expense of approximately $21 million as a result of improved financial performance between the respective periods.

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.

Other income (expense), net improved $10.3 million due primarily to an increase in equity income from joint ventures of $6.0 million.

Net interest and debt expense decreased $5.8 million for the nine months ended September 30, 2004 compared to the nine months ended September 30, 2003, due primarily to 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 $16.8 million from the nine months ended September 30, 2003 to the nine months ended September 30, 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 $398.9 million from the first nine months of 2003 to the first nine months of 2004 mainly as a result of higher operating income. Valero’s effective tax rate for the nine months ended September 30, 2004 decreased from the nine months ended September 30, 2003 due to the addition of the Aruba Refinery, whose results of operations are non-taxable in Aruba through December 31, 2010.

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

	Nine Months Ended September 30,
	2004		2003
Net income	$	1,315.3	$	489.9
Income tax expense		692.8		293.9
Depreciation and amortization expense		463.7		362.0
Interest and debt expense, net		195.6		201.4
Other amortizations		-		(1.9	)

EBITDA	$	2,667.4	$	1,345.3

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

	Nine Months Ended September 30,
	2004			2003
EBITDA	$	2,667.4		$	1,345.3
Interest incurred		222.6			217.7
Ratio of EBITDA to interest incurred		12.0	x		6.2	x

OUTLOOK

The beginning of the fourth quarter normally reflects increasing distillate margins due to the anticipation of the onset of colder weather and decreasing gasoline margins due to the end of the summer driving season. Distillate margins were very strong in the third quarter of 2004 as a result of higher domestic and foreign demand, and they are expected to further improve due to continuing strong demand, low inventories and high levels of industry-wide turnaround activity. Gasoline margins, on the other hand, weakened somewhat during the third quarter as the end of the summer driving season approached. However, the effects of Hurricane Ivan, which caused a number of refineries to temporarily shut down and interrupted crude deliveries, reduced gasoline production and tightened inventory levels, resulting in improved gasoline margins entering the fourth quarter. Gasoline margins to date in the fourth quarter have weakened to seasonal norms. Valero believes that continuing strong demand and tight supply will result in strong gasoline margins in 2005. Also, the margins for petrochemical feedstocks such as benzene, toluene and xylene have been strong which should keep these products out of the gasoline blendstock pool.

In regard to refinery feedstocks, sour crude oil discounts reached record levels since the end of the third quarter of 2004 and are expected to remain high for an extended period of time, partly due to increased

domestic and global 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 continued strong discounts. Furthermore, incremental crude oil processed to meet the increasing world demand for light products is generating excess by-product resid, which should also continue to support wide discounts for heavy, high-sulfur crude oils.

Operationally, Valero expects to benefit during the remainder of 2004 and through 2005 from its St. Charles and Aruba Acquisitions and from the completion of several turnaround and capital improvement projects. For 2005, throughput volume is expected to increase approximately 100,000 barrels per day compared to 2004 mainly as a result of a full year of operations of the Aruba Refinery and several capital projects completed in 2004. In addition, with the completion of current and planned capital improvement projects, Valero will further strengthen its ability to take advantage of an expected continuation of favorable sour crude oil discounts.

LIQUIDITY AND CAPITAL RESOURCES

Cash Flows for the Nine Months Ended September 30, 2004 and 2003
Net cash provided by operating activities for the nine months ended September 30, 2004 was $1.9 billion compared to $1.2 billion for the nine months ended September 30, 2003. The increase in cash generated from operating activities was due primarily to the significant increase in operating income discussed above under “Results of Operations,” partially offset by higher working capital requirements in the 2004 period. Changes in cash provided by or used for working capital during the first nine months of 2004 and 2003 are shown in Note 10 of Condensed Notes to Consolidated Financial Statements. The primary changes in working capital for 2004 resulted from an increase in the level of Valero’s inventories, an increase in accounts receivable and accounts payable resulting from a significant increase in commodity prices from December 2003 to September 2004, increased accrued expenses resulting from derivative transactions and interest accruals, and an increased accrual for income tax payments due to the significant income earned in the first nine months of 2004. In addition, approximately $100 million of cash was used for deferred items during the first nine months of 2004, primarily attributable to:

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

$25 million of the contributions made to Valero’s qualified pension plans during the period, and

approximately $25 million invested in re-imaging programs for various wholesale branded outlets.

The net cash generated from operating activities, combined with approximately $406 million of proceeds from the sale of common stock, approximately $333 million of net borrowings (net of debt repayments), $111.5 million of proceeds from the issuance of common stock related to Valero’s benefit plans, and $58.2 million of proceeds from the disposition of property, plant and equipment, were used to:

fund $1.0 billion of capital expenditures and deferred turnaround and catalyst costs,

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

fund the Aruba Acquisition of $548.4 million, net of cash acquired,

purchase 8.0 million shares of treasury stock at a cost of $245.2 million,

fund contingent payments in connection with acquisitions of $53.4 million, and

pay common and preferred stock dividends of $57.6 million.

In addition, Valero’s cash balance increased by $311.6 million from December 31, 2003 to September 30, 2004.

