Valero is also a leading marketer of refined products. Valero markets branded
and unbranded refined products on a wholesale basis in the United States and Canada
through an extensive bulk and rack marketing network. Valero also sells refined
products through a network of more than 4,500 retail and wholesale branded outlets
in the United States, Canada and Aruba. Valero’s retail operations include approximately
1,600 company- operated sites that sell transportation fuels and convenience store
merchandise. Valero’s primary wholesale and retail brand names include Diamond
Shamrock®, Shamrock®, Ultramar®, Valero® and Beacon®.
Through agreements with Valero L.P., Valero also has access to a logistics
system that complements Valero’s refining and marketing assets primarily in
the U.S. Gulf Coast, West Coast and Mid-Continent regions. Valero owns approximately
46% (including the 2% general partner interest) of Valero L.P., a master limited
partnership that owns and operates crude oil pipelines, crude oil and intermediate
feedstock storage facilities, and refined product pipelines and terminals primarily
in Texas, California, Oklahoma, New Mexico and Colorado. Limited partner units
of Valero L.P. are listed on the NYSE under the symbol “VLI.”
Valero’s reportable business segments are refining and retail. Valero’s refining
segment includes refining operations, wholesale marketing, product supply and
distribution, and transportation operations. The refining segment is segregated
geographically into the Gulf Coast, Mid-Continent, West Coast and Northeast
regions.
Valero’s retail segment includes company-operated convenience stores, Canadian
dealers/jobbers, truckstop facilities, cardlock facilities and home heating
oil operations. The retail segment is also segregated geographically. Valero’s
retail operations in the northeastern United States (which comprised a home
heating oil business that was sold in July 2003) combined with its retail operations
in eastern Canada are referred to as the Northeast System. Valero’s remaining
retail operations in the United States are referred to as the U.S. System.
COMPETITION
The refining and marketing industry continues to be highly competitive. Valero’s
competitors include fully integrated major oil companies (e.g., ExxonMobil and
ConocoPhillips) and other independent refining and marketing entities (e.g.,
Sunoco and Premcor) that operate in all of Valero’s market areas. Many of Valero’s
competitors are engaged on a national or international basis in many segments
of the petroleum business, including exploration, production, transportation,
refining and marketing, on scales much larger than Valero’s. These competitors
may have greater flexibility in responding to or absorbing market changes occurring
in one or more of these segments. All of Valero’s crude oil and feedstock supplies
are purchased from third-party sources, while some competitors have proprietary
sources of crude oil available for their own refineries.
Financial returns in the refining and marketing industry depend largely on
refining margins and retail fuel margins, both of which fluctuate significantly.
Refining margins are impacted by levels of refined product inventories, the
balance of refined product supply and demand, quantities of refined product
imports, and utilization rates of domestic refineries. Historically, refining
margins have been volatile, and they are likely to continue to be volatile in
the future. Valero’s ability to process significant amounts of sour crude oils
enhances Valero’s competitive position in the industry as sour crude oils typically
can be purchased at a discount to sweet crude oils.
Valero’s retail business faces competition from fully integrated major oil
companies that have increased their efforts to capture retail market share in
recent years. Valero also competes with large grocery stores and other merchandisers
(the so-called “hypermarts”) that often sell gasoline at aggressively competitive
prices in order to attract customers to their sites. In Quebec, Canada and in
the adjacent Atlantic Provinces, Valero is the largest independent retailer
of gasoline.
42.36% 
