Valero Energy Corporation Reports Fourth Quarter and Annual Earnings

Valero Energy Corporation (NYSE:VLO) today reported fourth quarter net income of $1.1 billion, or $1.80 per share, which compares to $1.3 billion, or $2.06 per share, in the fourth quarter of 2005. Fourth quarter 2006 results include a $196 million pre-tax gain, or $0.21 per share, on the sale of the company's remaining 59 percent ownership interest in Valero GP Holdings, LLC in December. The fourth quarter 2005 results include a $55 million pre-tax gain on the sale of the company's 20 percent interest in the Javelina off-gas processing joint venture in Corpus Christi. Excluding these special items, the company's fourth quarter 2006 net income was $987 million, or $1.59 per share, compared to $1.3 billion, or $2.00 per share, in the fourth quarter of 2005.

For the year ended December 31, 2006, the company's reported net income was $5.5 billion, or $8.64 per share, versus $3.6 billion, or $6.10 per share, in 2005. Excluding all special items for each year, net income for 2006 was $5.3 billion, or $8.30 per share, and for 2005 was $4.0 billion, or $6.76 per share.

Fourth quarter 2006 operating income was $1.5 billion, compared to $2.0 billion achieved in the same period last year, which was impacted by Hurricanes Katrina and Rita.

"This was the best fourth quarter we've ever seen for refining margins other than in last year's fourth quarter when margins were affected by the hurricanes," said Bill Klesse, Valero's Chairman of the Board and Chief Executive Officer. "In the fourth quarter, gasoline margins averaged more than $5.25 per barrel, while on-road diesel margins averaged over $13.50 per barrel on the Gulf Coast. In addition, sour crude oil discounts remained wide. The sour crude oil discounts benefited from ample sour crude oil supplies and very deep discounts on residual fuel oil, which can compete with crude oil as a feedstock in many of our complex refineries."

Regarding the company's cash flow, capital spending in 2006 was $3.7 billion, of which $550 million was for turnaround expenditures. In 2006, the company purchased approximately 35 million shares, or five percent, of its outstanding common stock, returning more than $2 billion to shareholders.

"Looking at this year's first quarter, despite the lack of early cold weather in the Northeast heating oil market, distillate margins remain good, particularly for on-road diesel, which is currently trading near $15 per barrel on the Gulf Coast. For gasoline, supplies are expected to tighten as spring maintenance activity gets underway. In addition, we will soon be dealing with the transition from winter-grade gasoline to summer-grade specifications, which generally leads to declines in inventories and higher margins as we head toward the summer driving season. Gasoline demand has been strong given lower pump prices and, until recently, mild weather. In fact, preliminary gasoline demand in January was up more than 2% compared to the same time last year," said Klesse.

"In January, we started up the newly expanded crude unit at the Port Arthur refinery, which allows us to process up to 325,000 barrels per day of sour crude oil. We will also be conducting turnarounds on some of our key units at Port Arthur, Benicia, Three Rivers and Lima. However, we do not expect this activity to materially impact our first quarter results.

"As part of the strategic planning process we completed in the fourth quarter, we have committed to improving returns and maximizing value from our assets in the years ahead. Accordingly, we have decided to explore strategic alternatives for our Lima, Ohio refinery. Deutsche Bank has been retained to assist us. Throughout our system, we are also focused on improving our operations and financial performance.

"With regard to our use of cash flow going forward, we will continue to demonstrate the balanced approach to investing those funds that we showed in 2006. The 50 percent increase in our dividend that was recently announced and the fact that we will continue purchasing our shares in the open market this year are examples of that commitment," said Klesse.

Valero's senior management will hold a conference call at 10 a.m. ET (9 a.m. CT) today to discuss this earnings release and provide an update on company operations. A live broadcast of the conference call will be available on the company's website at www.valero.com.

Valero Energy Corporation is a Fortune 500 company based in San Antonio, with approximately 22,000 employees and annual revenues of more than $90 billion. The company owns and operates 18 refineries throughout the United States, Canada and the Caribbean with a combined throughput capacity of approximately 3.3 million barrels per day, making it the largest refiner in North America. Valero is also one of the nation's largest retail operators with more than 5,500 retail and branded wholesale outlets in the United States, Canada and the Caribbean under various brand names including Valero, Diamond Shamrock, Shamrock, Ultramar, and Beacon. Please visit www.valero.com for more information.