As discussed above, net cash provided by operating activities during the first nine months of 2003 was $1.2 billion. The net cash provided by operations combined with approximately $300 million of proceeds from the issuance of senior notes in June 2003, $250.2 million of proceeds from the issuance of common stock in March 2003, $379.9 million of proceeds from the contribution and sale of certain assets to Valero L.P., $63.3 million of proceeds from the disposition of certain home heating oil operations and other property, plant and equipment, and $69.3 million of available cash on hand were used to:

fund $666.0 million of capital expenditures and deferred turnaround and catalyst costs,

fund part of the acquisition of the St. Charles Refinery for $308.0 million,

exercise options under structured lease arrangements to purchase $238.3 million of property and exercise an option under certain capital leases to purchase for $289.3 million the Corpus Christi East Refinery and related refined product logistics assets,

redeem $200 million of company-obligated preferred securities of subsidiary trusts,

fund a $104.5 million investment in the Cameron Highway Oil Pipeline Project, $35.0 million of earn-out payments and approximately $15 million of other acquisitions, and

pay common and preferred stock dividends of $35.0 million.

The remaining proceeds were used primarily to reduce borrowings under Valero’s committed and uncommitted bank credit facilities.

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 a working capital adjustment subsequent to the closing, consisted of $200 million in existing cash, approximately $36 million in borrowings under Valero’s existing bank credit facilities and approximately $406 million in net proceeds from the sale of 15.6 million shares of Valero common stock. In addition, upon termination on May 4, 2004 of an agreement in existence with a third-party marketing firm on the date of acquisition, Valero paid $67.8 million related to certain refined product inventories owned by the third-party marketing firm.

Capital Investments
During the nine months ended September 30, 2004, Valero expended $820.7 million for capital expenditures and $180.2 million for deferred turnaround and catalyst costs. Capital expenditures for the nine months ended September 30, 2004 included approximately $140 million to fund construction of gasoline desulfurization units at the Paulsboro, St. Charles, 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. In May 2004, Valero made an earn-out contingency payment of $35.0 million to Salomon Inc in connection with Valero’s acquisition of Basis Petroleum, Inc. Based on actual margin levels through October 2004 and estimated margin levels for November and December 2004, an earn-out payment related to the St. Charles Refinery of $50 million would be due in January 2005.

For 2004, Valero expects to incur approximately $1.7 billion for capital investments, including approximately $1.4 billion for capital expenditures (approximately $557 million of which is for environmental projects) and approximately $280 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 September 30, 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 nine months ended September 30, 2004.

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.

As of September 30, 2004, “current portion of long-term debt and capital lease obligations” included approximately $400 million of notes which become due during the first and second quarters of 2005.

As of September 30, 2004, Valero’s short-term and long-term purchase obligations increased by approximately $6 billion from the amount reported as of December 31, 2003. The increase is almost entirely attributable to an increase in obligations under crude oil supply contracts resulting mainly from a significantly higher crude oil price as of September 30, 2004.

On August 25, 2004, the Securities and Exchange Commission declared effective a shelf registration statement on Form S-3 filed by Valero to register $3.5 billion of securities for potential future issuance.

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.

Other Commercial Commitments
As of September 30, 2004, Valero’s committed lines of credit included (in millions):

	Borrowing Capacity
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 September 30, 2004, Valero had $175.7 million of letters of credit outstanding under its uncommitted short-term bank credit facilities, $216.3 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 35.1% as of September 30, 2004.

Other
During the first nine months of 2004, Valero contributed cash of $73.3 million to its qualified pension plans. No contributions are expected for the fourth quarter of 2004.

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 Note 15 of Condensed Notes to Consolidated Financial Statements.

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.

OFF-BALANCE SHEET ARRANGEMENTS

Accounts Receivable Sales Facility
As of September 30, 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 September 30, 2004, the amount of eligible receivables sold to the third-party financial institutions was $600 million.

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. No significant changes to Valero’s accounting policies have occurred subsequent to 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 September 30, 2004 and December 31, 2003 (dollars in millions, except for the weighted-average pay and receive prices as described below), including:

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

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

economic hedges held to:

manage price volatility in refining inventories, and

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

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.

	September 30, 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)		40,672	$	46.80		N/A	$	1,903.3		$	2,034.3		$	131.0
2005 (crude oil and refined products)		910		41.71		N/A		38.0			43.7			5.7
Futures - short:
2004 (crude oil and refined products)		51,354		N/A	$	46.51		2,388.4			2,573.0			(184.6	)
2005 (crude oil and refined products)		600		N/A		42.85		25.7			28.8			(3.1	)

*Cash Flow Hedges:*
Swaps - long:
2004 (crude oil and refined products)		40,765		31.60		48.56		N/A			691.4			691.4
2005 (crude oil and refined products)		59,755		35.71		44.69		N/A			536.7			536.7
Swaps - short:
2004 (crude oil and refined products)		40,485		56.26		36.35		N/A			(805.8	)		(805.8	)
2005 (crude oil and refined products)		59,755		50.59		40.31		N/A			(614.1	)		(614.1	)
Futures - long:
2004 (crude oil and refined products)		16,248		43.62		N/A		708.8			868.4			159.6
2005 (crude oil and refined products)		5,774		40.99		N/A		236.7			271.2			34.5
Futures - short:
2004 (crude oil and refined products)		15,522		N/A		43.93		681.8			847.1			(165.3	)
2005 (crude oil and refined products)		5,562		N/A		45.75		254.5			290.7			(36.2	)

