UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

SCHEDULE 14A

Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No.  )

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Valero Energy Corporation

(Name of Registrant as Specified In Its Charter)

 

(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

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VALERO ENERGY CORPORATION

NOTICE OF 2008 ANNUAL MEETING OF STOCKHOLDERS

The Board of Directors has determined that the 2008 Annual Meeting of Stockholders of Valero Energy Corporation will be held on Thursday, May 1, 2008 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 II directors to serve until the 2011 annual meeting of stockholders 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 2008;
	(3)		Vote on a stockholder proposal entitled, “Prohibition of Executive Officer Stock Sales During Stock Repurchase Periods”;
	(4)		Vote on a stockholder proposal entitled, “Stockholder Ratification of Executive Compensation”;
	(5)		Vote on a stockholder proposal entitled, “Disclosure of Corporate Political Contributions”; and
	(6)		Transact any other business properly brought before the meeting.

Valero Energy Corporation
One Valero Way
San Antonio, Texas 78249

March 20, 2008

TABLE OF CONTENTS

GENERAL INFORMATION			1
INFORMATION REGARDING THE BOARD OF DIRECTORS			2
INDEPENDENT DIRECTORS			3
Independence Determinations			3
COMMITTEES OF THE BOARD			4
Audit Committee			4
Compensation Committee			4
Compensation Committee Interlocks and Insider Participation			4
Executive Committee			4
Finance Committee			5
Nominating/Governance Committee			5
Selection of Director Nominees			5
Evaluation of Director Candidates			5
LEAD DIRECTOR AND MEETINGS OF NON-MANAGEMENT DIRECTORS			6
PROPOSAL NO. 1 ELECTION OF DIRECTORS			6
INFORMATION CONCERNING NOMINEES AND OTHER DIRECTORS			7
Class II Nominees			7
Other Directors			8
BENEFICIAL OWNERSHIP OF VALERO SECURITIES			9
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS			9
SECURITY OWNERSHIP OF MANAGEMENT AND DIRECTORS			10
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE			10
COMPENSATION COMMITTEE REPORT			11
COMPENSATION DISCUSSION AND ANALYSIS			11
OVERVIEW			11
ADMINISTRATION OF EXECUTIVE COMPENSATION PROGRAMS			12
Selection of Comparator Group and Other Benchmarking Data			12
Compensation Comparator Group			12
Peer Group			12
Use of Benchmarking Data			13
Process and Timing of Compensation Decisions			13
ELEMENTS OF EXECUTIVE COMPENSATION			14
General			14
Relative Size of Major Compensation Elements			15
Individual Performance and Personal Objectives			16
Base Salaries			16
Annual Incentive Bonus			17
Company Financial Performance Objectives			17
Long-Term Incentive Awards			19
Performance Shares			20
Stock Options and Restricted Stock			21
Perquisites and Other Benefits			22
Perquisites			22
Other Benefits			22
Post-Employment Benefits			23
Pension Plans			23
Nonqualified Deferred Compensation Plans			23
Severance Arrangements			24
IMPACT OF ACCOUNTING AND TAX TREATMENTS			25
Accounting Treatment			25
Tax Treatment			25

COMPENSATION-RELATED POLICIES			26
Stock Ownership Guidelines			26
Prohibition on Insider Trading and Speculation in Valero Stock			26
EXECUTIVE COMPENSATION			27
SUMMARY COMPENSATION TABLE			27
GRANTS OF PLAN-BASED AWARDS			30
OUTSTANDING EQUITY AWARDS			32
OPTION EXERCISES AND STOCK VESTED			35
POST-EMPLOYMENT COMPENSATION			36
PENSION BENEFITS			36
NONQUALIFIED DEFERRED COMPENSATION			38
POTENTIAL PAYMENTS UPON TERMINATION OR CHANGE OF CONTROL			39
PAYMENTS UNDER CHANGE OF CONTROL SEVERANCE AGREEMENTS			40
COMPENSATION OF DIRECTORS			43
DIRECTOR COMPENSATION			43
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS			46
REVIEW, APPROVAL AND RATIFICATION OF TRANSACTIONS WITH MANAGEMENT AND OTHERS			46
TRANSACTIONS WITH MANAGEMENT AND OTHERS			46
PROPOSAL NO. 2 RATIFICATION OF APPOINTMENT OF INDEPENDENT PUBLIC ACCOUNTING FIRM			48
KPMG FEES FOR FISCAL YEAR 2007			48
KPMG FEES FOR FISCAL YEAR 2006			49
AUDIT COMMITTEE PRE-APPROVAL POLICY			49
REPORT OF THE AUDIT COMMITTEE FOR FISCAL YEAR 2007			50
STOCKHOLDER PROPOSALS			51
PROPOSAL NO. 3 STOCKHOLDER PROPOSAL — PROHIBITION OF EXECUTIVE OFFICER STOCK SALES DURING STOCK REPURCHASE PERIODS			51
PROPOSAL NO. 4 STOCKHOLDER PROPOSAL — STOCKHOLDER RATIFICATION OF EXECUTIVE COMPENSATION			53
PROPOSAL NO. 5 STOCKHOLDER PROPOSAL — DISCLOSURE OF CORPORATE POLITICAL CONTRIBUTIONS			55
EQUITY COMPENSATION PLAN INFORMATION			57
MISCELLANEOUS			58
GOVERNANCE DOCUMENTS AND CODES OF ETHICS			58
STOCKHOLDER COMMUNICATIONS			58
STOCKHOLDER NOMINATIONS AND PROPOSALS			58
OTHER BUSINESS			59
FINANCIAL STATEMENTS AND ANNUAL REPORT			59
HOUSEHOLDING			59
TRANSFER AGENT			59

VALERO ENERGY CORPORATION

PROXY STATEMENT

ANNUAL MEETING OF STOCKHOLDERS

May 1, 2008

GENERAL INFORMATION

Introduction

Our Board is soliciting proxies to be voted at the 2008 Annual Meeting of Stockholders on May 1, 2008 (the “Annual Meeting”). The accompanying notice describes the time, place, and purposes of the Annual Meeting. 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” refers to the Board of Directors of Valero Energy Corporation.

We are mailing the Notice of Internet Availability of Proxy Materials (“Notice”) to our stockholders on or about March 20, 2008. On this date, you will have the ability to access all of our proxy materials on a website referenced in the Notice.

