PG&E CORP, S-4, 1997-05-13

PG&E CORP
S-4, 1997-05-13
ELECTRIC & OTHER SERVICES COMBINED

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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 13, 1997
REGISTRATION NO. 333-
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-----------
PG&E CORPORATION
(Exact Name of registrant as specified in its charter)

CALIFORNIA 4931 94-3234914
(State or other (Primary Standard Industrial (I.R.S. Employer
jurisdiction of Classification Code Number) Identification No.)
incorporation or
organization)

77 BEALE STREET, P.O. BOX 770000, SAN FRANCISCO, CALIFORNIA 94177
(415) 973-7000
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
-----------
BRUCE R. WORTHINGTON
GENERAL COUNSEL
PG&E CORPORATION
77 BEALE STREET
P.O. BOX 770000
SAN FRANCISCO, CALIFORNIA 94177
(415) 973-7000
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
-----------
Copies to:
LESLIE P. JAY EDWARD D. HERLIHY
ORRICK, HERRINGTON & SUTCLIFFE LLP WACHTELL, LIPTON,
OLD FEDERAL RESERVE BANK BUILDING ROSEN & KATZ
400 SANSOME STREET 51 WEST 52ND STREET
SAN FRANCISCO, CALIFORNIA 94111 NEW YORK, NEW YORK 10019
(415) 392-1122 (212) 403-1000
-----------

APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:

As soon as practicable after the Registration Statement becomes effective
and all other conditions to the Merger of PG&E Acquisition Corporation with
and into Valero Energy Corporation pursuant to the Agreement and Plan of
Merger described in the enclosed Proxy Statement-Prospectus have been
satisfied or waived.
-----------
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance
with General Instruction G, check the following box. [_]
-----------
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
============================================================================================================
PROPOSED PROPOSED
AMOUNT MAXIMUM MAXIMUM
TITLE OF EACH CLASS OF TO BE OFFERING PRICE AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED PER SHARE(1) OFFERING PRICE(1) REGISTRATION FEE(2)
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, no par value.......... 20,879,613 shares(3) $26.50(3) $553,309,744(3) $190,796(3)
21,325,000 shares $24.00 $511,800,000 $155,091
============================================================================================================
</TABLE>

(1) Estimated solely for the purpose of calculating the registration fee.
(2) Calculated pursuant to Rule 457(c), based on the average of the high and
low prices reported for a share of PG&E Corporation Common Stock on May
12, 1997, as reported by the New York Stock Exchange.
(3) Pursuant to Rule 457, a filing fee of $190,796 was previously paid in
connection with registering 20,879,613 shares of PG&E Corporation Common
Stock which are being carried forward from its Registration Statement on
Form S-4 (Registration No. 333-1103).
-----------
PURSUANT TO RULE 429 UNDER THE SECURITIES ACT OF 1933, AS AMENDED, THE
PROSPECTUS INCLUDED IN THIS REGISTRATION STATEMENT ALSO RELATES TO THE
20,879,613 SHARES OF PG&E CORPORATION'S COMMON STOCK REGISTERED PURSUANT TO
THE REGISTRANT'S REGISTRATION STATEMENT ON FORM S-4 (REGISTRATION NO. 333-
1103) WHICH REMAIN UNISSUED.

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
===============================================================================
<PAGE>

[LOGO OF
VALERO ENERGY
CORPORATION]

May 13, 1997

Dear Stockholder:

We have agreed to transfer our natural gas related services business to PG&E
Corp., if our stockholders approve the transaction. PG&E Corp. has agreed to
acquire this business based on a valuation of approximately $1.5 billion in
total. We believe this price and the other terms of the transaction are fair
and in the best interests of the stockholders.

To accomplish this transaction, we propose taking the following steps:

1. SPIN OFF NEW VALERO TO OUR STOCKHOLDERS.
We will spin off to you, our stockholders, all of the outstanding
shares of New Valero. These shares will represent your ownership in the
refining and marketing business--the business we are keeping. For each
share of Valero stock you own at the time of the spinoff, you will
receive one share of New Valero stock. In our tax counsel's opinion,
you will not pay federal income tax on this transaction.

2. MERGE OUR NATURAL GAS RELATED SERVICES BUSINESS WITH A WHOLLY OWNED
SUBSIDIARY OF PG&E CORP.
Immediately after the spinoff, we will merge the natural gas related
services business with a wholly owned subsidiary of PG&E Corp. PG&E
Corp. will pay for the natural gas related services business by issuing
shares of PG&E Corp. stock to you, our stockholders, in exchange for
your old Valero shares. In our tax counsel's opinion, you will not pay
federal income tax on this transaction, except that you will pay tax on
any cash that PG&E Corp. gives you in place of fractional shares. The
number of PG&E Corp. shares you will receive depends primarily on the
trading price of PG&E Corp. stock before the time of the merger and the
number of Valero shares that are outstanding before the time of the
merger.

Before we can proceed with the spinoff and the merger, the holders of a
majority of our outstanding shares must vote in favor of both steps. We will
seek this approval at the annual meeting of our stockholders. At the meeting,
stockholders will also be asked to elect three Class II directors to the
Valero Board of Directors and to ratify the appointment of Arthur Andersen LLP
as independent public accountants to examine Valero's accounts for the year
1997. At the meeting, or on the enclosed proxy card, you may vote on the
proposals separately, including the spinoff and the merger. Please keep in
mind, however, that neither the spinoff nor the merger will happen unless both
are approved. The meeting will be held:

Wednesday, June 18, 1997
10:00 a.m.
530 McCullough Avenue
San Antonio, Texas

YOUR VOTE IS VERY IMPORTANT. Whether or not you plan to attend the meeting,
please take the time to vote by completing and mailing the enclosed proxy
card. We recommend that you vote FOR the proposed slate of directors, the
proposed spinoff, the proposed merger, and the proposed
<PAGE>

ratification of the appointment of Arthur Andersen LLP. If you sign, date
and mail your proxy card without indicating how you want to vote, your
proxy will be counted as a vote for the proposed slate of directors and in
favor of the other proposals. Because approval of the proposed spinoff and
merger require the affirmative vote of the holders of a majority of the
outstanding common stock of Valero, if you do not return your proxy card,
the effect will be a vote against these two proposals.

This Proxy Statement-Prospectus provides detailed information about the
directors of and nominees to the Valero Board of Directors and about the
proposed spinoff and merger. We have also mailed to you, together with this
Proxy Statement-Prospectus, a Prospectus about New Valero. The Prospectus
describes New Valero's business, management, and financial condition.

I encourage you to read all of these documents thoroughly. In addition,
you can find more information about Valero and PG&E Corp. in documents
filed with the Securities and Exchange Commission.

Sincerely,

/s/ Bill Greehey

William E. Greehey
Chairman of the Board
and Chief Executive Officer

NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
REGULATOR HAS APPROVED THE PG&E CORP. COMMON STOCK TO BE ISSUED UNDER THIS
PROXY STATEMENT-PROSPECTUS OR THE NEW VALERO COMMON STOCK TO BE DISTRIBUTED
TO VALERO STOCKHOLDERS, OR DETERMINED IF THIS PROXY STATEMENT-PROSPECTUS IS
ACCURATE OR ADEQUATE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.

Proxy Statement-Prospectus dated May 13, 1997, and first mailed to
stockholders on or about May 14, 1997.
<PAGE>

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD JUNE 18, 1997

NOTICE IS HEREBY GIVEN that the Annual Meeting of Stockholders of Valero
Energy Corporation ("Valero") will be held on Wednesday, June 18, 1997, at
10:00 a.m., Central Time, at 530 McCullough Avenue, San Antonio, Texas 78215,
for the following purposes:

(1) To elect three Class II directors as members of the Board of Directors
of Valero to serve until the 2000 Annual Meeting, or if the Merger (as defined
below) is approved by Valero stockholders, for terms ending on the date of
consummation of the Merger;

(2) To consider and vote upon a proposal to approve the distribution
described in the Agreement and Plan of Distribution (as it may be amended,
supplemented or modified from time to time, the "Distribution Agreement") to
be executed by Valero and Valero Refining and Marketing Company, a Delaware
corporation and wholly owned subsidiary of Valero ("New Valero"). Pursuant to
the terms of the Distribution Agreement, immediately prior to the Merger,
Valero will distribute to its stockholders on a share-for-share basis, in a
non-taxable distribution (the "Distribution"), all the shares of common stock
of New Valero;

(3) To consider and vote upon a proposal to approve and adopt an Agreement
and Plan of Merger, dated as of January 31, 1997 (as it may be amended,
supplemented or modified from time to time, the "Merger Agreement"), by and
among Valero, PG&E Corporation, a California corporation ("PG&E Corp.") and
PG&E Acquisition Corporation, a Delaware corporation and a wholly owned
subsidiary of PG&E Corp. ("PG&E Acquisition"). Pursuant to the terms of the
Merger Agreement, conditioned on and immediately following the Distribution,
PG&E Acquisition will merge (the "Merger") into Valero, with Valero being the
corporation surviving the Merger as a wholly owned subsidiary of PG&E Corp.,
upon the terms and conditions contained in the Merger Agreement;

(4) To consider and vote upon a proposal to ratify the appointment of Arthur
Andersen LLP as independent public accountants to examine Valero's accounts
for the year 1997; and

(5) To transact such other business as may properly come before the meeting
or any adjournment thereof.

The Board of Directors of Valero has fixed the close of business on May 9,
1997 as the record date for the determination of stockholders entitled to
notice of and to vote at the Annual Meeting and any adjournments and
postponements thereof.

By order of the Board of Directors,

/s/ Rand C. Schmidt

RAND C. SCHMIDT
Corporate Secretary

San Antonio, Texas
May 13, 1997
<PAGE>

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
SUMMARY................................................................... 1
RISK FACTORS.............................................................. 17
THE PROPOSED TRANSACTIONS................................................. 20
General................................................................. 20
Background.............................................................. 21
Reasons for the Transactions; Recommendation of the Valero Board of
Directors.............................................................. 23
Opinion of Financial Advisor............................................ 24
Material Federal Income Tax Consequences................................ 28
No Appraisal Rights..................................................... 30
Interests of Certain Persons in the Transactions........................ 30
MARKETS AND MARKET PRICES................................................. 32
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION.............. 33
TERMS OF THE DISTRIBUTION AGREEMENT AND THE OTHER ANCILLARY AGREEMENTS.... 42
THE MERGER AGREEMENT...................................................... 42
Terms of the Merger..................................................... 42
Effective Time; Closing................................................. 44
Conduct of the Business Prior to Effective Time; Certain Covenants...... 44
Conditions.............................................................. 47
Representations and Warranties.......................................... 48
Waiver and Amendment.................................................... 49
Termination............................................................. 49
Termination Fee; Expenses............................................... 50
Certain Regulatory Matters.............................................. 50
Accounting Treatment.................................................... 50
Resale of PG&E Corp. Common Stock....................................... 51
Surrender of Share Certificates......................................... 51
THE ANNUAL MEETING........................................................ 54
General................................................................. 54
Date, Place and Time.................................................... 54
Record Date............................................................. 54
Voting and Revocation of Proxies........................................ 54
Other Business.......................................................... 55
Solicitation of Proxies................................................. 55
Miscellaneous........................................................... 55
PROPOSAL NO. 1--ELECTION OF DIRECTORS..................................... 57
Information Regarding the Board of Directors............................ 57
Audit Committee (2 meetings)............................................ 57
Compensation Committee (3 Meetings)..................................... 57
Executive Committee (2 Meetings)........................................ 57
Compensation of Directors............................................... 58
Election of Class II Directors.......................................... 58
Information Concerning Nominees and Other Directors..................... 59
BENEFICIAL OWNERSHIP OF VALERO SECURITIES................................. 61
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE................... 63
PERFORMANCE GRAPH......................................................... 63
REPORT OF THE COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS ON
EXECUTIVE COMPENSATION................................................... 64
</TABLE>

i
<PAGE>

TABLE OF CONTENTS--(CONTINUED)

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
EXECUTIVE COMPENSATION..................................................... 69
Stock Option Grants and Related Information.............................. 71
Long-Term Incentive Plans................................................ 73
Retirement Benefits...................................................... 74
ARRANGEMENTS WITH CERTAIN OFFICERS AND DIRECTORS........................... 75
TRANSACTIONS WITH MANAGEMENT AND OTHERS.................................... 76
PROPOSALS NOS. 2 AND 3--THE DISTRIBUTION AND MERGER........................ 77
PROPOSAL NO. 4--RATIFICATION OF INDEPENDENT PUBLIC ACCOUNTANTS............. 77
DESCRIPTION OF PG&E CORP. CAPITAL STOCK.................................... 78
COMPARISON OF CERTAIN RIGHTS OF STOCKHOLDERS OF VALERO AND PG&E CORP....... 79
Number of Directors...................................................... 79
Election of Directors.................................................... 79
Cumulative Voting for Directors.......................................... 80
Removal of Directors..................................................... 80
Vacancies in Board of Directors.......................................... 80
Limitation on Liability of Directors..................................... 81
Indemnification.......................................................... 81
Advance Notice of Shareholder Proposals.................................. 82
Shareholder Action by Written Consent.................................... 82
Special Meeting of Shareholders.......................................... 83
Charter and By-Law Amendments............................................ 83
Payment of Dividends..................................................... 83
Inspection of Books and Records.......................................... 83
Loans to Directors, Officers and Employees............................... 84
Shareholder Approval of Extraordinary Transactions....................... 84
Business Combination Statute............................................. 84
Fair Price Provisions.................................................... 84
Appraisal Rights......................................................... 85
Rights Plan.............................................................. 85
EXPERTS.................................................................... 87
LEGAL MATTERS.............................................................. 87
SUBMISSION OF STOCKHOLDER PROPOSALS........................................ 87
WHERE YOU CAN FIND MORE INFORMATION........................................ 88
INDEX OF DEFINED TERMS..................................................... 90
Appendix A: Agreement and Plan of Merger................................... A-1
Appendix B: Form of Agreement and Plan of Distribution..................... B-1
Appendix C: Opinion of Lehman Brothers, Inc................................ C-1
Appendix D: The Comparator Group........................................... D-1
</TABLE>

ii
<PAGE>

SUMMARY

This summary highlights selected information from this document, and may not
contain all of the information that is important to you. To better understand
the spinoff and the merger, and for a more complete understanding of the legal
terms of these transactions, you should read this entire document carefully, as
well as those additional documents we have referred you to. See "Where You Can
Find More Information" (page 88).

QUESTIONS AND ANSWERS ABOUT THE PROPOSED TRANSACTIONS

Q:WHAT IS THE PROPOSED TRANSACTION?

A: PG&E Corp. has agreed to acquire the natural gas related services business
of Valero for approximately $1.5 billion, comprised of approximately $722.5
million in PG&E Corp. common stock with the remainder being debt and other
liabilities of Valero, subject to certain adjustments.

The transaction will involve the following steps:

. Valero will spinoff to you, its stockholders, the refining and marketing
business of New Valero, including the business of Basis Petroleum, Inc.
("Basis"), described below.

. Following the spinoff, Valero will consist only of the natural gas
related services business.

. Valero will then merge with a subsidiary of PG&E Corp. As a result,
Valero will become a subsidiary of PG&E Corp. and you will receive shares
of common stock of PG&E Corp.

After the merger, Valero stockholders will own approximately 7% of PG&E
Corp.

Q:WHY IS VALERO DISPOSING OF ITS NATURAL GAS RELATED SERVICES BUSINESS?

A: Valero's Board of Directors believes that the merger will increase the
financial strength and market presence of the natural gas related services
business, better positioning it for future growth, and that the price PG&E
Corp. is paying for this business is fair and in the best interests of
Valero stockholders. The transaction will permit you to participate in the
future growth of the natural gas related services business through your
ownership of PG&E Corp. stock while at the same time permitting you to
retain your interest in a more focused refining and marketing business
through your ownership of New Valero stock.

Q:WHAT WILL I RECEIVE FOR MY VALERO SHARES?

A: For each Valero share you own at the time of the spinoff and merger, you
will receive:

. one share of New Valero stock; and

. a fraction of a share of PG&E Corp. common stock.

The exact fraction you receive is based on a number of factors that are
explained below.

The formula starts with $722.5 million, the total equity value that PG&E
Corp. has agreed to pay for Valero's natural gas related services business.
This amount (increased to reflect any cash amount paid to Valero upon
exercise of stock options and the exercise price of unexercised options or
stock appreciation rights, and decreased by any cash amount paid by Valero
to settle certain options, rights and performance shares) will be divided
by the total number of Valero shares that are outstanding, on a fully
diluted basis, at the time of the merger. This fraction will be divided by
the average trading price of a share of PG&E Corp. common stock during a
fifteen-day period prior to the merger, in order to determine the fraction
of a share of PG&E Corp. common stock that will be issued for each Valero
share.

1
<PAGE>

The $722.5 million amount may also be reduced to reflect the amount of any
adverse impact on the natural gas related services business in excess of
$50 million, but the amount of such reduction will not exceed $50 million
in the aggregate.

The average trading price of PG&E Corp. common stock will be subject to a
maximum price of $25.875 and a minimum price of $19.125. Within this price
range, stockholders will receive shares of PG&E Corp. stock having a fixed
value based on the above formula. If the price of PG&E Corp. common stock
is outside this range, stockholders of Valero will likely receive shares
worth more or less than the fixed value.

PG&E Corp. will not issue fractional shares in the merger. As a result, the
total number of PG&E Corp. shares that you receive in exchange for your
Valero shares will be rounded down to the nearest whole number, and you
will receive a cash payment based on the value of the remaining fraction of
a share of PG&E Corp. that you would otherwise be entitled to receive.

Q: CAN YOU GIVE ME AN EXAMPLE OF HOW MANY PG&E CORP. SHARES I WILL RECEIVE?

A: Here is a hypothetical example of how we would determine the fraction of a
share of PG&E Corp. common stock that will be issued for each Valero share
in the merger. Let's assume the following:

. All Valero convertible preferred stock has been converted into common
stock.

. All Valero stock options have been exercised in full prior to the
spinoff.

. The average trading price of a share of PG&E Corp. common stock at the
time of the merger is $23.550 (which was the average closing price of
a share of PG&E Corp. common stock over the fifteen consecutive
trading days ending on the second trading day prior to May 2, 1997).

. The total number of Valero shares that are outstanding at the time of
the merger is approximately 55,900,000 (which was the approximate
number on May 2, 1997, adjusted to reflect (1) conversion of the
preferred stock and (2) exercise of the options.

. Valero has paid approximately $300,000 to settle Valero stock
appreciation rights.

For the purpose of this example, the total equity value of shares that PG&E
Corp. will issue is equal to $722.2 million ($722.5 million, reduced to
reflect cash paid by Valero to settle Valero stock appreciation rights). We
would then divide the $722.2 million by the total number of Valero shares
outstanding. That fraction would be divided by $23.550 (the PG&E Corp.
trading price) to get the ratio of .549 of a share of PG&E Corp. for each
Valero share, representing approximately $12.93 for each Valero share based
on that PG&E Corp. trading price.

2
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In this example, if you owned 100 Valero shares, you would receive 54 whole
shares of PG&E Corp., and a cash payment for .9 of a share. You should
remember that the numbers we have chosen here are hypothetical. We are not
attempting to predict the actual fraction of a share of PG&E Corp. common
stock that will be issued for each Valero share in the merger.

The following table sets forth the fraction of a share of PG&E Corp. common
stock that would be received for each Valero share based on the foregoing
example, if the trading price of PG&E Corp. common stock is at or above the
$25.875 maximum price, at or below the $19.125 minimum price and at a
median price per share of PG&E Corp. common stock of $22.50.

<TABLE>
<CAPTION>
FRACTION OF PG&E
MARKET PRICE OF PG&E CORP. CORP. SHARE
COMMON STOCK FOR EACH VALERO SHARE
-------------------------- ---------------------
<S> <C>
$25.875 or above....................................... .499
$22.50................................................. .574
$19.125 or below....................................... .676
</TABLE>

Q: HOW DOES THE REDEMPTION OF THE VALERO CONVERTIBLE PREFERRED STOCK AFFECT THE
NUMBER OF PG&E CORP. SHARES WHICH I RECEIVE?

A: Valero has called for redemption all of its convertible preferred stock. The
convertible preferred stock may be converted into Valero common stock at any
time prior to the close of business on May 23, 1997, and any shares of
convertible preferred stock not converted will be redeemed for cash on June
2, 1997. If the price of Valero common stock at the time of redemption is
equal to or less than $28.21 per share, Valero believes that holders of the
convertible preferred stock may prefer to receive the cash redemption price,
rather than convert their shares into Valero common stock. To the extent
that the convertible preferred stock is redeemed, rather than converted into
Valero common stock, the number of shares of PG&E Corp. common stock to be
issued in the merger and the number of shares of Valero common stock
expected to be outstanding at the time of the merger, would both be reduced.

Q: WHEN WILL YOU DETERMINE THE EXACT EXCHANGE RATIO?

A: Because a number of the factors we use in the formula will not be set until
the time of the merger, we will not be able to calculate the exact ratio
until that time. Therefore, when you vote on the merger, you will not know
the exact fraction of a share of PG&E Corp. that you will receive for each
Valero share.

Beginning on May 14, 1997, Valero stockholders can obtain the average
trading price of PG&E Corp. common stock for the most recent fifteen-day
period by calling PG&E Corp.'s Shareholder Services at (800) 333-4964.

Valero does not have a right to call off the merger if the PG&E Corp. stock
price goes up or down. Valero believes, however, that the formula protects
the value that Valero stockholders will receive, because it values the PG&E
Corp. stock based on the trading price at the time of the merger, subject
to the maximum and minimum prices. This means that within the specified
price range, if the PG&E Corp. stock price goes down, PG&E Corp. will have
to issue more shares to pay the purchase price, and if the PG&E Corp. stock
price goes up, PG&E Corp. will issue fewer shares to pay the same purchase
price.

Q: WHY IS THE SALE STRUCTURED AS A SPINOFF AND A MERGER?

A: PG&E Corp. wants to acquire only the natural gas related services business
of Valero. The spinoff is necessary to separate the refining and marketing
business so that the remaining natural gas related services business can
then be acquired by PG&E Corp. Under this structure, our tax counsel will
give us an opinion that both transactions will be tax-free, for federal
income tax purposes, to Valero and to you,

3
<PAGE>

as its stockholders (except that you will be taxed on any cash payments you
receive in place of a fractional PG&E Corp. share).

Q: WHAT DO I NEED TO DO NOW?

A: Just mail your signed proxy card in the enclosed return envelope as soon as
possible, so that your shares may be represented at the annual meeting. The
meeting will take place on June 18, 1997. In addition to voting on the
proposed spinoff and merger, you will also be asked to elect three Class II
directors to the Valero Board of Directors and to ratify the appointment of
Arthur Andersen LLP as independent public accountants to examine Valero's
accounts for the year 1997. Valero's Board of Directors unanimously
recommends that you vote in favor of the proposed spinoff and the proposed
merger, as well as the election of the proposed slate of directors and the
ratification of the appointment of Arthur Andersen LLP.

Q: CAN I CHANGE MY VOTE AFTER I HAVE MAILED IN MY SIGNED PROXY CARD?

A: Yes. You can change your vote at any time before we vote your proxy at the
annual meeting. You can do so in one of three different ways. First, you can
send a written notice stating that you would like to revoke your proxy to
the tabulation agent, Harris Trust and Savings Bank, at the address given
below. Second, you can complete a new proxy card and send it to such
tabulation agent at the address given below. Third, you can attend the
annual meeting and vote in person. You should send any written notice or new
proxy card to the tabulation agent at the following address: Harris Trust
and Savings Bank, P.O. Box A3504, Chicago, Illinois 60690-3504, Attn: Proxy
Services. You may request a new proxy card by calling the tabulation agent
at (312) 461-6001.

Q: SHOULD I SEND IN MY STOCK CERTIFICATES NOW?

A: No. If you continue to hold your Valero shares at the time of the spinoff
and the merger, you will automatically receive your New Valero shares,
without the need to take any further action. You will also receive written
instructions for exchanging your old Valero shares for shares of PG&E Corp.
common stock (and your cash payment in place of any fraction of a PG&E Corp.
share).

Q: WHEN DO YOU EXPECT THE SPINOFF AND THE MERGER TO BE COMPLETED?

A: We are working to complete the spinoff and the merger as quickly as
possible. We currently expect to complete the transactions by the third
quarter of 1997, subject to obtaining all regulatory approvals.

Q: AM I ENTITLED TO APPRAISAL RIGHTS?

A: No. You will have no right under the Delaware General Corporation Law to
seek appraisal of your Valero shares in connection with the spinoff or the
merger. For a more detailed description of the absence of appraisal rights
under Delaware Law, see "THE PROPOSED TRANSACTIONS--No Appraisal Rights"
(page 30).

Q: WHERE CAN I FIND MORE INFORMATION?

A: You may obtain more information from various sources, as set forth below
under "WHERE YOU CAN FIND MORE INFORMATION" (page 88).

Q: WHY DID VALERO PURCHASE BASIS?

A: Basis owns and operates three refineries in Texas and Louisiana and conducts
marketing operations. After being acquired, Basis will be owned and operated
by New Valero. New Valero believes that, as a result of a recently completed
refinery upgrading project, reduced depreciation and amortization expenses
and various operational changes and efficiencies that New Valero intends to
implement, the acquisition of Basis is an attractive and potentially
profitable transaction for New Valero.

4
<PAGE>

THE COMPANIES

PG&E CORPORATION
77 Beale Street
San Francisco, California 94177
(415) 973-7000

PG&E Corp., a California corporation incorporated in 1995, is the holding
company of Pacific Gas and Electric Company ("PG&E Co.") and certain other
companies engaged principally in energy related businesses. PG&E Co.,
incorporated in California in 1905, is an operating public utility engaged
principally in the business of providing electric and natural gas services
throughout most of northern and central California. As of December 31, 1996,
PG&E Corp. had $26.1 billion in assets. PG&E Corp. generated $9.6 billion in
operating revenues for 1996. As of December 31, 1996, PG&E Corp. had
approximately 22,000 employees.

VALERO ENERGY CORPORATION
530 McCullough Avenue
San Antonio, Texas 78215
(210) 246-2000

Valero, a Delaware corporation incorporated in 1955, is a diversified energy
company engaged in the production, transportation and marketing of
environmentally clean fuels and products. Valero conducts its business through
two business segments: the refining and marketing segment (the "refining
business"), which refines, processes and markets various fuels, and the natural
gas related services segment (the "natural gas business"), which owns and
operates natural gas pipeline systems and natural gas processing plants and
markets natural gas, natural gas liquids and electric power. The refining
business will be spun off to stockholders of Valero; the natural gas business
will be retained by Valero and acquired by PG&E Corp. in the merger.

For more information relating to PG&E Corp. and Valero, you should review the
documents referenced in "WHERE YOU CAN FIND MORE INFORMATION" on page 88.

REASONS FOR THE SPINOFF AND THE MERGER

For the past several years, Valero's management has noted significant,
ongoing changes in the natural gas industry and in the electric utility
industry. Over this period, major oil companies, independent producers,
pipelines, local distribution companies and natural gas marketers have
increasingly merged, restructured, consolidated and formed alliances in order
to achieve or enhance competitive position. In the electric utility industry,
Valero recognized that certain trends would change the terms and conditions
upon which Valero would be required to compete in the future.

Over a period of years, Valero's management engaged in discussions with
prospective joint venture partners regarding possible alliances and
combinations involving the natural gas business; however, Valero's management
was not successful in arranging any such alliance or combination on
satisfactory terms. Over this same period, merger and acquisition activity in
the energy industry, as well as the size and scope of announced transactions,
increased markedly. Valero's management concluded that the size, scope and
frequency of these transactions could substantially erode Valero's relative
competitive position.

5
<PAGE>

Valero's management and Board of Directors concluded that this transaction
had the greatest potential to enhance overall stockholder value. Valero
stockholders would receive, on a tax-free basis, common stock in:

. A new company, PG&E Corp., that should be more competitive than
Valero's natural gas business would be on its own; and

. New Valero, which will own the refining business.

Therefore, the refining business would be able to finance its own growth
opportunities with its own publicly traded equity security. The Board of
Directors of Valero also determined that the spinoff and the merger would allow
investors to better evaluate the performance and investment characteristics and
the future prospects of the refining business, enhancing the likelihood that it
would achieve appropriate market recognition of its performance and potential.
Valero also concluded that a separation of the refining business from the
natural gas business would benefit the refining business by permitting it to
adopt a capitalization structure and strategies and investment opportunities
that best suit its needs, without concern for the natural gas business.

After contacting several potential acquirors of the natural gas business,
Valero received and reviewed several written proposals, which contemplated the
spinoff of New Valero and a merger immediately thereafter with Valero. The
Valero Board determined that the proposal submitted by PG&E Corp. was in the
best interest of Valero and Valero stockholders, and pursuant to the Valero
Board's approval, the management of Valero entered into a merger agreement with
PG&E Corp. and its wholly owned subsidiary PG&E Acquisition. In addition,
Lehman Brothers, Inc. has given its opinion to the Valero Board that, from a
financial point of view the consideration to be received by Valero stockholders
in the spinoff and the merger, taken as a whole, is fair to Valero
stockholders.

PG&E Corp. proposes to acquire the natural gas business as part of its
strategy to focus on the "midstream" portions of the gas market. This market
includes gas gathering, processing, storage, transportation and commodity
marketing. For more information relating to PG&E Corp., you should review the
documents in "WHERE YOU CAN FIND MORE INFORMATION" on page 88.

ABOUT NEW VALERO

In the spinoff, Valero stockholders will receive shares of New Valero common
stock. Here is a brief description of New Valero's business:

New Valero was incorporated in Delaware in 1981. New Valero's principal
business is specialized refining; New Valero refines high-sulfur atmospheric
residual oil and other refinery feedstocks into refined products, primarily
reformulated gasoline and petrochemical feedstocks, and markets those products
principally in Texas and also in the midwestern, northeastern and southeastern
United States. In addition, Valero has acquired Basis, which operates three
petroleum refineries. Basis will become a subsidiary of New Valero.

Valero mailed to you a prospectus about New Valero ("New Valero Prospectus")
together with this Proxy Statement-Prospectus. The New Valero Prospectus
describes New Valero, including a number of risks associated with that
business, which are discussed under the heading "RISK FACTORS." The New Valero
Prospectus also includes detailed information regarding Basis, including its
business operations, financial results, and certain projections and risk
factors related to Basis. We encourage you to review the New Valero Prospectus
carefully.

6
<PAGE>

THE SPINOFF AND THE MERGER

The merger agreement, which is the legal document that governs the merger, is
attached as Appendix A to this Proxy Statement-Prospectus. The distribution
agreement, which is the legal document that governs the spinoff, is attached as
Appendix B to this Proxy Statement-Prospectus. We encourage you to read both
documents carefully. In addition, we have filed other related agreements as
exhibits to the Registration Statements filed by PG&E Corp. and New Valero.
These agreements will govern specific relationships between Valero and New
Valero after the spinoff and the merger are completed. "WHERE YOU CAN FIND MORE
INFORMATION" (page 88) describes how to obtain copies of these exhibits.

HOW THE SPINOFF AND THE MERGER WILL BE COMPLETED (SEE PAGE 20)

The spinoff and the merger will involve the following steps:

. Valero will spin off to you, its stockholders, the refining business of
New Valero, including Basis, leaving behind only the natural gas business
in Valero.

. Valero will merge with a subsidiary of PG&E Corp. As a result, Valero
will become a subsidiary of PG&E Corp. and you, as stockholders of Valero
immediately prior to the merger, will receive shares of common stock of
PG&E Corp. in accordance with the formula set forth under "THE MERGER
AGREEMENT--Terms of the Merger."

CONDITIONS TO THE SPINOFF AND THE MERGER (SEE PAGE 47)

The spinoff and the merger will not be completed unless a number of
conditions are met (or waived), including the following:

. approval of stockholders holding at least a majority of Valero's
outstanding shares;

. clearance under antitrust laws and approval by the Federal Energy
Regulatory Commission ("FERC");

. opinions of tax counsel at the time of the merger that the spinoff and
the merger will be non-taxable for federal income tax purposes;

. redemption or conversion of all outstanding preferred stock of Valero,
prepayment of Valero's 10.58% senior notes or the consent of the holders
of such senior notes to the spinoff and merger, and prepayment of
Valero's VESOP notes; and

. the absence of certain material adverse changes.

In addition, the merger will not occur unless the spinoff has been completed.
If the spinoff is completed and all other conditions to the merger are met, the
merger will occur immediately after the completion of the spinoff.

TERMINATION OF THE MERGER AGREEMENT (SEE PAGE 49)

Valero and PG&E Corp. can terminate the merger agreement by mutual consent.
In addition, either party can terminate the agreement if the Valero Board
withdraws or modifies its approval or recommendation of the merger, or if the
Valero Board approves or recommends a superior transaction between Valero and a
third party, or if the Valero Board causes Valero to enter into an agreement
with a third party relating to a superior transaction. PG&E Corp. can also
terminate the agreement if any event has occurred or any information been
uncovered which would reasonably be expected to result in an adverse impact on
the natural gas business of more than $100 million. In addition, either company
can terminate the merger agreement if approval of the Valero stockholders is
not obtained or if the merger is not completed by July 31, 1997 (this date will
be extended up to December 31, 1997 if antitrust or FERC approval has not been
received), and under other specified circumstances.

7
<PAGE>

TERMINATION FEES (SEE PAGE 50)

Valero will pay PG&E Corp. $37.5 million in termination fees if a third party
proposes a different transaction involving an acquisition of Valero or the
natural gas business and the merger agreement fails for one of the following
reasons:

. The Valero Board terminates the merger agreement in order to comply with
its fiduciary duties.

. Either party terminates the merger agreement because the Valero Board has
done one of the following:

(1) withdrawn or modified its approval or recommendation of the merger and
the merger agreement, or

(2) approved a transaction involving an acquisition of Valero or the
natural gas business with a third party or caused Valero to enter into
an agreement to sell Valero or its natural gas business to a third
party.

. Valero stockholders do not approve the spinoff or the merger at the
annual meeting, the merger agreement is terminated under certain
circumstances specified in the merger agreement and, within twelve months
of the annual meeting, Valero enters into a definitive agreement to sell
Valero or its natural gas business to a third party.

REGULATORY APPROVALS (SEE PAGE 50)

The Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the
"HSR Act"), prohibits Valero and PG&E Corp. from completing the merger until
the two companies have furnished certain information to the Antitrust Division
of the Department of Justice (the "DOJ") and the Federal Trade Commission (the
"FTC"), and a required waiting period has ended. PG&E Corp. and Valero filed
their respective Premerger Notification and Report Forms under the HSR Act on
February 14, 1997 and early termination of the waiting period was granted on
February 26, 1997.

In addition, because Valero operates a power marketing subsidiary,
consummation of the merger requires approval of the FERC under Section 203 of
the Federal Power Act, which provides that no public utility may sell or
otherwise dispose of its jurisdictional facilities or, directly or indirectly,
merge or consolidate such facilities with those of any other person or acquire
any security of any other public utility without first having obtained
authorization from the FERC. Under Section 203 of the Federal Power Act, the
FERC will approve a merger if it finds such merger "consistent with the public
interest." PG&E Corp. and Valero filed a joint application with the FERC on
March 24, 1997. It is expected that the FERC will take action on the
application no later than the third quarter of 1997.

OPINION OF VALERO'S FINANCIAL ADVISOR (SEE PAGE 24)

Valero's Board has received the opinion of its financial advisor, Lehman
Brothers, Inc., that, from a financial point of view, the consideration to be
received by the stockholders of Valero in the spinoff and the merger is fair to
such stockholders. Lehman Brothers' written opinion, dated January 31, 1997, is
attached as Appendix C to this Proxy Statement-Prospectus. We encourage you to
read it thoroughly.

MATERIAL FEDERAL INCOME TAX CONSEQUENCES (SEE PAGE 28)

In structuring the transaction, it is intended that neither Valero nor you
will recognize any gain or loss for federal income tax purposes in the spinoff
and the merger (except you will be taxed on any cash payments you receive in
place of a fractional PG&E Corp. share and Valero may be required to recognize
some income in connection with the spinoff).

