UNITED STATES
                SECURITIES AND EXCHANGE COMMISSION
                     Washington, D.C. 20549

                            FORM 10-Q

(Mark One)
[X]   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES 
       EXCHANGE ACT OF 1934

      For the quarterly period ended September 30, 1997

                         OR

[ ]   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE 
       SECURITIES EXCHANGE ACT OF 1934

       For the transition period from   to                   

             Commission file number 333-27015


                     VALERO ENERGY CORPORATION
     (Exact name of registrant as specified in its charter)


      Delaware                                74-1828067
(State or other jurisdiction of             (I.R.S. Employer
 incorporation or organization)             Identification No.)

                              7990 West IH 10
                             San Antonio, Texas
                  (Address of principal executive offices)
                                   78230
                                 (Zip Code)

                               (210) 370-2000
              (Registrant's telephone number, including area code)
                                                  

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

                Yes     X           No          

                                                  

Indicated below is the number of shares outstanding of the registrant's only
 class of common stock, as of November 1, 1997.
 
                                                Number of 
                                                  Shares
            Title of Class                      Outstanding

         Common Stock, $.01 Par Value            56,120,558

<PAGE>




     VALERO ENERGY CORPORATION AND SUBSIDIARIES

                                 INDEX


                                                                            Page
PART I.  FINANCIAL INFORMATION

  Consolidated Balance Sheets - September 30, 1997 and December 31, 
    1996 . .........................................................

  Consolidated Statements of Income - For the Three Months Ended and
    Nine Months Ended September 30, 1997 and 1996. . . . . . . . . . .

  Consolidated Statements of Cash Flows - For the Nine Months Ended 
    September 30, 1997 and 1996. . . . . . . . . . . . . . . . . . . .

  Notes to Consolidated Financial Statements . . . . . . . . . . . . .

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

PART II.  OTHER INFORMATION. . . . . . . . . . . . . . . . . . . . . . 

SIGNATURE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
<PAGE>

<TABLE>
                    PART I - FINANCIAL INFORMATION
              VALERO ENERGY CORPORATION AND SUBSIDIARIES          
                     CONSOLIDATED BALANCE SHEETS
                       (Thousands of Dollars)
                            (Unaudited)
<CAPTION>
                                                September 30,   December 31,
                                                   1997            1996    
                 ASSETS

<S>                                            <C>            <C>
CURRENT ASSETS:
  Cash and temporary cash investments. . . . .  $    21,930    $       10 
  Receivables, less allowance for doubtful 
    accounts of $1,200 (1997) and $975 (1996).      352,420       162,457 
  Inventories. . . . . . . . . . . . . . . . .      347,277       159,871 
  Current deferred income tax assets . . . . .       14,797        17,587 
  Prepaid expenses and other . . . . . . . . .       10,471        11,924 
                                                    746,895       351,849 
PROPERTY, PLANT AND EQUIPMENT - including
  construction in progress of $54,984 (1997)
  and $21,786 (1996), at cost. . . . . . . . .    2,083,151     1,712,334 
    Less:  Accumulated depreciation. . . . . .      524,831       480,124 
                                                  1,558,320     1,232,210 

INVESTMENT IN AND ADVANCES TO JOINT VENTURES .       32,443        29,192 

NET ASSETS OF DISCONTINUED OPERATIONS. . . . .         -          280,515 

DEFERRED CHARGES AND OTHER ASSETS. . . . . . .       81,043        91,865 

                                                 $2,418,701    $1,985,631 
<FN>
See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>

<TABLE>
            PART I - FINANCIAL INFORMATION
       VALERO ENERGY CORPORATION AND SUBSIDIARIES
              CONSOLIDATED BALANCE SHEETS
               (Thousands of Dollars)
                   (Unaudited)


<CAPTION>
                                                September 30,   December 31,
                                                    1997           1996   

LIABILITIES AND STOCKHOLDERS' EQUITY
<S>                                            <C>          <C>
CURRENT LIABILITIES:
  Short-term debt. . . . . . . . . . . . . . .  $   175,000  $     57,728 
  Current maturities of long-term debt . . . .         -           26,037 
  Accounts payable . . . . . . . . . . . . . .      432,540       191,555 
  Other accrued expenses . . . . . . . . . . .       53,639        25,264 
                                                    661,179       300,584 

LONG-TERM DEBT, less current maturities. . . .      323,500       353,307 

DEFERRED INCOME TAXES. . . . . . . . . . . . .      242,755       224,548 

DEFERRED CREDITS AND OTHER LIABILITIES . . . .       40,567        30,217 

REDEEMABLE PREFERRED STOCK, SERIES A, issued
  1,150,000 shares, outstanding -0- (1997) 
  and 11,500 (1996) shares . . . . . . . . . .         -            1,150 

COMMON STOCK AND OTHER STOCKHOLDERS' EQUITY:
  Preferred stock, $.01 (1997) and $1 (1996)
   par value - 20,000,000 shares authorized 
   including redeemable preferred shares:
      $3.125 Convertible Preferred Stock, 
        issued and outstanding -0- (1997) 
        and 3,450,000 (1996) shares. . . . . .         -            3,450
  Common stock, $.01 (1997) and $1 (1996) par 
    value - 150,000,000 shares authorized; 
    issued 56,116,917 (1997)and 
    44,185,513 (1996) shares . . . . . . . . .          561        44,186 
  Additional paid-in capital . . . . . . . . .    1,110,540       540,133 
  Unearned Valero Employees' Stock Ownership 
    Plan Compensation. . . . . . . . . . . . .         -           (8,783)
  Retained earnings. . . . . . . . . . . . . .       39,750       496,839 
  Treasury stock, 4,631 (1997) and -0- (1996)
    common shares, at cost . . . . . . . . . .         (151)         -    
                                                  1,150,700     1,075,825 

                                                 $2,418,701    $1,985,631 
<FN>
See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>

<TABLE>
          VALERO ENERGY CORPORATION AND SUBSIDIARIES
             CONSOLIDATED STATEMENTS OF INCOME
      (Thousands of Dollars, Except Per Share Amounts)
                     (Unaudited)

<CAPTION>
                                                   Three Months Ended            Nine Months Ended       
                                                      September 30,                September 30,   
                                                    1997        1996            1997          1996        

<S>                                            <C>          <C>           <C>            <C>
OPERATING REVENUES . . . . . . . . . . . . . . .$ 1,975,665  $  678,059    $ 4,160,091    $ 1,927,590  

COSTS AND EXPENSES:
  Cost of sales and operating expenses . . . . .  1,846,626     634,632      3,887,135      1,793,652  
  Selling and administrative expenses. . . . . .     17,502       6,678         36,962         23,333  
  Depreciation expense . . . . . . . . . . . . .     17,430      13,689         47,674         40,906  
    Total. . . . . . . . . . . . . . . . . . . .  1,881,558     654,999      3,971,771      1,857,891  

OPERATING INCOME . . . . . . . . . . . . . . . .     94,107      23,060        188,320         69,699  

EQUITY IN EARNINGS OF JOINT VENTURES . . . . . .      1,189       1,350          3,251          2,171  

OTHER INCOME, NET. . . . . . . . . . . . . . . .        272         249          1,224          2,694  

INTEREST AND DEBT EXPENSE:
  Incurred . . . . . . . . . . . . . . . . . . .    (12,601)    (10,003)       (37,178)       (30,900) 
  Capitalized. . . . . . . . . . . . . . . . . .        408       1,089          1,274          2,004  

INCOME FROM CONTINUING OPERATIONS
  BEFORE INCOME TAXES. . . . . . . . . . . . . .     83,375      15,745        156,891         45,668  

INCOME TAX EXPENSE . . . . . . . . . . . . . . .     31,382       9,115         57,489         17,911  

INCOME FROM CONTINUING OPERATIONS. . . . . . . .     51,993       6,630         99,402         27,757  

INCOME (LOSS) FROM DISCONTINUED OPERATIONS,
  NET OF INCOME TAX EXPENSE (BENEFIT) OF
  $(1,082), $(1,415), $(8,889) AND $10,889, 
   RESPECTIVELY. . . . . . . . . . . . . . . . .       (432)      6,516        (15,672)        26,144  

NET INCOME . . . . . . . . . . . . . . . . . . .     51,561      13,146         83,730         53,901  
  Less:  Preferred stock dividend 
     requirements and redemption 
     premium . . . . . . . . . . . . . . . . . .       -          2,844          4,592          8,526  

NET INCOME APPLICABLE TO COMMON STOCK. . . . . . $   51,561  $   10,302    $    79,138    $    45,375  

EARNINGS (LOSS) PER SHARE OF COMMON STOCK:
  Continuing operations. . . . . . . . . . . . . $      .93  $      .15    $      1.98    $       .63  
  Discontinued operations. . . . . . . . . . . .       (.01)        .08           (.40)           .40  
    Total. . . . . . . . . . . . . . . . . . . . $      .92  $      .23    $      1.58    $      1.03  

WEIGHTED AVERAGE COMMON SHARES
  OUTSTANDING (in thousands) . . . . . . . . . .     55,950      43,984         50,175         43,878  

DIVIDENDS PER SHARE OF COMMON STOCK. . . . . . . $      .08  $      .13    $       .34    $       .39  


<FN>
See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>

<TABLE>
                 VALERO ENERGY CORPORATION AND SUBSIDIARIES
                   CONSOLIDATED STATEMENTS OF CASH FLOWS
                         (Thousands of Dollars)
                               (Unaudited)

<CAPTION>
                                                                            Nine Months Ended        
                                                                              September 30,          
                                                                        1997                 1996    
<S>                                                              <C>                  <C>   
CASH FLOWS FROM OPERATING ACTIVITIES:
Income from continuing operations. . . . . . . . . . . . . .      $     99,402         $     27,757  
  Adjustments to reconcile income from continuing 
    operations to net cash provided by continuing 
    operations:
      Depreciation expense . . . . . . . . . . . . . . . . .            47,674               40,906  
      Amortization of deferred charges and other, net. . . .            22,540               23,733  
      Changes in current assets and current liabilities. . .            50,500               17,671  
      Deferred income tax expense. . . . . . . . . . . . . .            20,927                9,763  
      Equity in earnings of joint ventures . . . . . . . . .            (3,251)              (2,171) 
      Changes in deferred items and other, net . . . . . . .            (7,927)             (10,030) 
        Net cash provided by continuing operations . . . . .           229,865              107,629  
        Net cash provided by discontinued operations . . . .            24,752               75,613  
          Net cash provided by operating activities. . . . .           254,617              183,242  

CASH FLOWS FROM INVESTING ACTIVITIES:
  Capital expenditures:
    Continuing operations. . . . . . . . . . . . . . . . . .           (40,586)             (41,973) 
    Discontinued operations. . . . . . . . . . . . . . . . .           (52,674)             (48,141) 
  Deferred turnaround and catalyst costs . . . . . . . . . .            (4,466)             (23,952) 
  Acquisition of Basis Petroleum, Inc. . . . . . . . . . . .          (362,060)                -       
  Investment in and advances to joint ventures, net. . . . .              -                   1,792  
  Dispositions of property, plant and equipment. . . . . . .                28                   92  
  Other, net . . . . . . . . . . . . . . . . . . . . . . . .                (5)              (1,162) 
    Net cash used in investing activities. . . . . . . . . .          (459,763)            (113,344) 

CASH FLOWS FROM FINANCING ACTIVITIES:
  Increase in short-term debt, net . . . . . . . . . . . . .           208,088               44,888  
  Long-term borrowings . . . . . . . . . . . . . . . . . . .         1,300,068               28,500  
  Long-term debt reduction . . . . . . . . . . . . . . . . .        (1,092,668)            (122,754) 
  Special spin-off dividend, including intercompany 
    note settlement. . . . . . . . . . . . . . . . . . . . .          (214,653)                -        
  Common stock dividends . . . . . . . . . . . . . . . . . .           (16,541)             (17,114) 
  Preferred stock dividends. . . . . . . . . . . . . . . . .            (5,419)              (8,526) 
  Issuance of common stock . . . . . . . . . . . . . . . . .            58,794                8,017  
  Purchase of treasury stock . . . . . . . . . . . . . . . .            (9,264)              (2,895) 
  Redemption of preferred stock. . . . . . . . . . . . . . .            (1,339)                -       
    Net cash provided by (used in) 
     financing activities. . . . . . . . . . . . . . . . . .           227,066              (69,884) 

NET INCREASE IN CASH AND TEMPORARY     
  CASH INVESTMENTS . . . . . . . . . . . . . . . . . . . . .            21,920                   14   

CASH AND TEMPORARY CASH INVESTMENTS AT
  BEGINNING OF PERIOD. . . . . . . . . . . . . . . . . . . .                10                   13  

CASH AND TEMPORARY CASH INVESTMENTS AT
  END OF PERIOD. . . . . . . . . . . . . . . . . . . . . . .      $     21,930          $        27  

<FN> 
See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>

     VALERO ENERGY CORPORATION AND SUBSIDIARIES                        

    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.  Restructuring

      In the discussion below and Notes that follow, "Energy" refers to 
Valero Energy Corporation and its consolidated subsidiaries, both 
individually and collectively, for periods prior to the restructuring, and to
the natural gas related services business of Energy for periods subsequent to
the restructuring.  The "Company" refers to the former Valero Refining and
Marketing Company ("VRMC"), which was renamed Valero Energy Corporation
("VEC") on the date of the restructuring, and its consolidated subsidiaries.

      On July 31, 1997, pursuant to an agreement and plan of distribution
between Energy and VRMC (the "Distribution Agreement"), Energy spun off VRMC
to Energy's stockholders by distributing all of VRMC's $.01 par value common
stock on a share for share basis to holders of record of Energy common stock
at the close of business on such date (the "Distribution").  Immediately 
after the Distribution, Energy merged its natural gas related services 
business with a wholly owned subsidiary of PG&E Corporation ("PG&E")(the 
"Merger").  The completion of the Distribution and the Merger (collectively 
referred to as the "Restructuring") finalizes the restructuring of Energy 
previously announced in January 1997.  The Distribution and the Merger 
were approved by Energy's stockholders at Energy's annual meeting of 
stockholders held on June 18, 1997 and, in the opinion of Energy's outside 
counsel, were tax-free transactions.  Regulatory approval of the Merger was 
received from the Federal Energy Regulatory Commission (the "FERC") on 
July 16, 1997.  Upon completion of the Restructuring, VRMC was renamed 
Valero Energy Corporation and is listed on the New York Stock Exchange 
under the symbol "VLO."

      Immediately prior to the Distribution, the Company paid to Energy a
$210 million dividend pursuant to the Distribution Agreement.  In addition,
the Company paid to Energy approximately $5 million in settlement of the
intercompany note balance between the Company and Energy arising from
certain transactions during the period from January 1 through July 31, 1997.
      
      In connection with the Merger, PG&E issued approximately 31 million
shares of its common stock in exchange for the outstanding $1 par value
common shares of Energy, and assumed $785.7 million of Energy's debt. 
Each Energy stockholder received .554 of a share of PG&E common stock
(trading on the New York Stock Exchange under the symbol "PCG") for each
Energy share owned.  This fractional share amount was based on the average
price of PG&E common stock during a prescribed period preceding the closing
of the transaction and the number of Energy shares issued and outstanding
at the time of the closing.

      Prior to the Restructuring, Energy, the Company, and PG&E entered into
a tax sharing agreement ("Tax Sharing Agreement"), which sets forth each
party's rights and obligations with respect to payments and refunds, if any,
of federal, state, local or other taxes for periods before the Restructuring.
In general, under the Tax Sharing Agreement, Energy and the Company are each
responsible for its allocable share of the federal, state and other taxes
incurred by the combined operations of Energy and the Company prior to the
Distribution.  Furthermore, the Company is responsible for substantially all
tax liability resulting from the failure of the Distribution or the Merger
to qualify as a tax-free transaction, except that Energy will be responsible
for any such tax liability attributable to certain actions taken by Energy
and/or PG&E.


2.  Basis of Presentation

      The consolidated financial statements included herein have been
prepared by the Company, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission (the "Commission").
However, all adjustments have been made to the accompanying financial
statements which are, in the opinion of the Company's management, necessary
for a fair presentation of the Company's results of operations for the
periods covered.  Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant
to such rules and regulations, although the Company believes that the
disclosures are adequate to make the information presented herein not
misleading.

