THE PROMPT RETURN OF PROXY CARDS WILL SAVE THE EXPENSE OF
FURTHER REQUESTS FOR PROXIES IN ORDER TO ASSURE A QUORUM.

NOTICE OF 20032004 ANNUAL MEETING OF STOCKHOLDERS

The Board of Directors has determined that the 20032004 Annual Meeting of Stockholders of Valero Energy Corporation will be held on Thursday, April 24, 200329, 2004 at 10:00 a.m., Central Time, at The Westin La Cantera Resort,Valero’s offices located at 16641 La Cantera Parkway,One Valero Way, San Antonio, Texas 78256,78249 (near the southwest corner of the intersection of I.H. 10 and Loop 1604 West), for the following purposes:

	(1)		To elect three Class IIII directors to serve until the 20062007 Annual Meeting or until their respective successors are elected and have qualified;
	(2)		To ratify the appointment of Ernst & YoungKPMG LLP as independent public accountants to examine Valero’s accounts for the year 2003;2004;
	(3)		To vote on a shareholder proposal entitled “Climate Change Resolution”; and
	(3)(4)		To transact any other business properly brought before the meeting.

VALERO ENERGY CORPORATION

PROXY STATEMENT

ANNUAL MEETING OF STOCKHOLDERS

April 24, 200329, 2004

General Information

This Proxy Statement is being mailed to stockholders beginning on or about March 25, 200326, 2004 in connection with the solicitation of proxies by the Board of Directors of Valero Energy Corporation to be voted at the 20032004 Annual Meeting of Stockholders of Valero on April 24, 2003.29, 2004. The accompanying notice describes the time, place and purposes of the Annual Meeting.

Holders of record of Valero’s Common Stock, $0.01 par value, at the close of business on February 24, 2003March 1, 2004 are entitled to vote on the matters presented at the Annual Meeting. On the record date, 107,612,194129,928,429 shares of Common Stock were issued and outstanding, and entitled to one vote per share.

Holders of record of Valero’s 2% Mandatory Convertible Preferred Stock (liquidation preference $25 per share) at the close of business on March 1, 2004 are entitled to vote on the matters presented at the Annual Meeting. On the record date, 10,000,000 shares of Preferred Stock were issued and outstanding, and entitled to 0.4955 of one vote per share.

Action may be taken at the Annual Meeting on April 24, 200329, 2004 or on any date or dates to which the meeting may be adjourned. AHolders of shares of Common Stock and Preferred Stock representing a majority of such shares,the voting power, present in person or represented by properly executed proxy, shall constitute a quorum. If instructions to the contrary are not given, shares will be voted as indicated on the proxy card. A stockholder may revoke a proxy at any time before it is voted by submitting a written revocation to Valero, returning a subsequently dated proxy to Valero or by voting in person at the Annual Meeting.

Brokers holding shares must vote according to specific instructions they receive from the beneficial owners. If specific instructions are not received, brokers may generally vote these shares in their discretion. However, the New York Stock Exchange 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 the existence of a quorum, has the effect of a negative vote when a majority of the sharesvoting 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. Pursuant to the rules of the New York Stock Exchange, brokers will not have discretion to vote on the threeshareholder proposal presented as Proposal No. 3, but will have discretion to vote on the other items scheduled to be presented at the Annual Meeting.

Valero pays for the cost of soliciting proxies and the Annual Meeting. In addition to the solicitation of proxies by mail, proxies may be solicited by personal interview, telephone and similar means by directors, officers or employees of Valero, none of whom will be specially compensated for such activities. Valero

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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 has retained Georgeson Shareholder Communications, Inc., a proxy soliciting firm, to assist in the solicitation of proxies, for an estimated fee of $11,500,$12,000, plus reimbursement of certain out-of-pocket expenses.

Participants in Valero Benefit Plans please note:

In the case of participants in Valero’s thrift plan the proxy card will represent (in addition to any shares held individually of record) the number of shares allocated to the participant’s accounts under the thrift plan. For those shares held under the plan, the proxy card will constitute an instruction to the Trustee of the plan as to how those shares are to be voted. Shares for which instructions are not received may be voted by the Trustee in accordance with the terms of the plan.

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Information Regarding the Board of Directors

The business of Valero is managed under the direction of the Board of Directors. The Board conducts its business through meetings of the Board and its committees. During 2002,2003, the Board held eight10 meetings and the standing committees held 1418 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. The Company expects all Board members to attend the Annual Stockholder Meeting. All Board members attended the 2003 Annual Stockholder Meeting.

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

The Board has standing Audit, Compensation, Executive, Finance and Nominating/Governance committees. Prior to the creation of the standing Nominating/Governance Committee in 2003, the Board periodically appointedEach committee has a nominating committee, generally annually, to consider and recommend candidates for election to the Board and assignments for the committees of the Board.written charter. The committees of the Board and the number of meetings held by each committee in 20022003 are described below.

Expansion ofIndependent Directors

The Board of Directors in Connection with UDS Merger

On December 31, 2001, Ultramar Diamond Shamrock Corporation (“UDS”) merged withhas one member of management and into Valero, with Valero asseven non-management directors. The Board has determined that all seven of its non-management directors meet the surviving corporationindependence requirements of the merger.listing standards of the New York Stock Exchange (“NYSE”) as set forth in the NYSE Listed Company Manual. The Agreementindependent directors are: E. Glenn Biggs, Ruben M. Escobedo, Bob Marbut, W.E. “Bill” Bradford, Dr. Ronald K. Calgaard, Jerry D. Choate, and PlanDr. Susan Kaufman Purcell.

As a member of Merger (the “Merger Agreement”), dated May 6, 2001 between Valeromanagement, William E. Greehey, Chairman of the Board and UDS requiredChief Executive Officer, is not an independent director under the NYSE’s listing standards.

The Audit, Compensation, Finance and Nominating/Governance committees of the Board are each 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 connectionthe regulations of the Securities and Exchange Commission (“SEC”).

Independence Determinations

Under the NYSE’s listing standards, no board member qualifies as independent unless the Board of Directors affirmatively determines that the director has no material relationship with the mergerCompany. Based upon information requested from and provided by each director concerning their background,

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employment and affiliations, including commercial, industrial, banking, consulting, legal, accounting, charitable and familial relationships, the Board of Directors has determined that Valero expand its Board and cause four members of the UDS board of directors (collectively, the “UDS Board Designees”) to be appointed to Valero’s Board. The Merger Agreement further required Valero to nominate and recommend each of the UDS Board Designeesindependent directors named above has no material relationship with the Company, either directly or as a partner, shareholder or officer of an organization that has a relationship with the Company, and is therefore independent under the NYSE’s listing standards.