The companies have received opinions of tax counsel to the effect that the
transactions will not be taxable for federal income tax purposes. The companies
do not intend to complete the spinoff and merger

8
<PAGE>

unless we have received favorable opinions of tax counsel at the time of the
merger. If the companies determine to complete the spinoff and merger without
receipt of favorable opinions, Valero will seek further stockholder approval
before completing the transactions. It is important that you consider, however,
that the opinions of tax counsel do not guarantee favorable tax treatment. This
means that there is a risk that the Internal Revenue Service might determine
that Valero and/or you must recognize gain or loss for federal income tax
purposes in the spinoff and the merger, even though we will obtain opinions of
tax counsel that the transactions will not be taxable.

You should be aware that on February 6, 1997, President Clinton's budget
recommendations to Congress called for legislation which, if enacted, could
cause Valero to be subject to tax upon consummation of the spinoff. However,
similar legislation introduced by the Chairs of the Congressional tax-writing
committees would not apply to transactions subject to a binding agreement on,
or announced publicly by, April 16, 1997. The companies believe it is likely
that any legislation ultimately enacted will provide an exemption for
transactions like the spinoff for which definitive agreements were executed
before February 6. However, if the legislation is enacted or pending prior to
consummation of the spinoff and merger with an effective date provision that
could cause Valero to be subject to tax, we may not be able to consummate the
spinoff and merger.

ACCOUNTING TREATMENT (SEE PAGE 50)

We expect the merger will be accounted for by PG&E Corp. as a purchase in
accordance with generally accepted accounting principles.

EFFECTS OF THE MERGER ON THE RIGHTS OF VALERO STOCKHOLDERS (SEE PAGE 79)

If the proposed spinoff and merger are completed and you continue to hold
your Valero stock, you will be a shareholder of both New Valero and PG&E Corp.
PG&E Corp. is governed by California corporate law and PG&E Corp.'s Articles of
Incorporation and Bylaws. Rights of PG&E Corp. shareholders under these
provisions differ in certain respects from the current rights of Valero
stockholders.

Pursuant to the merger, Valero will be renamed "PG&E Gas Transmission, Texas,
Co." and New Valero will be renamed "Valero Energy Corporation."

INTERESTS OF OFFICERS AND DIRECTORS IN THE SPINOFF AND THE MERGER (SEE PAGE 30)

The officers and directors of Valero may have interests in the transactions
that are different from, or in addition to, yours. For example, Valero officers
and directors hold stock options, and some hold restricted stock and
performance shares, that will vest and be unrestricted if the transactions are
completed. Certain Valero officers will be entitled to receive a cash bonus
upon completion of the transaction, and have entered into severance agreements
with Valero which provide certain payments and other benefits in the event of
their termination of employment under certain circumstances.

MARKETS AND MARKET PRICES (SEE PAGE 32)

The common shares of PG&E Corp. and the common shares of Valero are listed on
the New York Stock Exchange. On January 31, 1997, the last trading date prior
to the public announcement of the proposed sale of Valero's natural gas
business to PG&E Corp., PG&E Corp. common stock closed at $22.88 and Valero
common stock closed at $33.75. On May 2, 1997, PG&E Corp. common stock closed
at $24.25 and Valero common stock closed at $35.38.

LISTING OF PG&E CORP. COMMON STOCK AND NEW VALERO COMMON STOCK

The shares of PG&E Corp. common stock to be issued in the merger will be
listed on the New York Stock Exchange and the Pacific Stock Exchange. New
Valero expects to apply to list the shares of New Valero common stock to be
issued in the spinoff on the New York Stock Exchange, however, there is
currently no public trading market for the New Valero common stock, and there
is no guarantee that there will be an active market in shares of New Valero
common stock after the spinoff.

9
<PAGE>

SELECTED HISTORICAL FINANCIAL INFORMATION

PG&E CORP.

The table below provides selected historical consolidated financial data of
PG&E Corp. This information was prepared using the consolidated financial
statements of PG&E Corp. as of the dates indicated and for each of the fiscal
years in the five-year period ended December 31, 1996. The financial statements
as of the dates indicated and for each of the fiscal years in the five-year
period ended December 31, 1996, have been audited by Arthur Andersen LLP,
independent public accountants.

This selected historical consolidated financial data should be read along
with the historical financial statements and accompanying notes that have been
included or incorporated by reference in PG&E Corp.'s Annual Report on Form 10-
K for the year ended December 31, 1996 (you can obtain this report by following
the instructions we provide in this Proxy Statement-Prospectus under "WHERE YOU
CAN FIND MORE INFORMATION" on page 88).

It is also important that you read the unaudited pro forma combined financial
information and accompanying notes that we have included in this Proxy
Statement-Prospectus under "UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL
INFORMATION" on page 33.

<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------
1992 1993 1994 1995 1996
------- ------- ------- ------- -------
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Operating revenues..................... $10,316 $10,550 $10,350 $ 9,622 $ 9,610
Operating income....................... 2,700 2,560 2,424 2,763 1,896
Net income(a).......................... 1,171 1,065 1,007 1,339 755
Earnings per common share.............. 2.58 2.33 2.21 2.99 1.75
Dividends declared per common share.... 1.76 1.88 1.96 1.96 1.77
<CAPTION>
AS OF DECEMBER 31,
---------------------------------------
1992 1993 1994 1995 1996
------- ------- ------- ------- -------
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Total assets........................... $24,188 $27,146 $27,709 $26,850 $26,130
Common stock equity.................... 8,283 8,446 8,635 8,599 8,363
Preferred stock without mandatory
redemption provisions................. 791 808 733 402 402
Long-term obligations(b) and preferred
stock with mandatory redemption
provisions (excluding current
portions)............................. 8,526 9,367 8,813 8,486 8,208
Total capitalization................... 17,600 18,621 18,181 17,487 16,973
Book value per common share............ 19.41 19.77 20.07 20.77 20.73
Common stock price per common share.... 33.13 35.13 24.38 28.38 21.00
</TABLE>

- --------
(a) On January 1, 1997, PG&E Co. reorganized into a holding company with PG&E
Co. becoming a wholly owned subsidiary of its parent, PG&E Corp. As a
result, historical net income will be determined after deduction of
preferred dividends, which will cause the historical reported net income
set forth above to be decreased by $79 million, $64 million, $58 million,
$70 million and $33 million for the years 1992 through 1996, respectively.
Net income available for common stock and earnings per common share will be
unaffected by the reorganization.
(b) Includes PG&E Co. obligated mandatorily redeemable preferred securities of
trust holding solely PG&E Co. subordinated debentures.

10
<PAGE>

VALERO

The table below provides selected historical consolidated financial data of
Valero. This information was prepared using the consolidated financial
statements of Valero as of the dates indicated and for each of the fiscal years
in the five-year period ended December 31, 1996. The financial statements as of
the dates indicated and for each of the fiscal years in the five-year period
ended December 31, 1996, have been audited by Arthur Andersen LLP, independent
public accountants.

This selected historical consolidated financial data should be read along
with the historical financial statements and accompanying notes that have been
included or incorporated by reference in Valero's Annual Report on Form 10-K/A
for the year ended December 31, 1996 (you can obtain this report by following
the instructions we provide in this Proxy Statement-Prospectus under "WHERE YOU
CAN FIND MORE INFORMATION" on page 88).

<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------
1992 1993 1994(A) 1995 1996
------ ------ ------- ------ ------
(IN MILLIONS, EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C> <C> <C> <C>
Operating revenues............... $1,235 $1,222 $1,837 $3,198(b) $4,991
Operating income................. 134 76 126 189 201
Net income....................... 84 36 17(c) 60 73
Earnings per common share ....... 1.94 .82 .18(c) 1.10 1.40
Dividends declared per common
share........................... .42 .46 .52 .52 .52
<CAPTION>
AS OF DECEMBER 31,
-----------------------------------------
1992 1993 1994 1995 1996
------ ------ ------- ------ ------
(IN MILLIONS, EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C> <C> <C> <C>
Total assets..................... $1,759 $1,764 $2,817(c) $2,862(c) $3,135(c)
Common stock equity.............. 821 842 830(c) 852(c) 903(c)
Preferred stock without mandatory
redemption provisions at
liquidation value............... 0 0 173 173 173
Long-term obligations and
preferred stock with mandatory
redemption provisions (excluding
current portions)............... 497 499 1,034 1,043 869
Total capitalization............. 1,318 1,341 2,037(c) 2,068(c) 1,945(c)
Book value per common share...... 19.09 19.48 19.11(c) 19.48(c) 20.44(c)
Common stock price per common
share........................... 22.88 21.13 16.88 24.50 28.63
</TABLE>
- --------
(a) Reflects the consolidation of Valero Natural Gas Partners, L.P. and
subsidiaries as of May 31, 1994.
(b) Revised to include revenues from certain refining and marketing trading
activities previously classified as a reduction of cost of sales.
(c) Restated to reflect the effects of a prior period adjustment resulting in a
charge to 1994 income for an acquisition expense accrual originally charged
to property, plant and equipment. See "Restatement of Financial
Information" in Note 1 of Valero Energy Corporation and Subsidiaries Notes
to Consolidated Financial Statements in Valero's Annual Report on Form 10-
K/A.

11
<PAGE>

SUMMARY SELECTED UNAUDITED PRO FORMA
FINANCIAL INFORMATION

The summary selected pro forma financial information set forth below
includes:

. the historical financial information for PG&E Corp. as of and for the
year ended December 31, 1996.

. the historical financial information for PG&E Corp. as of and for the
year ended December 31, 1996, adjusted on a pro forma basis to reflect
the spinoff and merger of Valero.

. the historical financial information for Valero as of and for the year
ended December 31, 1996.

. the historical financial information for Valero as of and for the year
ended December 31, 1996, adjusted on a pro forma basis to reflect the
acquisition of Basis, assuming the spinoff and merger with PG&E Corp.
have not occurred.

The pro forma information is hypothetical and does not reflect the financial
performance that would have actually resulted if the acquisition of Basis by
Valero had occurred on the date specified and if the spinoff and merger of
Valero and PG&E Corp. had been completed on that date. This information also
does not necessarily reflect the future financial performance of PG&E Corp.
should the spinoff and merger with Valero actually occur.

Please see "UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION" on
page 33 of this Proxy Statement-Prospectus for a more detailed explanation of
this analysis.

12
<PAGE>

PG&E CORP. PRO FORMA FINANCIAL INFORMATION

The following table presents selected information from the combined balance
sheet and statement of income of PG&E Corp. on a historical basis and on a pro
forma basis, assuming the spinoff and the merger had been completed. The
combined statement of income information for the year ended December 31, 1996,
is presented as if the spinoff and the merger had been completed on January 1,
1996. The combined balance sheet information as of December 31, 1996, is
presented as if the spinoff and the merger had been completed on December 31,
1996.

<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31, 1996
--------------------
HISTORICAL PRO FORMA
---------- ---------
(IN MILLIONS, EXCEPT
PER SHARE AMOUNTS)
<S> <C> <C>
Operating revenues................................... $ 9,610 $12,052
Operating income..................................... 1,896 1,977
Net income(a)........................................ 755 768
Earnings per common share............................ 1.75 1.66
Dividends declared per common share(b)............... 1.77 1.77
<CAPTION>
AS OF
DECEMBER 31, 1996
--------------------
HISTORICAL PRO FORMA
---------- ---------
(IN MILLIONS, EXCEPT
PER SHARE AMOUNTS)
<S> <C> <C>
Total assets......................................... $26,130 $28,667
Common stock equity.................................. 8,363 9,077
Preferred stock without mandatory redemption
provisions.......................................... 402 402
Long-term obligations(c) and preferred stock with
mandatory redemption provisions (excluding current
portions)........................................... 8,208 9,051
Total capitalization................................. 16,973 18,530
Book value per common share.......................... 20.73 20.91
</TABLE>
- --------
(a) On January 1, 1997, PG&E Co. reorganized into a holding company with PG&E
Co. becoming a wholly owned subsidiary of its parent, PG&E Corp. As a
result, historical net income will be determined after deduction of
preferred dividends, which will cause the historical reported net income
set forth above to be decreased by $33 million. Net income available for
common stock and earnings per common share will be unaffected by the
reorganization.

(b) In October 1996, PG&E Corp. decreased its quarterly dividend from $.49 per
common share to $.30 per common share which corresponds to an annualized
dividend of $1.20 per common share. PG&E Corp.'s common stock dividend is
based on a number of financial considerations, including sustainability,
financial flexibility and competitiveness with investment opportunities of
similar risk.

(c) Includes PG&E Co. obligated mandatorily redeemable preferred securities of
trust holding solely PG&E Co. subordinated debentures.

13
<PAGE>

VALERO PRO FORMA FINANCIAL INFORMATION

The following table presents selected information from the combined balance
sheet and results of operations of Valero on a historical basis and on a pro
forma basis as if the acquisition of Basis occurred on December 31, 1996 (for
the balance sheet data) and January 1, 1996 (for the results of operations
data). Valero pro forma financial information reflects the effect of the
acquisition of Basis, assuming the spinoff and merger with PG&E Corp. have not
occurred, and New Valero pro forma financial information reflects the effect of
the acquisition of Basis, assuming the spinoff and merger with PG&E Corp. have
occurred.

<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
1996
-------------------------------
VALERO VALERO NEW VALERO
HISTORICAL PRO FORMA PRO FORMA
---------- --------- ----------
(IN MILLIONS, EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C> <C>
Operating revenues...................... $4,991 $12,359 $10,126
Operating income........................ 201 119 9
Net income.............................. 73 15 (17)
Earnings per common share............... 1.40 .07 (.32)
Dividends declared per common share..... .52 .52 n/a (a)
</TABLE>

<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1996
-------------------------------
VALERO VALERO NEW VALERO
HISTORICAL PRO FORMA PRO FORMA
---------- --------- ----------
<S> <C> <C> <C>
Total assets.............................. $3,135 $4,020 $2,575
Common stock equity....................... 903 1,023 1,042
Preferred stock without mandatory
redemption provisions at liquidation
value.................................... 173 173 --
Long-term obligations and preferred stock
with mandatory redemption provisions
(excluding current portions)............. 869 1,123 576
Total capitalization...................... 1,945 2,319 1,618
Book value per common share............... 20.44 21.48 19.07
</TABLE>
- --------
(a) The decision by New Valero as to whether to declare a dividend and the
amount thereof, if any, will be in the sole discretion of the New Valero
Board of Directors. Any future payment of dividends will depend upon the
financial condition, capital requirements and earnings of New Valero, and
such other factors that the New Valero Board of Directors may deem
relevant.

14
<PAGE>

COMPARATIVE PER SHARE DATA

The table below provides certain historical and pro forma per share financial
information as of and for the year ended December 31, 1996. The Valero and New
Valero pro forma per common share data assume that the acquisition of Basis has
occurred on December 31, 1996 (for the book value data) and January 1, 1996
(for the earnings and dividend data). The PG&E Corp. combined pro forma per
common share data assume that the spinoff and merger have occurred on December
31, 1996 (for the book value data) and January 1, 1996 (for the earnings and
dividend data) and are based on the purchase method of accounting and a
preliminary allocation of purchase price.

This information is hypothetical and does not reflect the financial
performance that would have actually resulted if the acquisition of Basis by
Valero had occurred on the date specified and if the spinoff and merger of
Valero and PG&E Corp. had been completed on that date. This information also
does not necessarily reflect the future financial performance of PG&E Corp.
should the spinoff and merger with Valero actually occur.

This information should be read along with the consolidated financial
statements and accompanying notes of PG&E Corp. and Valero included in the
documents described on page 88 of this Proxy Statement-Prospectus under "WHERE
YOU CAN FIND MORE INFORMATION," along with the pro forma financial information
of PG&E Corp. and Valero and accompanying discussion and notes that we have
included in this Proxy Statement-Prospectus on page 33 under "UNAUDITED PRO
FORMA CONDENSED COMBINED FINANCIAL INFORMATION," and along with the pro forma
condensed combined financial information of New Valero and accompanying
discussion and notes that we have included in the accompanying New Valero
Prospectus under "NEW VALERO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL
STATEMENTS."

PG&E CORP. PRO FORMA PER COMMON SHARE DATA

The table below compares historical amounts per common share of PG&E Corp.
with pro forma amounts adjusted to reflect the spinoff and merger.

<TABLE>
<CAPTION>
PRO FORMA PG&E
PG&E CORP. MERGER CORP.
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
<S> <C> <C> <C>
FOR THE YEAR ENDED DECEMBER 31, 1996
Earnings per common share................. $ 1.75 $(.09) $ 1.66
Dividends declared per common share....... 1.77(a) -- 1.77(a)
AS OF DECEMBER 31, 1996
Book value per common share............... 20.73 .18 20.91
</TABLE>
- --------

(a) In October 1996, PG&E Corp. decreased its quarterly dividend from $.49 per
common share to $.30 per common share which corresponds to an annualized
dividend of $1.20 per common share. PG&E Corp.'s common stock dividend is
based on a number of financial considerations, including sustainability,
financial flexibility and competitiveness with investment opportunities of
similar risk.

15
<PAGE>

VALERO PRO FORMA PER COMMON SHARE DATA

The table below compares amounts per common share of Valero on an historical
basis and as adjusted for the acquisition of Basis (Valero Pro Forma) with pro
forma amounts for the fraction of a share of PG&E Corp. (PG&E Corp. Pro Forma)
and the full share of New Valero (New Valero Pro Forma) that will be issued for
each old Valero share. The "Total Pro Forma" column in the table adds the
amounts for the fraction of a PG&E Corp. share and the full New Valero share to
show the total pro forma amount for the shares that you will hold after
completion of the spinoff and the merger for each Valero share that you held
before the spinoff and the merger. We have assumed for this purpose that PG&E
Corp. issues .549 of a PG&E Corp. share for each Valero share. The actual
fraction of a PG&E Corp. share will be determined using a formula and may be
higher or lower than .549 of a share.

<TABLE>
<CAPTION>
PG&E
CORP.
PRO FORMA
VALERO VALERO (PER NEW VALERO TOTAL
HISTORICAL PRO FORMA .549) PRO FORMA(A) PRO FORMA
---------- --------- --------- ------------ ---------
<S> <C> <C> <C> <C> <C>
FOR THE YEAR ENDED DE-
CEMBER 31, 1996
Earnings per common
share................ $ 1.40 $ .07 $ .91 $ (.32) $ .59
Dividends declared per
common share......... .52 .52 .97(b) n/a(c) .97
AS OF DECEMBER 31, 1996
Book value per common
share................ 20.44 21.48 11.48 19.07 30.55
</TABLE>
- --------
(a) Amounts for New Valero reflect adjustments made to allocate certain assets
and liabilities of Valero between Valero and New Valero in accordance with
the terms and conditions set forth in the distribution agreement and to
reflect certain other transactions anticipated by management. These
adjustments are described under "NEW VALERO UNAUDITED PRO FORMA CONDENSED
COMBINED FINANCIAL STATEMENTS" beginning at page 4 of the accompanying New
Valero Prospectus.

(c) The decision by New Valero as to whether to declare a dividend and the
amount thereof, if any, will be in the sole discretion of the New Valero
Board of Directors. Any future payment of dividends will depend upon the
financial condition, capital requirements and earnings of New Valero, and
such other factors that the New Valero Board may deem relevant.

16
<PAGE>

RISK FACTORS

Valero and PG&E Corp. have made forward-looking statements in this document
that are subject to risks and uncertainties. Forward-looking statements
include the information concerning possible or assumed future results of
operations of New Valero and PG&E Corp. set forth under "THE PROPOSED
TRANSACTIONS--Reasons for the Transactions; Recommendation of the Valero Board
of Directors" and "--Opinion of Financial Advisor" and those preceded by,
followed by or that include the words "believes," "expects," "anticipates" or
similar expressions. For those statements, Valero and PG&E Corp. claim the
protection of the safe harbor for forward-looking statements contained in the
Private Securities Litigation Reform Act of 1995. Stockholders of Valero
should understand that the following important factors, in addition to those
discussed elsewhere in this document and in the documents which are
incorporated by reference herein, could affect the future results of Valero
and PG&E Corp., and could cause those results to differ materially from those
expressed in such forward-looking statements: (i) the effect of economic
conditions; (ii) the impact of competitive pricing; (iii) the actions of
competitors; (iv) regulatory developments, including the ongoing restructuring
of the electric and gas industries and the outcome of regulatory proceedings
related to that restructuring; and (v) customer demand.

None of Valero, PG&E Corp. or New Valero undertakes any 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.

PG&E CORP.

Some important factors (but not necessarily all factors) that could affect
the performance of PG&E Corp. or its subsidiaries, or that otherwise could
cause actual results to differ materially from those expressed in any forward-
looking statement include the following:

Competition and Changing Regulatory Environment. The electric and gas
industries are undergoing significant change. Under traditional regulation,
utilities were provided the opportunity to earn a fair return on their
invested capital in exchange for a commitment to serve all customers within a
designated service territory. The objective of this regulatory policy was to
provide universal access to safe and reliable utility services. Regulation was
designed in part to take the place of competition and ensure that these
services were provided at fair prices.

Today, competitive pressures and emerging market forces are exerting an
increasing influence on the structure of the gas and electric industries.
Other companies are challenging the utilities' exclusive relationship with
customers and are seeking to replace certain utility functions with their own.
Customers, too, are asking for choice in their energy provider. These
pressures are causing a move from the existing regulatory framework to a
framework under which competition would be allowed in certain segments of the
gas and electric industries.

For several years, PG&E Corp. has been working with its regulators to
achieve an orderly transition to competition and to ensure that PG&E Corp. has
an opportunity to recover investments made under the traditional regulatory
policies. In addition, PG&E Corp. has proposed alternative forms of regulation
for those services for which prices and terms will not be determined by
competition. These alternative forms include performance-based ratemaking
("PBR") and other incentive-based alternatives. Over the next five years, a
significant portion of PG&E Corp.'s business will be transformed from the
current utility monopoly to a competitive operation. This change will impact
PG&E Corp.'s financial results and may result in greater earnings volatility.
During the transition period, PG&E Corp. expects the return on Diablo Canyon
Nuclear Power Plant ("Diablo Canyon") and certain other generation assets to
be significantly lower than historical levels.

Electric Industry Restructuring. In 1995, the California Public Utilities
Commission ("CPUC") issued a decision that provides a plan to restructure
California's electric utility industry. The decision acknowledges that much of
utilities' current costs and commitments result from past CPUC decisions and
that, in a competitive generation market, utilities would not recover some of
these costs through market-based revenues. To assure the

17
<PAGE>

continued financial integrity of California utilities, the CPUC authorized
recovery of these above-market costs, called "transition costs."

In 1996, California legislation was passed that adopts the basic tenets of
the CPUC's restructuring decision, including recovery of transition costs. In
addition, the restructuring legislation provides a 10 percent rate reduction
for residential and small commercial electric customers by January 1, 1998,
freezes electric customer rates for all other customers, and requires the
accelerated recovery of transition costs associated with owned electric
generation facilities. The legislation also establishes the operating
framework for a competitive electric generation market.

The rate freeze mandated by the restructuring legislation would continue
until the earlier of March 31, 2002, or until PG&E Corp. has recovered its
transition costs (the transition period). The freeze will hold rates at 1996
levels for all customers except those receiving the 10 percent rate reduction.
The rate freeze will hold the rates for these customers at the reduced level.

Transition Cost Recovery. The restructuring legislation authorizes the CPUC
to determine the costs eligible for recovery as transition costs. The amount
of costs will be based on the aggregate of above-market and below-market
values of utility-owned generation assets and obligations. In compliance with
the CPUC's restructuring decision and the restructuring legislation, PG&E
Corp. has filed numerous regulatory applications and proposals that detail its
transition cost recovery plan, which includes accelerated recovery of
transition costs. Under the proposed plan, PG&E Corp. would receive a reduced
return on common equity for certain transition costs related to generation
facilities for which recovery is accelerated. The lower return reflects the
reduced risk associated with the shorter amortization period and increased
certainty of recovery.

Most transition costs must be recovered by March 31, 2002. PG&E Corp.'s
ability to recover its transition costs during the transition period which
begins in 1997 will be dependent on several factors. These factors include:
(1) the extent to which application of the regulatory framework established by
the restructuring legislation will continue to be applied, (2) the amount of
transition costs approved by the CPUC, (3) the market value of PG&E Co.'s
generation plants, (4) future sales levels, (5) future fuel and operating
costs, (6) the market price of electricity, and (7) the ratemaking methodology
adopted for Diablo Canyon. Given its current evaluation of these factors, PG&E
Corp. believes it will recover its transition costs and that its utility-owned
generation plants are not impaired. However, a change in these factors could
affect the probability of recovery of transition costs and result in a
material loss.

Accounting for the Effects of Regulation. PG&E Corp. accounts for the
financial effects of regulation in accordance with Statement of Financial
Accounting Standards (SFAS) No. 71, "Accounting for the Effects of Certain
Types of Regulation." This statement allows PG&E Corp. to record certain
regulatory assets and liabilities which would be included in future rates and
would not be recorded under generally accepted accounting principles for
nonregulated entities. In addition, SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,"
requires that regulatory assets be written off when they are no longer
probable of recovery and that impairment losses be recorded for long-lived
assets when related future cash flows are less than the carrying value of the
assets.

PG&E Corp. believes that the restructuring legislation establishes a
definitive transition to market-based pricing for electric generation that
includes cost-of-service based ratemaking. In addition, under this framework
PG&E Corp.'s generation related transition costs will be collected through a
nonbypassable charge. Based on this structure, PG&E Corp. believes it
currently meets and will continue to meet the requirements to apply SFAS No.
71 as it relates to the transition costs throughout the transition period. At
the conclusion of the transition period, PG&E Corp. believes it will be at
risk to recover its generation costs through market-based revenues. At that
time, PG&E Corp. expects to discontinue the application of SFAS No. 71 for the
electric generation portion of its business. Since PG&E Corp. anticipates it
will have recovered all transition costs required to be recovered during the
transition period, including generation-related regulatory assets and above-
market investments in net plant, PG&E Corp. does not expect a material adverse
impact on its or PG&E Co.'s financial position or results of operations from
discontinuing the application at that time.

18
<PAGE>

As a result of California's electric industry restructuring and related
legislation, the staff of the SEC began discussions with PG&E Corp. and other
California utilities regarding the appropriateness of the continued
application of SFAS No. 71 for the generation portion of the electric
utilities' businesses as of January 1, 1997. PG&E Corp. participated in
discussions with the SEC staff and provided them with information in support
of PG&E Corp.'s position that it currently meets and will continue to meet the
requirements to apply SFAS No. 71 throughout the transition period. Because of
the importance of this issue to the electric utility industry in the United
States, the SEC referred the issue to the Emerging Issues Task Force (EITF) of
the Financial Accounting Standards Board. The EITF will provide the national
forum needed to establish the uniform financial reporting and accounting
standards necessary for determining if and when utilities should no longer be
subject to SFAS No. 71 during an industry restructuring with a transition to
market-based pricing. The SEC has notified PG&E Corp. that it will no longer
pursue this issue with PG&E Corp. unless the EITF cannot reach a consensus
prior to the end of the year.

The EITF will first meet to discuss this issue on May 22, 1997, with a
decision expected this year. Once a standard is established by the EITF, PG&E
Corp. will reevaluate the financial impact of electric industry restructuring
in light of the new standard. If PG&E Corp. cannot meet the new standard
established by the EITF needed to continue to apply the provisions of SFAS No.
71, PG&E Corp. would have a material write-off of its generation-related
regulatory assets. In accordance with PG&E Corp.'s cost recovery plan,
approved by the CPUC in 1996, generation-related regulatory assets would
continue to be recovered as part of the transition charge during the
transition period.

These and other factors affecting PG&E Corp. are described under
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Competition and Changing Regulatory Environment" in PG&E Corp.'s
Annual Report on Form 10-K for the year ended December 31, 1996, and in PG&E
Corp.'s Current Report on Form 8-K dated April 18, 1997. See "WHERE YOU CAN
FIND MORE INFORMATION" on page 88.

VALERO

Some important factors (but not necessarily all factors) that could affect
New Valero'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: general economic conditions in the areas served by the refining
business; changes in commodity pricing and demand; renewal or satisfactory
replacement of New Valero's residual oil ("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; the
acquisition of Basis and implementation of the cost reductions and operational
changes related thereto as described in the New Valero Prospectus; accidents
or other unscheduled shutdowns affecting New Valero'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; state and
federal environmental, economic, safety and other policies and regulations,
any changes therein, and any legal or regulatory delays or other factors
beyond New Valero's control; execution of planned capital projects; weather
conditions affecting New Valero's operations or the areas in which New
Valero's products are marketed; adverse 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, including tax legislation affecting the proposed merger with PG&E
Corp.; and adverse changes in the credit ratings assigned to New Valero's debt
securities and trade credit or its inability to secure satisfactory revolving
or other credit facilities.

19
<PAGE>

THE PROPOSED TRANSACTIONS

GENERAL

This Proxy Statement-Prospectus ("Proxy Statement-Prospectus") is being
furnished in connection with the solicitation of proxies by the Board of
Directors (the "Valero Board") of Valero Energy Corporation, a Delaware
corporation ("Valero"), from holders of record as of the close of business on
May 9, 1997 (the "Annual Meeting Record Date") of the outstanding shares of
common stock, par value $1.00 per share, of Valero ("Valero Common Stock") for
use at the Annual Meeting of Stockholders of Valero to be held on June 18,
1997, and at any adjournments or postponements thereof (the "Annual Meeting").

At the Annual Meeting, stockholders of Valero will be asked to consider and
vote upon:

Proposal No. 1--the election of three Class II directors as members of
the Valero Board to serve until the 2000 Annual Meeting, or if the Merger
(as defined below), is approved by Valero stockholders, for terms ending on
the date of consummation of the Merger. See "Proposal No. 1--Election of
Directors";

Proposal No. 2--a proposal (the "Distribution Proposal") to approve the
distribution described in the Agreement and Plan of Distribution (as it may
be amended, supplemented or modified from time to time, the "Distribution
Agreement") to be executed by Valero and Valero Refining and Marketing
Company, a Delaware corporation and a wholly owned subsidiary of Valero
("New Valero"). See "Proposals Nos. 2 and 3--The Distribution and Merger".
Pursuant to the terms of the Distribution Agreement, immediately prior to
the Merger, Valero will distribute to its stockholders on a share-for-share
basis, in a non-taxable distribution (the "Distribution"), all the shares
of New Valero. At the time of the Distribution, New Valero will own the
business, assets and liabilities of Valero relating to the refining and
processing of petroleum and other feedstocks and the marketing of various
fuels and other products (collectively, the "Refining Business"), and
Valero will own all of its natural gas and natural gas liquids related
services business, power marketing business and related risk management
business and the assets and liabilities related thereto (the "Natural Gas
Business") which will be acquired by PG&E Corporation, a California
corporation ("PG&E Corp.") in the Merger;

Proposal No. 3--a proposal (the "Merger Proposal") to approve and adopt
an Agreement and Plan of Merger, dated as of January 31, 1997 (as it may be
amended, supplemented or modified from time to time, the "Merger
Agreement"), by and among Valero, PG&E Corp. and PG&E Acquisition
Corporation, a Delaware corporation and a wholly owned subsidiary of PG&E
Corp. ("PG&E Acquisition"). See "Proposals Nos. 2 and 3--The Distribution
and Merger". Pursuant to the terms of the Merger Agreement, conditioned on
and immediately following the Distribution, PG&E Acquisition will merge
(the "Merger") into Valero, with Valero being the corporation surviving the
Merger (sometimes hereinafter referred to as the "Surviving Corporation"),
upon the terms and conditions contained in the Merger Agreement; and

Proposal No. 4--the ratification of the appointment of Arthur Andersen
LLP as independent public accountants to examine Valero's accounts for the
year 1997. See "Proposal No. 4--Ratification of Independent Public
Accountants."

The proposals and related considerations are described in this Proxy
Statement-Prospectus, including the Appendices hereto. Copies of the Merger
Agreement and the form of Distribution Agreement are attached as Appendices A
and B, respectively, to this Proxy Statement-Prospectus. The Merger Agreement
provides that, immediately prior to the Merger, Valero will effect the
Distribution in accordance with the terms of the Distribution Agreement. At
the time the Merger becomes effective (the "Effective Time"), each share of
Valero Common Stock outstanding immediately prior to the Effective Time, other
than shares held by PG&E Corp., Valero or certain subsidiaries of PG&E Corp.
and Valero, will be converted into a fraction of a share of common stock, no
par value, of PG&E Corp. ("PG&E Corp. Common Stock") equal to the Per Share
Merger Consideration (as defined herein). Holders of Valero Common Stock will
receive cash (without interest) in lieu of fractional shares of PG&E Corp.
Common Stock. The amount of cash payable in lieu of any fractional share

20
<PAGE>

of PG&E Corp. Common Stock will be equal to that fraction multiplied by the
Market Price (as defined below) of PG&E Corp. Common Stock.

In the Distribution, holders of Valero Common Stock on the Distribution
Record Date (as defined herein) will receive one share of common stock, par
value $.01 per share, of New Valero ("New Valero Common Stock") for each of
their shares of Valero Common Stock.

For purposes of the Merger Agreement, the term "Per Share Merger
Consideration" means a number, equal to the quotient of (a) $722,500,000
(increased by the total amount of cash paid to Valero prior to the closing of
the Merger (the "Closing") in order to exercise stock options plus an amount
equal to the total exercise price of any unexercised stock options and stock
appreciation rights, but reduced by the total cash amount paid by Valero
between December 31, 1996 and the Closing in settlement of any stock
appreciation rights, stock options or performance shares (the "Equity
Consideration"), divided by the number of shares of Valero Common Stock issued
and outstanding immediately before the Closing (plus the number of performance
shares, shares subject to unexercised options and accompanying stock
appreciation rights) divided by (b) the Market Price of PG&E Corp. Common
Stock. The dollar amount set forth in subsection (a) above shall be reduced to
the extent that the aggregate amount of any adverse impact on the Natural Gas
Business would reasonably be expected to exceed $50 million but in no event
shall such reduction exceed $50 million. See "THE MERGER AGREEMENT--Terms of
the Merger."

The term "Market Price" means the average of the daily closing prices per
share of PG&E Corp. Common Stock as reported on the New York Stock Exchange,
Inc. ("NYSE") Composite Tape on each of the last 15 consecutive full NYSE
trading days ending on and including the second trading day before the date of
the Closing; provided that in the event the Market Price of PG&E Corp. Common
Stock is less than $19.125 (the "Minimum Price"), then the Market Price of
PG&E Corp. Common Stock will be deemed to be the Minimum Price and in the
event the Market Price of PG&E Corp. Common Stock is greater than $25.875 (the
"Maximum Price"), then the Market Price of PG&E Corp. Common Stock will be
deemed to be the Maximum Price.

The Maximum Price and Minimum Price have the following effects: (i) if the
Market Price of PG&E Corp. Common Stock is between $19.125 and $25.875,
inclusive, the number of shares of PG&E Corp. Common Stock issued to holders
of Valero Common Stock will be based on the Equity Consideration, (ii) if the
Market Price of PG&E Corp. Common Stock is less than $19.125, the number of
such shares of PG&E Corp. Common Stock will nonetheless be based on a per
share price of $19.125 and will likely have an aggregate market value as of
the Effective Time which is less than the Equity Consideration, and (iii) if
the Market Price of PG&E Corp. Common Stock is more than $25.875, the number
of such shares will nonetheless be based on a per share price of $25.875 and
will likely have an aggregate market value as of the Effective Time which is
greater than the Equity Consideration.

In order to implement the transactions contemplated by the Merger Agreement,
immediately prior to, and subject to the satisfaction or waiver of each
condition to consummation of the Merger, the New Valero Common Stock will be
distributed on a pro rata basis to the stockholders of Valero of record on the
date authorized by the Valero Board (the "Distribution Record Date"), as
provided in the Distribution Agreement. The Merger and the Distribution are
sometimes referred to herein collectively as the "Transactions."