Statements contained in this release that state the company's or management's expectations or predictions of the future are forward-looking statements intended to be covered by the safe harbor provisions of the Securities Act of 1933 and the Securities Exchange Act of 1934. The words "believe," "expect," "should," "estimates," and other similar expressions identify forward-looking statements. It is important to note that actual results could differ materially from those projected in such forward-looking statements. For more information concerning factors that could cause actual results to differ from those expressed or forecasted, see Valero's annual reports on Form 10-K and quarterly reports on Form 10-Q, filed with the Securities and Exchange Commission and on Valero's website at www.valero.com.

              VALERO ENERGY CORPORATION AND SUBSIDIARIES
                           EARNINGS RELEASE
(Millions of Dollars, Except per Share, per Barrel and per Gallon
                               Amounts)
                             (Unaudited)

                             Three Months Ended   Twelve Months Ended
                                December 31,         December 31,
                             ------------------- ---------------------
                               2006     2005 (1) 2006    2005 (1) (2)
                             ---------- -------- -------- ------------
STATEMENT OF INCOME DATA:
Operating Revenues
(including $0, $2,759, $0
and $7,841, respectively,
related to buy/sell
arrangements) (3) (4)        $19,792 $25,894 $91,833      $82,162
                             ---------- -------- -------- ------------

Costs and Expenses:
Cost of Sales (3)             16,681   22,284   77,482       71,673
Refining Operating
   Expenses                        981      971    3,785        2,874
Retail Selling Expenses          202      207      803          758
General and Administrative
   Expenses                        140      183      598          558
Depreciation and
   Amortization Expense            308      252    1,155          840
                             ---------- -------- -------- ------------
   Total Costs and Expenses     18,312   23,897   83,823       76,703
                             ---------- -------- -------- ------------

Operating Income 1,480 1,997 8,010 5,459

Equity in Earnings of
Valero L.P. 10 9 45 41

Other Income, Net (5) (6) 213 57 351 53

Interest and Debt Expense:
Incurred (98) (104) (378) (334)
Capitalized 39 29 168 68

Minority Interest in Net
Income of Valero GP
Holdings, LLC (5) (3) - (7) -
---------- -------- -------- ------------

Income Before Income Tax
Expense 1,641 1,988 8,189 5,287

Income Tax Expense 527 641 2,726 1,697
---------- -------- -------- ------------

Net Income 1,114 1,347 5,463 3,590

Preferred Stock Dividends - 1 2 13
---------- -------- -------- ------------

Net Income Applicable to
Common Stock $1,114 $1,346 $5,461 $3,577
========== ======== ======== ============

Earnings per Common Share $1.85 $2.17 $8.94 $6.51

Weighted Average Common
Shares Outstanding (in
millions) 603 620 611 549

Earnings per Common Share -
Assuming Dilution $1.80 $2.06 $8.64 $6.10

Weighted Average Common
Equivalent Shares
Outstanding (in millions) 620 654 632 588

                                December 31,
                             -------------------
                               2006      2005
                             ---------- --------
BALANCE SHEET DATA:
Cash                           $1,590     $436

Total Debt $5,133 $5,378

                               Three Months Ended Twelve Months Ended
                                  December 31,        December 31,
                               ------------------ --------------------
                                   2006 2005 (1)   2006 2005 (1) (2)
                               --------- -------- ------- ------------
Operating Income (Loss) by
Business Segment:
Refining                         $1,614   $2,124 $8,470       $5,900
                               --------- -------- ------- ------------
Retail:
U.S.                                 9       53     113           81
Canada                              10       13      69           73
                               --------- -------- ------- ------------
Total Retail                       19       66     182          154
                               --------- -------- ------- ------------
Total Before Corporate           1,633    2,190   8,652        6,054
Corporate                          (153)    (193)   (642)        (595)
                               --------- -------- ------- ------------
Total                           $1,480   $1,997 $8,010       $5,459
                               ========= ======== ======= ============

