UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended June 30, 2008

OR

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

For the transition period from                                          to                                           

Commission file number 1-13175

VALERO ENERGY CORPORATION

(Exact name of registrant as specified in its charter)

Delaware (State or other jurisdiction of incorporation or organization)		74-1828067 (I.R.S. Employer Identification No.)

One Valero Way
San Antonio, Texas
(Address of principal executive offices)
78249
(Zip Code)

(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 þ No o

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

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

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

The number of shares of the registrant’s only class of common stock, $0.01 par value, outstanding as of July 31, 2008 was 523,159,876.

 

 

VALERO ENERGY CORPORATION AND SUBSIDIARIES

INDEX

		Page
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of June 30, 2008 and December 31, 2007			3
Consolidated Statements of Income for the Three and Six Months Ended June 30, 2008 and 2007			4
Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2008 and 2007			5
Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2008 and 2007			6
Condensed Notes to Consolidated Financial Statements			7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			31
Item 3. Quantitative and Qualitative Disclosures About Market Risk			51
Item 4. Controls and Procedures			55
PART II - OTHER INFORMATION
Item 1. Legal Proceedings			56
Item 1A. Risk Factors			57
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			57
Item 4. Submission of Matters to a Vote of Security Holders			58
Item 6. Exhibits			60
SIGNATURE			61

PART I - FINANCIAL INFORMATION

VALERO ENERGY CORPORATION AND SUBSIDIARIES

		June 30,				December 31,
		2008				2007
		(Unaudited)
ASSETS
Current assets:
Cash and temporary cash investments		$	1,644			$	2,464
Restricted cash			100				31
Receivables, net			7,721				7,691
Inventories			4,904				4,073
Deferred income taxes			388				247
Prepaid expenses and other			160				175
Assets held for sale			335				306
Total current assets			15,252				14,987
Property, plant and equipment, at cost			26,768				25,599
Accumulated depreciation			(4,493	)			(4,039	)
Property, plant and equipment, net			22,275				21,560
Intangible assets, net			268				290
Goodwill			4,039				4,019
Deferred charges and other assets, net			1,822				1,866
Total assets		$	43,656			$	42,722
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current portion of long-term debt and capital lease obligations		$	212			$	392
Accounts payable			10,963				9,587
Accrued expenses			447				500
Taxes other than income taxes			566				632
Income taxes payable			403				499
Deferred income taxes			247				293
Liabilities related to assets held for sale			10				11
Total current liabilities			12,848				11,914
Long-term debt and capital lease obligations, less current portion			6,263				6,470
Deferred income taxes			4,085				4,021
Other long-term liabilities			1,780				1,810
Commitments and contingencies
Stockholders’ equity:
Common stock, $0.01 par value; 1,200,000,000 shares authorized; 627,501,593 and 627,501,593 shares issued			6				6
Additional paid-in capital			7,215				7,111
Treasury stock, at cost; 102,473,766 and 90,841,602 common shares			(6,733	)			(6,097	)
Retained earnings			17,765				16,914
Accumulated other comprehensive income			427				573
Total stockholders’ equity			18,680				18,507
Total liabilities and stockholders’ equity		$	43,656			$	42,722

See Condensed Notes to Consolidated Financial Statements.

VALERO ENERGY CORPORATION AND SUBSIDIARIES

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2008				2007				2008				2007
Operating revenues (1)		$	36,640			$	24,202			$	64,585			$	42,957
Costs and expenses:
Cost of sales			33,673				19,310				59,342				34,820
Refining operating expenses			1,133				985				2,247				1,919
Retail selling expenses			190				200				378				371
General and administrative expenses			117				177				252				322
Depreciation and amortization expense			369				337				736				659
Total costs and expenses			35,482				21,009				62,955				38,091
Operating income			1,158				3,193				1,630				4,866
Other income, net			15				7				35				12
Interest and debt expense:
Incurred			(107	)			(110	)			(223	)			(199	)
Capitalized			24				27				43				58
Income from continuing operations before income tax expense			1,090				3,117				1,485				4,737
Income tax expense			356				1,055				490				1,587
Income from continuing operations			734				2,062				995				3,150
Income from discontinued operations, net of income tax expense			-				187				-				243
Net income		$	734			$	2,249			$	995			$	3,393
Earnings per common share:
Continuing operations		$	1.40			$	3.66			$	1.88			$	5.42
Discontinued operations			-				0.33				-				0.42
Total		$	1.40			$	3.99			$	1.88			$	5.84
Weighted-average common shares outstanding (in millions)			526				563				529				581
Earnings per common share – assuming dilution:
Continuing operations		$	1.37			$	3.57			$	1.85			$	5.28
Discontinued operations			-				0.32				-				0.40
Total		$	1.37			$	3.89			$	1.85			$	5.68
Weighted-average common shares outstanding – assuming dilution (in millions)			534				578				537				597
Dividends per common share		$	0.15			$	0.12			$	0.27			$	0.24
Supplemental information:
(1) Includes excise taxes on sales by our U.S. retail system		$	204			$	203			$	398			$	399

See Condensed Notes to Consolidated Financial Statements.

