YOUR PROMPT RESPONSE WILL SAVE THE EXPENSE OF FURTHER
REQUESTS FOR PROXIES IN ORDER TO ASSURE A QUORUM.

NOTICE OF 2007 ANNUAL MEETING OF STOCKHOLDERS

The Board of Directors has determined that the 2007 Annual Meeting of Stockholders of Valero Energy Corporation will be held on Thursday, April 26, 2007 at 10:00 a.m., Central Time, at our offices located at One Valero Way, San Antonio, Texas 78249, for the following purposes:

	(1)		Elect three Class I directors to serve until the 2010 Annual Meeting or until their respective successors are elected and have been qualified;
	(2)		Ratify the appointment of KPMG LLP as our independent registered public accounting firm for 2007;
	(3)		Vote on a shareholder proposal entitled, “Director Election Majority Vote Proposal;”
	(4)		Vote on a shareholder proposal entitled, “Shareholder Ratification of Executive Compensation Proposal;”
	(5)		Vote on a shareholder proposal entitled, “Supplemental Executive Retirement Plan Policy Proposal;” and
	(6)		Transact any other business properly brought before the meeting.

Valero Energy Corporation
One Valero Way
San Antonio, Texas 78249

March 23, 2007

VALERO ENERGY CORPORATION
PROXY STATEMENT
TABLE OF CONTENTS
2007 ANNUAL MEETING OF STOCKHOLDERS

GENERAL INFORMATION			1
INFORMATION REGARDING THE BOARD OF DIRECTORS			2
INDEPENDENT DIRECTORS			2
Independence Determinations			3
COMMITTEES OF THE BOARD			4
Audit Committee			4
Compensation Committee			4
Compensation Committee Interlocks and Insider Participation			4
Executive Committee			5
Finance Committee			5
Nominating/Governance Committee			5
Selection of Director Nominees			5
Evaluation of Director Candidates			6
LEAD DIRECTOR AND MEETINGS OF NON-MANAGEMENT DIRECTORS			6
PROPOSAL NO. 1 ELECTION OF DIRECTORS			7
MAJORITY VOTING POLICY			7
INFORMATION CONCERNING NOMINEES AND OTHER DIRECTORS			8
Class I Nominees			8
Other Directors			9
BENEFICIAL OWNERSHIP OF VALERO SECURITIES			11
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE			13
COMPENSATION COMMITTEE REPORT			14
COMPENSATION DISCUSSION AND ANALYSIS			14
OVERVIEW			14
ADMINISTRATION OF EXECUTIVE COMPENSATION PROGRAMS			14
Selection of Comparator Group and Other Data Resources			15
Process and Timing of Compensation Decisions			15
ELEMENTS OF EXECUTIVE COMPENSATION			16
General			16
Relative Size of Major Compensation Elements			17
Individual Performance and Personal Objectives			17
Base Salaries			18
Annual Incentive Bonus			18
Company Financial Performance Objectives			19
Long-Term Incentive Awards			20
Performance Shares			21
Stock Options and Restricted Stock			22
Perquisites and Other Benefits			23
Perquisites			23
Other Benefits			24
Post-Employment Benefits			24
Pension Plans			24
Nonqualified Deferred Compensation Plans			25
Severance Arrangements			26
IMPACT OF ACCOUNTING AND TAX TREATMENTS			27
Accounting Treatment			27
Tax Treatment			27

COMPENSATION-RELATED POLICIES			27
Stock Ownership Guidelines			27
Prohibition on Insider Trading and Speculation in Valero Stock			28
EXECUTIVE COMPENSATION			29
SUMMARY COMPENSATION TABLE			30
GRANTS OF PLAN-BASED AWARDS			33
OUTSTANDING EQUITY AWARDS			35
OPTION EXERCISES AND STOCK VESTED			40
POST-EMPLOYMENT COMPENSATION			41
PENSION BENEFITS			41
NONQUALIFIED DEFERRED COMPENSATION			43
POTENTIAL PAYMENTS UPON TERMINATION OR CHANGE IN CONTROL			44
PAYMENTS UNDER CHANGE OF CONTROL SEVERANCE AGREEMENTS			45
COMPENSATION OF DIRECTORS			48
DIRECTOR COMPENSATION			48
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS			52
REVIEW, APPROVAL AND RATIFICATION OF TRANSACTIONS WITH MANAGEMENT AND OTHERS			52
PROPOSAL NO. 2 RATIFICATION OF APPOINTMENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM			54
KPMG LLP FEES FOR FISCAL YEAR 2006			54
KPMG LLP FEES FOR FISCAL YEAR 2005			55
AUDIT COMMITTEE PRE-APPROVAL POLICY			55
REPORT OF THE AUDIT COMMITTEE FOR FISCAL YEAR 2006			56
SHAREHOLDER PROPOSALS			57
PROPOSAL NO. 3 SHAREHOLDER PROPOSAL — DIRECTOR ELECTION MAJORITY VOTE PROPOSAL			57
PROPOSAL NO. 4 SHAREHOLDER PROPOSAL — SHAREHOLDER RATIFICATION OF EXECUTIVE COMPENSATION PROPOSAL			60
PROPOSAL NO. 5 SHAREHOLDER PROPOSAL — SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN POLICY PROPOSAL			63
EQUITY COMPENSATION PLAN INFORMATION			65
MISCELLANEOUS			66
GOVERNANCE DOCUMENTS AND CODES OF ETHICS			66
SHAREHOLDER COMMUNICATIONS			66
NOTICE REQUIRED FOR STOCKHOLDER NOMINATIONS AND PROPOSALS			66
OTHER BUSINESS			67
FINANCIAL STATEMENTS AND ANNUAL REPORT			67
HOUSEHOLDING			67
TRANSFER AGENT			68

ANNUAL MEETING OF STOCKHOLDERS
April 26, 2007

GENERAL INFORMATION

Unless otherwise indicated, the terms “Valero,” “we,” “our” and “us” are used in this proxy statement to refer to Valero Energy Corporation, to one or more of our consolidated subsidiaries or to all of them taken as a whole. The term “Board” means our board of directors.

This proxy statement is being mailed to holders of our common stock, $0.01 par value, beginning on or about March 23, 2007, in connection with the solicitation of proxies by the Board to be voted at the 2007 Annual Meeting of Stockholders on April 26, 2007 (“Annual Meeting”). The accompanying notice describes the time, place and purposes of the Annual Meeting.

Holders of record of Valero’s common stock at the close of business on March 1, 2007 are entitled to vote on the matters presented at the Annual Meeting. On the record date, 600,055,514 shares of Common Stock were issued and outstanding and entitled to one vote per share.

Action may be taken at the Annual Meeting on April 26, 2007 or on any date to which the meeting may be adjourned. Stockholders representing a majority of voting power, present in person or represented by properly executed proxy, will constitute a quorum. If instructions to the contrary are not given, shares will be voted as indicated on the proxy card. You may revoke your proxy at any time before it is voted by submitting a written revocation to Valero, returning a subsequently dated proxy to Valero or by voting in person at the Annual Meeting.

Brokers holding shares must vote according to specific instructions they receive from the beneficial owners. If specific instructions are not received, brokers may generally vote these shares in their discretion. However, the New York Stock Exchange (“NYSE”) precludes brokers from exercising voting discretion on certain proposals without specific instructions from the beneficial owner. This results in a “broker non-vote” on such a proposal. A broker non-vote is treated as “present” for purposes of determining a quorum, has the effect of a negative vote when a majority of the voting power of the issued and outstanding shares is required for approval of a particular proposal and has no effect when a majority of the voting power of the shares present in person or by proxy and entitled to vote or a plurality or majority of the votes cast is required for approval. Per the NYSE’s rules, brokers will not have discretion to vote on the shareholder proposals presented as Proposals 3, 4 and 5 in this proxy statement, but will have discretion to vote on the other items scheduled to be presented at the Annual Meeting.

Valero pays for the cost of soliciting proxies and the Annual Meeting. In addition to the solicitation of proxies by mail, proxies may be solicited by personal interview, telephone, and similar means by directors, officers or employees of Valero, none of whom will be specially compensated for such activities. Valero also intends to request that brokers, banks, and other nominees solicit proxies from their principals and will pay such brokers, banks, and other nominees certain expenses incurred by them for such activities. Valero retained Georgeson Inc., a proxy soliciting firm, to assist in the solicitation of proxies, for an estimated fee of $14,000, plus reimbursement of certain out-of-pocket expenses.

For participants in Valero’s thrift plan, the proxy card will represent (in addition to any shares held individually of record by the participant) the number of shares allocated to the participant’s account(s) in the thrift plan. For shares held by the plan, the proxy card will constitute an instruction to the trustee of the plan on how those shares should be voted. Shares for which instructions are not received may be voted by the trustee per the terms of the plan.

Our 2005 and 2004 Stock Splits. Our common stock split two-for-one on December 15, 2005 and on October 7, 2004. Each split was effected in the form of a common stock dividend. All share and per share data (except par value) in this proxy statement have been adjusted to reflect the effect of these stock splits for all periods presented.

INFORMATION REGARDING THE BOARD OF DIRECTORS

Valero’s business is managed under the direction of its board of directors. Our Board conducts its business through meetings of its members and its committees. During 2006, our Board held six meetings and the standing committees held 22 meetings in the aggregate. No member of the Board attended less than 75% of the meetings of the Board and committees of which he or she was a member. All Board members are expected to attend the annual stockholders meeting. All Board members attended the 2006 annual stockholders meeting.

Valero’s Restated Certificate of Incorporation requires the Board to be divided into Class I, Class II, and Class III directors, with each class serving a staggered three-year term.

INDEPENDENT DIRECTORS

The Board presently has one member from our management, William R. Klesse, Chief Executive Officer and Chairman of the Board, and nine non-management directors. Two additional non-management directors served on our Board during 2006, namely, E. Glenn Biggs, who retired from the Board on April 27, 2006, and William E. Greehey, who resigned from the Board on January 17, 2007. The Board determined that 10 of 11 of its non-management directors who served at any time during 2006 met the independence requirements of the NYSE listing standards as set forth in the NYSE Listed Company Manual. Those independent directors were: E. Glenn Biggs, W.E. “Bill” Bradford, Ronald K. Calgaard, Jerry D. Choate, Irl F. Engelhardt, Ruben M. Escobedo, Bob Marbut, Donald L. Nickles, Robert A. Profusek and Susan Kaufman Purcell.

William E. Greehey served as Chairman of the Board during 2006. He had previously served as Valero’s Chief Executive Officer until his retirement from that position at the end of 2005. As a former member of management, Mr. Greehey was not an independent director under the NYSE’s listing standards.

William R. Klesse was elected Chief Executive Officer of Valero upon Mr. Greehey’s retirement from that position in 2005. As a member of management, Mr. Klesse is not an independent director under the NYSE’s listing standards.

The Board’s Audit, Compensation and Nominating/Governance Committees are composed entirely of directors who meet the independence requirements of the NYSE listing standards. Each member of the Audit Committee also meets the additional independence standards for Audit Committee members set forth in the regulations of the Securities and Exchange Commission (“SEC”).