Depreciation and Amortization
by Business Segment:
Refining                           $270     $218 $1,024         $720
                               --------- -------- ------- ------------
Retail:
U.S.                                17       18      60           60
Canada                               8        6      27           23
                               --------- -------- ------- ------------
Total Retail                       25       24      87           83
                               --------- -------- ------- ------------
Total Before Corporate             295      242   1,111          803
Corporate                            13       10      44           37
                               --------- -------- ------- ------------
Total                             $308     $252 $1,155         $840
                               ========= ======== ======= ============

Operating Highlights:
Refining:
Throughput Margin per Barrel $10.53 $11.91 $12.29 $11.14

Operating Costs per Barrel:
Refining Operating Expenses     $3.61    $3.49   $3.50        $3.16
Depreciation and
   Amortization                    0.99     0.79    0.95         0.80
                               --------- -------- ------- ------------
    Total Operating Costs per
     Barrel                       $4.60    $4.28   $4.45        $3.96
                               ========= ======== ======= ============

Throughput Volumes (Mbbls per
Day):
Feedstocks:
    Heavy Sour Crude                699      703     697          548
    Medium/Light Sour Crude         638      696     618          610
    Acidic Sweet Crude               60       78      65          103
    Sweet Crude                     880      905     888          670
    Residuals                       229      173     234          181
    Other Feedstocks                128      155     149          132
                               --------- -------- ------- ------------
       Total Feedstocks           2,634    2,710   2,651        2,244
Blendstocks and Other             325      314     309          244
                               --------- -------- ------- ------------
    Total Throughput Volumes      2,959    3,024   2,960        2,488
                               ========= ======== ======= ============

Yields (Mbbls per Day):
Gasolines and Blendstocks       1,431    1,437   1,432        1,174
Distillates                       965      958     938          763
Petrochemicals                     94       84      88           72
Other Products (7)                474      546     503          481
                               --------- -------- ------- ------------
    Total Yields                  2,964    3,025   2,961        2,490
                               ========= ======== ======= ============

Throughput Volumes (Mbbls
per Day) (9) 1,498 1,587 1,532 1,364

Throughput Margin per Barrel $11.53 $13.07 $13.23 $11.73

Operating Costs per Barrel:
   Refining Operating Expenses    $3.33    $3.23   $3.26        $3.03
   Depreciation and
    Amortization                   0.85     0.77    0.84         0.74
                               --------- -------- ------- ------------
    Total Operating Costs per
     Barrel                       $4.18    $4.00   $4.10        $3.77
                               ========= ======== ======= ============

Mid-Continent: (10)
Operating Income $210 $360 $1,329 $856

Throughput Volumes (Mbbls
per Day) (9) 580 549 559 364

Throughput Margin per Barrel $8.32 $11.26 $10.70 $10.44

Operating Costs per Barrel:
   Refining Operating Expenses    $3.36    $3.57   $3.27        $3.36
   Depreciation and
    Amortization                   1.02     0.57    0.92         0.65
                               --------- -------- ------- ------------
    Total Operating Costs per
     Barrel                       $4.38    $4.14   $4.19        $4.01
                               ========= ======== ======= ============

Northeast:
Operating Income $163 $219 $944 $725

Throughput Volumes (Mbbls
per Day) (9) 575 570 563 448

Throughput Margin per Barrel $8.51 $9.28 $9.80 $8.33

Operating Costs per Barrel:
   Refining Operating Expenses    $4.26    $4.31   $4.10        $3.11
   Depreciation and
    Amortization                   1.17     0.79    1.11         0.78
                               --------- -------- ------- ------------
    Total Operating Costs per
     Barrel                       $5.43    $5.10   $5.21        $3.89
                               ========= ======== ======= ============

West Coast:
Operating Income $227 $220 $1,088 $978

Throughput Volumes (Mbbls
per Day) 306 318 306 312

Throughput Margin per Barrel $13.61 $11.91 $15.07 $13.42

Operating Costs per Barrel:
   Refining Operating Expenses    $4.21    $3.19   $4.04        $3.59
   Depreciation and
    Amortization                   1.30     1.21    1.27         1.23
                               --------- -------- ------- ------------
    Total Operating Costs per
     Barrel                       $5.51    $4.40   $5.31        $4.82
                               ========= ======== ======= ============