As provided for reelection to Valero’s Board at Valero’s May 9, 2002 Annual Meeting of Stockholders, with at least one UDS Board Designee serving in each ofunder the three classes of directors and with no more than two UDS Board Designees serving in the same class of directors. Accordingly,NSYE listing standards, the Board expanded its size and appointed the UDS Board Designeesof Directors has adopted categorical standards or guidelines to assist the Board effective uponin making its independence determinations with respect to each director. Under the consummation ofNSYE listing standards, immaterial relationships that fall within the merger on December 31, 2001. The UDS Board Designees were Messrs. E. Glenn Biggs, W. E. “Bill” Bradford, W. H. Clark, who is retiring fromguidelines are not required to be disclosed in this proxy statement.

A relationship falls within the guidelines adopted by the Board at the 2003 Annual Meeting, and Bob Marbut. The UDS Board Designees were reelected to the Board at the May 9, 2002 Annual Meeting of Stockholders.if it:

	•		is not a relationship that would preclude a determination of independence under Section 303A.02(b) of the NYSE Listed Company Manual;
	•		consists of charitable contributions by the Company to an organization where a director is an executive officer and does not exceed the greater of $1 million or 2% of the organization’s gross revenue in any of the last 3 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 matching gift program of the Company and made on terms applicable to employees and directors; or is in amounts that do not exceed $50,000 per year;
	•		is not required to be, and it is not otherwise, disclosed in this proxy statement.

Audit Committee

The Audit Committee reviews and reports to the Board on various auditing and accounting matters, including the quality, objectivity and performance of Valero’s internal and external accountants and auditors, the adequacy of its financial controls and the reliability of financial information reported to the public. The Audit Committee also monitors Valero’s efforts to comply with environmental laws and regulations. The members of the Audit Committee are Ruben M. Escobedo (Chairman), E. Glenn Biggs W. E. “Bill” Bradford and Dr. Susan Kaufman Purcell. The Audit Committee met five times in 2002.2003. For further information, see the “Report“Report of the Audit Committee” on page 25.below.

The Board of Directors has determined that each of the Audit Committee members meets the independence standards for audit committee members set forth in the NYSE listing standards and applicable regulations of the Securities and Exchange Commission (“SEC”). The Board of Directors has determined that a member of the Audit Committee, namely Ruben M. Escobedo, is an “audit committee financial expert” (as defined by the SEC), and that he is “independent” as that term is used in Item 7(d)(3)(iv) of Schedule 14A under the Securities Exchange Act of 1934.

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 Valero’s stock option, restricted stock, incentive bonus and other stock plans.

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See “Report“Report of the Compensation Committee of the Board of Directors on Executive Compensation.Compensation” below. The members of the Compensation Committee are Robert G. DettmerBob Marbut (Chairman), W.E. “Bill” Bradford and Jerry D. Choate, and Bob Marbut, none of whom are current or former employees or officers of Valero. The Compensation Committee met foursix times in 2002.

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2003.

There are no compensation committee interlocks. For the previous three fiscal years, except for compensation arrangements disclosed in this Proxy Statement, the Company has not participated in any contracts, loans, fees, awards or financial interests, direct or indirect, with any committee member, nor is the Company aware of any means, directly or indirectly, by which a committee member could receive a material benefit from the Company.

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. Prior to the creation of the standing Nominating/Governance Committee in 2003, in the absence of the appointment of a Nominating Committee, the Executive Committee could review possible director candidates for nomination as a director. The members of the Executive Committee are William E. Greehey (Chairman), E. Glenn Biggs Robert G. Dettmer and Ruben M. Escobedo. The Executive Committee met three timesone time in 2002.2003.

Finance Committee

The Finance Committee reviews and monitors the investment policies and performance of the Company’s thrift and pension plans, insurance and risk management policies and programs, and finance matters and policies as needed. The members of the Finance Committee are Dr. Ronald K. Calgaard (Chairman), and, following the 2003 Annual Meeting, Bob Marbut and Dr. Susan Kaufman Purcell. The Finance Committee met twothree times in 2002.2003.

Nominating/Governance Committee

A standingThe Nominating/Governance Committee was created by the Board in 2003. The committee will evaluateevaluates policies on the size and composition of the Board and criteria and procedures for director nominations, and will considerconsiders and recommendrecommends candidates for election to the Board. The committee will also evaluate, recommendevaluates, recommends and monitormonitors corporate governance guidelines, policies and procedures, including codes of business conduct and ethics. The directors appointedIn addition to serve on the Nominating/Governance Committee are Jerry D. Choate (Chairman), W. E. “Bill Bradford and Dr. Ronald K. Calgaard. The Nominating/ Governance Committee did not meet in 2002.

Prior to the formation of the standing Nominating/Governance Committee in 2003, when deemed necessary or advisable, the Board formed from its members a nominating committee, generally annually, in accordance with Valero’s bylaws. When appointed, the committee evaluated policy on the size and composition of the Board and criteria and procedures for director nominations, and considered and recommend candidates for election to the Board.recommending E. Glenn Biggs, (Chairman), Ruben M. Escobedo and Bob Marbut, were appointedwho are currently Class I directors, as a nominating committee by the Board with respect to nominations for the 2003 Annual Meeting. The committee did not meet in 2002 and has had one meeting in 2003. In addition to recommending director nominees for Class I directors for the 20032004 Annual Meeting, the nominating committee considered and recommended the creation of a standing Nominating/Governance Committee, appointment of a presiding director to preside at meetings of the Board without management, and recommended assignments for the committees of the Board.

The full Board approved the recommendations of the nominating committeeNominating/Governance Committee and adopted resolutions approving the slate of director nominees to stand for election at the 20032004 Annual Meeting, the creation of the standing Nominating/Governance Committee, the appointment of a presiding director and assignments for the committees of the Board for the one year period following the 20032004 the Annual Meeting.

3The members of the Nominating/Governance Committee are Jerry D. Choate (Chairman), W. E. “Bill” Bradford and Dr. Ronald K. Calgaard. The Nominating/Governance Committee met three times in 2003.

Selection of Director Nominees

The Nominating/Governance Committee solicits recommendations for potential Board candidates from a number of sources including members of the Board of Directors, officers of the Company, individuals personally known to the members of the Board of Directors, and third-party research. In addition, the committee will consider candidates submitted by stockholders. Any such submissions must be in writing and should include the candidate’s name, qualifications for Board membership, sufficient biographical

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and other relevant information such that an informed judgment as to the proposed nominee’s qualifications can be made. Submissions should be directed to the Company’s Corporate Secretary at the address indicated on the cover page of this Proxy Statement. The level of consideration that the committee will give to the stockholder’s candidate will be commensurate with the quality and quantity of information about the candidate that the nominating stockholder makes available to the committee. The committee will consider all candidates identified through the processes described above and will evaluate each of them on the same basis. In addition, in order to nominate a person for election as a director at an annual stockholders meeting, the bylaws of the Company require stockholders to follow certain procedures, including providing timely notice, as described under“Additional Information—Advance Notice Required for Stockholder Nominations and Proposals”below.