Independence Determinations

Under the NYSE’s listing standards, no director qualifies as independent unless the board of directors affirmatively determines that the director has no material relationship with Valero. Based upon information requested from and provided by each director concerning their background, employment, and affiliations, including commercial, industrial, banking, consulting, legal, accounting, charitable, and familial relationships, the Board has determined that, other than being a director and/or stockholder of Valero, each of the independent directors named above has either no relationship with Valero, either directly or as a partner, shareholder, or officer of an organization that has a relationship with Valero, or has only immaterial relationships with Valero, and is therefore independent under the NYSE’s listing standards.

As provided for under the NYSE listing standards, the Board has adopted categorical standards or guidelines to assist the Board in making its independence determinations with respect to each director. These standards are published in Article I of Valero’s Corporate Governance Guidelines and are available on our website at www.valero.com (under the “Corporate Governance” tab in the “Investor Relations” section). Under the NYSE listing standards, immaterial relationships that fall within the guidelines are not required to be disclosed in this proxy statement.

A relationship falls within the guidelines adopted by the Board if it:

	•		is not a relationship that would preclude a determination of independence under Section 303A.02(b) of the NYSE Listed Company Manual;
	•		consists of charitable contributions by the Company to an organization where a director is an executive officer and does not exceed the greater of $1 million or 2% of the organization’s gross revenue in any of the last three years;
	•		consists of charitable contributions to any organization with which a director, or any member of a director’s immediate family, is affiliated as an officer, director or trustee pursuant to a matching gift program of the Company and made on terms applicable to employees and directors; or is in amounts that do not exceed $1 million per year; and
	•		is not required to be, and it is not otherwise, disclosed in this proxy statement.

COMMITTEES OF THE BOARD

The Board has standing Audit, Compensation, Executive, Finance, and Nominating/Governance Committees. Each committee has a written charter. These charters are published on our website at www.valero.com (under the “Corporate Governance” tab in the “Investor Relations” section). The committees of the Board and the number of meetings held by each committee in 2006 are described below.

Audit Committee

The Audit Committee reviews and reports to the Board on various auditing and accounting matters, including the quality, objectivity, and performance of our internal and external accountants and auditors, the adequacy of our financial controls, and the reliability of financial information reported to the public. The Audit Committee also monitors our efforts to comply with environmental laws and regulations. Members of the Audit Committee during 2006 were Ruben M. Escobedo (Chairman), E. Glenn Biggs (who retired on April 27, 2006), Irl F. Engelhardt, and Susan Kaufman Purcell. In February 2007, the Board also appointed Ronald K. Calgaard to the Audit Committee. The Audit Committee met eight times in 2006. The “Report of the Audit Committee for Fiscal Year 2006” appears below following the disclosures related to Proposal 2.

The Board has determined that a member of the Audit Committee, namely Ruben M. Escobedo, is an “audit committee financial expert” (as defined by the SEC), and that he is “independent” as independence for audit committee members is defined in the NYSE Listing Standards. For further information regarding Mr. Escobedo’s relevant experience, see “Information Concerning Nominees and Other Directors” below.

Compensation Committee

The Compensation Committee reviews and reports to the Board on matters related to compensation strategies, policies, and programs, including certain personnel policies and policy controls, management development, management succession, and benefit programs. The Compensation Committee also approves and administers our equity compensation plans and incentive bonus plan. See “Compensation Discussion and Analysis” below. The Compensation Committee has for administrative convenience delegated authority to the Company’s Chief Executive Officer to make non-material amendments to the Company’s benefit plans and to make limited grants of stock options and restricted stock to new hires who are not executive officers.

Members of the Compensation Committee during 2006 were Bob Marbut (Chairman), W.E. “Bill” Bradford, Jerry D. Choate, and Robert A. Profusek. The Compensation Committee met five times in 2006.

The “Compensation Committee Report” for fiscal year 2006 appears below, immediately preceding “Compensation Discussion and Analysis.”

     Compensation Committee Interlocks and Insider Participation

There are no compensation committee interlocks. None of the members of the Compensation Committee listed above has ever served as an officer or employee of Valero or had any relationship requiring disclosure by Valero under any paragraph of Item 404 of the SEC’s Regulation S-K, which addresses related party transactions.

Executive Committee

The Executive Committee exercises the power and authority of the Board during intervals between meetings of the Board. With limited exceptions specified in Valero’s bylaws and under Delaware law, actions taken by the Executive Committee do not require Board ratification. Members of the Executive Committee during 2006 were William E. Greehey (Chairman), Irl F. Engelhardt, Ruben M. Escobedo, and William R. Klesse. In February 2007, William R. Klesse was appointed as Chairman of the Executive Committee, and Jerry D. Choate and Bob Marbut were also appointed to the Executive Committee. The Executive Committee met one time in 2006.

Finance Committee

The Finance Committee reviews and monitors the investment policies and performance of our thrift and pension plans, insurance and risk management policies and programs, and finance matters and policies as needed. Members of the Finance Committee during 2006 were Ronald K. Calgaard (Chairman), William E. Greehey, Bob Marbut, Donald L. Nickles, and Susan Kaufman Purcell. In February 2007, Irl F. Englehardt was appointed Chairman of the Finance Committee, Ruben M. Escobedo was appointed to the Finance Committee, and Ronald K. Calgaard was moved from the Finance Committee to the Audit Committee. The Finance Committee met four times in 2006.

Nominating/Governance Committee

The Nominating/Governance Committee evaluates policies on the size and composition of the Board and criteria and procedures for director nominations, and considers and recommends candidates for election to the Board. The committee also evaluates, recommends and monitors corporate governance guidelines, policies and procedures, including our codes of business conduct and ethics. Members of the Nominating/Governance Committee during 2006 were Jerry D. Choate (Chairman), W.E. “Bill” Bradford, Ronald K. Calgaard, Donald L. Nickles, and Robert A. Profusek. The Nominating/Governance Committee met four times in 2006.

In addition to recommending Ruben M. Escobedo, Bob Marbut and Robert A. Profusek as the director nominees for election as Class I directors at the 2007 Annual Meeting, the committee considered and recommended the appointment of a lead director to preside at meetings of the independent directors without management (see “Lead Director and Meetings of Non-Management Directors” below), and recommended assignments for the committees of the Board. The full Board approved the recommendations of the Nominating/Governance Committee and adopted resolutions approving the slate of director nominees to stand for election at the 2007 Annual Meeting, the appointment of a lead director, and assignments for the committees of the Board.

     Selection of Director Nominees

The Nominating/Governance Committee solicits recommendations for potential Board candidates from a number of sources including members of the Board, Valero’s officers, individuals personally known to the members of the Board, and third-party research. In addition, the committee will consider candidates submitted by stockholders. Any submissions by stockholders must be in writing and include the candidate’s name, qualifications for Board membership, and sufficient biographical and other relevant information such that an informed judgment as to the proposed nominee’s qualifications can be made. Submissions must be directed to Valero’s Corporate Secretary at the address indicated on the cover page of this proxy statement. The level of consideration that the committee will give to a stockholder’s candidate will be commensurate with the quality and quantity of information about the candidate that the nominating stockholder makes available to the committee. The committee will consider all candidates identified through the processes described above and will evaluate each of them on the same basis. Also,

to nominate a person for election as a director at an annual stockholders meeting, our bylaws require stockholders to follow certain procedures, including providing timely notice, as described under “Notice Required for Stockholder Nominations and Proposals” below.

     Evaluation of Director Candidates

The Nominating/Governance Committee is responsible for assessing the skills and characteristics that candidates for election to the Board should possess, as well as the composition of the Board as a whole. The assessments include qualifications under applicable independence standards and other standards applicable to the Board and its committees, as well as consideration of skills and experience in the context of the needs of the Board. Each candidate must meet certain minimum qualifications, including:

	•		independence of thought and judgment;
	•		the ability to dedicate sufficient time, energy and attention to the performance of her or his duties, taking into consideration the nominee’s service on other public company boards; and
	•		skills and expertise complementary to the existing Board members’ skills; in this regard, the Board will consider its need for operational, managerial, financial, governmental affairs, or other relevant expertise.

The Nominating/Governance Committee may also consider the ability of a prospective candidate to work with the then-existing interpersonal dynamics of the Board and the candidate’s ability to contribute to the collaborative culture among Board members.

Based on this initial evaluation, the committee will determine whether to interview the candidate, and if warranted, will recommend that one or more of its members, other members of the Board, or senior management, as appropriate, interview the candidate in person or by telephone. After completing this evaluation and interview process, the committee ultimately determines its list of nominees and submits the list to the full Board for consideration and approval.

LEAD DIRECTOR AND MEETINGS OF NON-MANAGEMENT DIRECTORS

Following the recommendation of the Nominating/Governance Committee, the Board designated Ronald K. Calgaard to serve as the Lead Director during 2006 for meetings of the non-management Board members outside the presence of management. In 2007, following the recommendation of the Nominating/Governance Committee, the Board designated W.E. “Bill” Bradford to serve as the Lead Director during 2007. Non-management Board members regularly meet outside the presence of management.

PROPOSAL NO. 1 ELECTION OF DIRECTORS
(Item 1 on the Proxy Card)

Our Board is divided into three classes for purposes of election. Three Class I directors will be elected at the 2007 Annual Meeting to serve a three-year term that will expire at the 2010 Annual Meeting. Nominees for Class I directors are Ruben M. Escobedo, Bob Marbut, and Robert A. Profusek. The persons named in the enclosed proxy card intend to vote for the election of each of these nominees, unless you indicate on the proxy card that your vote should be withheld from any or all of such nominees.

The Board recommends that stockholders vote “FOR ALL” nominees.

Directors are elected by a plurality of the votes cast by the holders of the shares of Common Stock represented at the Annual Meeting and entitled to vote. The nominees for Class I directors receiving the greatest number of votes, whether or not these votes represent a majority of the votes of the holders of the shares of common stock present and voting at the Annual Meeting, will be elected as directors. Votes “withheld” from a nominee will not count against the election of the nominee. However, any director who receives a greater number of votes “withheld” from the director’s election than votes “for” the director’s election will be required to tender his or her resignation. See “Majority Voting Policy” below.

If any nominee is unavailable as a candidate at the time of the Annual Meeting, either the number of directors constituting the full Board will be reduced to eliminate the resulting vacancy, or the persons named as proxies will use their best judgment in voting for any available nominee. The Board has no reason to believe that any current nominee will be unable to serve.

MAJORITY VOTING POLICY

The Board has adopted a majority voting policy for the election of directors. The full text of the policy is published below within the disclosures relating to Proposal 3. Under the policy, in an uncontested election of directors (i.e., an election where the only nominees are those recommended by the Board), any nominee for director who receives a greater number of votes “withheld” from his or her election than votes “for” his or her election (a “Withheld Director”) will promptly tender his or her resignation. The Nominating/Governance Committee will promptly consider the resignation submitted by the Withheld Director, and the Nominating/Governance Committee will recommend to the Board whether to accept the tendered resignation or reject it. In considering whether to accept or reject the tendered resignation, the Nominating/Governance Committee will consider all factors deemed relevant by the members of the committee, including the stated reasons why stockholders “withheld” votes for election from such Withheld Director, the length of service and qualifications of the Withheld Director, the Withheld Director’s contributions to Valero, and Valero’s Corporate Governance Guidelines.