BACKGROUND

For the past several years, Valero's management has noted significant,
ongoing changes in the natural gas industry, as well as in the electric
utility industry. Over this period, major oil companies, independent
producers, pipelines, local distribution companies, and natural gas marketers
have increasingly merged, restructured, realigned, consolidated and formed
alliances and joint ventures in order to achieve or enhance competitive
position. In the electric utility industry, the marketing of electrical power
has rapidly become deregulated, and Valero has itself entered this business.
In the electric power business, deregulation has led to possibilities for
cross-fuel arbitrage and for "wheeling" of lower cost power into areas where
higher cost generation prevails.

21
<PAGE>

Another concept affecting both the natural gas and electrical power industries
is that of "one-stop shopping," that is, obtaining all or the majority of
household utility services (i.e., natural gas, electrical power, telephone,
cable, security monitoring and/or water) from a single provider. Valero
recognized that these trends would change the terms and conditions upon which
it would be required to compete in the future.

Over a period of years continuing until November 1996, Valero management
engaged in discussions with prospective joint venture partners regarding
possible alliances, combinations, partnerships or joint venture transactions
involving the Natural Gas Business. However, Valero management was not
successful in arranging any such transaction on satisfactory terms. Over this
same period, merger and acquisition activity in the energy industry, as well
as the size and scope of announced transactions, increased markedly.

On November 21, 1996, Valero announced that its Board of Directors had
determined to pursue strategic alternatives to further position its businesses
for future growth, including accelerating existing efforts to seek a strategic
alliance for Valero's Natural Gas Business and a likely spinoff of its
Refining Business. The management and Board of Directors of Valero concluded
that such a transaction had the greatest potential for enhancing the
competitive position of the Natural Gas Business, and thereby enhancing
overall stockholder value, since Valero stockholders would receive--on a tax-
free basis--both common stock in a new company (i.e., the Natural Gas Business
combined with the acquiror's existing business) that would have a stronger
market position and stronger earnings growth potential than Valero's Natural
Gas Business on a stand-alone basis, as well as separate common stock in the
spun-off company holding the Refining Business. Valero also concluded that a
separation of the Refining Business from the Natural Gas Business would
benefit the Refining Business by permitting it to adopt a capitalization
structure and strategies and investment opportunities that best suited its
needs, without concern for or competition for capital from the Natural Gas
Business. The management and Board of Directors of Valero were aware, however,
of the possibility that expected changes in the tax law could have eliminated
the tax benefit of this type of transaction if it were not finalized promptly.

Beginning in late November 1996, an offering memorandum was prepared
describing the Natural Gas Business and its prospects. Several potential
strategic acquirors of the Natural Gas Business, including PG&E Corp., were
contacted, and confidentiality agreements were entered into with a number of
such potential strategic acquirors, including PG&E Corp.

Twenty-four potential acquirors submitted preliminary proposals to engage in
a transaction with Valero. In January 1997, Valero invited five of these
parties, including PG&E Corp., to perform due diligence reviews of Valero and
engage in discussions concerning a potential transaction. Over the next
several weeks, these potential strategic acquirors continued to conduct due
diligence reviews of the Natural Gas Business and Valero.

In January, this group of potential acquirors was sent drafts of the form of
agreement that Valero proposed to use for the transaction, as well as a
description of the procedures to be followed in connection with the submission
of definitive proposals (the "Bidding Procedures"). The agreement and Bidding
Procedures were intended by Valero to result in the submission of definitive
proposals that contained the material terms that had been proposed by Valero,
that were not subject to material conditions and that in the view of the
Valero Board were likely to be consummated. In addition, the Bidding
Procedures were designed to result in the execution of definitive agreements
at the end of January or early February, in part because of a concern that an
imminent change in federal tax laws would eliminate the tax benefits of the
transaction structure proposed by the potential acquirors were a definitive
agreement not achieved in the near future. (At that time, it was anticipated
that the President's submission to Congress of the federal budget in early
February would include a proposal to eliminate the tax-free nature of
transactions of the type contemplated by Valero that were not the subject of
announced definitive agreements by that point in time.)

The Bidding Procedures provided that proposals to acquire the Natural Gas
Business should be submitted on January 27, 1997. PG&E Corp.'s proposal to
acquire the Natural Gas Business through a spinoff of the Refining Business
and a merger with Valero (which at that time would consist only of the Natural
Gas Business) was the only proposal received that satisfied the conditions set
forth in the Bidding Procedures.

22
<PAGE>

On January 29, 1997, the Valero Board reviewed and discussed the PG&E Corp.
proposal and other indications of interest that had been received. At this
meeting, Valero management reviewed in detail the financial and non-financial
terms of the PG&E Corp. proposal, including the facts that the PG&E Corp.
proposal accepted Valero's proposal of a 15% collar on the equity portion of
the consideration, did not require broad indemnification for breaches of
representations and warranties in the merger agreement, made substantial
commitments to Valero's employees and the community of San Antonio, and did
not add material conditions that the Valero Board believed would adversely
affect the likelihood of consummation of the transaction. The Valero Board was
also informed that one party had recently submitted an indication of interest
that purported to provide for a value nominally in excess of the value then
represented by the PG&E Corp. proposal. Management informed the Valero Board,
however, that it was not recommending that the Valero Board continue to pursue
this indication of interest because it did not fully comply with the Bidding
Procedures and included significant uncertainties as to contractual and
financial conditions and there could be no assurances as to Valero's ability
to successfully negotiate a transaction with that party on terms that were as
attractive as those associated with the PG&E Corp. proposal. The Valero Board
also was informed that continuing to pursue the other indication of interest
could jeopardize Valero's ability to negotiate successfully an agreement with
PG&E Corp. and that any further delay could jeopardize the ability to
implement the proposed transaction structure if the anticipated proposal by
the President to eliminate the tax-free nature of the transaction were
adopted. The Valero Board then discussed the relevant terms and open issues
associated with the PG&E Corp. proposal, and determined that at that time, the
PG&E Corp. proposal appeared to be the most attractive transaction for the
Valero stockholders.

After this meeting, the management and representatives of Valero and the
management and representatives of PG&E Corp. negotiated the issues that
remained open under the Merger Agreement, Distribution Agreement and the other
Ancillary Agreements (as defined below). On January 30, 1997, the Valero Board
reviewed the terms of the Merger Agreement, the Distribution Agreement and the
Ancillary Agreements. The Valero Board determined that PG&E Corp.'s proposal
was in the best interest of Valero and Valero's stockholders. Following review
and discussion at the meeting, the Valero Board unanimously approved the
Merger Agreement, the Distribution Agreement and the other Ancillary
Agreements. Thereafter, on January 31, 1997, the Merger Agreement was
completed, executed and delivered.

REASONS FOR THE TRANSACTIONS; RECOMMENDATION OF THE VALERO BOARD OF DIRECTORS

The Valero Board believes that the Distribution and the Merger will
accomplish a number of important business objectives. The Distribution and
Merger will allow Valero stockholders to retain an equity participation in a
stronger, more competitive natural gas business and to realize a premium for
Valero's existing Natural Gas Business as compared to the valuation ranges
arrived at by Valero's financial advisor, Lehman Brothers, Inc. ("Lehman
Brothers") in its valuation analysis performed in connection with rendering
its fairness opinion. See "-- Opinion of Financial Advisor." The Valero Board
also believes that the Distribution will permit Valero stockholders to
continue their participation in the Refining Business in a form designed to
maximize its strengths and focus on its particular business needs by adopting
strategies and pursuing investment opportunities that are appropriate to its
business and operating needs without concern for or competition for capital
from the Natural Gas Business. The Distribution will enable New Valero to have
its own publicly traded equity security to finance its own growth
opportunities. The Valero Board believes that, by distributing the New Valero
Common Stock to Valero stockholders, there will be a greater potential for
increasing the long-term value of the investment of Valero stockholders in the
Refining Business. The Valero Board believes that the Distribution and Merger
will allow investors to evaluate better the performance and investment
characteristics and the future prospects of the Refining Business now
conducted by Valero, enhancing the likelihood that it will achieve appropriate
market recognition of its performance and potential.

The Valero Board also considered certain potentially negative factors in its
deliberations concerning the Merger, including the following factors: (i) the
risk that the operations of the Natural Gas Business and PG&E Corp. would not
be successfully integrated, (ii) the risk that the legislative initiatives
discussed under "Material Federal Income Tax Consequences" might be enacted
without an exemption applicable to the Distribution and

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the Merger and (iii) the risk that, despite the intentions and the efforts of
the parties, the benefits sought to be achieved in the Merger would not be
achieved.

The Distribution and Merger were structured in a fashion designed to achieve
the strategic benefits discussed above in a tax-free manner. Neither Valero
nor PG&E Corp. was interested in a transaction that would combine PG&E Corp.
with all of Valero's business.

In addition to the foregoing, Valero's financial advisor, Lehman Brothers,
has given its opinion to the Valero Board that, from a financial point of
view, the consideration to be received by Valero stockholders in the
Distribution and the Merger is fair to Valero stockholders. See "Opinion of
Financial Advisor." The full text of the opinion of Lehman Brothers is
attached as Appendix C.

For the reasons discussed above, the directors of Valero have unanimously
approved the Distribution and the terms of the Merger Agreement and recommend
that Valero stockholders vote "For" approval of the Merger Proposal and "For"
approval of the Distribution Proposal.

OPINION OF FINANCIAL ADVISOR

Valero engaged Lehman Brothers to act as its financial advisor with respect
to pursuing a strategic alliance for Valero's Natural Gas Business and the
spinoff of its Refining Business. Valero instructed Lehman Brothers, in its
role as financial advisor, to evaluate the fairness, from a financial point of
view, to Valero stockholders of the consideration to be received by such
stockholders in the Transactions.

On January 30, 1997, Lehman Brothers delivered its oral opinion to the
Valero Board (subsequently confirmed in writing as of January 31, 1997) to the
effect that as of such date and based upon and subject to certain matters
stated therein, the consideration to be received by Valero stockholders in the
Transactions was fair to such stockholders from a financial point of view.

THE FULL TEXT OF THE WRITTEN OPINION OF LEHMAN BROTHERS, WHICH SETS FORTH
THE ASSUMPTIONS MADE, FACTORS CONSIDERED AND LIMITATIONS ON THE REVIEW
UNDERTAKEN BY LEHMAN BROTHERS IN RENDERING ITS OPINION, IS INCLUDED AS
APPENDIX C TO THIS PROXY STATEMENT-PROSPECTUS AND IS INCORPORATED HEREIN BY
REFERENCE. THE FOLLOWING IS A SUMMARY OF LEHMAN BROTHERS' OPINION AND THE
METHODOLOGY LEHMAN BROTHERS USED TO ARRIVE AT ITS OPINION. THE SUMMARY IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF SUCH OPINION.

Lehman Brothers was not requested to and did not make any recommendation to
the Valero Board as to the form or amount of the consideration to be received
by Valero in the Merger, which was determined through arm's-length
negotiations between the parties. In arriving at its opinion, Lehman Brothers
did not ascribe a specific value to Valero or the Natural Gas Business or the
Refining Business, but rather made its determination as to the fairness, from
a financial point of view, of the consideration to be received by Valero
stockholders in the Transactions on the basis of the financial and comparative
analyses described below. Lehman Brothers' opinion is for the use and benefit
of the Valero Board and was rendered to the Valero Board in connection with
its consideration of the Distribution and the Merger. Lehman Brothers' opinion
is not intended to be and does not constitute a recommendation to any
stockholder of Valero as to how such stockholder should vote with respect to
the Distribution and the Merger. Lehman Brothers was not requested to opine as
to, and its opinion does not address, Valero's underlying business decision to
proceed with or effect the Distribution or the Merger. Lehman Brothers also
did not express any opinion as to the prices at which shares of New Valero
Common Stock and PG&E Corp. Common Stock actually will trade following the
consummation of the Transactions and its opinion should not be viewed as
providing any assurance that the combined market value of the shares of New
Valero Common Stock to be received by a stockholder of Valero pursuant to the
Distribution and the shares of PG&E Corp. Common Stock to be received by a
stockholder of Valero pursuant to the Merger will be in excess of the market
value of the shares of Valero Common Stock owned by such stockholder at any
time prior to announcement or consummation of the Transactions. No limitations
were imposed by Valero on the scope of Lehman Brothers' investigation or the
procedures to be followed by Lehman Brothers in rendering its opinion, except
that, in connection with the

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<PAGE>

consideration of the proposals described below, Lehman Brothers was instructed
by the Valero Board to consider only those proposals received by Valero which,
in the Valero Board's judgment, complied with the Bidding Procedures.

In arriving at its opinion, Lehman Brothers reviewed and analyzed: (1) the
Merger Agreement, the Distribution Agreement and the specific terms of the
Transactions, (2) publicly available information concerning Valero that Lehman
Brothers believed to be relevant to its analysis, (3) financial and operating
information with respect to the business, operations and prospects of the
Natural Gas Business and the Refining Business furnished to Lehman Brothers by
Valero, (4) a trading history of Valero Common Stock from January 1, 1996 to
January 31, 1997 and a comparison of that trading history with those of other
companies that Lehman Brothers deemed relevant, (5) a comparison of the
historical financial results and present financial condition of the Natural
Gas Business and the Refining Business with those of other companies that
Lehman Brothers deemed relevant, (6) publicly available information with
respect to the business, operations and financial condition of PG&E Corp. that
Lehman Brothers believed to be relevant to its analysis, (7) a trading history
of PG&E Corp. Common Stock from January 1, 1996 to January 31, 1997 and a
comparison of the PG&E Corp. Common Stock price and valuation multiples with
those of other companies that Lehman Brothers deemed relevant, (8) research
analysts' reports and earnings estimates regarding the business, financial
condition and future financial performance of PG&E Corp., (9) a comparison of
the financial terms of the Merger with the financial terms of certain other
transactions that Lehman Brothers deemed relevant, and (10) the results of
efforts to solicit indications of interest and proposals from third parties
with respect to an acquisition of Valero (assuming the prior completion of the
spinoff), including an indication of interest from a third party which may
have provided for consideration to be paid to the stockholders of Valero which
may have been in excess of the consideration to be paid pursuant to the Merger
but which, in the judgment of the Valero Board, did not comply with the
Bidding Procedures. In addition, Lehman Brothers had discussions with the
management of Valero concerning the business, operations, assets, financial
condition and prospects of the Natural Gas Business and the Refining Business
and with the management of PG&E Corp. concerning its business, operations,
assets, financial condition and prospects and undertook such other studies,
analyses and investigations as Lehman Brothers deemed appropriate.

In arriving at its opinion, Lehman Brothers assumed and relied upon the
accuracy and completeness of the financial and other information used by it
without assuming any responsibility for independent verification of such
information and further relied upon the assurances of the management of Valero
that they were not aware of any facts or circumstances that would make such
information inaccurate or misleading. With respect to the financial
projections of the Natural Gas Business and the Refining Business, upon advice
of Valero, Lehman Brothers assumed that such projections were reasonably
prepared on a basis reflecting the best currently available estimates and
judgments of the management of Valero as to the future financial performance
of the Natural Gas Business and the Refining Business and that the Natural Gas
Business and the Refining Business will each perform substantially in
accordance with such projections. In arriving at its opinion, Lehman Brothers
did not conduct a physical inspection of the properties and facilities of the
Natural Gas Business or the Refining Business and did not make or obtain any
evaluations or appraisals of the assets or liabilities of Valero, the Natural
Gas Business or the Refining Business. In addition, in arriving at its
opinion, with the consent of the Valero Board, Lehman Brothers was not
provided with and did not review any projections prepared by management of
PG&E Corp. regarding its future financial performance. However, based on
discussions with PG&E Corp., Lehman Brothers assumed that the publicly
available budgeted earnings targets for 1997 were a reasonable basis to
evaluate and analyze the future financial performance of PG&E Corp. Lehman
Brothers further assumed that PG&E Corp. will perform substantially in
accordance with such targets. Upon advice of Valero and its legal and
accounting advisors, Lehman Brothers assumed that the Transactions will
qualify as tax-free transactions whereby the Distribution will qualify as a
tax-free distribution within the meaning of Section 355 of the Internal
Revenue Code of 1986, as amended (the "Code"), and the Merger shall qualify as
a reorganization within the meaning of Section 368(a)(1)(B) of the Code, and
therefore represents a tax-free transaction to the stockholders of Valero.
Lehman Brothers' opinion states that it is necessarily based upon market,
economic and other conditions as they existed on, and could be evaluated as
of, the date of its opinion.

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<PAGE>

In connection with the preparation and delivery of its opinion to the Valero
Board, Lehman Brothers performed certain financial and comparative analyses as
described below. The preparation of a fairness opinion involves various
determinations as to the most appropriate and relevant methods of financial
and comparative analysis and the application of those methods to the
particular circumstances, and therefore, such an opinion is not readily
susceptible to summary description. Furthermore, in arriving at its opinion,
Lehman Brothers did not attribute any particular weight to any analysis or
factor considered by it, but rather made qualitative judgments as to the
significance and relevance of each analysis and factor. Accordingly, Lehman
Brothers believes that its analyses must be considered as a whole and that
considering any portion of such analyses and factors, without considering all
analyses and factors, could create a misleading or incomplete view of the
process underlying its opinion. In its analyses, Lehman Brothers made numerous
assumptions with respect to industry performance, general business and
economic conditions and other matters, many of which are beyond the control of
Valero or PG&E Corp. Any estimates contained in these analyses are not
necessarily indicative of actual values or
predictive of future results or values, which may be significantly more or
less favorable than as set forth therein. In addition, analyses relating to
the value of businesses do not purport to be appraisals or to reflect the
prices at which businesses actually may be sold.

Valuation Analysis -- Lehman Brothers' valuation of Valero was analyzed
before the consideration of any cost savings or operating synergies resulting
from the Merger. In determining valuation, Lehman Brothers used the following
methodologies: discounted cash flow analysis ("DCF Analysis"), comparable
transactions analysis and comparable company trading analysis. Each of these
methodologies was used to generate a reference enterprise value range for the
Natural Gas Business. With respect to the Refining Business, Lehman Brothers
used a comparable company trading analysis to generate an enterprise value.
The enterprise value range was adjusted for appropriate on and off balance
sheet assets and liabilities to arrive at a common equity value range (in
aggregate dollars and dollars per common share) for Valero. The per share
equity value range (the "Per Share Equity Value Range") was then used to
evaluate the consideration to be received by the Valero stockholders in the
Transactions. Additionally, Lehman Brothers analyzed the impact on stockholder
value by comparing the combined value of the equity to be received by Valero
stockholders from PG&E Corp. and the estimated value of the equity to be
received by Valero stockholders in the Distribution with the Per Share Equity
Value Range. The implied valuation ranges derived using the various valuation
methodologies described above all supported the conclusion that the
consideration to be received by the Valero stockholders in the Transactions is
fair, from a financial point of view, to such stockholders. The various
valuation analyses are summarized below:

(i) DCF Analysis -- Lehman Brothers prepared an after-tax cash flow model
for the Natural Gas Business utilizing information and projections provided
by Valero. With respect to the Natural Gas Business, Lehman Brothers used
discount rates of 10%-12% and a terminal value based on the perpetuity
value of after-tax unlevered free cash flow assuming a growth rate of 1.5%-
3.0% annually. The discount rates were based on Lehman Brothers' review of
the financial terms of similar transactions in the intrastate gas pipeline
and gas gathering, processing and marketing ("GPM") sectors.

This methodology yielded valuations that imply an enterprise value range
of $1.1 to $1.4 billion for the Natural Gas Business.

(ii) Comparable Transactions Analysis -- With respect to the Natural Gas
Business, Lehman Brothers reviewed certain publicly available information
on selected transactions which took place from June of 1994 to December of
1996, including Duke/PanEnergy, El Paso/Tenneco, PG&E Corp./Teco Pipeline,
Tejas Gas/ Transok, NGC/Chevron, NGC/Trident, Panhandle Eastern/Associated
Natural Gas, and KN Energy/ American Oil & Gas. For each transaction,
relevant transaction multiples were analyzed including (i) the common
equity purchase price divided by the last 12 months ("LTM") cash flow from
operations ("CFFO") and (ii) the total purchase price (equity purchase
price plus any assumed obligations) divided by LTM earnings before
interest, taxes, depreciation and amortization ("EBITDA"). The appropriate
LTM CFFO multiple range was determined to be 8.0x -10.0x. The appropriate
LTM EBITDA multiple range was determined to be 8.5x--10.5x. This
methodology yielded valuations that imply an enterprise value range of $1.2
to $1.5 billion for the Natural Gas Business.

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<PAGE>

Because the market conditions, rationale and circumstances surrounding
each of the transactions analyzed were specific to each transaction and
because of the inherent differences between the businesses, operations,
financial conditions and prospects of the Natural Gas Business and the
acquired businesses analyzed, Lehman Brothers believed that it was
inappropriate to, and therefore did not, rely solely on the quantitative
results of the analysis, and accordingly, also made qualitative judgments
concerning differences between the characteristics of these transactions
and the Merger that would affect the acquisition values of Valero and such
acquired companies.

(iii) Comparable Company Trading Analysis -- With respect to the Natural
Gas Business, Lehman Brothers reviewed the public stock market trading
multiples for selected companies including Aquila Gas Pipeline, KN Energy,
NGC Corporation, Tejas Gas, Tejas Power Corporation, USX-Delhi and Western
Gas. Using publicly available information, Lehman Brothers calculated and
analyzed the common equity market value multiples of certain historical and
projected financial criteria (such as net income and CFFO) and the adjusted
capitalization multiples of certain historical and projected financial
criteria (such as EBITDA and EBIT). The adjusted capitalization of each
company was obtained by adding its long-term debt to the sum of the market
value of its common equity, the value of its preferred stock (market value
if publicly traded, liquidation value if not) and the book value of any
minority interest minus its cash balance. Lehman Brothers placed the most
emphasis on net income and CFFO and EBITDA multiples. The appropriate LTM
and projected CFFO multiple ranges were determined to be 7.0x-9.0x and
6.5x-8.5x, respectively. The appropriate LTM and projected EBITDA multiple
ranges were determined to be 7.5x-8.5x and 7.0x-8.0x, respectively. This
methodology yielded valuations that imply an enterprise value range of $1.1
to $1.4 billion for the Natural Gas Business.

With respect to the Refining Business, Lehman Brothers reviewed the
public stock market trading multiples for selected refining and marketing
companies including Ashland, Ultramar Diamond Shamrock, Sun Co., Tosco, and
Total Petroleum. Using publicly available information, Lehman Brothers
calculated and analyzed the common equity market value multiples of certain
historical and projected financial criteria (such as net income and CFFO)
and the adjusted capitalization multiples of certain historical and
projected financial criteria (such as EBITDA and EBIT). The adjusted
capitalization of each company was obtained by adding its long-term debt to
the sum of the market value of its common equity, the value of its
preferred stock (market value if publicly traded, liquidation value if not)
and the book value of any minority interest minus its cash balance. Lehman
Brothers placed the most emphasis on net income and EBITDA multiples. The
appropriate LTM and projected net income multiples were determined to be
15.0x-22.0x and 11.0x- 14.0x, respectively. The appropriate LTM and
projected EBITDA multiple ranges were determined to be 6.5x-7.5x and 5.5x-
6.5x, respectively. The methodology yielded valuations that imply an
enterprise value range of $1.15 to $1.35 billion for the Refining Business.

Because of the inherent differences between the businesses, operations,
financial conditions and prospects of the Natural Gas Business and the
Refining Business and the businesses, operations, financial conditions and
prospects of the companies included in the comparable company groups,
Lehman Brothers believed that it was inappropriate to, and therefore did
not, rely solely on the quantitative results of the analysis, and
accordingly, also made qualitative judgements concerning differences
between the financial and operating characteristics of the Natural Gas
Business and the Refining Business and companies in the comparable company
groups that would affect the public trading values of the Natural Gas
Business and the Refining Business and such comparable companies.

(iv) Impact on Stockholder Value -- Lehman Brothers estimated the pro
forma impact of the Transactions on stockholder value by aggregating the
$722.5 million to be received by Valero stockholders from PG&E Corp. with
the estimated equity value to be received by Valero stockholders in the
Distribution. The estimated equity value to be received by Valero
stockholders in the Distribution was derived from the Comparable Company
Trading Analysis discussed above. This methodology yielded a total value to
Valero stockholders at the upper end of the Per Share Equity Value Range.

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Lehman Brothers is an internationally recognized investment banking firm
and, as part of its investment banking activities, is regularly engaged in,
among other things, the valuation of businesses and their securities in
connection with mergers and acquisitions, negotiated underwritings,
competitive bids, secondary distributions of listed and unlisted securities,
private placements, and valuations for corporate and other purposes. The
Valero Board selected Lehman Brothers because of its expertise, reputation and
familiarity with Valero and because its investment banking professionals have
substantial experience in transactions comparable to the Transactions.

Lehman Brothers has previously rendered certain financial advisory and
investment banking services to Valero, for which it has received customary
compensation. Pursuant to the terms of an engagement letter agreement, dated
August 29, 1996, between Lehman Brothers and Valero, Valero paid Lehman
Brothers an initial financial advisory fee of $100,000 and a subsequent
financial advisory fee of $100,000. In addition, Valero has agreed to pay
Lehman Brothers a transaction fee of approximately $8.25 million payable upon
the successful completion of the Merger and the Distribution (advisory fees
paid to be credited against such amount). In
addition, Valero has agreed to reimburse Lehman Brothers for its reasonable
expenses (including, without limitation, professional and legal fees and
disbursements) incurred in connection with its engagement, and to indemnify
Lehman Brothers and certain related persons against certain liabilities in
connection with its engagement, including certain liabilities that may arise
under the federal securities laws.

In the ordinary course of its business, Lehman Brothers actively trades in
the debt and equity securities of Valero and PG&E Corp. (and will, after the
Transactions, trade in the debt and equity securities of New Valero) for its
own account and for the accounts of its customers and, accordingly, may at any
time hold a long or short position in such securities.

MATERIAL FEDERAL INCOME TAX CONSEQUENCES

General

In the opinion of Orrick, Herrington & Sutcliffe LLP, counsel to PG&E Corp.,
and Wachtell, Lipton, Rosen & Katz, special counsel to Valero, the following
discussion sets forth the material United States federal income tax
consequences of the Distribution and the Merger. The discussion which follows
is based on the Code, Treasury regulations promulgated thereunder, and
judicial and administrative interpretations thereof, all as in effect on the
date hereof, and is subject to any changes in these or other laws occurring
after such date. The discussion below does not address the effects of any
state, local or foreign tax laws.

The tax treatment of a stockholder may vary depending upon his or her
particular situation, and certain stockholders (including individuals who hold
restricted stock of Valero, individuals who hold options in respect of Valero
Common Stock, insurance companies, tax-exempt organizations, financial
institutions or broker-dealers, persons who do not hold the Valero Common
Stock as capital assets and persons who are neither citizens nor residents of
the United States, or who are foreign corporations, foreign partnerships or
foreign estates or trusts as to the United States) may be subject to special
rules not discussed below.

On February 6, 1997, the President's budget recommendations to Congress
called for new legislation which, if enacted, would require Valero to pay
federal income tax upon the consummation of the Distribution and the Merger on
gain equal to the excess of the value of the New Valero Common Stock
distributed to the stockholders over Valero's basis in such stock. The
President's proposal, which has not yet been introduced in Congress, would be
effective for distributions after the date of first committee action. On April
17, 1997, the Chairs of the House Ways and Means Committee and Senate Finance
Committee and the ranking Democrat on the Finance Committee introduced similar
legislation which, however, would not apply to distributions made pursuant to
a written agreement which was binding on April 16, 1997 and at all times
thereafter nor to distributions announced publicly by that date. It is
uncertain whether any such legislation ultimately will be enacted or what the
effective date may be. PG&E Corp. and Valero believe it is likely that any
legislation ultimately enacted will provide an exemption for transactions like
the Distribution and the Merger for which definitive agreements were executed
prior to February 6, 1997. However, if the proposal is enacted or pending
prior to the Merger with an effective

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<PAGE>

date provision that could cause Valero to be so subject to tax, the tax
opinions that are conditions to the obligations of PG&E Corp. and Valero to
consummate the Merger may not be available and as a result the Distribution
and the Merger may not be consummated. See "The Merger Agreement--Conditions."
If favorable tax opinions are not available at the time of the Merger and PG&E
Corp. and Valero determine to waive such conditions to consummation of the
Merger, Valero will seek further stockholder approval before completing the
Transactions.

EACH STOCKHOLDER IS URGED TO CONSULT HIS OR HER OWN TAX ADVISOR AS TO THE
PARTICULAR TAX CONSEQUENCES TO HIM OR HER OF THE TRANSACTIONS DESCRIBED
HEREIN, INCLUDING THE APPLICABILITY AND EFFECT OF ANY STATE, LOCAL OR FOREIGN
TAX LAWS, AND OF CHANGES IN APPLICABLE TAX LAWS.

Federal Income Tax Consequences of the Distribution and the Merger

Wachtell, Lipton, Rosen & Katz, special counsel to Valero, has issued an
opinion that the Distribution will qualify as a reorganization within the
meaning of Section 368(a)(1)(D) of the Code, and as a transaction described in
Code Section 355. Wachtell, Lipton, Rosen & Katz and Orrick, Herrington &
Sutcliffe LLP, counsel to PG&E Corp., have each issued an opinion that the
Merger will qualify as a "reorganization" under Section 368(a)(1)(B) of the
Code. These opinions are based on current law and certain representations as
to factual matters made by, among others, Valero, New Valero and PG&E Corp.
which, if incorrect in certain material respects, could jeopardize the
conclusions reached by counsel in their opinions. These opinions are also
based on the assumption that the Distribution and the Merger will be
consummated as described in this Proxy Statement-Prospectus, the Distribution
Agreement and the Merger Agreement. Moreover, these opinions are based on the
Code, Treasury regulations promulgated thereunder, and judicial and
administrative interpretations thereof, all as in effect on the date hereof,
and are subject to any changes in these or other laws occurring after such
date. Any such change, which may or may not be retroactive, could alter the
tax consequences discussed herein. Such opinions are not binding on the
Internal Revenue Service ("IRS") or the courts. The parties will not request
and the Distribution and the Merger are not conditioned upon a ruling from the
IRS with respect to any of the federal income tax consequences of the
Distribution and the Merger.

In the opinion of Wachtell, Lipton, Rosen & Katz, if the Distribution and
the Merger so qualify, then the following consequences will result:

(a) No gain or loss will be recognized by Valero or New Valero as a
result of the Distribution (other than income, if any, recognized by Valero
or its subsidiaries in connection with deferred intercompany transactions
under Treasury regulation section 1.1502-13 or excess loss accounts under
regulation section 1.1502-19).

(b) No gain or loss will be recognized by (and no amount will be included
in the income of) the Valero stockholders as a result of their receipt of
New Valero Common Stock (and the associated stock purchase rights) in the
Distribution.

(c) The aggregate basis of New Valero Common Stock and Valero Common
Stock in the hands of each Valero stockholder immediately after the
Distribution will be the same as the aggregate basis of Valero Common Stock
held immediately before the Distribution and such tax basis will be
allocated between the New Valero Common Stock and Valero Common Stock based
upon relative fair market values at the time of the Distribution.

(d) The holding period of New Valero Common Stock received by a
stockholder in the Distribution will include the period during which the
stockholder held Valero Common Stock, provided that the Valero Common Stock
was held as a capital asset.

(e) Except for any cash received in lieu of fractional shares, a
stockholder will not recognize any income, gain or loss as a result of the
receipt of PG&E Corp. Common Stock in the Merger.

(f) A stockholder's tax basis for shares of PG&E Corp. Common Stock
received in the Merger, including any fractional share interest for which
cash is received, will equal such stockholder's basis in Valero Common
Stock surrendered (as determined immediately following the Distribution
pursuant to (c) above).

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<PAGE>

(g) The holding period for the shares of PG&E Corp. Common Stock received
in the Merger, including any fractional share interest for which cash is
received, will include the period during which the stockholder held Valero
Common Stock, provided such shares were held as capital assets.

Orrick, Herrington & Sutcliffe LLP also has issued an opinion as to the
consequences set forth in paragraphs (e) through (g) above.

If the Distribution were not to qualify for tax-free treatment under Code
Sections 368(a)(1)(D) and 355, Valero would recognize gain equal to the excess
of the fair market value of the New Valero Common Stock distributed to its
stockholders over Valero's basis in such stock. Any resulting corporate income
tax on such gain would be payable by Valero. New Valero has agreed to
indemnify PG&E Corp. and Valero for such tax liability unless the failure of
the Merger and the Distribution to qualify under those sections of the Code is
the result of PG&E Corp.'s breach of the covenants referred to in the
preceding paragraph. In addition, each Valero stockholder who received shares
of New Valero Common Stock would be generally treated as if it had received a
taxable distribution in an amount equal to the fair market value of New Valero
Common Stock received. Further, if the Merger fails to qualify as a
"reorganization" under Code Section 368(a)(1)(B) each Valero stockholder who
receives shares of PG&E Corp. Common Stock would recognize gain or loss equal
to the difference between the fair market value of the PG&E Corp. Common Stock
received and his or her basis in the shares of Valero Common Stock
surrendered. Failure of the Merger to qualify as a tax-free reorganization
could jeopardize the tax-free treatment of the Distribution under Code
Sections 368(a)(1)(D) and 355.

Backup Withholding

Under the backup withholding rules, a holder of New Valero Common Stock and
PG&E Corp. Common Stock may be subject to backup withholding at the rate of
31% with respect to dividends and proceeds of redemption, unless such
stockholder (a) is a corporation or comes within certain other exempt
categories and, when required, demonstrates this fact or (b) provides a
correct taxpayer identification number, certifies as to no loss of exemption
from backup withholding and otherwise complies with applicable requirements of
the backup withholding rules. Any amount withheld under these rules will be
credited against the stockholder's federal income tax liability. New Valero or
PG&E Corp. may require holders of New Valero Common Stock or PG&E Corp. Common
Stock to establish an exemption from backup withholding or to make
arrangements satisfactory to New Valero or PG&E Corp. with respect to the
payment of backup withholding. A stockholder who does not provide New Valero
or PG&E Corp. with his or her current taxpayer identification number may be
subject to penalties imposed by the IRS.

NO APPRAISAL RIGHTS

Holders of Valero Common Stock will not have the right to elect to have the
fair value of their shares of Valero Common Stock judicially appraised and
paid to them in cash in connection with the Distribution or the Merger.
Section 262 ("Section 262") of the Delaware General Corporation Law (the
"Delaware Law") provides appraisal rights to stockholders of Delaware
corporations in connection with certain mergers and consolidations. Under
Section 262, appraisal rights are not available to the stockholders of a
corporation that is a party to a merger if the corporation's stock is listed
on a national securities exchange as of the record date set to determine the
stockholders entitled to receive notice of and to vote at the meeting of
stockholders to approve the merger so long as the consideration to be received
by such stockholders in the merger consists of (i) shares of the capital stock
of the surviving corporation in the merger, (ii) shares of the capital stock
of any other corporation provided that such stock is listed on a national
securities exchange as of the date on which the merger becomes effective,
(iii) cash in lieu of fractional shares or (iv) a combination of the
foregoing.

INTERESTS OF CERTAIN PERSONS IN THE TRANSACTIONS

In considering the recommendations of the Valero Board, stockholders should
be aware that certain members of management of Valero and of the Valero Board
have certain interests in the Transactions that are in addition to the
interests of stockholders generally and which may create potential conflicts
of interest. Valero

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<PAGE>

intends to pay additional cash bonuses upon completion of the Transactions.
Valero estimates that under all such arrangements, the officers of Valero
would be entitled to receive cash bonuses not exceeding $5 million in the
aggregate upon completion of the Transactions. All shares of restricted stock
and most stock options and performance shares held by Valero officers would
also vest upon completion of the Transactions.