Record Date and Shares Outstanding

Holders of record of our common stock, $0.01 par value (“Common Stock”), at the close of business on March 3, 2008 (the “record date”) are entitled to vote on the matters presented at the Annual Meeting. On the record date, 532,138,180 shares of Common Stock were issued and outstanding and entitled to one vote per share.

Quorum

Action may be taken at the Annual Meeting on May 1, 2008, 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.

Voting in Person at the Meeting

If you attend the Annual Meeting and plan to vote in person, we will provide you with a ballot at the meeting. If your shares are registered directly in your name, you are considered the stockholder of record and you have the right to vote the shares in person at the meeting. If your shares are held in the name of your broker or other nominee, you are considered the beneficial owner of shares held in street name. As a beneficial owner, if you wish to vote at the meeting, you will need to bring to the meeting a legal proxy from the stockholder of record (e.g., your broker or other nominee) authorizing you to vote the shares.

Revocability of Proxies

You may revoke your proxy at any time before it is voted at the Annual Meeting by (a) submitting a written revocation to Valero, (b) returning a subsequently dated proxy to Valero, or (c) attending the Annual Meeting, requesting that your proxy be revoked, and voting in person at the Annual Meeting. If instructions to the contrary are not provided, shares will be voted as indicated on the proxy card.

Broker Non-Votes

Brokers holding shares must vote according to specific instructions they receive from the beneficial owners of Common Stock. If specific instructions are not received, brokers may generally vote these shares in their discretion. However, the New York Stock Exchange (the “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 stockholder 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.

Solicitation of Proxies

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 our qualified 401(k) plan (“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 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 our Board. Our Board conducts its business through meetings of its members and its committees. 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. During 2007, our Board held seven meetings and the standing Board committees held 24 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 Meeting. All Board members attended the 2007 annual stockholders meeting.

INDEPENDENT DIRECTORS

The Board presently has one member from our management, William R. Klesse (Chief Executive Officer, President, and Chairman of the Board), and nine non-management directors. In addition, William E. Greehey served on our Board briefly in 2007 as a non-management director until his resignation from the Board on January 17, 2007. The Board determined that nine of ten of its non-management directors who served at any time during 2007 met the independence requirements of the NYSE listing standards as set forth in the NYSE Listed Company Manual. Those independent directors were 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 briefly served as Chairman of the Board during 2007 until his resignation from the Board on January 17, 2007. 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. As a present member of management, William R. 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 SEC.

Independence Determinations

Under the NYSE’s listing standards, no director qualifies as independent unless the Board affirmatively determines that he or she 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, stockholder, or officer of an organization that has a relationship with Valero, or has only immaterial relationships with Valero, and is 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 Valero 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 Valero 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. The charters are available 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 2007 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. Members of the Audit Committee are Ruben M. Escobedo (Chairman), Ronald K. Calgaard, Irl F. Engelhardt, and Susan Kaufman Purcell. The Audit Committee met eight times in 2007. The “Report of the Audit Committee for Fiscal Year 2007” appears below following the disclosures related to Proposal 2.

The Board has determined that 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 experience, see “Proposal No. 1 Election of Directors — Information Concerning Nominees and Other Directors.”

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. The Compensation Committee’s duties are described more fully in the “Compensation Discussion and Analysis” section below. The Compensation Committee has, for administrative convenience, delegated authority to Valero’s Chief Executive Officer to make non-material amendments to Valero’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 are Bob Marbut (Chairman), W.E. “Bill” Bradford, Jerry D. Choate, and Robert A. Profusek. The Compensation Committee met seven times in 2007. The “Compensation Committee Report” for fiscal year 2007 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 served as an officer or employee of Valero or had any relationship requiring disclosure by Valero under 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 are William R. Klesse (Chairman), Jerry D. Choate, Irl F. Engelhardt, Ruben M. Escobedo, and Bob Marbut. The Executive Committee met once in 2007.

Finance Committee

The Finance Committee reviews and monitors the investment policies and performance of our Thrift Plan and pension plans, insurance and risk management policies and programs, and finance matters and policies as needed. Members of the Finance Committee are Irl F. Engelhardt (Chairman), Ruben M. Escobedo, Bob Marbut, Donald L. Nickles, and Susan Kaufman Purcell. The Finance Committee met five times in 2007.

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 are Jerry D. Choate (Chairman), W.E. “Bill” Bradford, Ronald K. Calgaard, Donald L. Nickles, and Robert A. Profusek. The Committee met three times in 2007.

The Nominating/Governance Committee recommended W.E. “Bill” Bradford, Ronald K. Calgaard, and Irl F. Engelhardt to the Board as the director nominees for election as Class II directors at the Annual Meeting. The Committee also considered and recommended the appointment of a lead director to preside at meetings of the independent directors without management (see “Information Regarding the Board of Directors — Lead Director and Meetings of Non-Management Directors”), 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 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 when submitted in accordance with the procedures described in this proxy statement under the caption “Miscellaneous — Stockholder Nominations and Proposals.” The Committee will consider all candidates identified through the processes described above and will evaluate each of them on the same basis. The level of consideration that the Committee will extend 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.

     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 expertise 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 those of the existing Board members; 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 W.E. “Bill” Bradford to serve as the Lead Director during 2008 for meetings of the non-management Board members outside the presence of management. 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 II directors will be elected at the Annual Meeting to serve a three-year term that will expire at the 2011 annual meeting of stockholders. Nominees for Class II directors are W.E. “Bill” Bradford, Ronald K. Calgaard and Irl F. Engelhardt. The persons named on the 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.

In accordance with Valero’s bylaws, each director to be elected under this Proposal No. 1 shall be elected by the vote of the majority of the votes cast at the Annual Meeting if a quorum is present. For purposes of this election, a “majority of the votes cast” shall mean that the number of shares voted “for” a director’s election exceeds 50% of the number of votes cast with respect to that director’s election. With respect to each nominee, votes “cast” shall include votes to withhold authority and shall exclude abstentions.

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.

INFORMATION CONCERNING NOMINEES AND OTHER DIRECTORS

The following table describes (a) each nominee for election as a director at the Annual Meeting, and (b) the other members of the Board whose terms expire in 2009 and 2010. 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.

