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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes   X   No__

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes   X   No __

The number of shares of the registrant's only class of common stock, $0.01 par value, outstanding as of April 30, 2004 was 128,728,899.

PART I - FINANCIAL INFORMATION
Item 1. Financial Statements

See Condensed Notes to Consolidated Financial Statements.

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See Condensed Notes to Consolidated Financial Statements.

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

See Condensed Notes to Consolidated Financial Statements.

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See Condensed Notes to Consolidated Financial Statements.

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VALERO ENERGY CORPORATION AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

As used in this report, the term Valero may refer to Valero Energy Corporation, one or more of its consolidated subsidiaries, or all of them taken as a whole.

These unaudited consolidated financial statements include the accounts of Valero and subsidiaries in which it has a controlling interest. Intercompany balances and transactions have been eliminated in consolidation. Investments in 50% or less owned entities are accounted for using the equity method of accounting.

These unaudited consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X of the Securities Exchange Act of 1934. Accordingly, they do not include all of the information and notes required by United States generally accepted accounting principles (GAAP) for complete consolidated financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. Financial information for the three months ended March 31, 2004 and 2003 included in the Condensed Notes to Consolidated Financial Statements is derived from Valero's unaudited consolidated financial statements. Operating results for the three months ended March 31, 2004 are not necessarily indicative of the results that may be expected for the year ending December 31, 2004.

The consolidated balance sheet as of December 31, 2003 has been derived from the audited financial statements as of that date. For further information, refer to the consolidated financial statements and notes thereto included in Valero’s Annual Report on Form 10-K for the year ended December 31, 2003.

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

2. ACCOUNTING PRONOUNCEMENTS

FASB Staff Position 106-1
In January 2004, the Financial Accounting Standards Board (FASB) issued FASB Staff Position No. FAS 106-1, “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003,” which permits the sponsor of a postretirement health care plan that provides a prescription drug benefit to make a one-time election to defer accounting for the effects of the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the Act), including the effect of a federal subsidy provided for in the Act. The guidance of Staff Position No. FAS 106-1 is effective for interim or annual financial statements of fiscal years ending after December 7, 2003. Valero sponsors a postretirement health care plan that provides prescription drug benefits. As of December 31, 2003, Valero made the one-time election to defer recognition of the effects of the Act in accounting for its accumulated postretirement benefit obligation and net periodic postretirement benefit cost related to its postretirement health care plan. That election may not be changed, and the deferral continues to apply until authoritative guidance on accounting for the Act, including the federal subsidy, is issued, or until a significant event occurs that ordinarily would call for remeasurement of the Plan’s assets and obligations. Specific authoritative guidance on accounting for the Act, including the federal subsidy, is expected in the second quarter of 2004 and the guidance, when issued, could require Valero to revise previously reported information.

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

3. ACQUISITIONS

Aruba Acquisition
On March 5, 2004, Valero completed the purchase of El Paso Corporation’s 315,000 barrel-per-day refinery located on the island of Aruba in the Caribbean Sea (Aruba Refinery), and related marine, bunkering and marketing operations (collectively, Aruba Acquisition). The purchase price was $465 million plus $162 million for working capital, based on estimated amounts at closing that are subject to adjustment as set out in the purchase agreement. The working capital amount excluded certain inventories owned by a third-party marketing firm under an agreement in existence on the date of acquisition, which Valero acquired upon termination of the agreement on May 4, 2004 for $67.8 million. Consideration for the purchase was in the form of $200 million in cash, approximately $21 million in borrowings under Valero’s existing bank credit facilities and approximately $406 million in net proceeds from the sale of 7.8 million shares of Valero common stock through a public offering discussed in Note 8 under “Common Stock Offering.” The additional inventory purchased from the third-party marketing firm described above was funded through borrowings under Valero’s existing bank credit facilities. The results of operations of the Aruba Refinery are non-taxable through December 31, 2011.

Valero’s management believes that the acquisition of the Aruba Refinery strengthens Valero’s geographic and product diversification and will ensure a more secure supply of intermediate feedstocks and blendstocks to certain of its other refineries. Valero’s management also believes that the Aruba Acquisition increases Valero’s potential ability to take advantage of positive heavy sour crude oil fundamentals.