      Prior to the Restructuring, VRMC was a wholly owned subsidiary of
Energy.  For financial reporting purposes under the federal securities
laws, VRMC (now VEC) is a "successor registrant" to Energy.  As a result,
the historical financial information included herein for periods prior to
the Restructuring is the historical financial information of Energy, 
adjusted to reflect Energy's natural gas related services business as
discontinued operations.  These consolidated financial statements should
be read in conjunction with the unaudited pro forma condensed combined
financial statements and the notes thereto of VRMC and the consolidated
financial statements and the notes thereto of Energy included in VRMC's
Form S-1 registration statement filed with the Commission on May 13, 1997
("Form S-1").

3.  Discontinued Operations

      Prior to the Restructuring, Energy's historical practice was to
utilize a centralized cash management system and to incur certain
indebtedness for its consolidated group at the parent company level
rather than at the operating subsidiary level.  Therefore, the accompanying
consolidated financial statements reflect, for periods prior to the
Restructuring, the allocation of a portion of the borrowings under Energy's
various bank credit facilities, as well as a portion of other corporate 
debt of Energy, to the discontinued natural gas related services business 
based upon the ratio of such business' net assets, excluding the amounts 
of intercompany notes receivable or payable, to Energy's consolidated net 
assets.  Interest expense related to corporate debt was also allocated to 
the discontinued natural gas related services business for periods prior 
to the Restructuring based on the same net asset ratio.  Total interest 
expense allocated to discontinued operations in the accompanying 
Consolidated Statements of Income, including a portion of interest on 
corporate debt allocated pursuant to the methodology described above 
plus interest specifically attributed to discontinued operations, 
was $4.7 million and $32.7 million for the one month and seven months
ended July 31, 1997, respectively, and $14.1 million and $43.7 million 
for the three months and nine months ended September 30, 1996, respectively.

      Revenues of the discontinued natural gas related services business 
were $283.5 million and $1.7 billion for the one month and seven months 
ended July 31, 1997, respectively, and $504.4 million and $1.6 billion 
for the three months and nine months ended September 30, 1996, respectively. 
These amounts are not included in operating revenues as reported in the 
accompanying Consolidated Statements of Income.  

4.  Acquisition of Basis Petroleum, Inc.

      Effective May 1, 1997, Energy acquired the outstanding common stock 
of Basis Petroleum, Inc. ("Basis"), a wholly owned subsidiary of Salomon 
Inc ("Salomon"). Prior to the Restructuring, Energy transferred the stock 
of Basis to VRMC.  As a result, Basis was a part of the Company at the time
it was spun off to Energy's stockholders pursuant to the Restructuring.  
The primary assets of Basis included three refineries in the U.S. Gulf 
Coast region with total throughput capacity in excess of 300,000 barrels 
per day ("BPD") and an extensive wholesale marketing business.  The three 
refineries were comprised of a 160,000 BPD facility in Texas City, Texas; 
an 85,000 BPD facility in Houston, Texas; and a 65,000 BPD facility in 
Krotz Springs, Louisiana.  With the acquisition, the Company owns and
operates four refineries with total throughput capacity of about 500,000 BPD.
The acquisition was accounted for using the purchase method of accounting. 
Therefore, the accompanying consolidated statements of income of the 
Company include the results of the operations acquired in connection with 
the purchase of Basis for the months of May through September 1997.

      Energy acquired the stock of Basis for $476 million.  The purchase 
price was paid, in part, with 3,429,796 shares of Energy common stock having
a fair market value of $114 million, with the remainder paid in cash from 
borrowings under Energy's bank credit facilities (see Note 8).  In 
addition, Salomon is entitled to receive payments in any of the next 10 
years if certain average refining margins during any of such years improve 
above a specified level.  Any payments under this earn-out arrangement, 
which will be determined as of May 1 of each year beginning in 1998, are 
limited to $35 million in any year and $200 million in the aggregate and 
will be accounted for by the Company as an additional cost of the acquisition
and depreciated over the remaining lives of the assets to which the 
additional cost is allocated.

      The following unaudited pro forma financial information of the Company 
assumes that the acquisition of Basis occurred at the beginning of each period
presented.  Such pro forma information is not necessarily indicative of the 
results of future operations. (Dollars in thousands, except per share amounts.)

<TABLE>

<CAPTION>
                                                             Nine Months Ended September 30,  
                                                                1997               1996
    <S>                                                    <C>                <C>
     Operating revenues. . . . . . . . . . . . . . . . . .  $ 5,980,547        $ 7,104,243  
     Operating income (loss) . . . . . . . . . . . . . . .      127,133             (4,393) 
     Income (loss) from continuing operations. . . . . . .       60,902            (24,061) 
     Income (loss) from discontinued operations. . . . . .      (15,672)            26,143  
     Net income. . . . . . . . . . . . . . . . . . . . . .       45,230              2,082  
     Earnings (loss) per share of common stock:
       Continuing operations . . . . . . . . . . . . . . .         1.12               (.55) 
       Discontinued operations . . . . . . . . . . . . . .         (.43)               .40  
     Net income (loss) per share of common stock . . . . .          .69               (.15) 

</TABLE>

5.  Inventories

      Refinery feedstocks and refined products and blendstocks are carried
at the lower of cost or market, with the cost of feedstocks purchased for
processing and produced products determined primarily under the last-in, 
first-out ("LIFO") method of inventory pricing and the cost of feedstocks
and products purchased for resale determined primarily under the weighted 
average cost method.  The excess of the replacement cost of the Company's 
LIFO inventories over their LIFO values was approximately $61 million 
at September 30, 1997.  Materials and supplies are carried principally 
at weighted average cost not in excess of market.  In September 1997, 
the Company entered into a petroleum products purchase agreement whereby 
the Company reduced its inventory investment and working capital requirements
through the sale to a third party of various crude oil, residual fuel oil, 
distillate and gasoline inventories totaling $150 million.  Pursuant to
such agreement, the Company has an option through August 2002 to purchase 
all or a portion of petroleum product volumes equivalent to that sold.  
The Company pays a quarterly reservation fee of approximately $2.6 million 
for such option.  Inventories as of September 30, 1997 and December 31,
1996 were as follows (in thousands):

<TABLE>
<CAPTION>
                                                          September 30,          December 31,
                                                              1997                  1996       
    <S>                                                   <C>                  <C>
     Refinery feedstocks . . . . . . . . . .               $ 103,183            $   42,744    
     Refined products and blendstocks. . . .                 184,612                99,398    
     Materials and supplies. . . . . . . . .                  59,482                17,729    
                                                           $ 347,277             $ 159,871    
</TABLE>

6.  Statements of Cash Flows

      In order to determine net cash provided by continuing operations, 
income from continuing operations has been adjusted by, among other things, 
changes in current assets and current liabilities, excluding changes in 
cash and temporary cash investments, current deferred income tax assets, 
short-term debt and current maturities of long-term debt.  The changes in 
the Company's current assets and current liabilities, excluding the items 
noted above, are shown in the following table as an (increase)/decrease 
in current assets and an increase/(decrease) in current liabilities.  
The Company's temporary cash investments are highly liquid, low-risk 
debt instruments which have a maturity of three months or less when 
acquired. (Dollars in thousands.)

<TABLE>
<CAPTION>
                                                        Nine Months Ended           
                                                           September 30,          
                                                       1997           1996     
    <S>                                           <C>            <C>
     Receivables, net. . . . . . . . . . . . . . . $   50,182     $   23,429  
     Inventories . . . . . . . . . . . . . . . . .     59,085        (52,012) 
     Prepaid expenses and other. . . . . . . . . .      3,091          1,495  
     Accounts payable. . . . . . . . . . . . . . .    (57,708)        44,744  
     Other accrued expenses. . . . . . . . . . . .     (4,150)            15  
        Total. . . . . . . . . . . . . . . . . . . $   50,500     $   17,671  
</TABLE>

      Noncash investing and financing activities for the nine months ended 
September 30, 1997 included the issuance of Energy common stock to Salomon 
as partial consideration for the acquisition of the stock of Basis discussed
in Note 4, and various adjustments to debt and equity, including the 
assumption of certain debt by PG&E that was previously allocated to the 
Company, resulting from the Merger discussed in Note 1.

      Cash interest and income taxes paid, including amounts related to 
discontinued operations for periods up to and including July 31, 1997, 
were as follows (in thousands):

<TABLE>
<CAPTION>
                                                      Nine Months Ended         
                                                        September 30,            
                                                      1997         1996    
    <S>                                            <C>          <C>
     Interest (net of amount capitalized). . . . .  $60,055      $90,898  
     Income taxes. . . . . . . . . . . . . . . . .    5,601       10,746  
</TABLE>

7.  Industrial Revenue Bonds

      On April 16, 1997, the Industrial Development Corporation of the Port
of Corpus Christi issued and sold, for the benefit of the Company, 
$98.5 million of tax-exempt Revenue Refunding Bonds (the "Refunding Bonds"),
with credit enhancement provided through a letter of credit issued by
the Bank of Montreal (see Note 8).  The Refunding Bonds were issued in four
series with due dates ranging from 2009 to 2027.  The Refunding Bonds bear 
interest at floating rates determined weekly, with the Company having the 
right to convert such rates to a daily, weekly or commercial paper rate, 
or to a fixed rate.  Interest rates on the Refunding Bonds were initially 
set at rates ranging from 3.85% to 3.95%.  The Refunding Bonds were issued 
to refund the Company's $98.5 million principal amount of tax-exempt
bonds which were issued in 1987 and were guaranteed by Energy.  In 
connection with the refinancing, both the Energy guarantee, as well as a 
deed of trust and security agreement covering the Company's refinery in 
Corpus Christi, Texas, were released.

      On May 15, 1997, the Gulf Coast Industrial Development Authority issued
and sold, for the benefit of the Company, $25 million of new Waste Disposal 
Revenue Bonds (the "Revenue Bonds") which mature on December 1, 2031.  Other
terms and conditions of these bonds are similar to those of the Refunding
Bonds described above.

8.  Bank Credit Facility

      Effective May 1, 1997, Energy replaced its existing unsecured 
$300 million revolving bank credit and letter of credit facility with a 
new five-year, unsecured $835 million revolving bank credit and letter of 
credit facility.  The new credit facility has been used to finance a 
portion of the acquisition cost of Basis as discussed above in Note 4 
and to fund a $210 million dividend paid by the Company to Energy 
immediately prior to the Distribution as discussed above in Note 1.
The facility also provides continuing credit enhancement for the Company's 
Refunding Bonds and Revenue Bonds as discussed above in Note 7, and can 
be used to provide financing for other general corporate purposes.  
Energy was the borrower under the facility until the completion of the
Restructuring on July 31, 1997, at which time all obligations of Energy 
under the facility were assumed by the Company.  

      The facility amount reduces by $150 million at the end of each of 
the third and fourth years.  Availability under the facility is also 
reduced by the proceeds from debt issuances and certain asset sales, 
and by 75% of the proceeds from certain equity issuances.  The credit 
facility includes certain restrictive covenants including a minimum 
fixed charge coverage ratio of 1.8 to 1.0, a maximum debt to 
capitalization ratio of 45%, a minimum net worth test, and certain 
restrictions on, among other things, long-term leases and subsidiary debt.

      Borrowings under the credit facility bear interest at either LIBOR 
plus a margin, a base rate, or a money market rate.  In addition, various 
fees and expenses are required to be paid in connection with the credit 
facility, including a facility fee, a letter of credit issuance fee and 
a fee based on letters of credit outstanding.  The interest rate and fees 
under the credit facility are subject to adjustment based upon the credit 
ratings assigned to the Company's long-term debt.  In September 1997, 
the Company received a corporate credit rating of BBB- from 
Standard & Poor's.  As a result, interest rate margins and fees under the
credit facility were immediately reduced and the credit facility's prior 
limitations on the Company's ability to make certain dividend payments or 
repurchases of common stock were eliminated.  The Company is currently in 
the process of amending the bank credit facility to further enhance
the Company's financial flexibility.

9.  Redemption of Preferred Stock

      On March 30, 1997, Energy redeemed the remaining 11,500 outstanding 
shares of its Cumulative Preferred Stock, $8.50 Series A ("Series A 
Preferred Stock").  The redemption price was $104 per share, plus dividends
accrued to the redemption date of $.685 per share. 

      In April 1997, Energy called all of its outstanding $3.125 
convertible preferred stock ("Convertible Preferred Stock") for redemption 
on June 2, 1997.  The total redemption price for the Convertible Preferred 
Stock was $52.1966 per share (representing a per-share redemption price of
$52.188, plus accrued dividends in the amount of $.0086 per share for the 
one-day period from June 1, 1997 to the June 2, 1997 redemption date).  
The Convertible Preferred Stock was convertible into Energy common stock 
at a conversion price of $27.03 per share (equivalent to a conversion rate 
of approximately 1.85 shares of common stock for each share of Convertible 
Preferred Stock).  Prior to the redemption, substantially all of the 
outstanding shares of Convertible Preferred Stock were converted into 
shares of Energy common stock.

10.  Employee Benefit Plans

      In connection with effecting the Restructuring discussed in Note 1, 
on April 11, 1997, Energy's Board of Directors approved the termination of 
Energy's leveraged employee stock ownership plan ("VESOP"), in which 
Company employees were participants, and subsequently directed the VESOP
trustee to sell a sufficient amount of Energy common stock held in the 
VESOP suspense account to repay the outstanding amount of notes issued 
in connection with the VESOP ("VESOP Notes") and allocate the remaining 
stock in the suspense account to the accounts of the VESOP participants.  
The VESOP Notes were repaid in full in May 1997, after which 226,198 
remaining shares of Energy common stock were allocated to all VESOP 
participants.

11.  Litigation and Contingencies

Litigation Relating to Operations of Basis Prior to Acquisition

      Basis was named as a party to numerous claims and legal proceedings 
which arose prior to its acquisition by the Company.  Pursuant to the stock 
purchase agreement between Energy, the Company, Salomon, and Basis, 
Salomon assumed the defense of all known suits, actions, claims and 
investigations pending at the time of the acquisition and all obligations, 
liabilities and expenses related to or arising therefrom.  In addition, 
Salomon will assume all obligations, liabilities and expenses related 
to or resulting from all private third-party suits, actions and claims 
which arise out of a state of facts existing on or prior to the time
of the acquisition, but which were not pending at such time, subject to 
certain terms, conditions and limitations.  In certain pending matters, 
the plaintiffs are seeking damages and requesting injunctive relief which, 
if granted, could potentially result in the operations acquired in
connection with the purchase of Basis being adversely affected through 
required reductions in emissions or discharges, required additions and 
improvements to refinery controls or other equipment, or required 
reductions in permit limits or refinery throughput.  Although Energy and 
the Company have conducted a due diligence investigation of Basis, there 
can be no assurance that other material matters, not identified or fully 
investigated in due diligence, will not be subsequently identified.

Litigation Relating to Discontinued Operations

      Energy and certain of its natural gas related subsidiaries, as well 
as the Company, have been sued by Teco Pipeline Company ("Teco") regarding 
the operation of the 340-mile West Texas pipeline in which a subsidiary of 
Energy holds a 50% undivided interest.  In 1985, a subsidiary of Energy
sold a 50% undivided interest in the pipeline and entered into a joint 
venture through an ownership agreement and an operating agreement, each 
dated February 28, 1985, with the purchaser of the interest.  In 1988, 
Teco succeeded to that purchaser's 50% interest.  A subsidiary of Energy 
has at all times been the operator of the pipeline.  Notwithstanding the 
written ownership and operating agreements, the plaintiff alleges that a 
separate, unwritten partnership agreement exists, and that the defendants 
have exercised improper dominion over such alleged partnership's affairs.  
The plaintiff also alleges that the defendants acted in bad faith by
negatively affecting the economics of the joint venture in order to provide 
financial advantages to facilities or entities owned by the defendants 
and by allegedly usurping for the defendants' own benefit certain 
opportunities available to the joint venture.  The plaintiff asserts 
causes of action for breach of fiduciary duty, fraud, tortious 
interference with business relationships, professional malpractice and 
other claims, and seeks unquantified actual and punitive damages.  Energy's 
motion to compel arbitration was denied, but Energy has filed an appeal.  
Energy has also filed a counterclaim alleging that the plaintiff breached 
its own obligations to the joint venture and jeopardized the economic and 
operational viability of the pipeline by its actions.  Energy is seeking 
unquantified actual and punitive damages.  Although PG&E previously 
acquired Teco and now ultimately owns both Teco and Energy after the 
Restructuring, PG&E's Teco acquisition agreement purports to assign the 
benefit or detriment of this lawsuit to the former shareholders of Teco.  
Pursuant to the Distribution Agreement by which the Company was spun off 
to Energy's stockholders in connection with the Restructuring, the Company 
has agreed to indemnify and hold harmless Energy with respect to this 
lawsuit to the extent of 50% of the amount of any final judgment or 
settlement amount not in excess of $30 million, and 100% of that part of 
any final judgment or settlement amount in excess of $30 million.

