The following review of our results of operations and financial condition should be read in conjunction with Items 1, 1A, and 2, "Business, Risk Factors, and Properties," and Item 8, "Financial Statements and Supplementary Data," included in this report.

CAUTIONARY STATEMENT FOR THE PURPOSE OF SAFE HARBOR PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This report, including without limitation our disclosures below under the heading "OVERVIEW AND OUTLOOK," includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. You can identify our forward-looking statements by the words "anticipate," "believe," "expect," "plan," "intend," "estimate," "project," "projection," "predict," "budget," "forecast," "goal," "guidance," "target," "could," "should," "may," and similar expressions. These forward-looking statements include, among other things, statements regarding:
• future refining margins, including gasoline and distillate margins;

• future retail margins, including gasoline, diesel, heating oil, and convenience store merchandise margins;

• future ethanol margins;

• expectations regarding feedstock costs, including crude oil differentials, and operating expenses;

• anticipated levels of crude oil and refined product inventories;

• our anticipated level of capital investments, including deferred refinery turnaround and catalyst costs and capital expenditures for environmental and other purposes, and the effect of these capital investments on our results of operations;

• anticipated trends in the supply of and demand for crude oil and other feedstocks and refined products globally and in the regions where we operate;

• expectations regarding environmental, tax, and other regulatory initiatives; and

• the effect of general economic and other conditions on refining, retail, and ethanol industry fundamentals.

We based our forward-looking statements on our current expectations, estimates, and projections about ourselves and our industry. We caution that these statements are not guarantees of future performance and involve risks, uncertainties, and assumptions that we cannot predict. In addition, we based many of these forward-looking statements on assumptions about future events that may prove to be inaccurate. Accordingly, our actual results may differ materially from the future performance that we have expressed or forecast in the forward-looking statements. Differences between actual results and any future performance suggested in these forward-looking statements could result from a variety of factors, including the following:
• acts of terrorism aimed at either our facilities or other facilities that could impair our ability to produce or transport refined products or receive feedstocks;

• political and economic conditions in nations that produce crude oil or consume refined products;

• demand for, and supplies of, refined products such as gasoline, diesel fuel, jet fuel, heating oil, petrochemicals, and ethanol;

• demand for, and supplies of, crude oil and other feedstocks;

• the ability of the members of the Organization of Petroleum Exporting Countries (OPEC) to agree on and to maintain crude oil price and production controls;

• the level of consumer demand, including seasonal fluctuations;

• refinery overcapacity or undercapacity;

• our ability to successfully integrate any acquired businesses into our operations;

• the actions taken by competitors, including both pricing and adjustments to refining capacity in response to market conditions;

• the level of competitors' imports into markets that we supply;

• accidents, unscheduled shutdowns, or other catastrophes affecting our refineries, machinery, pipelines, equipment, and information systems, or those of our suppliers or customers;

• changes in the cost or availability of transportation for feedstocks and refined products;

• the price, availability, and acceptance of alternative fuels and alternative-fuel vehicles;

• the levels of government subsidies for ethanol and other alternative fuels;

• delay of, cancellation of, or failure to implement planned capital projects and realize the various assumptions and benefits projected for such projects or cost overruns in constructing such planned capital projects;

• earthquakes, hurricanes, tornadoes, and irregular weather, which can unforeseeably affect the price or availability of natural gas, crude oil, grain and other feedstocks, and refined products and ethanol;

• rulings, judgments, or settlements in litigation or other legal or regulatory matters, including unexpected environmental remediation costs, in excess of any reserves or insurance coverage;

• legislative or regulatory action, including the introduction or enactment of legislation or rulemakings by governmental authorities, including tax and environmental regulations, such as those to be implemented under the California Global Warming Solutions Act (also known as AB 32) and the EPA's regulation of greenhouse gases, which may adversely affect our business or operations;

• changes in the credit ratings assigned to our debt securities and trade credit;

• changes in currency exchange rates, including the value of the Canadian dollar, the pound sterling, and the euro relative to the U.S. dollar;

• overall economic conditions, including the stability and liquidity of financial markets; and

• other factors generally described in the "Risk Factors" section included in Items 1, 1A, and 2, "Business, Risk Factors, and Properties" in this report.

Any one of these factors, or a combination of these factors, could materially affect our future results of operations and whether any forward-looking statements ultimately prove to be accurate. Our 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. We do not intend to update these statements unless we are required by the securities laws to do so.
All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the foregoing. We undertake no obligation to publicly release 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.