The purchase price was allocated based on estimated fair values of the assets acquired and the liabilities assumed at the date of acquisition, pending the completion of an independent appraisal and other evaluations. As of March 31, 2004, the preliminary purchase price allocation, including transaction costs related to the acquisition, was as follows (in millions):

St. Charles Acquisition
On July 1, 2003, Valero completed the acquisition of the St. Charles Refinery (St. Charles Acquisition) from Orion Refining Corporation. Total consideration for the purchase, including various transaction costs incurred, was $510.4 million and included the issuance of 10 million shares of mandatory convertible preferred stock with a fair value of $22 per share. The purchase agreement required 844,000 shares to be held in escrow pending the satisfaction of certain conditions. The purchase agreement also provided for the assumption of certain environmental and regulatory obligations as well as for potential earn-out payments as discussed in Note 15 under “Contingent Earn-Out Agreements.” As of December 31, 2003, the escrowed shares had been converted to cash which was held in escrow and was

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

reflected in “restricted cash” in the consolidated balance sheets. In January 2004, Valero released $8.7 million of the escrowed cash as prescribed by the purchase agreement.

In accordance with Statement No. 141, “Business Combinations,” the potential earn-out payments discussed above, or a portion of such potential payments, are required to be accrued as part of the business combination if the net fair value of the assets acquired and liabilities assumed exceeds the cost of the acquisition. Since the net fair value of the St. Charles Refinery will not be known until the completion of the pending independent appraisal and other evaluations, no potential earn-out payments have been recorded as of March 31, 2004.

Unaudited Pro Forma Financial Information
The following unaudited pro forma financial information assumes that the Aruba Acquisition occurred on January 1, 2004 and 2003 and the St. Charles Acquisition occurred on January 1, 2003. This pro forma information assumes:

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

4. INVENTORIES

Inventories consisted of the following (in millions):

As of March 31, 2004 and December 31, 2003, the replacement cost of LIFO inventories exceeded their LIFO carrying values by approximately $1.1 billion and $666 million, respectively.

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

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

As of March 31, 2004 and December 31, 2003, Valero owned approximately 45.6% and 45.7%, respectively, of Valero L.P., a limited partnership that owns and operates crude oil and refined product pipeline, terminalling and storage tank assets. Financial information reported by Valero L.P. is summarized below (in millions):

Valero provides Valero L.P. with the corporate functions of legal, accounting, treasury, engineering, information technology and other services for an annual fee (Administrative Fee) originally established at $5.2 million through July 2008. On March 11, 2004, an amendment to the Administrative Fee between Valero L.P. and Valero was approved. Under the amendment, which became effective on April 1, 2004, the new Administrative Fee is equal to the actual cost of Valero’s corporate employees dedicated to Valero L.P. matters (which is expected to total approximately $5.6 million annually and is charged directly to Valero L.P.) plus an annual fee of $1.2 million. The annual fee of $1.2 million will be increased by $1.2 million per year over the next four years. Also on March 11, 2004, the Board of Directors of Valero agreed that the general partner’s distribution provided for in Valero L.P.‘s partnership agreement, including incentive distributions, would be capped at 25% for all distributions in excess of $0.66 per unit per quarter. Valero L.P. also amended its partnership agreement to reduce the minimum vote required to remove the general partner from 58% to a simple majority of Valero L.P.’s outstanding common and subordinated units, excluding the units held by affiliates of Valero.

6. LONG-TERM DEBT

On March 22, 2004, Valero issued $200 million of 3.50% Senior Notes due April 1, 2009 and $200 million of 4.75% Senior Notes due April 1, 2014 under its shelf registration statement. Interest is payable on April 1 and October 1 of each year beginning October 1, 2004. The notes are unsecured and are redeemable, in whole or in part, at Valero’s option. The net proceeds of this offering were used to repay borrowings under Valero’s revolving bank credit facilities.

On March 29, 2004, Valero borrowed $200 million under a five-year term loan, which matures March 31, 2009. The loan bears interest based on Valero’s debt rating, currently at LIBOR plus 75 basis points. Principal payments begin March 2007 with a $50.0 million principal payment due at that time and semi-annual payments of $37.5 million due thereafter until maturity. The net proceeds from this borrowing were used to repay borrowings under Valero’s revolving bank credit facilities.