*Economic Hedges:*
Swaps - long:
2004 (crude oil and refined products)		1,568		8.84		8.03		N/A			(1.3	)		(1.3	)
Swaps - short:
2004 (crude oil and refined products)		3,273		2.88		4.33		N/A			4.7			4.7
Futures - long:
2004 (crude oil and refined products)		20,054		49.20		N/A		986.6			1,053.3			66.7
2005 (crude oil and refined products)		1,289		50.93		N/A		65.6			70.9			5.3
Futures - short:
2004 (crude oil and refined products)		25,861		N/A		48.78		1,261.6			1,358.5			(96.9	)
2005 (crude oil and refined products)		1,907		N/A		49.75		94.9			104.8			(9.9	)
Options - long:
2004 (crude oil and refined products)		6,668		52.34		N/A		10.4			22.9			12.5
2005 (crude oil and refined products)		1,000		35.00		N/A		2.8			5.2			2.4
Options - short:
2004 (crude oil and refined products)		14,194		N/A		51.96		(13.8	)		8.2			(22.0	)
2005 (crude oil and refined products)		4,089		N/A		13.27		(2.6	)		3.2			(5.8	)

*Trading Activities:*
Swaps - long:
2004 (crude oil and refined products)		6,795		27.45		36.44		N/A			61.1			61.1
2005 (crude oil and refined products)		20,360		35.99		43.95		N/A			162.2			162.2
Swaps - short:
2004 (crude oil and refined products)		7,040		34.75		25.94		N/A			(62.0	)		(62.0	)
2005 (crude oil and refined products)		20,135		44.96		36.83		N/A			(163.7	)		(163.7	)
Futures - long:
2004 (crude oil and refined products)		22,520		41.40		N/A		932.3			1,169.2			236.9
2005 (crude oil and refined products)		3,320		39.31		N/A		130.5			157.1			26.6
2004 (natural gas)		1,060		7.01		N/A		7.4			8.4			1.0
2005 (natural gas)		210		7.04		N/A		1.5			1.6			0.1
Futures - short:
2004 (crude oil and refined products)		22,001		N/A		41.13		904.8			1,141.9			(237.1	)
2005 (crude oil and refined products)		2,534		N/A		39.36		99.7			123.1			(23.4	)
2004 (natural gas)		210		N/A		6.13		1.3			1.6			(0.3	)
2005 (natural gas)		210		N/A		6.38		1.3			1.5			(0.2	)
Options - long:
2004 (crude oil and refined products)		10,202		10.59		N/A		6.1			14.4			8.3
2005 (crude oil and refined products)		1,000		35.00		N/A		1.2			2.0			0.8
Options - short:
2004 (crude oil and refined products)		6,850		N/A		11.68		(7.4	)		4.0			(11.4	)

	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		5.05		N/A		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	)

INTEREST RATE RISK

The following table provides information about Valero’s long-term debt and interest rate derivative instruments (dollars in millions), 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.

	September 30, 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		$	4,864.7
Average interest rate		-	%		8.1	%		7.4	%		6.1	%		6.0	%		6.6	%		6.8	%
Floating rate	$	-		$	-		$	-		$	87.5		$	75.0		$	37.5		$	200.0		$	200.0
Average interest rate		-	%		-	%		-	%		2.6	%		2.6	%		2.6	%		2.6	%

Interest Rate Swaps
Fixed to Floating:
Notional amount	$	-		$	-		$	125.0		$	225.0		$	-		$	650.0		$	1,000.0		$	(11.2	)
Average pay rate		3.9	%		4.6	%		5.5	%		5.6	%		5.6	%		6.3	%		5.7	%
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 2.6% and hedge $200 million of debt with an interest rate of 4.75%.

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.

PART II – OTHER INFORMATION

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

(a) Sales of Unregistered Equity Securities . Valero is the sponsor of the Valero Energy Corporation Thrift Plan (Thrift Plan), a tax-qualified plan under Section 401(k) of the Internal Revenue Code. The Thrift Plan is a retirement savings vehicle that allows Valero employees to invest in several different investment funds, including a fund whose only asset is Valero common stock. Valero matches a percentage of employee contributions to the Thrift Plan. These matching contributions are invested in Valero common stock. Shares of Valero common stock are acquired for participants’ Thrift Plan accounts by an independent trustee. Purchases of Valero common stock are made by the trustee in the open market, and shares for employer matching contributions are acquired by the trustee from Valero.

Valero originally filed a registration statement on Form S-8 on July 21, 1997 to register shares of Valero common stock issued pursuant to the Thrift Plan. Valero has concluded that from 1999 through August 2004, approximately 9.1 million shares of Valero common stock were acquired by the trustee for the accounts of Thrift Plan participants inadvertently in excess of the number of shares originally registered on Form S-8. Purchases of Valero common stock by the trustee for Thrift Plan participants during this period were made at prices ranging from approximately $8.42 per share to $39.18 per share. Valero did not receive any proceeds from any shares of Valero common stock acquired by the trustee for Thrift Plan participants. Exemptions from registration under federal securities laws may not be available for all shares that have been acquired for the Thrift Plan in excess of the original number of registered shares. On September 1, 2004, Valero filed a new registration statement on Form S-8 to register 10.0 million shares of Valero common stock for the Thrift Plan.