		Executive Officer or				Age as of				Director
		Director Since (1)				12/31/07				Class (2)
Nominees
W.E. “Bill” Bradford, Director			2001				72			II
Ronald K. Calgaard, Director			1996				70			II
Irl F. Engelhardt, Director			2006				61			II
Other Directors
Ruben M. Escobedo, Director			1994				70				I
Bob Marbut, Director			2001				72				I
Robert A. Profusek, Director			2005				57				I
Jerry D. Choate, Director			1999				69			III
William R. Klesse, Chairman of the Board, Chief Executive Officer, and President			2001				61			III
Donald L. Nickles, Director			2005				59			III
Susan Kaufman Purcell, Director			1994				65			III

Footnotes:

Class II Nominees

     Mr. Bradford is the retired Chairman of Halliburton Company, a services and construction 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 Ultramar Diamond Shamrock Corporation (“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., a San Antonio-based investment management firm, 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. Dr. Calgaard has served as a director of Valero or its former parent company since 1996.

     Mr. Engelhardt is Chairman of the Board of Directors and Executive Advisor of Patriot Coal Corporation. Mr. Engelhardt served as Chairman and Chief Executive Officer of Peabody Energy Corporation from 1990 to December 2005 and its Chairman of the Board of Directors from 2006 to October 2007. He served as Co-Chief Executive Officer of The Energy Group from 1997 to 1998, Chairman of Suburban Propane Company from 1995 to 1996, Chairman of Cornerstone Construction and

Materials from 1994 to 1995 and Director and Group Vice President of Hanson Industries from 1995 to 1996. Mr. Engelhardt is also a director of The Williams Companies, Inc., Chairman of The Federal Reserve Bank of St. Louis, and General Manager of White Walnut Farms LLC. He has served as a director of Valero since 2006.

Other Directors

     Mr. Choate retired from Allstate Corporation, an insurance company, 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. and Van Kampen Mutual Funds. He has served as a director of Valero since 1999.

     Mr. Escobedo is a Certified Public Accountant. He owned and operated his public accounting firm, Ruben Escobedo & Company, CPAs, in San Antonio, Texas since its formation in 1977 through 2007. Mr. Escobedo also serves as a director of Cullen/Frost Bankers, Inc. He has served as a director of Valero or its former parent company since 1994.

     Mr. Klesse is Valero’s Chairman of the Board, Chief Executive Officer, and President. He was elected Chairman of the Board on January 18, 2007, and was elected President on January 17, 2008. 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.

     Mr. Marbut is Chairman and Co-Chief Executive Officer of Argyle Security, Inc., a provider of physical electronic security solutions, a company he co-founded in 2005 as Argyle Security Acquisition Corporation. Also, since 2004, he has served as Executive Chairman of Electronics Line 3000, Ltd, a provider of wireless security with remote management solutions. He is a director of Tupperware Brands Corporation and Hearst-Argyle Television, Inc. Mr. Marbut was previously founder and Chief Executive Officer of SecTecGLOBAL, Inc. (now a subsidiary of Electronics Line 3000 Ltd) from 2002 through 2006. He served as a director of UDS since 1990, and has served as a director of Valero 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 Directors of Chesapeake Energy Corporation; Fortress International Group, Inc.; and Washington Mutual Investors Fund. He has served as a director of Valero since 2005.

     Mr. Profusek is a partner of and heads the mergers and acquisitions department of the Jones Day law firm. His law practice focuses on mergers, acquisitions, takeovers, restructurings, and corporate governance matters, including compensation. Mr. Profusek is also a director of CTS Corporation. He has served as a director of Valero since 2005.

     Dr. Purcell is Director of the Center for Hemispheric Policy at the University of Miami. The Center examines political, economic, financial, trade and security issues in Latin America, as well as U.S. — Latin America relations. Dr. Purcell previously served as Vice President of the Council of the Americas, a non-profit business organization of Fortune 500 companies with investments in Latin America, and of the Americas Society, a non-profit educational institution, both in New York City. Dr. Purcell has been a director of Valero or its former parent company since 1994.

For information regarding the nominees’ holdings of 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

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS

The following table presents information regarding each person, or group of affiliated persons, we know to be a beneficial owner of more than five percent of our Common Stock as of the record date. The information is based solely upon reports filed by such persons with the SEC.

		Amount and Nature
		of Beneficial
Name and Address of Beneficial Owner		Ownership				Percent of Class (1)
FMR LLC			82,154,326	(2)			15.44	%
82 Devonshire Street Boston, Massachusetts 02109

SECURITY OWNERSHIP OF MANAGEMENT AND DIRECTORS

The following table presents information as of February 1, 2008 regarding 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. No executive officer, director, or nominee for director owns any class of equity securities of Valero other than Common Stock. None of the shares listed below are pledged as security. The address for each person is One Valero Way, San Antonio, Texas 78249.

						Shares Under								Percent
Name of Beneficial Owner		Shares Held (1)				Options (2)				Total Shares				of Class
W.E. “Bill” Bradford			52,339				49,000				101,339				*
Ronald K. Calgaard			23,576				13,000				36,576				*
Jerry D. Choate			16,661				57,000				73,661				*
Michael S. Ciskowski			264,380				54,240				318,620				0.06	%
S. Eugene Edwards			36,149				0				36,149				0.01	%
Irl F. Engelhardt			5,186				3,334				8,520				*
Ruben M. Escobedo			23,309				0				23,309				*
Joseph W. Gorder			62,019				24,418				86,437				0.02	%
Gregory C. King			321,325				168,750				490,075				0.09	%
William R. Klesse			636,863				766,896				1,403,759				0.26	%
Bob Marbut			61,363				82,184				143,547				*
Richard J. Marcogliese			92,849				225,670				318,519				0.06	%
Donald L. Nickles			4,852				11,000				15,852				*
Robert A. Profusek			5,039				7,667				12,706				*
Susan Kaufman Purcell			9,225				37,000				46,225				*
Directors and executive officers as a group (15 persons)			1,615,135				1,500,159				3,115,294				*

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Section 16(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), requires our executive officers, directors, and greater than 10% stockholders to file with the SEC certain reports of ownership and changes in ownership of our Common Stock. 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, 2007, all Section 16(a) reports applicable to our executive officers, directors and greater than 10% stockholders were timely filed, except for a Form 5 for William R. Klesse, Chairman of the Board, Chief Executive Officer and President, involving a charitable donation of 20,000 shares that was made in 2005 (the transaction was reported on a Form 5 filed in June 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, as amended (the “Securities Act”), or the Exchange Act, 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” (as defined below) 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.