Operating Income for Regions
Above $1,614 $2,124 $8,470 $6,521

LIFO Charge Resulting from
Premcor Acquisition (2) - - - (621)
--------- -------- ------- ------------

Total Refining Operating
Income $1,614 $2,124 $8,470 $5,900
========= ======== ======= ============

                               Three Months Ended Twelve Months Ended
                                  December 31,        December 31,
                               ------------------- -------------------
                                   2006   2005 (1)      2006 2005 (1)
                               --------- --------- ---------- --------
Retail - U.S.:
Company - Operated Fuel Sites
(Average)                         968     1,011        982    1,024
Fuel Volumes (Gallons per Day
per Site)                       5,133     4,733      4,985    4,830
Fuel Margin per Gallon          $0.126    $0.266     $0.162   $0.154
Merchandise Sales                 $235      $224       $960     $934
Merchandise Margin
(Percentage of Sales)            28.7%     29.5%      29.6%    29.7%
Margin on Miscellaneous Sales      $44       $35       $169     $126
Selling Expenses                  $142      $147       $569     $540

Retail - Canada:
Fuel Volumes (Thousand
Gallons per Day)                3,172     3,239      3,176    3,204
Fuel Margin per Gallon          $0.198    $0.211     $0.217   $0.211
Merchandise Sales                  $42       $38       $167     $150
Merchandise Margin
(Percentage of Sales)            26.7%     25.9%      27.4%    25.6%
Margin on Miscellaneous Sales       $8        $7        $32      $30
Selling Expenses                   $60       $60       $234     $218

Average Market Reference
Prices and Differentials
(Dollars per Barrel):
Feedstocks (at U.S. Gulf
   Coast, except as Noted):
   West Texas Intermediate
    (WTI) Crude Oil              $59.92    $59.98     $66.00   $56.44
   WTI Less Sour Crude Oil
    (11)                          $6.67     $7.50      $7.01    $6.88
   WTI Less Alaska North Slope
    (ANS) Crude Oil (U.S. West
    Coast)                        $4.43     $2.13      $2.47    $3.06
   WTI Less Maya Crude Oil       $13.03    $16.75     $14.80   $15.58

Products:
   U.S. Gulf Coast:
   Conventional 87 Gasoline
    Less WTI                      $5.35     $7.49     $11.34   $10.60
   No. 2 Fuel Oil Less WTI        $9.59    $15.81      $9.80   $11.57
   Propylene Less WTI             $4.36    $20.62      $8.78   $10.11
   U.S. Mid-Continent:
   Conventional 87 Gasoline
    Less WTI                      $6.36     $6.45     $12.16   $10.39
   Low-Sulfur Diesel Less WTI    $17.46    $22.88     $18.59   $15.54
   U.S. Northeast:
   Conventional 87 Gasoline
    Less WTI                      $6.94     $6.98     $10.62    $8.95
   No. 2 Fuel Oil Less WTI        $9.67    $14.01      $9.60   $11.60
   Lube Oils Less WTI            $67.66    $45.50     $55.56   $33.68
   U.S. West Coast:
   CARBOB 87 Gasoline Less ANS   $17.61    $11.57     $21.52   $19.42
   CARB Diesel Less ANS          $25.17    $21.82     $23.96   $21.91

(1) Amounts previously reported in 2005 for refining operating
expenses, retail selling expenses, general and administrative
expenses, and depreciation and amortization expense have been
reclassified for comparability with amounts reported in 2006. The
reclassifications resulted from the following changes that took
effect on January 1, 2006: (i) information services costs that were
previously allocated to the operating units are now being reported as
general and administrative expenses to better reflect the area
responsible for such costs and (ii) Statement of Financial Accounting
Standards No. 123 (revised 2004), "Share-Based Payment," was
implemented, which resulted in amounts previously reported as
amortization expense now being reported as operating, selling or
general and administrative expenses.