Valero's Restated Certificate of Incorporation and certain indemnification
agreements between Valero and its directors and officers provide for
indemnification of Valero's directors and officers arising out of actions
taken (or not taken) during such individuals' terms of office. Such
indemnification would apply to liabilities arising out of the approval of the
Transactions. Additionally, all officers of Valero currently hold Valero stock
options and several Valero officers hold Valero restricted stock and/or
performance shares. Valero stock options, restricted stock and performance
shares will generally accelerate and vest immediately upon stockholder
approval of the Transactions and certain executive officers and other key
employees of Valero will be entitled to receive a cash bonus upon completion
of the Transactions. Certain executive officers of Valero have entered into
severance agreements with Valero which provide certain payments and benefits
in the event of their termination of employment under certain circumstances.
See "MANAGEMENT" and "EXECUTIVE COMPENSATION" in the New Valero Prospectus,
which was mailed with this Proxy Statement-Prospectus.

31
<PAGE>

MARKETS AND MARKET PRICES

PG&E Corp. Common Stock is listed under the symbol "PCG" on the NYSE. Valero
Common Stock is listed under the symbol "VLO" on the NYSE. Application will be
made to list the New Valero Common Stock on the NYSE. There is currently no
public trading market for the New Valero Common Stock and there can be no
assurance that an active trading market will develop or, if a trading market
develops, that such market will be maintained, or as to the prices at which
trading in the New Valero Common Stock will occur after the transactions
contemplated by the Merger Agreement. Unless the New Valero Common Stock is
fully distributed and an orderly market develops, the prices at which trading
in the New Valero Common Stock occurs may fluctuate significantly. Prices at
which the PG&E Corp. Common Stock and the New Valero Common Stock may trade
cannot be predicted.

On April 30, 1997, there were 6,134 holders of record for Valero Common
Stock and 190,191 holders of record of PG&E Corp. Common Stock. On January 31,
1997, the last trading date prior to the public announcements by Valero and
PG&E Corp. of the signing of the Merger Agreement, the last reported sale
prices on the NYSE Composite Tape were $22.88 per share for PG&E Corp. Common
Stock and $33.75 per share for the Valero Common Stock. On May 2, 1997, the
last reported sale prices on the NYSE Composite Tape were $24.25 per share for
PG&E Corp. Common Stock and $35.38 per share for Valero Common Stock.

The following table sets forth, for the calendar quarters indicated (ended
March 31, June 30, September 30 and December 31), the range of high and low
sale prices of PG&E Corp. Common Stock and Valero Common Stock as reported on
the NYSE Composite Tape, and the dividends per share declared on PG&E Corp.
Common Stock and Valero Common Stock.

<TABLE>
<CAPTION>
PG&E CORP. COMMON STOCK VALERO COMMON STOCK
----------------------- -----------------------
CALENDAR QUARTER HIGH LOW DIVIDENDS HIGH LOW DIVIDENDS
- ---------------- ------ ------ --------- ------ ------ ---------
<S> <C> <C> <C> <C> <C> <C>
1994
1st Quarter.................. $35.00 $28.50 $.49 $24.13 $19.50 $.13
2nd Quarter.................. 29.75 22.50 .49 22.13 16.75 .13
3rd Quarter.................. 25.13 22.00 .49 21.13 17.25 .13
4th Quarter.................. 25.25 21.38 .49 22.00 16.50 .13
1995
1st Quarter.................. 25.75 24.25 .49 18.63 16.00 .13
2nd Quarter.................. 29.75 24.75 .49 22.88 17.75 .13
3rd Quarter.................. 30.00 28.38 .49 25.63 19.63 .13
4th Quarter.................. 30.63 27.13 .49 25.88 22.50 .13
1996
1st Quarter.................. 28.38 22.38 .49 26.50 22.13 .13
2nd Quarter.................. 23.75 21.50 .49 29.00 24.50 .13
3rd Quarter.................. 23.88 19.50 .49 25.50 20.25 .13
4th Quarter.................. 24.55 20.88 .30 30.00 21.88 .13
1997
1st Quarter.................. 24.25 20.88 .30 36.38 28.63 .13
2nd Quarter (through May 2,
1997)....................... 24.38 22.75 .30 36.88 34.25 .13
</TABLE>

No assurance can be given as to the market price of PG&E Corp. Common Stock
or Valero Common Stock at, or in the case of PG&E Corp. Common Stock after,
the Effective Time. STOCKHOLDERS ARE ADVISED TO OBTAIN CURRENT MARKET
QUOTATIONS FOR PG&E CORP. COMMON STOCK AND VALERO COMMON STOCK.

32
<PAGE>

UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION

PG&E CORP. UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION

The unaudited pro forma condensed combined financial information set forth
below gives effect to the Distribution and the Merger as if they had been
consummated on December 31, 1996, for balance sheet presentation purposes and
January 1, 1996, for income statement presentation purposes, subject to the
assumptions and adjustments in the accompanying notes to the pro forma
financial information.

The pro forma adjustments reflecting the consummation of the Merger are
based upon the purchase method of accounting and upon the assumptions set
forth in the notes hereto, including the exchange of all the outstanding
shares of Valero Common Stock for an aggregate of approximately 30,689,000
shares of PG&E Corp. Common Stock. This pro forma financial information should
be read in conjunction with the financial data appearing under "SUMMARY--
Selected Historical Financial Information" and the historical financial
statements of PG&E Corp. and Valero which have been incorporated herein by
reference. See "WHERE YOU CAN FIND MORE INFORMATION."

The pro forma adjustments reflecting the consummation of the Distribution
include the declaration and payment of a $210 million dividend by New Valero
to Valero. The Merger adjustments include the preliminary allocation of the
purchase price, discussed below, and the issuance of PG&E Corp. stock used to
effect the transaction. The unaudited pro forma income statement information
includes adjustments to recognize sales from Valero to New Valero previously
eliminated in consolidation, amortization of amounts assigned to plant in
service and cost in excess of fair value of assets acquired and amortization
of the premium on long-term debt recorded in purchase accounting. The pro
forma adjustments do not reflect any operating efficiencies and cost savings
which may be achievable with respect to the combined companies. The pro forma
adjustments do not include any adjustments to historical sales for any future
price changes nor any adjustments to selling and marketing expenses for any
future operating changes.

The following unaudited pro forma information is not necessarily indicative
of the financial position or operating results that would have occurred had
the Merger been consummated on the date, or at the beginning of the period,
for which the consummation of the Merger is being given effect. For purposes
of preparing the PG&E Corp. consolidated financial statements, PG&E Corp. will
establish a new basis for Valero's assets and liabilities (as adjusted to
reflect the exclusion of the assets and liabilities of the Refining Business)
based upon the fair values thereof and the PG&E Corp. purchase price,
including the costs of the Merger. A final determination of required purchase
accounting adjustments, including the allocation of the purchase price to the
assets acquired and liabilities assumed based on their respective fair values,
has not yet been made. Accordingly, the purchase accounting adjustments made
in connection with the development of the pro forma financial information are
preliminary and have been made solely for purposes of developing such pro
forma financial information. PG&E Corp. will undertake a study to determine
the fair value of certain of Valero's assets and liabilities (as so adjusted)
and will make appropriate purchase accounting adjustments upon completion of
that study. Assuming completion of the Merger, the actual financial position
and results of operations will differ, perhaps significantly, from the pro
forma amounts reflected herein because of a variety of factors, including
access to additional information, changes in value, and changes in operating
results between the dates of the pro forma financial data and the date on
which the Merger takes place.

The historical amounts for New Valero reflect adjustments made to allocate
certain assets and liabilities of Valero between Valero and New Valero as
specified in the Distribution Agreement and are not a reflection of actual or
projected results of the New Valero business. See "Valero Unaudited Pro Forma
Condensed Combined Financial Statements" on page 37 for additional information
regarding New Valero.

33
<PAGE>

PG&E CORP.
PRO FORMA CONDENSED COMBINED BALANCE SHEET
AS OF DECEMBER 31, 1996
(UNAUDITED)

<TABLE>
<CAPTION>
VALERO
PG&E LESS: NEW DISTRIBUTION MERGER PRO FORMA
CORP. VALERO VALERO(1) ADJUSTMENTS ADJUSTMENTS COMBINED
----------- ------ --------- ------------ ----------- -----------
(IN MILLIONS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
Assets
Net Plant.............. $ 19,008 $2,080 $1,229 $ -- $ 564(k) $ 20,423
Investments............ 1,700 29 29 1,700
Current Assets......... 2,672 888 332 4 (a) 3,441
210 (b)
(1)(c)
Deferred Charges and
Other Noncurrent As-
sets.................. 2,750 138 91 306 (l) 3,103
----------- ------ ------ ----- ---------- -----------
Total Assets............ $ 26,130 $3,135 $1,681 $ 213 $ 870 $ 28,667
=========== ====== ====== ===== ========== ===========
Capitalization and Lia-
bilities
Capitalization
Common Stock Equity.... $ 8,363 $ 903 $1,136 $ 210 (b) $ 592 (m) $ 9,077
173 (e) (8)(n)
(20)(h)
Preferred Stock without
Mandatory Redemption
Provisions (for Valero
at Liquidation Value). 402 173 (173)(e) 402
Long-Term
Obligations(/2/) and
Preferred Stock with
Mandatory Redemption
Provisions (excluding
Current Portions)..... 8,208 869 98 (1)(c) 76 (o) 9,051
(3)(f)
----------- ------ ------ ----- ---------- -----------
Total Capitalization.... 16,973 1,945 1,234 186 660 18,530
Current Liabilities.... 3,240 875 192 30 (d) 8 (n) 3,959
(2)(f)
Deferred Income Taxes . 4,321 280 225 (1)(g) 152 (p) 4,527
Other Noncurrent Lia-
bilities.............. 1,596 35 30 50 (q) 1,651
----------- ------ ------ ----- ---------- -----------
Total Capitalization and
Liabilities............ $ 26,130 $3,135 $1,681 $ 213 $ 870 $ 28,667
=========== ====== ====== ===== ========== ===========
Book Value Per Common
Share.................. $ 20.73 $ 20.91
Number of Common Shares
Outstanding............ 403,504,000 30,689,000 (r) 434,193,000
</TABLE>

See Notes to Pro Forma Condensed Combined Financial Information.

34
<PAGE>

PG&E CORP.
PRO FORMA CONDENSED COMBINED INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 1996
(UNAUDITED)

<TABLE>
<CAPTION>
VALERO
PG&E LESS: NEW DISTRIBUTION MERGER PRO FORMA
CORP. VALERO VALERO(1) ADJUSTMENTS ADJUSTMENTS COMBINED
----------- ------ --------- ------------ ----------- -----------
(IN MILLIONS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
Operating Revenues...... $ 9,610 $4,991 $2,729 $180 (i) $ -- $ 12,052
Operating Expenses...... 7,714 4,790 2,638 180 (i) 29 (s) 10,075
----------- ------ ------ ---- ---------- -----------
Operating Income........ 1,896 201 91 -- (29) 1,977
Interest Expense........ 640 95 8 (13)(t) 714
Other (Income) Expense.. (54) (8) 12 (74)
----------- ------ ------ ---- ---------- -----------
Pretax Income........... 1,310 114 71 (16) 1,337
Income Taxes............ 555 41 25 (2)(u) 569
----------- ------ ------ ---- ---------- -----------
Net Income(/3/)......... 755 73 46 (14) 768
Preferred Dividend Re-
quirements............. 33 12 (12)(j) 33
----------- ------ ------ ---- ---------- -----------
Earnings Available for
Common Shares.......... $ 722 $ 61 $ 46 $ 12 $ (14) $ 735
=========== ====== ====== ==== ========== ===========
Earnings Per Common
Share.................. $ 1.75 $ 1.66
Weighted Average Common
Shares Outstanding..... 412,542,000 30,689,000 (r) 443,231,000
Dividends Declared Per
Common Share........... $ 1.77(4) $ 1.77(4)
</TABLE>

See Notes to Pro Forma Condensed Combined Financial Information.

PG&E CORP.

NOTES TO PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION

- --------
(1) Allocation to New Valero is based on the Distribution Agreement which
allocates the historical assets and liabilities between the Refining
Business (New Valero) and the Natural Gas Business (Valero) for purposes
of completing the Distribution and Merger. The allocation is not
necessarily reflective of any individual or group of business units that
have existed or may exist in the future.
(2) Includes PG&E Co. obligated mandatorily redeemable preferred securities of
trust holding solely PG&E Co. subordinated debentures.
(3) On January 1, 1997, PG&E Co. reorganized into a holding company with PG&E
Co. becoming a wholly owned subsidiary of its parent, PG&E Corp. As a
result, historical net income will be determined after deduction of
preferred dividends, which will cause the historical reported net income
set forth above to be decreased by $33 million. Net income available for
common stock and earnings per common share will be unaffected by the
reorganization.
(4) In October 1996, PG&E Corp. decreased its quarterly dividend from $.49 per
common share to $.30 per common share which corresponds to an annualized
dividend of $1.20 per common share. PG&E Corp.'s common stock dividend is
based on a number of financial considerations, including sustainability,
financial flexibility and competitiveness with investment opportunities of
similar risk.

35
<PAGE>

NOTES TO PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION (CONTINUED)

VALERO DISTRIBUTION ADJUSTMENTS

(a) Cash received in settlement of deferred compensation in connection with
termination of Valero Employees' Stock Ownership Plan ("VESOP").
(b) Cash dividend of $210 million paid by New Valero to Valero at the time of
the Distribution.
(c) Redemption of remaining shares of Valero mandatorily redeemable preferred
stock.
(d) Accrual of out-of-pocket fees and expenses incurred by Valero and its
subsidiaries in connection with efforts to consummate transactions
contemplated by the Distribution and Merger, not to exceed $30 million.
See "THE MERGER AGREEMENT--Termination Fee; Expenses" for further
explanation.
(e) Conversion of 3,450,000 shares of Valero convertible preferred stock
without mandatory redemption provisions into Valero Common Stock.
(f) Prepayment of VESOP notes and termination of related VESOP note guarantee
by Valero.
(g) Tax effect of acceleration of employee vesting in Valero restricted stock.
(h) Equity impact of adjustments described in notes (a), (d), (f) and (g).
(i) Recognition of sales from Valero to New Valero previously eliminated in
consolidation.
(j) Elimination of preferred dividends on the Valero convertible preferred
stock without mandatory redemption provisions and the mandatorily
redeemable preferred stock.

MERGER ADJUSTMENTS

(k) Allocation of purchase price to plant in service to reflect a preliminary
estimate of fair value.
(l) Cost in excess of estimated fair values of assets acquired and liabilities
assumed as follows (in millions):

<TABLE>
<S> <C>
Purchase price......................... $ 722
Book value of net assets acquired...... (130)
-----
592
Premium on long-term debt.............. 76
Other noncurrent liabilities........... 50
Increase in deferred income taxes...... 152
Allocated to plant in service.......... (564)
-----
Purchase cost in excess of fair value
of net assets......................... $ 306
=====
</TABLE>

(m) Reflects net increase in equity of $592 million, which when added to the
$130 million of net assets of the Natural Gas Business (after the
Distribution adjustments) totals $722.2 million. The $722.2 million
represents the estimated market valuation of PG&E Corp. Common Stock to be
issued in the Merger which, when added to the book value of the debt and
other liabilities to which the Natural Gas Business is subject, equals the
aggregate Merger consideration of approximately $1.5 billion.
(n) Accrual of estimated PG&E Corp. transaction costs.
(o) Adjustment to reflect the Valero debt at its estimated fair value.
(p) Reflects deferred taxes associated with the Merger adjustments at 35%.
(q) Accrual of transition obligations associated with post employment
benefits, including pensions, and other contingent liabilities.
(r) Issuance of PG&E Corp. Common Stock in exchange for the outstanding shares
of Valero Common Stock (using an assumed PG&E Corp. Common Stock trading
price of $23.550).
(s) Depreciation of plant recorded in note (k) and amortization of the cost in
excess of fair value of assets and liabilities acquired, both over 30
years.
(t) Amortization of the premium on long-term debt recorded in purchase
accounting.
(u) Tax provision associated with additional depreciation and amortization of
premium on long-term debt.

36
<PAGE>

VALERO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS

On April 22, 1997, Valero entered into a stock purchase agreement with
Salomon Inc ("Salomon") to acquire Salomon's wholly owned subsidiary, Basis
(the "Basis Acquisition"), and on May 1, 1997 completed such acquisition.
Basis owns and operates three petroleum refineries located in Texas and
Louisiana and markets refined products. The Basis Acquisition will be
accounted for by New Valero under the purchase method of accounting, and, as a
result, pro forma adjustments are reflected in the accompanying unaudited pro
forma condensed combined financial statements to reflect, among other things,
a preliminary allocation of Valero's purchase cost among the assets acquired
and liabilities assumed, the elimination of operating results and shutdown
costs for operations of Basis which were discontinued prior to the Basis
Acquisition and the elimination of the effect from the sale of certain assets
by Basis prior to the Basis Acquisition. The assets acquired and liabilities
assumed by Valero as a result of the Basis Acquisition will become part of the
Refining Business that is being spun off to Valero stockholders immediately
prior to the Merger. The accompanying unaudited pro forma condensed combined
financial statements show the effects on the financial position and results of
operations of Valero and New Valero of the Basis Acquisition, after the
elimination of the operating results, shutdown costs and sale of certain
assets related to the operations discontinued by Basis prior to the Basis
Acquisition, and the proposed Distribution and Merger.

The accompanying unaudited pro forma condensed combined balance sheet at
December 31, 1996, presents the combined financial position of New Valero
assuming the Basis Acquisition and the Distribution and Merger had occurred on
that date. This balance sheet has been derived from the historical balance
sheet of Valero adjusted for the effects of the Basis Acquisition and the
divestiture of the Natural Gas Business as contemplated by the Distribution
Agreement, and the resulting effect on assets and liabilities which might have
occurred had such transactions occurred on December 31, 1996.

The accompanying unaudited pro forma condensed combined statement of income
for the year ended December 31, 1996, presents the combined results of
operations of New Valero assuming the Basis Acquisition and the Distribution
and Merger had occurred on January 1, 1996. This statement of income has been
derived from the historical statement of income of Valero adjusted for the
effects of the Basis Acquisition, the elimination of operating results and
shutdown costs for operations of Basis which were discontinued prior to the
Basis Acquisition, the elimination of the effect from the sale of certain
assets by Basis prior to the Basis Acquisition, the divestiture of the Natural
Gas Business as contemplated by the Distribution Agreement, and the resulting
effect on costs and expenses which might have occurred had such transactions
occurred on January 1, 1996.

The "Less: Natural Gas Business" column in the unaudited pro forma condensed
combined balance sheet represents the combined historical assets and
liabilities directly allocable to the Natural Gas Business plus a portion of
certain corporate assets and liabilities that have been allocated to the
Natural Gas Business based upon the Distribution Agreement.

The unaudited pro forma condensed combined financial statements should be
read in conjunction with the historical consolidated financial statements and
the related notes thereto of Valero and Basis which are included in the
accompanying New Valero Prospectus. The unaudited pro forma condensed combined
financial statements are not necessarily indicative of the financial position
that actually would have been obtained or the results of operations that
actually would have occurred if the Basis Acquisition and the Distribution and
Merger had been consummated on the specified dates, or the financial position
or results of operations which may be attained in the future.

37
<PAGE>

VALERO
PRO FORMA CONDENSED COMBINED BALANCE SHEET
AS OF DECEMBER 31, 1996
(UNAUDITED)

<TABLE>
<CAPTION>
BASIS ACQUISITION
---------------------- VALERO LESS: PRO FORMA NEW VALERO
VALERO PRO FORMA PRO FORMA NATURAL GAS MERGER PRO FORMA
HISTORICAL HISTORICAL ADJUSTMENTS COMBINED BUSINESS(1) ADJUSTMENTS COMBINED
---------- ---------- ----------- --------- ----------- ----------- ----------
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
Assets
Current Assets......... $ 888 $ 907 $ 65 (a) $ 1,476 $ 555 $ 10 (l) $ 931
(150)(a) 1 (m)
(234)(b) (1)(l)
Property, Plant and
Equipment, Net........ 2,080 818 (541)(a) 2,357 851 -- 1,506
Deferred Charges and
Other Noncurrent
Assets................ 167 9 8 (a) 187 47 (3)(m) 138
11 (a) 1 (m)
(8)(b)
------ ------ ----- ------- ------ ---- ------
Total Assets............ $3,135 $1,734 $(849) $ 4,020 $1,453 $ 8 $2,575
====== ====== ===== ======= ====== ==== ======
Liabilities and Stock-
holders' Equity
Liabilities
Current Liabilities,
excluding Short-Term
Debt and Current Ma-
turities of Long-Term $ 721 $ 673 $ 1,232 $ 529 $ -- $ 703
Debt.................. ------ ------ $ (39)(a) ------- ------ ---- ------
(123)(b)
-----
Total Debt
Short-Term Debt...... 82 -- -- 82 82 -- --
Current Maturities of
Long-Term Debt...... 72 -- -- 72 72 -- --
Long-Term Debt....... 868 -- 254 (a) 1,122 770 220 (l) 576
(99)(m)
103 (m)
Notes Payable to Af-
filiates............ -- 619 (619)(c) -- -- -- --
------ ------ ----- ------- ------ ---- ------
Total Debt......... 1,022 619 (365) 1,276 924 224 576
Deferred Income Taxes
and Other Noncurrent
Liabilities........... 315 69 (69)(b) 315 60 (1)(m) 254
------ ------ ----- ------- ------ ---- ------
Total Liabilities....... 2,058 1,361 (596) 2,823 1,513 223 1,533
------ ------ ----- ------- ------ ---- ------
Redeemable Preferred
Stock, Series A........ 1 -- -- 1 -- (1)(l) --
------ ------ ----- ------- ------ ---- ------
Preferred Stock without
Mandatory Redemption
Provisions at Liquida-
tion Value............. 173 173 173 --
Stockholders' Equity.... 903 373 (942)(a) 1,023 (233) (4)(m) 1,042
120 (a) (210)(l)
(50)(b)
619 (c)
------ ------ ----- ------- ------ ---- ------
Total Stockholders' Eq-
uity................... 1,076 373 (253) 1,196 (60) (214) 1,042
------ ------ ----- ------- ------ ---- ------
Total Liabilities and
Stockholders' Equity... $3,135 $1,734 $(849) $ 4,020 $1,453 $ 8 $2,575
====== ====== ===== ======= ====== ==== ======
Book Value per Common
Share.................. $20.44 $ 21.48 $19.07
</TABLE>

See Notes to Pro Forma Condensed Combined Financial Statements.

38
<PAGE>

VALERO
PRO FORMA CONDENSED COMBINED INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 1996
(UNAUDITED)

<TABLE>
<CAPTION>
BASIS ACQUISITION
---------------------- VALERO LESS: PRO FORMA NEW VALERO
VALERO PRO FORMA PRO FORMA NATURAL GAS MERGER PRO FORMA
HISTORICAL HISTORICAL ADJUSTMENTS COMBINED BUSINESS(1) ADJUSTMENTS COMBINED
---------- ---------- ----------- ---------- ----------- ----------- ----------
(IN MILLIONS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
Operating Revenues..... $ 4,991 $9,505 $ (1,936)(d) $ 12,359 $2,257 $ 24 (n) $ 10,126
---------- ------ ---------- ------ --------- ----------
(201)(e)
---------
Costs and Expenses
Cost of Sales and
Operating Expenses.. 4,606 9,565 (1,918)(d) 12,013 2,051 24 (n) 9,988
(245)(e) 2 (o)
12 (f)
(7)(g)
Selling and
Administrative
Expenses............ 82 36 (3)(d) 115 50 -- 65
Depreciation Expense. 102 47 (1)(d) 112 46 (2)(o) 64
(2)(e)
(34)(h)
---------- ------ --------- ---------- ------ --------- ----------
Total Costs and Ex-
penses................ 4,790 9,648 (2,198) 12,240 2,147 24 10,117
---------- ------ --------- ---------- ------ --------- ----------
Operating Income
(Loss)................ 201 (143) 61 119 110 -- 9
Interest Expense....... 95 39 (29)(i) 105 87 (5)(p) 25
12 (q)
Loss on Investment in
Proesa Joint Venture.. 20 -- -- 20 -- -- 20
Reversal of Acquisi-
tion Expense
Accrual............... (19) -- -- (19) (19) -- --
Other Expense (In-
come), Net............ (9) (82) 82 (e) (11) (1) (10)
(2)(f)
---------- ------ --------- ---------- ------ --------- ----------
Income (Loss) before
Income Taxes.......... 114 (100) 10 24 43 (7) (26)
Income Taxes........... 41 (35) 3 (j) 9 15 (3)(r) (9)
---------- ------ --------- ---------- ------ --------- ----------
Net Income (Loss)...... 73 (65) 7 15 28 (4) (17)
Less: Preferred Divi-
dend Requirement...... 12 -- -- 12 11 (1)(p) --
---------- ------ --------- ---------- ------ --------- ----------
Net Income (Loss)
Applicable to Common
Shareholders.......... $ 61 $ (65) $ 7 $ 3 $ 17 $ (3) $ (17)
========== ====== ========= ========== ====== ========= ==========
Earnings (Loss) Per
Common Share.......... $1.40 $0.07 $(0.32)
Weighted Average
Shares Outstanding.... 43,926,000 3,430,000 (k) 47,356,000 7,015,000 (s) 54,371,000
</TABLE>

See Notes to Pro Forma Condensed Combined Financial Statements.

39
<PAGE>

VALERO

NOTES TO PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS

(1) Allocation to Natural Gas Business is based on the Distribution Agreement
which allocates the historical assets and liabilities between the Refining
Business (New Valero) and the Natural Gas Business (Valero) for purposes
of completing the Distribution and Merger. The allocation is not
necessarily reflective of any individual or group of business units that
have existed or may exist in the future.

BASIS ACQUISITION PRO FORMA ADJUSTMENTS

(a) To reflect the issuance of $254 million of debt (including the incurrence
of $8 million of debt issuance costs) under a new $835 million revolving
credit facility with a group of banks, the issuance of $120 million of
equity and the receipt of $150 million pursuant to an inventory purchase
agreement whereby New Valero intends to sell a portion of its base
inventory to a third party, the proceeds of which are used to fund the
acquisition of all of the common stock of Basis. Also reflected are
adjustments to certain of Basis's historical assets and liabilities to
reflect the estimated fair values of the assets acquired and liabilities
assumed, based on the purchase price of $516 million, as follows (in
millions):

<TABLE>
<S> <C>
Increase in current assets......................................... $ 65
Decrease in property, plant and equipment, net..................... (541)
Decrease in current liabilities.................................... 39
Increase in deferred charges and other assets...................... 11
-----
Excess of historical cost over purchase price of Basis's assets
acquired and liabilities assumed................................ $(426)
=====
</TABLE>

(b) To reflect assets and liabilities to be retained by Salomon as follows (in
millions):

<TABLE>
<S> <C>
Current assets...................................................... $234
Deferred charges and other assets................................... 8
Current liabilities................................................. (123)
Deferred income taxes............................................... (69)
----
Net............................................................... $ 50
====
</TABLE>
(c) To reflect cancellation of the note payable by Basis to its parent,
Salomon.
(d) To reflect the elimination of income associated with Basis's investment in
a crude gathering business, which is being retained by Salomon, and to
reverse the elimination of sales made by Basis to the crude gathering
business.
(e) To reflect the elimination of operating losses and shutdown costs
associated with operations discontinued during 1995 and 1996, and to
eliminate the gain recorded on the sale of certain assets during 1996. Had
the operating results and shutdown costs for operations of Basis which
were discontinued prior to the Basis Acquisition and the effect from the
sale of certain assets by Basis prior to the Basis Acquisition not been
eliminated in the accompanying unaudited pro forma condensed combined
financial statements, operating income would have decreased by $46
million, other income would have increased by $82 million, income (loss)
before income taxes would have benefited by $36 million and net income
(loss) would have benefited by $23 million.
(f) To reflect costs associated with the $150 million inventory purchase
agreement and the reclassification of certain income from Cost of Sales to
Other Income.
(g) To reflect the elimination of income relating to certain 1996 inventory
adjustments and derivative transactions, resulting from the adjustment to
fair value of the assets acquired and liabilities assumed as of the date
of the Basis Acquisition, and to reduce turnaround expenses to conform to
New Valero's method of accounting.
(h) To reverse historical depreciation expense and record depreciation expense
on the portion of the Basis Acquisition cost allocated to property, plant
and equipment.

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BASIS ACQUISITION PRO FORMA ADJUSTMENTS (CONTINUED)

(i) To reflect elimination of $45 million of interest expense on the note
payable by Basis to Salomon and to reflect interest expense on the debt
issued to partially fund the Basis Acquisition. A 1/8% change in the
variable interest rate associated with such debt would have a $.3 million
effect on interest expense.
(j) To reflect the income tax effects of pro forma adjustments related to the
Basis Acquisition.
(k) To reflect issuance of Valero Common Stock in exchange for the outstanding
shares of Basis.

PRO FORMA MERGER ADJUSTMENTS

(l) To reflect the redemption of the remaining shares of mandatorily
redeemable preferred stock, the payment of a $210 million cash dividend to
Valero and bank borrowings required to fund such dividend and an increase
in operating cash balances to a $10 million level.
(m) To reflect the refunding of $98.5 million of Industrial Revenue Bonds
("IRBs") of New Valero. In connection therewith, New Valero anticipates
recording an extraordinary net of tax charge of $4 million. The loss
includes $3 million of unamortized issue costs and a $3 million premium
paid to redeem the IRBs, net of related income taxes. New Valero
transaction costs associated with the new issue will be $1 million.
(n) To recognize sales from New Valero to the Natural Gas Business previously
eliminated in consolidation.
(o) To adjust historical costs and expenses to reflect the allocation of
corporate assets and liabilities between Valero and New Valero in
accordance with the Distribution Agreement.
(p) To reduce interest expense and preferred stock dividends resulting from
the refunding and reissuance of the IRBs of New Valero and the redemption
of the mandatorily redeemable preferred stock, respectively. A 1/8%
change in the variable interest rate associated with the IRBs of New
Valero would have a $.1 million effect on interest expense.
(q) To reflect interest expense on borrowings under the new bank credit line
of New Valero. A 1/8% change in the variable interest rate associated with
such borrowings under the new bank credit line would have a $.2 million
effect on interest expense.
(r) To reflect the income tax effects of the pro forma Merger adjustments.
(s) To reflect the conversion of Valero convertible preferred stock and
exercise of stock options in connection with the Distribution and Merger.

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TERMS OF THE DISTRIBUTION AGREEMENT
AND THE OTHER ANCILLARY AGREEMENTS

For the purpose of effecting the Distribution and governing certain of the
relationships between Valero and New Valero after the Distribution, Valero and
New Valero will enter into the various agreements described in the New Valero
Prospectus. These agreements include the Distribution Agreement, the Tax
Sharing Agreement among Valero, New Valero and PG&E Corp. (the "Tax Sharing
Agreement"), and the Employee Benefits Agreement between Valero and New Valero
(the "Employee Benefits Agreement", and collectively, the "Ancillary
Agreements"). For a discussion of these agreements, see "AGREEMENTS BETWEEN
VALERO AND NEW VALERO" contained in the New Valero Prospectus. The Ancillary
Agreements summarized therein have been filed as exhibits to New Valero's
Registration Statement, and the Distribution Agreement is Appendix B to this
Proxy Statement-Prospectus.

THE MERGER AGREEMENT

This section of the Proxy Statement-Prospectus describes certain aspects of
the proposed Merger. To the extent that it relates to the Merger Agreement,
the following description does not purport to be complete and is qualified in
its entirety by reference to the Merger Agreement, which is attached as
Appendix A to this Proxy Statement-Prospectus and is incorporated herein by
reference. All stockholders are urged to read the Merger Agreement in its
entirety.

TERMS OF THE MERGER

At the Effective Time, Valero and PG&E Corp. will consummate the Merger
whereby PG&E Acquisition will merge with and into Valero and the separate
corporate existence of PG&E Acquisition will thereupon cease. Valero will be
the surviving corporation (the "Surviving Corporation"), will be a wholly-
owned subsidiary of PG&E Corp. and will continue to be governed by the laws of
the State of Delaware. The name of the Surviving Corporation will be "PG&E Gas
Transmission, Texas, Co."

Certificate of Incorporation and By-laws. The Merger Agreement provides that
the Certificate of Incorporation and the By-Laws of Valero in effect at the
Effective Time will continue as the Certificate of Incorporation and the By-
Laws of the Surviving Corporation, except that the Certificate of
Incorporation will be amended as set forth in Annex G to the Merger Agreement.

Directors and Officers. The Merger Agreement provides that the directors and
officers of PG&E Acquisition at the Effective Time will be the directors and
officers of the Surviving Corporation until the earlier of their resignation
or removal or until their respective successors are duly elected and
qualified.

Conversion of Valero Common Stock. Pursuant to the Merger Agreement, at the
Effective Time each share of Valero Common Stock issued and outstanding
immediately prior to the Effective Time (other than shares held by PG&E Corp.,
Valero or by certain subsidiaries of PG&E Corp. or Valero) will be converted
at the Effective Time into the right to receive that number (the "Per Share
Merger Consideration") of duly authorized, validly issued, fully paid and
nonassessable shares of PG&E Corp. Common Stock equal to the quotient, rounded
to the nearest thousandth, or if there is no nearest thousandth, the next
higher thousandth, of (x) the quotient of (A) $722,500,000 (increased by the
total amount of cash paid to Valero between January 31, 1997 and the Closing
(as defined below) in order to exercise options granted by Valero to purchase
shares of Valero Common Stock (the "Valero Options"), plus an amount equal to
the total exercise price of any unexercised Valero Options and any unexercised
stock appreciation rights, but reduced by the total cash amount paid by Valero
and its subsidiaries included in the Natural Gas Business (the "Retained
Companies") between December 31, 1996 and the Closing in settlement of any
stock appreciation rights, Valero Options or performance shares, except to the
extent such amounts have been recorded as accrued liabilities on the 1996
balance sheet included in the financial statements of the Retained Companies)
divided by (B) the sum of the number of shares of Valero Common Stock issued
and outstanding immediately prior to the Effective Time (including shares
issued pursuant to the conversion of Valero Convertible Preferred Stock) plus
the number of performance shares (not otherwise

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<PAGE>

reflected in the number of outstanding shares of Valero Common Stock), the
number of shares subject to unexercised Valero Options and the number of any
accompanying stock appreciation rights at such time, divided by (y) the Market
Price (as defined below) of PG&E Corp. Common Stock on the Closing Date. The
"Market Price" of PG&E Corp. Common Stock on any date means the average of the
daily closing prices per share of PG&E Corp. Common Stock as reported on the
NYSE Composite Tape on each of the last 15 consecutive full NYSE trading days
(the "Averaging Period") ending on and including the second trading day prior
to such date; provided that if the Board of Directors of PG&E Corp. declares a
dividend on the outstanding shares of PG&E Corp. Common Stock with an ex-
dividend date (based on "regular way" trading on the NYSE of shares of PG&E
Corp. Common Stock) that occurs during the Averaging Period, then for purposes
of computing the Market Price, appropriate adjustments will be made.

In the event that the Market Price of PG&E Corp. Common Stock on the Closing
Date is less than $19.125 (the "Minimum Price") or greater than $25.875 (the
"Maximum Price"), then solely for the purposes of calculating the Per Share
Merger Consideration, the Market Price of PG&E Corp. Common Stock on the
Closing Date will be deemed to be the Minimum Price or the Maximum Price, as
the case may be. If since January 31, 1997 there has occurred any event or
PG&E Corp. has uncovered any information that would reasonably be expected to
result in an adverse impact on the Natural Gas Business in excess of $50
million, then the $722,500,000 amount set forth above shall be reduced by an
amount equal to the amount by which such adverse impact exceeds $50 million;
provided, however, that in no event shall such reduction exceed $50 million in
the aggregate.