Evaluation of Director Candidates

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

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

The committee may also consider the ability of the prospective candidate to work with the then-existing interpersonal dynamics of the Board of Directors and her or his 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 determines the nominees and submits them to the full Board for consideration and approval.

Presiding DirectorDirector/Meetings of Non-Management Directors

Pursuant to the recommendation of the nominating committee,Nominating/Governance Committee, the Board has designated Robert G. DettmerDr. Ronald K. Calgaard to serve as the presiding directorPresiding Director for meetings of the non-management Board members outside the presence of management. The non-management Board members regularly meet outside the presence of management board members and management.

Communications with the Board, Non-Management Directors or Presiding Director

Stockholders and other interested parties may communicate with the Board, the non-management directors or the Presiding Director by sending a written communication in an envelope addressed to

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“Board of Directors,” “Non-management Directors,” or “Presiding Director” in care of the Company’s Corporate Secretary at the address indicated on the cover page of this Proxy Statement.

Code of Ethics for Senior Financial Officers

The Company has adopted a Code of Ethics for Senior Financial Officers that applies to the Company’s principal executive officer, principal financial officer, and controller (collectively referred to as the Company’s “Senior Financial Officers”). This Code charges the Senior Financial Officers with responsibilities regarding honest and ethical conduct, the preparation and quality of the disclosures in documents and reports the Company files with the Securities Exchange Commission and compliance with applicable laws, rules and regulations.

Governance Documents

Valero will post its corporate governance guidelines, code of business conduct and ethics, code of ethics for senior financial officers and the charters of the committees of the board of directors on Valero’s internet website at http://www.valero.com on or before the date of the Annual Meeting. Valero’s governance documents will be available in print to any stockholder of record that makes a written request to Valero. Inquiries must be directed to the Company’s Corporate Secretary at the address indicated on the cover page of this Proxy Statement

Compensation of Directors

Non-employee directors receive a retainer fee of $25,000$33,000 per year, plus $1,250$1,500 for each Board and committee meeting attended.attended in person and $1,000 for each Board and committee meeting attended telephonically. Directors who serve as chairperson of the Audit or Compensation Committee receive an additional $10,000 annually and Directors who serve as chairperson of a committee other than the Audit or Compensation Committees receive an additional $2,000$5,000 annually. Each director is also reimbursed for expenses of meeting attendance. Directors who are employees of the Company receive no compensation (other than reimbursement of expenses) for serving as directors.

Valero maintains the Restricted Stock Plan for Non-Employee Directors, or Director Stock Plan, and the Non-Employee Director Stock Option Plan, or Director Option Plan, to supplement the compensation paid to non-employee directors and increase their identification with the interests of Valero’s stockholders through ownership of Common Stock. Upon election to the Board, each non-employee director receives a grant of Common Stock valued at $45,000 that vests (becomes nonforfeitable) in equal annual installments over a three-year period. After all of the Common Stock previously granted to a director under the Director Stock Plan is fully vested and the director is reelected for an additional term, another similar grant is made.

The Director Option Plan provides non-employee directors of Valero automatic annual grants of stock options to purchase Valero’s Common Stock. To the extent necessary, the plan is administered by the Compensation Committee of the Board. The plan provides that each new non-employee director elected to the Valero Board automatically receives an initial grant of 5,000 options that vest in equal annual installments over a three-year period. On the date of each subsequent annual meeting of stockholders, each non-employee director (who is not a new non-employee director) automatically receives a grant of 2,0002,500 additional options which vest fully six months following the date of grant. Stock options awarded under the Director Option Plan have an exercise price equal to the market price of the Common Stock on the date of grant. All options expire ten years following the date of grant. Options vest and remain exercisable in accordance with their original terms if a director retires from the Board.

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In the event of a “Change of Control” as defined in the Director Stock Plan and Director Option Plan, all unvested shares of Common Stock and options previously granted under the plans immediately become vested or exercisable. The Director Option Plan also contains anti-dilution provisions providing for an adjustment in the number of options granted to prevent dilution of benefits or potential benefits in the event any change in the capital structure of the Company affects the Common Stock.

The Board of Directors determined in 2001 to cease benefit accruals in the Retirement Plan for Non-Employee Directors, or Retirement Plan. The plan provided for non-employee directors to receive a retirement benefit upon completion of five years of service. The annual benefit at retirement was equal to 10% of the highest annual cash retainer paid to the director during his or her service on the Board, multiplied by the number of full and partial years of service (not to exceed 10 years). This benefit was then paid for a period (not to exceed 10 years) that is equal to the director’s length of service on the Board or the director’s remaining life, whichever is shorter. The Retirement Plan provided no survivor benefits and was an unfunded plan paid from the general assets of the Company. The Board also determined that the Director retirees already receiving benefits under the Retirement Plan would continue to receive their benefits in accordance with the terms of the plan. Additionally, they determined that each of the then current directors would receive the actuarial value of their accrued benefits through December 31, 2001, via a lump sum cash payment or a monthly annuity for the director’s length of service on the Board, not to exceed 10 years.

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PROPOSAL NO. 1 Election of Directors

The Company’s Board is divided into three classes for purposes of election. Three Class IIII directors will be elected at the Annual Meeting to serve a three-year term that will expire at the 20062007 Annual Meeting of Stockholders. The nominees for Class IIII director are Jerry D. Choate, Robert G. DettmerE. Glenn Biggs, Ruben M. Escobedo and Susan Kaufman Purcell.Bob Marbut.

The persons named in the enclosed proxy card intend to vote for the election of each of the nominees, unless you indicate on the proxy card that your vote should be withheld from any or all of such nominees.

THE BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE “FOR ALL” NOMINEES.

Directors are elected by a plurality of the votes cast by the holders of the shares of Common Stock and Preferred Stock represented at the Annual Meeting and entitled to vote. The nominees for Class IIII directors receiving the greatest number of votes, whether or not these votes represent a majority of the votes of the holders of the shares of Common Stock and Preferred Stock present and voting at the Annual Meeting, will be elected as directors. Votes “withheld” from a nominee will not count against the election of the nominee. 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 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.

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Information Concerning Nominees and Other Directors

The following table sets forth information concerning each nominee for election as a director for a three-year term of office that will expire in 20062007 and the current directors whose terms expire in 20042005 and 2005.2006. The information provided is based partly on data furnished by the directors and partly on the Company’s records. There is no family relationship among any of the executive officers, directors or nominees for director of Valero.

(1)		Dates reported include service on the Board of Valero’s former parent company prior to Valero’s separation from that company in 1997.

(2)

If reelected, the terms of office of Class III directors will expire at the 2006 Annual Meeting of Stockholders. The terms of office of the Class I directors will expire at the 20042007 Annual Meeting of Stockholders and theStockholders. The terms of office of the Class II directors will expire at the 2005 Annual Meeting of Stockholders and the terms of office of the Class III directors will expire at the 2006 Annual Meeting of Stockholders.