VALERO ENERGY CORPORATION AND SUBSIDIARIES

		Six Months Ended June 30,
		2008				2007
Cash flows from operating activities:
Net income		$	995			$	3,393
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization expense			736				675
Stock-based compensation expense			24				46
Deferred income tax expense (benefit)			(93	)			153
Changes in current assets and current liabilities			189				60
Changes in deferred charges and credits and other operating activities, net			(49	)			24
Net cash provided by operating activities			1,802				4,351
Cash flows from investing activities:
Capital expenditures			(1,178	)			(1,042	)
Deferred turnaround and catalyst costs			(203	)			(230	)
(Investment) return of investment in Cameron Highway Oil Pipeline Company, net			12				(215	)
Advance proceeds related to sale of assets			17				96
Contingent payments in connection with acquisitions			(25	)			(75	)
Minor acquisitions and other investing activities, net			(43	)			15
Net cash used in investing activities			(1,420	)			(1,451	)
Cash flows from financing activities:
Long-term notes:
Borrowings			-				2,245
Repayments			(374	)			(413	)
Bank credit agreements:
Borrowings			296				3,000
Repayments			(296	)			(3,000	)
Purchase of common stock for treasury			(700	)			(4,181	)
Issuance of common stock in connection with employee benefit plans			11				111
Benefit from tax deduction in excess of recognized stock-based compensation cost			13				215
Common stock dividends			(143	)			(139	)
Other financing activities			(2	)			(21	)
Net cash used in financing activities			(1,195	)			(2,183	)
Effect of foreign exchange rate changes on cash			(7	)			29
Net increase (decrease) in cash and temporary cash investments			(820	)			746
Cash and temporary cash investments at beginning of period			2,464				1,590
Cash and temporary cash investments at end of period		$	1,644			$	2,336

See Condensed Notes to Consolidated Financial Statements.

VALERO ENERGY CORPORATION AND SUBSIDIARIES

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2008					2007			2008					2007
Net income		$	734			$	2,249			$	995			$	3,393
Other comprehensive income (loss):
Foreign currency translation adjustment, net of income tax expense of $0, $31, $0, and $31			15				141				(62	)			161
Pension and other postretirement benefits net (gain) loss reclassified into income, net of income tax expense (benefit) of $1, $(1), $1, and $(2)			(1	)			2				(1	)			3
Net loss on derivative instruments designated and qualifying as cash flow hedges:
Net loss arising during the period, net of income tax benefit of $27, $24, $54, and $47			(51	)			(45	)			(100	)			(87	)
Net (gain) loss reclassified into income, net of income tax expense (benefit) of $(17), $(2), $(9), and $4			32				4				17				(7	)
Net loss on cash flow hedges			(19	)			(41	)			(83	)			(94	)
Other comprehensive income (loss)			(5	)			102				(146	)			70
Comprehensive income		$	729			$	2,351			$	849			$	3,463

See Condensed Notes to Consolidated Financial Statements.

VALERO ENERGY CORPORATION AND SUBSIDIARIES

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

As used in this report, the terms “Valero,” “we,” “us,” or “our” may refer to Valero Energy Corporation, one or more of its consolidated subsidiaries, or all of them taken as a whole.

These unaudited consolidated financial statements include the accounts of Valero and subsidiaries in which Valero has a controlling interest. Intercompany balances and transactions have been eliminated in consolidation. Investments in significant non-controlled entities are accounted for using the equity method.

These unaudited consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles (GAAP) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X of the Securities Exchange Act of 1934. Accordingly, they do not include all of the information and notes required by GAAP for complete consolidated financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. All such adjustments are of a normal recurring nature unless disclosed otherwise. Financial information for the three and six months ended June 30, 2008 and 2007 included in these Condensed Notes to Consolidated Financial Statements is derived from our unaudited consolidated financial statements. Operating results for the three and six months ended June 30, 2008 are not necessarily indicative of the results that may be expected for the year ending December 31, 2008.

The consolidated balance sheet as of December 31, 2007 has been derived from the audited financial statements as of that date. For further information, refer to the consolidated financial statements and notes thereto included in our annual report on Form 10-K for the year ended December 31, 2007. As discussed in Note 3, the assets and liabilities related to the Krotz Springs Refinery, including inventory to be sold by our marketing and supply subsidiary associated with this transaction, have been reclassified as held for sale as of December 31, 2007.

See Note 3 for a discussion of the presentation in the statements of income of the results of operations of the Krotz Springs Refinery and the Lima Refinery, which were sold effective July 1, 2008 and July 1, 2007, respectively.

Use of Estimates
The preparation of financial statements in conformity with GAAP requires our management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. On an ongoing basis, management reviews its estimates based on currently available information. Changes in facts and circumstances may result in revised estimates.