Named Executive Officers. Throughout this proxy statement, in accordance with SEC rules, the individuals serving as our principal executive officer (Chief Executive Officer) and our principal financial officer (Chief Financial Officer) during the last completed fiscal year (i.e., William R. Klesse and Michael S. Ciskowski, respectively), our three other most highly compensated executive officers who were serving as executive officers at the end of the last completed fiscal year (i.e., Richard J. Marcogliese, Joseph W. Gorder, and S. Eugene Edwards), and one additional individual who would have been one of our three most highly compensated executive officers but for the fact that he was not serving as an executive officer on December 31, 2007 (i.e., Gregory C. King) are referred to collectively as the “named executive officers.”

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 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 “Information Regarding the Board of Directors — Committees of the Board — Compensation Committee.”

Selection of Comparator Group and Other Benchmarking Data

When determining executive compensation, the Compensation Committee relies on several sources of compensation data in assessing benchmark rates of base salary, annual incentive compensation, and long-term compensation. The Towers Perrin Compensation Data Bank (consisting of over 800 companies in both petroleum and general industry) and the Compensation Comparator Group (further described below), a subset of the Towers Perrin Compensation Data Bank, are used as references in benchmarking base salaries for our named executive officers. These are sometimes referred to as “compensation survey data” or “competitive survey data” throughout this proxy statement.

     Compensation Comparator Group

The Compensation Comparator Group consists of compensation information and analyses of Towers Perrin that includes compensation practices and available data for the following 13 companies that significantly participate in the domestic oil refining and marketing industry:

BP PLC Chevron Corporation CITGO Petroleum Corporation ConocoPhillips Exxon Mobil Corporation Hess Corporation Koch Industries, Inc.		Marathon Oil Corporation Murphy Oil Corporation Occidental Petroleum Corporation Shell Oil Company (USA) Sunoco, Inc. Tesoro Corporation

The Compensation Comparator Group is also used as a reference in benchmarking annual incentive bonus targets and long-term incentive targets for our named executive officers. Selection of the Compensation Comparator Group reflects consideration of each company’s relative revenues, asset base, employee population and capitalization, and the scope of managerial responsibility and reporting relationships for the positions under consideration.

     Peer Group

For other measurement purposes, we also use a Peer Group composed of the following 10 companies:

Chevron Corporation ConocoPhillips Exxon Mobil Corporation Frontier Oil Corporation Hess Corporation		Marathon Oil Corporation Murphy Oil Corporation Occidental Petroleum Corporation Sunoco, Inc. Tesoro Corporation

The Peer Group is used in measuring our return-on-investment metric for purposes of calculating annual incentive bonuses. In addition, the Peer Group is used in determining the percentage of common shares that may be issued upon the vesting of performance shares based upon our total stockholder return relative to the Peer Group. The Peer Group also represents the group of companies that we use for purposes of the “Performance Graph” disclosed in Part II, Item 5 of our Form 10-K for the year ended December 31, 2007. The Peer Group is not used in benchmarking base salaries, bonus targets, or long-term incentive targets.

          Use of Benchmarking Data

Recommendations for base salary, bonuses, and other compensation arrangements are developed under the supervision of the Compensation Committee by our compensation and benefits staff using the foregoing information and analyses and with assistance from Towers Perrin. Use of the 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, as well as that position’s relationship 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 addition, the charter of the Compensation Committee requires the independent directors of the Board to review and approve all compensation for the Chief Executive Officer.

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

     First Quarter:

	•		establish financial performance objectives for annual incentive bonus
	•		determine annual incentive bonus for preceding fiscal year
	•		review and certify financial performance for performance shares granted in prior years

     Third Quarter:

•

establish target levels of annual incentive and long-term incentive compensation for executive officers for the current fiscal year

     Fourth Quarter:

	•		consider base salaries for executive officers for next fiscal year
	•		consider long-term incentive compensation awards for executive officers for current fiscal year

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 a foundation upon which incentive opportunities and benefit levels are established. Our annual incentive bonuses are designed to focus our executive officers on Valero’s attainment of key financial performance measures (i.e., return-on-investment, earnings per share, and total stockholder return) to generate profitable annual operations and sustaining results. Our long-term equity incentive awards are designed to tie the executive officer’s financial reward opportunities with the rewards to stockholders as measured by long-term stock price performance and payment of regular dividends, and increasing our stockholders’ return-on-investment. Throughout this proxy statement, we use the term “Total Direct Compensation” to refer to the sum of an executive officer’s base salary, incentive bonus, and long-term incentive awards for a particular fiscal year.

Our Compensation Committee’s general philosophy for 2007 was to target base salary compensation for our named executive officers at or near the 50th percentile of competitive survey data. Base salaries are benchmarked on the 50th percentile of competitive survey data using regression analysis based on company size as measured by annual revenues. In 2007, for base salaries, actual compensation for each of our named executive officers was lower than the 50th percentile benchmark. The 50th percentile has been established as a desired target for our executives’ base salaries, and through the past several years the Company has been working toward that target. Significant changes in the structure and size of Valero from 2000 to the present, including significant mergers in 2001 and 2005, have resulted in changing landscapes of competitive

compensation and benchmarks from year to year. In July 2007, the independent members of our Board initiated an assessment of our Chief Executive Officer’s salary and, in so doing, used the most recent salary data available at that time (i.e., 2006 competitive survey data). Our Chief Executive Officer’s base salary was set at $1,500,000 in July 2007, which remained below the 50th percentile benchmark when measured against 2006 competitive survey data.

We established annual incentive bonus and long-term incentive target opportunities (expressed as a percentage of base salary) for each executive position based upon the 65th percentile benchmark of the Compensation Comparator Group for the annual incentive bonus, and the 50th percentile benchmark of the Compensation Comparator Group for long-term incentives. In 2007, actual incentive bonuses were paid above the 65th percentile benchmark target. As described under the caption “Annual Incentive Bonus — Company Financial Performance Objectives,” Valero’s performance for 2007 resulted in a bonus payout of 200% of target. In 2007, actual long-term incentive awards either matched or were within 0.5% of the 50th percentile target.

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 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 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.