The Board will act on the Nominating/Governance Committee’s recommendation no later than 90 days following the date of the stockholders meeting when the election occurred. In considering the Nominating/Governance Committee’s recommendation, the Board will consider the factors considered by the committee and such additional information and factors the Board believes to be relevant. Following the Board’s decision on the Nominating/Governance Committee’s recommendation, we will promptly publicly disclose the Board’s decision whether to accept the resignation as tendered (providing a full explanation of the process by which the decision was reached and, if applicable, the reasons for rejecting the tendered resignation) in a Form 8-K filed with the SEC. To the extent that one or more Withheld Directors’ resignations are accepted by the Board, the Nominating/Governance Committee will recommend to the Board whether to fill such vacancy or reduce the size of the Board.

INFORMATION CONCERNING NOMINEES AND OTHER DIRECTORS

The following table describes (i) each nominee for election as a director at the 2007 Annual Meeting, and (ii) the other members of the Board whose terms expire in 2008 and 2009. The information provided is based partly on data furnished by the directors and partly on Valero’s records. There is no family relationship among any of the executive officers, directors or nominees for director of Valero.

Position(s) Held

Executive Officer

Age as of

Director

with Valero

or Director Since (1)

12/31/06

Class (2)

Nominees

Ruben M. Escobedo

Director

1994

69

I

Bob Marbut

Director

2001

71

I

Robert A. Profusek

Director

2005

56

I

Other Directors

W.E. “Bill” Bradford

Director

2001

71

II

Ronald K. Calgaard

Director

1996

69

II

Irl F. Engelhardt

Director

2006

60

II

Jerry D. Choate

Director

1999

68

III

William R. Klesse

Chairman of the Board and Chief Executive Officer

2001

60

III

Donald L. Nickles

Director

2005

58

III

Susan Kaufman Purcell

Director

1994

64

III

Footnotes:

Class I Nominees

     Mr. Escobedo is a Certified Public Accountant and has been employed with his own public accounting firm, Ruben Escobedo & Company, CPAs, in San Antonio, Texas since its formation in 1977. Mr. Escobedo also serves as a director of Cullen/Frost Bankers, Inc., and previously served as a director of Valero Natural Gas Company from 1989 to 1994. Mr. Escobedo has served as a director of Valero or its former parent company since 1994.

     Mr. Marbut has been Chairman and Chief Executive Officer of Argyle Communications, Inc. since 1992, and Chairman of SecTecGLOBAL, Inc. since 2002. He also serves as Executive Chairman of Electronics Line 3000 Ltd. and as Chairman and Co-Chief Executive Officer of Argyle Security Acquisition Corporation. He is a director of Tupperware Brands Corporation and Hearst-Argyle Television, Inc. Mr. Marbut previously served as Chief Executive Officer of SecTecGLOBAL, Inc. from 2002 through 2006. He also previously served as Chairman and Co-Chief Executive Officer of Hearst-Argyle Television, Inc., Chairman and Chief Executive Officer of Argyle Television, Inc. and of Argyle Television Holding, Inc., and as Vice Chairman, President and Chief Executive Officer of Harte-Hanks Communications, Inc. Mr. Marbut served as a director of Ultramar Diamond Shamrock Corporation (UDS) since 1990, and has served as a director of Valero since Valero’s acquisition of UDS in 2001.

     Mr. Profusek is a partner of and heads the mergers and acquisitions department of the Jones Day law firm. His law practice focuses on M&A/takeovers, restructurings, and corporate governance matters, including compensation. He is also a director of CTS Corporation. He served as Executive Vice President of Omnicom Group Inc. from May 2000 to August 2002. Prior to May 2000, he was a partner at Jones Day, which he joined in 1975. Prior to his election as a director of Valero in 2005, Mr. Profusek served as a director of the managing general partner of Valero L.P. since 2001.

Other Directors

     Mr. Bradford is the retired Chairman of Halliburton Company. Prior to its 1998 merger with Halliburton, he was Chairman and Chief Executive Officer of Dresser Industries, Inc., where he had been employed in various capacities since 1963. Mr. Bradford served as a director of UDS or its predecessors since 1992, and has served as a director of Valero since Valero’s acquisition of UDS in 2001.

     Dr. Calgaard is Chairman of the Ray Ellison Grandchildren Trust in San Antonio, Texas. He was formerly Chairman and Chief Executive Officer of Austin Calvert & Flavin Inc. in San Antonio from 2000 to February 2006. Dr. Calgaard served as President of Trinity University, San Antonio, Texas, from 1979 until his retirement in 1999. He is also a director of The Trust Company, N.A. and served as its Chairman from June 1999 until January 2000. He previously served as a director of Valero Natural Gas Company from 1987 to 1994. Dr. Calgaard has served as a director of Valero or its former parent company since 1996.

     Mr. Choate retired from Allstate Corporation at the end of 1998 where he had served as Chairman of the Board and Chief Executive Officer since January 1, 1995. Mr. Choate also serves as a director of Amgen, Inc., H&R Block, and Van Kampen Mutual Funds. Mr. Choate has served as a director of Valero since 1999.

     Mr. Engelhardt is Chairman of the Board of Peabody Energy Corporation. He has been a director of Peabody and its predecessor company since 1990. He served as both Chairman and Chief Executive Officer of Peabody from 1993 through 2005 when he retired as Chief Executive Officer. He served as Chief Executive Officer of a predecessor company from 1990 to 1998. Mr. Engelhardt is also a director of The Williams Companies, Inc. and is Chairman of The Federal Reserve Bank of St. Louis.

     Mr. Klesse is Valero’s Chairman of the Board and Chief Executive Officer. He was elected Chairman of the Board on January 18, 2007. He previously served as Valero’s Chief Executive Officer and Vice Chairman of the Board since the end of 2005. He served as Valero’s Executive Vice President and Chief Operating Officer from 2003 through 2005, and as Executive Vice President—Refining and Commercial Operations since Valero’s acquisition of UDS in 2001.

     Senator Nickles retired in January 2005 as U.S. Senator from Oklahoma after serving in the U.S. Senate for 24 years. He had also served in the Oklahoma State Senate for two years. During his tenure as a U.S. Senator, he was Assistant Republican Leader for six years, Chairman of the Republican Senatorial Committee, and Chairman of the Republican Policy Committee. He served as Chairman of the Budget Committee, and as a member of the Finance and Energy and Natural Resources Committees. In 2005, he formed and is the Chairman and Chief Executive Officer of The Nickles Group, a Washington-based consulting and business venture firm. Senator Nickles also serves on the Board of Chesapeake Energy Corporation and Fortress America Acquisition Corporation. He has served as a director of Valero since February of 2005.

     Dr. Purcell is the Director of the Center for Hemispheric Policy at the University of Miami. The center was formed to examine the relationship between the United States and Latin America with respect to economic development, trade, healthcare, politics, security, and other issues. Dr. Purcell previously served as Vice President of the Americas Society in New York, New York since 1989 and also as Vice President of the Council of the Americas. Dr. Purcell has served as a director of Valero or its former parent company since 1994.

For information regarding the nominees’ holdings of Valero common stock, compensation, and other arrangements, see “Information Regarding the Board of Directors,” “Beneficial Ownership of Valero Securities,” “Compensation Discussion and Analysis,” “Executive Compensation,” and “Certain Relationships and Related Transactions.”

BENEFICIAL OWNERSHIP OF VALERO SECURITIES

The following table present information regarding each entity we know to be a beneficial owner of more than five percent of our common stock as of December 31, 2006. The information is based solely upon statements on Schedules 13G filed by such entities with the SEC.

Name and Address

Shares

Percent

Title of Security

of Beneficial Owner

Beneficially Owned

of Class *

Common Stock

FMR Corp. (1)

66,825,126

11.05

%

82 Devonshire Street

Boston, Massachusetts 02109

Barclays Global Investors, N.A. (2)

39,208,586

6.49

%

45 Fremont St., 17th Floor

San Francisco, California 94105

Directors, Nominees, Executive Officers. Except as otherwise indicated, the following table presents information as of February 1, 2007 regarding Valero common stock beneficially owned (or deemed to be owned) by each nominee for director, each current director, each executive officer named in the Summary Compensation Table, and all current directors and executive officers of Valero as a group. The persons listed below have furnished this information to Valero and accordingly this information cannot be independently verified by Valero.

						Shares Under
Name of		Shares Beneficially				Exercisable Options				Percent of Class of
Beneficial Owner (1)		Owned (2) (3)				(4)				Common Stock (2)
W.E. “Bill” Bradford			51,224				70,120				*
Ronald K. Calgaard			22,779				28,000				*
Jerry D. Choate			15,546				56,000				*
Michael S. Ciskowski			370,543				64,120				*
S. Eugene Edwards			96,698				12,460				*
Irl F. Engelhardt			4,212				1,667				*
Ruben M. Escobedo (5)			28,656				40,000				*
Gregory C. King			398,643				273,600				*
William R. Klesse			604,628				953,704				*
Bob Marbut (6)			60,218				81,184				*
Richard J. Marcogliese			69,360				249,800				*
Donald L. Nickles			4,230				6,667				*
Robert A. Profusek			4,120				3,334				*
Susan Kaufman Purcell			11,443				44,000				*
all executive officers and directors as a group (15 persons)			1,798,732				1,897,056				*

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Section 16(a) of the Securities Exchange Act of 1934 requires our executive officers, directors and greater than 10% stockholders to file with the SEC certain reports of ownership and changes in ownership. Based on a review of the copies of such forms received and written representations from certain reporting persons, we believe that during the year ended December 31, 2006, all Section 16(a) reports applicable to our executive officers, directors and greater than 10% stockholders were timely filed, except for: (a) a Form 5 for Gregory C. King, President, involving two gifts totaling 16,555 shares that were made in December 2005 (the transactions were reported on a Form 5 filed in January 2007), (b) a Form 5 for Michael S. Ciskowski, Executive Vice President and Chief Financial Officer, involving two gifts totaling 1,310 shares that were made in 2003 and 2004 (the transactions were reported on a Form 5 filed in March 2007), and (c) a Form 4 for Ruben M. Escobedo, director, involving a sale of 8,700 shares on June 20, 2006 (the transaction was reported on a Form 4 filed June 26, 2006, and amended March 12, 2007).

The following Compensation Committee Report is not “soliciting material,” is not deemed filed with the SEC and is not to be incorporated by reference into any of Valero’s filings under the Securities Act of 1933 or the Securities Exchange Act of 1934, as amended, respectively, whether made before or after the date of this proxy statement and irrespective of any general incorporation language therein.

COMPENSATION COMMITTEE REPORT

The Compensation Committee has reviewed and discussed the following Compensation Discussion and Analysis with management. Based on the foregoing review and discussions and such other matters the Compensation Committee deemed relevant and appropriate, the committee recommended to the Board that the Compensation Discussion and Analysis be included in this proxy statement.