Reclassifications
Previously reported amounts have been reclassified to present the assets and liabilities related to the Krotz Springs Refinery as held for sale as discussed above.

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

2. ACCOUNTING PRONOUNCEMENTS

FASB Statement No. 157
In September 2006, the FASB issued Statement No. 157, “Fair Value Measurements.” Statement No. 157 defines fair value, establishes a framework for measuring fair value under GAAP, and expands disclosures about fair value measures, but does not require any new fair value measurements. Statement No. 157 is effective for fiscal years beginning after November 15, 2007. The provisions of Statement No. 157 are to be applied on a prospective basis, with the exception of certain financial instruments for which retrospective application is required. FASB Staff Position No. FAS 157-2 (FSP 157-2), issued in February 2008, delayed the effective date of Statement No. 157 for nonfinancial assets and nonfinancial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually), until fiscal years beginning after November 15, 2008. We adopted Statement No. 157 effective January 1, 2008, with the exceptions allowed under FSP 157-2, the adoption of which has not affected our financial position or results of operations but did result in additional required disclosures, which are provided in Note 9. The exceptions apply to the following: nonfinancial assets and nonfinancial liabilities measured at fair value in a business combination; impaired property, plant and equipment; goodwill; and the initial recognition of the fair value of asset retirement obligations and restructuring costs. We do not expect any significant impact to our consolidated financial statements when we implement Statement No. 157 for these assets and liabilities.

FASB Statement No. 159
In February 2007, the FASB issued Statement No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities - Including an Amendment of FASB Statement No. 115.” Statement No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. Statement No. 159 is effective for fiscal years beginning after November 15, 2007. We have not elected to apply the provisions of Statement No. 159 to any of our financial instruments; therefore, the adoption of Statement No. 159 effective January 1, 2008 has not affected our financial position or results of operations.

FASB Statement No. 141 (revised 2007)
In December 2007, the FASB issued Statement No. 141 (revised 2007), “Business Combinations” (Statement No. 141R). This statement improves the financial reporting of business combinations and clarifies the accounting for these transactions. The provisions of Statement No. 141R are to be applied prospectively to business combinations with acquisition dates on or after the beginning of an entity’s fiscal year that begins on or after December 15, 2008, with early adoption prohibited. Due to its application to future acquisitions, the adoption of Statement No. 141R effective January 1, 2009 will not have any immediate effect on our financial position or results of operations.

FASB Statement No. 160
In December 2007, the FASB issued Statement No. 160, “Noncontrolling Interests in Consolidated Financial Statements - an amendment of ARB No. 51.” Statement No. 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. This statement provides guidance for the accounting and reporting of noncontrolling interests, changes in controlling interests, and the deconsolidation of subsidiaries. In addition, Statement No. 160 amends FASB Statement No. 128, “Earnings per Share,” to specify the computation, presentation, and disclosure requirements for earnings per share if an entity has one or more noncontrolling interests. The adoption of

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

Statement No. 160 effective January 1, 2009 is not expected to materially affect our financial position or results of operations.

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

FASB Statement No. 162
In May 2008, the FASB issued Statement No. 162, “The Hierarchy of Generally Accepted Accounting Principles.” Statement No. 162 identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements that are presented in conformity with GAAP. Statement No. 162 is effective 60 days following approval by the Securities and Exchange Commission (SEC) of the Public Company Accounting Oversight Board’s amendments to AU Section 411, “The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles.” The adoption of Statement No. 162 will not affect our financial position or results of operations.

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

3. DISPOSITIONS

Sale of Krotz Springs Refinery
On May 8, 2008, we entered into an agreement to sell our refinery in Krotz Springs, Louisiana to Alon Refining Krotz Springs, Inc. (Alon), a subsidiary of Alon USA Energy, Inc. As a result, the assets and liabilities related to the Krotz Springs Refinery as of June 30, 2008 and December 31, 2007 have been presented in the consolidated balance sheets as “assets held for sale” and “liabilities related to assets held for sale,” respectively. The nature and significance of our post-closing participation in the offtake agreement described below represents a continuation of activities with the Krotz Springs Refinery for accounting purposes, and as such the results of operations related to the Krotz Springs Refinery have not been presented as discontinued operations in the consolidated statements of income for any of the periods presented.

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

Effective July 1, 2008, we consummated the sale of our Krotz Springs Refinery to Alon. Initial proceeds from the sale were $333 million, plus $143 million representing a preliminary working capital settlement related to the sale of inventory by our marketing and supply subsidiary. The working capital settlement is expected to be finalized within 90 days after the effective date of the sale. In addition to the cash consideration received, we also received contingent consideration in the form of a three-year earn-out agreement based on certain product margins, which had a fair value of approximately $170 million as of July 1, 2008. We have hedged the risk of a decline in the referenced product margins subsequent to the acquisition date by entering into certain commodity derivative contracts.

