VALERO ENERGY CORP/TX
STOCK OPTION PLAN
<DOCUMENT>
<TYPE>EX-10.07
<SEQUENCE>10
<FILENAME>d13299exv10w07.txt
<DESCRIPTION>STOCK OPTION PLAN
<TEXT>
<PAGE>
                                  Exhibit 10.07















                            VALERO ENERGY CORPORATION


                             =======================

                              AMENDED AND RESTATED
                                STOCK OPTION PLAN

                                December 3, 2002
                             =======================


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                            VALERO ENERGY CORPORATION
                     AMENDED AND RESTATED STOCK OPTION PLAN


         The original Stock Option Plan (the "Original Plan") was adopted April
23, 1997 and amended as of July 30, 1997; October 29, 1997; May 19, 1999; and
December 3, 2002. The Original Plan is hereby amended and restated as of
December 3, 2002 to fully incorporate all of the amendments to the Original Plan
to date.

1.       Introduction and Statement of Purpose.

         This Stock Option Plan (the "Plan") of Valero Energy Corporation is
established for the purpose of giving additional incentive to Key Employees of
the Company by creating an opportunity for capital accumulation. It is intended
that the benefits available under this Plan, when added to other benefits
payable to these Key Employees, will furnish total compensation that is
competitive in the industries in which the Company conducts its business and in
which the Company competes for employees. This Plan sets forth the basis for the
eligibility of Employees to participate in the Plan and the terms and conditions
regulating participation. The Plan provides for the grant of Options to purchase
Common Stock of Valero and stock appreciation rights ("SARs") which are
automatically exercised upon the exercise of an Option. The Options granted
under the Plan are and are intended to be "non-qualified" options under the
Internal Revenue Code of 1986, as amended.

2.       Definitions.

         For the purposes of this Plan, the following terms shall have the
meanings stated below unless a different meaning is plainly required by the
context or such term is otherwise defined herein.

       (a)       "Affiliate" shall mean (i) any entity that, directly or through
                 one or more intermediaries, is controlled by the Company and
                 (ii) any entity in which the Company has a significant equity
                 interest, as determined by the Committee.
       (b)       "Board of Directors" shall mean the Board of Directors of
                 Valero.
       (c)       "Cause" shall mean the (i) conviction of the Participant by a
                 state or federal court of a felony involving moral turpitude,
                 (ii) conviction of the Participant by a state or federal court
                 of embezzlement or misappropriation of funds of the Company,
                 (iii) negligence or misconduct of the Participant which causes
                 material loss, damage or injury to the Company, any of its
                 Affiliates or their respective employees, or (iv) Participant's
                 failure to satisfactorily perform the material stated duties of
                 Participant's position with the Company or any of its
                 Affiliates.
       (d)       "Change of Control" shall have the meaning specified in
                 Paragraph 4.12.
       (e)       "Committee" shall mean the persons administering this Plan from
                 time to time pursuant to Paragraph 6.1.
       (f)       "Common Stock" shall mean the common stock, par value $0.01 per
                 share, of Valero.
       (g)       "Company" shall mean Valero and its subsidiaries, and any
                 successor or successors to such entities.
       (h)       "Distribution Agreement" shall mean the Agreement and Plan of
                 Distribution, entered into between VEC and Valero, in
                 connection with the transactions contemplated by the Merger
                 Agreement. "Distribution" and "Time of Distribution" shall have
                 the meanings specified in the Distribution Agreement.
       (i)       "EBA" shall mean the Employee Benefits Agreement, entered into
                 between Valero and VEC, in connection with the transactions
                 contemplated by the Merger Agreement.
       (j)       "Employee" shall mean any person employed by the Company,
                 including officers and directors of the Company within the
                 meaning of Section 16(a) of the Exchange Act, but shall include
                 a director only if also employed by the Company on a full-time
                 basis.
       (k)       "Exchange Act" shall mean the Securities Exchange Act of 1934,
                 as amended and in effect from time to time.

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       (l)       "Exercise Date" -- see Paragraph 4.3.
       (m)       "Expiration Date" -- see Paragraph 3.5.
       (n)       "Exercise Notice" -- see Paragraph 4.3.
       (o)       "Key Employee" shall mean any key Employee or prospective
                 Employee of the Company having responsibility for planning the
                 Company's operations, controlling or managing its business
                 activities, or advising the management of the Company with
                 respect to its operations and business activities. The
                 determination of "Key Employees" for purposes of determining
                 eligibility for participation in this Plan, and the
                 determination of "key employees" for purposes of applying any
                 New York Stock Exchange Rule or determining eligibility for
                 participation in any other stock option plan of the Company,
                 need not be consistent.
       (p)       "Merger Agreement" shall mean the Agreement and Plan of Merger,
                 dated as of January 31, 1997, between VEC, PG&E Corporation and
                 PG&E Acquisition Corporation.
       (q)       "Option" or "Options" shall mean an option or options granted
                 pursuant to this Plan to purchase shares of Common Stock.
       (r)       "Option Agreement" shall mean a written agreement entered into
                 between Valero and a Participant pursuant to Paragraph 3.9.
       (s)       "Option Price" -- see Paragraph 3.5.
       (t)       "Option Share" shall mean one share of Common Stock purchased
                 or which may be purchased pursuant to an Option.
       (u)       "Participant" shall mean a Key Employee who is eligible to be
                 granted an Option under this Plan.
       (v)       "Plan" -- see Paragraph 1.
       (w)       "Preference Share Purchase Right" shall mean one of the rights
                 distributed pursuant to the Rights Agreement to purchase 1/100
                 share of the Junior Participating Preferred Stock, Series I, of
                 Valero.
       (x)       "Ratio" shall mean the amount obtained by dividing the average
                 of the daily high and low trading prices per share of VEC
                 Common Stock as reported on the NYSE Composite Tape (the "NYSE
                 Tape") on each of the last 15 consecutive full NYSE trading
                 days (the "Averaging Period") ending on and including the
                 trading day preceding the Distribution Date (as defined in the
                 Distribution Agreement) (the "Company Price") by the difference
                 between (a) the Company Price and (b) the product of (1) the
                 Per Share Merger Consideration (as defined in the Merger
                 Agreement) and (2) the average of the daily high and low prices
                 per share of Acquiror Common Stock (as defined in the Merger
                 Agreement) as reported on the NYSE Tape during the Averaging
                 Period.
       (y)       "Rights Agreement" shall mean that certain Rights Agreement,
                 dated as of June 18, 1997, between Valero and Harris Trust and
                 Savings Bank, as Rights Agent, as amended and in effect from
                 time to time.
       (z)       "Restricted Optionee" shall mean any person who is a "director"
                 or "officer" of Valero within the meaning of Section 16(a) of
                 the Exchange Act, together with any person who is the
                 beneficial owner of more than 10 percent of any class of equity
                 security of Valero registered under Section 12 of the Exchange
                 Act.
       (aa)      "SAR" or "stock appreciation right" shall mean the right,
                 subject to the provisions of this Plan, to receive a payment in
                 cash equal to the difference between the specified Strike Price
                 of the SAR and the price of one share of the Common Stock at
                 the time specified in Paragraph 4.2.
       (bb)      "SEC" shall mean the Securities and Exchange Commission.
       (cc)      "Settlement Date" -- see Paragraph 4.3.
       (dd)      "Strike Price" shall mean the price per share of the Common
                 Stock, determined pursuant to Paragraph 3.7, from which the
                 appreciation (if any) with respect to an SAR shall be
                 calculated.