General

      The Company is also a party to additional claims and legal 
proceedings arising in the ordinary course of business.  The Company 
believes it is unlikely that the final outcome of any of the claims or 
proceedings to which the Company is a party would have a material adverse 
effect on the Company's financial statements; however, due to the inherent 
uncertainty of litigation, the range of possible loss, if any, cannot be 
estimated with a reasonable degree of precision and there can be no 
assurance that the resolution of any particular claim or proceeding would 
not have an adverse effect on the Company's results of operations for the
interim period in which such resolution occurred.

12.  Accounting Policies for Derivatives

      The Company enters into over-the-counter price swaps, options and 
futures contracts with third parties to hedge refinery feedstock purchases 
and refined product inventories in order to reduce the impact of adverse 
price changes on these inventories before the conversion of the feedstock 
to finished products and ultimate sale.  Hedges of inventories are 
accounted for under the deferral method with gains and losses included 
in the carrying amounts of inventories and ultimately recognized in cost 
of sales as those inventories are sold. 

      The Company also hedges anticipated transactions.  Over-the-counter 
price swaps, options and futures contracts with third parties are used to 
hedge refining operating margins for periods up to two years by locking 
in components of the margins, including the resid discount, the 
conventional crack spread and the premium product differentials. Hedges 
of anticipated transactions are also accounted for under the deferral 
method with gains and losses on these transactions recognized
in cost of sales when the hedged transaction occurs.

      The above noted contracts are designated at inception as a hedge 
where there is a direct relationship to the price risk associated with 
the Company's inventories, future purchases and sales of commodities 
used in the Company's operations, or components of the Company's refining
operating margins.  If such direct relationship ceases to exist, the 
related contract is designated "for trading purposes" and accounted for 
as described below.

      Gains and losses on early terminations of financial instrument 
contracts designated as hedges are deferred and included in cost of 
sales in the measurement of the hedged transaction. When an 
anticipated transaction being hedged is no longer likely to occur, 
the related derivative contract is accounted for similar to a contract 
entered into for trading purposes.

      The Company also enters into price swaps, over-the-counter and 
exchange-traded options, and futures contracts with third parties for 
trading purposes using its fundamental and technical analysis of market 
conditions to earn additional revenues.  Contracts entered into for trading
purposes are accounted for under the fair value method.  Changes in the 
fair value of these contracts are recognized as gains or losses in cost 
of sales currently and are recorded in the Consolidated Balance Sheets 
in "Prepaid expenses and other" and "Accounts payable" at fair value at 
the reporting date.  The Company determines the fair value of its 
exchange-traded contracts based on the settlement prices for open 
contracts, which are established by the exchange on which the 
instruments are traded.  The fair value of the Company's over-the-counter 
contracts is determined based on market-related indexes or by obtaining 
quotes from brokers.

      The Company's derivative contracts and their related gains and 
losses are reported in the Consolidated Balance Sheets and Consolidated 
Statements of Income as discussed above, depending on whether they are 
designated as a hedge or for trading purposes.  In the Consolidated 
Statements of Cash Flows, recognized gains and losses on derivative 
contracts are included in net income while deferred gains and losses 
are included in changes in current assets and current liabilities. 

13.  Recently Issued Accounting Standards

      In June 1997, the Financial Accounting Standards Board ("FASB") 
issued Statement of Financial Accounting Standards ("SFAS") No. 130, 
"Reporting Comprehensive Income," and SFAS No. 131, "Disclosures about 
Segments of an Enterprise and Related Information," both of which become 
effective for the Company's financial statements beginning in 1998.  
The FASB had previously issued in March 1997 SFAS No. 128, "Earnings 
per Share," and SFAS No. 129, "Disclosure of Information about 
Capital Structure," both of which become effective for the Company's 
financial statements beginning with the period ending December 31, 1997.  
Based on information currently available to the Company, the adoption of 
these statements will not have a material effect on the Company's 
consolidated financial statements.
<PAGE>

       VALERO ENERGY CORPORATION AND SUBSIDIARIES
         MANAGEMENT'S DISCUSSION AND ANALYSIS
    OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS


RESULTS OF OPERATIONS

      The following are the Company's financial and operating highlights 
for the three months ended and nine months ended September 30, 1997 
and 1996.  The amounts in the following table are in thousands of dollars, 
unless otherwise noted:

<TABLE>
<CAPTION>
                                                     Three Months Ended         Nine Months Ended      
                                                       September 30,              September 30,
                                                   1997 (1)       1996         1997 (1)       1996

<S>                                            <C>           <C>            <C>           <C>
Operating revenues . . . . . . . . . . . . . .  $1,975,665    $  678,059     $4,160,091    $1,927,590  

Operating income . . . . . . . . . . . . . . .      94,107        23,060        188,320        69,699  

Equity in earnings of joint ventures . . . . .       1,189         1,350          3,251         2,171  
Other income, net. . . . . . . . . . . . . . .         272           249          1,224         2,694  
Interest and debt expense, net . . . . . . . .      12,193         8,914         35,904        28,896  
Income from continuing operations. . . . . . .      51,993         6,630         99,402        27,757  
Income (loss) from discontinued 
  operations, net of income taxes. . . . . . .        (432)        6,516        (15,672)       26,144  
Net income . . . . . . . . . . . . . . . . . .      51,561        13,146         83,730        53,901  
Net income applicable to common stock. . . . .      51,561        10,302         79,138        45,375  

Earnings (loss) per share of common stock:
  Continuing operations. . . . . . . . . . . .  $      .93    $      .15     $     1.98     $     .63  
  Discontinued operations. . . . . . . . . . .        (.01)          .08           (.40)          .40  
    Total. . . . . . . . . . . . . . . . . . .  $      .92    $      .23     $     1.58     $    1.03  

Operating statistics:
  Corpus Christi refinery:
    Throughput volumes (Mbbls per day) . . . .         189           165            177           167  
    Operating cost per barrel. . . . . . . . .  $     3.16    $     3.21     $     3.43     $    3.32  

  Texas City/Houston/Krotz Springs refineries:
    Throughput volumes (Mbbls per day) (2) . .         318           N/A            312          N/A  
    Operating cost per barrel (2). . . . . . .  $     2.14           N/A     $     2.21          N/A  

  Sales volumes (Mbbls per day). . . . . . . .         774           282            578           281  

  Average throughput margin per barrel . . . .  $     4.91    $     5.22     $     5.18     $    5.40  

<FN>                                          
(1)Includes the operations of the Texas City, Houston and Krotz Springs 
   refineries commencing May 1, 1997.
(2)Year-to-date amounts are for the five months ended September 30, 1997.
</TABLE>

General

      The Company reported income from continuing operations of $52 million, 
or $.93 per share, for the third quarter of 1997 compared to $6.7 million, 
or $.15 per share, for the same period in 1996.  For the first nine months 
of 1997, income from continuing operations was $99.4 million, or $1.98 per 
share, compared to $27.8 million, or $.63 per share, for the first nine 
months of 1996.  Results from discontinued operations were losses of 
$.5 million, or $.01 per share, and $15.7 million, or $.40 per share, for 
the one month and seven months ended July 31, 1997, respectively, and income
of $6.4 million, or $.08 per share, and $26.1 million, or $.40 per share, 
for the three months and nine months ended September 30, 1996, respectively.
In determining earnings per share for the third quarter of 1996 and the 
1996 and 1997 year-to-date periods, dividends on Energy's Convertible 
Preferred Stock, which was redeemed on June 2, 1997 as described in Note 9 
of Notes to Consolidated Financial Statements, were deducted from income 
from discontinued operations as the Convertible Preferred Stock was issued 
to fund the repurchase of the publicly held units of Valero Natural Gas 
Partners, L.P. in 1994.

      The May 1, 1997 acquisition of Basis added significantly to the 
Company's third quarter and year-to-date results.  Income from continuing 
operations and related earnings per share increased during the quarter 
and year-to-date periods due primarily to significant increases in operating
income, partially offset by increases in interest and income tax expense.

Third Quarter 1997 Compared to Third Quarter 1996

      Operating revenues increased $1.3 billion, or 191%, to $2 billion 
during the third quarter of 1997 compared to the same period in 1996 due 
to a 174% increase in average daily sales volumes resulting primarily from 
additional volumes attributable to the May 1, 1997 acquisition of Basis. 
Also contributing to the increase in revenues was the effect of the sale 
of $150 million of certain inventories pursuant to a petroleum products 
purchase agreement as discussed in Note 5 of Notes to Consolidated 
Financial Statements.

      Operating income increased $71 million, from $23.1 million during 
the third quarter of 1996 to $94.1 million during the third quarter of 1997.
The increase in operating income was due primarily to an approximate 
$55 million contribution from the operations related to the Texas City,
Houston and Krotz Springs refineries which were acquired on May 1, 1997, 
and to an approximate $31 million increase in total throughput margins 
for the Company's previously existing refining operations in Corpus Christi 
and related marketing operations.  Partially offsetting these increases in 
operating income were an approximate $7 million increase in operating
expenses relating to the Company's previously existing refining operations 
and an approximate $8 million increase in administrative expenses resulting 
primarily from higher employee-related costs, including the effect of 
additional personnel resulting from the acquisition of Basis in May 1997.  
Total throughput margins for the Company's previously existing refining 
and marketing operations increased during the third quarter of 1997 
compared to the same period in 1996 due to a substantial improvement 
in the price differential between conventional gasoline and crude oil, 
higher oxygenate margins resulting primarily from an increase in sales
prices of oxygenates, such as MTBE, and higher premiums on sales of 
reformulated gasoline and petrochemical feedstocks, including a benefit 
from the sale of mixed xylenes produced from the xylene fractionation 
unit that was placed in service at the Corpus Christi refinery in January
1997.  Total throughput margins for previously existing operations were 
also higher in the third quarter of 1997 as total margins for the 1996 
period were reduced by the effect of certain scheduled maintenance 
turnarounds described below.  The increases resulting from these factors 
were partially offset by lower discounts on purchases of residual oil 
("resid") feedstocks due to continued high demand for resid in the Far 
East and a decrease in crude oil prices, and by decreased results from 
price risk management activities.  Operating expenses relating to the 
Company's previously existing refining operations increased, although
operating expenses per barrel decreased, due primarily to costs 
associated with the xylene fractionation unit and higher variable costs 
resulting from a 15% increase in throughput volumes at the Company's 
Corpus Christi refinery.  Corpus Christi throughput volumes were higher 
during the third quarter of 1997 compared to the third quarter of 1996 due
to the effects of scheduled maintenance turnarounds completed during the 
third quarter of 1996 on the hydrodesulfurization ("HDS") and MTBE units, 
and to a new processing arrangement entered into in 1997 with a local 
Corpus Christi refiner.

      Net interest and debt expense increased $3.3 million to $12.2 million 
during the third quarter of 1997 compared to the same period in 1996 due 
primarily to an increase in bank borrowings related to the acquisition of 
Basis and to the special pre-Distribution dividend paid to Energy described 
in Note 1 of Notes to Consolidated Financial Statements. The increase in 
interest and debt expense resulting from these factors was partially offset 
by a decrease in allocated interest expense related to corporate debt 
resulting from the Restructuring on July 31, 1997.  Income tax expense 
increased $22.3 million to $31.4 million during the third quarter of 1997 
compared to the same period in 1996 due primarily to higher pre-tax income 
from continuing operations.

Year-to-Date 1997 Compared to Year-To-Date 1996

      For the first nine months of 1997, operating revenues increased 
$2.2 billion, or 116%, to $4.2 billion compared to the first nine months 
of 1996 due to a 106% increase in average daily sales volumes resulting 
primarily from additional volumes attributable to the Basis acquisition and
to a lesser extent from increased wholesale marketing activities relating 
to the Company's previously existing refining and marketing operations.  
Operating revenues also increased due to the effect of the sale of 
$150 million of inventories pursuant to a petroleum products purchase 
agreement as noted above in the quarter-to-quarter comparison.

      Operating income increased $118.6 million, or 170%, to $188.3 million 
during the first nine months of 1997 compared to the same period in 1996 
due to an approximate $78 million contribution from the operations related 
to the Texas City, Houston and Krotz Springs refineries, and to an 
approximate $64 million increase in total throughput margins, partially 
offset by an approximate $13 million increase in operating expenses, 
relating to the Company's previously existing refining and marketing 
operations.  Also impacting the change in operating income was an 
approximate $10 million increase in administrative expenses resulting 
primarily from higher employee-related costs, including the effect of the 
Basis acquisition as noted above.  Total throughput margins for previously 
existing refining and marketing operations increased due primarily to 
increased price differentials between conventional gasoline and crude oil, 
higher premiums on sales of petrochemical feedstocks including premiums 
on sales of mixed xylenes in 1997, and the effect of less unit downtime in 
the 1997 period.  The increases resulting from these factors were partially 
offset by lower oxygenate margins and resid discounts and decreased results 
from price risk management activities.  Operating expenses relating to 
the Company's previously existing refining operations increased due to the 
factors noted above in the quarter-to-quarter comparison and to higher
maintenance costs resulting primarily from certain unit repairs required 
in the 1997 second quarter.

      Net interest and debt expense increased $7 million to $35.9 million 
during the first nine months of 1997 compared to the same period in 1996 
due primarily to the factors noted above in the quarter-to-quarter 
comparison.  Income tax expense increased $39.6 million to $57.5 million 
during the same periods due primarily to higher pre-tax income from 
continuing operations.


LIQUIDITY AND CAPITAL RESOURCES

      Net cash provided by continuing operations increased $122.2 million 
to $229.9 million during the first nine months of 1997 compared to the 
same period in 1996 due primarily to the increase in income from continuing 
operations described above under "Results of Operations," and, to a lesser
extent, to the changes in current assets and current liabilities detailed 
in Note 6 of Notes to Consolidated Financial Statements. Included in the 
changes in current assets and current liabilities was a $59.1 million 
decrease in inventories in the first nine months of 1997 which was 
primarily attributable to a $150 million reduction in the Company's 
inventory investment pursuant to the petroleum products purchase agreement 
entered into in September 1997 and described in Note 5, partially offset 
by higher feedstock inventory levels attributable to the operation of the 
Texas City, Houston and Krotz Springs refineries.  During the first nine 
months of 1997, cash provided by operating activities, including proceeds 
from the sale of inventories pursuant to the petroleum products purchase
agreement, along with net proceeds from bank borrowings, proceeds from 
the issuance of the Revenue Bonds as described in Note 7, and issuances 
of common stock related to Energy's benefit plans totaled approximately 
$729 million.  These funds were utilized to acquire Basis, fund capital 
expenditures and deferred turnaround and catalyst costs, pay common and 
preferred stock dividends, pay a special dividend to Energy and settle 
the intercompany note balance with Energy pursuant to the Distribution 
Agreement as described in Note 1, purchase treasury stock, and redeem 
the remaining outstanding shares of Energy's Series A Preferred Stock
and Convertible Preferred Stock as described in Note 9.  

      As described in Note 8 of Notes to Consolidated Financial Statements, 
effective May 1, 1997, the financial flexibility and liquidity of the 
Company was significantly increased through the replacement of Energy's 
existing $300 million revolving bank credit and letter of credit facility 
with a new $835 million revolving bank credit and letter of credit facility.
Such facility was assumed by the Company upon completion of the Restructuring
on July 31, 1997 at which time total availability increased to the full 
$835 million.  As of September 30, 1997, approximately $327 million was 
outstanding under this committed facility with approximately $508 million 
available for additional borrowings and letters of credit.  The Company 
also has numerous uncommitted short-term bank credit facilities, along with
several uncommitted letter of credit facilities.  As of September 30, 1997, 
$175 million was outstanding under the short-term bank credit facilities,
and approximately $57 million was outstanding under the uncommitted letter 
of credit facilities with approximately $223 million available for 
additional letters of credit.  The Company was in compliance with all 
covenants contained in its various debt facilities as of September 30, 1997.

      As described in Note 8 of Notes to Consolidated Financial Statements, 
in September 1997, the Company received a corporate credit rating of BBB- 
from Standard and Poor's.  This rating resulted in an immediate reduction 
in interest rate margins and fees associated with the Company's $835 million 
bank credit facility and allowed the Company to eliminate the prior 
restrictive covenant under such facility which limited the Company's 
ability to make certain dividend payments and repurchases of common stock.  
The Company is currently in the process of amending the bank credit facility
to further enhance the Company's financial flexibility.