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

7. OTHER LONG-TERM LIABILITIES

During the first quarter of 2004, other long-term liabilities decreased primarily as a result of the following:

8. STOCKHOLDERS’ EQUITY

Common Stock Offering
On February 5, 2004, Valero sold in a public offering 7.8 million shares of its common stock, which included 1.0 million shares related to an overallotment option exercised by the underwriter, at a price of $53.25 per share and received proceeds, net of underwriter’s discount and commissions, of $405.9 million. These shares were issued under Valero’s shelf registration statement to partially fund the acquisition of the Aruba Refinery and related operations discussed in Note 3.

Cash Dividends
On April 29, 2004, Valero’s Board of Directors approved an increase in Valero’s quarterly cash dividend on common stock from $0.12 per share to $0.15 per share effective with the dividend payable on June 16, 2004 to holders of record at the close of business on May 19, 2004. Also on April 29, 2004, Valero’s Board of Directors declared a dividend on the mandatory convertible preferred stock of $0.125 per share payable on June 30, 2004 to holders of record on June 29, 2004.

Common Stock Purchases
Valero purchases shares of its common stock in open market transactions to meet its obligations under its employee benefit plans. Valero also purchases shares of its common stock from its employees and non-employee directors in connection with the exercise of stock options, the vesting of restricted stock and other stock compensation transactions. During the three months ended March 31, 2004 and 2003, Valero purchased 0.2 million and 0.1 million shares of its common stock at a cost of $12.1 million and $4.3 million, respectively. During April 2004, Valero purchased in the open market 2.6 million shares of its common stock at a cost of $154.3 million to be used to satisfy Valero’s obligations under its employee benefit plans.

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

9. EARNINGS PER COMMON SHARE

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

The following table reflects outstanding stock options that were not included in the computation of dilutive securities because the options’ exercise prices were greater than the average market price of the common shares during the reporting period, and therefore the effect of including such options would be anti-dilutive (in millions):

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

10. STATEMENTS OF CASH FLOWS

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

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

There were no significant noncash investing or financing activities for the three months ended March 31, 2004. For the three months ended March 31, 2003, noncash investing activities included:

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

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

11. PRICE RISK MANAGEMENT ACTIVITIES

Interest Rate Risk
On March 25, 2004, Valero entered into additional interest rate swap contracts with a total notional amount of $200 million. These interest rate swap contracts currently have an estimated pay rate of 1.72% and hedge $200 million of debt with an interest rate of 4.75%.

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

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

The estimated amount of existing net gain included in “accumulated other comprehensive income” as of March 31, 2004 that is expected to be reclassified into income within the next 12 months was $10.5 million. As of March 31, 2004, the maximum length of time over which Valero was hedging its exposure to the variability in future cash flows for forecasted transactions was 21 months, with the majority of the transactions maturing in less than one year. For the three months ended March 31, 2004 and 2003, there were no amounts reclassified from “accumulated other comprehensive income” into income as a result of the discontinuance of cash flow hedge accounting.

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

12. SEGMENT INFORMATION

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

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

The entire balance of goodwill as of March 31, 2004 and December 31, 2003 has been included in the total assets of the refining reportable segment.

13. STOCK-BASED COMPENSATION

Valero accounts for its employee stock compensation plans using the intrinsic value method of accounting set forth in APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations as permitted by Statement No. 123, “Accounting for Stock-Based Compensation.”

Because Valero accounts for its employee stock compensation plans using the intrinsic value method, compensation cost is not recognized in the consolidated statements of income for Valero’s fixed stock option plans as all options granted had an exercise price equal to the market value of the underlying common stock on the date of grant. Had compensation cost for Valero’s fixed stock option plans been determined based on the grant-date fair value of awards consistent with the method set forth in Statement No. 123, Valero’s net income applicable to common stock, net income and earnings per common share,

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

both with and without dilution, for the three months ended March 31, 2004 and 2003 would have been reduced to the pro forma amounts indicated below (in millions, except per share amounts):

14. EMPLOYEE BENEFIT PLANS

The components of net periodic benefit cost related to Valero’s defined benefit plans were as follows for the three months ended March 31, 2004 and 2003 (in millions):

Valero’s anticipated contributions to its pension plans during 2004 have not changed significantly from amounts previously disclosed in Valero’s consolidated financial statements for the year ended

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

December 31, 2003. Valero has no minimum required contributions to its pension plans during 2004 under the Employee Retirement Income Security Act. For the three months ended March 31, 2004 and 2003, Valero contributed $25.0 million and $11.0 million, respectively, to its qualified pension plans.