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       (ee)      "Tax Payment" -- see Paragraph 4.3.
       (ff)      "Time of Distribution" -- see "Distribution Agreement."
       (gg)      "Valero" shall mean Valero Energy Corporation, a Delaware
                 corporation formerly known as Valero Refining and Marketing
                 Company, incorporated in 1981 under the name Saber Energy, Inc.
       (hh)      "VEC" shall mean PG&E Gas Transmission, Texas Corporation, a
                 Delaware corporation formerly known as Valero Energy
                 Corporation, incorporated in 1955 under the name Coastal States
                 Oil and Gas Company.
       (ii)      "VEC Common Stock" shall mean the Common Stock, $1.00 par
                 value, of VEC.
       (jj)      "VEC Option Plans" shall mean the following stock option plans
                 previously adopted by VEC: the VEC Stock Option Plan No. 3, the
                 VEC Stock Option Plan No. 4, and the VEC Stock Option Plan No.
                 5.
       (kk)      "VRM Participant" shall have the same meaning as given in the
                 EBA.

3.     Granting of Options and SARs to Employees.

       3.1. Selection of Participants. The Committee may grant Options to
purchase a specified number of Option Shares to Key Employees of the Company
selected by the Committee in its sole and absolute discretion to become
Participants. At or subsequent to the time that an Option is granted to a Key
Employee by the Committee, the Committee may grant to that Key Employee a number
of SARs not exceeding the number of Option Shares that may be purchased pursuant
to such Option, provided, that no SARs shall be granted with respect to Option
Shares that have theretofore been purchased by a Participant or to any
Participant who, subsequent to the date of grant of such Option, is no longer an
Employee. Subject to the full and final authority of the Committee to administer
the Plan and select Participants, the granting of Options and SARs and the
selection of Participants may be based on recommendations made by the Chief
Executive Officer of Valero.

       3.2. Exclusion of Committee Members. No member of the Committee, while so
serving, may be granted Options or SARs. However, a Participant who has been
granted an Option or SARs under this Plan prior to serving on the Committee may,
during such term of service, continue to hold any Options and SARs and may
exercise any such Options and SARs and hold the Option Shares acquired upon the
exercise of any such Options, subject to the provisions of this Plan.

       3.3. No Right to Participate. No Employee or prospective Employee of the
Company shall have the right to require the Company or the Committee to make him
or her a Participant under this Plan.

       3.4. Certain Options Granted Under Prior VEC Stock Option Plans. Pursuant
to the terms of the Merger Agreement, the EBA and the VEC Option Plans, certain
stock options previously awarded by VEC under the VEC Option Plans will be
automatically converted at the Time of Distribution into Options to purchase
Options Shares under this Plan. Each such VEC option that is outstanding and
unexercised immediately prior to the Time of Distribution and is held by a
person who, immediately before the Time of Distribution, is a VRM Participant,
or their respective beneficiaries and dependents, shall be converted in
accordance with the EBA into Options to purchase Option Shares under this Plan.
Each such VEC option eligible to be replaced by an Option under this Plan shall
be replaced with an Option with respect to a number of Option Shares equal to
the number of shares of VEC Common Stock subject to such VEC option immediately
before such replacement, multiplied by the Ratio, rounded up to the nearest
whole share as necessary, and having a per-share exercise price equal to the
per-share exercise price of such VEC option immediately before such replacement,
divided by the Ratio (rounded down to the nearest whole cent as necessary). The
other terms and conditions of any such VEC option, including the vesting and
termination dates thereof, shall remain unchanged, except as may be necessary to
conform to the provisions of the Plan or as otherwise may be determined by the
Committee.


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       3.5. Determination of Option Provisions. When granting Options, the
Committee shall designate the number of Option Shares the Employee may purchase
under the Option, a date upon which the Option will automatically expire (unless
an earlier termination date is established pursuant to Paragraph 8.3; the
earlier of such dates being referred to herein as the "Expiration Date"), the
price per share at which the Option Shares may be purchased (the "Option
Price"), and the remaining terms and conditions of the Option. If the Committee
determines to grant SARs to the grantee or holder of an Option, the Committee
shall designate the number of SARs granted and any terms and conditions
pertaining thereto.