6Class I Nominees

Class III Nominees

Mr. ChoateBiggsis President of Biggs & Co., a corporation engaged in developmental projects and financial planning. He was electedformerly Chairman of the Board of First National Bank of San Antonio and was Vice Chairman and Chairman of the Executive Committee of InterFirst Bank, San Antonio. Mr. Biggs is currently Chairman of Hester Asset Management Corp. and Southwestern Bancorp. He is a former Chairman and Director of Bolivian Power Corporation. He previously served as a director of Valero Natural Gas Company from 1987 to 1989. Mr. Biggs served as a director of UDS or its predecessors since 1987, and has served as a director of Valero since 2001.

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

Mr. Marbuthas been Chairman and Chief Executive Officer of Argyle Communications, Inc. since 1992, and Chairman and Chief Executive Officer of SecTecGLOBAL, Inc. since 2002. He was Chairman and Co-Chief Executive Officer of Hearst-Argyle Television, Inc. from 1997 until 2001 and remained as Chairman until 2003. He was Chairman and Chief Executive Officer of Argyle Television, Inc. from 1994 until its merger with Hearst Broadcasting in 1997. He was Chairman and Chief Executive Officer of Argyle Television Holding, Inc. from 1993 until 1994. Prior to 1992, Mr. Marbut served as President and Chief Executive Officer of Harte-Hanks Communications, Inc. for 20 years and was also Vice Chairman for one year. He is a director of Tupperware Corporation and Hearst-Argyle Television, Inc. Mr. Marbut served as a director of UDS or its predecessors since 1990, and has served as a director of Valero since 2001.

Other Directors

Mr. Bradfordis the retired Chairman of Halliburton Company. He became Chairman of Halliburton upon its merger in 1998 with Dresser Industries, Inc. Previously, Mr. Bradford was Chairman and Chief Executive Officer of Dresser Industries, Inc. Mr. Bradford had been with Dresser Industries, Inc. since 1963, holding various positions in production and management. He is also a director of Kerr-McGee Corporation. Mr. Bradford served as a director of UDS or its predecessors since 1992, and has served as a director of Valero since 2001.

Dr. Calgaardserved as President of Trinity University, San Antonio, Texas, from 1979 until his retirement in 1999. Dr. Calgaard is currently Chairman and Chief Executive Officer of Austin Calvert & Flavin Inc. in San Antonio, and is a director of The Trust Company. He previously served as a director of Valero Natural Gas Company from 1987 to 1994. Dr. Calgaard has served as a director of Valero or its former parent company since 1996.

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

Mr. Dettmerserved as Executive Vice President and Chief Financial Officer of PepsiCo, Inc. from 1986 until his retirement in 1996. Mr. DettmerChoate has served as a director of Valero orsince 1999.

Mr. Greeheyhas served as Chairman of the Board and Chief Executive Officer of Valero and its former parent company since 1991.1979. He was also President of Valero from 1998 until January 2003. Mr. Greehey is also Chairman of the Board of the managing general partner of Valero L.P.¹

Dr. Purcellhas served as Vice President of the Americas Society in New York, New York since 1989 and is also Vice President of the Council of the Americas. She serves as a director of The Brazil Fund, Inc., The Korea Fund, Inc., Scudder Global High Income Fund, Inc. and Scudder New Asia Fund, Inc. Dr. Purcell has served as a director of Valero or its former parent company since 1994.

Other Directors

Mr. Biggsis President of Biggs & Co., a corporation engaged in developmental projects and financial planning. He has been involved in commercial banking beginning with his service as Chairman of the Board of First National Bank of San Antonio. He later served as Vice Chairman and Chairman of the Executive Committee of InterFirst Bank, San Antonio. He is currently Chairman of Hester Asset Management Corp. and Southwestern Bancorp. He is a former Chairman and Director of Bolivian Power Corporation. He previously served as a director of Valero Natural Gas Company from 1987 to 1989. Mr. Biggs served as a director of UDS or its predecessors since 1987.

Mr. Bradfordis the retired Chairman of Halliburton Company. He became Chairman of Halliburton Company upon its merger in 1998 with Dresser Industries, Inc. Prior to that, Mr. Bradford was Chairman and Chief Executive Officer of Dresser Industries, Inc. Mr. Bradford had been with Dresser Industries, Inc. since 1963, holding various positions in production and management. He is also a director of Kerr-McGee Corporation. Mr. Bradford served as a director of UDS or its predecessors since 1992.

Dr. Calgaardserved as President of Trinity University, San Antonio, Texas, from 1979 until his retirement in 1999. Dr. Calgaard currently serves as Chairman of Austin Calvert & Flavin Inc. in San Antonio, and is a director of The Trust Company. He previously served as a director of Valero Natural Gas Company from 1987 to 1994. Dr. Calgaard has served as a director of Valero or its former parent company since 1996.

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

Mr. Greeheyhas served as Chairman of the Board and Chief Executive Officer, and at various times, President of Valero and its former parent company since 1979. Most recently, he was President of Valero from 1998 until January 2003. Mr. Greehey is also Chairman of the Board of the managing general partner of Valero L.P.¹

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Mr. Marbuthas been Chairman and Chief Executive Officer of Argyle Communications, Inc. since 1992, and Chairman and Chief Executive Officer of SecTecGLOBAL, Inc. since September 2002. He was Chairman and Co-Chief Executive Officer of Hearst-Argyle Television, Inc. from August 1997 until January 1, 2001 and remained as Chairman until January 1, 2003. He was Chairman and Chief Executive Officer of Argyle Television, Inc. from August 1994 until its merger with Hearst Broadcasting in August 1997. He was Chairman and Chief Executive Officer of Argyle Television Holding, Inc. from its founding in March 1993 until April 1994. Prior to 1992, Mr. Marbut served as President and Chief Executive Officer of Harte-Hanks Communications, Inc. for 20 years and served one year as Vice Chairman of that company. He is a director of Tupperware Corporation and Hearst-Argyle Television, Inc. Mr. Marbut served as a director of UDS or its predecessors since 1990.

For detailed information regarding the nominees’ holdings of Common Stock, compensation and other arrangements, see “Information“Information Regarding the Board of Directors,” “Beneficial Ownership of Valero Securities,” “Executive Compensation,” “Arrangements with Certain Officers and Directors”and “Transactions“Transactions with Management and Others.”

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Beneficial Ownership of Valero Securities

The following table sets forth information as of December 31, 2002 with respect to each entity known to Valero to be the beneficial owner of more than 5% of its Common Stock as of December 31, 2003 and of its Preferred Stock as of March 1, 2004, and with respect to its Common Stock, is based solely upon a statementstatements on ScheduleSchedules 13G filed by such entityentities with the Securities and Exchange Commission (“SEC”):

*     The reported percentage is based on the number of shares of Valero common stock issued and outstanding of 107,130,703 shares on December 31, 2002.