(c) Issuer Purchases of Equity Securities . 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

July 2004	0	n/a	0	$ 361 million

August 2004	220,000	$33.265	0	$ 361 million

September 2004	0	n/a	0	$ 361 million

Total	220,000	$33.265	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 4. Submission of Matters to a Vote of Security Holders

A special meeting of Valero’s stockholders was held September 13, 2004. Stockholders met to consider an amendment to Valero’s certificate of incorporation to increase the total number of shares of common stock, par value $0.01 per share, that Valero is authorized to issue from 300 million shares to 600 million shares. The proposal to amend the certificate of incorporation passed. Voting results were as follows:


For				116,898,275
Against				3,440,904
Abstain				645,482
Broker Non-Votes				n/a

Item 6. Exhibits

Exhibit No. Description

3.01

Amended and Restated Certificate of Incorporation of Valero Energy Corporation, formerly known as Valero Refining and Marketing Company — incorporated by reference to Exhibit 3.1 to Valero’s Registration Statement on Form S-1 (file no. 333-27013), filed May 13, 1997.

3.02

Certificate of Amendment (dated July 31, 1997) to Restated Certificate of Incorporation of Valero Energy Corporation — incorporated by reference to Exhibit 3.02 to Valero’s Annual Report on Form 10-K for the year ended December 31, 2003.

3.03

Certificate of Merger of Ultramar Diamond Shamrock Corporation with and into Valero Energy Corporation dated December 31, 2001 — incorporated by reference to Exhibit 3.03 to Valero’s Annual Report on Form 10-K for the year ended December 31, 2003.

*3.04

Second Certificate of Amendment (dated September 17, 2004) to Restated Certificate of Incorporation of Valero Energy Corporation.

4.01

Amendment No. 3 dated as of August 15, 2004 to Rights Agreement dated July 17, 1997 between Valero Energy Corporation and Computershare Investor Services, LLC, as Rights Agent — incorporated by reference to Exhibit 4.10 to Valero’s Registration Statement on Form S-8 (file no. 333-118731), filed September 1, 2004.

*10.01

Stock Option Agreement dated October 21, 2004 between Valero Energy Corporation and Gregory C. King.

*10.02

Schedule of Stock Option Agreements dated October 21, 2004.

*10.03

Restricted Stock Agreement dated October 21, 2004 between Valero Energy Corporation and Gregory C. King.

*10.04

Schedule of Restricted Stock Agreements dated October 21, 2004.

*10.05

Restricted Unit Agreement dated October 21, 2004 between Valero Energy Corporation and William E. Greehey.

*12.01

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

*31.01

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

*32.01

Section 1350 Certifications (as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002).

_________________

* Filed herewith.

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: November 8, 2004

Exhibit 3.04

SECOND

CERTIFICATE OF AMENDMENT

to the

RESTATED CERTIFICATE OF INCORPORATION

of

VALERO ENERGY CORPORATION

Valero Energy Corporation (the “Corporation”), a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware (the “DGCL”), hereby adopts this Certificate of Amendment (this “Certificate of Amendment”), which amends its Restated Certificate of Incorporation, as amended by the Certificate of Designation filed July 31, 1997, the Certificate of Amendment filed July 31, 1997, the Certificate of Merger filed December 31, 2001 and the Certificate of Designation filed June 30, 2003 (as amended, the “Restated Certificate of Incorporation”), as described below, and does hereby further certify that:

1. The name of the Corporation is Valero Energy Corporation.

2. At a meeting of the Board of Directors of the Corporation resolutions were duly adopted setting forth a proposed amendment of the Restated Certificate of Incorporation (the “Amendment”), declaring the Amendment to be advisable and calling a meeting of the stockholders of the Corporation for consideration thereof. The resolution setting forth the Amendment is as follows:

NOW THEREFORE, BE IT RESOLVED, that the Board of Directors adopts and approves amending and restating the first paragraph of Article IV of the Restated Certificate of Incorporation of the Company to read in its entirety as follows (the “Charter Amendment”):

“The total number of shares of all classes of stock that the corporation shall have authority to issue is 620,000,000 shares, divided into classes as follows: 600,000,000 shares shall be Common Stock, par value $0.01 per share (“Common Stock”); and 20,000,000 shares shall be Preferred Stock, par value $0.01 per share (“Preferred Stock”). Shares of any class of stock of the corporation may be issued for such consideration and for such corporate purposes as the Board of Directors of the corporation may from time to time determine.”

3. Pursuant to resolutions of its Board of Directors, a special meeting of the stockholders of the Corporation was duly called and held, upon notice in accordance with Section 222 of the DGCL, at which meeting the necessary number of shares as required by statute and the Restated Certificate of Incorporation were voted in favor of the Amendment.

4. The Amendment was duly adopted in accordance with the provisions of Section 242 of the DGCL.

5. Pursuant to Section 103(d) of the DGCL, the Amendment will become effective upon its filing with the Secretary of State of the State of Delaware.

IN WITNESS WHEREOF, the Corporation has caused this certificate to be executed on its behalf this 17th day of September, 2004.


	VALERO ENERGY CORPORATION
	By: /s/ Jay D. Browning
	Jay D. Browning
	Vice President & Secretary

Exhibit 10.01


Notice of Grant of Stock Option	Valero Energy Corporation
and Option Agreement	ID: 74-1828067
	P. O. Box 696000
	San Antonio, TX 78269-6000
Gregory C. King

Effective October 21, 2004, you have been granted an option to buy 38,000 shares of the common stock of Valero Energy Corporation (the “Company”) at $42.71 per share.

Your Options will vest on the dates shown below.