Members of the Compensation Committee:
Bob Marbut, Chairman
W.E. “Bill” Bradford
Jerry D. Choate
Robert A. Profusek

COMPENSATION DISCUSSION AND ANALYSIS

OVERVIEW

Our philosophy for compensating our named executive officers is based on the belief that a significant portion of executive compensation should be incentive-based and determined by both company and individual performance. Our executive compensation programs are designed to accomplish the following long-term objectives:

	•		to produce long-term, positive results for our stockholders;
	•		to build stockholder wealth while practicing good corporate governance;
	•		to align executive incentive compensation with Valero’s short- and long-term performance results, with discrete measurements of such performance; and
	•		to provide market-competitive compensation and benefits to enable us to recruit, retain and motivate the executive talent necessary to be successful.

Compensation for our named executive officers includes base salary, an annual incentive bonus opportunity, and long-term, equity-based incentives. Our named executive officers also participate in benefit plans generally available to our other employees.

ADMINISTRATION OF EXECUTIVE COMPENSATION PROGRAMS

Our executive compensation programs are administered by our Board’s Compensation Committee. The Compensation Committee is composed of four independent directors who are not participants in our executive compensation programs. Policies adopted by the Compensation Committee are implemented by our compensation and benefits staff. The Compensation Committee has also retained Towers Perrin as an independent compensation consultant with respect to executive compensation matters. In its role as an advisor to the Compensation Committee, Towers Perrin is retained directly by the Committee, which has the authority to select, retain, and/or terminate its relationship with the consulting firm in its sole discretion. The duties and responsibilities of the Compensation Committee are further described in this proxy statement under the caption “Compensation Committee.”

Selection of Comparator Group and Other Data Resources

When determining executive compensation, the Compensation Committee relies on several sources of competitive compensation data in assessing benchmark rates of base salary, annual incentive compensation, and long-term compensation. We use a Compensation Comparator Group, consisting of compensation information and analyses of Towers Perrin that include compensation practices and available data for a group of 13 companies that significantly participate in the domestic oil refining and marketing industry. We also use other Towers Perrin and independent compensation survey data for executive pay practices in the oil refining and marketing industry as well as general industry. The data are compiled by Towers Perrin, which also determines percentile benchmarks within the competitive data. The selection of the Compensation Comparator Group reflects consideration of each company’s relative revenues, asset base, employee population and capitalization, along with the scope of managerial responsibility and reporting relationships for the positions under consideration.

Recommendations for base salary, bonuses and other compensation arrangements are developed under the supervision of the Compensation Committee by our compensation and benefits staff utilizing the foregoing information and analyses and with assistance from Towers Perrin. Use of the Compensation Comparator Group and the other compensation survey data is consistent with our philosophy of providing executive compensation and benefits that are competitive with those of companies competing with us for executive talent. In addition, the use of competitive compensation survey data and analyses assists the Compensation Committee in gauging our pay levels and targets relative to companies in our Compensation Comparator Group, the domestic oil refining and marketing industry, and general industry.

In addition to benchmarking competitive pay levels to establish compensation levels and targets, we also consider the relative importance of a particular management position in comparison to other management positions in the organization. In this regard, when setting the compensation level and target for a particular position, we evaluate that position’s scope and nature of responsibilities, size of business unit, complexity of duties and responsibilities, and evaluate the position relative to managerial authorities throughout the management ranks of Valero.

Process and Timing of Compensation Decisions

The Compensation Committee reviews and approves all compensation targets and payments for the named executive officers. The Chief Executive Officer evaluates the performance of the other named executive officers and develops individual recommendations based upon the competitive survey data. Both the Chief Executive Officer and the Committee may make adjustments to the recommended compensation based upon an assessment of an individual’s performance and contributions to the Company. The compensation for the Chief Executive Officer is reviewed and approved by the Compensation Committee and by the Board, based on the competitive survey data, and discretionary adjustments may be made based upon their independent evaluation of the Chief Executive Officer’s performance and contributions.

In the third quarter of each fiscal year, the Compensation Committee establishes the target levels of annual incentive and long-term incentive compensation for the current fiscal year based upon its review of competitive market data provided by the Committee’s consultant. The Compensation Committee also reviews competitive market data for annual salary rates for executive officer positions for the next fiscal year and recommends new salary rates to become effective the next fiscal year. The Compensation Committee may, however, review salaries or grant long-term incentive awards at other times during the year because of new appointments or promotions during the year.

The following table summarizes the approximate timing of some of our more significant compensation events:

Event		Timing
establish financial performance objectives for annual incentive bonus		first quarter
determine annual incentive bonus for preceding fiscal year		first quarter
review and certify financial performance for performance shares granted in prior years		first quarter
consider base salaries for executive officers for next fiscal year		fourth quarter
consider long-term incentive compensation awards		fourth quarter

ELEMENTS OF EXECUTIVE COMPENSATION

General

Our executive compensation programs consist of the following material elements:

	•		base salaries;
	•		annual incentive bonuses;
	•		long-term equity-based incentives, including:

	•		performance shares;
	•		stock options; and
	•		restricted stock; and

•

medical and other insurance benefits, retirement benefits and other perquisites.

We chose these elements in order to remain competitive in attracting and retaining executive talent and to provide strong performance incentives that provide the potential for both current and long-term payouts. We use base salary as the foundation for our executive compensation program. Base salary is designed to provide a fixed level of competitive pay that reflects the executive officer’s primary duties and responsibilities as well as foundation upon which incentive opportunities and benefit levels are established. Our annual incentive bonuses are designed to focus our executives on Valero’s attainment of key financial performance measures (i.e., return on investment, earnings per share, and total shareholder return) to generate profitable annual operations and sustaining results. Our long-term equity incentive awards are designed to directly tie the executive’s financial reward opportunities with the rewards to shareholders as measured by long-term stock price performance and payment of regular dividends, and increasing the shareholders’ return on investment.

For 2006, the Compensation Committee maintained its compensation philosophy of setting “target” compensation at or near the 50th percentile of competitive practice. This means that we established base salary rates for each of our named executive officers at or near the 50th percentile benchmark of the Compensation Comparator Group. We also established annual incentive bonus and long-term incentive target opportunities (expressed as a percentage of base salary) for each executive position based upon the 50th percentile benchmark of the competitive survey data.

Relative Size of Major Compensation Elements

In setting executive compensation, the Compensation Committee considers the aggregate amount of compensation payable to an executive officer and the form of the compensation. The Compensation Committee seeks to achieve an appropriate balance between immediate cash rewards for the achievement of company and personal objectives and long-term incentives that align the interests of our executive officers with those of our stockholders. The size of each element is based on the assessment of competitive market practices as well as company and individual performance.

The level of incentive compensation typically increases in relation to an executive officer’s responsibilities within the company, with the level of incentive compensation for more senior executive officers being a greater percentage of total compensation than for less senior executive officers. The Compensation Committee believes that making a significant portion of an executive officer’s incentive compensation contingent on long-term stock price performance more closely aligns the executive officer’s interests with those of our stockholders.

We evaluate the total compensation opportunity offered to each executive officer at least once annually and have conducted compensation assessments on several occasions during the course of the year. In this regard, the Compensation Committee analyzes total compensation from a market competitive perspective, and then evaluates each component relative to its market reference. Because we place such a large amount of our total executive compensation opportunity at risk in the form of variable pay (annual and long-term incentives), the Committee generally does not adjust current compensation based upon realized gains or losses from prior incentive awards, prior compensation, or current stock holdings. For example, we will not reduce the size of a target long-term incentive grant in a particular year solely because Valero’s stock price performed well during the immediately preceding years. The Compensation Committee believes that any such adjustments would be sending an inappropriate signal to management that current compensation may be penalized as a result of prior success.

Individual Performance and Personal Objectives

The Compensation Committee evaluates the individual performance and performance objectives for the Chief Executive Officer and our other named executive officers. Compensation for our Chief Executive Officer is reviewed and approved by the Compensation Committee and the Board. For officers other than the Chief Executive Officer, individual performance is evaluated with the recommendations of the Chief Executive Officer. Individual performance and objectives are specific to each officer position and may relate to the following matters, among others:

	•		personal growth and development;
	•		acquisitions or divestitures; or
	•		any other business priority.

This evaluation information is used to supplement our objective compensation criteria. For example, if an officer’s indicated bonus were calculated to be $100,000, the individual performance evaluation by the Chief Executive Officer might result in a reduction of that officer’s bonus to $90,000 or an increase to $110,000.

The following table summarizes the relative size of base salary and incentive compensation for 2006 (which we call “total direct compensation”) for each of our named executive officers:

		Percentage of Total Direct Compensation
						Annual
Name		Base Salary				Incentive Bonus				Long-Term Incentives
William R. Klesse			14	%			18	%			68	%
Gregory C. King			23	%			18	%			59	%
Michael S. Ciskowski			27	%			19	%			54	%
Richard J. Marcogliese			27	%			19	%			54	%
S. Eugene Edwards			27	%			19	%			54	%

Base Salaries

Base salaries for each executive position are set based on the Compensation Comparator Group data for positions having similar duties and levels of responsibility. Base salaries are reviewed annually and may be adjusted to reflect promotions, the assignment of additional responsibilities, individual performance or the performance of Valero. Salaries are also periodically adjusted to remain competitive with the Compensation Comparator Group.

During 2006, the base salaries of our named executive officers were adjusted to the following levels:

Name		Base Salary
William R. Klesse		$	900,000
Gregory C. King		$	707,000
Michael S. Ciskowski		$	465,000
Richard J. Marcogliese		$	415,000
S. Eugene Edwards		$	370,000

The base salaries for our Chief Executive Officer and other executive officers are approved by the Compensation Committee based on recommendations of Towers Perrin and our compensation staff. Base salaries for executive officers other than the Chief Executive Officer are also based upon the recommendation of the Chief Executive Officer. Valero’s bylaws also require the independent directors of the Board to review and approve all compensation of the Chief Executive Officer.

The base salaries of our named executive officers were increased in fiscal year 2006 to remain competitive in our market and to recognize the promotions of William R. Klesse to Chief Executive Officer, and Richard J. Marcogliese and S. Eugene Edwards to the Executive Vice President level.

Annual Incentive Bonus

Our named executive officers can earn annual incentive bonuses based on the following three factors:

	•		the position of the named executive officer, which is used to determine a targeted percentage of annual base salary that may be awarded as incentive bonus, based on competitive compensation survey data at the 50th percentile, with the targets ranging from a low of 70% of base salary to 125% of base salary for our Chief Executive Officer;
	•		Valero’s realization of quantitative financial performance goals for the year, which are approved by the Compensation Committee during the first quarter of the year; and
	•		a qualitative evaluation of the individual’s performance.

The following table shows the percentage of each named executive’s annual salary that represents his annual bonus target for the fiscal year ended December 31, 2006 before discretionary adjustments by the Compensation Committee, as discussed below:

		Annual Incentive Bonus Target
Name		as a Percentage of Base Salary
William R. Klesse			125	%
Gregory C. King			80	%
Michael S. Ciskowski			70	%
Richard J. Marcogliese			70	%
S. Eugene Edwards			70	%

     Company Financial Performance Objectives

The dollar amount of a named executive officer’s annual incentive bonus is determined by first multiplying the executive’s bonus target percentage by his base salary (e.g., for Mr. Klesse, 125% times $900,000, resulting in an annual incentive bonus target of $1,125,000). Then, the performance of Valero for the applicable year is assessed using a quantitative formula that measures Valero’s earnings per share, total shareholder return, and return on investment, which are measured against target levels for each as pre-established by the Compensation Committee. The sum of the three calculations (each metric is weighted equally as one-third of the total) yields a total performance score that is then applied to the executive’s bonus target to determine his annual incentive bonus award for the year. The performance score can range from 0% of target to as high as 200% of the target. (To continue the foregoing example, if Valero’s performance yielded a 140% performance score, then Mr. Klesse’s annual incentive target of $1,125,000 would be multiplied by 140% to yield an actual annual incentive bonus of $1,575,000.) In addition, the Compensation Committee may adjust the total performance score from 0% to as much as 25% in either a positive or negative direction based upon its judgment of Valero’s and an executive’s performance during the year. The Committee also retains the authority to ultimately determine whether any annual incentive award will be paid to an executive officer for his or her performance during the plan year.