OVERVIEW AND OUTLOOK

Overview
For the year ended December 31, 2012, we reported net income attributable to Valero stockholders from continuing operations of $2.1 billion, or $3.75 per share (assuming dilution), which was comparable to the $2.1 billion, or $3.69 per share (assuming dilution), in net income attributable to Valero stockholders from continuing operations for the year ended December 31, 2011. Included in our 2012 results, however, were noncash asset impairment losses totaling $983 million after taxes, or $1.77 per share (assuming dilution), primarily related to the impairment of the refining assets of our Aruba Refinery in connection with our decision in September 2012 to reorganize the refinery into a crude oil and refined products terminal. This matter is more fully discussed in Note 4 of Notes to Consolidated Financial Statements.
Our operating income increased $330 million from 2011 to 2012 as outlined by business segment in the following table (in millions):

                                                    Year Ended December 31,
                                                  2012         2011       Change
Operating income (loss) by business segment:
Refining                                       $   4,450     $ 3,516     $  934
Retail                                               348         381        (33 )
Ethanol                                              (47 )       396       (443 )
Corporate                                           (741 )      (613 )     (128 )
Total                                          $   4,010     $ 3,680     $  330

Operating income for 2012 was also negatively impacted by the noncash asset impairment losses discussed above, as well as severance expense of $41 million related to the operations at our Aruba Refinery, and operating income for 2011 was impacted by a $542 million loss on commodity derivative contracts related to forward sales of refined product. Excluding these significant items, total operating income for 2012 and 2011 would have been $5.1 billion and $4.2 billion, respectively, reflecting a $900 million favorable increase between the years, and refining segment operating income for 2012 and 2011 would have been $5.5 billion and $4.1 billion, respectively, reflecting a favorable increase of $1.4 billion between the years.

The $1.4 billion increase in refining segment operating income was primarily the result of improvements in the margin generated by our U.S. Mid-Continent and North Atlantic refining operations, which experienced increases in throughput margin of $2.58 per barrel and $3.81 per barrel, respectively, in 2012 compared to 2011. Our U.S. Mid-Continent region continued to benefit from the favorable difference between the price of Brent crude oil and WTI-type crude oil, which is the type of crude oil primarily processed by our refineries in this region. Because the market for refined products generally tracks the price of Brent crude oil, we benefit when the price of WTI-type crude oil is lower than the price of Brent crude oil. The favorable difference between the price of WTI and Brent crude oil improved by $1.67 per barrel in 2012 compared to 2011, which contributed significantly to the increase in the throughput margin generated by our operations in this region. The results of our North Atlantic region were favorably impacted by increases in refined product prices due largely to a reduction in the supply of refined products in this region as compared to the prior year. This reduction in supply resulted from the continued shutdown of refineries in the U.S. East Coast, Caribbean, and Western Europe during 2012, which was due to poor refining economics in these areas, and supply disruptions caused by Hurricane Sandy, which struck the U.S. East Coast in October 2012.

The favorable results of our refining segment were partially offset by the $443 million decrease in our ethanol segment's operating income in 2012 compared to 2011. This decrease was due to significantly lower gross

margins in 2012 caused by a combination of high corn prices and an oversupply of ethanol in the market. The increase in corn prices in 2012 was largely due to the severe drought experienced in grain producing regions of the U.S. in 2012, and the oversupply of ethanol inventories was largely attributable to lower exports of ethanol to Europe and increased imports of ethanol from Brazil.

Outlook
Throughout 2011 and 2012, our refining business benefited from processing sweet crude oils sourced from the inland U.S., such as WTI crude oil, due to the favorable difference between the price of this type of crude oil and the price of a benchmark sweet crude oil, such as Brent crude oil. Historically, the price of WTI-type crude oil has closely approximated Brent crude oil, but due to the significant development of crude oil reserves within the U.S. Mid-Continent region and increased deliveries of crude oil from Canada into the U.S. Mid-Continent region, the increased supply of WTI crude oil has resulted in WTI crude oil being priced at a significant discount to Brent crude oil. This benefit, however, may decline as various crude oil pipeline and logistics projects are completed. These projects will allow cost-advantaged crude oils from the inland U.S. and Canada to be transported to the U.S. Gulf Coast region, which is expected to result in a narrowing of the price differential of WTI-priced crude oils relative to Brent-priced crude oils. As a result, the margins for refined products for refiners that process WTI-priced crude oils may decline.

Continued refinery closures in the U.S. East Coast, Caribbean, and Western Europe and additional closures expected to occur in the industry combined with poor reliability and low utilization in Latin American refineries create opportunities for competitive refineries to export quality products at higher margins. However, some marginally profitable refineries may continue to be operated, which could negatively impact refined product margins.

Thus far in the first quarter of 2013, ethanol margins have improved, but the improvement is not significant and the margins remain far below those experienced in 2011. We expect a continued modest improvement in ethanol margins throughout 2013 relative to those in 2012.

Energy markets and margins are volatile, and we expect them to continue to be volatile in the near to mid-term.