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

	•		an agreement to supply crude oil and other feedstocks to the Krotz Springs Refinery through September 30, 2008, unless terminated earlier by Alon;
	•		an offtake agreement under which we will (i) purchase all refined products from the Krotz Springs Refinery for three months after the effective date of the sale, (ii) purchase certain products for an additional one to five years after the expiration of the initial three-month period of the agreement, and (iii) provide certain refined products to Alon that are not produced at the Krotz Springs Refinery for an initial term of 15 months and thereafter until terminated by either party; and
	•		a transition services agreement under which we agreed to provide certain accounting and administrative services to Alon, with the services terminating by July 31, 2009.

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

		June 30,				December 31,
		2008				2007
Current assets (primarily inventory)		$	136			$	111
Property, plant and equipment, net			153				149
Goodwill			42				42
Deferred charges and other assets, net			4				4
Assets held for sale		$	335			$	306
Current liabilities			$ 10				$ 11
Liabilities related to assets held for sale			$ 10				$ 11

Sale of Lima Refinery
Effective July 1, 2007, we sold our refinery in Lima, Ohio to Husky Refining Company, a wholly owned subsidiary of Husky Energy Inc. As a result, the consolidated statements of income for the three and six months ended June 30, 2007 reflect the operations related to the Lima Refinery in “income from discontinued operations, net of income tax expense.” Financial information related to the Lima Refinery operations for the three and six months ended June 30, 2007 was as follows (in millions):

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

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

4. INVENTORIES

Inventories consisted of the following (in millions):

		June 30,				December 31,
		2008				2007
Refinery feedstocks		$	2,349			$	1,701
Refined products and blendstocks			2,290				2,117
Convenience store merchandise			86				85
Materials and supplies			179				170
Inventories		$	4,904			$	4,073

Excluding the inventories sold to Alon as discussed in Note 3, as of June 30, 2008 and December 31, 2007, the replacement cost (market value) of LIFO inventories exceeded their LIFO carrying amounts by approximately $10.4 billion and $6.2 billion, respectively.

5. DEBT

On February 1, 2008, we redeemed our 9.50% senior notes for $367 million, or 104.750% of stated value. These notes had a carrying amount of $381 million on the date of redemption, resulting in a gain of $14 million that was included in “other income, net” in the consolidated statement of income. In addition, in March 2008, we made a scheduled debt repayment of $7 million related to certain of our other debt.

During the six months ended June 30, 2008, we borrowed and repaid $296 million under our revolving bank credit facility. As of June 30, 2008, we had no borrowings under our revolving credit facilities or our short-term uncommitted bank credit facilities.

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

As of June 30, 2008, we had $663 million of letters of credit outstanding under our uncommitted short-term bank credit facilities and $898 million of letters of credit outstanding under our committed revolving credit facilities, excluding our Canadian facility. Under our Canadian committed revolving credit facility, we had Cdn. $16 million of letters of credit outstanding as of June 30, 2008.

6. STOCKHOLDERS’ EQUITY

Treasury Stock
During the six months ended June 30, 2008 and 2007, we purchased 12.6 million and 61.9 million shares of our common stock at a cost of $700 million and $4.2 billion, respectively, in connection with the administration of our employee benefit plans and common stock purchase programs authorized by our board of directors. During the six months ended June 30, 2008, we issued 0.9 million shares from treasury at an average cost of $67.08 per share, and for the six months ended June 30, 2007, we issued 11.4 million shares from treasury at an average cost of $61.28 per share, for our employee benefit plans.

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

On February 28, 2008, our board of directors approved a new $3 billion common stock purchase program. This program is in addition to the remaining amount under the $6 billion program previously authorized. This new $3 billion program has no expiration date. As of June 30, 2008, we had made no purchases of our common stock under the new $3 billion program. As of June 30, 2008, we have approvals under these stock purchase programs to purchase approximately $3.7 billion of our common stock.

Common Stock Dividends
On July 9, 2008, our board of directors declared a regular quarterly cash dividend of $0.15 per common share payable on September 10, 2008 to holders of record at the close of business on August 6, 2008.

7. EARNINGS PER COMMON SHARE

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

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2008					2007			2008					2007
Earnings per common share from continuing operations:
Income from continuing operations			$  734				$  2,062				$  995				$  3,150
Weighted-average common shares outstanding			526				563				529				581
Earnings per common share from continuing operations			$  1.40				$  3.66				$  1.88				$  5.42
Earnings per common share from continuing operations – assuming dilution:
Income from continuing operations			$  734				$  2,062				$  995				$  3,150
Weighted-average common shares outstanding			526				563				529				581
Effect of dilutive securities:
Stock options			8				13				8				14
Performance awards and other benefit plans			-				1				-				1
Contingently issuable shares related to accelerated share repurchase program			-				1				-				1
Weighted-average common shares outstanding – assuming dilution			534				578				537				597
Earnings per common share from continuing operations – assuming dilution			$  1.37				$  3.57				$  1.85				$  5.28

Approximately 4 million outstanding stock options were not included in the computation of dilutive securities for the three and six months ended June 30, 2008 because the options’ exercise prices were greater than the average market price of the common shares during the reporting period, and therefore the

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

effect of including such options would be anti-dilutive. There were no anti-dilutive stock options outstanding for the three and six months ended June 30, 2007.