*

The reported percentages are based on 120,266,437 shares of Common Stock outstanding on December 31, 2003 and 10,000,000 shares of Preferred Stock outstanding on March 1, 2004.

(1)		AXA Financial, Inc. has filed with the SEC a Schedule 13G, reporting that it or certain of its affiliates beneficially owned 15,197,384in the aggregate 15,989,985 shares. One affiliate, Alliance Capital Management L.P., was reported to have sole dispositive power with respect to 15,170,22915,947,895 shares, sole voting power with respect to 9,390,4948,647,473 shares, and shared voting power with respect to 1,173,8312,516,151 shares and shared dispositive power with respect to 3,180 shares. Another affiliate, The Equitable Life Assurance Society of the United States, was reported to have sole dispositive power with respect to 24,950 shares and sole voting power with respect to 24,95038,850 shares.
(2)		Barclays Global Investors, N.A. has filed with the SEC a Schedule 13G, reporting that it or certain of its affiliates beneficially owned in the aggregate 6,727,544 shares, and that it had sole dispositive and voting power with respect to 4,689,757 shares.

810

Except as otherwise indicated, the following table sets forth information as of February 1, 20032004 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. The persons listed below have furnished this information to Valero and accordingly this information cannot be independently verified by Valero.

*

Indicates that the percentage of beneficial ownership does not exceed 1% of the class.

(1)		The business address for all beneficial owners listed above is One Valero Place,Energy Corporation, P.O. Box 500, San Antonio, Texas, 78212.78292-0500.
(2)		As of February 1, 2003, 107,329,8802004, 121,366,569 shares of Common Stock were issued and outstanding. No executive officer, director or nominee for director of Valero owns any class of equity securities of Valero other than Common Stock. The calculation for Percent of Class includes shares listed under the captions “Shares Beneficially Owned” and “Shares Under Exercisable Options.”
(3)		Includes shares allocated pursuant to the Valero Thrift Plan through January 31, 2003,2004, as well as shares of restricted stock granted under Valero’s Executive Stock Incentive Plan and the Director Stock Plan. Except as otherwise noted, each person named in the table and each other executive officer, has sole power to vote or direct the vote and to dispose or direct the disposition of all such shares beneficially owned by him or her. Restricted stock granted under the Executive Stock Incentive Plan and the Director Stock Plan may not be disposed of until vested. Does not include shares that could be acquired under options, which information is set forth in the second column.
(4)		Includes shares subject to options that are exercisable within 60 days from February 1, 2003.2004. Such shares may not be voted unless the options are exercised. Options that may become exercisable

9

		within such 60-day period only in the event of a change of control of Valero are excluded. Except as set forth in this Proxy Statement, none of the current executive officers, directors or nominees for director of Valero hold any rights to acquire Common Stock, except through exercise of stock options.
(5)		Includes 1,500 shares held by spouse.
(6)		Includes 673 shares held by spouse and 673 shares held in a trust.
(7)		Includes the following shares for which issuance and delivery have been deferred until January of the year following Mr. Greehey’s retirement: 112,250 shares awarded under the Executive Stock Incentive Plan as performance shares and 13,864 shares awarded under the plan that comprise Mr. Greehey’s bonus award for 2002.

11

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Securities Exchange Act of 1934, as amended, or Exchange Act, requires Valero’s executive officers, directors and greater than 10% stockholders to file with the SEC certain reports of ownership and changes in ownership. Based on a review of the copies of such forms received and written representations from certain reporting persons, Valero believes that during the year ended December 31, 2002,2003, with one exception, its executive officers, directors and greater than 10% stockholders were in compliance with applicable requirements of Section 16(a). Valero is aware of one late filing for fiscal year 2003. The late filing involved a single transaction (the withholding of shares to satisfy the tax obligation on a restricted stock vesting) for William R. Klesse, Executive Vice President and Chief Operating Officer of Valero. The withholding transaction occurred on December 31, 2003 and was reported on Form 4 on February 9, 2004. The report of the original grant of restricted shares to Mr. Klesse was timely filed with the SEC in 2002.

The following Performance Graph and Report of the Compensation Committee of the Board of Directors on Executive Compensation are not “soliciting material,” are not deemed filed with the SEC and are not to be incorporated by reference in any of our filings under the Securities Act of 1933 or the Securities Exchange Act of 1934, as amended, respectively, whether made before or after the date of this Proxy Statement and irrespective of any general incorporation language therein.

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Performance Graph

Set forth below is a line graph which compares the Cumulative Total Return* on an investment in Valero Common Stock against the cumulative total return of the S&P 500 Composite Index and an index of peer companies selected by Valero for the period of five years commencing December 31, 19971998 and ending December 31, 2002.2003. The Peer Group selected by Valero consists of the following 12 companies that are engaged in the domestic energy industry: Ashland Inc., Amerada Hess Corp., ChevronTexaco Corp., ConocoPhillips, ExxonMobil Corp., Frontier Oil Corp., Marathon Oil Corp., Murphy Oil Corp., Occidental Petroleum Corp., Premcor Inc., Sunoco Inc., and Tesoro Petroleum Corp. The prior Peer Group consisted of Sunoco, Inc. and Ultramar Diamond Shamrock Corp., which was acquired by Valero on December 31, 2001.

Comparison of Five Year Cumulative Total Return*
Among Valero Energy Corporation, the S & P 500 Index,
a New Peer Group and an Old Peer Group

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

*

Assumes an investment in Valero common stockCommon Stock and assumes that each index was $100 on December 31, 1997.1998. “Cumulative Total Return” is based on share price appreciation plus reinvestment of dividends on Valero common stockCommon Stock from December 31, 19971998 through December 31, 2002.2003.

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Report of the Compensation Committee of the Board of Directors on Executive Compensation

Valero’s executive compensation programs are administered by the Compensation Committee of Valero’s Board of Directors. The Committee is composed of three independent outside directors who are not participants in the Company’s executive compensation programs. Policies adopted by the Committee are implemented by Valero’s compensation and benefits staff. Valero’s executive compensation programs are intended to provide strong incentives for high performance, enabling Valero to recruit, retain and motivate the executive talent necessary to be successful.

Compensation Policies

Valero’s philosophy for compensating executive officers is based on the belief that a significant portion of executive compensation should be incentive based and determined by both the Company’s and the executive’s performance. Compensation for Valero executives includes base salary, an annual incentive bonus opportunity and long-term, equity-based incentives. The CEO and other executive officers also participate in benefit plans generally available to other employees.