We continue to make progress in the separation of our retail business under a new company named CST Brands, Inc. The separation is planned by way of a pro rata distribution of 80 percent of the outstanding shares of CST common stock to Valero stockholders. The distribution is expected to take place in the second quarter of 2013, assuming a favorable private letter ruling from the IRS and clearance of all comments from the SEC relating to CST's registration statement on Form 10. When the distribution occurs, we expect to receive approximately $1.1 billion of cash and incur a tax liability of approximately $230 million. We also expect to liquidate the remaining 20 percent of CST outstanding shares within 18 months of the distribution. Details of the separation and distribution are provided in filings with the SEC by CST.

RESULTS OF OPERATIONS
The following tables highlight our results of operations, our operating performance, and market prices that directly impact our operations. The narrative following these tables provides an analysis of our results of operations.

2012 Compared to 2011
                          Financial Highlights (a) (b)
                (millions of dollars, except per share amounts)
                                                         Year Ended December 31,
                                                    2012           2011          Change
Operating revenues                              $  139,250     $  125,987     $   13,263
Costs and expenses:
Cost of sales (c)                                  127,268        115,719         11,549
Operating expenses:
Refining (d)                                         3,668          3,406            262
Retail                                                 686            678              8
Ethanol                                                332            399            (67 )
General and administrative expenses                    698            571            127
Depreciation and amortization expense:
Refining                                             1,370          1,338             32
Retail                                                 119            115              4
Ethanol                                                 42             39              3
Corporate                                               43             42              1
Asset impairment loss (e)                            1,014              -          1,014
Total costs and expenses                           135,240        122,307         12,933
Operating income                                     4,010          3,680            330
Other income, net                                        9             43            (34 )
Interest and debt expense, net of capitalized
interest                                              (313 )         (401 )           88
Income from continuing operations before
income tax expense                                   3,706          3,322            384
Income tax expense                                   1,626          1,226            400
Income from continuing operations                    2,080          2,096            (16 )
Loss from discontinued operations, net of
income taxes                                             -             (7 )            7
Net income                                           2,080          2,089             (9 )
Less: Net loss attributable to noncontrolling
interests                                               (3 )           (1 )           (2 )
Net income attributable to Valero stockholders  $    2,083     $    2,090     $       (7 )

Net income attributable to Valero stockholders:
Continuing operations                           $    2,083     $    2,097     $      (14 )
Discontinued operations                                  -             (7 )            7
Total                                           $    2,083     $    2,090     $       (7 )

Earnings per common share - assuming dilution:
Continuing operations                           $     3.75     $     3.69     $     0.06
Discontinued operations                                  -          (0.01 )         0.01
Total                                           $     3.75     $     3.68     $     0.07


________________

                         Refining Operating Highlights
                (millions of dollars, except per barrel amounts)
                                            Year Ended December 31,
                                          2012          2011      Change
Refining (a) (b):
Operating income (c) (d) (e)          $   4,450       $ 3,516    $  934
Throughput margin per barrel (f)      $   10.96       $  9.91    $ 1.05
Operating costs per barrel:
Operating expenses (d)                     3.79          3.83     (0.04 )
Depreciation and amortization expense      1.44          1.51     (0.07 )
Total operating costs per barrel (e)       5.23          5.34     (0.11 )
Operating income per barrel           $    5.73       $  4.57    $ 1.16

Throughput volumes (thousand BPD):
Feedstocks:
Heavy sour crude                            453           454        (1 )
Medium/light sour crude                     547           442       105
Acidic sweet crude                           81           116       (35 )
Sweet crude                                 910           745       165
Residuals                                   200           282       (82 )
Other feedstocks                            120           122        (2 )
Total feedstocks                          2,311         2,161       150
Blendstocks and other                       302           273        29
Total throughput volumes                  2,613         2,434       179

Yields (thousand BPD):
Gasolines and blendstocks                 1,251         1,120       131
Distillates                                 918           834        84
Other products (g)                          467           494       (27 )
Total yields                              2,636         2,448       188


__________

                  Refining Operating Highlights by Region (h)
                (millions of dollars, except per barrel amounts)
                                                         Year Ended December 31,
                                                    2012           2011          Change
U.S. Gulf Coast (a):
Operating income (c) (d) (e)                    $    2,541     $    2,205     $      336
Throughput volumes (thousand BPD)                    1,488          1,450             38
Throughput margin per barrel (c) (f)            $     9.65     $     9.33     $     0.32
Operating costs per barrel:
Operating expenses (d)                                3.55           3.66          (0.11 )
Depreciation and amortization expense                 1.44           1.50          (0.06 )
Total operating costs per barrel (d) (e)              4.99           5.16          (0.17 )
Operating income per barrel                     $     4.66     $     4.17     $     0.49