An executive’s compensation typically increases in relation to his or her responsibilities within Valero, with the level of compensation for more senior executive officers being higher than that for less senior executive officers. For example, the base salary and overall compensation for our President in 2007 was higher than that of the other named executive officers (except for our Chief Executive Officer) because the Compensation Committee believed that this compensation appropriately reflected the duties and scope of responsibility assigned to that position as compared to the duties and responsibilities of the other officer positions. The determination of Mr. King’s compensation in light of these duties and responsibilities was otherwise commensurate with the determination process for other named executive officers.

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.

The following table summarizes the relative size of base salary and target incentive compensation for 2007 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	%
Michael S. Ciskowski			23	%			18	%			59	%
Richard J. Marcogliese			16	%			19	%			65	%
Joseph W. Gorder			23	%			18	%			59	%
S. Eugene Edwards			23	%			18	%			59	%
Gregory C. King			16	%			19	%			65	%

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’s independent directors. For officers other than the Chief Executive Officer, individual performance is evaluated by the Compensation Committee 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; and
	•		any other business priority.

Assessment of individual performance may include objective criteria, but it is largely subjective. Generally, we do not use prescribed targets or other quantitative criteria — such as an executive’s business unit achieving a certain percentage of sales or growth — to measure individual performance. Rather, we use specific quantitative metrics (e.g., return-on-investment, earnings per share, and total stockholder return) to calculate Valero’s performance for purposes of the annual incentive bonus. The criteria used to measure an individual’s performance may include assessment of objective criteria (e.g., execution of projects within budget parameters, improving an operating unit’s profitability, or timely completing an acquisition or divestiture) as well as more qualitative factors such as the executive officer’s ability to lead, ability to communicate, and successful adherence to Valero’s stated core values (i.e., commitment to environment and safety, acting with integrity, showing work commitment, communicating effectively, and respecting others). There are no specific weights assigned to these various elements of individual performance.

This evaluation is used to supplement our objective compensation criteria and adjustments to an executive officer’s recommended compensation may be made as a result. For example, if an officer’s indicated bonus were calculated to be $200,000, the individual performance evaluation by the Chief Executive Officer might result in a reduction of that officer’s bonus to $180,000 or an increase to $220,000.

Base Salaries

Base salaries for each executive officer position are determined using data from the Towers Perrin Compensation Data Bank and the Compensation Comparator Group for positions with 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 entities within the compensation survey data.

In 2007, the base salaries of our named executive officers were adjusted to the following levels:

Name		Base Salary 12/31/2006				Base Salary 12/31/2007
William R. Klesse		$	900,000			$	1,500,000
Michael S. Ciskowski		$	465,000			$	580,000
Richard J. Marcogliese		$	415,000			$	555,000
Joseph W. Gorder		$	330,000			$	423,000
S. Eugene Edwards		$	370,000			$	410,000
Gregory C. King		$	707,000			$	905,000

The base salaries for our Chief Executive Officer and other executive officers are approved by the Compensation Committee taking into consideration compensation survey data. In addition, the Compensation Committee considers the recommendations of the Chief Executive Officer with regard to officers other than the Chief Executive Officer. The base salary and all other compensation of the Chief Executive Officer is reviewed and approved by the independent directors of the Board.

The base salaries of our named executive officers were increased for fiscal year 2007 to remain competitive in our market. Effective January 1, 2008, the annual base salaries of Richard J. Marcogliese, Michael S. Ciskowski, and Joseph W. Gorder were increased to $855,000, $700,000, and $445,000, respectively, in recognition of competitive survey data, promotions, and/or the assumption of additional duties and responsibilities.

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 the Compensation Comparator Group at the 65th percentile benchmark, with the targets ranging from a low of 75% of base salary to 130% 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 officer’s annual base salary that represents his annual bonus target for the fiscal year ended December 31, 2007, before discretionary adjustments, as discussed below:

		Annual Incentive Bonus Target
Name		as a Percentage of Base Salary
William R. Klesse			130	%
Michael S. Ciskowski			75	%
Richard J. Marcogliese			120	%
Joseph W. Gorder			75	%
S. Eugene Edwards			75	%
Gregory C. King			120	%

     Company Financial Performance Objectives

The dollar amount of a named executive officer’s annual incentive bonus is determined by first multiplying the executive officer’s bonus target percentage by his base salary (e.g., for Mr. Klesse, 130% times $1,500,000 results in an annual incentive bonus target of $1,950,000). Then, the performance of Valero for

the applicable year is assessed using the following quantitative performance metrics, which are measured against target levels for each as pre-established by the Compensation Committee:

	•		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 stockholder 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 our Peer Group for the 12-month period ended September 30, 2007.

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 officer’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 $1,950,000 would be multiplied by 140% to yield an actual annual incentive bonus of $2,730,000.) In addition, under the bonus plan the Compensation Committee can adjust the total performance score by 0% to as much as 25% in either a positive or negative direction based upon its judgment of Valero’s and an executive officer’s performance during the year. In any year, the Committee retains the authority ultimately to determine whether any annual incentive award will be paid to an executive officer for his or her performance.

We believe that these 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 ROI 50th percentile ranking for our Peer Group.

For the 2007 annual incentive bonus program, the Compensation Committee established the following company performance metrics as the target metrics: EPS of $5.79, TSR of 7.50%, and ROI at the 50th percentile of our Peer Group ranking. For 2007, our performance was above the maximum payout levels for EPS and TSR, and ROI was at approximately the 79th percentile of our Peer Group ranking. Accordingly, the three financial metrics generated a bonus performance score of 190.77% of the target bonus amounts.

Considering Valero’s accomplishments during 2007, which included a quarterly dividend increase of 50% to $0.12 per common share, an increase in Valero’s share repurchase program from $2 billion to approximately $6 billion, the successful completion of the sale of our Lima Refinery, and Valero’s achievements in safety,

the Compensation Committee used its discretion to adjust the bonus performance score upward by a factor of 4.84% to 200%. As requested by Mr. Klesse, the Board determined that the bonus of the Chief Executive Officer would be paid at the company performance score of 190.77% rather than the discretionary adjusted amount of 200%.