15. COMMITMENTS AND CONTINGENCIES

Accounts Receivable Sales Facility
As of March 31, 2004, Valero had an accounts receivable sales facility with three third-party financial institutions to sell on a revolving basis up to $600 million of eligible trade and credit card receivables, which matures in October 2005. As of March 31, 2004 and December 31, 2003, the amount of eligible receivables sold to the third-party financial institutions was $600 million.

Structured Lease Arrangements
As of December 31, 2003, Valero had various long-term operating lease commitments that were funded through structured lease arrangements with non-consolidated third-party entities. For each lease, Valero had the option to purchase the leased assets at any time during the lease term for a price that approximated fair value. In March 2004, Valero exercised its option to purchase the leased properties under each of its four remaining structured lease arrangements. The leased properties, which totaled $567.1 million, were purchased through borrowings under Valero’s existing bank credit facilities.

Guarantees
In connection with the sale of the Golden Eagle Business in 2002, Valero guaranteed certain lease payment obligations related to a lease assumed by Tesoro Refining and Marketing Company, which totaled approximately $40 million as of March 31, 2004. This lease expires in 2010.

Contingent Earn-Out Agreements
In connection with Valero’s acquisitions of Basis Petroleum, Inc. in 1997 and the St. Charles Refinery in 2003, the sellers are entitled to receive payments in any of the ten years and seven years, respectively, following these acquisitions if certain average refining margins during any of those years exceed a specified level. No earn-out payments were made during the three months ended March 31, 2004 and 2003. The following table summarizes the payment limitations for these acquisitions (in millions):

Sale of Headquarters Facility
On January 20, 2004, Valero finalized an agreement to sell both of its current headquarters buildings for $27.3 million. Valero expects to complete the sale of the buildings by the end of the second quarter of 2004. Since the carrying value of these buildings was written down to their fair values less selling costs in the fourth quarter of 2003, no gain or loss is expected to be recognized in 2004 related to the disposition of these buildings.

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

Environmental Matters
The Environmental Protection Agency’s (EPA) Tier II Gasoline and Diesel Standards. The EPA’s Tier II standards, adopted under the Clean Air Act, phase in limitations on the sulfur content of gasoline beginning in 2004 and the sulfur content of diesel fuel sold to highway consumers beginning in 2006. Modifications will be required at most of Valero’s refineries as a result of the Tier II gasoline and diesel standards. Valero believes that capital expenditures of approximately $1.5 billion will be required through 2006 for Valero to meet the Tier II specifications, of which approximately $550 million was expended through March 31, 2004. The aggregate estimate of expenditures includes amounts related to projects at two Valero refineries to provide hydrogen as part of the process of removing sulfur from gasoline and diesel. Valero expects that such estimates will change as additional engineering is completed and progress is made toward construction of these various projects. Factors that will affect the impact of these regulations on Valero include its ultimate selection of specific technologies to meet the Tier II standards and uncertainties related to timing, permitting and construction of specific units. Valero expects to meet all Tier II gasoline and diesel standards by their respective effective dates.

EPA’s Section 114 Initiative. In 2000, the EPA issued to a majority of refiners operating in the United States a series of information requests pursuant to Section 114 of the Clean Air Act as part of an enforcement initiative. Valero received a Section 114 information request pertaining to all of its refineries owned at that time. Valero has completed its response to the request. Several other refiners have reached settlements with the EPA regarding this enforcement initiative. Though Valero has not been named in any proceeding, it has been discussing the possibility of settlement with the EPA regarding this initiative. Based in part upon announced settlements and evaluation of its relative position, Valero expects to incur penalties and related expenses in connection with a potential settlement of this enforcement initiative. Valero believes that any potential settlement penalties will be immaterial to its results of operations and financial position. However, Valero believes that any potential settlement with the EPA in this matter will require various capital improvements or changes in operating parameters, or both, at some or all of its refineries which could be material in the aggregate.