      As described in Note 4 of Notes to Consolidated Financial Statements, 
Energy acquired the outstanding common stock of Basis on May 1, 1997 for 
approximately $362 million in cash, funded with borrowings under Energy's 
bank credit facilities, and Energy common stock which had a fair market
value of $114 million on the date of issuance.  Although Basis incurred 
significant operating losses during 1995 and 1996, the Texas City, Houston 
and Krotz Springs refining and marketing operations were able to contribute 
approximately $78 million to the Company's operating income for the months 
of May through September 1997, as described above under "Results of 
Operations."  The achievement of such results was due to, among other 
things, recently completed refinery upgrading projects, a reduction in 
depreciation and amortization expense due to the acquisition cost of 
Basis being less than its net book value, and a reduction in operating 
and overhead costs through various operational and personnel-related 
changes implemented by the Company.  The Company believes that the 
operations related to the Texas City, Houston and Krotz Springs 
refineries will continue to benefit the Company's consolidated cash 
flow and earnings throughout the remainder of 1997.

      During the first nine months of 1997, the Company expended, exclusive 
of the Basis acquisition,  approximately $98 million for capital investments,
primarily capital expenditures, $45 million of which related to continuing 
refining and marketing operations while $53 million related to the 
discontinued natural gas related services operations.  For total year 1997, 
the Company currently expects to incur approximately $120 million for 
capital expenditures and deferred turnaround and catalyst costs related to 
its continuing refining and marketing operations, $45 million of which 
relates to the Texas City, Houston and Krotz Springs refineries for the 
months of May through December.

      As described in Note 7 of Notes to Consolidated Financial Statements, 
the Company refinanced its outstanding $98.5 million principal amount of 
industrial revenue bonds in April 1997 at substantially lower interest 
rates.  Based on the floating rates in effect as of September 30, 1997,
the Company expects the reduction in interest expense resulting from 
such refinancing to be in excess of $5 million per year.

      The Company believes it has sufficient funds from operations, and to 
the extent necessary, from the public and private capital markets and 
bank markets, to fund its ongoing operating requirements.  The Company 
expects that to the extent necessary, it can raise additional funds from
time to time through equity or debt financings; however, except for 
borrowings under bank credit agreements, the Company has no specific 
financing plans as of the date hereof to increase the amount of debt 
outstanding.  From time to time, the Company will consider the debt 
market to fix the interest rate on a portion of its outstanding variable 
rate debt.  This could either be done synthetically through interest rate 
swaps or caps, or by issuing new fixed rate debt and using the proceeds to 
pay down existing variable rate debt.

      As discussed in Note 13 of Notes to Consolidated Financial Statements, 
the FASB has issued various new statements of financial accounting standards 
in 1997 which require adoption at various times in the future. Based on 
information currently available to the Company, the future adoption of these
statements is not expected to have a material effect on the Company's 
consolidated financial statements.

      The foregoing discussion contains certain estimates, predictions, 
projections and other "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) that involve various risks and 
uncertainties.  While these forward-looking statements, and any assumptions
upon which they are based, are made in good faith and reflect the Company's 
current judgment regarding the direction of its business, actual results 
will almost always vary, sometimes materially, from any estimates, 
predictions, projections, assumptions, or other future performance
suggested herein.  Some important factors (but not necessarily all factors) 
that could affect the Company's sales volumes, growth strategies, future 
profitability and operating results, or that otherwise could cause actual 
results to differ materially from those expressed in any forward-looking
statement include the following:  renewal or satisfactory replacement of 
the Company's resid feedstock arrangements as well as market, political 
or other forces generally affecting the pricing and availability of resid 
and other refinery feedstocks and refined products; accidents or other 
unscheduled shutdowns affecting the Company's, its suppliers' or its 
customers' pipelines, plants, machinery or equipment; excess industry 
capacity; competition from products and services offered by other energy
enterprises; changes in the cost or availability of third-party vessels, 
pipelines and other means of transporting feedstocks and products; ability 
to implement the cost reductions and operational changes related to, and 
realize the various assumptions and efficiencies projected for, the
operation of the Texas City, Houston and Krotz Springs refineries; state 
and federal environmental, economic, safety and other policies and 
regulations, any changes therein, and any legal or regulatory delays
or other factors beyond the Company's control; execution of planned 
capital projects; weather conditions affecting the Company's operations 
or the areas in which the Company's products are marketed; rulings, 
judgments, or settlements in litigation or other legal matters, including
unexpected environmental remediation costs in excess of any reserves; the 
introduction or enactment of legislation; and changes in the credit ratings
assigned to the Company's debt securities and trade credit.  Certain of 
these risk factors are more fully discussed in the Company's Form S-1.  
The Company undertakes no obligation to publicly release the result of 
any revisions to any such forward-looking statements that may be made to 
reflect events or circumstances after the date hereof or to reflect
the occurrence of unanticipated events. 
<PAGE>

PART II - OTHER INFORMATION

Item 1.  Legal Proceedings

      Energy and certain of its natural gas related subsidiaries, as well 
as the Company, have been sued by Teco Pipeline Company ("Teco") regarding 
the operation of the 340-mile West Texas pipeline in which a subsidiary of 
Energy holds a 50% undivided interest.  In 1985, a subsidiary of Energy
sold a 50% undivided interest in the pipeline and entered into a joint 
venture through an ownership agreement and an operating agreement, each 
dated February 28, 1985, with the purchaser of the interest.  In 1988, 
Teco succeeded to that purchaser's 50% interest.  A subsidiary of Energy 
has at all times been the operator of the pipeline.  Notwithstanding the 
written ownership and operating agreements, the plaintiff alleges that a 
separate, unwritten partnership agreement exists, and that the defendants 
have exercised improper dominion over such alleged partnership's affairs.  
The plaintiff also alleges that the defendants acted in bad faith by
negatively affecting the economics of the joint venture in order to provide 
financial advantages to facilities or entities owned by the defendants and 
by allegedly usurping for the defendants' own benefit certain opportunities 
available to the joint venture.  The plaintiff asserts causes of action 
for breach of fiduciary duty, fraud, tortious interference with business 
relationships, professional malpractice and other claims, and seeks 
unquantified actual and punitive damages.  Energy's motion to compel 
arbitration was denied, but Energy has filed an appeal.  Energy has also 
filed a counterclaim alleging that the plaintiff breached its own 
obligations to the joint venture and jeopardized the economic and 
operational viability of the pipeline by its actions.  Energy is seeking 
unquantified actual and punitive damages.  Although PG&E previously 
acquired Teco and now ultimately owns both Teco and Energy after the 
Restructuring, PG&E's Teco acquisition agreement purports to assign the 
benefit or detriment of this lawsuit to the former shareholders of Teco.  
Pursuant to the Distribution Agreement by which the Company was spun off 
to Energy's stockholders in connection with the Restructuring, the Company 
has agreed to indemnify and hold harmless Energy with respect to this 
lawsuit to the extent of 50% of the amount of any final judgment or 
settlement amount not in excess of $30 million, and 100% of that part of 
any final judgment or settlement amount in excess of $30 million.

Item 2.  Changes in Securities

     Rights Agreement.  In connection with the Distribution, the 
Company's Board of Directors declared a dividend distribution of one 
Preferred Share Purchase Right ("Right") for each outstanding share of the 
Company's common stock, $.01 par value ("Common Stock") distributed to 
Energy stockholders pursuant to the Distribution.  Except as set forth 
below, each Right entitles the registered holder to purchase from the 
Company one one-hundredth of a share of the Company's Junior Participating 
Preferred Stock, Series I, ("Junior Preferred Stock") at a price of 
$100 per one one-hundredth of a share, subject to adjustment (the 
"Purchase Price").  The description and terms of the Rights are set 
forth in the Rights Agreement dated July 17, 1997 between the Company 
and Harris Trust and Savings Bank (the "Rights Agreement").  

     Until the earlier to occur of (i) 10 days following a public 
announcement that a person or group of affiliated or associated persons 
(an "Acquiring Person") has acquired beneficial ownership of 15% or more 
of the outstanding shares of the Company's Common Stock, (ii) 10 business 
days (or such later date as may be determined by action of the Company's 
Board of Directors) following the initiation of a tender offer or exchange 
offer which would result in the beneficial ownership by an Acquiring 
Person of 15% or more of such outstanding Common Stock (the earlier of 
such dates being called the "Rights Separation Date"), or (iii)
the earlier redemption or expiration of the Rights, the Rights will be 
transferred only with the Common Stock.  The Rights are not exercisable 
until the Rights Separation Date.  As soon as practicable following the 
Rights Separation Date, separate certificates evidencing the Rights (the
"Right Certificates") will be mailed to holders of record of Common Stock 
as of the close of business on the Rights Separation Date and such 
separate Right Certificates alone will evidence the Rights.  The Rights 
will expire on June 30, 2007 (the "Final Expiration Date"), unless the 
Final Expiration Date is extended or unless the Rights are earlier 
redeemed or exchanged by the Company, in each case, as described below.

    Because of the nature of the Junior Preferred Stock's dividend, 
liquidation and voting rights, the value of the one one-hundredth interest 
in a share of Junior Preferred Stock purchasable upon exercise of each 
Right should approximate the value of one share of Common Stock.  

    In the event that after the Rights Separation Date, the Company is 
acquired in a merger or other business combination transaction, or if 50% 
or more of its consolidated assets or earning power are sold, proper 
provision will be made so that each holder of a Right will thereafter 
have the right to receive, upon the exercise thereof at the then current 
exercise price of the Right, that number of shares of common stock of the 
acquiring company which at the time of such transaction will have a market 
value of two times the exercise price of the Right.  In the event that any 
person or group of affiliated or associated persons becomes the beneficial 
owner of 15% or more of the outstanding Common Stock, proper provision 
shall be made so that each holder of a Right, other than Rights beneficially 
owned by the Acquiring Person (which will thereafter be void), will 
thereafter have the right to receive upon exercise that number of shares 
of Common Stock having a market value of two times the exercise price of 
the Right.   

     At any time after the acquisition by an Acquiring Person of beneficial 
ownership of 15% or more of the outstanding Common Stock and prior to the 
acquisition by such Acquiring Person of 50% or more of the outstanding 
Common Stock, the Company's Board of Directors may exchange the Right
(other than Rights owned by such Acquiring Person which have become void), 
at an exchange ratio of one share of Common Stock, or one one-hundredth of 
a share of Junior Preferred Stock, per Right (subject to adjustment).  

     At any time prior to the acquisition by an Acquiring Person of 
beneficial ownership of 15% or more of the outstanding Common Stock, 
the Company's Board of Directors may redeem the Rights at a price of 
$.01 per Right (the "Redemption Price").  The redemption of the Rights 
may be made effective at such time, on such basis and with such conditions 
as the Company's Board of Directors may establish.  Immediately upon any 
redemption of the Rights, the right to exercise the Rights will terminate 
and the only right of the holders of Rights will be to receive the 
Redemption Price.  

     Until a Right is exercised, the holder will have no rights as a 
stockholder of the Company including, without limitation, the right to 
vote or to receive dividends.  

     The Rights may have certain anti-takeover effects.  The Rights will 
cause substantial dilution to a person or group that attempts to acquire 
the Company on terms not approved by the Company's Board of Directors, 
except pursuant to an offer conditioned on a substantial number of Rights
being acquired.  The Rights should not interfere with any merger or other 
business combination approved by the Company's Board of Directors since 
the Rights may be redeemed by the Company at the Redemption Price prior to 
the time that a person or group has acquired beneficial ownership of 15% 
or more of the Common Stock.  

     The foregoing summary of certain terms of the Rights is qualified in 
its entirety by reference to the Rights Agreement and to the Certificate 
of Designations, Rights and Preferences for the Junior Preferred Stock.

     Credit Agreement.  Effective May 1, 1997, Energy replaced its existing 
unsecured $300 million revolving bank credit and letter of credit facility 
with a new five-year, unsecured $835 million revolving bank credit and 
letter of credit facility.  The new credit facility has been used to
finance a portion of the acquisition cost of Basis (as discussed in the 
Notes to Consolidated Financial Statements), to provide continuing credit 
enhancement for the Company's Refunding Bonds and Revenue Bonds (also 
discussed in the Notes to Consolidated Financial Statements) and to provide 
financing for other general corporate purposes.  Energy was the borrower 
under the facility until the completion of the Restructuring on 
July 31, 1997, at which time all obligations of Energy under the facility 
were assumed by the Company.

     The credit facility includes certain restrictive covenants including 
a minimum fixed charge coverage ratio of 1.8 to 1.0, a maximum debt to 
capitalization ratio of 45%, a minimum net worth test and certain 
restrictions on, among other things, long-term leases and subsidiary debt.  
In September 1997, the Company received a corporate credit rating of BBB- 
from Standard & Poor's.  As a result, interest rate margins and fees under 
the credit facility were immediately reduced and the credit facility's 
prior limitations on the Company's ability to make certain dividend 
payments or repurchases of common stock were eliminated.

Item 4.  Submission of Matters to a Vote of Security Holders

        The Company's annual meeting of stockholders (the "Meeting") 
was held July 17, 1997.  All of the issued and outstanding shares of 
the Company's common stock (the "Company Common Stock") were voted by 
Energy, then the sole stockholder of the Company, in favor of all 
matters presented at the Meeting.  William E. Greehey, Edward C. Benninger, 
E. Baines Manning, Stan L. McLelland, George E. Kain and Wayne D. Smithers 
were elected at the Meeting to serve as directors of the Company until 
the time of the filing of an amendment and restatement of the Company's 
Restated Certificate of Incorporation (the "Certificate") in connection 
with the Distribution.  New Bylaws for the Company were also adopted at 
the Meeting.  The amendment and restatement of the Certificate approved 
at the Meeting, among other things, increased the authorized number of 
shares of Company Common Stock from 3,000 shares to 150,000,000 shares; 
changed the par value of the Company Common Stock from $1.00 par value 
per share to $.01 par value per share; created an authorized class of 
capital stock of the Company consisting of 20,000,000 shares designated 
as Preferred Stock; classified the Board of Directors into three classes, 
each having a three year term; and changed the name of the Company from 
Valero Refining and Marketing Company to Valero Energy Corporation.  
The sole stockholder also approved the removal of certain of the directors 
elected at the Meeting upon effectiveness of the filing of the Certificate 
and the simultaneous election of new directors so that after giving effect 
to such actions, the Board of Directors would consist of eight directors 
classified in the respective classes and serving for the respective 
periods set forth below:

        Class I  -  Directors to serve until 1998
                   Ruben Escobedo
                 Lowell H. Leberman

        Class II  -  Directors to serve until 1999
                 Ronald K. Calgaard
                 William E. Greehey
                Susan Kaufman Purcell

        Class III  -  Directors to serve until 2000
                 Edward C. Benninger
                James L. ("Rocky") Johnson
                   Robert G. Dettmer

Item 5.  Other Information

     Annual Stockholder's Meeting.  The Company's 1998 Annual Meeting of 
Stockholders will be held in San Antonio, Texas, on April 30, 1998.  The 
Company requests that any proposals of stockholders intended to be 
submitted for inclusion in the proxy statement for such meeting pursuant to
Regulation 14A of the rules and regulations of the Securities and Exchange 
Commission promulgated under the Securities Exchange Act of 1934, as 
amended, be submitted to the Corporate Secretary of the Company not later 
than November 28, 1997.  Stockholders intending to propose business to be 
considered by the stockholders of the Company are encouraged to review 
the requirements of Regulation 14A and of the Company's By-laws before 
submitting any such proposal. 

Item 6.  Exhibits and Reports on Form 8-K

      (a)   Exhibits.

     11.1   Computation of Earnings Per Share.

     27.1*  Financial Data Schedule (reporting financial 
            information as of and for the nine months ended 
            September 30, 1997).

     27.2*  Financial Data Schedule (reporting financial information 
            as of and for the nine months ended September 30, 1996).
__________
 
         *  The Financial Data Schedules shall not be deemed "filed" 
            for purposes of Section 11 of the Securities Act of 1933
            or Section 18 of the Securities Exchange Act of 1934, and 
            are included as exhibits only to the electronic filing of 
            this Form 10-Q in accordance with Item 601(c) of 
            Regulation S-K and Section 401 of Regulation S-T.

      (b)   Reports on Form 8-K.  The Company did not file any Current
            Reports on Form 8-K during the quarter ended September 30, 1997.
<PAGE>

                                    SIGNATURE

    Pursuant to the requirements of the Securities Exchange Act of 1934, 
the registrant has duly caused this report to be signed on its behalf by 
the undersigned, thereunto duly authorized.