Stock Options. Each Valero Option which is outstanding and unexercised
immediately prior to the Effective Time and after the Distribution shall cease
to represent a right to acquire shares of Valero Common Stock and shall be
converted automatically into an option (not intended to qualify under section
422 of the Code) to purchase shares of PG&E Corp. Common Stock in an amount
and at an exercise price determined as follows: (a) the number of shares of
PG&E Corp. Common Stock to be subject to the new option shall be equal to the
product of (i) the sum of (A) the number of shares of Valero Common Stock
subject to the original option and (B) the number of stock appreciation rights
accompanying the original option and (ii) the Per Share Merger Consideration;
provided that any fractional shares of PG&E Corp. Common Stock resulting from
such multiplication shall be rounded up to the nearest share; and (b) the
exercise price per share of PG&E Corp. Common Stock under the new option shall
be equal to the exercise price per share of Valero Common Stock or stock
appreciation right, as the case may be, under the original option divided by
the Per Share Merger Consideration; provided that such exercise price shall be
rounded down to the nearest cent. Valero is required to take all action
necessary so that each Valero Option held by a current or former employee of
Valero that is outstanding after the Distribution shall be adjusted to take
into account the impact of the Distribution upon the capitalization of Valero.
Each Valero Option held by a current or former employee of New Valero will be
converted as of the Distribution into an option to acquire New Valero Common
Stock. See "AGREEMENTS BETWEEN VALERO AND NEW VALERO--Employee Benefits
Agreement" in the accompanying New Valero Prospectus.

The Merger Agreement also provides that each share of capital stock of PG&E
Acquisition issued and outstanding immediately prior to the Effective Time
will be converted into and become one fully paid and nonassessable share of
Common Stock, par value $0.01 per share, of the Surviving Corporation.

Fractional Shares. No fractional shares of PG&E Corp. Common Stock will be
issued in the Merger. Instead, the Merger Agreement provides that each holder
of Valero Common Stock who would otherwise have been entitled to receive a
fraction of a share of PG&E Corp. Common Stock will be entitled to receive, in
lieu thereof, cash (without interest) in an amount equal to the fraction of a
share to which such holder would otherwise have been entitled, multiplied by
the Market Price of PG&E Corp. Common Stock on the Closing Date, without
giving effect to the Maximum Price or the Minimum Price, less the amount of
any withholding taxes which may be required thereon. The Merger Agreement
provides that for purposes of paying such cash in lieu of fractional shares,
all certificates formerly representing shares of Valero Common Stock ("Old
Certificates") surrendered for exchange by a holder on the same letter of
transmittal will be aggregated, and no such holder will receive cash in lieu
of fractional shares in an amount equal to or greater than the value of one
full share of PG&E Corp. Common Stock with respect to all such Old
Certificates surrendered.

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<PAGE>

Per Share Merger Consideration. The following table sets forth the aggregate
number of shares of PG&E Corp. Common Stock that may be issuable in the Merger
and the Per Share Merger Consideration if the Market Price of PG&E Corp.
Common Stock is at or above the Maximum Price, at or below the Minimum Price
and at a median price per share of PG&E Corp. Common Stock of $22.50, based on
the following assumptions:

. All outstanding shares of Valero Convertible Preferred Stock have been
converted into Valero Common Stock.

. All outstanding Valero Options have been exercised in full prior to
Distribution on a "cashless" basis, i.e., optionholders have used shares
of Valero Common Stock to pay the option exercise price and any income
taxes.

. The total number of shares of Valero Common Stock that are outstanding at
the time of the Merger is approximately 55,900,000 (which was the
approximate number on May 2, 1997, adjusted to reflect (1) conversion of
the Valero Convertible Preferred Stock, and (2) exercise of the Valero
Options).

. Valero has paid approximately $300,000 to settle Valero stock appreciation
rights.

<TABLE>
<CAPTION>
AGGREGATE NUMBER OF
SHARES OF PG&E CORP.
COMMON STOCK PER SHARE MERGER
MARKET PRICE OF PG&E CORP. COMMON STOCK ISSUABLE IN MERGER CONSIDERATION
- --------------------------------------- -------------------- ----------------
<S> <C> <C>
$25.875 or above......................... 27,894,100 .499
$22.50................................... 32,086,600 .574
$19.125 or below......................... 37,788,400 .676
</TABLE>

Based on the foregoing assumptions and the Market Price of PG&E Corp. Common
Stock on May 2, 1997 of $23.550, the Per Share Merger Consideration would be
approximately .549.

Beginning on May 14, 1997, Valero stockholders can obtain the Market Price
of PG&E Corp. Common Stock for the most recent Averaging Period by calling
PG&E Corp.'s Shareholder Services at (800) 333-4964.

EFFECTIVE TIME; CLOSING

The Merger will become effective, and the Effective Time will occur, on the
date and at the time that a certificate of merger (a "Certificate of Merger")
is filed with the Secretary of State of the State of Delaware, or at such
later date and time as the parties may agree and as may be specified in the
Certificate of Merger. The Merger Agreement provides that the closing of the
Merger (the "Closing") will take place on the first business day on which all
the conditions specified therein are fulfilled or waived, but no earlier than
10 business days following the Annual Meeting, or on such other date as Valero
and PG&E Corp. may agree. The date upon which the Closing will occur is herein
called the "Closing Date." Valero and PG&E Corp. expect that the Closing will
occur after the Annual Meeting, upon receipt of FERC approval.

CONDUCT OF BUSINESS PRIOR TO EFFECTIVE TIME; CERTAIN COVENANTS

Operational Covenants. The Merger Agreement provides that, during the period
from December 31, 1996 until the Effective Time, except for the Distribution
and the other transactions expressly contemplated by the Merger Agreement and
the Ancillary Agreements, or to the extent that PG&E Corp. otherwise consents
in writing, Valero and each of its subsidiaries will conduct the Natural Gas
Business in the ordinary course, and Valero will use reasonable efforts to
preserve intact the present business organization, maintain insurance
policies, keep available the services of present officers and employees
engaged primarily in the Natural Gas Business and to preserve the
relationships with key customers, suppliers and others having business
dealings with the Natural Gas Business.

The Merger Agreement also includes limitations, prohibitions, covenants and
other provisions relating to Valero's and its subsidiaries' conduct of
business during this period with respect to (a) the payment of dividends,

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<PAGE>

(b) splits, combinations or reclassifications of any of its capital stock or
the issuance of any of its capital stock, (c) the repurchase, redemption or
other acquisition of any shares of capital stock or debt, (d) issuance,
transfer, sale or disposition of any shares of capital stock, (e) indebtedness
for borrowed money or guarantees, (f) amendments of their certificates of
incorporation or by-laws, or other organizational documents, (g) the
acquisition of any business or assets that would be part of the Natural Gas
Business, (h) the sale, lease, license, encumbrance or other disposition of
any assets of the Natural Gas Business, (i) employee benefit plans, (j) grants
of stock options, performance shares, restricted stock or other stock-based
awards, (k) increases in compensation and grants of severance or termination
pay, (l) changes in accounting principles, practices or procedures, (m) liens
on the assets of the Natural Gas Business, and (n) any action which would
disqualify the Distribution from being treated as a "reorganization" within
the meaning of Section 368(a)(1)(D) of the Code and from being treated as a
tax-free distribution within the meaning of Section 355 or 361(c) of the Code
or the Merger from being treated as a "reorganization" within the meaning of
Section 368(a)(1)(B) of the Code, (o) tax matters, (p) maintenance and repair
of property, (q) the redemption or conversion of the Valero Convertible
Preferred Stock and the Valero mandatorily redeemable preferred stock
(collectively, the "Valero Preferred Stock"), (r) repayment of certain
outstanding borrowings, and (s) the separate operation of and accounting for
the Natural Gas Business and Refining Business.

Covenants of PG&E Corp. The Merger Agreement provides that neither PG&E
Corp. nor any of its subsidiaries will take any action prior to the Effective
Time which would disqualify the Distribution from being treated as a
"reorganization" within the meaning of Section 368(a)(1)(D) of the Code and
from being treated as a tax-free distribution within the meaning of Section
355 of the Code, or the Merger from being treated as a "reorganization" within
the meaning of Section 368(a)(1)(B) of the Code. PG&E Corp. has also agreed in
the Merger Agreement that no later than six months after the Effective Time,
it will cease using certain "Valero' names and marks. In addition, for a
period of at least five years following the Effective Time, PG&E Corp. will
cause one or more of its subsidiaries to have a substantial corporate presence
in San Antonio, Texas, or its metropolitan area by maintaining offices and
employing not less than 340 employees on average over such five-year period.

The Merger Agreement also requires that PG&E Corp. for a period of two (2)
years after the Merger: (i) take all action necessary to extend coverage under
PG&E Corp.'s Pacific Gas Transmission Company subsidiary ("PGT") pension plan
to those individuals employed by Valero immediately after the Distribution and
immediately before the Merger (all such individuals, "Continuing Employees")
who were participants in Valero's pension plan immediately before the
Distribution; (ii) provide Continuing Employees with welfare benefits
(including retiree medical benefits) no less favorable than those provided by
PGT prior to the Effective Time to its other similarly situated employees;
(iii) provide Continuing Employees with severance pay and other employee
benefits that are no less favorable in the aggregate than those provided by
Valero prior to the Distribution (other than any equity-based benefits
including, without limitation, stock options); and (iv) waive any limitations
regarding pre-existing conditions under any welfare or other employee benefit
plan maintained by PG&E Corp. or PGT. From and after the Effective Time, with
respect to Continuing Employees who do not elect in connection with the
Distribution to receive a distribution of the balance of their accounts under
Valero's thrift plan or to transfer their accounts to New Valero's thrift
plan, PG&E Corp. will take all actions necessary to permit such Continuing
Employees to transfer their account balances in the Valero thrift plan to a
thrift plan of PG&E Corp. or an affiliate. For all purposes under all
compensation and benefit plans and policies applicable to employees of PG&E
Corp., PG&E Corp. will treat all service by Continuing Employees with Valero
prior to the Merger as service with PG&E Corp., except to the extent such
treatment would result in duplication of benefits. PG&E Corp. and New Valero
will use their best efforts to permit all employees of Valero to participate
in New Valero's flex plan through December 31, 1997, provided that Valero will
reimburse New Valero for the costs of such participations. Prior to the
Effective Time, Valero and PG&E Corp. will use their best efforts to
collaborate with respect to the design, implementation and administration of
an early retirement program.

Other Actions. The Merger Agreement provides that, subject to the
termination rights of the parties thereto as described below under "--
Termination", Valero and PG&E Corp. and their respective subsidiaries will use
reasonable best efforts not to take any action that would, or that could
reasonably be expected to, result in any of

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<PAGE>

the conditions to the Merger not being satisfied or materially impair the
ability of Valero to consummate the Distribution in accordance with the terms
of the Merger Agreement and the Ancillary Agreements or the ability of Valero,
PG&E Corp. and PG&E Acquisition to consummate the Merger in accordance with
the terms of the Merger Agreement or that would, or that reasonably could be
expected to, materially delay such consummation.

Acquisition Proposals; Board Recommendation. The Merger Agreement provides
that Valero will, and will direct and use reasonable efforts to cause its
directors, officers, employees, representatives and agents to, immediately
cease any discussions or negotiations with any parties that may be ongoing
with respect to an Acquisition Proposal (as defined below). Pursuant to the
Merger Agreement, Valero will not, nor will it permit any of its subsidiaries
to, nor will it authorize or permit any of its directors, officers, or
employees or any investment banker, financial advisor, attorney, accountant or
other representative retained by it or any of its subsidiaries to, directly or
indirectly, (i) solicit, initiate or knowingly encourage (including by way of
furnishing confidential information), or take any other action knowingly to
facilitate, any inquiries or the making of any proposal which constitutes, or
may reasonably be expected to lead to, any Acquisition Proposal or (ii)
participate in any discussions or negotiations regarding any Acquisition
Proposal; provided, however, that if the Valero Board determines in good
faith, after consultation with outside counsel, that it is necessary to do so
in order to comply with its fiduciary duties to Valero stockholders under
applicable law, Valero may, in response to an Acquisition Proposal that was
not solicited subsequent to the date of the Merger Agreement, and subject to
compliance with the terms of the Merger Agreement, (x) furnish information to
any person pursuant to a customary confidentiality agreement (as determined by
Valero after consultation with its outside counsel) and (y) participate in
discussions or negotiations regarding such Acquisition Proposal. "Acquisition
Proposal" means any inquiry, proposal or offer from any person with respect to
either (A) a merger, acquisition, consolidation or similar transaction
involving, or any purchase of, all or substantially all of the assets or more
than 50% of the voting securities of Valero or any subsidiary (excluding any
such transaction relating solely to the assets or voting securities of New
Valero and its subsidiaries) or (B) an acquisition or similar transaction
involving the purchase of a substantial portion of the assets of or a
substantial equity interest in the Natural Gas Business.

Except as described below, the Merger Agreement provides that neither the
Valero Board nor any committee thereof will (i) withdraw or modify, or propose
publicly to withdraw or modify, in a manner adverse to PG&E Corp., its
approval or recommendation of the Merger or the Merger Agreement, (ii) approve
or recommend, or propose publicly to approve or recommend, any Acquisition
Proposal or (iii) cause Valero to enter into any letter of intent, agreement
in principle, acquisition agreement or other similar agreement (each, an
"Acquisition Agreement") related to any Acquisition Proposal. Notwithstanding
the foregoing, in the event that the Valero Board determines in good faith,
after consultation with outside counsel, that it is necessary to do so in
order to comply with its fiduciary duties to Valero stockholders under
applicable law, the Valero Board may (x) withdraw or modify its approval or
recommendation of the Merger and the Merger Agreement or (y) approve or
recommend a Superior Proposal (as defined below) or (z) terminate the Merger
Agreement (and concurrently with or after such termination, if it so chooses,
cause Valero to enter into any Acquisition Agreement with respect to any
Superior Proposal), but in each case only at a time that is following PG&E
Corp.'s receipt of written notice advising PG&E Corp. that the Valero Board
has received a Superior Proposal, specifying the material terms and conditions
of such Superior Proposal and identifying the person making such Superior
Proposal. A "Superior Proposal" means any bona fide Acquisition Proposal made
by a third party on terms which the Valero Board determines in its good faith
judgment to be more favorable to Valero stockholders than the Merger and the
other transactions contemplated by the Merger Agreement.

The Merger Agreement provides that Valero will promptly advise PG&E Corp.
orally and in writing of any request for confidential information in
connection with an Acquisition Proposal or of any Acquisition Proposal. In
addition, Valero will keep PG&E Corp. reasonably informed of the status of and
material information concerning (including amendments or proposed amendments)
any Acquisition Proposal.

The Merger Agreement provides that nothing contained therein will prohibit
Valero from making any disclosure to Valero stockholders if, in the good faith
judgment of the Valero Board, after consultation with outside counsel, failure
so to disclose would be inconsistent with applicable law.

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<PAGE>

Required Filings. The Merger Agreement provides that, prior to termination
thereof, no amendment or supplement to the PG&E Corp. Form S-4 Registration
Statement or the New Valero Registration Statement ("Registration Statements")
or this Proxy Statement-Prospectus will be filed with the Securities and
Exchange Commission (the "SEC") by Valero or PG&E Corp. without giving the
other party and its counsel a reasonable opportunity to review and comment on
such filings prior to the filing thereof. Each of Valero and PG&E Corp. has
agreed in the Merger Agreement to use its reasonable best efforts, (a) after
consultation with the other, to respond promptly to any comments by the SEC
with respect to such filings, including preparing and filing any amendments or
supplements thereto, and to have all such filings declared effective or
cleared by the SEC as promptly as practicable and (b) to obtain all necessary
state securities law or "blue sky" permits and approvals required to carry out
the transactions contemplated by the Merger Agreement and the Ancillary
Agreements, and each of PG&E Corp. and Valero has agreed to furnish all
information as may be reasonably requested in connection with any such action.

Pursuant to the Merger Agreement, each of Valero and PG&E Corp. is required
to make applications or filings under the HSR Act, under Section 203 of the
Federal Power Act and under applicable Canadian law; provided that PG&E Corp.
is not required in order to obtain any approval or authorization to dispose of
any of its assets or any assets of the Natural Gas Business having an
aggregate book value in excess of $100 million, or to incur any other burdens
which would impair the value of its investment in Valero or the Natural Gas
Business, nor shall Valero make any such dispositions or incur such burdens
without the consent of PG&E Corp.

CONDITIONS

The respective obligations of Valero, PG&E Corp. and PG&E Acquisition to
consummate the Merger are subject to the satisfaction or waiver on or prior to
the Closing Date of a number of conditions, including the following: (a)
approval by Valero stockholders of the Merger, (b) the approval for listing on
the NYSE, subject to official notice of issuance, of the PG&E Corp. Common
Stock to be issued by PG&E Corp. pursuant to the Merger, (c) expiration or
termination of the waiting period applicable to the Merger under the HSR Act,
(d) no temporary restraining order, preliminary or permanent injunction or
other order issued by any court of competent jurisdiction or other legal
restraint or prohibition being in effect that prohibits consummation of the
transactions contemplated by the Merger Agreement or the Ancillary Agreements,
(e) the effectiveness under the Securities Act of 1933, as amended (the
"Securities Act") or the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), as applicable, of the Registration Statements and no stop
order suspending the effectiveness of the Registration Statements being issued
and no proceedings for that purpose being initiated or threatened by the SEC,
(f) the consummation of the Distribution, the prepayment of the Valero VESOP
notes, and the prepayment of the Valero 10.58% senior notes or the consent of
the senior noteholders to the Distribution and the Merger, and (g) the
approval by the FERC and any applicable Canadian authority of the Merger.

In addition, the obligation of Valero to consummate the Merger is also
subject to the satisfaction or waiver by Valero on or prior to the Closing
Date of each of the following conditions: (a) certain representations and
warranties of PG&E Corp. and PG&E Acquisition set forth in the Merger
Agreement and the Ancillary Agreements (i) that are qualified as to
materiality being true and correct and (ii) that are not qualified as to
materiality being true and correct in all material respects, in each case, as
of the date of the Merger Agreement and as of the Closing Date as though made
on and as of the Closing Date (with certain exceptions set forth in the Merger
Agreement), and receipt of an officer's certificate to such effect; (b) the
obligations required to be performed by PG&E Corp. and PG&E Acquisition under
the Merger Agreement and the Ancillary Agreements at or prior to the Closing
Date having been performed in all material respects and receipt of an
officer's certificate to such effect; (c) the receipt by Valero of the opinion
of Wachtell, Lipton, Rosen & Katz, special counsel to Valero, dated the
Closing Date, to the effect that (i) the Distribution qualifies as a
transaction described in Sections 355(a), 355(c)(1) and 368(a)(1)(D) of the
Code in which no gain or loss shall be recognized to Valero and (ii) the
Merger qualifies as a "reorganization" within the meaning of Section
368(a)(1)(B) of the Code and (d) all consents, approvals and authorizations
required to be made or obtained prior to the Closing Date with or from any
governmental entity or third party in connection with the execution, delivery
and performance of the

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Merger Agreement or the Ancillary Agreements having been made or obtained,
except where the failure to make or obtain the same would not, individually or
in the aggregate, have a material adverse effect on the Refining Business
taken as a whole.

In addition, the obligations of PG&E Corp. and PG&E Acquisition to
consummate the Merger are subject to the satisfaction or waiver by PG&E Corp.
on or prior to the Closing Date of each of the following conditions: (a)
certain representations and warranties of Valero set forth in the Merger
Agreement and the Ancillary Agreements (i) that are qualified as to
materiality being true and correct and (ii) that are not qualified as to
materiality being true and correct in all material respects, in each case, as
of the date of the Merger Agreement and as of the Closing Date as though made
on and as of the Closing Date (with certain exceptions set forth in the Merger
Agreement), and receipt of an officer's certificate to such effect; (b) the
obligations required to be performed by Valero and New Valero under the Merger
Agreement and the Ancillary Agreements at or prior to the Closing Date having
been performed in all material respects and receipt of an officer's
certificate to such effect; (c) the receipt by PG&E Corp. of the opinion of
Orrick, Herrington & Sutcliffe LLP, counsel to PG&E Corp., dated the Closing
Date, to the effect that the Merger qualifies as a "reorganization" within the
meaning of Section 368(a)(1)(B) of the Code and the opinion of Wachtell,
Lipton, Rosen & Katz, special counsel to Valero, dated the Closing Date, to
the effect that the Distribution qualifies as a transaction described in
Sections 355(a), 355(c)(1), and 368(a)(1)(D) of the Code in which no gain or
loss shall be recognized to Valero and (d) all consents, approvals and
authorizations required to be made or obtained prior to the Closing Date with
or from any governmental entity or third party in connection with the
execution, delivery and performance of the Merger Agreement or the Ancillary
Agreements having been made or obtained, except where the failure to make or
obtain the same would not, individually or in the aggregate, have a material
adverse effect on the Retained Companies, taken as a whole, or on PG&E Corp.
and its subsidiaries, taken as a whole; and (e) Valero having redeemed or
converted all issued and outstanding shares of Valero Preferred Stock.

REPRESENTATIONS AND WARRANTIES

The Merger Agreement contains various representations and warranties of
Valero as to: (a) the corporate organization, standing and power of Valero and
its subsidiaries, (b) Valero's capitalization, (c) the authorization of the
Merger Agreement and the Ancillary Agreements, (d) noncontravention of laws
and agreements and the absence of the need (except as specified) for
governmental or third party consents, (e) the accuracy of Valero's financial
statements and filings with the SEC, (f) the accuracy of information to be
supplied by Valero for inclusion in this Proxy Statement-Prospectus, and in
certain other filings with the SEC, (g) the absence of certain material events
and changes, (h) pending or threatened litigation, (i) Valero's and its
subsidiaries' compliance with applicable laws, (j) brokers and finders
employed by Valero, (k) certain matters relating to the Employee Retirement
Income Security Act of 1974, as amended ("ERISA") and certain employment and
labor relations matters, (l) the Retained Companies' title to their respective
assets, (m) certain matters with respect to tax filings, (n) the fact that
neither Valero nor any of its subsidiaries is a "holding company" as such term
is defined in the Public Utility Holding Company Act of 1935, as amended and
(o) various other matters relating to Valero, its subsidiaries and the Natural
Gas Business.

The Merger Agreement also includes representations and warranties by PG&E
Corp. and PG&E Acquisition as to: (a) the corporate organization, standing and
power of PG&E Corp. and PG&E Acquisition, (b) PG&E Corp.'s capital structure,
(c) the authorization of the Merger Agreement and the Ancillary Agreements to
which PG&E Corp. and PG&E Acquisition are parties, (d) noncontravention of
laws and agreements and the absence of the need (except as specified) for
governmental or third party consents, (e) the accuracy of PG&E Corp.'s
financial statements and filings with the SEC, (f) the accuracy of information
to be supplied by PG&E Corp. for inclusion in this Proxy Statement-Prospectus,
(g) the absence of certain material events and changes, (h) pending or
threatened litigation, (i) PG&E Corp.'s compliance with applicable laws, (j)
the absence of any required action by the stockholders of PG&E Corp. to
approve the Merger Agreement, the Merger or any Ancillary Agreements, (k) PG&E
Corp.'s exemption from regulation as a public utility holding company, and (l)
various other matters relating to PG&E Corp. and PG&E Acquisition.

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The representations, warranties and agreements in the Merger Agreement
expire at the Effective Time or upon termination of the Merger Agreement,
except that, in the event of the consummation of the Merger, certain
agreements with respect to (a) the Merger and the conversion and cancellation
of the shares of Valero Common Stock in the Merger, (b) the allocation of
certain income tax deductions, (c) the limitation on PG&E Corp.'s use of
Valero names and marks, (d) employees and employee benefit plans, and (e)
certain post-Closing matters, survive the Effective Time.

WAIVER AND AMENDMENT

The Merger Agreement provides that the conditions to each party's obligation
to consummate the Merger are for the sole benefit of such party and may be
waived by such party in whole or in part to the extent permitted by applicable
law. In addition, subject to applicable law, the parties to the Merger
Agreement may amend the Merger Agreement at any time prior to the Effective
Time by written agreement, whether before or after the Annual Meeting.

TERMINATION

The Merger Agreement may be terminated and the Merger may be abandoned at
any time prior to the Effective Time, before or after the approval by the
stockholders of Valero, (a) by the mutual written consent of Valero and PG&E
Corp.; (b) by either Valero or PG&E Corp. if (i) the Merger has not been
consummated by July 31, 1997 (unless HSR or FERC approval has not been
received in which case such date is postponed until 10 business days after
receipt of such approval, but in no event later than December 31, 1997) or
(ii) at the Annual Meeting or at any adjournment thereof, the requisite
approvals of Valero stockholders have not been obtained; (c) by Valero, (i) if
PG&E Corp. or PG&E Acquisition has breached in any material respect any of
their respective covenants, representations, warranties, or agreements
contained in the Merger Agreement or any Ancillary Agreement, which breach is
not cured within 30 days following written notice of such breach, or (ii) as
permitted by the Merger Agreement in connection with a Superior Proposal as
described above under the caption "--Acquisition Proposals; Board
Recommendation"; (d) by PG&E Corp. (i) if Valero or New Valero has breached in
any material respect any of the covenants, representations, warranties or
agreements contained in the Merger Agreement or any Ancillary Agreement, which
breach has not been cured within 30 days following written notice of such
breach, (ii) if the Valero Board has exercised certain rights under the Merger
Agreement in connection with a Superior Proposal as described above under the
caption "--Acquisition Proposals; Board Recommendation"; or (iii) if (A) (x)
there has occurred since the date of the Merger Agreement any event, change,
effect or state of facts (collectively "Events"), other than Events which
result from any action by PG&E Corp. or any of its subsidiaries, affiliates,
officers, employees, agents or representatives or changes in general economic,
financial, market or business conditions, or (y) PG&E Corp. in its ongoing due
diligence investigation uncovers information (collectively, "Information")
that, as of the date of the Merger Agreement, has not been previously
disclosed in any Valero SEC filings or has not been disclosed by Valero to
PG&E Corp. on or prior to the date of the Merger Agreement and (B) such Events
and Information in the aggregate would reasonably be expected to result in an
adverse impact on the Natural Gas Business of more than $100 million, which
amount shall be net of income tax effects and shall include the present value
of any reasonably projected costs, expenses or liabilities or losses of
projected business revenue caused by the occurrence of such Events or
attributable to such Information.

In the event of termination of the Merger Agreement and the abandonment of
the Merger pursuant to the Merger Agreement, no party to the Merger Agreement
or any Ancillary Agreements (or any of its directors or officers) will have
any liability or further obligation to any other party, except with respect to
certain representations, warranties and covenants which survive such
termination, and except that nothing in the Merger Agreement will relieve any
party from liability for any material and willful breach of the Merger
Agreement or any Ancillary Agreements.

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TERMINATION FEE; EXPENSES

Valero has agreed to pay PG&E Corp. $37.5 million (the "Termination Fee"),
if (a) the Board of Directors of Valero or any committee thereof (i) withdraws
or modifies or proposes publicly to withdraw or modify, in a manner adverse to
PG&E Corp., its approval or recommendation of the Merger or the Merger
Agreement, (ii) approves or recommends, or proposes publicly to approve or
recommend, any Acquisition Proposal or (iii) causes Valero to enter into any
Acquisition Agreement related to any Acquisition Proposal; (b) prior to the
termination of the Merger Agreement, a bona fide Acquisition Proposal was
commenced, publicly proposed, publicly disclosed or, in the case described in
clause (c)(i) below, communicated to the Valero Board (or the willingness of
any person to make such an Acquisition Proposal was publicly disclosed or, in
the case described in clause (c)(i) below, communicated to the Valero Board);
and (c)(i) the Valero Board, in accordance with the provisions of the Merger
Agreement, has withdrawn or modified its approval or recommendation of the
Merger Agreement or the Merger in a manner materially adverse to PG&E Corp.,
approved or recommended such Acquisition Proposal, caused Valero to enter into
an Acquisition Agreement with respect to an Acquisition Proposal or terminated
the Merger Agreement or (ii) the requisite approval of Valero stockholders for
the Distribution or the Merger was not obtained at the Annual Meeting and,
within twelve months following the date of the Annual Meeting (or following
the date of termination of the Merger Agreement, if the Annual Meeting was not
held prior to such termination), an Acquisition Proposal has been consummated
or Valero has entered into a definitive agreement with respect to any
Acquisition Proposal, except that, the Termination Fee will not be payable if,
at the time of any action described in clause (c)(i) above or the Annual
Meeting (or on the date of the termination of the Merger Agreement, if the
Annual Meeting was not held prior to such termination), PG&E Corp. was in
material breach of its covenants or agreements contained in the Merger
Agreement.

All out-of-pocket fees and expenses incurred by Valero and its subsidiaries
in connection with efforts to consummate any of the transactions contemplated
by the Merger Agreement or the Ancillary Agreements shall be paid by Valero;
provided that the amount so paid by Valero shall not exceed $30 million, plus
the amount of any redemption or prepayment penalty to be paid with respect to
the Valero 10.58% senior notes under the note purchase agreement, and any
amount in excess of such aggregate amount shall be paid by New Valero.

CERTAIN REGULATORY MATTERS

Under the HSR Act, certain transactions, including the Merger, may not be
consummated unless certain waiting period requirements have been satisfied. On
February 14, 1997, Valero and PG&E Corp. filed Premerger Notification and
Report Forms pursuant to the HSR Act with the DOJ and the FTC. On February 26,
1997, Valero and PG&E Corp. received early termination of the waiting period.
At any time before or after the Effective Time, the FTC, the DOJ or others
could take action under the antitrust laws with respect to the Merger,
including seeking to enjoin the consummation of the Merger, to rescind the
Merger or to require divestiture of substantial assets of Valero or PG&E Corp.
There can be no assurance that a challenge to the Merger on antitrust grounds
will not be made or, if such a challenge is made, that it would not be
successful.

In addition, the obligation of each of Valero, PG&E Corp. and PG&E
Acquisition to consummate the Merger is conditioned upon receipt of advance
agreements or approvals of the FERC under Section 203 of the Federal Power
Act, which provides that no public utility may sell or otherwise dispose of
its jurisdictional facilities or, directly or indirectly, merge or consolidate
such facilities with those of any other person or acquire any security of any
other public utility without first having obtained authorization from the
FERC. Under Section 203 of the Federal Power Act, the FERC will approve a
merger if it finds such merger "consistent with the public interest." PG&E
Corp. and Valero filed a joint application with the FERC on March 24, 1997.

ACCOUNTING TREATMENT

The Merger will be accounted for by PG&E Corp. as a purchase for financial
accounting purposes in accordance with generally accepted accounting
principles. PG&E Corp. will be treated as the acquiror of the Natural Gas
Business for purposes of preparing the PG&E Corp. consolidated financial
statements and

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PG&E Corp. will establish a new accounting basis for the Natural Gas
Business's assets and liabilities (as adjusted to exclude the assets and
liabilities of New Valero) based upon the fair values thereof and the purchase
price, including the costs of the Merger. PG&E Corp. will record as goodwill
the excess, if any, of the purchase price over such fair values. A final
determination of required purchase accounting adjustments, including the
allocation of the purchase price to the assets acquired and liabilities
assumed based on their respective fair values, has not yet been made.
Accordingly, the purchase accounting adjustments made in connection with the
development of the unaudited pro forma condensed combined financial
information of PG&E Corp. appearing elsewhere in this Proxy Statement-
Prospectus are preliminary and have been made solely for purposes of
developing such unaudited pro forma condensed combined financial information.
PG&E Corp. will undertake a study to determine the fair value of certain of
Valero's assets and liabilities (as so adjusted) and will make appropriate
purchase accounting adjustments upon completion of that study. For financial
reporting purposes, the results of operations of the Natural Gas Business will
be included in the PG&E Corp. consolidated statement of income following the
Effective Time. The PG&E Corp. financial statements for prior periods will not
be restated as a result of the Merger or related transactions.

New Valero will be deemed to be the successor to Valero for financial
reporting purposes. The historical results of operations of the Natural Gas
Business will be presented as a "discontinued operation" in New Valero's
financial statements subsequent to the Distribution.

RESALE OF PG&E CORP. COMMON STOCK

The shares of PG&E Corp. Common Stock issuable to stockholders of Valero in
connection with the Merger may be traded freely and without restriction by
those stockholders not deemed to be "affiliates" of Valero or PG&E Corp. as
that term is defined in the rules under the Securities Act. An "affiliate" of
a person is generally defined as a person who controls, is controlled by or is
under common control with such person.

Shares of PG&E Corp. Common Stock received by those stockholders of Valero
who are deemed to be "affiliates" of Valero or PG&E Corp. may be resold
without registration as provided for by Rules 144 and 145 under the Securities
Act, or as otherwise permitted under the Securities Act. This Proxy Statement-
Prospectus does not cover any resales of PG&E Corp. Common Stock received by
"affiliates" of Valero or PG&E Corp., or by certain of their family members or
related interests.

Pursuant to the Merger Agreement, Valero has agreed to use its reasonable
best efforts to cause each individual holder of Valero's capital stock deemed
to be an "affiliate" of Valero to enter into a written agreement providing
that such "affiliate" will not sell, pledge, transfer or otherwise dispose of
the shares of PG&E Corp. Common Stock to be received by such person in the
Merger except in compliance with the applicable provisions of the Securities
Act and the rules and regulations thereunder.

SURRENDER OF SHARE CERTIFICATES

VALERO STOCKHOLDERS SHOULD NOT SEND IN THEIR SHARE CERTIFICATES UNTIL AFTER
THE EFFECTIVE TIME AND UNTIL THEY RECEIVE THE LETTER OF TRANSMITTAL FORM AND
INSTRUCTIONS.

The Merger Agreement provides that, as of the Effective Time, PG&E Corp.
will deposit with an exchange agent appointed by PG&E Corp. (the "Exchange
Agent"), certificates ("New Certificates") representing PG&E Corp. Common
Stock in amounts sufficient to allow the Exchange Agent to make all deliveries
of New Certificates that may be required in exchange for certificates formerly
representing shares of Valero Common Stock ("Old Certificates") pursuant to
the Merger Agreement. The Merger Agreement also provides that PG&E Corp. will
provide to the Exchange Agent on a timely basis funds necessary to pay any
cash payable in lieu of fractional shares and funds or other property
necessary to pay or make any dividends or distributions with respect to shares
of PG&E Corp. Common Stock.

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The Merger Agreement provides that as soon as reasonably practicable after
the Effective Time, PG&E Corp. will cause the Exchange Agent to mail or
deliver to each person who was, at the Effective Time, a holder of record of
Valero Common Stock a letter of transmittal containing instructions for use in
effecting the surrender of Old Certificates in exchange for New Certificates
and payments pursuant to the Merger Agreement. Upon surrender to the Exchange
Agent of an Old Certificate for cancellation together with such letter of
transmittal, duly executed and completed in accordance with the instructions
thereto, the holder of such Old Certificate will be entitled to receive in
exchange therefor a New Certificate representing that number of whole shares
of PG&E Corp. Common Stock which such holder has the right to receive pursuant
to the Merger Agreement, a check in the amount of any cash which such holder
is entitled to receive pursuant to the Merger Agreement in lieu of fractional
shares of PG&E Corp. Common Stock, and any dividends or distributions on
shares of PG&E Corp. Common Stock with a record date after the Effective Time,
and the Old Certificate so surrendered will be canceled. No interest will be
paid or will accrue on the amount payable upon surrender of Old Certificates.

Until surrendered as provided in the Merger Agreement, each Old Certificate
will be deemed at any time after the Effective Time to represent only the
right to receive, upon surrender of such Old Certificate, the New Certificate,
cash in lieu of fractional shares of PG&E Corp. Common Stock and any such
dividends and distributions on shares of PG&E Corp. Common Stock as provided
by the Merger Agreement. In the event of a transfer of ownership of Valero
Common Stock that is not registered on the transfer records of Valero, New
Certificates representing the proper number of shares of PG&E Corp. Common
Stock, any cash in lieu of fractional shares and any dividends or
distributions described above may be issued to a person other than the person
in whose name the Old Certificate so surrendered is registered, if such Old
Certificate is properly endorsed or otherwise in proper form for transfer and
the person requesting such issuance pays any transfer or other taxes required
by reason of the issuance of shares of PG&E Corp. Common Stock or establishes
to the satisfaction of PG&E Corp. that such tax has been paid or is not
applicable. Six months after the Effective Time, PG&E Corp. will be entitled
to cause the Exchange Agent to deliver to it any New Certificates, cash or
other property (including any interest thereon) deposited with the Exchange
Agent that are unclaimed by the former stockholders of Valero. Any former
stockholders of Valero who have not theretofore exchanged their Old
Certificates for New Certificates, cash and other property pursuant to the
Merger Agreement will thereafter be entitled to look exclusively to PG&E Corp.
and only as general creditors thereof for the PG&E Corp. Common Stock, cash
and other property to which they become entitled upon exchange of their Old
Certificates pursuant to the Merger Agreement. Notwithstanding the foregoing,
neither the Exchange Agent nor any party to the Merger Agreement will be
liable to any former holder of Valero Common Stock for any amount properly
delivered to a public official pursuant to applicable abandoned property,
escheat or similar laws. PG&E Corp. will pay all charges and expenses,
including those of the Exchange Agent, in connection with the exchange of New
Certificates and cash for Old Certificates as contemplated in the Merger
Agreement.