(2) The information presented for the twelve months ended December 31,
2005 includes the operations related to the acquisition of Premcor
Inc. for periods subsequent to its acquisition on September 1, 2005.
For the twelve months ended December 31, 2005, cost of sales includes
a $621 million pre-tax LIFO charge related to the difference between
the fair market value recorded for the inventories acquired in the
Premcor acquisition under purchase accounting and the amounts
required to be recorded under Valero Energy Corporation's LIFO
accounting policy. This LIFO charge is excluded from the consolidated
and regional throughput margins per barrel and the regional operating
income amounts presented herein in order to make the information
presented comparable between periods.

(3) Valero Energy Corporation's buy/sell arrangements involve linked
purchases and sales related to crude oil contracts entered into to
address location, quality or grade requirements. Commencing January
1, 2006, Valero adopted Emerging Issues Task Force Issue No. 04-13,
"Accounting for Purchases and Sales of Inventory with the Same
Counterparty," which requires that such buy/sell arrangements be
accounted for as one transaction, thereby resulting in no recognition
of revenues and cost of sales for these transactions. For buy/sell
arrangements prior to 2006, cost of sales includes amounts which
approximate the revenues resulting from these transactions.

(4) Includes excise taxes on sales by Valero's U.S. retail system of
$195 million and $196 million for the three months ended December 31,
2006 and 2005, respectively, and $782 million and $807 million for
the twelve months ended December 31, 2006 and 2005, respectively.

(5) On December 22, 2006, Valero Energy Corporation sold its remaining
ownership interest, or 25.2 million units, in Valero GP Holdings,
LLC. On July 19, 2006, Valero Energy Corporation had sold to the
public 40.6% of its ownership interest, or 17.3 million units, in
Valero GP Holdings, LLC. Subsidiaries of Valero GP Holdings, LLC own
the general partner interest, the incentive distribution rights and a
21.4% limited partner interest in Valero L.P. The sales resulted in a
pre-tax gain for the three months and twelve months ended December
31, 2006 of $196 million and $328 million, respectively, which is
included in "Other Income, Net" in the statement of income. The
minority interest in net income of Valero GP Holdings, LLC represents
the public unitholders' interest in the earnings of Valero GP
Holdings, LLC from July 19, 2006 through December 21, 2006.

(6) "Other Income, Net" for the three months and twelve months ended
December 31, 2005 includes a $55 million pre-tax gain on the sale of
Valero Energy Corporation's 20% interest in the Javelina off-gas
processing joint venture.

(7) Primarily includes gas oils, No. 6 fuel oil, petroleum coke and
asphalt.

(8) The regions reflected herein contain the following refineries
subsequent to the Premcor acquisition: Gulf Coast- Corpus Christi
East, Corpus Christi West, Texas City, Houston, Three Rivers, Krotz
Springs, St. Charles, Aruba and Port Arthur Refineries; Mid-
Continent- McKee, Ardmore, Memphis and Lima Refineries; Northeast-
Quebec, Paulsboro and Delaware City Refineries; and West Coast-
Benicia and Wilmington Refineries. The Mid-Continent region also
included the Denver Refinery prior to its disposition on May 31,
2005.

(9) Throughput volumes for the Gulf Coast, Mid-Continent and Northeast
regions for the twelve months ended December 31, 2006 include 287,
304 and 201 Mbbls per day, respectively, related to the operations of
the refineries acquired from Premcor Inc. on September 1, 2005.
Throughput volumes for the Gulf Coast, Mid-Continent and Northeast
regions for the twelve months ended December 31, 2005 include 78, 106
and 63 Mbbls per day, respectively, related to those acquired
refineries subsequent to their acquisition date of September 1, 2005.

(10) The information presented for the Mid-Continent region for the
twelve months ended December 31, 2005 includes the operations of the
Denver Refinery prior to its sale to Suncor Energy (U.S.A.) Inc. on
May 31, 2005. Throughput volumes include 15 Mbbls per day related to
the Denver Refinery for the twelve months ended December 31, 2005.

(11) The market reference differential for sour crude oil is based on
50% Arab Medium and 50% Arab Light posted prices.

CONTACT: Valero Energy Corporation, San Antonio
Investors, Eric Fisher, Vice President,
Investor Relations: 210-345-2896
or
Media, Bill Day, Manager,
Corporate Communications: 210-345-2314
Website: http://www.valero.com

SOURCE: Valero Energy Corporation