To assist with determining executive compensation, levels,including base salary and annual and long-term incentive compensation, Valero utilizes a groupCompensation Peer Group, consisting of companies from a nationally recognized compensation database compiled by Towers Perrin,information and analyses of an independent compensation consultant. Thisconsultant that includes compensation practices and data for a group consists of 1213 companies referred to as the Compensation Peer Group, that have significant participation in the domestic oil refining and marketing industry, and includes those Peer Group companies for which compensation data is available. Towers Perrin’sThe selection of the companies included in the Compensation Peer Group recommendation reflects consideration of each company’s relative revenues, asset base, employee population and capitalization, along with the scope of managerial responsibility and reporting relationships. Baserelationships for the positions under consideration. Additionally, Valero periodically references other independent compensation surveys for executive pay practices in the oil refining and marketing industry. Recommendations for base salary, bonuses and other compensation recommendationsarrangements are developed by Valero’sValero compensation and benefits staff using recognized, independent compensation surveys. Theyutilizing the foregoing information and analyses and are periodically reviewed by Towers Perrinthe independent compensation consultant and submitted to the Committee for consideration.

Annual incentive bonuses, when awarded, are related both to measures of Company financial performance and to individual performance. Long-term incentives, consisting of performance shares, restricted stock and stock option grants, are intended to balance executive management focus between short and long-term goals and provide capital accumulation linked directly to the performance of Valero. For executive officers, other than the CEO, base salary levels are targeted at approximately the 50th percentile of the Compensation Peer Group, while annual and long-term incentive compensation, when awarded, are targeted at the 65th percentile. Forincluding the CEO, base salary levels as well as annual and long-term incentive compensation when awarded, are targeted at approximately the 75th percentile.50th percentile of the Compensation Peer Group.

Base Salaries

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

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Annual Incentive Bonus

Executive officers have the opportunity to earn an annual incentive bonus based on the following three factors:

12

	•		the position of the executive officer, which is used to determine a targeted percentage of annual base salary that may be awarded as incentive bonus, with the targets ranging from a low of approximately 50% of base salary to approximately 100% of base salary (forfor the CEO);CEO;
	•		realization by the Company of quantitative financial performance goals approved by the Committee; and
	•		a qualitative evaluation of the individual’s performance.

For each executive, the target percentage of base salary is adjusted upward or downward depending upon whether Valero achieves certain financial performance goals. The Committee retains discretion to further adjust individual bonus targetsawards upward or downward by up to 25%, based upon such factors as the Committee deems appropriate, and ultimately to determine whether to award a bonus to any individual. The following three, equally weighted quantitative measures of financial performance were utilized in establishing incentive bonuses for 2002:2003:

	•		return on investment, or ROI, of Valero compared with the average ROI for the Peer Group for the 12-month period ended September 30, 2002;2003;
	•		earnings per share, or EPS, of Valero compared to a target EPS approved in advance by the Committee; and
	•		total shareholder return, or TSR, compared to a target TSR approved in advance by the Committee (TSR measures the growth in the daily average closing price per share of Valero’s common stockCommon Stock during the month of November, including the reinvestment of dividends, compared with the daily average closing price of Valero’s common stockCommon Stock during the corresponding period in the prior year).

For the ROI financial performance measure, the target percentage of base salary is subject to adjustment, upward or downward, depending upon whether Valero’s ROI exceeds, or falls short of, the average ROI for the Peer Group. For the EPS and TSR performance measures, the target percentage of base salary is subject to adjustment, upward or downward, based on theupon whether the Company’s EPS and TSR exceed or fall short of the target EPS and TSR, respectively. The three performance factors were given equal weight in determining potential adjustments to the target percentages of base salary for 2002.2003.

For 2002,2003, the Company’s performance was abovebelow the average ROI for the Peer Group, and belowabove the target EPS and TSR thresholds.above the target TSR. The three financial metrics generated a bonus targetpayout level of approximately 63%149% of the original target bonus amounts. TheConsidering the Company’s accomplishments during 2003, including the improvement in profitability and strengthening of the Company’s balance sheet through debt reduction, the deconsolidation of Valero L.P., and the acquisition of the St. Charles refinery, the Committee used its discretion and slightly adjusted the bonus target amounts upward.payout level upward by approximately 18%. Executives received bonus awards at an average of approximately 65%175% of the original target bonus amounts. To further emphasize Valero’s goal of increasing stock ownership as a component of both short and long-term compensation, director-level-and-above employees were given the opportunity to purchase Valero Common Stock at fair market value utilizing 25% of eachtheir bonus award of $10,000 or greater was paid with shares of Valero common stock and the remainder in cash. For the CEO, 50% of his bonus award was paid with shares of Valero common stock, with receipt deferred until after retirement, and the remainder in cash.award.

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Long-TermLong-term Incentive Awards

Valero provides stock-based, long-term compensation for executives through its Executive Stock Incentive Plan.Plan, which was approved by Valero’s stockholders on May 10, 2001. The plan authorizes awards of performance shares which vest (become nonforfeitable) upon the achievement of an objective performance goal, as well as grants of restricted stock and stock options, each of which vest over a period determined by the Committee.

For each eligible executive, a targeted number of long-term incentives is set with an aggregate hypothetical market value at the date of grant targeted at the 65th50^th percentile of the Compensation Peer Group. The targeted award can then be adjusted based upon an evaluation of individual performance, which (for executives other than the CEO) is based upon the recommendation of

13

the CEO, and other factors the Committee deems appropriate. As with the annual incentive bonus, the Committee retains the discretion to determine whether an award should be made.

Performance Shares

The total number of performance shares awarded is a function of Valero’s common stockCommon Stock price at the time of grant and the number of shares required to achieve a percentage of compensation target. The Committee anticipates awards of performance shares will generally be made annually.

Performance shares are earned only upon the achievement of an objective performance measure. Total shareholder return is the performance measure utilized for determining what portion of performance share awards may vest. Each award is subject to vesting in three annual increments, based upon Valero’s total shareholder return during rolling three-year periods that end on December 31 of each year following the date of grant. At the end of each performance period, the Company’s total shareholder return is compared to the Peer Group and ranked by quartile. Participants then earn 0%, 50%, 100% or 150% of that portion of the initial grant amount that is vesting, depending upon whether Valero’s total shareholder return is in the last, 3rd, 2nd or 1st quartile, respectively; and they earn 200% if Valero ranks 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 achieved for that subsequent period. For the performance period ended December 31, 2002,2003, Valero’s performance ranked in the 1stsecond quartile of the group, resulting in vesting of eligible shares at the 150%100% level. The Committee believes this type of incentive award strengthens the tie between the named executive’s pay and the Company’s financial performance. Because performance share awards are intended to provide an incentive for future performance, determination of individual awards are not based upon Valero’s past performance. Additionally, in determining an individual award, the Committee does not consider performance shares or restricted stock previously awarded or currently held, because the Committee does not wish to encourage executives to sell stock in order to qualify for additional awards.