Shares	Grant Date	Full Vest	Expiration
7,600	10/21/04	10/21/05	10/21/14
7,600	10/21/04	10/21/06	10/21/14
7,600	10/21/04	10/21/07	10/21/14
7,600	10/21/04	10/21/08	10/21/14
7,600	10/21/04	10/21/09	10/21/14

By your signature and the Company’s signature below, you and the Company agree that the Option referenced above is granted under and governed by the terms and conditions of the Company’s 2001 Executive Stock Incentive Plan and the Option Agreement attached hereto, all of which are made a part of this agreement.


VALERO ENERGY CORPORATION


By: /s/ Mike Crownover	Oct. 21, 2004
Mike Crownover	Date
Director - Human Resources


/s/ Gregory C. King	Oct. 21, 2004
Gregory C. King	Date
Employee

OPTION AGREEMENT
Valero Energy Corporation 2001 Executive Stock Incentive Plan

This Option Agreement (“Agreement”) is entered into between Valero Energy Corporation, a Delaware corporation (“Valero”), and Employee pursuant to the terms of the Valero Energy Corporation 2001 Executive Stock Incentive Plan (“Plan”). As used herein, Employee means Gregory C. King . Capitalized terms used in this Agreement but not otherwise defined in this Agreement have the meanings set forth in the Plan.

1. Grant of Option. Valero grants to Employee the option (“Option”) to purchase up to 38,000 shares of Common Stock of Valero, $.01 par value per share (“Shares”), in accordance with the terms of this Agreement and the Plan. The Shares, when issued to Employee upon the exercise of the Option, will be fully paid and non-assessable.

2. Purchase Price. The purchase price of the Shares will be $42.71 per Share.

3. Exercise of Option. The period during which the Option is in effect (“Option Period”) will commence on October 21, 2004. The Option Period will terminate on October 21, 2014. No portion of the Option may be exercised prior to October 21, 2005. Subject to the provisions of the Plan relating to suspension or termination from the Plan, the Option will be available for exercise in the following increments: 7,600 shares on 10/21/05 ; 7,600 shares on 10/21/06 ; 7,600 shares on 10/21/07 ; 7,600 shares on 10/21/08 ; and 7,600 shares on 10/21/09 .

If the Employee desires to exercise the Option, Employee must deliver written notice to Stock Plan Administration of Valero substantially in the form of the attached Form A (“Exercise Notice”). The Option must be exercised in accordance with one of the methods for exercise set forth in the attached form of Exercise Notice. The date on which the Exercise Notice is received by Valero will be the “Exercise Date.” The completed Exercise Notice must include the number of Shares with respect to which the Option is being exercised. Payment for the Shares will be made at Valero’s San Antonio offices.

If any law or regulation requires Valero to take any action with respect to the Shares specified in the Exercise Notice, then the date of delivery of the Shares against payment will be extended for the period necessary to take such action. In the event of any failure by Employee to pay for the number of Shares specified in the Exercise Notice on the Settlement Date, as the same may be extended as provided above, the exercise of the Option with respect to such number of Shares will be treated as if it had never been made.

4. Plan Incorporated by Reference. The Plan is incorporated herein, and by this reference, is made a part hereof for all purposes.

5. Limitation of Rights of Employee. Employee will have no rights with respect to any Shares not expressly conferred by the Plan or this Agreement.

6. No Assignment. This Agreement and the Option granted hereunder are of a personal nature and Employee’s rights with respect hereto and thereto may not be sold, mortgaged, pledged, assigned, transferred, conveyed or disposed of in any manner by Employee, and may not be exercised by any person, other than Employee, except as expressly permitted under the Plan. Any such attempted sale, mortgage, pledge, assignment, transfer, conveyance, disposition or exercise will be void, and Valero will not be bound thereby.

7. Successors. This Agreement is binding upon any successors of Valero and the heirs, successors and legal representatives of Employee.

8. Direct Registration. Employee agrees that in lieu of stock certificates, any Shares issuable in connection with the exercise of the Options may be issued in uncertificated form pursuant to the Direct Registration Service of Valero’s stock transfer agent.

EXHIBIT 10.02

SCHEDULE OF STOCK OPTION AGREEMENTS
dated October 21, 2004

The following have executed Stock Option Agreements substantially in the form of the agreement attached as Exhibit 10.01 (the “Exhibit”) to the Valero Energy Corporation Form 10-Q for the quarter ended September 30, 2004.

Keith D. Booke
Michael S. Ciskowski
William R. Klesse

The following information sets forth the material details in which the Stock Option Agreements described in this Schedule differ from the Exhibit.

Named Executive Officer	Number of Options
Keith D. Booke	23,000
Michael S. Ciskowski	23,000
William R. Klesse	34,000

Exhibit 10.03

RESTRICTED STOCK AGREEMENT
Valero Energy Corporation 2001 Executive Stock Incentive Plan

This Restricted Stock Agreement (“Agreement”) is between Valero Energy Corporation, a Delaware corporation (“Valero”), and Gregory C. King, an employee of Valero Energy Corporation or one of its Affiliates (“Employee”), who agree as follows:

1. Introduction . Pursuant to the Valero Energy Corporation 2001 Executive Stock Incentive Plan (the “Plan”), on October 21, 2004, Employee was awarded 15,000 shares of Common Stock of Valero (“Restricted Stock”) under the Plan to Employee as “Restricted Stock” (as defined in the Plan). The parties hereby enter into this Agreement to evidence the terms, conditions and restrictions applicable to the Restricted Stock.