       3.6. Option Shares and SARs Available for Grant. (A) Subject to the
provisions of Paragraphs 4.7 and 5, the maximum number of shares of Common Stock
that may be optioned under this Plan shall be 2,000,000 shares. In addition, the
number of shares available to be optioned under this Plan may from time to time
be increased by such number of additional shares as the Committee may deem
necessary. However, in no event shall the total number of shares optioned and
sold under this Plan equal or exceed 20 percent of the "voting power
outstanding," as defined in the NYSE's Company Manual, Paragraph 312. Shares of
Common Stock optioned and sold under this Plan (and any rights or other
securities sold or delivered in accordance with Paragraph 5.1) may be either
authorized but unissued securities or reacquired (treasury) securities.

              (B) Subject to the provisions of Paragraphs 4.7 and 5, the maximum
number of SARs that may be granted under this Plan shall be equal to the maximum
number of shares of Common Stock that may be optioned and sold under this Plan.

              (C) During the term of this Plan, Valero will at all times reserve
and keep available, or have authorized but unissued, shares of Common Stock
sufficient to satisfy the requirements of this Plan. The inability of Valero to
obtain, from any regulatory body having jurisdiction, any authority deemed by
Valero's counsel to be necessary to the lawful issuance and sale of Common Stock
hereunder, shall relieve the Company of any liability in respect of the
nonissuance or sale of such Common Stock as to which such requisite authority
shall not have been obtained.

       3.7. Limitations Regarding Option Price and Strike Price. The Option
Price for any Option Share shall be as specified by the Committee in its sole
discretion, but shall not be less than (a) the average of the "high" and "low"
reported sales price per share of Common Stock on the date of grant as reported
in the New York Stock Exchange - Composite Transactions listing or such other
listing or quotation medium as the Committee may later designate, or if there
are no sales on such date, on the next following day on which there are sales,
or (b) in the event that the Common Stock is not listed for trading on the NYSE,
an amount determined in accordance with standards adopted by the Committee. The
Strike Price at which an SAR is granted shall be equal to the Option Price of
the Option Shares to which such SAR is related.

       3.8. Limitation Regarding Option Period. The Plan shall continue
indefinitely. However, no Option granted under this Plan shall have a stated
Expiration Date that is more than 10 years and 30 days following its date of
grant. Subject to the provisions of Paragraph 4.11, an Option and any associated
SARs shall lapse and be automatically forfeited upon the earlier of the
Expiration Date (i) as set forth in the Option Agreement pursuant to which such
Option and any associated SARs are granted, or (ii) as established pursuant to
Paragraph 8.3, unless an Exercise Notice is delivered to Valero on or before the
Expiration Date.

       3.9. Option Agreements. Options and SARs shall be evidenced by Option
Agreements having such terms and provisions, not inconsistent with this Plan, as
the Committee deems advisable. Option Agreements need not be uniform. Promptly
following each determination by the Committee to grant an Option or SARs to a
Key Employee, the Committee shall cause Valero to enter into an appropriate
Option


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Agreement (or, in the case of a grant only of SARs, an amendment to an
existing Option Agreement) with such Key Employee. No Key Employee or other
person claiming by, through or under a Key Employee shall be entitled to
exercise any Option or SAR until an appropriate Option Agreement (or amendment
thereto) shall have been executed by Valero and the Key Employee. In the event
that a Key Employee of the Company is granted an Option or SARs by the Committee
but for any reason, including but not limited to death or disability, does not
actually enter into a fully executed Option Agreement (or appropriate amendment
thereto) with Valero, such Key Employee shall not be deemed a Participant with
respect to such Option or SARs and neither such Key Employee nor any person
claiming by, through or under such Key Employee shall be entitled under any
circumstances to exercise such Option or SARs.

       3.10 Provisions Regarding Prospective Employees. If a prospective
Employee of the Company is granted an Option or SARs pursuant to this Plan prior
to actually commencing employment with the Company but for any reason,
including, but not limited to, death or total and permanent disability, does not
actually commence employment with the Company, such person shall not be deemed a
Participant for any purpose of this Plan and neither such person nor any person
claiming by, through or under such person shall be entitled under any
circumstances to exercise such Option or SARs. Upon actually commencing
employment with the Company, such a prospective Key Employee will then be deemed
a Participant for all purposes of this Plan, and will then, but only then, be
deemed solely for purposes of this Plan to have been continually employed by the
Company from the date of grant of the Option to the date of commencement of
employment.

4.     Exercise of Options and SARs.

       4.1. Exercise of Options. Any Option and any associated SARs shall be
exercisable at such time and in such amounts, either as to all of the Option
Shares covered thereby or in installments, as is provided in the Participant's
Option Agreement or as may otherwise be provided in this Plan. An installment
option may allow the purchase of all or any part of the Option Shares on a
specified installment date or dates, and the subsequent purchase of any
unpurchased Option Shares after such installment date(s) and through the
Expiration Date. However, no Option may be exercised with respect to a
fractional share.

       4.2. Automatic Exercise of SARs, Settlement Price for SARs. SARs may not
be exercised except simultaneously with the exercise of an Option. A Participant
or other person exercising an Option shall be deemed to have automatically
exercised on the Exercise Date that number of related SARs equal to the number
of Option Shares purchased, not exceeding the lesser of (a) the number of
related SARs held by the Participant, or (b) the number of SARs then permitted
to be exercised under the Participant's Option Agreement. When a Participant
holds fewer related SARs than the number of Option Shares to which his or her
Option pertains, the Committee may adopt policies, or include terms in the
Participant's Option Agreement, that permit or require the Participant to
exercise such SARs during or after specified periods, or in conjunction with the
exercise of a certain portion of an Option, or that permit the Participant to
determine, with any restrictions as the Committee may prescribe, the timing of
exercise of the SARs. SARs shall be settled on the basis of the daily average
sales price of the Common Stock on the Exercise Date.