8. STATEMENTS OF CASH FLOWS

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

		Six Months Ended June 30,
		2008				2007
Decrease (increase) in current assets:
Restricted cash		$	(69	)		$	-
Receivables, net			(54	)			(268	)
Inventories			(865	)			(638	)
Income taxes receivable			-				32
Prepaid expenses and other			4				14
Increase (decrease) in current liabilities:
Accounts payable			1,466				464
Accrued expenses			(144	)			(71	)
Taxes other than income taxes			(61	)			3
Income taxes payable			(88	)			524
Changes in current assets and current liabilities		$	189			$	60

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

	•		the amounts shown above exclude changes in cash and temporary cash investments, deferred income taxes, and current portion of long-term debt and capital lease obligations;
	•		previously accrued capital expenditures, deferred turnaround and catalyst costs, and contingent earn-out payments, as well as advance proceeds related to the sale of assets, are reflected in investing activities in the consolidated statements of cash flows;
	•		amounts accrued for common stock purchases in the open market that are not settled as of the balance sheet date are reflected in financing activities in the consolidated statements of cash flows when the purchases are settled and paid;
	•		changes in assets held for sale and liabilities related to assets held for sale related to the Krotz Springs Refinery from December 31, 2007 to June 30, 2008 and the Lima Refinery from December 31, 2006 to June 30, 2007 are reflected in the line items to which the changes relate in the table above; and
	•		certain differences between consolidated balance sheet changes and consolidated statement of cash flow changes reflected above result from translating foreign currency denominated amounts at different exchange rates.

There were no significant noncash investing or financing activities for the six months ended June 30, 2008 and 2007.

Cash flows related to the discontinued operations of the Lima Refinery have been combined with the cash flows from continuing operations within each category in the consolidated statement of cash flows for the

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

six months ended June 30, 2007. Cash provided by operating activities related to our discontinued Lima Refinery operations was $260 million for the six months ended June 30, 2007. Cash used in investing activities related to the Lima Refinery was $14 million for the six months ended June 30, 2007.

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

		Six Months Ended June 30,
		2008				2007
Interest paid (net of amount capitalized)		$	199			$	139
Income taxes paid (net of tax refunds received)			659				811

9. FAIR VALUE MEASUREMENTS

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

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

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

The table below presents information (dollars in millions) about our assets and liabilities measured at fair value on a recurring basis and indicates the fair value hierarchy of the inputs utilized by us to determine the fair values as of June 30, 2008. These assets and liabilities have previously been measured at fair value in accordance with existing GAAP, and our accounting for these assets and liabilities was not impacted by our adoption of Statement No. 157 and Statement No. 159. As of June 30, 2008, we did not have any assets or liabilities that had fair values determined by Level 3 inputs.

		Fair Value Measurements Using
		Quoted				Significant
		Prices				Other				Significant
		in Active				Observable				Unobservable
		Markets				Inputs				Inputs				Total as of
		(Level 1)				(Level 2)				(Level 3)				June 30, 2008
Assets:
Commodity derivative contracts		$	135			$	-			$	-			$	135
Nonqualified benefit plans			130				-				-				130
Liabilities:
Commodity derivative contracts			-				142				-				142
Nonqualified benefit plans			38				-				-				38

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

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

Deposits of $335 million in broker accounts covered by master netting arrangements are netted against the fair value of the commodity derivatives reflected in Level 1. Certain of our commodity derivative contracts under master netting arrangements include both asset and liability positions. Under the guidance of FASB Staff Position No. FIN 39-1, “Amendment of FASB Interpretation No. 39,” we have elected to offset the fair value amounts recognized for multiple derivative instruments executed with the same counterparty, including the related cash collateral.

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

10. PRICE RISK MANAGEMENT ACTIVITIES

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

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2008				2007				2008				2007
Fair value hedges		$	-			$	(1	)			$  2			$	(2	)
Cash flow hedges			-				(7	)			(10	)			(6	)

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

For cash flow hedges, gains and losses reported in “accumulated other comprehensive income” in the consolidated balance sheets are reclassified into “cost of sales” when the forecasted transactions affect income. During the six months ended June 30, 2008, we recognized in “other comprehensive income” unrealized after-tax losses of $100 million on certain cash flow hedges, primarily related to forward sales of distillates and associated forward purchases of crude oil, with $66 million of cumulative after-tax losses on cash flow hedges remaining in “accumulated other comprehensive income” as of June 30, 2008. We expect that the deferred losses as of June 30, 2008 will be reclassified into “cost of sales” over the next 18 months as a result of hedged transactions that are forecasted to occur. The amount ultimately realized in income, however, will differ as commodity prices change. For the six months ended June 30, 2008 and 2007, 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)