The Merger Agreement provides that notwithstanding any other provisions of
the Merger Agreement, no dividends or distributions with respect to PG&E Corp.
Common Stock with a record date after the Effective Time will be paid to any
person holding an Old Certificate until such Old Certificate is surrendered
for exchange as provided therein. Subject to the effect of applicable laws,
following surrender of any such Old Certificate by any holder thereof, there
will be paid to the holder of the New Certificate issued in exchange therefor,
without interest, (i) at the time of such surrender, the amount of dividends
or other distributions with a record date after the Effective Time theretofore
payable with respect to the PG&E Corp. Common Stock represented thereby, less
the amount of any withholding taxes which may be required thereon, and (ii) at
the appropriate payment date, the amount of dividends or other distributions
with a record date after the Effective Time but prior to the time of such
surrender and a payment date subsequent to the time of such surrender payable
with respect to the PG&E Corp. Common Stock represented thereby, less the
amount of any withholding taxes which may be required thereon.

All shares of PG&E Corp. Common Stock issued upon surrender for exchange of
Old Certificates, any cash in lieu of fractional shares of PG&E Corp. Common
Stock paid or any dividend or distribution with respect to PG&E Corp. Common
Stock paid or made, in each case pursuant to the provisions of the Merger
Agreement,

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will be deemed to have been issued, paid and made in full satisfaction of all
rights pertaining to the shares of Valero Common Stock theretofore represented
by such Old Certificates, and there will be no further registration of
transfers of the shares of Valero Common Stock which were outstanding
immediately prior to the Effective Time. If, after the Effective Time, Old
Certificates are presented to the Surviving Corporation or the Exchange Agent
for any reason, they will be canceled and exchanged as described above.

The Merger Agreement provides that in the event that any Old Certificate has
been lost, stolen or destroyed, upon the making of an affidavit of that fact
by the person claiming such Old Certificate to be lost, stolen or destroyed
and, if required by the Surviving Corporation, the posting by such person of a
bond in such reasonable amount as the Surviving Corporation may direct as
indemnity against any claim that may be made against it with respect to such
Old Certificate, the Surviving Corporation will, in exchange for such lost,
stolen or destroyed Old Certificate, issue or cause to be issued the PG&E
Corp. Common Stock and pay or cause to be paid the amounts deliverable in
respect thereof pursuant to the Merger Agreement.

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THE ANNUAL MEETING

GENERAL

This Proxy Statement-Prospectus is furnished to holders of Valero Common
Stock in connection with the solicitation of proxies by the Valero Board for
use at the Annual Meeting (i) to elect three Class II directors to the Valero
Board (Proposal No. 1), (ii) to consider and vote upon the approval of the
Distribution Proposal (Proposal No. 2), (iii) to consider and vote upon the
approval and adoption of the Merger Proposal (Proposal No. 3), and (iv) to
ratify the appointment of Arthur Andersen LLP as independent public
accountants to examine Valero's accounts for the year 1997 (Proposal No. 4).
Each copy of this Proxy Statement-Prospectus mailed to holders of Valero
Common Stock is accompanied by a form of proxy for use at the Annual Meeting.

The New Valero Prospectus, mailed to Valero stockholders along with this
Proxy Statement-Prospectus, is furnished to Valero stockholders as a
prospectus in connection with the issuance of the shares of New Valero Common
Stock in the Distribution.

DATE, PLACE AND TIME

The Annual Meeting will be held at 530 McCullough Avenue in the city of San
Antonio, Texas, on June 18, 1997, at 10:00 a.m. local time.

RECORD DATE

The Valero Board has fixed the close of business on May 9, 1997 as the
Annual Meeting Record Date for the determination of the holders of Valero
Common Stock entitled to receive notice of and to vote at the Annual Meeting.

VOTING AND REVOCATION OF PROXIES

At the Annual Meeting Record Date, there were 48,429,235 shares of Valero
Common Stock outstanding. Each share of Valero Common Stock outstanding on
such record date is entitled to one vote upon each matter properly submitted
at the Annual Meeting, except with regard to the election of directors. In the
election of directors, each share of Valero Common Stock has as many votes as
there are directors to be elected, and those votes may be cumulated and voted
for one nominee, or they may be distributed among the nominees in any way the
stockholder desires. The affirmative vote of a majority of the outstanding
shares of Valero Common Stock is required to approve the Distribution Proposal
and the Merger Proposal. The affirmative vote of a majority of the shares of
Valero Common Stock represented at the Annual Meeting and entitled to vote
thereat is required to ratify the appointment of the independent public
accountants. Directors will be elected by a plurality of the Valero Common
Stock represented at the Annual Meeting and entitled to vote.

The presence in person or by proxy at the Annual Meeting of the holders of
at least a majority of the outstanding shares of Valero Common Stock is
necessary to constitute a quorum for the transaction of business. If
instructions to the contrary are not given, shares will be voted as indicated
on the proxy card. A stockholder may revoke a proxy at any time before it is
voted by submitting a written revocation to the tabulation agent, Harris Trust
and Savings Bank, returning a subsequently dated proxy to such tabulation
agent or by voting in person at the Annual Meeting. Attendance at the Annual
Meeting will not in and of itself constitute revocation of a proxy.

Brokers holding shares of Valero Common Stock must vote according to
specific instructions they receive from the beneficial owners. If specific
instructions are not received, brokers may generally vote these shares in
their discretion, depending on the type of proposal involved. However, the
NYSE precludes brokers from exercising voting discretion on certain proposals
without specific instructions from the beneficial owner. This results in a
"broker non-vote" on such proposal. A broker non-vote is treated as "present"
for purposes of determining the existence of a quorum, has the effect of a
negative vote when a majority of the shares issued

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and outstanding is required for approval of a particular proposal and has no
effect when a majority of the shares present and entitled to vote or a
majority of the votes cast is required for approval. Under the rules of the
NYSE, brokers who hold shares in street name for customers will not have the
authority to vote on the Distribution Proposal or the Merger Proposal unless
they receive specific instructions from the beneficial owner, but brokers will
have the discretion to vote for directors and upon the ratification of Arthur
Andersen LLP.

As of May 9, 1997, directors and executive officers of Valero and their
affiliates owned beneficially an aggregate of approximately 715,000 shares of
Valero Common Stock. Directors and executive officers of Valero have indicated
their intention to vote their shares of Valero Common Stock in favor of the
nominees to the Valero Board, in favor of the Distribution Proposal, in favor
of the Merger Proposal, and in favor of the ratification of the appointment of
Arthur Andersen LLP as independent public accountants. See "THE PROPOSED
TRANSACTIONS--Interests of Certain Persons in the Transactions."

OTHER BUSINESS

The Valero Board was not aware at a reasonable time before solicitation of
proxies began of any business to be acted upon at the Annual Meeting other
than as described herein. If, however, other matters are properly brought
before the Annual Meeting, the persons appointed as proxies will have
discretion to vote or act thereon according to their best judgment.
Stockholders of Valero will not be entitled to present any matters for
consideration at the Annual Meeting.

SOLICITATION OF PROXIES

In addition to solicitation by mail, directors, officers and employees of
Valero, who will not be specifically compensated for such services, may
solicit proxies from the stockholders of Valero, personally or by telephone,
telecopy or telegram or other forms of communication. Brokerage houses,
nominees, fiduciaries and other custodians will be requested to forward
soliciting materials to beneficial owners and will be reimbursed for their
reasonable expenses incurred in sending proxy materials to beneficial owners.

In addition, Valero has retained Kissel-Blake, Inc. ("Kissel"), a proxy
soliciting firm, to assist in the solicitation of proxies from its
stockholders. Kissel will assist by distributing proxy material to banks,
brokers and other institutional holders and by reviewing charges from brokers
for forwarding material to beneficial owners. Kissel will also monitor
returned proxy cards and may assist in sending follow-up letters and in some
cases making phone calls to broker clients and larger record holders. The fees
to be paid to such firm for such services by Valero are not expected to exceed
$11,000, plus reimbursement of certain out-of-pocket expenses.

MISCELLANEOUS

This Proxy Statement-Prospectus, together with the New Valero Prospectus
being mailed simultaneously to Valero stockholders, contain the information
and financial statements specified in, and are also intended to constitute, an
annual report to stockholders under the SEC's proxy rules.

Harris Trust and Savings Bank, Chicago, Illinois, serves as transfer agent,
registrar and dividend paying agent for Valero Common Stock. Correspondence
relating to any stock accounts, dividends or transfers of stock certificates,
should be addressed to:

Harris Trust and Savings Bank
Shareholder Services Division
P.O. Box A3504
Chicago, Illinois 60690-3504
(312) 461-6001

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Participants in Employee Stock Plans Please Note:

In the case of participants in Valero's Thrift Plan and Employees' Stock
Ownership Plan, the proxy card will represent (in addition to any shares held
individually of record) the number of shares allocated to the participant's
account under each plan. For those shares held under the plans, the proxy card
will constitute an instruction to the trustee under the plans as to how such
shares are to be voted. Shares for which instructions are not received may be
voted by the Trustee in accordance with the plans.

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PROPOSAL NO. 1--ELECTION OF DIRECTORS

INFORMATION REGARDING THE BOARD OF DIRECTORS

The business of Valero is managed by or under the direction of the Valero
Board. The Valero Board conducts its business through meetings of the Valero
Board and its committees. Eight regular meetings and one special meeting of
the Valero Board were held in 1996. The Valero Board has standing Audit,
Compensation and Executive Committees. When deemed necessary or advisable, the
Valero Board also forms from its members a Nominating Committee to consider
and recommend candidates for election to the Valero Board. No Nominating
Committee was constituted in connection with the Annual Meeting. No Valero
Board member attended less than 87% of the meetings of the Valero Board and
committees of which he or she was a member held during the periods that he or
she served.

The standing committees of the Valero Board and the number of meetings held
by each committee in 1996 are described below.

A. Ray Dudley is retiring from the Valero Board at the Annual Meeting after
having served and assisted Valero as a director for nine years. The members of
the Valero Board and the management of Valero express their sincere gratitude
to Mr. Dudley for his guidance and wise counsel during his tenure on the
Valero Board.

Valero's Restated Certificate of Incorporation requires the Valero Board to
be divided into Class I, Class II and Class III directors, with each class
serving a staggered three-year term. The Valero Board currently has nine
members and, following Mr. Dudley's retirement at the Annual Meeting, the size
of the Valero Board will be set at eight members.

AUDIT COMMITTEE (2 MEETINGS)

The Audit Committee reviews and reports to the Valero Board on various
auditing and accounting matters, including the quality and performance of
Valero's internal and external accountants and auditors, the adequacy of its
financial controls, and the reliability of financial information reported to
the public. The Audit Committee also monitors Valero's efforts to comply with
environmental laws and regulations. Current members of the Audit Committee are
James L. Johnson (Chairman), Ruben M. Escobedo and Susan Kaufman Purcell.

COMPENSATION COMMITTEE (3 MEETINGS)

The Compensation Committee reviews and reports to the Valero Board on
matters related to compensation strategies, policies and programs, including
certain personnel policies and policy controls, management development,
management succession, and benefit programs. The Committee also approves and
administers Valero's stock option, restricted stock bonus, incentive bonus and
other stock plans. See "Report of the Compensation Committee of the Board of
Directors on Executive Compensation." Current members of the Compensation
Committee are Lowell H. Lebermann (Chairman), Robert G. Dettmer, A. Ray Dudley
and James L. Johnson, none of whom are current or former employees or officers
of Valero.

There are no compensation committee interlocks. For the previous three
fiscal years, except for compensation arrangements disclosed herein, Valero
has not participated in any contracts, loans, fees, awards or financial
interests, direct or indirect, with any committee member, nor is Valero aware
of any means, directly or indirectly, by which a committee member could
receive a material benefit from Valero.

EXECUTIVE COMMITTEE (2 MEETINGS)

The Executive Committee exercises the power and authority of the Valero
Board during intervals between meetings of the Valero Board. Actions taken by
the Executive Committee do not require ratification by the Valero Board. For
1997 the Executive Committee also reviewed possible director candidates and
recommended individuals for election as a director. The Executive Committee
also reviewed and recommended assignments for the Committees of the Valero
Board following the Annual Meeting. Current members of the Executive Committee
are Robert G. Dettmer (Chairman), Ronald K. Calgaard, A. Ray Dudley, William
E. Greehey, and Lowell H. Lebermann.

57
<PAGE>

COMPENSATION OF DIRECTORS

Non-employee directors receive a retainer fee of $18,000 per year, plus
$1,000 for each Valero Board and committee meeting attended. Each director is
also reimbursed for expenses of meeting attendance. Directors who are
employees of Valero receive no compensation (other than reimbursement of
expenses) for serving as directors.

Valero maintains the 1990 Restricted Stock Plan for Non-Employee Directors
("Director Plan") and the Non-Employee Director Stock Option Plan ("Director
Option Plan") to supplement the compensation paid to non-employee directors
and increase their identification with the interests of Valero's stockholders
through ownership of Common Stock ("Director Stock"). Under the Director Plan,
non-employee directors receive grants of Director Stock that vest (become
nonforfeitable) in three equal annual installments. Upon election to the
Valero Board, each non-employee director receives a grant, the value of which
is determined annually based on changes in the consumer price index. Annual
installments usually vest on or about the date of the Annual Meeting of the
stockholders of Valero. When all of the Director Stock previously granted to a
director is fully vested and the director is reelected for an additional term,
or his term of office otherwise continues after his Director Stock is fully
vested, another similar grant is made. However, if a director is not eligible
for reelection due to Valero's mandatory retirement policy or if a director
does not intend to stand for reelection, the grant is reduced pro rata based
on the number of years remaining to the end of that director's term. Directors
receiving a grant in 1997 will receive Director Stock having a value of
approximately $54,000.

The Director Option Plan provides non-employee directors of Valero automatic
annual grants of stock options for Valero Common Stock. To the extent
necessary, the Plan is administered by the Compensation Committee of the
Valero Board. The Plan provides that each new non-employee director elected to
the Valero Board automatically receives an initial grant of 5,000 options. On
the date of each subsequent annual meeting of stockholders of Valero, each
non-employee director (other than new non-employee directors receiving their
initial grant of 5,000 options) automatically receives a grant of 1,000
additional options. Stock options awarded under the Director Option Plan have
an exercise price equal to the market price of the Valero Common Stock on the
date of grant. The initial grant of options to each non-employee director
vests in three equal annual installments on each anniversary date of the
grant. The subsequent annual grants of 1,000 options vest fully six months
following the date of grant. All options expire ten years following the date
of grant. Options vest and remain exercisable in accordance with their
original terms in the case of a director retiring from the Valero Board. In
the event of a "Change of Control" as defined in the Director Option Plan, all
options previously granted under the plan immediately become vested or
exercisable upon the date of the Change of Control, except as otherwise
provided in the plan. The Director Option Plan also provides for adjustment in
the number of options to prevent dilution or enlargement of the benefits or
potential benefits intended under the plan in the event the Compensation
Committee determines that any dividend or other distribution,
recapitalization, stock split, reverse stock split, reorganization, merger,
consolidation, split-up, spin-off, combination, repurchase, or exchange of
shares of Valero or other similar corporate transaction or event affects the
Valero Common Stock.

Under the Retirement Plan for Non-Employee Directors ("Retirement Plan"),
non-employee directors become entitled to a retirement benefit upon completion
of five years of service. The annual benefit at retirement is equal to 10% of
the highest annual cash retainer paid to the director during his or her
service on the Valero Board, multiplied by the number of full and partial
years of service (not to exceed 10 years). Such benefit is then paid for a
period equal to the shorter of the director's number of years of service or
the director's lifetime, but in no event for longer than 10 years. The
Retirement Plan provides no survivor benefits and is an unfunded plan paid
from the general assets of Valero.

ELECTION OF CLASS II DIRECTORS

Three Class II directors will be elected at the Annual Meeting to serve
until the 2000 Annual Meeting of Stockholders, or if the Merger is approved by
Valero stockholders, for terms ending on the date of consummation of the
Merger.

58
<PAGE>

Edward C. Benninger, James L. (Rocky) Johnson and Robert G. Dettmer have
been nominated for election as Class II directors. The Valero Board was
reduced from ten to nine members upon the resignation of F. Joseph Becraft
from the Board on November 20, 1996 and will be further reduced to eight
members upon the retirement from the Valero Board of A. Ray Dudley at the
Annual Meeting. Upon recommendation of the Executive Committee, the Valero
Board at its meeting on April 11, 1997 determined to fix the number of
directors at eight members effective at the date of the Annual Meeting.
Valero's Bylaws permit a Class III director to be redesignated as a Class II
director so that after the redesignation and election of Class II directors at
the Annual Meeting, the Valero Board would consist of two Class I directors,
three Class II directors, and three Class III directors. Subject to his being
duly elected as a Class II director at the Annual Meeting, Mr. Dettmer has
agreed to be redesignated as a Class II director and to resign as a Class III
director. Should Mr. Dettmer not be elected as a Class II director, he would
not be redesignated as a Class II director but would instead serve the
remainder of his term as a Class III director. Class III directors are
scheduled to stand for reelection in 1998.

THE BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE "FOR" THE ELECTION
OF EACH SUCH NOMINEE.

Directors are elected by a plurality of the shares of Valero Common Stock
represented at the Annual Meeting and entitled to vote. Votes "withheld" from
a nominee will not count against the election of the nominee, and the three
nominees for Class II director receiving the greatest number of votes, whether
or not such votes represent a majority of the shares present and voting at the
Annual Meeting, will be elected as Class II directors.

In the election of directors each share has as many votes as there are
directors to be elected, and those votes may be cumulated and voted for one
nominee, or they may be distributed among the nominees in any way the
stockholder desires. To vote cumulatively, the stockholder should write the
words "cumulative" followed by the name of the nominee or nominees selected on
the line under Item 1 of the proxy. Otherwise, for shares represented by
proxies the votes will be cast, except when authority to vote is withheld for
any nominee, for the election of the nominees in equal proportions unless the
persons named therein as proxies shall, in accordance with their best
judgment, otherwise direct. If any nominee should be unavailable as a
candidate at the time of the meeting, either the number of directors
constituting the full Valero Board will be appropriately reduced to eliminate
the vacancy, or the persons named as proxies will vote, in accordance with
their best judgment, for any available nominee. The Valero Board has no reason
to believe that any current nominee will be unable to serve.

INFORMATION CONCERNING NOMINEES AND OTHER DIRECTORS

The following table sets forth information concerning each nominee for
election as a director and the current directors whose terms expire in 1998
and 1999. The information regarding directors of Valero contained herein is
based partly on data furnished by the directors and partly on Valero's
records. There is no family relationship among any of the executive officers,
directors or nominees for director of Valero.

59
<PAGE>

<TABLE>
<CAPTION>
EXECUTIVE
OFFICER OR AGE AS OF PRESENT CURRENT
POSITION(S) HELD DIRECTOR DECEMBER 31, TERM DIRECTOR
NAME WITH VALERO SINCE 1996 EXPIRES CLASS
- ---- ------------------ ---------- ------------ ------- --------
<S> <C> <C> <C> <C> <C>
Ruben M. Escobedo....... Director 1994 59 1998 III
William E. Greehey...... Director, Chairman 1979 60 1998 III
of the Board and
Chief Executive
Officer
Lowell H. Lebermann..... Director 1986 57 1998 III
Susan Kaufman Purcell... Director 1994 54 1999 I
</TABLE>
- --------
* Subject to his being duly elected as a Class II director at the Annual
Meeting, Mr. Dettmer has agreed to be redesignated as a Class II director and
to resign as a Class III director. Should Mr. Dettmer not be elected as a
Class II director, he would not be redesignated as a Class II director but
would instead serve the remainder of his term as a Class III director.

Mr. Benninger has served as a director of Valero since 1990. He was elected
President and Chief Financial Officer of Valero in 1996. He had served as
Executive Vice President of Valero since 1989, and previously served as Chief
Operating Officer of Valero Natural Gas Company from 1992 to 1995. He has
served in various other capacities with Valero since 1975.

Mr. Johnson has been a director of Valero since 1991. He previously served
as Chairman and Chief Executive Officer of GTE Corporation from 1988 to 1992,
and since 1992 has served as Chairman Emeritus. Mr. Johnson also serves as a
director of CellStar Corporation, FINOVA Group, Inc., Harte-Hanks
Communications, Inc., The Mutual Life Insurance Company of New York and Walter
Industries, Inc.

Dr. Calgaard has been a director of Valero since 1996. He has served as
President of Trinity University, San Antonio, Texas, since 1979. Dr. Calgaard
previously served as a director of Valero Natural Gas Company from 1987 until
1994.

Mr. Dettmer was elected as a director of Valero in 1991. He retired from
PepsiCo, Inc. in 1996 after serving as Executive Vice President and Chief
Financial Officer since 1986.

Mr. Dudley has served as a director of Valero since 1988 and currently
serves as an independent consultant in the petroleum industry. Mr. Dudley
served in various capacities with Tenneco Oil Company from 1959 until his
retirement in 1987.

Mr. Escobedo was elected as a director of Valero in 1994. He has been with
his own public accounting firm, Ruben Escobedo & Company, CPAs, in San
Antonio, Texas since its formation in 1977. Mr. Escobedo also serves as a
director of Cullen/Frost Bankers, Inc. and previously served as a director of
Valero Natural Gas Company from 1989 to 1994.

Mr. Greehey has served as Chief Executive Officer and as a director of
Valero since 1979 and as Chairman of the Board since 1983. He retired from his
positions as President and Chief Executive Officer in June 1996. Upon request
of the Board, Mr. Greehey resumed his position as Chief Executive Officer
following the resignation of Mr. Becraft in November 1996. Mr. Greehey is also
a director of Weatherford Enterra, Inc. and Santa Fe Energy Resources, Inc.

Mr. Lebermann was elected as a director of Valero in 1986, and previously
served on Valero's Board from 1979 to 1983. Mr. Lebermann has been President
of Centex Beverage, Inc., a beverage distributor, in Austin, Texas, since
1981. Mr. Lebermann is also a director of Station Casinos, Inc. and of
Franklin Federal Bankcorp, a Federal Savings Bank, Austin, Texas.

Dr. Purcell was elected as a director of Valero in 1994. She has served as
Vice President of the Americas Society in New York, New York since 1989 and is
also Vice President of the Council of the Americas. She is a consultant for
several international and national firms and serves on the boards of several
mutual funds, including The Argentina Fund, The Latin America Dollar Income
Fund and Scudder World Income Opportunities Fund.

60
<PAGE>

For detailed information regarding the nominees' holdings of Valero Common
Stock, compensation and other arrangements, see "Information Regarding the
Board of Directors," "Beneficial Ownership of Valero Securities," "Executive
Compensation," "Arrangements with Certain Officers and Directors," and
"Transactions with Management and Others."

BENEFICIAL OWNERSHIP OF VALERO SECURITIES

The following table sets forth information as of December 31, 1996, with
respect to each entity known to Valero to be the beneficial owner of more than
five percent of Valero Common Stock, based solely upon a statement on Schedule
13G filed by such entity with the Securities and Exchange Commission ("SEC"):

<TABLE>
<CAPTION>
SHARES
BENEFICIALLY PERCENT
TITLE OF CLASS NAME AND ADDRESS OF BENEFICIAL OWNER OWNED OF CLASS
- -------------- ------------------------------------ ------------ --------
<S> <C> <C> <C>
Common Stock Franklin Resources, Inc.(1) 6,366,167 14.4%
777 Mariners Island Blvd.
San Mateo, CA 94404
Common Stock Merrill Lynch & Co., Inc.(2) 4,160,610 9.4%
World Financial Center, North Tower
250 Vessey Street
New York, NY 10281
Common Stock Frost National Bank of 4,027,492 9.1%
San Antonio, N.A.(3)
100 West Houston Street
San Antonio, TX 78205
Common Stock The Capital Group Companies, Inc.(4) 3,292,700 7.4%
75 State Street
Boston, MA 02109
Common Stock Wellington Management Company(5) 2,841,946 6.4%
75 State Street
Boston, MA 02109
</TABLE>
- --------
(1) Franklin Resources, Inc. has reported that it and certain of its
shareholders and subsidiaries have sole voting power with respect to
5,960,170 shares, shared voting power with respect to 459,997 shares and
shared dispositive power with respect to 6,366,167 shares.

(2) Merrill Lynch & Co., Inc. has reported that it has shared voting power
with respect to 4,160,610 shares, while certain of its subsidiaries have
shared voting power and shared dispositive power with respect to up to
4,160,610 shares.

(3) Frost National Bank of San Antonio, N.A. has reported that it has shared
voting and dispositive power with respect to 4,027,492 shares in its
capacity as Trustee for the Valero Thrift Plan, the leveraged Valero
Employees' Stock Ownership Plan, the non-leveraged Valero Employees' Stock
Ownership Plan, the Valero Benefits Trust and the Valero SERP.

(4) The Capital Group Companies, Inc. has reported that it and certain
investment management subsidiaries have sole voting power with respect to
600 shares and sole dispositive power with respect to 3,292,700 shares.
One such subsidiary, Capital Research and Management Company, has also
reported that it has sole dispositive power with respect to 2,823,180 of
such shares.

(5) Wellington Management Company, LLP has reported shared dispositive power
with respect to 2,841,946 shares and shared voting power with respect to
126,099 shares. Its affiliate, Vanguard/Windsor Fund, Inc., has reported
shared dispositive power with respect to 2,688,100 of such shares.

Except as otherwise indicated, the following table sets forth information as
of March 31, 1997, regarding Valero Common Stock and Valero Convertible
Preferred Stock beneficially owned (or deemed to be owned) by each nominee for
director, each current director, each executive officer named in the Summary
Compensation Table, and all current directors and executive officers of Valero
as a group. Such information has been furnished to Valero by such persons and
cannot be independently verified by Valero. The Valero Convertible Preferred
Stock has been called for redemption and will be redeemed prior to the Annual
Meeting.

61
<PAGE>

<TABLE>
<CAPTION>
COMMON STOCK
SHARES $3.125 PERCENT
BENEFICIALLY SHARES UNDER CONVERTIBLE OF CLASS
OWNED EXERCISABLE PREFERRED (COMMON
NAME OF BENEFICIAL OWNER (1) (2)(3)(4) OPTIONS(5) STOCK(2) STOCK)(2)
- ---------------------------- ------------ ------------ ----------- ---------
<S> <C> <C> <C> <C>
F. Joseph Becraft(6)........... 0 0 0 *
Edward C. Benninger............ 114,247 75,139 1,000 *
Ronald K. Calgaard............. 2,142 1,667 0 *
Terrence E. Ciliske............ 18,648 26,918 0 *
Robert G. Dettmer(7)........... 5,877 3,000 0 *
A. Ray Dudley.................. 8,141 3,000 0 *
Ruben M. Escobedo(8)........... 3,094 3,000 0 *
William E. Greehey............. 369,861 478,184 4,385 1.9%
James L. Johnson............... 3,852 3,000 0 *
Lowell H. Lebermann............ 2,244 3,000 0 *
E. Baines Manning.............. 47,959 43,750 1,000 *
Stan L. McLelland.............. 93,596 56,504 0 *
Susan Kaufman Purcell.......... 2,289 3,000 0 *
All executive officers and
directors as a group,
including
the persons named above (15
persons)(9)................... 704,828 746,873 6,385 3.3%
</TABLE>
- --------
* Indicates that the percentage of beneficial ownership does not exceed 1% of
the class.

(1) The business address for all beneficial owners listed above is 530
McCullough Avenue, San Antonio, Texas 78215.

(2) No executive officer, director or nominee for director of Valero owns any
class of equity securities of Valero other than Valero Common Stock and
Valero Convertible Preferred Stock. Neither any such person, nor all such
persons as a group, owns 1% or more of the Valero Convertible Preferred
Stock. The calculation for Percent of Class includes shares listed under
the captions "Shares Beneficially Owned" and "Shares Under Exercisable
Options."

(3) Includes shares allocated pursuant to various employee stock plans
available to its employees generally (collectively, the "Employee Stock
Plans"), as well as shares granted under Valero's Restricted Stock Bonus
and Incentive Stock Plan (the "Restricted Stock Plan"), Executive Stock
Incentive Plan ("ESIP") and the Director Plan. Except as otherwise noted,
each person named in the table, and each other executive officer, has sole
power to vote or direct the vote of all such shares beneficially owned by
him or her. Except as otherwise noted, each person named in the table, and
each other executive officer, has sole power to dispose or direct the
disposition of shares beneficially owned by him or her. Valero Common
Stock granted under the Restricted Stock Plan, ESIP and the Director Plan
("Restricted Stock") may not be disposed of until vested.

(4) Does not include shares that could be acquired under options, which
information is set forth in the second column.

(5) Includes shares subject to options that are exercisable within 60 days
from March 31, 1997. Such shares may not be voted unless the options are
exercised. Options that may become exercisable within such 60 day period
only in the event of a change of control of Valero are excluded. None of
the current executive officers, directors or nominees for director of
Valero holds any rights to acquire Valero Common Stock except through
exercise of stock options.

(6) Mr. Becraft resigned from his position as a director of Valero and as
Chief Executive Officer of Valero effective November 20, 1996.

(7) Includes shares held by spouse.

(8) Includes shares held by spouse and shares held in a trust.

(9) Certain officers of Valero not designated as executive officers by the
Valero Board do not perform the duties of executive officers and are not
classified as "executive officers" for purposes of this Proxy Statement-
Prospectus.

62
<PAGE>

SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Section 16(a) of the Exchange Act requires Valero's executive officers,
directors, and greater than 10 percent stockholders to file certain reports of
ownership and changes in ownership. Based on a review of the copies of such
forms received and written representations from certain reporting persons,
Valero believes that, during the year ended December 31, 1996, its executive
officers, directors and greater than 10 percent stockholders were in
compliance with applicable requirements of Section 16(a).

PERFORMANCE GRAPH

Set forth below is a line graph comparing the cumulative total stockholder
return on Valero Common Stock against the cumulative total return of the S&P
500 Composite Index and the S&P Oil (Domestic Integrated) Index for the period
of five fiscal years commencing December 31, 1991 and ending December 31,
1996. As a result of Valero's reacquisition of the publicly held interest in
Valero Natural Gas Partners, L.P. in 1994, Valero has significant operations
in both the refining and natural gas industries. Accordingly, the accompanying
graph also contains supplemental information for the S&P Natural Gas Index for
the same period.

[PERFORMANCE GRAPH APPEARS HERE]

COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURN* AMONG VALERO, THE S&P 500
INDEX, THE S&P OIL (DOMESTIC INTEGRATED) INDEX AND THE S&P NATURAL GAS INDEX

<TABLE>
<CAPTION>
12/1991 12/1992 12/1993 12/1994 12/1995 12/1996
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Valero Common Stock............. 100 78 74 60 90 107
S&P 500......................... 100 108 118 120 165 203
S&P Oil (Domestic Integrated)... 100 102 108 113 129 196
S&P Natural Gas................. 100 111 132 126 179 237
</TABLE>
- --------
*Assumes that the value of the investment in Valero Common Stock and each
index was $100 on December 31, 1991, and that all dividends were reinvested.

63
<PAGE>

The foregoing Performance Graph and related textual information are based on
historical data and are not necessarily indicative of future performance. The
S&P Oil (Domestic Integrated) Index includes Amerada Hess Corp., Atlantic
Richfield Co., Occidental Petroleum Corp., Pennzoil Co., Philips Petroleum
Co., USX-Marathon Group and Unocal Corp. The S&P Natural Gas Index includes
Coastal Corp., Columbia Gas System, Inc., Consolidated Natural Gas Co.,
Eastern Enterprises, Enron Corp., Enserch Corp., NICOR Inc., NorAm Energy
Corp., ONEOK Inc., Pacific Enterprises, PanEnergy Corp., Peoples Energy Corp.,
Sonat Inc., and Williams Companies, Inc.

REPORT OF THE COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS ON EXECUTIVE
COMPENSATION

Valero's executive compensation programs are administered by the
Compensation Committee (the "Committee") of the Valero Board. The Committee is
composed of four independent outside directors not eligible to participate in
Valero's executive compensation programs. The Committee's policies are
implemented by Valero's compensation and benefits staff under the direction of
the Director, Human Resources. Valero's executive compensation programs are
intended to provide strong incentives for high performance, enabling Valero to
recruit, retain, and motivate the executive talent necessary to be successful.

Overview. Valero's executive compensation program includes base salary, an
annual incentive bonus opportunity and long-term, stock-based incentives. The
CEO and other executive officers also participate in benefit plans generally
available to employees of Valero. Because of its ongoing business activities,
Valero competes for executive talent in both the oil refining industry and the
natural gas industry. Accordingly, for purposes of determining executive
compensation levels, Valero utilizes a subgroup of companies from a nationally
recognized compensation database compiled by Hewitt Associates, L.L.C.
("Hewitt"), an independent compensation consultant retained by Valero. The
subgroup consists of 17 companies with significant participation in the oil
refining industry or natural gas industry (the "Comparator Group"). The
Comparator Group has been approved by the Committee, and the companies in the
Comparator Group are identified in Appendix D; there were no changes in the
Comparator Group for 1996. Base salary, bonuses, and other compensation
recommendations are developed by Valero's compensation and benefits staff,
reviewed by Hewitt and submitted to the Committee for consideration. Other
nationally recognized compensation surveys are utilized to validate the
information provided by Hewitt. In establishing and implementing executive
compensation arrangements, the Committee reviews and discusses the staff
recommendations directly with representatives of Hewitt.

Annual incentive bonuses, when awarded, are related both to measures of
Valero financial performance and to individual performance. Long-term
incentives, consisting of performance shares, restricted stock and stock
option grants, as well as the noncash portion of annual incentive bonus
awards, are intended to balance executive management focus between short- and
long-term goals and provide capital accumulation linked directly to the
performance of Valero Common Stock. Base salary levels are targeted at
approximately the 50th percentile of the Comparator Group, while annual
incentive compensation and long-term incentive compensation, when awarded, are
targeted at the 65th percentile. While no specific percentile target is set
for overall compensation, the Committee intends that each executive's total
compensation package favor longer-term and variable compensation over fixed
compensation. For the six executives named in the Summary Compensation Table,
the average base salary component of total annual and long-term compensation
for 1996, as reported in the Summary Compensation Table, was approximately
27%, while the average annual incentive and longer-term compensation component
was approximately 73%. For purposes of the preceding sentence, stock options
granted in 1996 have been valued using the "grant date present value" set
forth in the table below titled "Option/SAR Grants in the Last Fiscal Year."

Base Salaries. Base salaries for each executive position are set based upon
the Hewitt compensation survey data for Comparator Group positions with
similar duties and levels of responsibility. Base salaries are reviewed
annually and may be adjusted to reflect promotions, the assignment of
additional responsibilities,

64
<PAGE>

individual performance or the performance of Valero. Salaries are also
periodically adjusted to remain competitive with the Comparator Group. Base
salaries for the named executive officers (other than Mr. Greehey and Mr.
Becraft) were increased in mid-1996 by an average of approximately 4.5% in
order to maintain salaries at targeted levels.