U.S. Mid-Continent:
Operating income (c)                            $    2,044     $    1,535     $      509
Throughput volumes (thousand BPD)                      430            411             19
Throughput margin per barrel (c) (f)            $    18.49     $    15.91     $     2.58
Operating costs per barrel:
Operating expenses                                    4.02           4.15          (0.13 )
Depreciation and amortization expense                 1.48           1.52          (0.04 )
Total operating costs per barrel                      5.50           5.67          (0.17 )
Operating income per barrel                     $    12.99     $    10.24     $     2.75

North Atlantic (b):
Operating income                                $      752     $      171     $      581
Throughput volumes (thousand BPD)                      428            317            111
Throughput margin per barrel (f)                $     9.24     $     5.43     $     3.81
Operating costs per barrel:
Operating expenses                                    3.59           3.08           0.51
Depreciation and amortization expense                 0.85           0.87          (0.02 )
Total operating costs per barrel                      4.44           3.95           0.49
Operating income per barrel                     $     4.80     $     1.48     $     3.32

U.S. West Coast:
Operating income (c)                            $      147     $      147     $        -
Throughput volumes (thousand BPD)                      267            256             11
Throughput margin per barrel (c) (f)            $     8.84     $     9.11     $    (0.27 )
Operating costs per barrel:
Operating expenses                                    5.09           5.25          (0.16 )
Depreciation and amortization expense                 2.25           2.29          (0.04 )
Total operating costs per barrel                      7.34           7.54          (0.20 )
Operating income per barrel                     $     1.50     $     1.57     $    (0.07 )

Operating income for regions above              $    5,484     $    4,058     $    1,426
Loss on derivative contracts related to the
forward sales of refined product (c)                     -           (542 )          542
Severance expense (d)                                  (41 )            -            (41 )
Asset impairment loss applicable to refining
(e)                                                   (993 )            -           (993 )
Total refining operating income                 $    4,450     $    3,516     $      934


__________

               Average Market Reference Prices and Differentials
                     (dollars per barrel, except as noted)

                                                         Year Ended December 31,
                                                    2012           2011         Change
Feedstocks:
Brent crude oil                                 $   111.70     $   110.93          0.77
Brent less WTI crude oil                             17.55          15.88          1.67
Brent less Alaska North Slope (ANS) crude oil         1.08           1.39         (0.31 )
Brent less LLS crude oil                             (0.91 )        (0.54 )       (0.37 )
Brent less Mars crude oil                             3.97           3.46          0.51
Brent less Maya crude oil                            12.06          12.18         (0.12 )
LLS crude oil                                       112.61         111.47          1.14
LLS less Mars crude oil                               4.88           4.00          0.88
LLS less Maya crude oil                              12.97          12.72          0.25
WTI crude oil                                        94.15          95.05         (0.90 )

Natural gas (dollars per million British
thermal units)                                        2.71           3.96         (1.25 )

Products:
U.S. Gulf Coast:
Conventional 87 gasoline less Brent                   6.49           5.58          0.91
Ultra-low-sulfur diesel less Brent                   16.48          13.78          2.70
Propylene less Brent                                (22.38 )         8.23        (30.61 )
Conventional 87 gasoline less LLS                     5.58           5.04          0.54
Ultra-low-sulfur diesel less LLS                     15.57          13.24          2.33
Propylene less LLS                                  (23.29 )         7.69        (30.98 )
U.S. Mid-Continent:
Conventional 87 gasoline less WTI                    25.40          22.37          3.03
Ultra-low-sulfur diesel less WTI                     34.96          31.06          3.90
North Atlantic:
Conventional 87 gasoline less Brent                  11.46           6.24          5.22
Ultra-low-sulfur diesel less Brent                   19.06          15.64          3.42
U.S. West Coast:
CARBOB 87 gasoline less ANS                          15.39          11.48          3.91
CARB diesel less ANS                                 19.93          18.47          1.46
CARBOB 87 gasoline less WTI                          31.86          25.97          5.89
CARB diesel less WTI                                 36.40          32.96          3.44
New York Harbor corn crush (dollars per gallon)      (0.15 )         0.25         (0.40 )


__________

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

                                                       Year Ended December 31,
                                                   2012        2011        Change
Retail-U.S.:
Operating income (e)                             $   240     $   213     $     27
Company-operated fuel sites (average)              1,013         994           19
Fuel volumes (gallons per day per site)            5,083       5,060           23
Fuel margin per gallon                           $ 0.162     $ 0.144     $  0.018
Merchandise sales                                $ 1,239     $ 1,223     $     16
Merchandise margin (percentage of sales)            29.7 %      28.7 %        1.0  %
Margin on miscellaneous sales                    $    89     $    88     $      1
Operating expenses                               $   434     $   416     $     18
Depreciation and amortization expense            $    77     $    77     $      -
Asset impairment loss (e)                        $    12     $     -     $     12

. . .