11. SEGMENT INFORMATION

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

		Refining				Retail				Corporate				Total
Three months ended June 30, 2008:
Operating revenues from external customers		$	33,625			$	3,015			$	-			$	36,640
Intersegment revenues			2,367				-				-				2,367
Operating income (loss)			1,235				49				(126	)			1,158
Three months ended June 30, 2007:
Operating revenues from external customers			21,883				2,319				-				24,202
Intersegment revenues			1,654				-				-				1,654
Operating income (loss)			3,327				56				(190	)			3,193
Six months ended June 30, 2008:
Operating revenues from external customers			59,055				5,530				-				64,585
Intersegment revenues			4,267				-				-				4,267
Operating income (loss)			1,803				99				(272	)			1,630
Six months ended June 30, 2007:
Operating revenues from external customers			38,732				4,225				-				42,957
Intersegment revenues			2,963				-				-				2,963
Operating income (loss)			5,103				109				(346	)			4,866

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

		June 30,				December 31,
		2008				2007
Refining		$	39,236			$	37,703
Retail			2,193				2,098
Corporate			2,227				2,921
Total consolidated assets		$	43,656			$	42,722

The entire balance of goodwill as of June 30, 2008 and December 31, 2007 has been included in the total assets of the refining reportable segment. Total assets related to the Krotz Springs Refinery have been included in the refining reportable segment for both periods presented.

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

12. EMPLOYEE BENEFIT PLANS

The components of net periodic benefit cost related to our defined benefit plans were as follows for the three and six months ended June 30, 2008 and 2007 (in millions):

										Other Postretirement
		Pension Plans								Benefit Plans
		2008				2007				2008				2007
Three months ended June 30:
Components of net periodic benefit cost:
Service cost		$	24			$	24			$	4			$	4
Interest cost			19				17				7				6
Expected return on plan assets			(26	)			(21	)			-				-
Amortization of:
Prior service cost (credit)			-				-				(3	)			(2	)
Net loss			1				3				1				1
Net periodic benefit cost before special charges			18				23				9				9
Charge for special termination benefits			-				7				-				1
Net periodic benefit cost		$	18			$	30			$	9			$	10
Six months ended June 30:
Components of net periodic benefit cost:
Service cost		$	47			$	48			$	7			$	7
Interest cost			38				35				14				13
Expected return on plan assets			(52	)			(42	)			-				-
Amortization of:
Prior service cost (credit)			1				1				(5	)			(5	)
Net loss			1				5				2				3
Net periodic benefit cost before special charges			35				47				18				18
Charge for special termination benefits			-				7				-				1
Net periodic benefit cost		$	35			$	54			$	18			$	19

During the six months ended June 30, 2008, we contributed $20 million to our qualified pension plans, and in July 2008, we made an additional $80 million contribution to those plans. We do not expect to make any additional contributions to our qualified pension plans during 2008. There were no contributions made during the six months ended June 30, 2007.

13. COMMITMENTS AND CONTINGENCIES

Accounts Receivable Sales Facility
As of December 31, 2007, we had an accounts receivable sales facility with a group of third-party entities and financial institutions to sell on a revolving basis up to $1 billion of eligible trade receivables. The facility had a maturity date of August 2008. In June 2008, we amended our agreement to extend the maturity date to June 2009. As of June 30, 2008 and December 31, 2007, the amount of eligible receivables sold to the third parties was $100 million.

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

Contingent Earn-Out Agreements
In January 2008 and January 2007, we made previously accrued earn-out payments of $25 million and $50 million, respectively, related to the acquisition of the St. Charles Refinery. As of June 30, 2008, aggregate earn-out payments related to the St. Charles Refinery totaled $175 million, which was the aggregate limit under that agreement. As of June 30, 2008, we have no further commitments with respect to contingent earn-out agreements.

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

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

Effective January 1, 2007, the Government of Aruba (GOA) enacted a turnover tax on revenues from the sale of goods produced and services rendered in Aruba. The turnover tax, which is 3% for on-island sales and services and 1% on export sales, is being assessed by the GOA on sales by our Aruba Refinery. However, due to a previous tax holiday that was granted to our Aruba Refinery by the GOA through December 31, 2010 as well as other reasons, we believe that exports by our Aruba Refinery should not be subject to this turnover tax. Accordingly, no expense or liability has been recognized in our consolidated financial statements with respect to this turnover tax on exports. We have commenced arbitration proceedings with the Netherlands Arbitration Institute pursuant to which we will seek to enforce our rights under the tax holiday. We have also filed protests of these assessments through proceedings in Aruba. In April 2008, we entered into an escrow agreement with the GOA and Caribbean Mercantile Bank NV (CMB), pursuant to which we agreed to deposit an amount equal to the disputed turnover tax on exports into an escrow account with CMB, pending resolution of the tax protest proceedings in Aruba. Under this escrow agreement, we are required to continue to deposit an amount equal to the disputed tax on a monthly basis until the tax dispute is resolved through the Aruba proceedings. Amounts deposited under this escrow agreement, which totaled approximately $70 million as of June 30, 2008, are reflected as “restricted cash” in our consolidated balance sheet.