For 2006, the following three, equally weighted performance metrics were used to determine the annual incentive bonus awards for the year:

	•		Valero’s earnings per share, or EPS, compared to the target, threshold, and maximum EPS performance levels approved at the start of the plan year by the Compensation Committee;
	•		Valero’s total shareholder return, or TSR, compared to the target, threshold, and maximum TSR performance levels approved at the start of the plan year by the Compensation Committee (TSR measures the growth in the daily average closing price per share of our common stock during the month of November, including the reinvestment of dividends, compared with the daily average closing price of our common stock during the corresponding period in the prior year); and
	•		Valero’s return on investment, or ROI, compared to the target, threshold, and maximum ROI performance levels, approved at the start of the plan year by the Compensation Committee, for a peer group of 10 companies1 for the 12-month period ended September 30, 2006.

We believe that these three financial performance metrics appropriately reflect our business planning process and corporate financial theory regarding financial performance measurement. We believe that annual incentive bonus plans should measure both the quantity of earnings as well as the quality of earnings, while maintaining an appropriate focus on increasing returns to stockholders. The quantity of earnings is typically measured by some amount of earnings performance, such as earnings per share or net income from operations. The quality of earnings is typically measured by some determination of return on investment, such as return on investment or return on capital employed, allowing consideration of management’s ability to generate a reasonable rate of return on the capital investment in the business. Our current incentive bonus plan considers these financial principles in its overall design.

For the EPS and TSR performance measures, the target percentage of base salary is subject to adjustment, upward or downward, based upon whether our EPS and TSR exceed or fall short of the target EPS and TSR, respectively. For the ROI financial performance measure, the target percentage of base salary is subject to adjustment, upward or downward, depending upon whether our ROI exceeds, or falls short of, the average ROI for the peer group of 10 companies identified in the Performance Graph.

For the 2006 annual incentive bonus program, the Compensation Committee established the following company performance metrics as the target metrics: EPS of $7.15, TSR from 7.0% to 8.9%, and ROI as the average ROI of the peer group of 10 companies identified in the Performance Graph. For 2006, our performance was above the EPS target, below the TSR target, and approximately equal to the average ROI for the peer group of 10 companies identified in the Performance Graph. Accordingly, the three financial metrics generated a bonus performance score of approximately 116% of the target bonus amounts. Considering Valero’s accomplishments during 2006, which included record net income of $5.5 billion and record earnings per share of $8.64, as well as the successful integration of the Premcor acquisition, our repurchase of over $2 billion in common stock to return cash to our shareholders, our improved balance sheet and credit ratings, and the continued growth and improvement of our operations, the Compensation Committee used its discretion to adjust the bonus performance score upward by a factor of 25%, to 145%.

At the request of the Chief Executive Officer, the Compensation Committee determined that the bonus of the Chief Executive Officer would be paid at the target amount of 116% rather than the discretionary adjusted amount of 145%. Also upon the recommendation of the Chief Executive Officer, the Compensation Committee determined that an amount equal to the difference between the Chief Executive’s target bonus amount of 116% and discretionary bonus amount of 145%, or $326,250, would be added to the all-employee bonus pool and distributed as an incremental bonus to all the employees participating in the all-employee bonus plan.

As a group, our named executive officers received bonus awards at an average of approximately 135% of their target bonus amounts.

Long-Term Incentive Awards

We provide stock-based, long-term compensation for executives through our 2005 Omnibus Stock Incentive Plan, which was approved by our stockholders on April 28, 2005. Prior to that, such compensation was provided under the now-discontinued 2001 Executive Stock Incentive Plan, which was approved by our stockholders on May 10, 2001. The plans provide for a variety of stock and stock-based awards, including performance shares that vest (become nonforfeitable) upon Valero’s achievement of an objective performance goal, as well as stock options and restricted stock, each of which vest over a period determined by the Compensation Committee.

For each eligible executive, a target amount of long-term incentives is established based on the 50th percentile of the Compensation Comparator Group and is expressed as a percentage of base salary. Under

the design of the long-term incentive program, awards consist of an allocation of performance shares, stock options and restricted stock. The allocation of awards provides 30% of long-term incentives in the form of performance shares, 35% in the form of stock options, and 35% in the form of restricted stock, and is based on Valero’s determination to award long-term components in approximately one-third increments to provide an appropriate balance of long-term incentives. The targeted award can then be adjusted based upon an evaluation of the executive’s individual performance, which (for executives other than the Chief Executive Officer) is based upon the recommendation of the Chief Executive Officer. As with the annual incentive bonus, the Compensation Committee retains discretion to determine whether any award should be made.

The Compensation Committee does not time grants of long-term incentive awards around Valero’s release of undisclosed material information.

The following table shows the percentages of each named executive’s base salary and Total Direct Compensation that represent his long-term compensation target for the fiscal year ended December 31, 2006:

						Long-Term Incentive
		Long-Term Incentive				Awards Target as a
		Awards Target as a				Percentage of “Total
		Percentage of Base				Direct Compensation”
Name		Salary				2
William R. Klesse			485	%			68	%
Gregory C. King			260	%			59	%
Michael S. Ciskowski			200	%			54	%
Richard J. Marcogliese			200	%			54	%
S. Eugene Edwards			200	%			54	%

     Performance Shares

Performance shares comprise 30% of each named executive officer’s total long-term incentive target. The Compensation Committee currently expects to award performance shares annually. Performance shares are earned only upon Valero’s achievement of an objective performance measure, namely total shareholder return. Total shareholder return is the performance measure used for determining what portion of an executive’s previously granted performance shares may vest. The Compensation Committee believes this type of incentive award strengthens the tie between the named executive’s pay and our financial performance. Because performance share awards are intended to provide an incentive for future performance, determinations of individual awards are not based upon our past performance.

Each award is subject to vesting in three annual increments, based upon our total shareholder return during rolling three-year periods that end on December 31 of each year following the date of grant. At the end of each performance period, our total shareholder return for the prior three years is compared to that of the peer group of 10 companies identified in the Performance Graph and ranked by quartile. Executives then earn 0%, 50%, 100% or 150% of that portion of the initial grant amount that is vesting, depending upon whether our total shareholder return is in the last, 3rd, 2nd or 1st quartile, respectively, and they earn 200% if we rank highest in the group. Amounts not earned in a given performance period can be carried forward for one additional performance period and up to 100% of the carried amount can still be earned, depending upon the quartile performance ranking for that subsequent period. For the performance period ended December 31, 2006, our performance ranked third in the group, placing us in the first quartile of the group and resulting in the vesting of eligible shares at the 150% level.

Our named executive officers received two separate awards of performance shares during 2006. The second award of performance shares, made during the fourth quarter of 2006, would ordinarily have been approved in January 2007, but the Committee determined to transition the administration of all long-term incentive compensation to the same time each year, namely, during the fourth quarter. The measurement period for determining the vesting, if any, of the October 2006 grants will be consistent with our past practice, and will be the same as if the awards had been approved and granted in January 2007.

The following table shows the percentages of each named executive’s base salary and Total Direct Compensation that represent his performance shares target for the fiscal year ended December 31, 2006.

						Performance Shares
		Performance Shares				Award Target as a
		Target as a Percentage				Percentage of Total
Name		of Base Salary				Direct Compensation
William R. Klesse			145	%			20	%
Gregory C. King			78	%			17	%
Michael S. Ciskowski			60	%			16	%
Richard J. Marcogliese			60	%			16	%
S. Eugene Edwards			60	%			16	%

     Stock Options and Restricted Stock

In 2003, the Compensation Committee revised its policy regarding our use of stock options as a component of long-term incentive compensation, and this revised policy has continued through 2006. Anticipating the adoption of Financial Accounting Standards Board Statement of Financial Accounting Standards No. 123 (revised 2004) Share-Based Payment (SFAS 123R), which requires companies to expense the costs of equity awards over the period in which an employee is required to provide service in exchange for the awards, and in view of the portion of previously granted stock options that remained unexercised, the Compensation Committee determined to reduce its use of stock options by approximately one-third in the overall mix of our executives’ long-term incentive compensation. The Committee replaced that portion of compensation with a number of shares of restricted stock of approximately equal value.

In addition, to further emphasize longer-term company performance and to reduce compensation expense, the Compensation Committee determined that awards of restricted stock and stock options will vest in equal annual installments over a period of five years (previous awards made by the Compensation Committee generally vested over a period of three years). Options awarded in 2005 and 2006 generally have seven-year terms and options awarded in prior years generally have ten-year terms.

Grants and vesting of stock options and restricted stock are not contingent upon the achievement of any specified performance targets. However, because the exercise price of options cannot be less than 100% of the fair market value of our common stock on the date of grant, options will provide a benefit to the executive only to the extent that there is appreciation in the market price of our common stock. Options and restricted stock are subject to forfeiture if an executive terminates employment prior to vesting.

Stock options comprise 35% of each officer’s total long-term incentive target, and shares of restricted stock comprise an additional 35% of each officer’s total long-term incentive target. The Compensation Committee presently expects to make awards of options and restricted stock annually.

The stock option and restricted stock components of our executives’ 2006 long-term incentive package were awarded in October 2006. The following table shows the percentages of each named executive’s base salary and Total Direct Compensation that represent his stock option and restricted stock targets for the fiscal year ended December 31, 2006.

						Stock Option Target				Restricted Stock				Restricted Stock
		Stock Option Target				as a Percentage of				Target as a				Target as
		as a Percentage of				Total Direct				Percentage of Base				Percentage of Total
Name		Base Salary				Compensation				Salary				Direct Compensation
William R. Klesse			170	%			24	%			170	%			24	%
Gregory C. King			91	%			21	%			91	%			21	%
Michael S. Ciskowski			70	%			19	%			70	%			19	%
Richard J. Marcogliese			70	%			19	%			70	%			19	%
S. Eugene Edwards			70	%			19	%			70	%			19	%

The Compensation Committee considers and grants awards of stock options and restricted stock to our executives and other employees annually, typically during the third or fourth quarter. The Compensation Committee may also grant stock options or restricted stock to new executives and employees when they are hired. During periods between meetings of the Compensation Committee, as an administrative convenience, the Chief Executive Officer has limited authority to make awards to employees other than executive officers when they are hired.