                          VALERO ENERGY CORPORATION
                               (Registrant)

                          By:  /s/ Edward C. Benninger    
                               Edward C. Benninger
                               President and Chief
                               Financial Officer
                              (Duly Authorized Officer and Principal
                               Financial and Accounting Officer)

Date: November 14, 1997
{"company-data": {"conformed-name": "VALERO ENERGY CORP/TX", "cik": "0001035002", "assigned-sic": "2911", "irs-number": "741828067", "state-of-incorporation": "DE", "fiscal-year-end": "1231"}, "filing-values": {"form-type": "10-Q", "act": "34", "file-number": "001-13175", "film-number": "97721182"}, "business-address": {"street1": "7990 WEST IH 10", "city": "SAN ANTONIO", "state": "TX", "zip": "78230", "phone": "210-370-2000"}, "mail-address": {"street1": "7990 WEST IH10", "city": "SAN ANTONIO", "state": "TX", "zip": "78230"}}
UNITED STATES
                SECURITIES AND EXCHANGE COMMISSION
                     Washington, D.C. 20549

                            FORM 10-Q

(Mark One)
[X]   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES 
       EXCHANGE ACT OF 1934

      For the quarterly period ended September 30, 1997

                         OR

[ ]   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE 
       SECURITIES EXCHANGE ACT OF 1934

       For the transition period from   to                   

             Commission file number 333-27015

                     VALERO ENERGY CORPORATION
     (Exact name of registrant as specified in its charter)

      Delaware                                74-1828067
(State or other jurisdiction of             (I.R.S. Employer
 incorporation or organization)             Identification No.)

                              7990 West IH 10
                             San Antonio, Texas
                  (Address of principal executive offices)
                                   78230
                                 (Zip Code)

                               (210) 370-2000
              (Registrant's telephone number, including area code)
                                                  

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

                Yes     X           No          

                                                  

Indicated below is the number of shares outstanding of the registrant's only
 class of common stock, as of November 1, 1997.
 
                                                Number of 
                                                  Shares
            Title of Class                      Outstanding

         Common Stock, $.01 Par Value            56,120,558
VALERO ENERGY CORPORATION AND SUBSIDIARIES

                                 INDEX

                                                                            Page
PART I.  FINANCIAL INFORMATION

  Consolidated Balance Sheets - September 30, 1997 and December 31, 
    1996 . .........................................................

  Consolidated Statements of Income - For the Three Months Ended and
    Nine Months Ended September 30, 1997 and 1996. . . . . . . . . . .

  Consolidated Statements of Cash Flows - For the Nine Months Ended 
    September 30, 1997 and 1996. . . . . . . . . . . . . . . . . . . .

  Notes to Consolidated Financial Statements . . . . . . . . . . . . .

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

PART II.  OTHER INFORMATION. . . . . . . . . . . . . . . . . . . . . . 

SIGNATURE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PART I - FINANCIAL INFORMATION
              VALERO ENERGY CORPORATION AND SUBSIDIARIES          
                     CONSOLIDATED BALANCE SHEETS
                       (Thousands of Dollars)
                            (Unaudited)
September 30,   December 31,
                                                   1997            1996    
                 ASSETS
CURRENT ASSETS:
  Cash and temporary cash investments. . . . .  $    21,930    $       10 
  Receivables, less allowance for doubtful 
    accounts of $1,200 (1997) and $975 (1996).      352,420       162,457 
  Inventories. . . . . . . . . . . . . . . . .      347,277       159,871 
  Current deferred income tax assets . . . . .       14,797        17,587 
  Prepaid expenses and other . . . . . . . . .       10,471        11,924 
                                                    746,895       351,849 
PROPERTY, PLANT AND EQUIPMENT - including
  construction in progress of $54,984 (1997)
  and $21,786 (1996), at cost. . . . . . . . .    2,083,151     1,712,334 
    Less:  Accumulated depreciation. . . . . .      524,831       480,124 
                                                  1,558,320     1,232,210 

INVESTMENT IN AND ADVANCES TO JOINT VENTURES .       32,443        29,192 

NET ASSETS OF DISCONTINUED OPERATIONS. . . . .         -          280,515 

DEFERRED CHARGES AND OTHER ASSETS. . . . . . .       81,043        91,865 

                                                 $2,418,701    $1,985,631
See Notes to Consolidated Financial Statements.
PART I - FINANCIAL INFORMATION
       VALERO ENERGY CORPORATION AND SUBSIDIARIES
              CONSOLIDATED BALANCE SHEETS
               (Thousands of Dollars)
                   (Unaudited)
September 30,   December 31,
                                                    1997           1996   

LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
  Short-term debt. . . . . . . . . . . . . . .  $   175,000  $     57,728 
  Current maturities of long-term debt . . . .         -           26,037 
  Accounts payable . . . . . . . . . . . . . .      432,540       191,555 
  Other accrued expenses . . . . . . . . . . .       53,639        25,264 
                                                    661,179       300,584 

LONG-TERM DEBT, less current maturities. . . .      323,500       353,307 

DEFERRED INCOME TAXES. . . . . . . . . . . . .      242,755       224,548 

DEFERRED CREDITS AND OTHER LIABILITIES . . . .       40,567        30,217 

REDEEMABLE PREFERRED STOCK, SERIES A, issued
  1,150,000 shares, outstanding -0- (1997) 
  and 11,500 (1996) shares . . . . . . . . . .         -            1,150 

COMMON STOCK AND OTHER STOCKHOLDERS' EQUITY:
  Preferred stock, $.01 (1997) and $1 (1996)
   par value - 20,000,000 shares authorized 
   including redeemable preferred shares:
      $3.125 Convertible Preferred Stock, 
        issued and outstanding -0- (1997) 
        and 3,450,000 (1996) shares. . . . . .         -            3,450
  Common stock, $.01 (1997) and $1 (1996) par 
    value - 150,000,000 shares authorized; 
    issued 56,116,917 (1997)and 
    44,185,513 (1996) shares . . . . . . . . .          561        44,186 
  Additional paid-in capital . . . . . . . . .    1,110,540       540,133 
  Unearned Valero Employees' Stock Ownership 
    Plan Compensation. . . . . . . . . . . . .         -           (8,783)
  Retained earnings. . . . . . . . . . . . . .       39,750       496,839 
  Treasury stock, 4,631 (1997) and -0- (1996)
    common shares, at cost . . . . . . . . . .         (151)         -    
                                                  1,150,700     1,075,825 

                                                 $2,418,701    $1,985,631
See Notes to Consolidated Financial Statements.
VALERO ENERGY CORPORATION AND SUBSIDIARIES
             CONSOLIDATED STATEMENTS OF INCOME
      (Thousands of Dollars, Except Per Share Amounts)
                     (Unaudited)
Three Months Ended            Nine Months Ended       
                                                      September 30,                September 30,   
                                                    1997        1996            1997          1996
OPERATING REVENUES . . . . . . . . . . . . . . .$ 1,975,665  $  678,059    $ 4,160,091    $ 1,927,590  

COSTS AND EXPENSES:
  Cost of sales and operating expenses . . . . .  1,846,626     634,632      3,887,135      1,793,652  
  Selling and administrative expenses. . . . . .     17,502       6,678         36,962         23,333  
  Depreciation expense . . . . . . . . . . . . .     17,430      13,689         47,674         40,906  
    Total. . . . . . . . . . . . . . . . . . . .  1,881,558     654,999      3,971,771      1,857,891  

OPERATING INCOME . . . . . . . . . . . . . . . .     94,107      23,060        188,320         69,699  

EQUITY IN EARNINGS OF JOINT VENTURES . . . . . .      1,189       1,350          3,251          2,171  

OTHER INCOME, NET. . . . . . . . . . . . . . . .        272         249          1,224          2,694  

INTEREST AND DEBT EXPENSE:
  Incurred . . . . . . . . . . . . . . . . . . .    (12,601)    (10,003)       (37,178)       (30,900) 
  Capitalized. . . . . . . . . . . . . . . . . .        408       1,089          1,274          2,004  

INCOME FROM CONTINUING OPERATIONS
  BEFORE INCOME TAXES. . . . . . . . . . . . . .     83,375      15,745        156,891         45,668  

INCOME TAX EXPENSE . . . . . . . . . . . . . . .     31,382       9,115         57,489         17,911  

INCOME FROM CONTINUING OPERATIONS. . . . . . . .     51,993       6,630         99,402         27,757  

INCOME (LOSS) FROM DISCONTINUED OPERATIONS,
  NET OF INCOME TAX EXPENSE (BENEFIT) OF
  $(1,082), $(1,415), $(8,889) AND $10,889, 
   RESPECTIVELY. . . . . . . . . . . . . . . . .       (432)      6,516        (15,672)        26,144  

NET INCOME . . . . . . . . . . . . . . . . . . .     51,561      13,146         83,730         53,901  
  Less:  Preferred stock dividend 
     requirements and redemption 
     premium . . . . . . . . . . . . . . . . . .       -          2,844          4,592          8,526  

NET INCOME APPLICABLE TO COMMON STOCK. . . . . . $   51,561  $   10,302    $    79,138    $    45,375  

EARNINGS (LOSS) PER SHARE OF COMMON STOCK:
  Continuing operations. . . . . . . . . . . . . $      .93  $      .15    $      1.98    $       .63  
  Discontinued operations. . . . . . . . . . . .       (.01)        .08           (.40)           .40  
    Total. . . . . . . . . . . . . . . . . . . . $      .92  $      .23    $      1.58    $      1.03  

WEIGHTED AVERAGE COMMON SHARES
  OUTSTANDING (in thousands) . . . . . . . . . .     55,950      43,984         50,175         43,878  

DIVIDENDS PER SHARE OF COMMON STOCK. . . . . . . $      .08  $      .13    $       .34    $       .39
See Notes to Consolidated Financial Statements.
VALERO ENERGY CORPORATION AND SUBSIDIARIES
                   CONSOLIDATED STATEMENTS OF CASH FLOWS
                         (Thousands of Dollars)
                               (Unaudited)
Nine Months Ended        
                                                                              September 30,          
                                                                        1997                 1996
CASH FLOWS FROM OPERATING ACTIVITIES:
Income from continuing operations. . . . . . . . . . . . . .      $     99,402         $     27,757  
  Adjustments to reconcile income from continuing 
    operations to net cash provided by continuing 
    operations:
      Depreciation expense . . . . . . . . . . . . . . . . .            47,674               40,906  
      Amortization of deferred charges and other, net. . . .            22,540               23,733  
      Changes in current assets and current liabilities. . .            50,500               17,671  
      Deferred income tax expense. . . . . . . . . . . . . .            20,927                9,763  
      Equity in earnings of joint ventures . . . . . . . . .            (3,251)              (2,171) 
      Changes in deferred items and other, net . . . . . . .            (7,927)             (10,030) 
        Net cash provided by continuing operations . . . . .           229,865              107,629  
        Net cash provided by discontinued operations . . . .            24,752               75,613  
          Net cash provided by operating activities. . . . .           254,617              183,242  

CASH FLOWS FROM INVESTING ACTIVITIES:
  Capital expenditures:
    Continuing operations. . . . . . . . . . . . . . . . . .           (40,586)             (41,973) 
    Discontinued operations. . . . . . . . . . . . . . . . .           (52,674)             (48,141) 
  Deferred turnaround and catalyst costs . . . . . . . . . .            (4,466)             (23,952) 
  Acquisition of Basis Petroleum, Inc. . . . . . . . . . . .          (362,060)                -       
  Investment in and advances to joint ventures, net. . . . .              -                   1,792  
  Dispositions of property, plant and equipment. . . . . . .                28                   92  
  Other, net . . . . . . . . . . . . . . . . . . . . . . . .                (5)              (1,162) 
    Net cash used in investing activities. . . . . . . . . .          (459,763)            (113,344) 

CASH FLOWS FROM FINANCING ACTIVITIES:
  Increase in short-term debt, net . . . . . . . . . . . . .           208,088               44,888  
  Long-term borrowings . . . . . . . . . . . . . . . . . . .         1,300,068               28,500  
  Long-term debt reduction . . . . . . . . . . . . . . . . .        (1,092,668)            (122,754) 
  Special spin-off dividend, including intercompany 
    note settlement. . . . . . . . . . . . . . . . . . . . .          (214,653)                -        
  Common stock dividends . . . . . . . . . . . . . . . . . .           (16,541)             (17,114) 
  Preferred stock dividends. . . . . . . . . . . . . . . . .            (5,419)              (8,526) 
  Issuance of common stock . . . . . . . . . . . . . . . . .            58,794                8,017  
  Purchase of treasury stock . . . . . . . . . . . . . . . .            (9,264)              (2,895) 
  Redemption of preferred stock. . . . . . . . . . . . . . .            (1,339)                -       
    Net cash provided by (used in) 
     financing activities. . . . . . . . . . . . . . . . . .           227,066              (69,884) 

NET INCREASE IN CASH AND TEMPORARY     
  CASH INVESTMENTS . . . . . . . . . . . . . . . . . . . . .            21,920                   14   

CASH AND TEMPORARY CASH INVESTMENTS AT
  BEGINNING OF PERIOD. . . . . . . . . . . . . . . . . . . .                10                   13  

CASH AND TEMPORARY CASH INVESTMENTS AT
  END OF PERIOD. . . . . . . . . . . . . . . . . . . . . . .      $     21,930          $        27
See Notes to Consolidated Financial Statements.
VALERO ENERGY CORPORATION AND SUBSIDIARIES                        

    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.  Restructuring

      In the discussion below and Notes that follow, "Energy" refers to 
Valero Energy Corporation and its consolidated subsidiaries, both 
individually and collectively, for periods prior to the restructuring, and to
the natural gas related services business of Energy for periods subsequent to
the restructuring.  The "Company" refers to the former Valero Refining and
Marketing Company ("VRMC"), which was renamed Valero Energy Corporation
("VEC") on the date of the restructuring, and its consolidated subsidiaries.

      On July 31, 1997, pursuant to an agreement and plan of distribution
between Energy and VRMC (the "Distribution Agreement"), Energy spun off VRMC
to Energy's stockholders by distributing all of VRMC's $.01 par value common
stock on a share for share basis to holders of record of Energy common stock
at the close of business on such date (the "Distribution").  Immediately 
after the Distribution, Energy merged its natural gas related services 
business with a wholly owned subsidiary of PG&E Corporation ("PG&E")(the 
"Merger").  The completion of the Distribution and the Merger (collectively 
referred to as the "Restructuring") finalizes the restructuring of Energy 
previously announced in January 1997.  The Distribution and the Merger 
were approved by Energy's stockholders at Energy's annual meeting of 
stockholders held on June 18, 1997 and, in the opinion of Energy's outside 
counsel, were tax-free transactions.  Regulatory approval of the Merger was 
received from the Federal Energy Regulatory Commission (the "FERC") on 
July 16, 1997.  Upon completion of the Restructuring, VRMC was renamed 
Valero Energy Corporation and is listed on the New York Stock Exchange 
under the symbol "VLO."

      Immediately prior to the Distribution, the Company paid to Energy a
$210 million dividend pursuant to the Distribution Agreement.  In addition,
the Company paid to Energy approximately $5 million in settlement of the
intercompany note balance between the Company and Energy arising from
certain transactions during the period from January 1 through July 31, 1997.
      
      In connection with the Merger, PG&E issued approximately 31 million
shares of its common stock in exchange for the outstanding $1 par value
common shares of Energy, and assumed $785.7 million of Energy's debt. 
Each Energy stockholder received .554 of a share of PG&E common stock
(trading on the New York Stock Exchange under the symbol "PCG") for each
Energy share owned.  This fractional share amount was based on the average
price of PG&E common stock during a prescribed period preceding the closing
of the transaction and the number of Energy shares issued and outstanding
at the time of the closing.

      Prior to the Restructuring, Energy, the Company, and PG&E entered into
a tax sharing agreement ("Tax Sharing Agreement"), which sets forth each
party's rights and obligations with respect to payments and refunds, if any,
of federal, state, local or other taxes for periods before the Restructuring.
In general, under the Tax Sharing Agreement, Energy and the Company are each
responsible for its allocable share of the federal, state and other taxes
incurred by the combined operations of Energy and the Company prior to the
Distribution.  Furthermore, the Company is responsible for substantially all
tax liability resulting from the failure of the Distribution or the Merger
to qualify as a tax-free transaction, except that Energy will be responsible
for any such tax liability attributable to certain actions taken by Energy
and/or PG&E.

2.  Basis of Presentation

      The consolidated financial statements included herein have been
prepared by the Company, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission (the "Commission").
However, all adjustments have been made to the accompanying financial
statements which are, in the opinion of the Company's management, necessary
for a fair presentation of the Company's results of operations for the
periods covered.  Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant
to such rules and regulations, although the Company believes that the
disclosures are adequate to make the information presented herein not
misleading.