The following table provides a summary of how the 2007 annual incentive bonus amounts paid to our named executive officers were calculated:

		Klesse				Ciskowski				Marcogliese				Gorder				Edwards				King
Base salary (1)		$	1,500,000			$	580,000			$	555,000			$	423,000			$	410,000			$	905,000
Bonus target percentage (2)			130	%			75	%			120	%			75	%			75	%			120	%
Bonus target amount $ (3)		$	1,950,000			$	435,000			$	666,000			$	317,250			$	307,500			$	1,086,000
Bonus performance score (4)			190.77	%			190.77	%			190.77	%			190.77	%			190.77	%			190.77	%
Bonus amount before discretionary adjustment (5)		$	3,720,015			$	829,850			$	1,270,528			$	605,218			$	586,618			$	2,071,762
Discretionary adjustment (6)			0	%			4.84	%			4.84	%			4.84	%			4.84	%			4.84	%
Discretion adjusted bonus calculation (7)		$	3,720,015			$	870,015			$	1,332,022			$	634,511			$	615,010			$	2,172,035
Actual bonus amount paid (8)		$	3,720,015			$	870,000			$	1,332,000			$	634,500			$	615,000			$	2,172,000

Footnotes:

Long-Term Incentive Awards

We provide stock-based, long-term compensation for executive officers through our stockholder-approved equity plans. 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. The Committee does not time the grants of long-term incentive awards around Valero’s release of undisclosed material information.

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 provide an appropriate balance of long-term incentives. The targeted award may then be adjusted based upon the Compensation Committee’s evaluation of the executive officer’s individual performance, which (for executive officers other than the Chief Executive Officer) takes into consideration the recommendation of the Chief Executive Officer. See “Compensation Discussion and Analysis — Elements of Executive Compensation — Individual Performance and Personal Objectives.” As with the annual incentive bonus, the Compensation Committee retains discretion to determine whether any award should be made.

The following table shows the percentages of each named executive officer’s base salary and Total Direct Compensation that represent his long-term compensation target for the fiscal year ended December 31, 2007:

		Long-Term Incentive Awards				Long-Term Incentive Awards
		Target as a Percentage of				Target as a Percentage of Total
Name		Base Salary				Direct Compensation
William R. Klesse			485	%			68	%
Michael S. Ciskowski			250	%			59	%
Richard J. Marcogliese			400	%			65	%
Joseph W. Gorder			250	%			59	%
S. Eugene Edwards			250	%			59	%
Gregory C. King			400	%			65	%

          Performance Shares

Performance shares comprise 30% of each named executive officer’s long-term incentive target. The Compensation Committee currently expects to award performance shares annually. Performance shares are earned (vest) only upon Valero’s achievement of an objective performance measure, namely total stockholder return. The Compensation Committee believes this type of incentive award strengthens the tie between the named executive officer’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 TSR 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 TSR for the prior three years is compared to that of our Peer Group and ranked by quartile. Executive officers then earn 0%, 50%, 100% or 150% of that portion of the initial grant amount that is vesting, depending upon whether our TSR 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, 2007, Valero’s performance ranked fourth in the group, placing us in the second quartile, and resulting in the vesting of eligible shares at the 100% level.

The performance share component of our executive officers’ 2007 long-term incentive packages was awarded in October 2007. The following table shows the percentages of each named executive officer’s base salary and Total Direct Compensation that represent his performance shares target for the fiscal year ended December 31, 2007.

		Performance Shares Target				Performance Shares Award
		as a Percentage of Base				Target as a Percentage of
Name		Salary				Total Direct Compensation
William R. Klesse			145	%			20	%
Michael S. Ciskowski			74	%			17	%
Richard J. Marcogliese			120	%			19	%
Joseph W. Gorder			74	%			17	%
S. Eugene Edwards			74	%			17	%
Gregory C. King			120	%			19	%

          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 continued through 2007. The Compensation Committee determined to reduce the use of stock options by approximately one-third in the overall mix of our executive officers’ long-term incentive compensation in anticipation 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 Committee replaced that portion of compensation with a number of shares of restricted stock of approximately equal value.

Stock options comprise 35% of each executive 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. To further emphasize longer-term company performance and to reduce compensation expense, the Compensation Committee has determined that awards of restricted stock and stock options will vest in equal annual installments over a period of five years. Options awarded in 2007 have seven-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.

The Compensation Committee considers and grants stock options and restricted stock to our executive officers and other employees annually, typically during the third or fourth quarter. The Committee may also grant stock options or restricted stock to new executive officers 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 NYSE 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.

The stock option and restricted stock components of our executive officers’ 2007 long-term incentive packages were awarded in October 2007. The following table shows the percentages of each named executive officer’s base salary and Total Direct Compensation that represent his stock option and restricted stock targets for the fiscal year ended December 31, 2007.

						Stock Option								Restricted Stock
						Target as a				Restricted Stock				Target as
		Stock Option				Percentage of				Target as a				Percentage of
		Target as a Percentage of				Total Direct				Percentage of Base				Total Direct
Name		Base Salary				Compensation				Salary				Compensation
William R. Klesse			170	%			24	%			170	%			24	%
Michael S. Ciskowski			88	%			21	%			88	%			21	%
Richard J. Marcogliese			140	%			23	%			140	%			23	%
Joseph W. Gorder			88	%			21	%			88	%			21	%
S. Eugene Edwards			88	%			21	%			88	%			21	%
Gregory C. King			140	%			23	%			140	%			23	%

Perquisites and Other Benefits

          Perquisites

We provide certain perquisites to our named executive officers. They 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 or supplemental executive medical benefits or coverage. In addition, we generally do not allow executive officers to use company aircraft for personal use, such as travel to and from vacation destinations. However, spouses (or other family members) occasionally accompany executive officers when executive officers 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 our Thrift Plan and insurance and supplemental plans chosen and paid for by employees who desire 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 “Compensation Discussion and Analysis — Elements of Executive Compensation — 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 of 1986, as amended (the “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. The SERP benefit payment is made in a lump sum; an annuity form of benefit payment is not available under the SERP. 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.

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.

Pursuant to the DC Plan, Valero may from time to time make discretionary contributions to participants’ accounts in such amounts as shall be determined or determinable under a formula and announced to plan participants. For any Board member, the Chief Executive Officer, or the President, any contributions would

be made upon recommendation by the Compensation Committee and approval of the Board. For certain other executive officers, any contributions would be made upon recommendation of the Chief Executive Officer and approval of the Compensation Committee. For any other participant, any contributions would be made upon recommendation of the Chief Executive Officer. We have made no discretionary contributions to participants’ accounts, and we have no plans to make any discretionary contributions to participants’ accounts. We would likely only consider such contributions in the event of a significant, catastrophic economic event (or series of events) that materially impairs the value of participants’ accounts.