The exercise price for stock options is the mean of the highest and lowest sales prices per share of our common stock as reported on the New York Stock Exchange on the grant date. All awards of options described in the Summary Compensation Table and Grants of Plan-Based Awards Table of this proxy statement were reviewed and approved by the Compensation Committee. All of the stock options have a grant date that is equal to or after the date on which the options were approved the Compensation Committee, except for grants to our Chief Executive Officer, which have a grant date that is equal to or after the date on which our independent directors approve grants recommended by the Compensation Committee, and grants to new-hires which have a grant date equal to the date on which the new employee commences employment with Valero.

Perquisites and Other Benefits

     Perquisites

We provide certain perquisites to our executive officers. Executives are eligible to receive reimbursement for club dues, personal excess liability insurance, federal income tax preparation, life insurance policy premiums with respect to cash value life insurance, annual health examination, residential alarm monitoring, residential internet service with access to Valero’s information services portal, and tickets to sporting and other entertainment events. We do not provide executive officers with automobiles or automobile allowances, supplemental executive medical benefits or coverage. In addition, we generally do not allow executives to use company aircraft for personal use, such as travel to and from vacation destinations. However, spouses (or other family members) occasionally accompany executives when executives are traveling on company aircraft for business purposes, such as attending an industry business conference at which spouses are invited and expected to attend.

     Other Benefits

We provide other benefits, including medical, life, dental, and disability insurance in line with competitive market conditions. Our named executive officers are eligible for the same benefit plans provided to our other employees, including insurance plans and supplemental plans chosen and paid for by employees who wish additional coverage.

Executive officers and other employees whose compensation exceeds certain limits are eligible to participate in non-qualified excess benefit programs whereby those individuals can choose to make larger contributions than allowed under the qualified plan rules and receive correspondingly higher benefits. These plans are described below under “Post-Employment Benefits.”

Post-Employment Benefits

     Pension Plans

We maintain a noncontributory defined benefit Pension Plan in which most of our employees, including our named executive officers, are eligible to participate and under which contributions by individual participants are neither required nor permitted. We also maintain a noncontributory, non-qualified Excess Pension Plan and a non-qualified Supplemental Executive Retirement Plan, or SERP, which provide supplemental pension benefits to certain highly compensated employees, and under which our named executive officers are participants. The Excess Pension Plan and the SERP provide eligible employees with additional retirement savings opportunities that cannot be achieved with tax-qualified plans due to Internal Revenue Code limits on (i) annual compensation that can be taken into account under qualified plans, or (ii) annual benefits that can be provided under qualified plans.

The Pension Plan (supplemented, as necessary, by the Excess Pension Plan) provides a monthly pension at normal retirement equal to 1.6% of the participant’s average monthly compensation (based upon the participant’s earnings during the three consecutive calendar years during the last 10 years of the participant’s credited service, including service with our former parent, affording the highest such average) times the participant’s years of credited service. The SERP provides an additional benefit equal to .35% times the product of the participant’s years of credited service (maximum 35 years) multiplied by the excess of the participant’s average monthly compensation over the lesser of 1.25 times the monthly average (without indexing) of the social security wage bases for the 35-year period ending with the year the participant attains social security retirement age, or the monthly average of the social security wage base in effect for the year that the participant retires. For purposes of the SERP, the participant’s most highly compensated consecutive 36 months of service are considered, including employment with our former parent and its subsidiaries. An executive will become a participant in the SERP as of the date he or she is selected and named in the minutes of the Compensation Committee for inclusion as a participant in the SERP. Compensation for purposes of the Pension Plan, Excess Pension Plan and SERP includes salary and bonus. Pension benefits are not subject to any deduction for social security or other offset amounts.

For more information regarding our named executive officers’ participation in our pension plans, see the table under the caption “Pension Benefits” and its related disclosures.

     Nonqualified Deferred Compensation Plans

Deferred Compensation Plan. Our named executive officers are eligible to participate in our Deferred Compensation Plan (“DC Plan”). The DC Plan permits eligible employees to defer a portion of their salary and/or bonus until retirement or termination of employment, or at other designated distribution times provided for in the DC Plan. The DC Plan is a non-qualified deferred compensation arrangement designed to be a “top hat” plan within the meaning of the Employee Retirement Income Security Act (“ERISA”) and is, therefore, exempt from most of ERISA’s requirements relating to pension plans. The DC Plan is not designed to constitute a qualified pension plan under section 401(a) of the Internal Revenue Code of 1986 (“Code”).

Designated eligible employees are intended to constitute a select group of management or highly compensated employees within the meaning of ERISA. Each year, eligible employees are permitted to elect to defer up to 30% of their salary and/or 50% of their cash bonuses payable during the following year under the DC Plan. The DC Plan also permits Valero to make discretionary contributions to participants’ accounts from time to time in amounts and on terms as Valero may determine. No such additional discretionary contributions have been made to date.

Participant accounts are credited with earnings (or losses) based on investment fund choices made by the participants among available funds selected by the BPAC from time to time.

At the time of their deferral elections, participants may also elect when and over what period of time their deferrals will be distributed. Participants may elect to have their accounts distributed in a lump sum on a specified date in the future. Additionally, even if a participant has elected a specified distribution date, the participant’s DC Plan account will be distributed upon the participant’s retirement or other termination of employment.

Participants may, at the time of their deferral elections, choose to have their accounts distributed as soon as reasonably practical following retirement or other termination, or the January 1 following the date of retirement of termination. Participants may also elect to have their accounts distributed in one lump sum payment or in five, ten or fifteen year installments upon retirement, and in a lump sum or five annual installments upon other termination. If participants fail to make a distribution election, their accounts will be distributed in fifteen annual installments commencing as soon as reasonably practical following retirement, or in a lump sum as soon as reasonably practical following other termination. Further, upon a participant’s disability (as defined in the DC Plan), the participant’s DC Plan account is distributed in 15 annual installments to the participant, and, upon a participant’s death, the account is distributed to the participant’s beneficiary in a lump sum payment. Participants are also permitted to make in-service partial withdrawals in the event of an unforeseeable emergency.

Upon a change in control (as defined in the DC Plan) of Valero, all DC Plan accounts are immediately vested in full; however, distributions are not accelerated and are made in accordance with the DC Plan’s normal distribution provisions.

As a nonqualified deferred compensation arrangement, the DC Plan is subject to Code section 409A and its regulations. We intend to administer and interpret the DC Plan in a manner consistent with such Code section and regulations. Additional DC Plan amendments will be made under transitional relief provided by the Internal Revenue Service under Code section 409A, in order to document the DC Plan’s compliance with these rules.

Excess Thrift Plan. Our Excess Thrift Plan provides benefits to our employees whose annual additions to our qualified 401(k) plan (“Thrift Plan”) are subject to the limitations on such annual additions as provided under Section 415 of the Internal Revenue Code, and/or who are constrained from making maximum contributions under the Thrift Plan by Section 401(a)(17) of the Code, which limits the amount of an employee’s annual compensation which may be taken into account under that plan. Two separate components comprise the Excess Thrift Plan: (1) an “excess benefit plan” as defined under Section 3(36) of ERISA, and (2) a plan that is unfunded and maintained primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees. Each component of the Excess Thrift Plan consists of a separate plan for purposes of Title I of ERISA.

Information regarding contributions by Valero and each of our named executive officers under our non-qualified defined contribution and other deferred compensation plans during the year ended December 31, 2006, is stated in this proxy statement in the table under the caption “Nonqualified Deferred Compensation.”

     Severance Arrangements

We have entered into change of control agreements with each of the named executive officers. These agreements are intended to assure the continued availability of these executives in the event of certain transactions culminating in a “change of control” of Valero. The change of control employment agreements have three-year terms, which are automatically extended for one year upon each anniversary unless a notice not to extend is given by Valero. If a “change of control” (as defined in the agreements) occurs during the term of an agreement, then the agreement becomes operative for a fixed three-year period. The agreements provide generally that the executive’s terms and conditions of employment (including position, location, compensation and benefits) will not be adversely changed during the three-year period after a change of control.

The agreements also provide that upon a change of control:

	•		all stock options held by the executive will vest and remain exercisable for the shorter of five years from the date of termination or the remainder of the original option term;
	•		the restrictions and deferral limitations applicable to any restricted stock awards held by the executive will lapse, and such restricted stock awards shall become fully vested; and
	•		all performance share awards held by the executive will fully vest and be earned and payable based on the deemed achievement of performance at 200% of target level.

Following a change of control, particular payments under the agreements are triggered commensurate with the occurrence of any of the following: (i) termination of employment by the company other than for “cause” (as defined in the agreement) or disability, (ii) termination by the executive for “good reason” (as defined in the agreements), (iii) termination by the executive other than for “good reason,” and (iv) termination of employment because of death or disability. These triggers were designed to ensure the continued availability of the executives following a change of control, and to compensate the executives at appropriate levels if their employment is unfairly or prematurely terminated during the applicable term following a change of control. For more information regarding payments that may be made under our severance arrangements, see our disclosures below under the caption “Potential Payments upon Termination or Change-in-Control.”

IMPACT OF ACCOUNTING AND TAX TREATMENTS

Accounting Treatment

Effective January 1, 2006, we adopted SFAS 123R, which requires us to recognize in our financial statements the costs of equity awards over the period in which an employee is required to provide service in exchange for the awards. The cost of such awards is measured at fair value on the date of grant and we use the Black-Scholes option pricing model to determine the grant date present value of stock options.

As discussed above under the caption “Stock Options and Restricted Stock,” as a result of our adoption of SFAS 123R, the Compensation Committee determined to reduce the stock option portion of our long-term incentive compensation package by approximately one-third and to replace that portion with a number of shares of restricted stock of approximately equal value.

Tax Treatment

Under Section 162(m) of the Internal Revenue Code, publicly held corporations may not take a tax deduction for compensation in excess of $1 million paid to the Chief Executive Officer or the other four most highly compensated executive officers unless that compensation meets the Internal Revenue Code’s definition of “performance based” compensation. Section 162(m) allows a deduction for compensation to a specified executive that exceeds $1 million only if it is paid (i) solely upon attainment of one or more performance goals, (ii) pursuant to a qualifying performance-based compensation plan adopted by the Compensation Committee, and (iii) the material terms, including the performance goals, of such plan are approved by the stockholders before payment of the compensation.

The Compensation Committee considers deductibility under Section 162(m) with respect to compensation arrangements for executive officers. The Compensation Committee believes that it is in our best interests for the committee to retain its flexibility and discretion to make compensation awards to foster achievement of performance goals established by the committee and other corporate goals the committee deems important to our success, such as encouraging employee retention, rewarding achievement of nonquantifiable goals and achieving progress with specific projects. We believe that stock options and performance share grants qualify as performance-based compensation and are not subject to any deductibility limitations under Section 162(m). Grants of restricted stock, restricted stock units or other equity-based awards that are not subject to specific quantitative performance measures will likely not qualify as “performance based” compensation and, in such event, would be subject to 162(m) deduction restrictions.

COMPENSATION-RELATED POLICIES

Stock Ownership Guidelines

Our Board, the Compensation Committee and our executives recognize that ownership of Valero common stock is an effective means by which to align the interests of our directors and executives with those of our stockholders. In reviewing the stock ownership positions of our named executive officers, the Compensation Committee determined that the executives have high company-stock ownership levels compared to the management teams of their peers and also determined that our directors (other than recently elected directors) also have significant and appropriate ownership levels of Valero common stock. We have long emphasized the importance of stock ownership among our executives and directors.