Aruba Refinery Fire
On January 25, 2008, our Aruba Refinery was shut down due to a fire in its vacuum unit. As of June 30, 2008, we had completed the repairs and resumed full operations of the refinery.

Keystone Pipeline
In July 2008, we entered into an agreement to participate as a prospective shipper on the 500,000 barrel-per-day expansion of the Keystone crude oil pipeline system, which is expected to be completed by 2012.

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

Once completed, the pipeline will enable crude oil to be transported from Western Canada to the U.S. Gulf Coast at Port Arthur, Texas. In addition to our commitment to ship crude oil through the pipeline, we have an option to acquire an equity interest in the Keystone partnerships. We have also secured commitments from several Canadian oil producers to sell to us heavy sour crude oil for shipment through the pipeline.

Litigation
MTBE Litigation
As of August 1, 2008, we were named as a defendant in 83 cases alleging liability related to MTBE contamination in groundwater. The plaintiffs are generally water providers, governmental authorities, and private water companies alleging that refiners and marketers of MTBE and gasoline containing MTBE are liable for manufacturing or distributing a defective product. We have been named in these lawsuits together with many other refining industry companies. We are being sued primarily as a refiner and marketer of MTBE and gasoline containing MTBE. We do not own or operate gasoline station facilities in most of the geographic locations in which damage is alleged to have occurred. The lawsuits generally seek individual, unquantified compensatory and punitive damages, injunctive relief, and attorneys’ fees.

We, together with several other refining industry defendants, and the plaintiffs have reached an agreement in principle to settle 59 of the 83 cases, including the Suffolk County Water Authority case, which is scheduled for trial in September 2008. Under the proposed settlement, we are assigned a percentage of the aggregate settlement amount, which will require us to make an immaterial cash payment. We anticipate that a portion of our payment will be funded by third parties. In addition, we will commit to participate with other defendants in contingent future treatment of water supply wells under certain defined circumstances. The settlement will not become effective until it is approved by one federal and two state court judges, which we believe may occur in the third quarter of 2008. The federal judge approved the settlement on July 22, 2008.

Most of the 24 cases that are not subject to the proposed settlement are pending in federal court and are consolidated for pre-trial proceedings in the U.S. District Court for the Southern District of New York (Multi-District Litigation Docket No. 1358, In re: Methyl-Tertiary Butyl Ether Products Liability Litigation). A 2007 ruling on jurisdiction from the U.S. Court of Appeals for the Second Circuit has resulted in a remand of two cases to state court (People of the State of New Hampshire and People of the State of California). Discovery is now open in all cases. We believe that we have strong defenses to all claims and are vigorously defending the remaining cases.

We have recorded a loss contingency liability with respect to our MTBE litigation portfolio in accordance with FASB Statement No. 5, “Accounting for Contingencies.” However, due to the inherent uncertainty of litigation, we believe that it is reasonably possible (as defined in Statement No. 5) that we may suffer a loss with respect to one or more of the lawsuits in excess of the amount accrued. We believe that such an outcome in any one of these lawsuits would not have a material adverse effect on our results of operations or financial position. However, we believe that an adverse result in all or a substantial number of the remaining cases could have a material effect on our results of operations and financial position. An estimate of the possible loss or range of loss from an adverse result in all or substantially all of these remaining cases cannot reasonably be made.

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

Retail Fuel Temperature Litigation
As of August 1, 2008, we were named in 21 consumer class action lawsuits relating to fuel temperature. We have been named in these lawsuits together with several other defendants in the retail petroleum marketing business. The complaints, filed in federal courts in several states, allege that because fuel volume increases with fuel temperature, the defendants have violated state consumer protection laws by failing to adjust the volume of fuel when the fuel temperature exceeded 60 degrees Fahrenheit. The complaints seek to certify classes of retail consumers who purchased fuel in various locations. The complaints seek an order compelling the installation of temperature correction devices as well as associated monetary relief. In June 2007, the federal lawsuits were consolidated into a multi-district litigation case in the U.S. District Court for the District of Kansas (Multi-District Litigation Docket No. 1840, In re: Motor Fuel Temperature Sales Practices Litigation). In February 2008, the court denied the defendants’ motion to dismiss the complaints. In July 2008, plaintiffs filed a pleading attempting to name Valero and other petroleum companies as class representatives of defendant classes composed of their respective branded outlets, including retail outlets owned by other parties. We believe that we have several strong defenses to these lawsuits and intend to contest them. We have not recorded a loss contingency liability with respect to this matter, but due to the inherent uncertainty of litigation, we believe that it is reasonably possible (as defined in Statement No. 5) that we may suffer a loss with respect to one or more of the lawsuits. An estimate of the possible loss or range of loss from an adverse result in all or substantially all of these cases cannot reasonably be made.