Stock OptionsOptions/Restricted Stock

Under the Executive Stock Incentive Plan,In 2003, the Committee reviewed and revised its policy with respect to the stock option portion of its long-term incentive awards. In view of the possibility that accounting rules may grantbe changed to require that options be expensed, and in view of the portion of previously granted options that remain unexercised, the Committee determined to reduce the stock option portion of long-term incentive awards by approximately one-third and to replace that portion with a number of shares of restricted stock that are approximately equal in value. In addition, to further emphasize longer-term Company performance and to reduce compensation expense, the Committee determined that awards of restricted stock and stock options to executive officers. Procedures for determining the numberwill vest in equal annual installments over a period of stock options to be granted are in all material respects the same as for performance share awards.five years. Generally, previous option awards made by the Committee vestvested over a period of three years in equal installments and expireexpired ten years from the date of grant. The Committee expectsdetermined that option awards would generally continue to continue this practice.

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have a ten-year term. The award and vesting of stock options isand restricted stock are not contingent upon achievement of any specified performance targets, but the options will provide a future benefit to the executive only to the extent that there is appreciation in the market price of Valero Common Stock. Options and restricted stock are subject to forfeiture if an executive terminates employment prior to vesting.

Procedures for determining the number of stock duringoptions and restricted stock to be granted are in all material respects the option period.same as for performance share awards. The Committee anticipates awards of options and restricted stock will generally be made annually.

Other Long-TermLong-term Incentive Awards

Certain of Valero’s executives including each of the named executive officers, devote a portion of their time and attention to the operations and management of Valero L.P. Valero L.P. is a Delaware limited partnership whose common units are listed on the New York Stock Exchange under the symbol “VLI.” Valero, through its wholly owned subsidiaries, owns the general partner of Valero L.P. and owns an aggregate of approximately 47.5%43.6% of the limited partner interests in Valero L.P. These executives are eligible to receive incentive compensation awards from Valero GP, LLC’s 2000 Long-TermLong-term Incentive Plan and 2002 Unit Option Plan, which provide for grants of restricted common units of Valero L.P. and options to purchase Valero L.P. common units, respectively. With respectIn 2003, the Company’s ownership of Valero L.P. was reduced and Valero L.P. is no longer consolidated with the Company for financial reporting purposes. Prior to suchthe deconsolidation of Valero executives,L.P., the Committee recommendsrecommended that a portion of theirthe targeted long-term equity-based incentive compensation for those executives devoting a portion of their time and attention to the operations and management of Valero L.P. should be in the form of Valero L.P. restricted common units and options to purchase common units, and the Committee forwardsforwarded its recommendations to the compensation committee of Valero L.P.’s managing general partner, which administers the Valero GP, LLC Long-Term2000 Long-term Incentive Plan and the 2002 Unit Option Plan and determinesPlan. That committee then determined in its discretion whether to make any grant to any Valero executive out of these plans. Generally,From and after the deconsolidation of Valero L.P., the Committee does not expect to recommend that any of the named executives receive awards of Valero L.P. restricted common unit and option awards vest in equal annual installments over a three-year period and the exercise period for options expire ten years from the date of grant.units or options.

14

Determination of the CEO’s Compensation

The CEO’s compensation is recommendedapproved by the Committee and approved by the independent directors on Valero’s Board of Directors. Mr. Greehey’s base salary, which is determined as described above, was set at $1.3 million in 2000 and was not changed in 2001 or 2002.increased to $1.4 million effective July 2003. In determining the CEO’s annual incentive bonus for the 20022003 bonus year, the Committee considered the three financial performance measures as described above and made a similar discretionary upward adjustment as described above. Considering Mr. Greehey’s individual performanceOn January 14 and contributions to the Company’s success in 2002, in particular the integration with Valero of Ultramar Diamond Shamrock Corporation (“UDS”) following the consummation of Valero’s acquisition of UDS on December 31, 2001,15, 2004, respectively, the Committee further exercised its discretion and recommended, and on January 23, 2003 the Board of Directorsindependent directors approved a bonus award to Mr. Greehey equal to $1$2.45 million, which is approximately 77%175% of his annual base pay.salary. With respect to Mr. Greehey’s long-term incentive awards, as with other Valero executives, a targeted number of long-term incentives is set with an aggregate hypothetical market value at the date of grant targeted at the 50th percentile of the Compensation Peer Group. Mr. Greehey received an award of 100,000 Performance Shares in February of 2003 pursuant to the procedures described above, which represents approximately 30% of the long-term incentive award target for the CEO position based upon the estimated present value of the award on the date of grant.

In light of the Committee’s determination to decrease option awards relative to other forms of long-term incentive compensation generally, and considering his current ownership of stock options and Common Stock, the Committee determined that Mr. Greehey would not receive an award of options or restricted stock. The Committee and the Board further determined that 50%to make an award to Mr. Greehey consisting of 275,000

17

restricted stock units, payable in the form of cash. The award will vest in equal annual increments over a three-year period beginning on the first anniversary of the bonus woulddate of grant. The cash payment on the date of each vesting will be payable in sharesequal to one-third of the number of original units granted multiplied by the average price of Valero common stock andCommon Stock on the remainder in cash andvesting date. Accordingly, the value of the award will increase or decrease depending upon whether the price of Valero’s Common Stock increases or decreases during each vesting period, thereby aligning Mr. Greehey’s interests with the share price performance of the Company’s Common Stock for each of the next three years. The award provides compensation to meet Mr. Greehey’s annual long-term incentive compensation target for 2003. Further, Mr. Greehey received no option grant for 2002 so that the stockCompany could make competitive grants of options to new employees from Ultramar Diamond Shamrock Corporation (“UDS”) who joined the Company as a result of the merger of UDS with and into Valero. Accordingly, a portion of the bonus award would be delivered on January 12003 grant of the year followingrestricted stock units was provided to meet 70% of Mr. Greehey’s retirement. Aslong-term compensation target for 2002. Additionally, the award formally recognizes Mr. Greehey’s leadership in recent years in positioning Valero as a result,Fortune 100 company and leading U.S. petroleum refinery and marketing organization. Under Mr. Greehey’s leadership, the Company has successfully executed a key strategic merger, upgraded its refinery facilities and other physical assets, improved productivity and operating efficiencies, and added a retail component to the Company’s tax burden under Section 162(m)portfolio during a period of considerable turmoil and financial uncertainty in energy markets in the internal revenue code (discussed below) was reduced by approximately $0.2 million in 2002.U.S. and worldwide.