      Prior to the Restructuring, VRMC was a wholly owned subsidiary of
Energy.  For financial reporting purposes under the federal securities
laws, VRMC (now VEC) is a "successor registrant" to Energy.  As a result,
the historical financial information included herein for periods prior to
the Restructuring is the historical financial information of Energy, 
adjusted to reflect Energy's natural gas related services business as
discontinued operations.  These consolidated financial statements should
be read in conjunction with the unaudited pro forma condensed combined
financial statements and the notes thereto of VRMC and the consolidated
financial statements and the notes thereto of Energy included in VRMC's
Form S-1 registration statement filed with the Commission on May 13, 1997
("Form S-1").

3.  Discontinued Operations

      Prior to the Restructuring, Energy's historical practice was to
utilize a centralized cash management system and to incur certain
indebtedness for its consolidated group at the parent company level
rather than at the operating subsidiary level.  Therefore, the accompanying
consolidated financial statements reflect, for periods prior to the
Restructuring, the allocation of a portion of the borrowings under Energy's
various bank credit facilities, as well as a portion of other corporate 
debt of Energy, to the discontinued natural gas related services business 
based upon the ratio of such business' net assets, excluding the amounts 
of intercompany notes receivable or payable, to Energy's consolidated net 
assets.  Interest expense related to corporate debt was also allocated to 
the discontinued natural gas related services business for periods prior 
to the Restructuring based on the same net asset ratio.  Total interest 
expense allocated to discontinued operations in the accompanying 
Consolidated Statements of Income, including a portion of interest on 
corporate debt allocated pursuant to the methodology described above 
plus interest specifically attributed to discontinued operations, 
was $4.7 million and $32.7 million for the one month and seven months
ended July 31, 1997, respectively, and $14.1 million and $43.7 million 
for the three months and nine months ended September 30, 1996, respectively.

      Revenues of the discontinued natural gas related services business 
were $283.5 million and $1.7 billion for the one month and seven months 
ended July 31, 1997, respectively, and $504.4 million and $1.6 billion 
for the three months and nine months ended September 30, 1996, respectively. 
These amounts are not included in operating revenues as reported in the 
accompanying Consolidated Statements of Income.  

4.  Acquisition of Basis Petroleum, Inc.

      Effective May 1, 1997, Energy acquired the outstanding common stock 
of Basis Petroleum, Inc. ("Basis"), a wholly owned subsidiary of Salomon 
Inc ("Salomon"). Prior to the Restructuring, Energy transferred the stock 
of Basis to VRMC.  As a result, Basis was a part of the Company at the time
it was spun off to Energy's stockholders pursuant to the Restructuring.  
The primary assets of Basis included three refineries in the U.S. Gulf 
Coast region with total throughput capacity in excess of 300,000 barrels 
per day ("BPD") and an extensive wholesale marketing business.  The three 
refineries were comprised of a 160,000 BPD facility in Texas City, Texas; 
an 85,000 BPD facility in Houston, Texas; and a 65,000 BPD facility in 
Krotz Springs, Louisiana.  With the acquisition, the Company owns and
operates four refineries with total throughput capacity of about 500,000 BPD.
The acquisition was accounted for using the purchase method of accounting. 
Therefore, the accompanying consolidated statements of income of the 
Company include the results of the operations acquired in connection with 
the purchase of Basis for the months of May through September 1997.

      Energy acquired the stock of Basis for $476 million.  The purchase 
price was paid, in part, with 3,429,796 shares of Energy common stock having
a fair market value of $114 million, with the remainder paid in cash from 
borrowings under Energy's bank credit facilities (see Note 8).  In 
addition, Salomon is entitled to receive payments in any of the next 10 
years if certain average refining margins during any of such years improve 
above a specified level.  Any payments under this earn-out arrangement, 
which will be determined as of May 1 of each year beginning in 1998, are 
limited to $35 million in any year and $200 million in the aggregate and 
will be accounted for by the Company as an additional cost of the acquisition
and depreciated over the remaining lives of the assets to which the 
additional cost is allocated.

      The following unaudited pro forma financial information of the Company 
assumes that the acquisition of Basis occurred at the beginning of each period
presented.  Such pro forma information is not necessarily indicative of the 
results of future operations. (Dollars in thousands, except per share amounts.)
Nine Months Ended September 30,  
                                                                1997               1996
Operating revenues. . . . . . . . . . . . . . . . . .  $ 5,980,547        $ 7,104,243  
     Operating income (loss) . . . . . . . . . . . . . . .      127,133             (4,393) 
     Income (loss) from continuing operations. . . . . . .       60,902            (24,061) 
     Income (loss) from discontinued operations. . . . . .      (15,672)            26,143  
     Net income. . . . . . . . . . . . . . . . . . . . . .       45,230              2,082  
     Earnings (loss) per share of common stock:
       Continuing operations . . . . . . . . . . . . . . .         1.12               (.55) 
       Discontinued operations . . . . . . . . . . . . . .         (.43)               .40  
     Net income (loss) per share of common stock . . . . .          .69               (.15)
5.  Inventories

      Refinery feedstocks and refined products and blendstocks are carried
at the lower of cost or market, with the cost of feedstocks purchased for
processing and produced products determined primarily under the last-in, 
first-out ("LIFO") method of inventory pricing and the cost of feedstocks
and products purchased for resale determined primarily under the weighted 
average cost method.  The excess of the replacement cost of the Company's 
LIFO inventories over their LIFO values was approximately $61 million 
at September 30, 1997.  Materials and supplies are carried principally 
at weighted average cost not in excess of market.  In September 1997, 
the Company entered into a petroleum products purchase agreement whereby 
the Company reduced its inventory investment and working capital requirements
through the sale to a third party of various crude oil, residual fuel oil, 
distillate and gasoline inventories totaling $150 million.  Pursuant to
such agreement, the Company has an option through August 2002 to purchase 
all or a portion of petroleum product volumes equivalent to that sold.  
The Company pays a quarterly reservation fee of approximately $2.6 million 
for such option.  Inventories as of September 30, 1997 and December 31,
1996 were as follows (in thousands):
September 30,          December 31,
                                                              1997                  1996
Refinery feedstocks . . . . . . . . . .               $ 103,183            $   42,744    
     Refined products and blendstocks. . . .                 184,612                99,398    
     Materials and supplies. . . . . . . . .                  59,482                17,729    
                                                           $ 347,277             $ 159,871
6.  Statements of Cash Flows

      In order to determine net cash provided by continuing operations, 
income from continuing operations has been adjusted by, among other things, 
changes in current assets and current liabilities, excluding changes in 
cash and temporary cash investments, current deferred income tax assets, 
short-term debt and current maturities of long-term debt.  The changes in 
the Company's current assets and current liabilities, excluding the items 
noted above, are shown in the following table as an (increase)/decrease 
in current assets and an increase/(decrease) in current liabilities.  
The Company's temporary cash investments are highly liquid, low-risk 
debt instruments which have a maturity of three months or less when 
acquired. (Dollars in thousands.)
Nine Months Ended           
                                                           September 30,          
                                                       1997           1996
Receivables, net. . . . . . . . . . . . . . . $   50,182     $   23,429  
     Inventories . . . . . . . . . . . . . . . . .     59,085        (52,012) 
     Prepaid expenses and other. . . . . . . . . .      3,091          1,495  
     Accounts payable. . . . . . . . . . . . . . .    (57,708)        44,744  
     Other accrued expenses. . . . . . . . . . . .     (4,150)            15  
        Total. . . . . . . . . . . . . . . . . . . $   50,500     $   17,671
Noncash investing and financing activities for the nine months ended 
September 30, 1997 included the issuance of Energy common stock to Salomon 
as partial consideration for the acquisition of the stock of Basis discussed
in Note 4, and various adjustments to debt and equity, including the 
assumption of certain debt by PG&E that was previously allocated to the 
Company, resulting from the Merger discussed in Note 1.

      Cash interest and income taxes paid, including amounts related to 
discontinued operations for periods up to and including July 31, 1997, 
were as follows (in thousands):
Nine Months Ended         
                                                        September 30,            
                                                      1997         1996
Interest (net of amount capitalized). . . . .  $60,055      $90,898  
     Income taxes. . . . . . . . . . . . . . . . .    5,601       10,746
7.  Industrial Revenue Bonds

      On April 16, 1997, the Industrial Development Corporation of the Port
of Corpus Christi issued and sold, for the benefit of the Company, 
$98.5 million of tax-exempt Revenue Refunding Bonds (the "Refunding Bonds"),
with credit enhancement provided through a letter of credit issued by
the Bank of Montreal (see Note 8).  The Refunding Bonds were issued in four
series with due dates ranging from 2009 to 2027.  The Refunding Bonds bear 
interest at floating rates determined weekly, with the Company having the 
right to convert such rates to a daily, weekly or commercial paper rate, 
or to a fixed rate.  Interest rates on the Refunding Bonds were initially 
set at rates ranging from 3.85% to 3.95%.  The Refunding Bonds were issued 
to refund the Company's $98.5 million principal amount of tax-exempt
bonds which were issued in 1987 and were guaranteed by Energy.  In 
connection with the refinancing, both the Energy guarantee, as well as a 
deed of trust and security agreement covering the Company's refinery in 
Corpus Christi, Texas, were released.

      On May 15, 1997, the Gulf Coast Industrial Development Authority issued
and sold, for the benefit of the Company, $25 million of new Waste Disposal 
Revenue Bonds (the "Revenue Bonds") which mature on December 1, 2031.  Other
terms and conditions of these bonds are similar to those of the Refunding
Bonds described above.

8.  Bank Credit Facility

      Effective May 1, 1997, Energy replaced its existing unsecured 
$300 million revolving bank credit and letter of credit facility with a 
new five-year, unsecured $835 million revolving bank credit and letter of 
credit facility.  The new credit facility has been used to finance a 
portion of the acquisition cost of Basis as discussed above in Note 4 
and to fund a $210 million dividend paid by the Company to Energy 
immediately prior to the Distribution as discussed above in Note 1.
The facility also provides continuing credit enhancement for the Company's 
Refunding Bonds and Revenue Bonds as discussed above in Note 7, and can 
be used to provide financing for other general corporate purposes.  
Energy was the borrower under the facility until the completion of the
Restructuring on July 31, 1997, at which time all obligations of Energy 
under the facility were assumed by the Company.  

      The facility amount reduces by $150 million at the end of each of 
the third and fourth years.  Availability under the facility is also 
reduced by the proceeds from debt issuances and certain asset sales, 
and by 75% of the proceeds from certain equity issuances.  The credit 
facility includes certain restrictive covenants including a minimum 
fixed charge coverage ratio of 1.8 to 1.0, a maximum debt to 
capitalization ratio of 45%, a minimum net worth test, and certain 
restrictions on, among other things, long-term leases and subsidiary debt.

      Borrowings under the credit facility bear interest at either LIBOR 
plus a margin, a base rate, or a money market rate.  In addition, various 
fees and expenses are required to be paid in connection with the credit 
facility, including a facility fee, a letter of credit issuance fee and 
a fee based on letters of credit outstanding.  The interest rate and fees 
under the credit facility are subject to adjustment based upon the credit 
ratings assigned to the Company's long-term debt.  In September 1997, 
the Company received a corporate credit rating of BBB- from 
Standard & Poor's.  As a result, interest rate margins and fees under the
credit facility were immediately reduced and the credit facility's prior 
limitations on the Company's ability to make certain dividend payments or 
repurchases of common stock were eliminated.  The Company is currently in 
the process of amending the bank credit facility to further enhance
the Company's financial flexibility.

9.  Redemption of Preferred Stock

      On March 30, 1997, Energy redeemed the remaining 11,500 outstanding 
shares of its Cumulative Preferred Stock, $8.50 Series A ("Series A 
Preferred Stock").  The redemption price was $104 per share, plus dividends
accrued to the redemption date of $.685 per share. 

      In April 1997, Energy called all of its outstanding $3.125 
convertible preferred stock ("Convertible Preferred Stock") for redemption 
on June 2, 1997.  The total redemption price for the Convertible Preferred 
Stock was $52.1966 per share (representing a per-share redemption price of
$52.188, plus accrued dividends in the amount of $.0086 per share for the 
one-day period from June 1, 1997 to the June 2, 1997 redemption date).  
The Convertible Preferred Stock was convertible into Energy common stock 
at a conversion price of $27.03 per share (equivalent to a conversion rate 
of approximately 1.85 shares of common stock for each share of Convertible 
Preferred Stock).  Prior to the redemption, substantially all of the 
outstanding shares of Convertible Preferred Stock were converted into 
shares of Energy common stock.

10.  Employee Benefit Plans

      In connection with effecting the Restructuring discussed in Note 1, 
on April 11, 1997, Energy's Board of Directors approved the termination of 
Energy's leveraged employee stock ownership plan ("VESOP"), in which 
Company employees were participants, and subsequently directed the VESOP
trustee to sell a sufficient amount of Energy common stock held in the 
VESOP suspense account to repay the outstanding amount of notes issued 
in connection with the VESOP ("VESOP Notes") and allocate the remaining 
stock in the suspense account to the accounts of the VESOP participants.  
The VESOP Notes were repaid in full in May 1997, after which 226,198 
remaining shares of Energy common stock were allocated to all VESOP 
participants.

11.  Litigation and Contingencies

Litigation Relating to Operations of Basis Prior to Acquisition

      Basis was named as a party to numerous claims and legal proceedings 
which arose prior to its acquisition by the Company.  Pursuant to the stock 
purchase agreement between Energy, the Company, Salomon, and Basis, 
Salomon assumed the defense of all known suits, actions, claims and 
investigations pending at the time of the acquisition and all obligations, 
liabilities and expenses related to or arising therefrom.  In addition, 
Salomon will assume all obligations, liabilities and expenses related 
to or resulting from all private third-party suits, actions and claims 
which arise out of a state of facts existing on or prior to the time
of the acquisition, but which were not pending at such time, subject to 
certain terms, conditions and limitations.  In certain pending matters, 
the plaintiffs are seeking damages and requesting injunctive relief which, 
if granted, could potentially result in the operations acquired in
connection with the purchase of Basis being adversely affected through 
required reductions in emissions or discharges, required additions and 
improvements to refinery controls or other equipment, or required 
reductions in permit limits or refinery throughput.  Although Energy and 
the Company have conducted a due diligence investigation of Basis, there 
can be no assurance that other material matters, not identified or fully 
investigated in due diligence, will not be subsequently identified.

Litigation Relating to Discontinued Operations

      Energy and certain of its natural gas related subsidiaries, as well 
as the Company, have been sued by Teco Pipeline Company ("Teco") regarding 
the operation of the 340-mile West Texas pipeline in which a subsidiary of 
Energy holds a 50% undivided interest.  In 1985, a subsidiary of Energy
sold a 50% undivided interest in the pipeline and entered into a joint 
venture through an ownership agreement and an operating agreement, each 
dated February 28, 1985, with the purchaser of the interest.  In 1988, 
Teco succeeded to that purchaser's 50% interest.  A subsidiary of Energy 
has at all times been the operator of the pipeline.  Notwithstanding the 
written ownership and operating agreements, the plaintiff alleges that a 
separate, unwritten partnership agreement exists, and that the defendants 
have exercised improper dominion over such alleged partnership's affairs.  
The plaintiff also alleges that the defendants acted in bad faith by
negatively affecting the economics of the joint venture in order to provide 
financial advantages to facilities or entities owned by the defendants 
and by allegedly usurping for the defendants' own benefit certain 
opportunities available to the joint venture.  The plaintiff asserts 
causes of action for breach of fiduciary duty, fraud, tortious 
interference with business relationships, professional malpractice and 
other claims, and seeks unquantified actual and punitive damages.  Energy's 
motion to compel arbitration was denied, but Energy has filed an appeal.  
Energy has also filed a counterclaim alleging that the plaintiff breached 
its own obligations to the joint venture and jeopardized the economic and 
operational viability of the pipeline by its actions.  Energy is seeking 
unquantified actual and punitive damages.  Although PG&E previously 
acquired Teco and now ultimately owns both Teco and Energy after the 
Restructuring, PG&E's Teco acquisition agreement purports to assign the 
benefit or detriment of this lawsuit to the former shareholders of Teco.  
Pursuant to the Distribution Agreement by which the Company was spun off 
to Energy's stockholders in connection with the Restructuring, the Company 
has agreed to indemnify and hold harmless Energy with respect to this 
lawsuit to the extent of 50% of the amount of any final judgment or 
settlement amount not in excess of $30 million, and 100% of that part of 
any final judgment or settlement amount in excess of $30 million.