2. The Plan, Restrictions, Vesting . The Plan is incorporated herein by reference for all purposes, and Employee hereby agrees to the terms and conditions stated therein applicable to the Restricted Stock and the rights and powers of Valero and the Compensation Committee as provided therein. In addition, Employee agrees as follows:

2.01 Except to the extent otherwise provided in the Plan or this Agreement, shares of Restricted Stock issued to Employee under the Plan may not be sold, exchanged, pledged, hypothecated, transferred, garnished or otherwise disposed of or alienated prior to vesting.

2.02 Employee’s rights to and interest in the shares of Restricted Stock described herein shall vest and accrue to Employee in the following increments: 3,000 shares on 10/21/05; 3,000 shares on 10/21/06; 3,000 shares on 10/21/07; 3,000 shares on 10/21/08; and 3,000 shares on 10/21/09. The restrictions described in Section 2 of this Agreement shall terminate prior to the expiration of such five-year period (i) upon the retirement, death or total and permanent disability of Employee, or (ii) if a Change of Control with respect to Valero should occur, as set forth in Section 8 of the Plan. In the event Employee’s employment with Valero is terminated, the provisions set forth in Section 6(h)(vii) of the Plan shall apply.

2.03 Employee agrees that in lieu of certificates representing Employee’s shares of Restricted Stock, the Restricted Stock and any Shares issuable in connection with their vesting may be issued in uncertificated form pursuant to the Direct Registration Service of Valero’s stock transfer agent.

2.04 If, as the result of a stock split, stock dividend, combination of shares or any other change, including an exchange of securities for any reason, the Employee shall be entitled to new or additional or different shares of stock or securities, such stock or securities shall be subject to the terms and conditions of the Plan and this Agreement.

3. Limitation . The Employee shall have no rights with respect to any shares of Restricted Stock not expressly conferred by the Plan or this Agreement.

4. Miscellaneous . All capitalized terms contained in this Agreement shall have the definitions set forth in the Plan unless otherwise defined herein. This Agreement shall be binding upon the parties hereto and their respective beneficiaries, heirs, administrators, executors, legal representatives, and successors.

EFFECTIVE as of the 21st day of October, 2004.


	VALERO ENERGY CORPORATION
	/s/ Mike Crownover
	Mike Crownover
	Director-Human Resources


	/s/ Gregory C. King
	Gregory C. King
	Employee

EXHIBIT 10.04

SCHEDULE OF RESTRICTED STOCK AGREEMENTS
dated October 21, 2004

The following have executed Restricted Stock Agreements substantially in the form of the agreement attached as Exhibit 10.03 (the “Exhibit”) to the Valero Energy Corporation Form 10-Q for the quarter ended September 30, 2004.

Keith D. Booke
Michael S. Ciskowski
William R. Klesse

The following information sets forth the material details in which the Restricted Stock Agreements described in this Schedule differ from the Exhibit.

Named Executive Officer	Number of Shares of Restricted Stock
Keith D. Booke	9,000
Michael S. Ciskowski	9,000
William R. Klesse	14,000

Exhibit 10.05

RESTRICTED UNIT AGREEMENT

This Restricted Unit Agreement (the “Agreement”) dated October 21, 2004 is by and between Valero Energy Corporation , a Delaware corporation (“Valero”), and William E. Greehey , Chief Executive Officer of Valero (“Greehey”).

1 .

Grant of Restricted Units . Valero hereby grants to Greehey 138,350 “Restricted Units” representing the right to receive certain cash payments from Valero on the Vesting Dates set forth below. The amount of cash payable to Greehey on each Vesting Date will be equal to the product of: (a) the number of Restricted Units vesting on that date, multiplied by (b) the fair market value on that date of one share of Valero common stock, $.01 par value (“Common Stock”). For purposes of this Agreement, “fair market value” means the average of the “high” and “low” reported sales price per share of Common Stock as reported on the New York Stock Exchange as of the relevant measuring date, or if there are no sales on the NYSE on that measuring date, then as of the next following day on which there were sales.

2 .

Dividend Rights . In addition to the right to receive cash on each Vesting Date as described in Section 1 above, Greehey will be entitled to receive periodic cash payments in relation to dividends that are paid on Valero’s common stock (the “Dividend Rights”). For purposes of the settlement of Greehey’s Dividend Rights under this Agreement, Greehey will be deemed to be a holder of one share of Valero Common Stock for each unvested Restricted Unit held by Greehey. As and when dividends are declared on Valero’s Common Stock, in settlement of the Dividend Rights granted hereunder Greehey will be entitled to receive a cash payment equal to the product of: (a) the declared dividend per share on Valero’s Common Stock, multiplied by (b) the number of unvested Restricted Units held by Greehey on the dividend record date.

3 .	Vesting . The Restricted Units will vest in the following increments on the following dates: 46,117 on October 21, 2005 ; 46,117 on October 21, 2006 ; and 46,116 on October 21, 2007 (each a “Vesting Date”).

Termination of Employment . If Greehey’s employment with Valero is terminated by Greehey (whether through retirement, death, disability or otherwise), or is terminated by Valero without “cause” (as defined per the Employment Agreement then in effect between Valero and Greehey, or if none, then the Employment Agreement presently in effect on the date hereof, as amended) (hereafter, as applicable, the “Employment Agreement”), then any Restricted Units that have not vested as of the date of termination of Greehey’s employment shall not be forfeited and shall continue to vest in accordance with the vesting schedule set forth in Section 3 above. If, however, Greehey’s employment is terminated by Valero for “cause” (as defined per the Employment Agreement), then those Restricted Units that have not yet vested on the date of termination of Greehey’s employment shall be forfeited as of that date and Greehey shall not be entitled to Dividend Rights or any other payments with respect thereto.