       4.3. Exercise Procedure. Options and SARs may be exercised only by
written notice of exercise (the "Exercise Notice"), in such form as the
Committee may prescribe, delivered to Valero's Stock Benefit Plan Administration
department at Valero's principal business office and signed by the Participant
or other person specified herein as being entitled to exercise the same. The
date on which the Exercise Notice is delivered to Valero shall be the "Exercise
Date." The Exercise Notice for Options Shares shall specify a date (the
"Settlement Date"), not less than five business days nor more than ten business
days following the Exercise Date, upon which the Option Shares shall be issued
to the


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Participant (or other person entitled to exercise the Option) and the Option
Price shall be paid to Valero. Subject to the provisions of Paragraph 3.6(A), on
the Settlement Date the person exercising an Option shall tender to Valero full
payment for the Option Shares with respect to which the Option is exercised,
together with an additional amount equal to the amount of all taxes required to
be collected or withheld by the Company in connection with the exercise of the
Option (the "Tax Payment"); provided, however, that when related SARs are
exercised at the same time an Option is exercised, the Tax Payment shall be
reduced by withholding the amount thereof, to the extent possible, from the cash
payment otherwise payable by the Company to the Participant as the result of the
exercise of such SARs. Subject to the prior approval or disapproval of the
Committee, and to such rules and limitations as it may adopt, if no related SARs
are exercised the Tax Payment may also be made in whole or in part by (a)
withholding from the number of shares otherwise deliverable to the person
exercising the Option a number of shares whose fair market value equals the Tax
Payment or (b) delivering certificates for other shares of Common Stock owned by
the person exercising the Option, endorsed in blank with appropriate signature
guarantee, having a fair market value equal to the amount otherwise to be
collected or withheld. All calculations with respect to a Participant's income,
required tax withholding or other matters required to be made by the Company
upon the exercise of an Option shall be made using the average sales price of
the Common Stock on the Exercise Date, whether or not the Exercise Notice is
delivered to Valero before or after the close of trading on such date, unless
otherwise specified by the Committee. All calculations made with respect to a
Participant's income, required tax withholding or other matters made upon
exercise of an SAR shall be made using the price at which such SAR is settled,
unless otherwise specified by the Committee.

       4.4. Payment for SARs. SARs shall be paid or settled only in cash.
Payment for SARs shall be made on the Settlement Date.

       4.5. Payment with Common Stock. Subject to any rules and limitations as
the Committee may adopt or as may be set forth in any Option Agreement, a person
exercising an Option for the receipt of Option Shares may pay for the Option
Shares with other shares of Common Stock legally and beneficially owned by that
person at the time of the exercise of an Option.

       4.6. Rights as Stockholder. Until the issuance of the stock
certificate(s) for Option Shares purchased hereunder (as evidenced by the
appropriate entry on the books of Valero or of a duly authorized transfer agent
of Valero), no right to vote or receive dividends or any other rights as a
stockholder of Valero shall exist with respect to such Option Shares,
notwithstanding the exercise of any Option. No adjustment will be made for a
dividend or other rights for which the record date is prior to the date that
stock certificates evidencing such shares of Common Stock are issued, except as
otherwise provided under Paragraph 5.

       4.7 Effect of Termination and Forfeiture. (A) Except as otherwise
expressly provided in this Paragraph 4.7 and Paragraphs 4.11 and 4.12, or as
otherwise determined by the Committee on the date of grant and included in the
Option Agreement, an Option (and any associated SARs) may be exercised by a
Participant only while he or she is and has continually been, since the date of
the grant of the Option, an Employee of the Company. In the event a
Participant's employment with the Company is voluntarily terminated by the
Participant (other than through retirement, death or disability) or is
terminated by the Company for Cause, then those Options (and any associated
SARs) previously awarded to the Participant hereunder and not yet exercised in
accordance with Paragraph 4.3 shall automatically lapse and be forfeited,
whether vested or unvested, as of the date of the Participant's termination. If
a Participant's employment is terminated by the Company other than for Cause,
then (i) those Options (and any associated SARs) previously awarded to the
Participant hereunder and not yet vested shall automatically lapse and be
forfeited as of the date of the Participant's termination and (ii) those Options
(and any associated SARs) previously awarded to the Participant hereunder which
are vested but unexercised as of


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<PAGE>


the date of the Participant's termination shall automatically lapse and be
forfeited at the close of business on the last business day of the twelfth month
following the month during which Participant's termination occurs, unless such
vested Options (and any associated SARs) sooner expire according to their
original term. If a Participant's employment is terminated by retirement, death
or disability, the provisions of Paragraph 4.11 shall apply. If a Participant
shall forfeit, voluntarily surrender or otherwise permanently lose his right to
exercise an Option or SAR under any provision of this Plan or otherwise, or if
any Option shall terminate or expire pursuant to its terms, the Option Shares
subject to such Option shall once more be available to be optioned and sold
under this Plan pursuant to a new Option granted hereunder, and any associated
SARs shall again be available for grant hereunder.