During 2005, the Compensation Committee engaged Towers Perrin to help formalize stock ownership and retention guidelines for directors and officers to ensure continuation of our successful track record in aligning the interests of our directors and officers with those of our stockholders through ownership of our common stock. The guidelines were approved by the Compensation Committee and our board of directors in 2005.

Non-Employee Director Stock Ownership Guidelines. Non-employee directors are expected to acquire and hold during their service shares of our common stock equal in value to at least five times the annual cash retainer paid to our directors. Directors have five years from their initial election to the Board to meet the target stock ownership guideline, and they are expected to continuously own sufficient shares to meet the guideline once attained.

Executive Stock Ownership Guidelines. Stock ownership guidelines for our officers are as follows:

Officer Position		Value of Shares Owned
Chief Executive Officer		10.0x Base Salary
President		4.0x Base Salary
Executive Vice Presidents		3.0x Base Salary
Senior Vice Presidents		2.0x Base Salary
Vice Presidents		1.0x Base Salary

Our officers are expected to meet the applicable guideline within five years and are expected to continuously own sufficient shares to meet the guideline once attained. The full text of our stock ownership and retention guidelines is posted in the Corporate Governance section of our internet website at http://www.valero.com (in the “Investor Relations” section).

Prohibition on Insider Trading and Speculation in Valero Stock

We have established policies prohibiting our officers, directors, and employees from purchasing or selling Valero securities while in possession of material, nonpublic information, or otherwise using such information for their personal benefit or in any manner that would violate applicable laws and regulations. In addition, our policies prohibit our officers, directors, and employees from speculating in our stock, which includes short selling (profiting if the market price of our stock decreases), buying or selling publicly traded options (including writing covered calls), hedging, or any other type of derivative arrangement that has a similar economic effect.

EXECUTIVE COMPENSATION

The tables listed below, which appear in the following sections of this proxy statement, provide information required by the SEC regarding the compensation we paid for the year ended December 31, 2006, to our Chief Executive Officer, Chief Financial Officer and our other most highly compensated executive officers (our “named executive officers”). Except as noted below, we have used captions and headings in these tables in accordance with the SEC regulations requiring these disclosures. The footnotes to these tables provide important information to explain the values presented in the tables, and are an important part of our disclosures relating to our executive compensation for the year ended December 31, 2006.

	•		Summary Compensation Table
	•		Grants of Plan-Based Awards
	•		Outstanding Equity Awards
	•		Option Exercises and Stock Vested
	•		Pension Benefits
	•		Nonqualified Deferred Compensation
	•		Payments Under Change of Control Severance Agreements 3
	•		Director Compensation

SUMMARY COMPENSATION TABLE
FOR FISCAL YEAR ENDED DECEMBER 31, 2006

The following table provides a summary of compensation paid for the year ended December 31, 2006, to our named executive officers. The table shows amounts earned by such persons for services rendered to Valero in all capacities in which they served. The elements of compensation listed in the table are more fully described in the “Compensation Discussion and Analysis” section of this proxy statement and in the footnotes that follow this table.

																										Change in
																										Pension Value
																										and Nonqualified
																										Deferred
														Stock				Option				Non-Equity				Compensation				All Other
Name and						Salary				Bonus				Awards ($)				Awards ($)				Incentive Plan				Earnings ($)				Compensation ($)				Total
Principal Position		Year				($)				($)				(1)				(2)				Compensation ($)				(3)				(4)				($)
William R. Klesse,			2006				900,000				1,305,000				4,704,686				2,162,232				—				780,800				85,755				9,938,473
Chief Executive Officer and Chairman of the Board
Gregory C. King,			2006				707,000				820,000				2,982,794				554,472				—				261,462				54,707				5,380,435
President
Michael S.			2006				465,000				475,000				1,832,153				315,044				—				275,048				43,221				3,405,466
Ciskowski, Executive Vice President and Chief Financial Officer
Richard J.			2006				415,000				475,000				964,230				193,481				—				676,857				41,918				2,766,486
Marcogliese, Executive Vice President-Operations
S. Eugene Edwards,			2006				370,000				350,000				787,875				145,426				—				228,757				37,690				1,919,748
Executive Vice President-Corporate Development and Strategic Planning

Footnotes appear on the following page.

Footnotes to “Summary Compensation” table:

Name		(A)				(B)				total
William R. Klesse		$	780,800			$	0			$	780,800
Gregory C. King		$	261,462			$	0			$	261,462
Michael S. Ciskowski		$	275,048			$	0			$	275,048
Richard J. Marcogliese		$	676,857			$	0			$	676,857
S. Eugene Edwards		$	228,757			$	0			$	228,757

items of income (in dollars)		Klesse				King				Ciskowski				Marcogliese				Edwards
Valero contribution to thrift plan account		$	13,200			$	13,200			$	13,200			$	13,200			$	13,200
Valero contribution to excess thrift plan account			40,800				29,220				14,700				11,700				9,000
unused portions of Valero-provided dollars for the purchase of health and welfare benefits			3,267				—				—				342				482
reimbursement of club membership dues			5,070				5,260				7,609				5,070				5,718
imputed income for personal liability insurance			2,168				2,168				2,168				2,168				2,168
imputed income for tax return preparation			—				785				785				785				785
executive insurance premiums with respect to cash value life insurance			17,176				—				—				—				—
long-term disability premium imputed income			3,655				3,655				3,655				3,655				3,655
imputed income for insurance (life and survivor) over $50,000			—				—				685				4,998				1,842
residential alarm monitoring			419				419				419				—				840
total		$	85,755			$	54,707			$	43,221			$	41,918			$	37,690

GRANTS OF PLAN-BASED AWARDS
FOR FISCAL YEAR ENDED DECEMBER 31, 2006

The following table provides information regarding grants of plan-based awards (specifically, performance shares, shares of restricted stock, and stock options) made to our named executive officers in 2006.

																		Exercise or				Closing				Grant Date
						Estimated Future Payouts Under Equity												Base Price				Market				Fair Value of
						Incentive Plan Awards												of Option				Price on				Stock and Option
						Threshold				Target				Maximum				Awards				Grant				Awards
Name		Grant Date				(#)				(#)				(#)				($/sh.)(1)				Date				($)
William R. Klesse			01/19/06	(2)			0				27,790				55,580												1,564,577
			10/19/06	(3)			0				23,620				47,240												621,442
			10/19/06	(4)			n/a				28,730				n/a												1,509,618
			10/19/06	(5)			n/a				75,400				n/a				52.545				52.94				1,489,150
Gregory C. King			01/18/06	(2)			0				11,700				23,400												651,924
			10/19/06	(3)			0				9,950				19,900												261,785
			10/19/06	(4)			n/a				12,100				n/a												635,795
			10/19/06	(5)			n/a				31,750				n/a				52.545				52.94				627,063
Michael S. Ciskowski			01/18/06	(2)			0				5,920				11,840												329,862
			10/19/06	(3)			0				5,030				10,060												132,339
			10/19/06	(4)			n/a				6,120				n/a												321,575
			10/19/06	(5)			n/a				16,000				n/a				52.545				52.94				316,000
Richard J. Marcogliese			01/18/06	(2)			0				5,030				10,060												280,271
			10/19/06	(3)			0				4,490				8,980												118,132
			10/19/06	(4)			n/a				5,460				n/a												286,896
			10/19/06	(5)			n/a				14,350				n/a				52.545				52.94				283,413
S. Eugene Edwards			01/18/06	(2)			0				4,710				9,420												262,441
			10/19/06	(3)			0				3,785				7,570												99,583
			10/19/06	(4)			n/a				4,605				n/a												241,970
			10/19/06	(5)			n/a				12,088				n/a				52.545				52.94				238,738

Footnotes appear on the following page.

Footnotes to “Grants of Plan-Based Awards” table:

	(1)		Valero’s 2005 Omnibus Incentive Plan provides that the exercise price for all options granted under the plan will be equal to the average of the high and low reported sales price per share on the NYSE of our common stock on the date of grant.
	(2)		Represents a grant of performance shares, the first portion of which vested in January 2007. The performance shares are subject to vesting in three annual increments, based upon our total shareholder return during rolling three-year periods that end on December 31 of each year following the date of grant. At the end of each performance period, our total shareholder return for the prior three years is compared to that of the Compensation Comparator Group. Executives can earn, in shares of common stock, from 0% to 200% of that portion of the initial grant amount that is vesting, depending on the ranking of our total shareholder return for that period. The performance shares are more fully described in “Compensation Discussion and Analysis” under the captions “Long-Term Incentive Awards” and “Performance Shares.”
	(3)		Represents a grant of performance shares, the first portion of which will vest in January 2008. Performance shares historically had been awarded in January of each year. Beginning in 2006, our Compensation Committee determined to consider performance share grants in October of each year together with other long-term incentive awards (e.g., stock options and restricted stock).
	(4)		Represents a grant of shares of restricted stock. The shares vest (become nonforfeitable) in equal annual installments over a period of five years beginning in 2007. Dividends on restricted shares are paid as and when dividends are declared and paid on Valero’s outstanding common stock. The restricted shares are more fully described in “Compensation Discussion and Analysis” under the captions “Long-Term Incentive Awards” and “Stock Options and Restricted Stock.”
	(5)		Represents a grant of options to purchase our common stock. The options vest (become nonforfeitable) in equal annual installments over a period of five years beginning in 2007, and will expire in seven years from their date of grant. The reported grant date fair value of the options was determined in compliance with SFAS 123R. Under SFAS 123R, the fair value of stock options must be determined using an option-pricing model such as Black-Scholes or a binomial model taking into consideration the following:

	•		the exercise price of the option;
	•		the expected life of the option;
	•		the current price of the underlying stock;
	•		the expected volatility of the underlying stock;
	•		the expected dividends on the underlying stock; and
	•		the risk-free interest rate for the expected life of the option.

The Black-Scholes option pricing model was used to determine grant date fair value. This model is designed to value publicly traded options. Options issued under our plans are not freely traded, and the exercise of such options is subject to substantial restrictions. Moreover, the Black-Scholes model does not give effect to either risk of forfeiture or lack of transferability. The estimated values under the Black-Scholes model are based on assumptions as to variables such as interest rates, stock price volatility, and future dividend yield. The estimated values presented in this table were calculated using an expected average option life of five years, risk free rate of return of 4.73%, average volatility rate for the five-year period prior to the grant date of 36.3%, and a dividend yield of 0.61%, which is the expected annualized quarterly dividend rate in effect at the date of grant expressed as a percentage of the market value of our common stock on the date of grant. The actual value of stock options could be zero; realization of any positive value depends upon the actual future performance of our common stock, which cannot be forecast with reasonable accuracy, the continued employment of the option holder throughout the vesting period, and the timing of the exercise of the option. Accordingly, the values set forth in this table may not be achieved. The actual value, if any, that a person will realize upon exercise of an option will depend on the excess of the market value of our common stock over the exercise price on the date the option is exercised. The options are more fully described in “Compensation Discussion and Analysis” under the captions “Long-Term Incentive Awards” and “Stock Options and Restricted Stock.”