Annual Incentive Bonus. Executive officers have the opportunity to earn an
annual incentive bonus based on three factors: (i) the position of the
executive officer, which is used to determine a targeted percentage of annual
base salary that may be awarded as incentive bonus, with the targets for the
named executive officers ranging from a low of approximately 45% of base
salary to approximately 60% of base salary (for the CEO); (ii) realization by
Valero of quantitative financial performance targets approved by the
Committee; and (iii) a qualitative evaluation of the individual's performance.
For each executive, the targeted percentage of base salary is adjusted, upward
or downward, based upon Valero's achievement of the financial performance
goals. In addition, the Committee considers the total amount of executive
bonuses in relation to earnings available to Valero Common Stock. The
Committee retains discretion to adjust the bonus targets by up to
approximately 25%, based upon such factors as it deems to be appropriate, and
ultimately to determine whether to award a bonus to any individual. Four
approximately equally weighted quantitative measures of Valero financial
performance were utilized in establishing incentive bonuses for 1996,
consisting of (i) return on equity ("ROE") compared with the average ROE for a
group of 11 similarly-sized companies in the oil refining and natural gas
businesses (the "Target Group"); (ii) return on investment ("ROI") compared
with the Target Group; (iii) earnings per share of Valero Common Stock in 1996
compared with 1995; and (iv) the daily average closing price of a share of
Valero Common Stock during December 1996, compared with the daily average
closing price during the corresponding period in the prior year. For the ROE
and ROI financial performance measures, the targeted salary percentage is
subject to adjustment, upward or downward, depending upon whether Valero's ROE
and ROI exceeds, or falls short of, the average ROE and ROI for the Target
Group. For the earnings per share and stock price performance measures, the
Committee establishes a targeted performance range; the targeted salary
percentage is then subject to adjustment if Valero's performance exceeds or
falls short of the preestablished ranges. The four performance factors were
given approximately equal weight in determining potential adjustments to the
targeted salary percentages for 1996. ROE and ROI are measured against the
Target Group, rather than the Comparator Group, because (i) some entities for
which compensation survey information is either not available or not
comparable are nonetheless included in the Target Group because their
operations are most comparable to Valero; and (ii) some entities with which
Valero competes for executive talent, and which are therefore included in the
Comparator Group, have operations sufficiently different in size or scope from
Valero's to make financial comparisons less meaningful. In 1996, the Target
Group was reduced from 12 to 11 companies to reflect the deletion of one
refining company which had substantially under-performed the other refining
companies in the Target Group.

For 1996, Valero's performance was slightly below the Target Group average
for ROE, equal to the Target Group average for ROI, substantially above the
earnings per share target range and slightly above the stock price target
range. Based on these results, the Committee (and, in the case of Mr.
Benninger, the Valero Board) ultimately determined to adjust the bonus target
amounts for the named executives (other than the CEO) by an average of
approximately 21% from the originally targeted amounts. In reaching this
result, the Committee and the Valero Board adjusted each individual bonus
amount, upward or downward, to reflect the Committee's or the Valero Board's
subjective evaluation of individual performance.

Approximately seventy-five percent of the gross amount of each executive's
1996 annual incentive award was paid in shares of Valero Common Stock and the
remainder in cash, with applicable federal income and other taxes being paid
out of the stock portion of the award. The Committee believes that this
allocation is consistent with Valero's goal of emphasizing stock ownership in
both short-term and long-term compensation and providing a vested interest and
incentive for long-term financial and operating performance.

Long-Term Incentive Awards. To provide stock-based longer-term compensation
for executives, Valero maintains the Executive Stock Incentive Plan ("ESIP"),
which was approved by the stockholders in 1995. The plan authorizes awards of
performance shares ("Performance Shares"), which vest (become nonforfeitable)
upon

65
<PAGE>

the achievement of an objective performance goal, as well as grants of
restricted shares of Valero Common Stock ("Restricted Stock") which vest over
a period determined by the Committee. In 1996, the Committee determined to
reduce the general use of Restricted Stock and to emphasize the use of
Performance Shares. For each eligible executive, a targeted number of
Performance Shares is set with an aggregate hypothetical market value at the
date of grant targeted at the 65th percentile of the Comparator Group. Such
targeted award can then be adjusted based upon an individual subjective
performance evaluation, which (for executives other than the CEO) is based
upon the recommendation of the CEO, and such other factors as the Committee
deems appropriate. As with the annual incentive bonus, discretion is retained
by the Committee ultimately to determine that no award should be made. The
total number of shares awarded is a function of the Valero Common Stock price
at the time of grant and the number of shares required to achieve the
percentile compensation target. In the past, the Committee has generally made
awards of Performance Shares or Restricted Stock every year.

Performance Shares will vest only upon the achievement of an objective
performance goal. The Committee established total stockholder return ("TSR")
as the performance measure for determining what portion of the 1996
Performance Share awards will vest. Each 1996 award is subject to vesting in
three increments, based upon Valero's TSR during rolling three-year periods
with the first such three-year period ended December 31, 1996. At the end of
each three-year period, Valero's TSR is compared to the Target Group of
companies and ranked by quartile. Participants then earn 0%, 50%, 100% or 150%
of the initial grant amount depending upon whether Valero's TSR is in the
last, 3rd, 2nd or 1st quartile; 200% would be earned if Valero ranks highest
in the group. Amounts not earned in a given three-year period can be carried
forward for one additional three-year period and up to 100% of the carried
amount can still be earned, depending upon the quartile achieved for such
subsequent period. For the performance period ended December 31, 1996,
Valero's performance ranked in the second quartile, resulting in a vesting of
100% of the initial grant amounts for such period. The Committee believes this
type of incentive award strengthens the tie between pay and performance for
Valero's executive compensation program. Because Performance Share awards are
intended to provide an incentive for future performance, the amount of the
awards is not based upon past Valero performance. Additionally, in determining
individual awards the Committee does not consider Performance Shares or
Restricted Stock previously awarded or currently held, because such
considerations are not reflected in the compensation survey information upon
which awards are based, and because Valero does not wish to encourage
executives to sell stock in order to qualify for additional awards. See "Stock
Retention Guidelines," below.

In November 1996, Mr. Becraft, who was then serving as President and CEO of
Valero, resigned. The Valero Board requested that Mr. Greehey, who had retired
as CEO in June 1996, again serve as CEO; at the same time, Mr. Benninger was
elected to serve as President. The Valero Board determined to make a special
grant of 60,000 shares of Restricted Stock to Mr. Greehey and 20,000 shares of
Restricted Stock to Mr. Benninger. Except for the grant to Mr. Becraft
described below, no other awards of Restricted Stock were made in 1996 to any
of the other executive officers named in the Summary Compensation Table. The
awards made to Mr. Greehey and Mr. Benninger were principally intended to
serve as a special incentive for successful completion of the strategic
transaction represented by the Merger Agreement and will vest in their
entirety upon consummation of that transaction. In the event a strategic
transaction is not consummated, such shares of Restricted Stock could vest in
equal installments over a period of three years, but will be subject to
forfeiture if the executive terminates employment for any reason (other than
death or disability) prior to vesting. Recipients of Restricted Stock
participate in any appreciation or depreciation in the market price of the
Valero Common Stock during the vesting period and thereafter as long as such
stock is retained.

Stock Retention Guidelines. Beginning in 1996, the Committee implemented
stock retention guidelines for executive officers and certain other key
executives of Valero. The Committee and Valero have always encouraged employee
stock ownership and, although informal encouragement has been successful, the
Committee believed that the adoption of formal guidelines will strengthen the
goals for long-term performance. The guidelines will apply to the CEO, other
executive officers and key executive division heads (currently a total of 13
executives). The guidelines are established at five times annual salary for
the CEO, three times annual salary for four functional head executive officers
and one times annual salary for the remaining executives. While all executives
currently meet or exceed the guidelines, a period of three years was provided
as a time frame in

66
<PAGE>

which to achieve the established guideline. Considering the past success of
informal methods, the Committee did not adopt any formal measures should
guidelines not be met. Valero's employees as a whole are estimated to own or
control approximately 17% of Valero Common Stock (including both exercisable
stock options and shares beneficially owned) and the executives participating
in the stock retention program are estimated to own or control approximately
4%. The Committee believes these levels of ownership, coupled with the adopted
guidelines, exemplify executive management's ongoing commitment to improvement
in Valero's performance.

Stock Options. Under the ESIP, as well as under Valero's Stock Option Plans
No. 3 and No. 4, the Committee may grant stock options to executive officers.
Procedures for determining the number of options to be granted are in all
material respects the same as for Performance Share awards. The option awards
made by the Committee in 1996 will vest over a period of three years in equal
installments and remain exercisable for ten years. The award and vesting of
stock options are not contingent on achievement of any specified performance
targets, but the options will provide a benefit to the executive only to the
extent that there is appreciation in the market price of the Valero Common
Stock during the option period.

Determination of the CEO's Compensation. The CEO's compensation is
recommended by the Committee and established by the Valero Board. As noted
above, Mr. Becraft resigned from his positions as President and CEO of Valero
in November 1996 and Mr. Greehey was elected CEO at that time.

The 1996 compensation of Mr. Becraft consisted of base salary as President
for the period January 1 through June 30, and base salary as President and CEO
for the period July 1 through November 20, 1996. In addition, Mr. Becraft
received an annual award of Performance Shares in January 1996, and a special
award of 10,000 shares of Restricted Stock and 40,000 options in May 1996 in
recognition of his election as CEO. Effective July 1, 1996, Mr. Becraft's base
salary was increased from $400,000 to $500,000 per annum in accordance with
the base salary targets described above. Upon his resignation, all stock
options, Performance Shares and Restricted Stock previously granted to Mr.
Becraft were vested pursuant to the terms of a separation agreement and Mr.
Becraft was paid for unused vacation. Mr. Becraft was not paid an incentive
bonus for 1996. Base salary comprised approximately 36% of Mr. Becraft's 1996
total annual and long-term compensation as reported in the Summary
Compensation Table, versus approximately 64% for long-term and incentive
compensation.

The 1996 compensation of Valero's current CEO, Mr. Greehey, was
substantially affected by Mr. Greehey's retirement at July 1, 1996 and
subsequent reemployment on November 21, 1996. Mr. Greehey's 1996 compensation
included base salary for the period January 1 through June 30, 1996; director
fees and consulting fees for the period from July 1, 1996 to November 20,
1996; salary for the period from November 20, 1996 through December 31, 1996,
at an annual rate equal to the amount which Mr. Greehey had been receiving
immediately prior to his reemployment, consisting of consulting fees, director
fees, Pension Plan and SERP payments and deferred compensation plan payments;
an annual award of Performance Shares under the ESIP in January 1996; the
special Restricted Stock award described above; and an annual incentive bonus
paid in January 1997. See "Arrangements with Certain Officers and Directors."
Mr. Greehey also received certain categories of income resulting from his
retirement and not specifically subject to Valero Board discretion, including
the vesting of certain previously reported grants of Restricted Stock; payment
of the accumulated balance is his Excess Thrift Plan account; payments under
the Pension Plan, SERP and Executive Deferred Compensation Plan for the period
July 1, 1996 through November 20, 1996; and payment for unused vacation. In
addition, upon becoming a non-employee director on July 1, 1996, Mr. Greehey
received a grant of stock options under Valero's Non-Employee Director Stock
Option Plan and a grant of Restricted Stock under the 1990 Restricted Stock
Plan for Non-Employee Directors in accordance with the provisions of such
plans. Mr. Greehey's base salary was not increased in 1996. Base salary
comprised approximately 16% of Mr. Greehey's 1996 total annual and longterm
compensation reported in the Summary Compensation Table, versus approximately
84% for incentive and long-term compensation. The base salary component
comprised a lower percentage of the total in 1996 compared with 1995 because
of the special Restricted Stock award described above and Mr. Greehey's
retirement at July 1, 1996. The CEO's base salary and annual incentive bonus,
when paid, are determined using the procedures described above. In determining
the CEO's incentive bonus for 1996, the Committee considered the four
financial performance measures, and made substantially the same adjustments,
as discussed above. Based upon

67
<PAGE>

these factors, on January 23, 1997, the Committee recommended, and the Valero
Board approved an incentive bonus for Mr. Greehey of $670,739, which was 11%
above his original bonus target.

Tax Policy. Under Section 162(m) of the Code, with certain exceptions,
publicly held corporations, including Valero, may not take a tax deduction for
compensation in excess of $1 million paid to the CEO or the other four most
highly compensated executive officers named in the Summary Compensation Table
and serving at year-end. Section 162(m) will not apply to limit the
deductibility of performance-based compensation exceeding $1 million if such
compensation is paid (i) solely upon attainment of one or more performance
goals, (ii) pursuant to a qualifying performance-based compensation plan
adopted by the Committee, and (iii) the material terms, including the
performance goals, of such plan are approved by the stockholders before
payment of the compensation. Valero believes that options granted under its
stock option plans (including stock option awards under the ESIP) qualify as
performance based compensation and are not subject to any deductibility
limitations under Section 162(m) of the Code. However, the ESIP does not
require satisfaction of quantifiable performance goals for awards of
Restricted Stock, and the performance goals adopted for the Performance
Shares, as described above, have not been specifically approved by the
stockholders. Accordingly, Restricted Stock and Performance Share grants
heretofore made under the ESIP are ineligible for the performance-based
compensation exception of Section 162(m) described above.

Valero believes that all compensation paid to Mr. Becraft in 1996 will be
deductible. However, the deductibility of Mr. Greehey's 1996 compensation
under Section 162(m) may have been affected by Mr. Greehey's reemployment in
November 1996. Absent such reemployment, Valero believes that application of
Section 162(m) would not have materially affected Valero's ability to deduct
amounts earned by Mr. Greehey in 1996, since Section 162(m) is applicable only
to persons serving as executive officers at year-end. However, Mr. Greehey's
retirement triggered certain income to him, including the vesting of
Restricted Stock and payments under the Excess Thrift Plan and SERP which, as
a result of Mr. Greehey's subsequent reemployment, may be required to be
counted in determining Valero's tax deduction for 1996. As a result of Mr.
Greehey's subsequent reemployment, Valero believes it is unclear whether such
payments are required to be counted in determining Valero's tax deduction for
1996. Valero is filing a ruling request with the Internal Revenue Service
seeking to preserve a tax deduction for the amounts earned by Mr. Greehey upon
and during his retirement. Depending upon the ultimate outcome of such ruling
request, Valero estimates that as much as $1.9 million of Mr. Greehey's 1996
income may not be deductible if the income reported by Mr. Greehey by virtue
of his retirement is required to be counted in determining his deductible
compensation for 1996. For purposes of Section 162(m), the annual incentive
bonus paid in January 1996 based on 1995 results is included in 1996
compensation, and the bonus amount shown in the Summary Compensation Table,
which is attributable to 1996 performance, will be included in determining
1997 compensation under Section 162(m). Awards of Restricted Stock are
generally included in compensation for purposes of Section 162(m) only upon
vesting. Since Restricted Stock shown in the Summary Compensation Table vests
beginning in 1997, such awards are not included in determining 1996
compensation under Section 162(m).

The Committee will consider deductibility under Section 162(m) with respect
to future compensation arrangements with executive officers. However, the
Committee and the Valero Board believe that it is in the best interests of the
stockholders that the Committee retain its flexibility and discretion to make
compensation awards to foster other corporate goals, such as to encourage
employee retention or to reward achievement of nonquantifiable goals,
including achieving progress with specific projects such as the strategic
transaction contemplated by the Merger Agreement.

Members of the Compensation Committee:

Lowell H. Lebermann, Chairman Robert G. Dettmer A. Ray Dudley James L. Johnson

68
<PAGE>

Notwithstanding anything to the contrary set forth in any of Valero's
previous filings under the Securities Act, or in the Exchange Act that might
incorporate future filings by reference, including this Proxy Statement-
Prospectus, in whole or in part, the Performance Graph and Report of the
Compensation Committee of the Board of Directors on Executive Compensation
shall not be incorporated by reference into any such filings. The foregoing
Performance Graph and Report of the Compensation Committee of the Board of
Directors on Executive Compensation shall not be deemed to be "soliciting
material" or to be "filed" with the SEC or subject to regulations 14A or 14C
under the Exchange Act, or to the liabilities of Section 18 of the Exchange
Act.

EXECUTIVE COMPENSATION

The following table provides a summary of compensation paid to the persons
serving as Valero's CEO, and to its four other most highly compensated
executive officers, for services rendered in all capacities to Valero for the
last three years. Benefits under health care, disability, term life insurance,
vacation and other plans available to employees generally are not included
herein.

SUMMARY COMPENSATION TABLE (1994-1996)

<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
---------------------------------- ---------------------
RESTRICTED SECURITIES
STOCK UNDERLYING ALL OTHER
BONUS AWARDS OPTIONS/ LTIP COMPENSATION
ALL OTHER NAME AND POSITION(S) YEAR SALARY($) ($)(1) ($)(2) SARS(#) PAYOUTS(3) ($)(4)
- ------------------------------ ---- --------- -------- ---------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
William E. Greehey(5)... 1996 $497,337 $670,739 $1,545,362 5,000 $325,000 $928,949
Director, Chairman 1995 684,540 560,000 431,250 0 0 73,007
of the Board and 1994 622,020 0 0 355,300 0 71,664
Chief Executive
Officer of Valero
F. Joseph Becraft(5).... 1996 $450,030 $ 0 $ 276,250 40,000 $271,138 $ 4,252
Director, President 1995 266,680 180,000 421,875 120,000 0 4,252
and Chief Executive
Officer of Valero
Edward C. Benninger(5).. 1996 $357,180 $335,370 $ 497,500 25,000 $ 93,698 $ 28,541
Director and President 1995 342,600 210,000 189,750 0 0 27,016
of Valero 1994 335,040 0 0 125,500 0 27,598
Stan L. McLelland....... 1996 $300,930 $111,812 $ 0 25,000 $ 70,200 $ 25,631
Executive Vice 1995 278,700 162,000 138,000 0 0 23,313
President and General 1994 262,380 0 0 82,600 0 23,836
Counsel of Valero
E. Baines Manning(6).... 1996 $253,230 $122,989 $ 0 18,000 $ 58,500 $ 18,753
Executive Vice 1995 231,420 120,000 51,750 0 0 12,468
President of Valero 1994 216,420 0 0 63,500 0 15,524
Refining and
Marketing Company
Terrence E. Ciliske(6).. 1996 $180,156 $167,701 $ 51,000 3,400 $ 36,823 $ 10,670
Executive Vice
President of Valero
Natural Gas Company
</TABLE>
- --------
(1) In 1994, executives received no bonuses. For 1995, executives received
bonuses payable 70% in cash and 30% in Common Stock. For 1996, executives
received bonuses payable 25% in cash and 75% in Common Stock. For further
information, see the Report of the Compensation Committee of the Board of
Directors on Executive Compensation above.

69
<PAGE>

(2) For each named executive officer, the number of shares of Restricted Stock
held at December 31, 1996, and the value thereof, based on the closing
market price of the Valero Common Stock at December 31, 1996, was as
follows: Mr. Greehey: 62,073 shares--$1,776,840; Mr. Benninger: 27,333
shares--$782,407; Mr. McLelland: 5,333 shares--$152,667; Mr. Manning:
2,000 shares--$57,250; and Mr. Ciliske: 3,400 shares--$97,325. Dividends
are paid on the Restricted Stock at the same rate as on Valero's
unrestricted Common Stock. The 1996 grants of Restricted Stock to Messrs.
Greehey and Benninger will vest upon completion of the transaction
contemplated by the Merger Agreement or, if such transaction is not
consummated, would vest in annual increments of 33 1/3% beginning on the
first anniversary of the grant date. The grant of Restricted Stock to Mr.
Becraft vested upon his resignation; Mr. Becraft did not hold Restricted
Stock at December 31, 1996.

(3) LTIP payouts are the number of performance share awards vested for 1996
multiplied by the market price per share on the vesting date. For more
information see the notes following the table entitled "Long Term
Incentive Plans--Awards in Last Fiscal Year."

(4) Amounts include Valero contributions pursuant to the Employee Stock Plans,
and that portion of interest accrued under the Executive Deferred
Compensation Plan which is deemed to be at "above-market" rates under
applicable SEC rules. Messrs. Greehey, Becraft, Benninger, McLelland,
Manning and Ciliske were allocated $31,460, $10,975, $25,574, $21,074,
$18,758, and $10,670, respectively, as a result of Valero contributions to
Employee Stock Plans for 1996, and $9,066, $0, $2,967 $4,557, $0 and $0
respectively, as a result of "above-market" allocations to the Executive
Deferred Compensation Plan for 1996. Messrs. Becraft, Manning and Ciliske
do not participate in the Executive Deferred Compensation Plan. Amounts
for Mr. Greehey also include executive insurance policy premiums with
respect to cash value life insurance (not split-dollar life insurance) in
the amount of $13,000 for 1994 and 1995 and $7,583 for 1996; such amounts
for 1996 also include (i) consulting fees ($141,667), Board fees
($29,833), SERP payments ($278,862) and the interest component of deferred
compensation plan payments ($27,648) made during the period following his
retirement and prior to his reemployment, and (ii) payments made following
his retirement for Excess Thrift Plan balances ($339,617) and unused
vacation ($63,213). Payments received during Mr. Greehey's retirement
directly from the Pension Plan are excluded.

(5) Mr. Becraft was employed by Valero beginning May 1, 1995, and was elected
President of Valero on January 1, 1996 and Chief Executive Officer of
Valero on June 30, 1996. Mr. Greehey resigned from his position as Chief
Executive Officer of Valero on June 30, 1996. Mr. Becraft resigned from
his positions as President and Chief Executive Officer of Valero on
November 20, 1996, whereupon Mr. Greehey was reap- pointed Chief Executive
Officer of Valero. At that time, the Valero Board also promoted Mr.
Benninger from Executive Vice President to President of Valero.

(6) The Valero Board has determined to include Mr. Ciliske and Mr. Manning in
the Summary Compensation Table in accordance with Rule 3b-7 under the
Exchange Act. Mr. Ciliske was not an executive officer of Valero for any
part of 1994 or 1995.

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<PAGE>

STOCK OPTION GRANTS AND RELATED INFORMATION

The following table provides further information regarding the grants of
stock options to the named executive officers reflected in the Summary
Compensation Table.

OPTION/SAR GRANTS IN THE LAST FISCAL YEAR

<TABLE>
<CAPTION>
NUMBER OF
SECURITIES PERCENT
UNDERLYING OF TOTAL
OPTIONS/ OPTIONS/ MARKET
SARS SARS GRANTED EXERCISE OR PRICE AT GRANT DATE
GRANTED TO EMPLOYEES BASE PRICE GRANT DATE EXPIRATION PRESENT VALUE
NAME (#)(1) IN FISCAL YEAR ($/SH) ($/SH) DATE ($)(2)
- ---- ---------- -------------- ----------- ---------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
William E. Greehey...... 5,000 .69% $25.3125 $25.3125 07/01/2006 $ 29,580
F. Joseph Becraft....... 40,000 5.56% $27.5625 $27.5625 05/30/2006 259,440
Edward C. Benninger..... 25,000 3.47% $27.5625 $27.5625 05/30/2006 162,150
Stan L. McLelland....... 25,000 3.47% $27.5625 $27.5625 05/30/2006 162,150
E. Baines Manning....... 18,000 2.50% $27.5625 $27.5625 05/30/2006 116,748
Terrence E. Ciliske..... 7,500 1.04% $27.5625 $27.5625 05/30/2006 48,645
2,500 .35% $25.3125 $25.3125 07/01/2006 14,790
</TABLE>
- --------
(1) Options granted in 1996 vest (become exercisable and nonforfeitable) in
equal increments over a three year period from the date of grant. In the
event of a change of control of Valero (including stockholder approval of
the Merger Agreement), such options would also become immediately
exercisable pursuant to provisions of the plan or of an executive
severance agreement. Under the terms of the plan, the exercise price and
tax withholding obligations related to exercise may be paid by delivery of
already owned shares or by offset of the underlying shares, subject to
certain conditions.

(2) A variation of the Black-Scholes option pricing model was used to
determine grant date present value. This model is designed to value
publicly traded options. Options issued under Valero's option plans are
not freely traded, and the exercise of such options is subject to
substantial restrictions. Moreover, the Black-Scholes model does not give
effect to either risk of forfeiture or lack of transferability. The
estimated values under the Black-Scholes model are based on assumptions as
to variables such as interest rates, stock price volatility and future
dividend yield. The estimated grant date present values presented in this
table were calculated using an expected average option term of 3.32 years,
a risk-free rate of return of 6.41%, an average volatility rate of 25.4%
for the options expiring 5/30/2006 and 25.17% for the options expiring
7/1/2006 and a dividend yield of 1.88% for the options expiring 5/30/2006
and 2.04% for the options expiring 7/1/2006. The actual value of stock
options could be zero; realization of any positive value depends upon the
actual future performance of the Valero Common Stock, the continued
employment of the option holder throughout the vesting period and the
timing of the exercise of the option. Accordingly, the values set forth in
this table may not be achieved.

71
<PAGE>

The following table provides information regarding securities underlying
options exercisable at December 31, 1996, and options exercised during 1996,
for the executive officers named in the Summary Compensation Table:

AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION/SAR VALUES

<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF SECURITIES IN-THE-MONEY
UNDERLYING UNEXERCISED OPTIONS/SARS AT
SHARES ACQUIRED VALUE OPTIONS/SARS AT FY-END(#) FY-END ($)(1)
ON EXERCISE REALIZED ------------------------- --------------------------
NAME (#) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLES
- ---- --------------- -------- ----------- ------------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C>
William E. Greehey...... -- -- 510,184 5,000 $4,522,154 $ 15,625
F. Joseph Becraft....... -- -- 160,000 -- 1,167,500 --
Edward C. Benninger..... -- -- 62,472 133,833 364,587 1,031,800
Stan L. McLelland....... -- -- 47,857 96,266 328,157 682,762
E. Baines Manning....... -- -- 38,217 72,833 270,792 524,300
Terrence E. Ciliske..... -- -- 24,019 25,400 158,628 155,588
</TABLE>
- --------
(1) Represents the dollar value obtained by multiplying the number of
unexercised options/SARs by the difference between the stated exercise
price per share of the options/SARs and the average market price per share
of Valero Common Stock on December 31, 1996.

72
<PAGE>

LONG-TERM INCENTIVE PLANS

The following table provides information regarding long-term incentive
grants to the named executive officers reflected in the Summary Compensation
Table.

LONG TERM INCENTIVE PLANS--AWARDS IN LAST FISCAL YEAR(1)

ESTIMATED FUTURE PAYOUTS UNDER NON-STOCK PRICE-BASED PLANS

<TABLE>
<CAPTION>
PERFORMANCE
NUMBER OF OR OTHER PERIOD
SHARES, UNITS UNTIL MATURATION THRESHOLD TARGET MAXIMUM
NAME OR OTHER RIGHTS OR PAYOUT (# SHARES) (# SHARES) (# SHARES)
- ---- --------------- ---------------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
William E. Greehey...... 10,000 12/31/96 0 10,000 20,000
10,000 12/31/97 0 10,000 20,000
10,000 12/31/98 0 10,000 20,000
F. Joseph Becraft....... 3,634 12/31/96 0 3,634 7,268
3,633 12/31/97 0 3,633 7,266
3,633 12/31/98 0 3,633 7,266
Edward C. Benninger..... 2,884 12/31/96 0 2,884 5,768
2,883 12/31/97 0 2,883 5,766
2,883 12/31/98 0 2,883 5,766
Stan L. McLelland....... 2,160 12/31/96 0 2,160 4,320
2,160 12/31/97 0 2,160 4,320
2,160 12/31/98 0 2,160 4,320
E. Baines Manning....... 1,800 12/31/96 0 1,800 3,600
1,800 12/31/97 0 1,800 3,600
1,800 12/31/98 0 1,800 3,600
Terrence E. Ciliske..... 1,134 12/31/96 0 1,134 2,268
1,134 12/31/97 0 1,134 2,268
1,134 12/31/98 0 1,134 2,268
</TABLE>
- --------
(1) Long-term incentive awards are grants of performance shares ("Performance
Shares") made under the ESIP.

(2) Total stockholder return ("TSR") during a specified "performance period"
was established as the performance measure for determining what portion of
the 1996 Performance Share awards will vest. For purposes of the
Performance Share awards, TSR is measured by dividing the sum of (a) the
net change in the price of a share of Valero Common Stock between the
beginning of the performance period and the end of the performance period,
and (b) the total dividends paid on the Valero Common Stock during the
performance period, by (c) the price of a share of Valero Common Stock at
the beginning of the performance period. Each 1996 Performance Share award
is subject to vesting in three increments, based upon Valero's TSR during
overlapping three-year periods, with the first such three-year period for
the 1996 grants beginning January 1, 1994 and ending December 31, 1996. At
the end of the three-year performance period, Valero's TSR is compared to
the TSR for each company in a target group of approximately 16 companies.
Valero and the companies in the target group are then ranked by quartile.
At the end of each performance period, participants earn 0%, 50%, 100% or
150% of the initial grant amount for such period depending upon whether
Valero's TSR is in the last, 3rd, 2nd or 1st quartile of the target group;
200% will be earned if Valero ranks highest in the group. Amounts not
earned in a given three-year period can be carried forward for one
additional three-year period and up to 100% of the carried amount can
still be earned, depending upon the quartile achieved for such subsequent
period.

73
<PAGE>

RETIREMENT BENEFITS

The following table shows the estimated annual gross benefits payable under
Valero's Pension Plan ("Pension Plan"), Supplemental Pension Plan and
Supplemental Executive Retirement Plan ("SERP") upon retirement at age 65,
based upon the assumed compensation levels and years of service indicated and
assuming an election to have payments continue for the benefit of the life of
the participant only.

ESTIMATED ANNUAL PENSION BENEFITS AT AGE 65

<TABLE>
<CAPTION>
YEARS OF SERVICE
COVERED -----------------------------------------------------------------------
COMPENSATION 15 20 25 30 35
- ------------ -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
$ 200,000 $ 55,000 $ 73,000 $ 92,000 $110,000 $128,000
300,000 84,000 112,000 141,000 169,000 197,000
400,000 114,000 151,000 189,000 227,000 265,000
500,000 143,000 190,000 238,000 286,000 333,000
600,000 172,000 229,000 287,000 344,000 401,000
700,000 201,000 268,000 336,000 403,000 470,000
800,000 231,000 307,000 384,000 461,000 538,000
900,000 260,000 346,000 433,000 520,000 606,000
1,000,000 289,000 385,000 482,000 578,000 674,000
1,100,000 318,000 424,000 531,000 637,000 743,000
1,200,000 348,000 463,000 579,000 695,000 811,000
1,300,000 377,000 502,000 628,000 754,000 879,000
</TABLE>

Valero maintains a noncontributory defined benefit Pension Plan in which
virtually all employees are eligible to participate and under which
contributions for individual participants are not determinable. Valero also
maintains a noncontributory, nonqualified Supplemental Pension Plan which
provides supplemental pension benefits to certain highly compensated employees
to the extent that the pension benefits otherwise payable to such employees
from the Pension Plan would exceed benefits permitted under applicable
regulations to be paid from a tax-qualified defined benefits plan. Accrued
contributions for the 1996 Pension Plan year were approximately 5.5% of total
covered compensation. No contributions were made to the Supplemental Pension
Plan. The Pension Plan (supplemented, as necessary, by the Supplemental
Pension Plan) provides a monthly pension at normal retirement equal to 1.6% of
the participant's average monthly compensation (based upon the participant's
base earnings during the 60 consecutive months of the participant's credited
service affording the highest such average) times the participant's years of
credited service, plus .35% times the product of the participant's years of
credited service (maximum 35 years) multiplied by the excess of the
participant's average monthly compensation over the lesser of 1.25 times the
monthly average (without indexing) of the social security wage bases for the
35-year period ending with the year the participant attains social security
retirement age, or the monthly average of the social security wage base in
effect for the year that the participant retires.

Valero also maintains the SERP, a non-qualified plan providing additional
pension benefits to certain executive officers and employees of Valero.
Valero's obligations under the SERP are substantially fully funded through
investments held in a trust established for the SERP under which Frost
National Bank of San Antonio, N.A., serves as trustee. During 1996
contributions aggregating $9.2 million were made to the SERP Trust.

Compensation for purposes of the Pension Plan and Supplemental Pension Plan
includes only salary as reported in the Summary Compensation Table and
excludes cash bonuses. For purposes of the SERP, the participant's most highly
compensated consecutive 36 months of service during the participant's last 10
years of employment (rather than 60 months) are considered, and bonuses are
included. Accordingly, the amounts reported in the Summary Compensation Table
under the headings "Salary" and "Bonus" constitute covered compensation for
purposes of the SERP. Pension benefits are not subject to any deduction for
social security or other offset amounts.

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Credited years of service for the period ended December 31, 1996 for the
executive officers named in the Summary Compensation Table are as follows: Mr.
Greehey--33 years; Mr. Becraft--6 years; Mr. Benninger-- 22 years; Mr.
McLelland--18 years; Mr. Manning--10 years; and Mr. Ciliske--13 years. The
credited service for Mr. Becraft and Mr. McLelland includes five years and two
years service, respectively, credited pursuant to the terms of their
employment by Valero and for which benefits are payable only from the SERP.
See "Arrangements with Certain Officers and Directors."

ARRANGEMENTS WITH CERTAIN OFFICERS AND DIRECTORS

Valero entered into an employment agreement with Mr. Greehey dated May 16,
1990 which expired June 9, 1995. The agreement provided that Mr. Greehey would
be entitled to receive certain post-retirement benefits, including office
facilities and secretarial support until age 69, transfer of certain club
memberships, the vesting of previously granted stock option and restricted
stock grants, certain medical and life insurance benefits and the right to
certain supplemental amounts under the SERP. In November 1994, the Valero
Board approved resolutions continuing such post-retirement benefits,
notwithstanding the termination of such agreement. Effective upon his
retirement from his positions as President and Chief Executive Officer in June
1996, the specified post-retirement benefits were provided to Mr. Greehey and
he was requested to continue to serve as Chairman of the Valero Board. Valero
and Mr. Greehey also entered into a consulting agreement pursuant to which Mr.
Greehey received compensation at the rate of $340,000 per annum for providing
general advice and consulting services, as well as management services for
particular projects. Mr. Greehey was reemployed by Valero on November 21,
1996, and the consulting agreement terminated at that time. For additional
information regarding Mr. Greehey's compensation, see "Report of the
Compensation Committee of the Board of Directors on Executive Compensation."
In order to clarify Mr. Greehey's continuing benefit arrangements, the Valero
Board determined that, following Mr. Greehey's ultimate retirement from active
employment, he will continue to be eligible to receive substantially the same
office and secretarial support, medical and life insurance benefits and
supplemental SERP benefits as were provided following his earlier retirement.

Effective May 1, 1995, Valero entered into an employment agreement with Mr.
Becraft expiring April 30, 2000. Under the agreement, Mr. Becraft was entitled
to receive a minimum base salary of $400,000 per annum, and to participate in
Valero's executive incentive bonus plan, restricted stock plans, option plans
and SERP; for purposes of determining benefits payable under the SERP, Mr.
Becraft's prior service from 1984-1989 was credited. Mr. Becraft was elected
Chief Executive Officer of Valero effective July 1, 1996, and his base salary
was increased to $500,000 at that time. Valero subsequently entered into a
separation agreement with Mr. Becraft effective November 20, 1996. The
separation agreement provided that, through April 30, 2000, Mr. Becraft will
continue to receive his then-effective base salary. Additionally, the
agreement provided for the immediate vesting of previously granted stock
options, restricted stock and performance shares; office and secretarial
support for a six-month period; transfer of a club membership; certain health
benefits until the original expiration date of the employment agreement;
assignment of a life insurance policy; and certain tax planning services.