5.	Withholding . Valero is hereby authorized to withhold from any settlement of the Restricted Units or Dividend Rights the amount of any applicable withholding taxes with respect to such settlement, and to take any other action necessary to satisfy all obligations for the payment of the taxes.

Reorganization Event . In the event of any stock dividend, rights distribution, split-up, recapitalization, share exchange, merger, consolidation, stock acquisition, spin-off, separation, reorganization, liquidation or other similar event (any one of which being hereafter referred to as a “Reorganization Event”), as a result of which (i) shares or other securities of any class or rights shall be issued in respect of outstanding shares of Common Stock, or (ii) shares of Common Stock shall be changed into the same or a different number of shares of the same or another class or classes or other securities, then the Restricted Units granted under this Agreement shall be affected as follows. Upon the closing of the Reorganization Event, each unvested Restricted Unit shall be treated as one share of Common Stock for purposes of determining the number of unvested Restricted Units owned by Greehey immediately following the Reorganization Event.

7.	Change of Control . Defined . A “Change of Control” shall be deemed to occur when:

(a)

the stockholders of Valero approve any agreement or transaction pursuant to which: (i) Valero will merge or consolidate with any other entity (other than a wholly owned subsidiary of Valero) and will not be the surviving entity (or in which Valero survives only as the subsidiary of another entity); (ii) Valero will sell all or substantially all of its assets to any other person or entity (other than a wholly owned subsidiary of Valero); or (iii) Valero will be liquidated or dissolved;

(b)

any “person” or “group” (as these terms are used in Section 13(d) and 14(d) of the Securities Exchange Act of 1934) other than Valero, any subsidiary of Valero, any employee benefit plan of Valero or its subsidiaries, or any entity holding shares of Common Stock for or pursuant to the terms of such employee benefit plans, is or becomes an “Acquiring Person” as defined in the Rights Agreement dated June 18, 1997 between Valero and Computershare Investor Services, L.L.C., as successor Rights Agent to Harris Trust and Savings Bank, as amended (or any successor Rights Agreement), or, if no Rights Agreement is then in effect, such person or group acquires or holds such number of shares as, under the terms and conditions of the most recent such Rights Agreement to be in force and effect, would have caused such person or group to be an “Acquiring Person” thereunder;

(c)

any “person” or “group” shall commence a tender offer or exchange offer for 15% or more of the shares of Common Stock then outstanding, or for any number or amount of shares of Common Stock which, if the tender or exchange offer were to be fully subscribed and all shares of Common Stock for which the tender or exchange offer is made were to be purchased or exchanged pursuant to the offer, would result in the acquiring person or group directly or indirectly beneficially owning 50% or more of the shares of Common Stock then outstanding;

(d)

individuals who, as of any date, constitute Valero’s Board of Directors (the “Incumbent Board”) thereafter cease for any reason to constitute at least a majority of the Board of Directors; provided, however, that any individual becoming a director whose election, or nomination for election by Valero’s stockholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a person or group other than the Board of Directors;

(e)

the occurrence of the Distribution Date (as defined in the Rights Agreement dated June 18, 1997 between Valero and Computershare Investor Services, L.L.C., as successor Rights Agent to Harris Trust and Savings Bank, as amended); or

(f)

any other event determined by Valero’s Board of Directors or the Compensation Committee thereof to constitute a “Change of Control” hereunder.

8.	Actions of Compensation Committee . The Compensation Committee, as constituted before a Change of Control, is hereby authorized, and has sole discretion to take any one or more of the following actions, whether in connection with a Change of Control or otherwise:

(a)

provide for the acceleration of any vesting periods relating to the Restricted Units to a date or dates determined by the Compensation Committee;

(b)

adjust any unvested Restricted Units as the Compensation Committee deems appropriate to reflect a Change of Control; or

(c)

cause any unvested Restricted Units to be assumed, or new rights substituted therefor, by the acquiring or surviving corporation after a Change of Control. The Compensation Committee may in its discretion include other provisions and limitations in any amended Restricted Unit Agreement as it may deem equitable and in the best interests of Valero.

9.	Rights as Stockholder . Except for the Dividend Rights described above, neither Greehey nor any person claiming by, through or under Greehey with respect to the Restricted Units shall have any rights as a stockholder of Valero (including, without limitation, voting rights).

10.

Assignment .

(a)

This Agreement and Greehey’s interest in the Restricted Units and Dividend Rights granted by this Agreement are of a personal nature, and, except as expressly provided below, Greehey’s rights with respect thereto may not be sold, mortgaged, pledged, assigned, transferred, conveyed or disposed of in any manner by Greehey. Any such attempted sale, mortgage, pledge, assignment, transfer, conveyance or disposition shall be void, and Valero shall not be bound thereby.

(b)

Cash payments upon settlement of the Restricted Units and Dividend Rights may be made only to Greehey, during his lifetime, or to his beneficiary(ies) after his death. After Greehey’s death, any cash settlements with respect to Restricted Units or Dividend Rights will be made to Greehey’s beneficiary(ies) as designated under Greehey’s Valero Energy Corporation Beneficiary Designation Form , or if there is no such designation, to the beneficiary(ies) designated in Greehey’s last will and testament.

11.