Rosolowski
Rosolowski v. Clark Refining & Marketing, Inc., et al., Judicial Circuit Court, Cook County, Illinois (Case No. 95-L 014703). We assumed this class action lawsuit in the acquisition of Premcor Inc. The lawsuit, filed in 1995, relates in part to a release to the atmosphere of spent catalyst containing low levels of metals from the now-closed Blue Island, Illinois refinery in 1994. The case was certified as a class action in 2000 with three classes, two of which received nominal or no damages, and one of which received a sizeable jury verdict. That class consisted of local residents who claimed property damage or loss of use and enjoyment of their property over a period of several years. In November 2005, the jury returned a verdict for the plaintiffs of $80.1 million in compensatory damages and $40 million in punitive damages. However, following our motions for new trial and judgment notwithstanding the verdict (citing, among other things, misconduct by plaintiffs’ counsel and improper class certification), the trial judge in November 2006 vacated the jury’s award and decertified the class. Plaintiffs appealed the court’s decision to vacate the $120 million judgment and decertify the class. Plaintiffs’ appeal was heard before the state appeals court in February 2008, and in June 2008, the state appeals court reversed the trial court’s decision to decertify the class and set aside the judgment. The appeals court preserved our rights, and on August 4 we filed an appeal to the Illinois Supreme Court. While we believe that it is reasonably possible that we will prevail on the merits of this case, we have recorded a loss contingency liability with respect to this matter in accordance with Statement No. 5. We do not believe that the ultimate resolution of this matter will have a material effect on our financial position or results of operations.

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

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

14. CONDENSED CONSOLIDATING FINANCIAL INFORMATION

In conjunction with the acquisition of Premcor Inc. on September 1, 2005, Valero Energy Corporation has fully and unconditionally guaranteed the following debt of The Premcor Refining Group Inc. (PRG), a wholly owned subsidiary of Valero Energy Corporation, that was outstanding as of June 30, 2008:

	•		6.75% senior notes due February 2011,
	•		6.125% senior notes due May 2011,
	•		6.75% senior notes due May 2014, and
	•		7.5% senior notes due June 2015.

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

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

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

Condensed Consolidating Balance Sheet as of June 30, 2008
(unaudited, in millions)

		Valero								Other Non-
		Energy								Guarantor
		Corporation				PRG				Subsidiaries				Eliminations				Consolidated
ASSETS
Current assets:
Cash and temporary cash investments		$	858			$	-			$	786			$	-			$	1,644
Restricted cash			22				2				76				-				100
Receivables, net			-				93				7,628				-				7,721
Inventories			-				333				4,571				-				4,904
Deferred income taxes			-				-				388				-				388
Prepaid expenses and other			-				9				151				-				160
Assets held for sale			-				-				335				-				335
Total current assets			880				437				13,935				-				15,252
Property, plant and equipment, at cost			-				5,636				21,132				-				26,768
Accumulated depreciation			-				(398	)			(4,095	)			-				(4,493	)
Property, plant and equipment, net			-				5,238				17,037				-				22,275
Intangible assets, net			-				-				268				-				268
Goodwill			-				1,836				2,203				-				4,039
Investment in Valero Energy affiliates			7,989				2,273				(19	)			(10,243	)			-
Long-term notes receivable from affiliates			16,037				-				-				(16,037	)			-
Deferred income tax receivable			419				-				-				(419	)			-
Deferred charges and other assets, net			389				116				1,317				-				1,822
Total assets		$	25,714			$	9,900			$	34,741			$	(26,699	)		$	43,656
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current portion of long-term debt and capital lease obligations		$	208			$	-			$	4			$	-			$	212
Accounts payable			112				274				10,577				-				10,963
Accrued expenses			80				33				334				-				447
Taxes other than income taxes			-				17				549				-				566
Income taxes payable			262				66				75				-				403
Deferred income taxes			247				-				-				-				247
Liabilities related to assets held for sale			-				-				10				-				10
Total current liabilities			909				390				11,549				-				12,848
Long-term debt and capital lease obligations, less current portion			5,325				900				38				-				6,263
Long-term notes payable to affiliates			-				7,177				8,860				(16,037	)			-
Deferred income taxes			-				1,255				3,249				(419	)			4,085
Other long-term liabilities			800				197				783				-				1,780
Stockholders’ equity:
Common stock			6				-				2				(2	)			6
Additional paid-in capital			7,215				75				3,603				(3,678	)			7,215
Treasury stock			(6,733	)			-				-				-				(6,733	)
Retained earnings (deficit)			17,765				(92	)			6,726				(6,634	)			17,765
Accumulated other comprehensive income (loss)			427				(2	)			(69	)			71				427
Total stockholders’ equity			18,680				(19	)			10,262				(10,243	)			18,680
Total liabilities and stockholders’ equity		$	25,714			$	9,900			$	34,741			$	(26,699	)		$	43,656

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

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

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