OUTSTANDING EQUITY AWARDS
AT DECEMBER 31, 2006

The following table provides information regarding our named executive officers’ unexercised stock options, unvested shares of restricted stock, and unvested performance shares as of December 31, 2006.

		Option Awards																Stock Awards
																														Equity Incentive
																										Equity Incentive				Plan Awards: Market
		Number of				Number of																				Plan Awards: Number				or Payout Value of
		Securities				Securities																Market Value of				of Unearned Shares,				Unearned Shares,
		Underlying				Underlying												Number of Shares or				Shares or Units of				Units or Other				Units or Other
		Unexercised Options				Unexercised Options				Option Exercise				Option Expiration				Units of Stock That				Stock That Have Not				Rights That Have				Rights That Have
Name		(#) Exercisable				(#) Unexercisable				Price ($)				Date				Have Not Vested (#)				Vested ($)				Not Vested (#)				Not Vested ($)
William R. Klesse			134,800				—				9.15123				12/01/08				16,000	(1)			818,560				14,400	(5)			1,105,056
			5,144				—				9.15123				02/07/10				16,800	(2)			859,488				16,000	(6)			1,023,200
			200,000				—				9.61875				12/31/11				12,480	(3)			638,477				27,790	(7)			1,658,710
			160,000				—				7.515				09/18/12				28,730	(4)			1,469,827				23,620	(8)			1,208,399
			49,548				—				10.1875				02/07/10
			55,012				—				9.6175				02/07/10
			64,800				43,200	(1)			9.825				10/29/13
			102,392				—				11.5525				02/06/11
			1,384				—				11.5525				02/07/10
			40,084				—				14.755				02/06/11
			50,900				—				15.65				02/06/11
			27,476				—				18.6125				02/06/11
			26,164				—				18.0825				02/06/11
			27,200				40,800	(2)			21.355				10/21/14
			8,800				35,200	(3)			47.4775				10/20/12
			—				75,400	(4)			52.545				10/19/13

		Option Awards																Stock Awards
																														Equity Incentive
																										Equity Incentive				Plan Awards: Market
		Number of				Number of																				Plan Awards: Number				or Payout Value of
		Securities				Securities																Market Value of				of Unearned Shares,				Unearned Shares,
		Underlying				Underlying												Number of Shares or				Shares or Units of				Units or Other				Units or Other
		Unexercised Options				Unexercised Options				Option Exercise				Option Expiration				Units of Stock That				Stock That Have Not				Rights That Have				Rights That Have
Name		(#) Exercisable				(#) Unexercisable				Price ($)				Date				Have Not Vested (#)				Vested ($)				Not Vested (#)				Not Vested ($)
Gregory C. King			160,000				—				7.515				09/18/12				19,200	(1)			982,272				16,800	(9)			1,289,232
			74,400				46,600	(1)			9.825				10/29/13				18,000	(2)			920,880				17,333	(10)			1,108,458
			30,400				45,600	(2)			21.355				10/21/14				12,480	(3)			638,477				11,700	(11)			698,334
			8,800				35,200	(3)			47.4775				10/20/12				12,100	(4)			619,036				9,950	(8)			509,042
			—				31,750	(4)			52.545				10/19/13
Michael S. Ciskowski			40,800				27,200	(1)			9.825				10/29/13				12,800	(1)			654,848				10,800	(12)			828,792
			18,400				27,600	(2)			21.355				10/21/14				10,800	(2)			552,528				10,800	(13)			690,660
			4,920				19,680	(3)			47.4775				10/20/12				6,592	(3)			337,247				5,920	(14)			353,362
			—				16,000	(4)			52.545				10/19/13				6,120	(4)			313,099				5,030	(8)			257,335
Richard J. Marcogliese			80,000				—				7.00				05/04/10				4,800	(1)			245,568				4,000	(15)			306,960
			20,000				—				9.8625				06/16/11				4,800	(2)			245,568				7,333	(16)			468,958
			60,000				—				8.43625				07/18/11				3,200	(3)			163,712				5,030	(17)			300,232
			60,000				—				7.515				09/18/12				5,460	(4)			279,334				4,490	(8)			229,708
			19,200				12,800	(1)			9.825				10/29/13
			8,000				12,000	(2)			21.355				10/21/14
			2,600				10,400	(3)			47.4775				10/20/12
			—				14,350	(4)			52.545				10/19/13

		Option Awards																Stock Awards
																														Equity Incentive
																										Equity Incentive				Plan Awards: Market
		Number of				Number of																				Plan Awards: Number				or Payout Value of
		Securities				Securities																Market Value of				of Unearned Shares,				Unearned Shares,
		Underlying				Underlying												Number of Shares or				Shares or Units of				Units or Other				Units or Other
		Unexercised Options				Unexercised Options				Option Exercise				Option Expiration				Units of Stock That				Stock That Have Not				Rights That Have				Rights That Have
Name		(#) Exercisable				(#) Unexercisable				Price ($)				Date				Have Not Vested (#)				Vested ($)				Not Vested (#)				Not Vested ($)
S. Eugene Edwards			6,400				12,800	(1)			9.825				10/29/13				4,800	(1)			245,568				4,132	(18)			317,090
			3,780				11,340	(2)			21.355				10/21/14				4,548	(2)			232,676				4,133	(19)			264,318
			2,280				9,120	(3)			47.4775				10/20/12				3,152	(3)			161,256				4,710	(20)			281,124
			—				12,088	(4)			52.545				10/19/13				4,605	(4)			235,592				3,785	(8)			193,641

Footnotes appear on the following page.

Footnotes to “Outstanding Equity Awards” table:

(1)		The unvested portion of this award will vest in equal installments on 10/29/07 and 10/29/08.
(2)		The unvested portion of this award will vest in equal installments on 10/21/07, 10/21/08, and 10/21/09.
(3)		The unvested portion of this award will vest in equal installments on 10/20/07, 10/20/08, 10/20/09, and 10/20/10.
(4)		The unvested portion of this award will vest in equal installments on 10/19/07, 10/19/08, 10/19/09, 10/19/10, and 10/19/11.
(5)		These performance shares vested at 150% on 1/17/07. The value shown in the column, “Equity Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or Other Rights That Have Not Vested,” represents the market value of 150% of the shares at the closing price of Valero’s stock on 12/29/06.
(6)		Of the performance shares remaining unvested at 12/31/06, 8,000 shares vested on 1/17/07 at 150%. The value shown in the column, “Equity Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or Other Rights That Have Not Vested,” represents the combined market value of 150% of 8,000 shares and 100% of the 8,000 shares remaining in this award that will vest in January 2008.
(7)		Of the performance shares remaining unvested at 12/31/06, 9,264 shares vested on 1/17/07 at 150%. The value shown in the column, “Equity Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or Other Rights That Have Not Vested,” represents the combined market value of 150% of 9,264 shares and 100% of the 18,526 shares remaining in this award that will vest in equal installments in January 2008 and January 2009.
(8)		These performance shares will vest in 1/3 increments in each of January 2008, January 2009, and January 2010.
(9)		These performance shares vested at 150% on 1/17/07. The value shown in the column, “Equity Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or Other Rights That Have Not Vested,” represents the market value of 150% of the shares at the closing price of Valero’s stock on 12/29/06.
(10)		Of the performance shares remaining unvested at 12/31/06, 8,667 shares vested on 1/17/07 at 150%. The value shown in the column, “Equity Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or Other Rights That Have Not Vested,” represents the combined market value of 150% of 8,667 shares and 100% of the 8,666 shares remaining in this award that will vest in January 2008.
(11)		Of the performance shares remaining unvested at 12/31/06, 3,900 shares vested on 1/17/07 at 150%. The value shown in the column, “Equity Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or Other Rights That Have Not Vested,” represents the combined market value of 150% of 3,900 shares and 100% of the 7,800 shares remaining in this award that will vest in equal installments in January 2008 and January 2009.
(12)		These performance shares vested at 150% on 1/17/07. The value shown in the column, “Equity Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or Other Rights That Have Not Vested,” represents the market value of 150% of the shares at the closing price of Valero’s stock on 12/29/06.
(13)		Of the performance shares remaining unvested at 12/31/06, 5,400 shares vested on 1/17/07 at 150%. The value shown in the column, “Equity Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or Other Rights That Have Not Vested,” represents the combined market value of 150% of 5,400 shares and 100% of the 5,400 shares remaining in this award that will vest in January 2008.
(14)		Of the performance shares remaining unvested at 12/31/06, 1,974 shares vested on 1/17/07 at 150%. The value shown in the column, “Equity Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or Other Rights That Have Not Vested,” represents the combined market value of 150% of 1,974 shares and 100% of the 3,946 shares remaining in this award that will vest in equal installments in January 2008 and January 2009.
(15)		These performance shares vested at 150% on 1/17/07. The value shown in the column, “Equity Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or Other Rights That Have Not Vested,” represents the market value of 150% of the shares at the closing price of Valero’s stock on 12/29/06.
(16)		Of the performance shares remaining unvested at 12/31/06, 3,667 shares vested on 1/17/07 at 150%. The value shown in the column, “Equity Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or Other Rights That Have Not Vested,” represents the combined market value of 150% of 3,667 shares and 100% of the 3,666 shares remaining in this award that will vest in January 2008.
(17)		Of the performance shares remaining unvested at 12/31/06, 1,677 shares vested on 1/17/07 at 150%. The value shown in the column, “Equity Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or Other Rights That Have Not Vested,” represents the combined market value of 150% of 1,677 shares and 100% of the 3,353 shares remaining in this award that will vest in equal installments in January 2008 and January 2009.

(18)		These performance shares vested at 150% on 1/17/07. The value shown in the column, “Equity Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or Other Rights That Have Not Vested,” represents the market value of 150% of the shares at the closing price of Valero’s stock on 12/29/06.
(19)		Of the performance shares remaining unvested at 12/31/06, 2,067 shares vested on 1/17/07 at 150%. The value shown in the column, “Equity Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or Other Rights That Have Not Vested,” represents the combined market value of 150% of 2,067 shares and 100% of the 2,066 shares remaining in this award that will vest in January 2008.
(20)		Of the performance shares remaining unvested at 12/31/06, 1,570 shares vested on 1/17/07 at 150%. The value shown in the column, “Equity Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or Other Rights That Have Not Vested,” represents the combined market value of 150% of 1,570 shares and 100% of the 3,140 shares remaining in this award that will vest in equal installments in January 2008 and January 2009.
(21)		These performance shares vested at 150% on 1/17/07. The value shown in the column, “Equity Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or Other Rights That Have Not Vested,” represents the market value of 150% of the shares at the closing price of Valero’s stock on 12/29/06.
(22)		Of the performance shares remaining unvested at 12/31/06, 1,667 shares vested on 1/17/07 at 150%. The value shown in the column, “Equity Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or Other Rights That Have Not Vested,” represents the combined market value of 150% of 1,667 shares and 100% of the 1,666 shares remaining in this award that will vest in January 2008.
(23)		Of the performance shares remaining unvested at 12/31/06, 1,274 shares vested on 1/17/07 at 150%. The value shown in the column, “Equity Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or Other Rights That Have Not Vested,” represents the combined market value of 150% of 1,274 shares and 100% of the 2,546 shares remaining in this award that will vest in equal installments in January 2008 and January 2009.