General

      The Company is also a party to additional claims and legal 
proceedings arising in the ordinary course of business.  The Company 
believes it is unlikely that the final outcome of any of the claims or 
proceedings to which the Company is a party would have a material adverse 
effect on the Company's financial statements; however, due to the inherent 
uncertainty of litigation, the range of possible loss, if any, cannot be 
estimated with a reasonable degree of precision and there can be no 
assurance that the resolution of any particular claim or proceeding would 
not have an adverse effect on the Company's results of operations for the
interim period in which such resolution occurred.

12.  Accounting Policies for Derivatives

      The Company enters into over-the-counter price swaps, options and 
futures contracts with third parties to hedge refinery feedstock purchases 
and refined product inventories in order to reduce the impact of adverse 
price changes on these inventories before the conversion of the feedstock 
to finished products and ultimate sale.  Hedges of inventories are 
accounted for under the deferral method with gains and losses included 
in the carrying amounts of inventories and ultimately recognized in cost 
of sales as those inventories are sold. 

      The Company also hedges anticipated transactions.  Over-the-counter 
price swaps, options and futures contracts with third parties are used to 
hedge refining operating margins for periods up to two years by locking 
in components of the margins, including the resid discount, the 
conventional crack spread and the premium product differentials. Hedges 
of anticipated transactions are also accounted for under the deferral 
method with gains and losses on these transactions recognized
in cost of sales when the hedged transaction occurs.

      The above noted contracts are designated at inception as a hedge 
where there is a direct relationship to the price risk associated with 
the Company's inventories, future purchases and sales of commodities 
used in the Company's operations, or components of the Company's refining
operating margins.  If such direct relationship ceases to exist, the 
related contract is designated "for trading purposes" and accounted for 
as described below.

      Gains and losses on early terminations of financial instrument 
contracts designated as hedges are deferred and included in cost of 
sales in the measurement of the hedged transaction. When an 
anticipated transaction being hedged is no longer likely to occur, 
the related derivative contract is accounted for similar to a contract 
entered into for trading purposes.

      The Company also enters into price swaps, over-the-counter and 
exchange-traded options, and futures contracts with third parties for 
trading purposes using its fundamental and technical analysis of market 
conditions to earn additional revenues.  Contracts entered into for trading
purposes are accounted for under the fair value method.  Changes in the 
fair value of these contracts are recognized as gains or losses in cost 
of sales currently and are recorded in the Consolidated Balance Sheets 
in "Prepaid expenses and other" and "Accounts payable" at fair value at 
the reporting date.  The Company determines the fair value of its 
exchange-traded contracts based on the settlement prices for open 
contracts, which are established by the exchange on which the 
instruments are traded.  The fair value of the Company's over-the-counter 
contracts is determined based on market-related indexes or by obtaining 
quotes from brokers.

      The Company's derivative contracts and their related gains and 
losses are reported in the Consolidated Balance Sheets and Consolidated 
Statements of Income as discussed above, depending on whether they are 
designated as a hedge or for trading purposes.  In the Consolidated 
Statements of Cash Flows, recognized gains and losses on derivative 
contracts are included in net income while deferred gains and losses 
are included in changes in current assets and current liabilities. 

13.  Recently Issued Accounting Standards

      In June 1997, the Financial Accounting Standards Board ("FASB") 
issued Statement of Financial Accounting Standards ("SFAS") No. 130, 
"Reporting Comprehensive Income," and SFAS No. 131, "Disclosures about 
Segments of an Enterprise and Related Information," both of which become 
effective for the Company's financial statements beginning in 1998.  
The FASB had previously issued in March 1997 SFAS No. 128, "Earnings 
per Share," and SFAS No. 129, "Disclosure of Information about 
Capital Structure," both of which become effective for the Company's 
financial statements beginning with the period ending December 31, 1997.  
Based on information currently available to the Company, the adoption of 
these statements will not have a material effect on the Company's 
consolidated financial statements.
VALERO ENERGY CORPORATION AND SUBSIDIARIES
         MANAGEMENT'S DISCUSSION AND ANALYSIS
    OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

RESULTS OF OPERATIONS

      The following are the Company's financial and operating highlights 
for the three months ended and nine months ended September 30, 1997 
and 1996.  The amounts in the following table are in thousands of dollars, 
unless otherwise noted:
Three Months Ended         Nine Months Ended      
                                                       September 30,              September 30,
                                                   1997 (1)       1996         1997 (1)       1996
Operating revenues . . . . . . . . . . . . . .  $1,975,665    $  678,059     $4,160,091    $1,927,590  

Operating income . . . . . . . . . . . . . . .      94,107        23,060        188,320        69,699  

Equity in earnings of joint ventures . . . . .       1,189         1,350          3,251         2,171  
Other income, net. . . . . . . . . . . . . . .         272           249          1,224         2,694  
Interest and debt expense, net . . . . . . . .      12,193         8,914         35,904        28,896  
Income from continuing operations. . . . . . .      51,993         6,630         99,402        27,757  
Income (loss) from discontinued 
  operations, net of income taxes. . . . . . .        (432)        6,516        (15,672)       26,144  
Net income . . . . . . . . . . . . . . . . . .      51,561        13,146         83,730        53,901  
Net income applicable to common stock. . . . .      51,561        10,302         79,138        45,375  

Earnings (loss) per share of common stock:
  Continuing operations. . . . . . . . . . . .  $      .93    $      .15     $     1.98     $     .63  
  Discontinued operations. . . . . . . . . . .        (.01)          .08           (.40)          .40  
    Total. . . . . . . . . . . . . . . . . . .  $      .92    $      .23     $     1.58     $    1.03  

Operating statistics:
  Corpus Christi refinery:
    Throughput volumes (Mbbls per day) . . . .         189           165            177           167  
    Operating cost per barrel. . . . . . . . .  $     3.16    $     3.21     $     3.43     $    3.32  

  Texas City/Houston/Krotz Springs refineries:
    Throughput volumes (Mbbls per day) (2) . .         318           N/A            312          N/A  
    Operating cost per barrel (2). . . . . . .  $     2.14           N/A     $     2.21          N/A  

  Sales volumes (Mbbls per day). . . . . . . .         774           282            578           281  

  Average throughput margin per barrel . . . .  $     4.91    $     5.22     $     5.18     $    5.40
(1)Includes the operations of the Texas City, Houston and Krotz Springs 
   refineries commencing May 1, 1997.
(2)Year-to-date amounts are for the five months ended September 30, 1997.
General

      The Company reported income from continuing operations of $52 million, 
or $.93 per share, for the third quarter of 1997 compared to $6.7 million, 
or $.15 per share, for the same period in 1996.  For the first nine months 
of 1997, income from continuing operations was $99.4 million, or $1.98 per 
share, compared to $27.8 million, or $.63 per share, for the first nine 
months of 1996.  Results from discontinued operations were losses of 
$.5 million, or $.01 per share, and $15.7 million, or $.40 per share, for 
the one month and seven months ended July 31, 1997, respectively, and income
of $6.4 million, or $.08 per share, and $26.1 million, or $.40 per share, 
for the three months and nine months ended September 30, 1996, respectively.
In determining earnings per share for the third quarter of 1996 and the 
1996 and 1997 year-to-date periods, dividends on Energy's Convertible 
Preferred Stock, which was redeemed on June 2, 1997 as described in Note 9 
of Notes to Consolidated Financial Statements, were deducted from income 
from discontinued operations as the Convertible Preferred Stock was issued 
to fund the repurchase of the publicly held units of Valero Natural Gas 
Partners, L.P. in 1994.

      The May 1, 1997 acquisition of Basis added significantly to the 
Company's third quarter and year-to-date results.  Income from continuing 
operations and related earnings per share increased during the quarter 
and year-to-date periods due primarily to significant increases in operating
income, partially offset by increases in interest and income tax expense.

Third Quarter 1997 Compared to Third Quarter 1996

      Operating revenues increased $1.3 billion, or 191%, to $2 billion 
during the third quarter of 1997 compared to the same period in 1996 due 
to a 174% increase in average daily sales volumes resulting primarily from 
additional volumes attributable to the May 1, 1997 acquisition of Basis. 
Also contributing to the increase in revenues was the effect of the sale 
of $150 million of certain inventories pursuant to a petroleum products 
purchase agreement as discussed in Note 5 of Notes to Consolidated 
Financial Statements.

      Operating income increased $71 million, from $23.1 million during 
the third quarter of 1996 to $94.1 million during the third quarter of 1997.
The increase in operating income was due primarily to an approximate 
$55 million contribution from the operations related to the Texas City,
Houston and Krotz Springs refineries which were acquired on May 1, 1997, 
and to an approximate $31 million increase in total throughput margins 
for the Company's previously existing refining operations in Corpus Christi 
and related marketing operations.  Partially offsetting these increases in 
operating income were an approximate $7 million increase in operating
expenses relating to the Company's previously existing refining operations 
and an approximate $8 million increase in administrative expenses resulting 
primarily from higher employee-related costs, including the effect of 
additional personnel resulting from the acquisition of Basis in May 1997.  
Total throughput margins for the Company's previously existing refining 
and marketing operations increased during the third quarter of 1997 
compared to the same period in 1996 due to a substantial improvement 
in the price differential between conventional gasoline and crude oil, 
higher oxygenate margins resulting primarily from an increase in sales
prices of oxygenates, such as MTBE, and higher premiums on sales of 
reformulated gasoline and petrochemical feedstocks, including a benefit 
from the sale of mixed xylenes produced from the xylene fractionation 
unit that was placed in service at the Corpus Christi refinery in January
1997.  Total throughput margins for previously existing operations were 
also higher in the third quarter of 1997 as total margins for the 1996 
period were reduced by the effect of certain scheduled maintenance 
turnarounds described below.  The increases resulting from these factors 
were partially offset by lower discounts on purchases of residual oil 
("resid") feedstocks due to continued high demand for resid in the Far 
East and a decrease in crude oil prices, and by decreased results from 
price risk management activities.  Operating expenses relating to the 
Company's previously existing refining operations increased, although
operating expenses per barrel decreased, due primarily to costs 
associated with the xylene fractionation unit and higher variable costs 
resulting from a 15% increase in throughput volumes at the Company's 
Corpus Christi refinery.  Corpus Christi throughput volumes were higher 
during the third quarter of 1997 compared to the third quarter of 1996 due
to the effects of scheduled maintenance turnarounds completed during the 
third quarter of 1996 on the hydrodesulfurization ("HDS") and MTBE units, 
and to a new processing arrangement entered into in 1997 with a local 
Corpus Christi refiner.

      Net interest and debt expense increased $3.3 million to $12.2 million 
during the third quarter of 1997 compared to the same period in 1996 due 
primarily to an increase in bank borrowings related to the acquisition of 
Basis and to the special pre-Distribution dividend paid to Energy described 
in Note 1 of Notes to Consolidated Financial Statements. The increase in 
interest and debt expense resulting from these factors was partially offset 
by a decrease in allocated interest expense related to corporate debt 
resulting from the Restructuring on July 31, 1997.  Income tax expense 
increased $22.3 million to $31.4 million during the third quarter of 1997 
compared to the same period in 1996 due primarily to higher pre-tax income 
from continuing operations.

Year-to-Date 1997 Compared to Year-To-Date 1996

      For the first nine months of 1997, operating revenues increased 
$2.2 billion, or 116%, to $4.2 billion compared to the first nine months 
of 1996 due to a 106% increase in average daily sales volumes resulting 
primarily from additional volumes attributable to the Basis acquisition and
to a lesser extent from increased wholesale marketing activities relating 
to the Company's previously existing refining and marketing operations.  
Operating revenues also increased due to the effect of the sale of 
$150 million of inventories pursuant to a petroleum products purchase 
agreement as noted above in the quarter-to-quarter comparison.

      Operating income increased $118.6 million, or 170%, to $188.3 million 
during the first nine months of 1997 compared to the same period in 1996 
due to an approximate $78 million contribution from the operations related 
to the Texas City, Houston and Krotz Springs refineries, and to an 
approximate $64 million increase in total throughput margins, partially 
offset by an approximate $13 million increase in operating expenses, 
relating to the Company's previously existing refining and marketing 
operations.  Also impacting the change in operating income was an 
approximate $10 million increase in administrative expenses resulting 
primarily from higher employee-related costs, including the effect of the 
Basis acquisition as noted above.  Total throughput margins for previously 
existing refining and marketing operations increased due primarily to 
increased price differentials between conventional gasoline and crude oil, 
higher premiums on sales of petrochemical feedstocks including premiums 
on sales of mixed xylenes in 1997, and the effect of less unit downtime in 
the 1997 period.  The increases resulting from these factors were partially 
offset by lower oxygenate margins and resid discounts and decreased results 
from price risk management activities.  Operating expenses relating to 
the Company's previously existing refining operations increased due to the 
factors noted above in the quarter-to-quarter comparison and to higher
maintenance costs resulting primarily from certain unit repairs required 
in the 1997 second quarter.

      Net interest and debt expense increased $7 million to $35.9 million 
during the first nine months of 1997 compared to the same period in 1996 
due primarily to the factors noted above in the quarter-to-quarter 
comparison.  Income tax expense increased $39.6 million to $57.5 million 
during the same periods due primarily to higher pre-tax income from 
continuing operations.

LIQUIDITY AND CAPITAL RESOURCES

      Net cash provided by continuing operations increased $122.2 million 
to $229.9 million during the first nine months of 1997 compared to the 
same period in 1996 due primarily to the increase in income from continuing 
operations described above under "Results of Operations," and, to a lesser
extent, to the changes in current assets and current liabilities detailed 
in Note 6 of Notes to Consolidated Financial Statements. Included in the 
changes in current assets and current liabilities was a $59.1 million 
decrease in inventories in the first nine months of 1997 which was 
primarily attributable to a $150 million reduction in the Company's 
inventory investment pursuant to the petroleum products purchase agreement 
entered into in September 1997 and described in Note 5, partially offset 
by higher feedstock inventory levels attributable to the operation of the 
Texas City, Houston and Krotz Springs refineries.  During the first nine 
months of 1997, cash provided by operating activities, including proceeds 
from the sale of inventories pursuant to the petroleum products purchase
agreement, along with net proceeds from bank borrowings, proceeds from 
the issuance of the Revenue Bonds as described in Note 7, and issuances 
of common stock related to Energy's benefit plans totaled approximately 
$729 million.  These funds were utilized to acquire Basis, fund capital 
expenditures and deferred turnaround and catalyst costs, pay common and 
preferred stock dividends, pay a special dividend to Energy and settle 
the intercompany note balance with Energy pursuant to the Distribution 
Agreement as described in Note 1, purchase treasury stock, and redeem 
the remaining outstanding shares of Energy's Series A Preferred Stock
and Convertible Preferred Stock as described in Note 9.  

      As described in Note 8 of Notes to Consolidated Financial Statements, 
effective May 1, 1997, the financial flexibility and liquidity of the 
Company was significantly increased through the replacement of Energy's 
existing $300 million revolving bank credit and letter of credit facility 
with a new $835 million revolving bank credit and letter of credit facility.
Such facility was assumed by the Company upon completion of the Restructuring
on July 31, 1997 at which time total availability increased to the full 
$835 million.  As of September 30, 1997, approximately $327 million was 
outstanding under this committed facility with approximately $508 million 
available for additional borrowings and letters of credit.  The Company 
also has numerous uncommitted short-term bank credit facilities, along with
several uncommitted letter of credit facilities.  As of September 30, 1997, 
$175 million was outstanding under the short-term bank credit facilities,
and approximately $57 million was outstanding under the uncommitted letter 
of credit facilities with approximately $223 million available for 
additional letters of credit.  The Company was in compliance with all 
covenants contained in its various debt facilities as of September 30, 1997.

      As described in Note 8 of Notes to Consolidated Financial Statements, 
in September 1997, the Company received a corporate credit rating of BBB- 
from Standard and Poor's.  This rating resulted in an immediate reduction 
in interest rate margins and fees associated with the Company's $835 million 
bank credit facility and allowed the Company to eliminate the prior 
restrictive covenant under such facility which limited the Company's 
ability to make certain dividend payments and repurchases of common stock.  
The Company is currently in the process of amending the bank credit facility
to further enhance the Company's financial flexibility.