Participant accounts are credited with earnings (or losses) based on investment fund choices made by the participants among available funds selected by Valero’s benefits plans administrative committee 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. 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 on the January 1st following the date of retirement or termination. Participants may also elect to have their accounts distributed in one lump sum payment or in five, 10 or 15 year installments upon retirement, and in a lump sum or five annual installments upon other termination. 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, instead, are made in accordance with the DC Plan’s normal distribution provisions.

As a nonqualified deferred compensation arrangement, the DC Plan is subject to Internal Revenue Code Section 409A and its regulations. We intend to administer and interpret the DC Plan in a manner consistent with such Internal Revenue Code section and regulations. Additional DC Plan amendments may be made under transitional relief provided by the Internal Revenue Service under 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 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 Internal Revenue 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: (a) an “excess benefit plan” as defined under Section 3(36) of ERISA; and (b) 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, 2007, is stated in this proxy statement in the table under the caption “Executive Compensation — 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 executive officers in the event of certain transactions culminating in a change of control of 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 officer’s terms and conditions of employ-

ment (including position, location, compensation and benefits) will not be adversely changed during the three-year period after a change of control.

Following a change of control, particular payments under the agreements are triggered commensurate with the occurrence of any of the following: (a) termination of employment by Valero other than for “cause” (as defined in the agreement) or disability; (b) termination by the executive for “good reason” (as defined in the agreements); (c) termination by the executive other than for “good reason”; and (d) termination of employment because of death or disability. These triggers were designed to ensure the continued availability of the executive officers following a change of control, and to compensate the executive officers 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 “Executive Compensation — Potential Payments upon Termination or Change of 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 “Long-Term Incentive Awards — 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 (a) solely upon attainment of one or more performance goals, (b) pursuant to a qualifying performance-based compensation plan adopted by the Compensation Committee, and (c) 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 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 our outstanding 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 Section 162(m) deduction restrictions.

COMPENSATION-RELATED POLICIES

Stock Ownership Guidelines

Our Board, the Compensation Committee and our executive officers recognize that ownership of Common Stock is an effective means by which to align the interests of our directors and executive officers with those of our stockholders. We have long emphasized the importance of stock ownership among our executive officers and directors. Our stock ownership and retention guidelines for our directors and officers, as approved by the Compensation Committee and our Board, are set forth below.

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		10x Base Salary
President		4x Base Salary
Executive Vice Presidents		3x Base Salary
Senior Vice Presidents		2x Base Salary
Vice Presidents		1x 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 available on our website at www.valero.com under the “Corporate Governance” tab 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 that appear in the following sections of this proxy statement provide information required by the SEC regarding compensation paid to or earned by our named executive officers for the year ended December 31, 2007. 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.

SUMMARY COMPENSATION TABLE

The following table provides a summary of compensation paid to our named executive officers for the fiscal years ending December 31, 2007, and December 31, 2006. 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 table’s footnotes.

																						Change in
																						Pension Value
																						and Nonquali-
														Stock				Option				fied Deferred				All Other
														Awards				Awards				Compensation				Compensa-
Principal Position		Year				Salary ($)				Bonus ($)				($)(1)(2)				($)(1)(3)				Earnings($)(4)				tion ($)(5)				Total ($)
William R. Klesse,			2007				1,500,000				3,720,015				5,545,605				3,028,257				1,122,665				117,110				15,033,652
Chief Executive Officer,			2006				900,000				1,305,000				4,704,686				2,162,232				780,800				85,755				9,938,473
President, and Chairman of the Board
Michael S. Ciskowski,			2007				580,000				870,000				1,018,068				280,081				—				47,309				2,795,458
Executive Vice President			2006				465,000				475,000				1,832,153				315,044				275,048				43,221				3,405,466
and Chief Financial Officer
Richard J. Marcogliese,			2007				555,000				1,332,000				2,393,109				1,597,676				835,994				51,490				6,765,269
Executive Vice President			2006				415,000				475,000				964,230				193,481				676,857				41,918				2,766,486
and Chief Operating Officer
Joseph W. Gorder,			2007				423,000				634,500				472,737				135,306				70,659				44,306				1,780,508
Executive Vice President- Marketing and Supply (6)
S. Eugene Edwards,			2007				410,000				615,000				555,402				160,223				—				38,295				1,778,920
Executive Vice President-			2006				370,000				350,000				787,875				145,426				228,757				37,690				1,919,748
Corporate Development and Strategic Planning
Gregory C. King			2007				905,000				2,172,000				4,575,397				2,636,921				4,134,500				72,217				14,496,035
(7)			2006				707,000				820,000				2,982,794				554,472				261,462				54,707				5,380,435

Footnotes to “Summary Compensation” table:

Name		Year				(A)				(B)				Total
William R. Klesse			2007			$	1,122,665			$	0			$	1,122,665
			2006				780,800				0				780,800
Michael S. Ciskowski			2007			$	(62,988	)		$	0			$	(62,988	)
			2006				275,048				0				275,048
Richard J. Marcogliese			2007			$	835,994			$	0			$	835,994
			2006				676,857				0				676,857
Joseph W. Gorder			2007			$	83,584			$	0			$	83,584
S. Eugene Edwards			2007			$	(108,796	)		$	0			$	(108,796	)
			2006				228,757				0				228,757
Gregory C. King			2007			$	4,134,500			$	0			$	4,134,500
			2006				261,462				0				261,462

(5)

The amounts listed as “All Other Compensation” are composed of the following items:

Item of income (in dollars)		Year				Klesse				Ciskowski				Marcogliese				Gorder				Edwards				King
Valero contribution to Thrift Plan			2007				13,500				13,500				13,500				13,500				13,500				13,500
account			2006				13,200				13,200				13,200								13,200				13,200
Valero contribution to Excess Thrift			2007				63,000				18,600				16,470				13,860				10,317				35,655
Plan account			2006				40,800				14,700				11,700								9,000				29,220
Unused portions of Valero-provided			2007				4,250				—				—				—				500				—
dollars for health & welfare benefits			2006				3,267				—				342								482				—
Reimbursement of club membership			2007				5,070				7,032				5,070				7,531				5,820				5,602
dues			2006				5,070				7,609				5,070								5,718				5,260
Imputed income for personal liability			2007				2,266				2,266				2,266				2,266				2,266				2,266
insurance			2006				2,168				2,168				2,168								2,168				2,168
Imputed income for tax return			2007				—				785				785				785				785				785
preparation			2006				—				785				785								785				785
Executive insurance premiums with			2007				17,493				—				—				—				—				—
respect to cash value life insurance			2006				17,176				—				—								—				—
Long-term disability premium			2007				3,728				3,728				3,728				3,728				3,728				3,728
imputed income			2006				3,655				3,655				3,655								3,655				3,655
Imputed income for insurance (life			2007				7,564				1,159				9,671				2,636				900				—
and survivor) over $50,000			2006				—				685				4,998								1,842				—
Residential alarm monitoring			2007				239				239				—				—				479				239
			2006				419				419				—								840				419
Accrued vacation payout			2007				—				—				—				—				—				10,442
			2006				—				—				—								—				—
TOTAL			2007				117,110				47,309				51,490				44,306				38,295				72,217
			2006				85,755				43,221				41,918								37,690				54,707

GRANTS OF PLAN-BASED AWARDS
FOR FISCAL YEAR ENDED DECEMBER 31, 2007

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 2007.

																		Exercise or
						Estimated Future Payouts Under												Base Price				Closing				Grant Date Fair
						Equity Incentive Plan Awards												of Option				Market Price				Value of Stock
						Threshold				Target				Maximum				Awards				on Grant				and Option
Name		Grant Date				(#)				(#)				(#)				($/sh.) (1)				Date ($/sh.)				Awards ($)(2)
William R. Klesse			10/25/07	(3)			0				38,000				76,000												2,115,143
			10/25/07	(4)			n/a				45,000				n/a												3,215,250
			10/25/07	(5)			n/a				110,000				n/a				71.45				72.11				2,696,100
Michael S. Ciskowski			10/25/07	(3)			0				7,500				15,000												436,466
			10/25/07	(4)			n/a				9,000				n/a												643,050
			10/25/07	(5)			n/a				22,000				n/a				71.45				72.11				539,220
Richard J. Marcogliese			10/25/07	(3)			0				17,680				35,360												643,461
			10/25/07	(4)			n/a				21,200				n/a												1,514,740
			10/25/07	(5)			n/a				51,400				n/a				71.45				72.11				1,259,814
Joseph W. Gorder			10/25/07	(3)			0				5,470				10,940												309,311
			10/25/07	(4)			n/a				6,560				n/a												468,712
			10/25/07	(5)			n/a				15,900				n/a				71.45				72.11				389,709
S. Eugene Edwards			10/25/07	(3)			0				5,300				10,600												326,344
			10/25/07	(4)			n/a				6,360				n/a												454,422
			10/25/07	(5)			n/a				15,400				n/a				71.45				72.11				377,454
Gregory C. King			10/25/07	(3)			0				18,720				37,440												955,020
			10/25/07	(4)			n/a				22,440				n/a												1,603,338
			10/25/07	(5)			n/a				54,400				n/a				71.45				72.11				1,333,344

Footnotes:

	•		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 4.0%, average volatility rate for the five-year period prior to the grant date of 33.7%, and a dividend yield of 0.7%, 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 — Elements of Executive Compensation — Long-Term Incentive Awards.”

OUTSTANDING EQUITY AWARDS
AT DECEMBER 31, 2007

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, 2007.

																		Stock Awards
																										(Performance Shares)
																										Equity Incentive				Equity Incentive
						Option Awards												(Restricted Stock)								Plan Awards:				Plan Awards:
		Number of				Number of																Market Value				Number of				Market or
		Securities				Securities												Number of				of Shares				Unearned Shares,				Payout Value of
		Underlying				Underlying												Shares or				or Units of				Units or				Unearned Shares,
		Unexercised				Unexercised				Option				Option				Units of Stock				Stock That				Other Rights				Units or Other
		Options (#)				Options (#)				Exercise				Expira-				That Have				Have Not				That Have Not				Rights That Have
Name		Exercisable				Unexcercisable				Price ($)(1)				tion Date				Not Vested (#)				Vested ($)(2)				Vested (#)(2)				Not Vested ($)(2)
William R. Klesse			200,000				—				9.61875				12/31/11				8,000	(3)			560,240				8,000	(8)			560,240
			160,000				—				7.515				09/18/12				11,200	(4)			784,336				18,526	(9)			1,946,064
			86,400				21,600	(3)			9.825				10/29/13				9,360	(5)			655,481				23,620	(10)			2,756,801
			102,392				—				11.5525				02/06/11				22,984	(6)			1,609,570				38,000	(11)			5,322,280
			40,084				—				14.755				02/06/11				45,000	(7)			3,151,350
			50,900				—				15.65				02/06/11
			27,476				—				18.6125				02/06/11
			26,164				—				18.0825				02/06/11
			40,800				27,200	(4)			21.355				10/21/14
			17,600				26,400	(5)			47.4775				10/20/12
			15,080				60,320	(6)			52.545				10/19/13
			—				110,000	(7)			71.45				10/25/14
Michael S. Ciskowski			13,600				13,600	(3)			9.825				10/29/13				6,400	(3)			448,192				5,400	(8)			378,162
			27,600				18,400	(4)			21.355				10/21/14				7,200	(4)			504,216				3,946	(12)			414,508
			9,840				14,760	(5)			47.4775				10/20/12				4,944	(5)			346,228				5,030	(13)			587,061
			3,200				12,800	(6)			52.545				10/19/13				4,896	(6)			342,867				7,500	(11)			1,050,450
			—				22,000	(7)			71.45				10/25/14				9,000	(7)			630,270
Richard J. Marcogliese			40,000				—				7.00				05/04/10				2,400	(3)			168,072				3,666	(8)			256,730
			20,000				—				9.8625				06/16/11				3,200	(4)			224,096				3,353	(14)			352,181
			60,000				—				8.43625				07/18/11				2,400	(5)			168,072				4,490	(15)			524,034
			60,000				—				7.515				09/18/12				4,368	(6)			305,891				17,680	(11)			2,476,261
			25,600				6,400	(3)			9.825				10/29/13				21,200	(7)			1,484,636