              (B) In the case of any termination of employment (whether
voluntary or involuntary, disability related, or upon retirement or otherwise),
the Committee or the Chief Executive Officer of Valero may, in connection with
any Participant's termination of employment with the Company, (i) authorize any
existing Option Agreement of such Participant to remain in full force and effect
under its existing terms and conditions (including its existing vesting
schedule) or such amended terms and conditions as the Committee or the Chief
Executive Officer shall approve, and/or (ii) authorize amendments to any
existing Option Agreement (or a new Option Agreement superseding any prior
Option Agreement) between Valero and such Participant removing and/or modifying
any or all of the then present or future restrictions, conditions and/or
limitations (whether arising under such Option Agreement or this Plan) on the
exercise of the Options (and any associated SARs) previously granted to such
Participant; provided that no authorization or amendment (or new Option
Agreement) shall increase the aggregate number of Options granted to any
Participant; and provided that, in accordance with Article II. Section 4 of
Valero's Bylaws, any such action with respect to the Chief Executive Officer or
the President must be approved by the Board of Directors and any such action
with respect to a Restricted Optionee must be approved by the Committee. Any
action referred to in the preceding sentence shall be taken by Valero, if at
all, not later than six months following the Participant's effective date of
termination.

              (C) In cases of ambiguity in connection with the termination of
any Participant from employment with the Company, the Chief Executive Officer of
the Company is authorized to determine which, if any, of the provisions of this
Article 4 shall apply to such termination of employment, such determination to
be binding upon the Company.

       4.8 Effect of Leave of Absence. A Participant who commences a leave of
absence shall thereupon be suspended from participation in this Plan during the
leave of absence. During a period of suspension from this Plan, a Participant
cannot exercise any Option or any associated SARs that would, but for this
provision, vest during such period of suspension, provided however, that such
Participant shall be entitled to exercise any Options or SARs that become
exercisable pursuant to Paragraph 4.12 during the period of suspension. A
Participant, while suspended, may exercise an Option (and any related SARs) with
respect to any portion which vested prior to the first day of such suspension;
however, such Option Shares must be purchased prior to the Expiration Date of
the Option. Notwithstanding the foregoing provisions of this Paragraph 4.8, the
Committee, in its sole and absolute discretion, may determine at any time before
or after the commencement of such leave of absence that the commencement of such
leave of absence will be treated as a termination of employment for purposes of
the Plan. If the Committee so determines, the Committee shall so notify the
Participant and specify a date, not less than 10 days following such
notification, by which the Participant must deliver an Exercise Notice with
respect to any Option Shares which the Participant is then entitled to purchase
and exercise any related SARs that may then be exercised. Options and SARs not
exercised by the Participant by such date shall be forfeited. The Committee may,
in its sole and absolute discretion, change or modify the exercise dates or
other terms of any Option or SARs held by a Participant who commences a leave of
absence which were not vested at the commencement of such leave of absence.


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<PAGE>


       4.9 Effect of Disability. The total and permanent disability of a
Participant shall terminate the participation of such Participant in this Plan
subject to the conditions set forth in Paragraph 4.11. The Committee shall
determine whether a Participant is totally and permanently disabled for purposes
of this Plan and when such disability (if any) commenced, and such
determinations by the Committee shall be conclusive and binding on the
Participant and all persons claiming by, through or under such Participant.
These determinations shall be made on the basis of medical reports and other
evidence satisfactory to the Committee and in accordance with a uniform,
nondiscriminatory policy applied by the Committee, but such determinations shall
not be binding on the Company or any Participant with respect to any other
employee benefit or other plan or insurance policy, and need not be consistent
with any determinations made under any such plan or insurance policy.

       4.10 Effect of Retirement or Death. The retirement or death of a
Participant shall terminate, effective on the date of such retirement or death,
the participation of such Participant in this Plan subject to the conditions set
forth in Paragraph 4.11. For purposes of this Plan, a Participant shall be
deemed to have retired when the Participant retires under the provisions of the
pension plan for Employees of Valero or any other, similar pension plan of the
Company providing benefits to such Participant. In the case of a Participant who
is not a participant in such a plan, retirement shall be deemed to occur when
the Participant retires from the service of the Company.

       4.11 Exercise Following Termination, Retirement, Disability or Death. If
a Participant's employment is terminated because of retirement, death or
disability (with the determination of disability to be made within the sole
discretion of the Committee), any unexercised Option or SAR held by the
Participant shall remain outstanding according to its original terms;
alternatively, the Committee or, except with respect to a Participant subject to
Section 16 under the Exchange Act, the Chief Executive Officer of the Company,
may prescribe new or additional terms for the vesting, exercise or realization
of the Option or SAR. Absent any determination by the Committee or the Chief
Executive Officer to the contrary, any unexercised Option or SAR held by a
Participant whose employment is terminated because of retirement, death or
disability shall vest or become exercisable according to the Option or SAR's
original terms.

       4.12 Effect of Change of Control. (A) As used herein, the term "Change of
Control" shall mean each occurrence of any one or more of the following events:

              (i) the stockholders of Valero approve any agreement or
       transaction pursuant to which: (a) the Company will merge or consolidate
       with any other Person (other than a wholly owned subsidiary of the
       Company) and will not be the surviving entity (or in which the Company
       survives only as the subsidiary of another entity); (b) the Company will
       sell all or substantially all of its assets to any other Person (other
       than a wholly owned subsidiary of the Company); or (c) the Company will
       be liquidated or dissolved; or

              (ii) any "person" or "group" (as these terms are used in Section
       13(d) and 14(d) of the Exchange Act) other than the Company, any
       subsidiary of the Company, any employee benefit plan of the Company or
       its subsidiaries, or any entity holding Common Stock for or pursuant to
       the terms of such employee benefit plans, is or becomes an "Acquiring
       Person" as defined in the Rights Agreement (or any successor Rights
       Agreement) (or, if no Rights Agreement is then in effect, such person or
       group acquires or holds such number of shares as, under the terms and
       conditions of the most recent such Rights Agreement to be in force and
       effect, would have caused such person or group to be an "Acquiring
       Person" thereunder); or