Houston/Galveston SIP.     Valero’s Houston and Texas City Refineries are located in the Houston/Galveston area, which is classified as “severe nonattainment” for compliance with EPA air-quality standards for ozone. In October 2001, the EPA approved a State Implementation Plan (SIP) to bring the Houston/Galveston area into compliance with the EPA’s ozone standards by 2007. The EPA-approved plan was based on a requirement for industry sources to reduce emissions of nitrogen oxides (NOx) by 90% from a 1997-1999 average actual emissions baseline. Certain industry and business groups challenged the plan based on technical feasibility of the 90% NOx control and its effectiveness in meeting the ozone standard. In December 2002, the Texas Commission on Environmental Quality (TCEQ) adopted a revised approach for the Houston/Galveston SIP. This alternative plan requires an 80% reduction in NOx emissions and a 64% reduction in so-called highly reactive volatile organic compounds (HRVOC). This alternative plan is subject to EPA scrutiny and approval. Valero’s Texas City and Houston Refineries will be required to install NOx and HRVOC control and monitoring equipment and practices by 2007, at a cost estimated by Valero to be approximately $60 million based on the proposed TCEQ approach.

Litigation
Unocal
In 2002, Union Oil Company of California (Unocal) sued Valero alleging patent infringement. The complaint seeks a 5.75 cent per gallon royalty on all reformulated gasoline infringing on Unocal’s ’393

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

and ’126 patents. These patents cover certain compositions of cleaner-burning gasoline. The complaint seeks treble damages for Valero’s alleged willful infringement of Unocal’s patents and Valero’s alleged conduct to induce others to infringe the patents. In a previous lawsuit involving its ’393 patent, Unocal prevailed against five other major refiners.

In 2001, the Federal Trade Commission (FTC) began an antitrust investigation concerning Unocal’s misconduct with a joint industry research group and regulators during the time that Unocal was prosecuting its patents at the U.S. Patent and Trademark Office (PTO). In 2003, the FTC filed a complaint against Unocal for antitrust violations. The FTC’s complaint seeks an injunction against any future ’393 or ’126 patent enforcement activity by Unocal. In November 2003, an administrative law judge dismissed the FTC’s case against Unocal, which the FTC staff appealed to the full Commission. The Commission has not yet ruled on that appeal.

Each of the ’393 and ’126 patents is being reexamined by the PTO. The PTO has issued notices of rejection of all claims of each of these patents. These rejections are subject to additional proceedings, including administrative appeal by Unocal, followed by an appeal in federal district court or the court of appeals. Ultimate invalidation would preclude Unocal from pursuing claims based on the ’393 or ’126 patents.

Unocal’s patent lawsuit against Valero is indefinitely stayed as a result of the PTO reexamination proceedings. Notwithstanding the judgment against the other refiners in the previous litigation, Valero believes that it has several strong defenses to Unocal’s lawsuit, including those arising from Unocal’s misconduct, and Valero believes it will prevail in the lawsuit. However, due to the inherent uncertainty of litigation, it is reasonably possible (as defined in FASB Statement No. 5) that Valero will not prevail in the lawsuit, and an adverse result could have a material effect on Valero’s results of operations and financial position.

MTBE Litigation
Valero is a defendant in more than 60 cases pending in 16 states alleging MTBE contamination in groundwater. The plaintiffs are generally water providers, governmental authorities and private well owners alleging that refiners and suppliers of gasoline containing MTBE are liable for manufacturing or distributing a defective product. Almost all of these cases were filed on or after September 30, 2003 in anticipation of a pending federal energy bill that may contain provisions for MTBE liability protection. Valero is named in these suits together with many other refining industry companies. Valero is being sued primarily as a refiner, supplier and marketer of gasoline containing MTBE. Valero does not own or operate physical facilities in most of the states where the suits are filed. The suits generally seek individual, unquantified compensatory and punitive damages and attorneys’ fees. Valero believes that it has several strong defenses to these claims and intends to vigorously defend the lawsuits. Although an adverse result in one or more of these suits is reasonably possible (as defined in FASB Statement No. 5), Valero believes that such an outcome in any one of these suits would not have a material effect on its results of operations or financial position. However, Valero believes that an adverse result in all or a substantial number of these cases could have a material effect on Valero’s results of operations and financial position.