      As described in Note 4 of Notes to Consolidated Financial Statements, 
Energy acquired the outstanding common stock of Basis on May 1, 1997 for 
approximately $362 million in cash, funded with borrowings under Energy's 
bank credit facilities, and Energy common stock which had a fair market
value of $114 million on the date of issuance.  Although Basis incurred 
significant operating losses during 1995 and 1996, the Texas City, Houston 
and Krotz Springs refining and marketing operations were able to contribute 
approximately $78 million to the Company's operating income for the months 
of May through September 1997, as described above under "Results of 
Operations."  The achievement of such results was due to, among other 
things, recently completed refinery upgrading projects, a reduction in 
depreciation and amortization expense due to the acquisition cost of 
Basis being less than its net book value, and a reduction in operating 
and overhead costs through various operational and personnel-related 
changes implemented by the Company.  The Company believes that the 
operations related to the Texas City, Houston and Krotz Springs 
refineries will continue to benefit the Company's consolidated cash 
flow and earnings throughout the remainder of 1997.

      During the first nine months of 1997, the Company expended, exclusive 
of the Basis acquisition,  approximately $98 million for capital investments,
primarily capital expenditures, $45 million of which related to continuing 
refining and marketing operations while $53 million related to the 
discontinued natural gas related services operations.  For total year 1997, 
the Company currently expects to incur approximately $120 million for 
capital expenditures and deferred turnaround and catalyst costs related to 
its continuing refining and marketing operations, $45 million of which 
relates to the Texas City, Houston and Krotz Springs refineries for the 
months of May through December.

      As described in Note 7 of Notes to Consolidated Financial Statements, 
the Company refinanced its outstanding $98.5 million principal amount of 
industrial revenue bonds in April 1997 at substantially lower interest 
rates.  Based on the floating rates in effect as of September 30, 1997,
the Company expects the reduction in interest expense resulting from 
such refinancing to be in excess of $5 million per year.

      The Company believes it has sufficient funds from operations, and to 
the extent necessary, from the public and private capital markets and 
bank markets, to fund its ongoing operating requirements.  The Company 
expects that to the extent necessary, it can raise additional funds from
time to time through equity or debt financings; however, except for 
borrowings under bank credit agreements, the Company has no specific 
financing plans as of the date hereof to increase the amount of debt 
outstanding.  From time to time, the Company will consider the debt 
market to fix the interest rate on a portion of its outstanding variable 
rate debt.  This could either be done synthetically through interest rate 
swaps or caps, or by issuing new fixed rate debt and using the proceeds to 
pay down existing variable rate debt.

      As discussed in Note 13 of Notes to Consolidated Financial Statements, 
the FASB has issued various new statements of financial accounting standards 
in 1997 which require adoption at various times in the future. Based on 
information currently available to the Company, the future adoption of these
statements is not expected to have a material effect on the Company's 
consolidated financial statements.

      The foregoing discussion contains certain estimates, predictions, 
projections and other "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) that involve various risks and 
uncertainties.  While these forward-looking statements, and any assumptions
upon which they are based, are made in good faith and reflect the Company's 
current judgment regarding the direction of its business, actual results 
will almost always vary, sometimes materially, from any estimates, 
predictions, projections, assumptions, or other future performance
suggested herein.  Some important factors (but not necessarily all factors) 
that could affect the Company's sales volumes, growth strategies, future 
profitability and operating results, or that otherwise could cause actual 
results to differ materially from those expressed in any forward-looking
statement include the following:  renewal or satisfactory replacement of 
the Company's resid feedstock arrangements as well as market, political 
or other forces generally affecting the pricing and availability of resid 
and other refinery feedstocks and refined products; accidents or other 
unscheduled shutdowns affecting the Company's, its suppliers' or its 
customers' pipelines, plants, machinery or equipment; excess industry 
capacity; competition from products and services offered by other energy
enterprises; changes in the cost or availability of third-party vessels, 
pipelines and other means of transporting feedstocks and products; ability 
to implement the cost reductions and operational changes related to, and 
realize the various assumptions and efficiencies projected for, the
operation of the Texas City, Houston and Krotz Springs refineries; state 
and federal environmental, economic, safety and other policies and 
regulations, any changes therein, and any legal or regulatory delays
or other factors beyond the Company's control; execution of planned 
capital projects; weather conditions affecting the Company's operations 
or the areas in which the Company's products are marketed; rulings, 
judgments, or settlements in litigation or other legal matters, including
unexpected environmental remediation costs in excess of any reserves; the 
introduction or enactment of legislation; and changes in the credit ratings
assigned to the Company's debt securities and trade credit.  Certain of 
these risk factors are more fully discussed in the Company's Form S-1.  
The Company undertakes no obligation to publicly release the result of 
any revisions to any such forward-looking statements that may be made to 
reflect events or circumstances after the date hereof or to reflect
the occurrence of unanticipated events.
PART II - OTHER INFORMATION

Item 1.  Legal Proceedings

      Energy and certain of its natural gas related subsidiaries, as well 
as the Company, have been sued by Teco Pipeline Company ("Teco") regarding 
the operation of the 340-mile West Texas pipeline in which a subsidiary of 
Energy holds a 50% undivided interest.  In 1985, a subsidiary of Energy
sold a 50% undivided interest in the pipeline and entered into a joint 
venture through an ownership agreement and an operating agreement, each 
dated February 28, 1985, with the purchaser of the interest.  In 1988, 
Teco succeeded to that purchaser's 50% interest.  A subsidiary of Energy 
has at all times been the operator of the pipeline.  Notwithstanding the 
written ownership and operating agreements, the plaintiff alleges that a 
separate, unwritten partnership agreement exists, and that the defendants 
have exercised improper dominion over such alleged partnership's affairs.  
The plaintiff also alleges that the defendants acted in bad faith by
negatively affecting the economics of the joint venture in order to provide 
financial advantages to facilities or entities owned by the defendants and 
by allegedly usurping for the defendants' own benefit certain opportunities 
available to the joint venture.  The plaintiff asserts causes of action 
for breach of fiduciary duty, fraud, tortious interference with business 
relationships, professional malpractice and other claims, and seeks 
unquantified actual and punitive damages.  Energy's motion to compel 
arbitration was denied, but Energy has filed an appeal.  Energy has also 
filed a counterclaim alleging that the plaintiff breached its own 
obligations to the joint venture and jeopardized the economic and 
operational viability of the pipeline by its actions.  Energy is seeking 
unquantified actual and punitive damages.  Although PG&E previously 
acquired Teco and now ultimately owns both Teco and Energy after the 
Restructuring, PG&E's Teco acquisition agreement purports to assign the 
benefit or detriment of this lawsuit to the former shareholders of Teco.  
Pursuant to the Distribution Agreement by which the Company was spun off 
to Energy's stockholders in connection with the Restructuring, the Company 
has agreed to indemnify and hold harmless Energy with respect to this 
lawsuit to the extent of 50% of the amount of any final judgment or 
settlement amount not in excess of $30 million, and 100% of that part of 
any final judgment or settlement amount in excess of $30 million.

Item 2.  Changes in Securities

     Rights Agreement.  In connection with the Distribution, the 
Company's Board of Directors declared a dividend distribution of one 
Preferred Share Purchase Right ("Right") for each outstanding share of the 
Company's common stock, $.01 par value ("Common Stock") distributed to 
Energy stockholders pursuant to the Distribution.  Except as set forth 
below, each Right entitles the registered holder to purchase from the 
Company one one-hundredth of a share of the Company's Junior Participating 
Preferred Stock, Series I, ("Junior Preferred Stock") at a price of 
$100 per one one-hundredth of a share, subject to adjustment (the 
"Purchase Price").  The description and terms of the Rights are set 
forth in the Rights Agreement dated July 17, 1997 between the Company 
and Harris Trust and Savings Bank (the "Rights Agreement").  

     Until the earlier to occur of (i) 10 days following a public 
announcement that a person or group of affiliated or associated persons 
(an "Acquiring Person") has acquired beneficial ownership of 15% or more 
of the outstanding shares of the Company's Common Stock, (ii) 10 business 
days (or such later date as may be determined by action of the Company's 
Board of Directors) following the initiation of a tender offer or exchange 
offer which would result in the beneficial ownership by an Acquiring 
Person of 15% or more of such outstanding Common Stock (the earlier of 
such dates being called the "Rights Separation Date"), or (iii)
the earlier redemption or expiration of the Rights, the Rights will be 
transferred only with the Common Stock.  The Rights are not exercisable 
until the Rights Separation Date.  As soon as practicable following the 
Rights Separation Date, separate certificates evidencing the Rights (the
"Right Certificates") will be mailed to holders of record of Common Stock 
as of the close of business on the Rights Separation Date and such 
separate Right Certificates alone will evidence the Rights.  The Rights 
will expire on June 30, 2007 (the "Final Expiration Date"), unless the 
Final Expiration Date is extended or unless the Rights are earlier 
redeemed or exchanged by the Company, in each case, as described below.

    Because of the nature of the Junior Preferred Stock's dividend, 
liquidation and voting rights, the value of the one one-hundredth interest 
in a share of Junior Preferred Stock purchasable upon exercise of each 
Right should approximate the value of one share of Common Stock.  

    In the event that after the Rights Separation Date, the Company is 
acquired in a merger or other business combination transaction, or if 50% 
or more of its consolidated assets or earning power are sold, proper 
provision will be made so that each holder of a Right will thereafter 
have the right to receive, upon the exercise thereof at the then current 
exercise price of the Right, that number of shares of common stock of the 
acquiring company which at the time of such transaction will have a market 
value of two times the exercise price of the Right.  In the event that any 
person or group of affiliated or associated persons becomes the beneficial 
owner of 15% or more of the outstanding Common Stock, proper provision 
shall be made so that each holder of a Right, other than Rights beneficially 
owned by the Acquiring Person (which will thereafter be void), will 
thereafter have the right to receive upon exercise that number of shares 
of Common Stock having a market value of two times the exercise price of 
the Right.   

     At any time after the acquisition by an Acquiring Person of beneficial 
ownership of 15% or more of the outstanding Common Stock and prior to the 
acquisition by such Acquiring Person of 50% or more of the outstanding 
Common Stock, the Company's Board of Directors may exchange the Right
(other than Rights owned by such Acquiring Person which have become void), 
at an exchange ratio of one share of Common Stock, or one one-hundredth of 
a share of Junior Preferred Stock, per Right (subject to adjustment).  

     At any time prior to the acquisition by an Acquiring Person of 
beneficial ownership of 15% or more of the outstanding Common Stock, 
the Company's Board of Directors may redeem the Rights at a price of 
$.01 per Right (the "Redemption Price").  The redemption of the Rights 
may be made effective at such time, on such basis and with such conditions 
as the Company's Board of Directors may establish.  Immediately upon any 
redemption of the Rights, the right to exercise the Rights will terminate 
and the only right of the holders of Rights will be to receive the 
Redemption Price.  

     Until a Right is exercised, the holder will have no rights as a 
stockholder of the Company including, without limitation, the right to 
vote or to receive dividends.  

     The Rights may have certain anti-takeover effects.  The Rights will 
cause substantial dilution to a person or group that attempts to acquire 
the Company on terms not approved by the Company's Board of Directors, 
except pursuant to an offer conditioned on a substantial number of Rights
being acquired.  The Rights should not interfere with any merger or other 
business combination approved by the Company's Board of Directors since 
the Rights may be redeemed by the Company at the Redemption Price prior to 
the time that a person or group has acquired beneficial ownership of 15% 
or more of the Common Stock.  

     The foregoing summary of certain terms of the Rights is qualified in 
its entirety by reference to the Rights Agreement and to the Certificate 
of Designations, Rights and Preferences for the Junior Preferred Stock.

     Credit Agreement.  Effective May 1, 1997, Energy replaced its existing 
unsecured $300 million revolving bank credit and letter of credit facility 
with a new five-year, unsecured $835 million revolving bank credit and 
letter of credit facility.  The new credit facility has been used to
finance a portion of the acquisition cost of Basis (as discussed in the 
Notes to Consolidated Financial Statements), to provide continuing credit 
enhancement for the Company's Refunding Bonds and Revenue Bonds (also 
discussed in the Notes to Consolidated Financial Statements) and to provide 
financing for other general corporate purposes.  Energy was the borrower 
under the facility until the completion of the Restructuring on 
July 31, 1997, at which time all obligations of Energy under the facility 
were assumed by the Company.

     The credit facility includes certain restrictive covenants including 
a minimum fixed charge coverage ratio of 1.8 to 1.0, a maximum debt to 
capitalization ratio of 45%, a minimum net worth test and certain 
restrictions on, among other things, long-term leases and subsidiary debt.  
In September 1997, the Company received a corporate credit rating of BBB- 
from Standard & Poor's.  As a result, interest rate margins and fees under 
the credit facility were immediately reduced and the credit facility's 
prior limitations on the Company's ability to make certain dividend 
payments or repurchases of common stock were eliminated.

Item 4.  Submission of Matters to a Vote of Security Holders

        The Company's annual meeting of stockholders (the "Meeting") 
was held July 17, 1997.  All of the issued and outstanding shares of 
the Company's common stock (the "Company Common Stock") were voted by 
Energy, then the sole stockholder of the Company, in favor of all 
matters presented at the Meeting.  William E. Greehey, Edward C. Benninger, 
E. Baines Manning, Stan L. McLelland, George E. Kain and Wayne D. Smithers 
were elected at the Meeting to serve as directors of the Company until 
the time of the filing of an amendment and restatement of the Company's 
Restated Certificate of Incorporation (the "Certificate") in connection 
with the Distribution.  New Bylaws for the Company were also adopted at 
the Meeting.  The amendment and restatement of the Certificate approved 
at the Meeting, among other things, increased the authorized number of 
shares of Company Common Stock from 3,000 shares to 150,000,000 shares; 
changed the par value of the Company Common Stock from $1.00 par value 
per share to $.01 par value per share; created an authorized class of 
capital stock of the Company consisting of 20,000,000 shares designated 
as Preferred Stock; classified the Board of Directors into three classes, 
each having a three year term; and changed the name of the Company from 
Valero Refining and Marketing Company to Valero Energy Corporation.  
The sole stockholder also approved the removal of certain of the directors 
elected at the Meeting upon effectiveness of the filing of the Certificate 
and the simultaneous election of new directors so that after giving effect 
to such actions, the Board of Directors would consist of eight directors 
classified in the respective classes and serving for the respective 
periods set forth below:

        Class I  -  Directors to serve until 1998
                   Ruben Escobedo
                 Lowell H. Leberman

        Class II  -  Directors to serve until 1999
                 Ronald K. Calgaard
                 William E. Greehey
                Susan Kaufman Purcell

        Class III  -  Directors to serve until 2000
                 Edward C. Benninger
                James L. ("Rocky") Johnson
                   Robert G. Dettmer

Item 5.  Other Information

     Annual Stockholder's Meeting.  The Company's 1998 Annual Meeting of 
Stockholders will be held in San Antonio, Texas, on April 30, 1998.  The 
Company requests that any proposals of stockholders intended to be 
submitted for inclusion in the proxy statement for such meeting pursuant to
Regulation 14A of the rules and regulations of the Securities and Exchange 
Commission promulgated under the Securities Exchange Act of 1934, as 
amended, be submitted to the Corporate Secretary of the Company not later 
than November 28, 1997.  Stockholders intending to propose business to be 
considered by the stockholders of the Company are encouraged to review 
the requirements of Regulation 14A and of the Company's By-laws before 
submitting any such proposal. 

Item 6.  Exhibits and Reports on Form 8-K

      (a)   Exhibits.

     11.1   Computation of Earnings Per Share.

     27.1*  Financial Data Schedule (reporting financial 
            information as of and for the nine months ended 
            September 30, 1997).

     27.2*  Financial Data Schedule (reporting financial information 
            as of and for the nine months ended September 30, 1996).
__________
 
         *  The Financial Data Schedules shall not be deemed "filed" 
            for purposes of Section 11 of the Securities Act of 1933
            or Section 18 of the Securities Exchange Act of 1934, and 
            are included as exhibits only to the electronic filing of 
            this Form 10-Q in accordance with Item 601(c) of 
            Regulation S-K and Section 401 of Regulation S-T.

      (b)   Reports on Form 8-K.  The Company did not file any Current
            Reports on Form 8-K during the quarter ended September 30, 1997.
SIGNATURE

    Pursuant to the requirements of the Securities Exchange Act of 1934, 
the registrant has duly caused this report to be signed on its behalf by 
the undersigned, thereunto duly authorized.

                          VALERO ENERGY CORPORATION
                               (Registrant)

                          By:  /s/ Edward C. Benninger    
                               Edward C. Benninger
                               President and Chief
                               Financial Officer
                              (Duly Authorized Officer and Principal
                               Financial and Accounting Officer)

Date: November 14, 1997