                                       8
<PAGE>


              (iii) any "person" or "group" shall commence a tender offer or
       exchange offer for 30% or more of the shares of Common Stock then
       outstanding, or for any number or amount of Common Stock which, if the
       tender or exchange offer were to be fully subscribed and all shares for
       which the tender or exchange offer is made were to be purchased or
       exchanged pursuant to the offer, would result in the acquiring person or
       group directly or indirectly beneficially owning 50% or more of the
       Common Stock then outstanding; or

              (iv) individuals who, as of any date, constitute the Board of
       Directors (the "Incumbent Board") thereafter cease for any reason to
       constitute at least a majority of the Board; provided, however, that any
       individual becoming a director whose election, or nomination for election
       by Valero's stockholders, was approved by a vote of at least a majority
       of the directors then comprising the Incumbent Board shall be considered
       as though such individual were a member of the Incumbent Board, but
       excluding, for this purpose, any such individual whose initial assumption
       of office occurs as a result of an actual or threatened election contest
       with respect to the election or removal of directors or other actual or
       threatened solicitation of proxies or consents by or on behalf of a
       person or group other than the Board; or

              (v) the occurrence of the Distribution Date (as defined in the
       Rights Agreement); or

              (vi) any other event determined by the Board of Directors or the
       Committee to constitute a "Change of Control" hereunder.

              (B) Notwithstanding the provisions of Paragraph 4.7, in the event
that a Change of Control shall occur, each Option (and any SARs) held by a
Participant pursuant to the Plan shall remain exercisable until the earlier of
(i) the Expiration Date of the Option, or (ii) 90 days following the
Participant's date of termination of employment.

5.     Adjustments Upon Changes In Capitalization.

       5.1. Securities Received Upon Exercise. If all or any portion of an
Option or SAR is exercised subsequent to any stock dividend, rights
distribution, split-up, recapitalization, exchange of shares, merger,
consolidation, spin-off, reorganization, or liquidation, as a result of which
shares or other securities of any class or rights shall be issued in respect of
outstanding shares of Common Stock or shares of Common Stock shall be changed
into the same or a different number of shares of the same or another class or
other securities (hereafter "Reorganization Event"), the person exercising such
Option or SAR shall receive, (a) for the aggregate price payable upon such
exercise of such Option, (i) the aggregate number and class of shares, rights or
other securities for which a recognized market exists, and (ii) a cash amount
equal to the fair market value on such date, as reasonably determined by the
Committee, of any other property (other than regular cash dividend payments) and
of any shares, rights or other securities for which no recognized market exists,
which, if shares of Common Stock (as authorized at the date of the granting of
such Option) had been purchased at the date of granting of the Option for the
same aggregate price (on the basis of the price per share provided in the
Option) and had not been disposed of, such person or persons would be holding at
the time of such exercise as a result of such purchase and any such
Reorganization Event, and (b) a cash amount upon the exercise of the SARs equal
to the difference between the aggregate Strike Price of such SAR and the
aggregate of (i) the average sales price, on the date provided in Paragraph 4.2
hereof, as the case may be, of any whole shares or units of Common Stock, rights
or other securities for which a recognized market exists, and (ii) the fair
market value on such date, as reasonably determined by the Committee, of any
other property (other than regular cash dividend payments) which the holder of a
number of shares of Common Stock equal to the number of such SARs, if such
shares had been purchased at the date of granting of such SARs and not otherwise
disposed of, would be holding at the time of exercise of such SARs as a result
of such purchase and any


                                       9
<PAGE>


such Reorganization Event; provided, however, that no fractional share of Common
Stock, fractional right or other fractional security shall be issued upon any
such exercise, and the aggregate price paid shall be appropriately reduced to
reflect any fractional share of Common Stock, fractional right or other
fractional security not issued; and provided further, however, that if the
exercise of any Option subsequent to any Reorganization Event would, pursuant to
clause (a) of this Paragraph 5.1, require the delivery of shares, rights or
other securities that Valero is not then authorized to issue or that in the sole
judgment of the Committee cannot be issued without undue effort or expense, the
person exercising the Option shall receive, in lieu of such shares, rights or
other securities, a cash payment equal to the fair market value on the Exercise
Date, as reasonably determined by the Committee, of such shares, rights or other
securities. For purposes of applying the provisions of this Plan, the Preference
Share Purchase Rights distributed pursuant to the Rights Agreement shall be
deemed not to have been distributed until the Distribution Date (as defined in
the Rights Agreement).

       5.2. Adjustment of Option Shares Available. In the event of any change in
the number of shares of Common Stock outstanding resulting from a Reorganization
Event, (a) the aggregate number and class of shares of Common Stock remaining
available to be optioned under this Plan shall be that number and class which a
person, to whom an Option had been granted for all of the available shares of
Common Stock under this Plan on the date preceding such change, would be
entitled to receive as provided in Paragraph 5, and (b) the aggregate number of
SARs remaining available under this Plan shall be determined pursuant to the
formula b/a (c) wherein:

       a =    the number of Option Shares available to be optioned under this
              Plan immediately prior to such change,
       b =    the number of Option Shares available to be optioned under this
              Plan immediately following such change, and
       c =    the number of SARs available for grant under this Plan immediately
              prior to such change.

       Upon the occurrence of any Reorganization Event, the Committee shall be
entitled (but shall not be required) to determine that new Option Agreements
shall be entered into with Participants reflecting the Reorganization Event.

6.     Administration.

       6.1. Plan Administered by Committee. This Plan shall be administered by a
committee composed solely of two or more "Non-Employee Directors" (as defined in
Rule 16b-3 under the Exchange Act) of Valero, which committee shall, except as
hereinafter set forth, be the Compensation Committee, as appointed and
constituted from time to time by the Board of Directors. In the event that the
membership of the Compensation Committee shall fail to meet the foregoing
criteria, then additional or different members of the Board of Directors shall
be appointed by the Board of Directors to act for purposes of administering this
Plan so that the Committee administering this Plan shall consist solely of two
or more "Non-Employee Directors."