Other Litigation
Valero is also a party to additional claims and legal proceedings arising in the ordinary course of business. Valero believes it is unlikely that the final outcome of any of the claims or proceedings to which it is a

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

party would have a material adverse effect on its financial position, results of operations or liquidity; however, due to the inherent uncertainty of litigation, the range of possible loss, if any, cannot be estimated with a reasonable degree of precision and there can be no assurance that the resolution of any particular claim or proceeding would not have an adverse effect on Valero’s results of operations, financial position or liquidity.

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

FORWARD-LOOKING STATEMENTS

This Form 10-Q, including without limitation the discussion below under the heading “Results of Operations - Outlook,” contains certain estimates, predictions, projections, assumptions and other “forward-looking statements” (as defined in Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934) that involve various risks and uncertainties. While these forward-looking statements, and any assumptions upon which they are based, are made in good faith and reflect Valero’s current judgment regarding the direction of its business, actual results will almost always vary, sometimes materially, from any estimates, predictions, projections, assumptions or other future performance suggested in this report. These forward-looking statements can generally be identified by the words “anticipate,” “believe,” “expect,” “plan,” “intend,” “estimate,” “project,” “budget,” “forecast,” “will,” “could,” “should,” “may” and similar expressions. These forward-looking statements include, among other things, statements regarding:

Valero’s forward-looking statements are based on its beliefs and assumptions derived from information available at the time the statements are made. Differences between actual results and any future performance suggested in these forward-looking statements could result from a variety of factors, including the following:

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Any one of these factors, or a combination of these factors, could materially affect Valero’s future results of operations and whether any forward-looking statements ultimately prove to be accurate. Valero’s forward-looking statements are not guarantees of future performance, and actual results and future performance may differ materially from those suggested in any forward-looking statements. Valero does not intend to update these statements unless it is required by the securities laws to do so.

All subsequent written and oral forward-looking statements attributable to Valero or persons acting on its behalf are expressly qualified in their entirety by the foregoing. Valero undertakes no obligation to publicly release the results of any revisions to any such forward-looking statements that may be made to reflect events or circumstances after the date of this report or to reflect the occurrence of unanticipated events.

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Overview
As of March 31, 2004, Valero, an independent refining and marketing company, owned and operated 15 refineries in the United States, Canada and Aruba with a combined throughput capacity, including crude oil and other feedstocks, of approximately 2.4 million barrels per day.

Valero markets refined products through an extensive bulk and rack marketing network and a network of more than 4,500 retail and wholesale branded outlets in the United States, Canada and Aruba under various brand names including Diamond Shamrock®, Shamrock®, Ultramar®, Valero®, and Beacon®. Valero’s operations are affected by:

Valero’s profitability is determined in large part by the spread between the price of refined products and the price of crude oil, referred to as the refined product margin. Additionally, since a significant percentage of Valero’s total throughput represents sour crude oil feedstocks, Valero’s profitability is also affected by the spread between sweet crude oil and sour crude oil prices, referred to as the sour crude oil discount. During the first quarter of 2004, refined product margins were at record levels and sour crude oil discounts were very favorable. Therefore, despite significant turnaround activity at several of Valero’s refineries, the results of operations reported for the first quarter of 2004 were very good. Valero expects the favorable industry fundamentals that resulted in the strong first quarter 2004 results to continue, as is more fully discussed in “Outlook” below.

During the first quarter of 2004, Valero continued its strategic growth through the acquisition of the Aruba Refinery, which has a throughput capacity of 315,000 barrels per day, and related marine, bunkering and marketing operations. The acquisition was partially funded through the sale of 7.8 million shares of Valero common stock in a public offering. The Aruba Refinery processes heavy, sour crude oil that generally sells at a discount to sweet crude oil. Valero believes that its acquisition of the Aruba Refinery will further enable Valero to benefit from expected wide sour crude oil discounts.

During the first quarter of 2004, Valero exercised its option to purchase the leased properties under each of the four structured lease arrangements that existed as of December 31, 2003. Valero purchased the leased properties for $567.1 million, using borrowings under its existing bank credit facilities. Valero issued $400 million of senior notes in March 2004 to refinance these borrowings under its existing bank credit facilities and to take advantage of favorable treasury rates. The notes comprise $200 million of five-year notes at a rate of 3.50% and $200 million of ten-year notes at a rate of 4.75%. Also in March 2004, Valero borrowed $200 million under a five-year term loan, which currently bears interest at LIBOR plus 75 basis points.

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