Successors . This Agreement shall be binding upon any successors of Valero and upon the beneficiaries, legatees, heirs, administrators, executors and legal representatives of Greehey.

12.

No Trust Fund . This Agreement shall not create or be construed to create a trust or separate fund of any kind or any fiduciary relationship between Valero and Greehey or any other person with respect to the Restricted Units and Dividend Rights. To the extent that any person acquires a right to receive payments from Valero under this Agreement, such right shall be no greater than the right of any unsecured general creditor of Valero.

13.

Governing Law . The validity, construction, and effect of this Agreement shall be determined in accordance with the laws of the State of Texas.


	VALERO ENERGY CORPORATION
	By: /s/ Keith D. Booke
	Keith D. Booke
	Executive Vice President and
	Chief Administrative Officer



	/s/ William E. Greehey
	WILLIAM E. GREEHEY

Exhibit 12.01

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

	Nine Months Ended			Year Ended December 31,
	September 30, 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	$	1,977.1		$	980.8		$	191.5		$	913.0		$	530.4		$	17.9
Add:
Fixed charges		301.4			395.5			408.9			143.2			114.6			80.2
Amortization of capitalized interest		5.2			6.2			5.7			5.3			5.1			5.2
Distributions from equity investees		31.7			26.5			4.8			2.8			9.2			4.0
Less:
Interest capitalized		(27.0	)		(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	$	2,288.4		$	1,363.5		$	550.6		$	1,040.3		$	645.1		$	101.5

Fixed charges:
Interest expense, net	$	195.6		$	261.3		$	285.7		$	88.5		$	76.3		$	55.4
Interest capitalized		27.0			26.3			16.2			10.6			7.4			5.8
Rental expense interest factor (1)		78.8			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	$	301.4		$	395.5		$	408.9		$	143.2		$	114.6		$	80.2

Ratio of earnings to fixed charges		7.6	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	$	2,288.4		$	1,363.5		$	550.6		$	1,040.3		$	645.1		$	101.5

Total fixed charges	$	301.4		$	395.5		$	408.9		$	143.2		$	114.6		$	80.2
Preferred stock dividends		14.4			6.8			-			-			-			-

Total fixed charges and
preferred stock dividends	$	315.8		$	402.3		$	408.9		$	143.2		$	114.6		$	80.2

Ratio of earnings to fixed charges
and preferred stock dividends		7.2	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.

Exhibit 31.01

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 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: November 8, 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 of Valero Energy Corporation;

(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: November 8, 2004


	/s/ Michael S. Ciskowski

	Michael S. Ciskowski
	Executive Vice President and Chief Financial Officer

Exhibit 32.01

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

In connection with the Quarterly Report of Valero Energy Corporation (the Company) on Form 10-Q for the quarter ending September 30, 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:

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

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
	November 8, 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 TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Valero Energy Corporation (the Company) on Form 10-Q for the quarter ending September 30, 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:

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

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
	November 8, 2004

VALERO ENERGY CORPORATION (Exact name of registrant as specified in its charter)

VALERO ENERGY CORPORATION AND SUBSIDIARIES INDEX

PART I — FINANCIAL INFORMATION Item 1. Financial Statements

VALERO ENERGY CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Millions of Dollars, Except Par Value)

VALERO ENERGY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Millions of Dollars, Except per Share Amounts) (Unaudited)

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

VALERO ENERGY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Millions of Dollars) (Unaudited)

VALERO ENERGY CORPORATION AND SUBSIDIARIES CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

2. ACCOUNTING PRONOUNCEMENTS

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

3. ACQUISITIONS

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

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

4. INVENTORIES

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

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

6. LONG-TERM DEBT

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

7. OTHER LONG-TERM LIABILITIES

8. STOCKHOLDERS’ EQUITY

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

9. EARNINGS PER COMMON SHARE

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

10. STATEMENTS OF CASH FLOWS

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

11. PRICE RISK MANAGEMENT ACTIVITIES

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

12. SEGMENT INFORMATION

13. STOCK-BASED COMPENSATION

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

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

14. EMPLOYEE BENEFIT PLANS

15. COMMITMENTS AND CONTINGENCIES

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

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

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

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

16. SUBSEQUENT EVENT

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

FORWARD-LOOKING STATEMENTS

RESULTS OF OPERATIONS

Third Quarter 2004 Compared to Third Quarter 2003

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

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

General

Refining

Retail

Corporate Expenses and Other

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

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

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

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

General

Refining

Retail

Corporate Expenses and Other

Item 3. Quantitative and Qualitative Disclosures About Market Risk

INTEREST RATE RISK

Item 4. Controls and Procedures

PART II – OTHER INFORMATION

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

Item 6. Exhibits

SIGNATURE

SECOND

CERTIFICATE OF AMENDMENT

to the

RESTATED CERTIFICATE OF INCORPORATION

of

VALERO ENERGY CORPORATION

RESTRICTED UNIT AGREEMENT

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)

VALERO ENERGY CORPORATION
(Exact name of registrant as specified in its charter)

VALERO ENERGY CORPORATION AND SUBSIDIARIES

INDEX

PART I — FINANCIAL INFORMATION
Item 1. Financial Statements

VALERO ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Millions of Dollars, Except Par Value)

VALERO ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Millions of Dollars, Except per Share Amounts)
(Unaudited)

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

VALERO ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Millions of Dollars)
(Unaudited)

VALERO ENERGY CORPORATION AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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)