       6.2. Powers of the Committee. In connection with its administration of
this Plan, the Committee is empowered to:

       (a)  Make all determinations and computations concerning the selection
            of Participants, the granting of Options and SARs, the pricing
            thereof and the number of Option Shares to be optioned, and SARs to
            be granted, to each Participant;
       (b)  Cause Valero to enter into Option Agreements with Participants;


                                       10
<PAGE>


       (c)  With the consent of the Participant, enter into agreements amending
            any Option Agreement to grant SARs thereunder, change the Option
            Price or Expiration Date of any Option, the Strike Price of any SAR
            or any other term or condition thereof, or to terminate any such
            Option Agreement;
       (d)  Make rules and regulations for the administration of the Plan not
            inconsistent with the terms and provisions of this Plan, including
            rules providing for the accelerated exercise of Options and SARs in
            such circumstances as the Committee may deem appropriate;
       (e)  Construe all terms, provisions, conditions and limitations of the
            Plan in good faith, and adopt amendments to the Plan;
       (f)  Make equitable adjustments for any mistakes or errors in the
            administration of this Plan or deemed by the Committee to be
            necessary as the result of any unusual situation or any ambiguity in
            the Plan;
       (g)  Select, employ and compensate, from time to time, consultants,
            accountants, attorneys and other agents and employees as the
            Compensation Committee may deem necessary or advisable for the
            proper and efficient administration of this Plan.

       6.3. Express Powers not Exclusive. The foregoing list of express powers
granted to the Committee upon the adoption of this Plan is not intended to be
either complete or exclusive, but the Committee shall have, in addition to the
specific powers granted by this Plan, such powers that it may deem necessary,
desirable, convenient or appropriate for the supervision and administration of
this Plan. Except as otherwise specifically provided herein, the decisions or
judgment of the Committee on any question or claim arising hereunder shall be
final, binding and conclusive upon the Participants and all persons claiming by,
through or under a Participant.

7.     Miscellaneous Provisions.

       7.1. Nonassignability. Without prior written approval from the Committee,
no Options, SARs, or any other security, right or interest granted under this
Plan shall be transferable by the Participant, except upon Participant's death
and then the same shall be transferred to the Participant's beneficiary
designated under the Valero Energy Corporation Beneficiary Designation Form, or
if there is no such designation, then the same shall be transferred pursuant to
the will of the Participant and if there is no will, then pursuant to the
applicable laws of descent and distribution, and no Participant or other person
claiming by, through or under a Participant shall have any right to sell,
assign, transfer, pledge, anticipate, mortgage or otherwise encumber, transfer,
hypothecate or convey in advance of actual receipt any Option Shares, SARs, or
any cash amounts or other shares, rights or securities (if any) payable
hereunder, or any part thereof, all of which are, and all rights in and to which
are, hereby expressly declared to be nonassignable and nontransferable; any such
purported sale, assignment or conveyance without the Committee's prior approval
shall be void and of no force or effect. No Option Shares, SARs, and no part of
any cash amounts or other shares, rights or securities payable hereunder (if
any) shall, prior to actual payment or delivery, be subject to seizure or
sequestration for the payment of any debts, judgments, alimony or separate
maintenance owed by a Participant, or other person claiming by, through or under
a Participant, or be transferable by operation of law in the event of bankruptcy
or insolvency.

       7.2. Investment Letter. As a condition to the exercise of any portion of
an Option, the Committee, the General Counsel or the Corporate Secretary may
require the person exercising such Option to represent and warrant to Valero at
the time of any such exercise that the Option Shares are being purchased only
for investment and without any present intention to sell or distribute such
Option Shares, if, in the opinion of counsel for Valero, such representation is
required or desirable under the Securities Act of 1933 or any other applicable
state, federal or local law, regulation or rule of any governmental


                                       11
<PAGE>


agency. The Committee, the General Counsel or the Corporate Secretary may
require such person to execute and deliver to Valero an appropriate investment
letter containing representations and warranties of the type generally described
above.

       7.3. Representatives of the Participant. Neither the Company, its
officers, directors, employees, or agents, nor any member of the Committee shall
bear any liability to the estate of, or to any spouse, beneficiary, legatee or
heir of a Participant, or to the Participant, or to any other person, for
authorizing an heir, beneficiary, executor, legatee, administrator, guardian or
legal representative of a Participant, or an individual or entity who is
represented as such, to exercise an Option or SAR or for issuing the Option
Shares purchased pursuant to the exercise of any Option, or for making any cash
payment (or for withholding any Tax Payment from any cash payment) relating to
any SAR granted under this Plan.

       7.4. Responsibility for Taxes. All taxes payable with respect to income
to a Participant resulting from the exercise of an Option or SARs granted
hereunder shall be the sole responsibility of the Participant, not of the
Company or Valero, whether or not Valero or the Company shall have withheld or
collected from the Participant any sums required to be withheld or collected in
respect of such income, and whether or not any sums withheld or collected shall
be sufficient to provide for any such taxes.

       7.5. Employment Not Guaranteed. Nothing contained in this Plan nor any
action taken hereunder shall be construed to create a contract of employment or
to give any Participant any right to be retained in the employ of the Company or
to serve or continue to serve as an officer or director of Valero or any
subsidiary of Valero.

       7.6. Gender, Singular and Plural. All pronouns and any variations thereof
shall be deemed to refer to the masculine, feminine, or neuter, as the identity
of the person or persons may require. As the context may require, the singular
may be read as the plural and the plural as the singular.