Tax Policy

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 CEO or the other four most highly compensated executive officers unless that compensation meets the Internal Revenue Code’s definition of “performance based” compensation. Section 162(m) allows a deduction for compensation to a specified executive that exceeds $1 million only if it is paid (i) solely upon attainment of one or more performance goals, (ii) pursuant to a qualifying performance-based compensation plan adopted by the Committee, and (iii) the material terms, including the performance goals, of such plan are approved by the stockholders before payment of the compensation. The Committee considers deductibility under Section 162(m) with respect to compensation arrangements for executive officers. The Committee believes that it is in the best interest of the Company for the Committee to retain its flexibility and discretion to make compensation awards to foster achievement of performance goals established by the Committee (which may include performance goals defined in the Internal Revenue Code) and other corporate goals the Committee deems important to Valero’s success, such as encouraging employee retention, rewarding achievement of nonquantifiable goals and achieving progress with specific projects. Valero believes that stock options granted under its stock option and unit option plans as well as 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 and other equity-based awards will likely not qualify as “performance based” compensation and, in such event, would be subject to 162(m) deduction restrictions.

Members of the Compensation Committee:

Robert G. Dettmer,Bob Marbut, Chairman
W. E. “Bill” Bradford
Jerry D. Choate
Bob Marbut

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Executive Compensation

The following table provides a summary of compensation paid for the last three years, if applicable, to Valero’s CEO and to its four other most highly compensated executive officers. The table shows amounts earned by such persons for services rendered to the Company in all capacities in which they served. Benefits under health care, disability, term life insurance, vacation and other plans available to employees generally are not included in the table.

Summary Compensation Table (2000-2002)

		Amounts also include Company contributions pursuant to the Thrift Plan and Valero’s Excess Thrift Plan, unused portions of amounts provided by the Company under the Company’s Flexible Benefits Plan and that portion of interest accrued under the Executive Deferred Compensation Plan that is deemed to be at “above-market” rates under applicable SEC rules. Messrs. Greehey, King, Klesse, GibbonsBooke and BookeCiskowski were allocated $80,167, $58,318, $63,616, $52,875$103,500, $43,709, $44,100, $32,340 and $52,733,$24,938, respectively, as a result of Company contributions to the Thrift Plan and Valero’s Excess Thrift Plan for 2002,2003. Messrs. Greehey, King, Klesse, and Booke received $7,118, $2,934, $4,122,$8,059, $3,107, $4,122 and $4,724,$5,470, respectively, as reimbursement of certain membership dues. Mr. Greehey also received $28,186$24,405 as a result of “above-market” allocations to the Executive Deferred Compensation Plan for 2002.2003. Amounts for Mr. Greehey also include executive insurance policy premiums with respect to cash value life insurance (not split-dollarsplit dollar life insurance) in the amount of $12,212 for 2000, 2001, 2002 and 2002.2003. Amounts for Mr. Klesse also include executive insurance policy premiums with respect to cash value life insurance (not split-dollarsplit dollar life insurance) in the amount of $4,850 for 2002.2002 and $14,681 for 2003.
		Amounts2002 amounts include grants of Valero L.P. restricted units. DividendsDistributions are paid on the restricted units at the same rate as on Valero L.P.’s unrestricted units. Restricted units reported vest 1/3 annually over a three-year period. In 2002, Messrs. Greehey, King, Klesse Gibbons, and Booke received restricted units with an aggregate fair market value on the date of grant of $1,023,750, $163,800, $204,750 $163,800, and $163,800, respectively.

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Stock Option Grants and Related Information

The following table provides further information regarding the grants of Valero stock options and the grants of Valero L.P. unit options to the named executive officers reflected in the Summary Compensation Table.

Option Grants in the Last Fiscal Year (1)

(1)		Since Valero L.P. has no employees, this percentage was calculated based on the total number of unit options granted in 2002.
(2)		All options reported vest in equal increments over a three-yearfive-year period from the date of grant, unless otherwise noted. In the event of a change of control of Valero, such options may become immediately exercisable pursuant to provisions of the plan under which such options were granted or of an executive severance agreement. Under the terms of the Company’s option plans, the exercise price and tax withholding obligations related to exercise may be paid by delivery of already owned shares or by offset of the underlying option shares, subject to certain conditions.
(3)		All unit options reported vest in equal increments over a three-year period from the date of grant, unless otherwise noted. Under the terms of the Valero GP, LLC Option Plan, the exercise price and tax withholding obligations related to exercise may be paid by delivery of already owned shares or by offset of the underlying option shares, subject to certain conditions.
(4)(2)		A variation of the Black-Scholes option pricing model was used to determine grant date present value. This model is designed to value publicly traded options. Options issued under the Company’s option 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 grant date present values presented in this table were calculated using an expected average option life of 3.325 years, risk-free rate of return of 2.38%3.26%, average volatility rate for the 3.32 year5-year period prior to the grant date of 44.50%44.81%, and a dividend yield of 1.05%1.02%, which is the expected annualized quarterly dividend rate in effect at the date of grant expressed as a percentage of the market value of the Common Stock at 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 the Common Stock, 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.
(5)		A variation of the Black-Scholes option pricing model was used to determine grant date present value. This model is designed to value publicly traded options. Options issued under Valero GP, LLC’s option plan 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 grant date present values presented in this table were calculated using an expected average option life of 3.32 years, risk-free rate of return of 2.24%, average volatility rate of 18.70% based on daily volatility rates from the initial public offering by Valero L.P. in April of 2001 through December 31, 2002, and distribution yield of 7.50%, which is the expected annualized quarterly distribution rate in effect at the date of grant expressed as a percentage of the market value of Valero L.P. common units at the date of grant. The actual value of unit options could be zero; realization of any positive value depends upon the actual future performance of Valero L.P. common units, 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.

1720

Long Term Incentive Plans —- Awards in Last Fiscal Year (1)

(1)

Long-term incentive awards are grants of Performance Shares made under the Executive Stock Incentive Plan. Total shareholder return, or TSR, during a specified “performance period” was established as the performance measure for determining what portion of an award may vest. TSR is measured by dividing the sum of (a) the net change in the price of a share of Valero’s Common Stock between the beginning of the performance period and the end of the performance period, and (b) the total dividends paid on the Common Stock during the performance period, by (c) the price of a share of Valero’s Common Stock at the beginning of the performance period. Each Performance Share award is subject to vesting in three equal increments, based upon the Company’s TSR during rolling three-year periods that end on December 31, 2001, 20022003, 2004 and 2003,2005, respectively. At the end of each performance period, the Company’s TSR is compared to the TSR for the Peer Group. Valero and the companies in the Peer Group are then ranked by quartile. Participants then earn 0%, 50%, 100% or 150% of that portion of the initial grant amount that is vesting for such period, depending upon whether the Company’s TSR is in the last, 3rd, 2nd or 1st quartile of the Peer Group; 200% will be earned if the Company ranks 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 achieved for such subsequent period.

1821

The following table provides information regarding shares of Valero Energy stock and Valero L.P. units underlying options exercisable at December 31, 2002,2003, and options exercised during 2002,2003, for the executive officers named in the Summary Compensation Table:

Aggregated Option Exercises in Last Fiscal Year
and FY-End Option Values