       7.7. Captions. The captions of the Paragraphs of this Plan are for
convenience only and shall not control or affect the meaning or construction of
any of its provisions.

       7.8. Validity. In the event any provision of this Plan is held invalid,
void, or unenforceable, the same shall not affect, in any respect whatsoever,
the validity of any other provision of this Plan.

       7.9. Notice. Any notice, statement, decision or communication required or
permitted to be given under this Plan shall be sufficient if in writing and hand
delivered, or sent by registered or certified mail, if to the Company, to the
principal office of Valero, directed to the attention of the Corporate Secretary
of Valero, and if to a Participant or other person, to the address of the
Participant or other person as it shall appear on the books of the Company. Any
such notice shall be deemed given as of the date of delivery or, if delivery is
made by mail, as of the third day following the date shown on the postmark on
receipt for registration or certification.

       7.10 NYSE Listing. Notwithstanding anything to the contrary contained in
this Plan, in any Option grant, or any agreement entered into hereunder, any
grant made under this Plan shall be conditional and shall be entered into or
granted, as the case may be, subject to acceptance of the Option Shares for
listing on the NYSE. No such agreement entered into under this Plan or any
Option grant made under this Plan shall create any obligation in the Company
prior to such acceptance. If the Option Shares ultimately are not accepted for
such listing, then any and all such agreements theretofore entered into shall
thereupon terminate and shall be void and of no force or effect, no Option
Shares shall be required to be issued thereunder.


                                       12
<PAGE>


       7.11 Inconsistency. In the event of any conflict or inconsistency between
the provisions of this Plan and the provisions of any Option Agreement, the
provisions of this Plan shall control.

       7.12 Delegation. Subject to the terms of the Plan and applicable law, the
Committee may delegate to one or more officers or managers of the Company or any
Affiliate, or to a committee of such officers or managers, the authority,
subject to the terms and limitations the Committee shall determine, to grant
Awards to, or to cancel, modify or waive rights with respect to, or to amend,
suspend, or terminate Awards held by, Employees who are not deemed "officers" or
"directors" of the Company for purposes of Section 16 of the Exchange Act, or
who are otherwise not subject to Section 16.

8.     Amendment and Termination of Plan and Option Agreements.

       8.1. Amendments and Termination. The Board of Directors or the Committee,
without approval of the Participants but subject to Paragraph 8.2, may amend
this Plan from time to time. The Board of Directors or the Committee, without
approval of the Participants but subject to Paragraph 8.2, may at any time
terminate this Plan.

       8.2. Effect of Amendment or Termination. Any amendment or termination of
this Plan may not materially adversely affect Options or SARs already granted.
If any termination or amendment materially adversely affects Options or SARs
already granted, then such Options and SARs shall, subject to Paragraph 8.3,
remain in full force and effect as if this Plan had not been so amended or
terminated. If the Board of Directors or the Committee deems it appropriate or
is advised by counsel that stockholder approval is required, the amendment or
termination of this Plan shall be submitted to the stockholders of Valero for
approval.

       8.3 Cancellation of Options. Any other provision of this Plan to the
contrary notwithstanding, if either (a) the Option Price of any Option shall on
any NYSE trading day equal or exceed 125 percent of the closing sales price per
share of the Common Stock (determined as provided in Paragraph 3.7), or (b) out
of any period of 120 consecutive NYSE trading days the Option Price of any
Option shall exceed the closing sales price per share of the Common Stock
(determined as provided in Paragraph 3.7) on any 80 or more of such days, then
the Committee, in its sole discretion, may unilaterally cancel and terminate
such Option, the related Option Agreement and any associated SARs. Upon such
Committee determination, the Expiration Date of such Option, Option Agreement,
and SARs shall be at the close of business on the date of such determination.
The Committee shall cause notification of cancellation to be sent to the
Participant (or other person entitled to exercise such Option), but failure to
send or any delay in sending notice shall not nullify, delay, or otherwise
affect cancellation. No compensation shall be paid or payable to any Participant
(or other person entitled to exercise such Option), or other person claiming by,
through or under a Participant, in respect of any cancellation. If an Option,
the related Option Agreement, and any associated SARs, shall be terminated and
canceled pursuant to the provisions of this Paragraph 8.3, the Option Shares and
any associated SARs subject to such Option (to the extent not theretofore
exercised) shall once more be available to be optioned and sold under this Plan
pursuant to a new Option granted hereunder. No Participant with respect to whom
an Option and any associated SARs has been canceled pursuant to this Paragraph
8.3 shall have any right, whether by virtue of such cancellation or otherwise,
to require the Company or the Committee to grant a new Option to him under this
Plan or any other stock option plan of the Company.


                                       13
<PAGE>


9.     Claims.

       9.1. Filing of Claims. A Participant or other person claiming to have
been denied any benefit or right provided under this Plan shall have the right
to file a written claim with the Committee. All claims shall be submitted on a
form provided by the Committee, which shall be signed by the claimant and shall
be considered filed on the date the claim is received by the Committee. The
claim will be reviewed and a written decision will be rendered by a member of
the Committee designated by the Committee for such purpose within 90 days
following receipt of the claim.

         9.2. Review of Denial. Within 90 days after receipt of a notice of any
denial of benefits, the claimant or his authorized representative may request,
in writing, to appear before the full Committee for a review of his or her
claim. The Committee in its discretion may elect to grant the Participant's
request to personally appear before the Committee. Any decision of the Committee
thereafter to deny benefits shall be in writing and shall include the specific
reasons for the decision and references to relevant Plan provisions on which the
decision is based. The decision of the Committee shall be final, conclusive and
binding upon the Participant or other claimant and all persons claiming by,
through or under such claimant.


                                       14

</TEXT>
</DOCUMENT>