Valero has entered into agreements (the "Severance Agreements") with Messrs.
Greehey, Benninger, McLelland and Manning which provide certain payments and
other benefits in the event of their termination of employment under certain
circumstances. The Severance Agreements provide that if the executive leaves
Valero for any reason (other than death, disability or normal retirement)
within two years after a "change of control," the executive will receive a
lump sum cash payment equal to three times, in the cases of Messrs. Greehey
and McLelland, and two times, in the cases of Messrs. Benninger and Manning,
his highest compensation during any consecutive 12-month period in the prior
three years. The executive will also be entitled to accelerated exercise of
stock options and SARs and accelerated vesting of restricted stock previously
granted. The agreements also provide for special retirement benefits if the
executive would have qualified for benefits under the Pension Plan had he
remained with Valero for the three-year period following such termination, for
continuance of life and health insurance coverages and other fringe benefits
for such three-year period and for relocation assistance. Messrs. Greehey,
Benninger, McLelland and Manning have each executed waivers providing that the
consummation of the transactions contemplated by the Merger Agreement will not
constitute a "change of control" for purposes of such Severance Agreements.

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In connection with pursuing various strategic alternatives, including the
transactions contemplated by the Merger Agreement, Valero entered into
Management Stability Agreements ("Stability Agreements") and Incentive Bonus
Agreements ("Incentive Agreements") with various key executives, including Mr.
Terrence E. Ciliske, Executive Vice President of Valero Natural Gas Company
and Mr. Peter A. Fasullo, Senior Vice President-Corporate Development. These
agreements are intended to assure the continued availability of
Messrs. Ciliske and Fasullo in the event of certain transactions culminating
in a "change of control" of Valero and/or a divestiture of one of Valero's
principal businesses. Under the Stability Agreements, in the event either of
such executive's employment is terminated within two years after a change of
control or divestiture transaction has occurred, and termination is not
voluntary or the result of death, permanent disability, retirement or certain
other defined circumstances, the executive would be entitled to receive a lump
sum cash payment equal to the sum of (i) two times the highest annual
compensation paid to such executive during the prior three year period, plus
an amount equal to the executive's average annual incentive bonus over the
prior three years; the continuation of life, disability and health insurance
coverages for two years; and certain relocation assistance. The executives
would also be entitled to accelerated vesting of all previously granted stock
options, SARs and restricted stock. Under the Incentive Agreements, if the
executive continues to be employed by Valero and a merger or another
qualifying transaction is accomplished, the executive will be entitled to
receive a cash incentive bonus payment equal to one times the executive's
highest annual base salary during the prior three year period. In the case of
Mr. Ciliske, all of such payment is payable at the closing of the transaction,
and in the case of Mr. Fasullo, 60% of such payment is payable at closing and
40% is payable six months following closing or, under certain circumstances,
upon his earlier termination of employment.

In connection with Mr. Greehey's then-pending retirement, in May 1996 the
Compensation Committee approved special retirement arrangements that would be
applicable to Messrs. Benninger and McLelland if they deferred their
retirement from Valero to after June 30, 1996. Under these arrangements, upon
their ultimate retirement, Messrs. Benninger and McLelland would each receive
eight supplemental retirement "points," to be divided between age and credited
service in such proportions as each shall elect at the time of retirement. In
addition, for the year in which he retires each executive will be entitled to
a prorated executive incentive bonus and tax preparation services. Each
executive would also be entitled to accelerated vesting of all previously
granted stock options and Restricted Stock, and Mr. Benninger's existing club
membership would be transferred to him without cost.

TRANSACTIONS WITH MANAGEMENT AND OTHERS

Valero has invested through a subsidiary approximately $10.7 million in a
program to drill coal seam gas wells in New Mexico. In order to share the
drilling and other risks inherent in this project, various officers and
employees of Valero were permitted to invest as general partners in a
partnership to which the subsidiary's interest was assigned. The Valero Board
determined in 1992 that this transaction was fair to Valero. During 1992 and
1993 Messrs. Greehey, Benninger, McLelland and Manning invested approximately
$207,000, $52,000, $156,000 and $104,000, respectively, to acquire respective
interests of 2.0%, .50%, 1.5% and 1.0% in the project. No additional
investments were made by these executive officers during 1994 or 1996. During
1995, a company owned by Mr. Manning purchased an additional .25% interest in
the project from another investor. During 1996, Messrs. Greehey, Benninger,
McLelland and Manning (including such company) received cash distributions of
$45,680, $11,420, $34,260 and $28,550, respectively, attributable to their
investments. Additionally, all investors in the project may be eligible to
utilize certain federal income tax credits applicable to the project.

Except as disclosed herein, no executive officer, director or nominee for
director of Valero has been indebted to Valero, or has acquired a material
interest in any transaction to which Valero is a party, during the last fiscal
year.

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PROPOSALS NOS. 2 AND 3--THE DISTRIBUTION AND MERGER

At the Annual Meeting, the Valero stockholders will be asked to approve and
adopt the following resolution with respect to Proposal No. 2 (the
Distribution Proposal), as adopted at the Valero Board meeting held on
April 11, 1997:

RESOLVED, that the distribution described in the Agreement and Plan of
Distribution (as it may be amended, supplemented or modified from time to
time), as described in the Proxy Statement-Prospectus for this Annual
Meeting, is hereby approved and adopted.

In addition, the Valero stockholders will be asked at the Annual Meeting to
approve and adopt the following resolution with respect to Proposal No. 3 (the
Merger Proposal), as adopted at the Valero Board meeting held on April 11,
1997:

RESOLVED, that the Agreement and Plan of Merger, dated as of January 31,
1997 (as it may be amended, supplemented or modified from time to time), as
described in the Proxy Statement-Prospectus for this Annual Meeting, is
hereby approved and adopted.

AS NOTED ABOVE, VALERO'S BOARD OF DIRECTORS HAS RECOMMENDED THAT THE
STOCKHOLDERS VOTE FOR BOTH PROPOSALS.

PROPOSAL NO. 4--RATIFICATION OF INDEPENDENT PUBLIC ACCOUNTANTS

The Valero Board desires to obtain stockholder approval of the following
resolution adopted at the Valero Board meeting held on April 11, 1997,
appointing Arthur Andersen LLP, 70 N.E. Loop 410, San Antonio, Texas 78216, as
independent public accountants for Valero for the year 1997. Arthur Andersen
LLP has served continuously in such capacity for Valero since 1979.

RESOLVED, that the appointment of the firm of Arthur Andersen LLP,
Certified Public Accountants, as the independent auditors for Valero for
the purpose of conducting an examination and audit of the financial
statements of Valero and its subsidiaries for the fiscal year ending
December 31, 1997, is hereby approved and ratified.

THE BOARD RECOMMENDS THAT THE STOCKHOLDERS VOTE "FOR" THE PROPOSAL TO RATIFY
THE APPOINTMENT OF INDEPENDENT PUBLIC ACCOUNTANTS.

Passage of the proposal requires approval of a majority of the shares
represented at the Annual Meeting and entitled to vote thereat. If the
appointment is not approved, the adverse vote will be considered as an
indication to the Valero Board that it should select other independent public
accountants for the following year. Because of the difficulty and expense of
making any substitution of accountants so long after the beginning of the
current year, it is contemplated that the appointment for the year 1997 will
be permitted to stand unless the Valero Board finds other good reason for
making a change.

A representative of Arthur Andersen LLP is expected to be present at the
Annual Meeting to respond to appropriate questions raised at the Annual
Meeting or submitted to such firm in writing prior to the Annual Meeting, and
to make a statement if he desires to do so.

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DESCRIPTION OF PG&E CORP. CAPITAL STOCK

The following description of certain terms of the PG&E Corp. capital stock
does not purport to be complete and is qualified in its entirety by reference
to the Restated Articles of Incorporation of PG&E Corp. ("PG&E Corp.'s
Articles of Incorporation") and the Bylaws of PG&E Corp., as amended ("PG&E
Corp.'s Bylaws"), as well as by applicable statutory or other law.

Authorized and Outstanding Shares. PG&E Corp.'s Articles of Incorporation
authorize the issuance of 800 million shares of common stock ("PG&E Corp.
Common Stock") and 85 million shares of preferred stock ("PG&E Corp. Preferred
Stock"). As of April 30, 1997, there were approximately 405,852,050
outstanding shares of PG&E Corp. Common Stock and no shares of PG&E Corp.
Preferred Stock outstanding. PG&E Corp. Common Stock and PG&E Corp. Preferred
Stock may be issued by PG&E Corp. from time to time upon such terms and for
such consideration (and, as to preferred stock, having such rights,
preferences, privileges, and restrictions) as may be determined by PG&E
Corp.'s Board of Directors. Such further issuances, up to the aggregate
amounts authorized by PG&E Corp.'s Articles of Incorporation, will not require
approval by the shareholders. PG&E Corp. also may issue PG&E Corp. Common
Stock from time to time pursuant to dividend reinvestment and employee benefit
plans.

Voting Rights. Holders of PG&E Corp. Common Stock have voting rights on the
basis of one vote per share. Any series of PG&E Corp. Preferred Stock issued
by PG&E Corp. will have such voting rights as may be determined by PG&E
Corp.'s Board of Directors at the time of issuance. PG&E Corp. shareholders
may not cumulate votes in elections of directors. As a result, the holders of
PG&E Corp. Common Stock and (if issued) Preferred Stock entitled to exercise
more than 50% of the voting rights in an election of directors can elect 100%
of the directors to be elected if they choose to do so. In such event, the
holders of the remaining PG&E Corp. Common Stock and Preferred Stock voting
for the election of directors will not be able to elect any persons to the
Board of Directors.

Dividend, Liquidation and Other Rights. Holders of PG&E Corp. Common Stock,
subject to any prior rights or preferences of PG&E Corp. Preferred Stock
outstanding, (a) have equal rights to receive dividends if and when declared
by the Board of Directors out of funds legally available therefor, and (b)
will receive any distribution made to shareholders upon liquidation. PG&E
Corp. Common Stock has no preemptive rights to subscribe for additional shares
of PG&E Corp. Common Stock or other securities of PG&E Corp., nor does it have
any redemption or conversion rights.

PG&E Corp.'s common stock dividend is based on a number of financial
considerations, including sustainability, financial flexibility, and
competitiveness with investment opportunities of similar risk. In light of the
electric industry restructuring, the ratemaking methodology proposed for
Diablo Canyon and PG&E Corp.'s future business prospects, PG&E Corp. in
October 1996 decreased its quarterly dividend from $.49 per common share to
$.30 per common share which corresponds to an annualized dividend of $1.20 per
common share. PG&E Corp. has identified a dividend payout ratio objective
(dividends declared divided by earnings available for common stock) of between
50 and 65 percent (based on earnings exclusive of nonrecurring adjustments).
PG&E Corp. anticipates paying dividends, if declared, on PG&E Corp. Common
Stock on the 15th day of January, April, July and October to holders of record
on or about the 15th day of the preceding calendar month.

PG&E Corp. Common Stock is listed on the New York Stock Exchange and on the
Pacific Stock Exchange. All outstanding shares of PG&E Corp. Common Stock are
fully paid and nonassessable.

Anti-Takeover Protections. Certain provisions of PG&E Corp.'s Articles of
Incorporation could make more difficult the acquisition of PG&E Corp. For
example, PG&E Corp.'s Articles of Incorporation authorize the Board of
Directors to issue PG&E Corp. Preferred Stock without shareholder approval and
contain a Fair Price Provision. See "COMPARISON OF CERTAIN RIGHTS OF
STOCKHOLDERS OF VALERO AND PG&E CORP.--Fair Price Provisions".

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COMPARISON OF CERTAIN RIGHTS
OF STOCKHOLDERS OF VALERO AND PG&E CORP.

Upon consummation of the Merger, the stockholders of Valero, a Delaware
corporation, will become shareholders of PG&E Corp., a California corporation.
The rights of such stockholders will then be governed by PG&E Corp.'s Articles
of Incorporation and Bylaws and the California General Corporation Law (the
"California Law"). The following is a summary of the material differences
between the rights of stockholders of Valero under the Restated Certificate of
Incorporation of Valero ("Valero's Certificate of Incorporation"), the By-laws
of Valero, as amended and restated ("Valero's By-laws"), and the Delaware
General Corporation Law (the "Delaware Law"), on the one hand, and the rights
of shareholders of PG&E Corp. under PG&E Corp.'s Articles of Incorporation and
Bylaws and the California Law, on the other hand. This summary does not
purport to constitute a detailed comparison of the provisions of the Delaware
Law and the California Law, and the identification of certain specific
differences is not meant to indicate that other differences do not exist. This
summary is qualified in its entirety by the Delaware Law, the California Law
and the respective charters and By-laws of Valero and PG&E Corp., to which the
stockholders of Valero are referred for a definitive treatment of the subject.
Copies of Valero's Certificate of Incorporation and By-laws are available for
inspection at the offices of Valero and copies will be sent to the holders of
Valero Common Stock upon request. Copies of PG&E Corp.'s Articles of
Incorporation and Bylaws are available for inspection at the offices of PG&E
Corp. and copies will be sent to the holders of PG&E Corp. Common Stock upon
request.

NUMBER OF DIRECTORS

Under the Delaware Law, a corporation's board of directors must consist of
one or more members, with the number fixed by, or in the manner provided in,
the by-laws, unless the certificate of incorporation fixes the number of
directors. The Delaware Law permits the board of directors to change the
authorized number of directors by amendment to the by-laws unless the number
of directors or the manner of fixing the number of directors is set forth in
the certificate of incorporation, in which case the number of directors may be
changed only by amendment of the certificate of incorporation or consistent
with the manner specified in the certificate of incorporation, as the case may
be. Valero's Certificate of Incorporation provides that the number of
directors which shall constitute the whole board of directors shall be as
specified in Valero's By-laws, but in no event fewer than seven. Valero's By-
laws allow a range between seven and thirteen directors. Valero currently has
nine directors.

Under the California Law, as long as a California corporation has more than
two shareholders of record, a corporation's board of directors must consist of
not less than three members with the number fixed by the bylaws or the
articles of incorporation. The California Law permits the bylaws to provide
that the number of directors may vary within a specified range, the exact
number to be determined by the board of directors. The California Law further
provides that, in the case of a variable board, the maximum number of
directors may not exceed two times the minimum number minus one. The
California Law also requires that any change in a fixed number of directors
and any change in the range of a variable board of directors specified in the
bylaws must be approved by a majority of the outstanding shares entitled to
vote; provided that a change reducing the fixed number or minimum number of
directors to less than five cannot be adopted if votes cast against its
adoption are equal to more than 16 2/3% of the outstanding shares entitled to
vote. PG&E Corp.'s Articles of Incorporation allow a range between nine and
seventeen directors, and PG&E Corp.'s Bylaws fix the number at sixteen.

ELECTION OF DIRECTORS

The Delaware Law and the California Law both permit, but do not require, the
adoption of a classified Board of Directors pursuant to which the directors
can be divided into as many as three classes with staggered terms of office
with only one class of directors coming up for election each year.

Valero's Certificate of Incorporation and By-laws provide that Valero's
Board of Directors shall be divided into three classes as nearly equal in
number as may be, each class elected to serve for a three-year term at
alternating annual meetings of shareholders.

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PG&E Corp.'s Articles of Incorporation and Bylaws do not provide for a
classified Board of Directors and accordingly all directors must stand for
election each year.

CUMULATIVE VOTING FOR DIRECTORS

Under the Delaware Law, stockholders of a Delaware corporation do not have
the right to cumulate their votes in elections of directors unless such
corporation's certificate of incorporation expressly provides for cumulative
voting. Under cumulative voting, each share of stock entitled to vote in any
election of directors has such number of votes as is equal to the number of
directors to be elected. A stockholder then may cast all of his or her votes
for a single candidate or may allocate them among as many candidates as the
stockholder may choose. Valero's Certificate of Incorporation provides for
cumulative voting.

Under the California Law, by contrast, shareholders of a California
corporation have the right to cumulate their votes in elections of directors
unless such corporation's articles of incorporation expressly eliminate the
right to cumulative voting. PG&E Corp.'s Articles of Incorporation eliminate
cumulative voting and therefore shareholders are entitled to only one vote per
share for each director to be elected.

REMOVAL OF DIRECTORS

Under the Delaware Law, any director or the entire Board may be removed,
with or without cause, by the holders of a majority of the shares entitled to
vote at an election of directors, subject to certain exceptions, including the
exception (unless the certificate of incorporation otherwise provides) that if
the Board is divided into classes, such removal may only be for cause.

Under the California Law, any director or the entire Board may be removed
without cause by the holders of a majority of the shares entitled to vote,
provided that the shares voted against such removal would not be sufficient to
elect the director under cumulative voting rules. Neither Valero's nor PG&E
Corp.'s charter or Bylaws address removal of directors.

VACANCIES IN BOARD OF DIRECTORS

Under the Delaware Law, unless otherwise provided in the certificate of
incorporation or by-laws, vacancies and newly created directorships resulting
from an increase in the number of directors may be filled by majority vote of
the directors then in office (even if less than a quorum), or by a sole
remaining director. Additionally, if, at the time of filling any vacancy or
newly created directorship, the directors then in office shall constitute less
than a majority of the whole Board (as constituted immediately prior to any
such increase), the Court of Chancery may, upon application of any stockholder
or stockholders holding at least 10% of the total number of the shares at the
time outstanding having the right to vote for such directors, summarily order
an election to be held to fill any such vacancies or newly created
directorships, or to replace the directors chosen by the directors then in
office. Valero's Certificate of Incorporation and By-laws are consistent with
the provisions of Delaware law concerning vacancies and newly created
directorships.

Under the California Law, unless otherwise provided in the articles of
incorporation or bylaws and except for vacancies created by the removal of a
director, vacancies may be filled by majority vote of the directors then in
office (even if less than a quorum), or by a sole remaining director. Unless
the articles of incorporation or a bylaw adopted by the shareholders provide
that the Board of Directors may fill vacancies occurring by reason of the
removal of directors, such vacancies may be filled only by approval of a
majority of the shareholders. Additionally, if, after the filling of any
vacancy by the directors of a corporation, the directors then in office who
have been elected by the corporation's shareholders constitute less than a
majority of the directors then in office, then: (a) any holder or holders of
at least 5% of the voting power of the then outstanding shares of voting stock
of the corporation, entitled to vote in the election of directors may call a
special meeting of shareholders, and (b) the superior court of the appropriate
county shall, upon application of such shareholder(s), order a special meeting
of the shareholders to elect the entire Board of Directors of the corporation.
PG&E Corp.'s Articles of Incorporation and Bylaws do not address filling
vacancies on the Board.

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LIMITATION ON LIABILITY OF DIRECTORS

Under the Delaware Law, a corporation may limit or eliminate a director's
personal liability to the corporation or its stockholders for monetary damages
for breach of fiduciary duty, except for liability for acts or omissions which
(a) resulted in breach of the director's duty of loyalty to the corporation or
its stockholders, (b) were not in good faith or involved intentional
misconduct or a knowing violation of law, (c) resulted in violation of a
statute prohibiting certain dividend payments and stock purchases or
redemptions, (d) resulted in an improper personal benefit or (e) occurred
prior to the adoption by the corporation of a provision in the certificate of
incorporation limiting the director's personal liability. Valero's Certificate
of Incorporation contains a provision to such effect.

The California Law allows a corporation to limit or eliminate a director's
personal liability for monetary damages to the corporation or its shareholders
for breach of certain duties as director except where such liability is based
on: (a) intentional misconduct or knowing and culpable violation of law, (b)
acts or omissions that a director believes to be contrary to the best
interests of the corporation or its shareholders, or that involve the absence
of good faith on the part of the director, (c) receipt of an improper personal
benefit, (d) acts or omissions that show reckless disregard for the director's
duty to the corporation or its shareholders, where the director in the
ordinary course of performing a director's duties should be aware of a risk of
serious injury to the corporation or its shareholders, (e) acts or omissions
that constitute an unexcused pattern of inattention that amounts to an
abdication of the director's duty to the corporation or its shareholders, (f)
interested transactions between the corporation and a director in which a
director has a material financial interest, or (g) liability for improper
distributions, loans or guarantees. PG&E Corp.'s Articles of Incorporation
provide that the liability of directors shall be eliminated to the fullest
extent permissible under California law.

INDEMNIFICATION

In general, the Delaware Law and the California Law both provide that
directors and officers as well as other employees and individuals may be
indemnified against expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement in connection with specified actions, suits or
proceedings, whether civil, criminal, administrative or investigative (other
than an action by or in the right of the corporation as a derivative action)
if they acted in good faith and in a manner they reasonably believed to be in
the best interest of the corporation, and, with respect to any criminal action
or proceeding, if they had no reasonable cause to believe their conduct was
unlawful. There are, however, certain differences between the Delaware Law and
the California Law.

The California Law permits indemnification of expenses incurred in
derivative or third-party actions, except that with respect to derivative
actions (a) no indemnification may be made when a person is adjudged liable to
the corporation in the performance of that person's duty to the corporation
and its shareholders, unless a court determines such person is entitled to
indemnity for expenses, and then such indemnification may be made only to the
extent that such court shall determine and (b) no indemnification may be made
under the California Law in respect of amounts paid in settling or otherwise
disposing of a pending action or expenses incurred in defending a pending
action which is settled or otherwise disposed of without court approval. The
Delaware Law allows indemnification of such expenses without court approval.

Indemnification is permitted by the California Law provided the requisite
standards of conduct are met, as determined by a majority vote of a quorum of
disinterested directors, independent legal counsel (if a quorum of
disinterested directors is not obtainable), a majority vote of the
shareholders (excluding shares owned by the indemnified party) or the court
handling the action.

The California Law requires indemnification when the individual has
successfully defended the action on the merits (as opposed to the Delaware Law
which requires indemnification relating to a successful defense on the merits
or otherwise).

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The Delaware Law generally permits indemnification of expenses incurred in
the defense or settlement of a derivative or third-party action, provided
there is a determination by the disinterested directors, by independent legal
counsel or by a majority vote of the shareholders that the person seeking
indemnification acted in good faith and in a manner reasonably believed to be
in or (in contrast to the California Law) not opposed to the best interests of
the corporation. Without court approval, however, no indemnification may be
made in respect of any derivative action in which such person is adjudged
liable for negligence or misconduct in the performance of his or her duty to
the corporation.

Under the Delaware Law, rights to indemnification and expenses are non-
exclusive, in that they need not be limited to those expressly provided by
statute. The California Law is similar in that it permits non-exclusive
indemnification if authorized in the corporation's charter.

As is permitted under Section 145 of the Delaware Law, Valero has also
entered into individual indemnification agreements ("Indemnification
Agreements") with its officers and directors. Each Indemnification Agreement
provides directors and officers with additional contractual assurance that
indemnification and advancement of expenses will be available to them
regardless of any amendments to or revocation of the indemnification
provisions of the Valero By-laws. Each Indemnification Agreement provides for
indemnification of directors and officers against both stockholder derivative
claims and third-party claims.

Valero's Certificate of Incorporation and Bylaws provide that Valero shall
indemnify the directors, officers, employees or agents of Valero or (if so
serving at the request of Valero) of another corporation, partnership, joint
venture, trust or other enterprise, to the extent permitted under the Delaware
Law.

PG&E Corp.'s Articles of Incorporation provide for indemnification through
bylaws, resolutions, agreements with agents, vote of shareholders or
disinterested directors, or otherwise, in excess of the indemnification
otherwise permitted by California Law, subject only to certain limits. The
Board of Directors of PG&E Corp. has adopted a resolution generally providing
for the indemnification of any officer or director of PG&E Corp. to the
fullest extent permissible under California Law and PG&E Corp.'s Articles of
Incorporation.

ADVANCE NOTICE OF SHAREHOLDER PROPOSALS

Valero's By-laws provide that in order for nominations or other business to
be properly brought before an annual meeting by a stockholder, the other
business must be a proper matter for stockholder action and the holder must
give timely notice to the Secretary of Valero. To be timely, a stockholder's
notice will generally have to be delivered to the Secretary not later than the
close of business on the 60th day nor earlier than the close of business on
the 90th day prior to the first anniversary of the preceding year's annual
meeting. PG&E Corp.'s Bylaws, by contrast, do not address the issue of
shareholder proposals.

SHAREHOLDER ACTION BY WRITTEN CONSENT

Both Delaware and California Law provide that, unless a corporation's
certificate or articles of incorporation states to the contrary, any action
which otherwise is required to be taken or may be taken at a shareholders'
meeting may be taken without a meeting if holders of outstanding stock having
not less than the minimum number of votes necessary to take or authorize such
action at a meeting consent in writing to the action. Valero's By-laws provide
that, in order to determine the stockholders entitled to consent to corporate
action in writing without a meeting, the Board of Directors may fix a record
date. The Valero By-laws further provide that any stockholder of record
seeking to have the stockholders authorize or take corporate action by written
consent shall request the Board of Directors to fix such a date. In the event
of any such action by written consent, the Valero By-laws require Valero to
engage independent inspectors of elections for the purpose of promptly
performing a ministerial review of the validity of the consents. No action by
written consent without a meeting is effective until such date as the
independent inspectors certify that the consents represent at least the
minimum number of votes that would be necessary to take corporate action.

PG&E Corp.'s Articles of Incorporation and Bylaws do not address shareholder
action by written consent.

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SPECIAL MEETING OF SHAREHOLDERS

The Delaware Law provides that special meetings of stockholders may be
called by the Board of Directors and by the person or persons so authorized by
the certificate of incorporation or by-laws. Valero's By-laws state that,
except as otherwise provided by law, special meetings of the stockholders may
be called only by the Chief Executive Officer or by the Board of Directors
pursuant to a resolution adopted by a majority of the directors which Valero
would have if there were no vacancies.

Under the California Law, a special meeting of shareholders may be called by
the Board of Directors, the Chairman of the Board, the President or the
holders of shares entitled to cast not less than 10% of the votes at such
meeting and such persons as are authorized by the articles of incorporation or
bylaws. In addition, PG&E Corp.'s Bylaws authorize the Vice Chairman of the
Board, and the Chairman of the Executive Committee to call a special meeting.

CHARTER AND BY-LAW AMENDMENTS

Both Delaware Law and California Law permit corporations to amend their
charter as often and in whatever fashion desired, so long as the amended
charter contains only provisions that would be lawful in an original charter
at the time of amendment. Amendments may be authorized by the Board of
Directors, followed by majority vote of the shareholders entitled to vote and,
in certain instances, of each class of shares entitled to vote. Certain
specified amendments may also be authorized by the Board without shareholder
approval. Valero's Certificate of Incorporation provides for stockholders and
the Board of Directors to amend both the Bylaws and the Certificate of
Incorporation, except that an amendment of the Certificate of Incorporation
requires an affirmative vote of eighty percent (80%) of all voting stock to
amend, alter, change or repeal certain provisions regarding the Board of
Directors and affiliated transactions.

With one exception, PG&E Corp.'s Articles of Incorporation do not address
amendments. Article EIGHTH of the Articles of Incorporation which contains a
Fair Price Provision requires the affirmative vote of not less than seventy-
five percent (75%) of the voting stock to amend, repeal or adopt any
provisions inconsistent with the Article, unless the Board of Directors first
approves or recommends such, in which case a majority of the voting stock is
sufficient. PG&E Corp.'s Bylaws provide for amendment by majority action from
either the shareholders or the Board. See "Fair Price Provisions" below.

PAYMENT OF DIVIDENDS

Under the Delaware Law, subject to any restrictions in the certificate of
incorporation, a corporation may declare and pay dividends out of surplus or,
if there is no surplus, out of net profits for the current and/or preceding
fiscal year, provided that no dividend may be declared and paid out of net
profits if the capital of the corporation is less than the aggregate amount of
the capital represented by the issued and outstanding stock of all classes
having a preference upon the distribution of assets. Valero's Certificate of
Incorporation provides for dividend payments which "are by law available."

Under the California Law, any dividends or other distributions to
shareholders, such as redemptions, are limited to the greater of (a) retained
earnings or (b) an amount which would leave the corporation with assets
(excluding certain intangible assets) equal to at least 125% of its
liabilities (excluding certain deferred items) and current assets equal to at
least 100% (or, in certain circumstances, 125%) of its current liabilities.

INSPECTION OF BOOKS AND RECORDS

Under the Delaware Law, any stockholder of record may, upon written demand
under oath stating the purpose thereof, inspect for any proper purpose the
corporation's stock ledger, a list of its stockholders, and its other books
and records and to make copies or extracts therefrom.

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The California Law similarly provides that any shareholder of record has the
right, upon written demand stating a purpose reasonably related to such
holder's interests as a shareholder, to inspect the accounting records and
minutes of the corporation. In addition, the California Law provides for an
absolute right of inspection of the shareholder list for shareholders holding
5% or more of a corporation's outstanding voting shares or shareholders
holding 1% or more of such shares who have filed a Schedule 14A with the
Securities and Exchange Commission.

LOANS TO DIRECTORS, OFFICERS AND EMPLOYEES

Under the Delaware Law, a corporation may make loans to, or guarantee the
obligations of, or otherwise assist the officers or employees of the
corporation or its subsidiaries (including directors who are also officers or
employees) without stockholder approval if such action, in the judgment of the
directors, may reasonably be expected to benefit the corporation. The Delaware
Law permits such loans or guarantees to be unsecured and without interest.

The California Law provides that any loan or guaranty (other than loans to
permit the purchase of shares under certain stock purchase plans) for the
benefit of any officer or director, or any employee benefit plan authorizing
such loan or guaranty (except certain employee stock purchase plans), must be
approved by the shareholders of a California corporation.

SHAREHOLDER APPROVAL OF EXTRAORDINARY TRANSACTIONS

The Delaware Law requires the vote of the holders of a majority of all
outstanding shares entitled to vote thereon to adopt an agreement of merger or
consolidation, to approve the sale, lease or exchange of all or substantially
all the assets of a corporation, and to authorize the dissolution of a
corporation.

Similarly, California Law generally requires the approval of the holders of
a majority of all outstanding shares entitled to vote thereon of each class to
adopt an agreement of merger or acquisition, to approve the sale, lease or
exchange of all or substantially all the assets of a corporation, and to
authorize the dissolution of a corporation.

BUSINESS COMBINATION STATUTE

Under the Delaware Law, no corporation may engage in a business combination
(as defined therein) with any interested shareholder (as defined therein) of
such corporation for a period of three years following the time that such
stockholder became an interested stockholder unless (a) prior to such time the
Board of Directors approved either the business combination or the transaction
which resulted in the stockholder becoming an interested stockholder, (b) upon
consummation of the transaction which resulted in the stockholder becoming an
interested stockholder, the interested stockholder owned at least 85% of the
voting stock of the corporation outstanding at the time the transaction
commenced (excluding certain shares), (c) at or subsequent to such time the
business combination is approved by the Board of Directors and authorized at
an annual or special meeting of stockholders by the affirmative vote of at
least 66 2/3% of the outstanding voting stock not owned by the interested
stockholder or (d) certain other conditions are met.

The California Law has no comparable corporate statute, however, Section 854
of the California Public Utilities Code provides that no person shall acquire
or control either directly or indirectly a public utility organized and doing
business in California without approval from the California Public Utilities
Commission.

FAIR PRICE PROVISIONS

Valero's Certificate of Incorporation provides that the affirmative vote of
eighty percent (80%) of all stock is required in the case of: (i) a merger or
consolidation; (ii) a sale or lease of all or any substantial part of the
assets of Valero to any other person; or (iii) sales or leases by any other
person (other than a subsidiary of

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Valero) to Valero or any subsidiary thereof of any assets (except assets
having an aggregate fair market value of less than 10% of the net assets of
Valero and its consolidated subsidiaries at the time of such sale or lease) in
exchange for certain voting stock of Valero or any subsidiary thereof, if, as
of a specified time, the other person which is a party to such a transaction
is the beneficial owner, directly or indirectly, of 5% or more of the
outstanding shares of any class or series of voting stock of Valero.
Similarly, if the other person which is a party to one of the above described
transactions is the beneficial owner, directly or indirectly, of twenty
percent (20%) or more of the outstanding shares of any class or series of
voting stock of Valero as of the specified time, then an affirmative vote of
ninety percent (90%) of all stock is required. However, the above related
provisions do not apply if Valero's Board approves a memorandum of
understanding with the other person regarding such a transaction prior to the
time that the other person became a beneficial owner of more than 5% of the
voting stock of Valero. The provisions also do not apply in certain
transactions by and among Valero and its subsidiaries.

PG&E Corp.'s Articles of Incorporation provide that transactions with any
shareholder beneficially owning 5% or more of the voting stock of PG&E Corp.
(other than a subsidiary of PG&E Corp. or a dividend reinvestment or employee
benefit plan of PG&E Corp. or its subsidiaries) who seeks to effect certain
business combinations with PG&E Corp. or a subsidiary of PG&E Corp. (such as a
merger, consolidation, transfer of substantial assets, or recapitalization)
must (a) be approved by 75% of the outstanding voting stock, (b) be approved
by a majority of disinterested directors, or (c) satisfy certain "fair price"
criteria with respect to the remaining shareholders. In addition, PG&E Corp.'s
Articles of Incorporation provide that, when evaluating any proposal or offer
involving a business combination or merger or consolidation of PG&E Corp. or
any of its subsidiaries, the PG&E Corp. Board of Directors shall give due
consideration to all factors they may consider relevant. Such factors may
include the legal, economic, environmental, regulatory, and social effects of
the proposed transaction on PG&E Corp.'s and its subsidiaries' employees,
customers, and suppliers, and other affected persons and entities and on the
communities and geographic areas in which PG&E Corp. and its subsidiaries
provide utility service or are located, and in particular, the effect on PG&E
Corp.'s or its subsidiaries' ability to safely and reliably meet any public
utility obligations at reasonable rates.

APPRAISAL RIGHTS

The Delaware Law grants appraisal rights (i.e., rights to cash payment of
the fair value of one's shares determined by judicial appraisal) to dissenting
stockholders in the case of certain mergers or consolidations, except where
(a) the shares of the corporation are listed on a national securities exchange
or held by more than 2,000 holders or (b) the corporation is the surviving
corporation and the merger did not require for its approval the votes of the
stockholders thereof, and, in the case of both clause (a) and (b), certain
other conditions are met. Additionally, under the Delaware Law, a corporation
may provide in its certificate of incorporation for appraisal rights in
certain specified circumstances.

The California Law grants appraisal rights to dissenting shareholders in
certain mergers and acquisitions, except (a) where the shares of the
corporation are listed on a national securities exchange or on the OTC margin
stock list, unless the holders of at least 5% of the class of outstanding
shares assert the appraisal right, or (b) in any reorganization in which a
corporation or the shareholders of the corporation own more than 5/6 of the
voting power of the surviving or acquiring corporation.

RIGHTS PLAN

Valero adopted a stockholder rights plan that is designed to protect
stockholders from coercive or unfair tactics. To implement the plan, on
October 26, 1995, the Valero Board declared a dividend of one preference share
purchase right (a "Right") for each outstanding share of Valero Common Stock
("Common Share"). The dividend was payable on November 25, 1995 (the "Rights
Record Date") to the stockholders of record on that date. Each Right entitles
the registered holder to purchase one one-hundredth of a share of Junior
Participating Serial Preference Stock, Series III, par value $1.00 per share
(the "Preference Shares"), at a price of $75.00 per one one-hundredth of a
Preference Share (the "Purchase Price"), subject to adjustment. The
description and terms of the Rights are set forth in a Rights Agreement (the
"Rights Agreement") between Valero and Harris Trust and Savings Bank, as
Rights Agent (the "Rights Agent").

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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") have acquired beneficial ownership of 20% or more of the outstanding
Common Shares or (ii) 10 business days (or such later date as may be
determined by action of the Board of Directors prior to such time as any
person or group of affiliated persons becomes an Acquiring Person) following
the commencement of, or announcement of an intention to make, a tender offer
or exchange offer the consummation of which would result in the beneficial
ownership by a person or group of 20% or more of the outstanding Common Shares
(the earlier of such dates being called the "Rights Distribution Date"), the
Rights are evidenced, with respect to any of the Common Share certificates
outstanding as of the Rights Record Date, by such Common Share certificate
with a copy of a Summary of Rights attached thereto.

The Rights Agreement provides that, until the Rights Distribution Date (or
earlier redemption or expiration of the Rights), the Rights will be
transferred with and only with the Common Shares. Until the Rights
Distribution Date (or earlier redemption or expiration of the Rights), new
Common Share certificates issued after the Rights Record Date upon transfer or
new issuance of Common Shares contain a notation incorporating the Rights
Agreement by reference. Until the Rights Distribution Date (or earlier
redemption or expiration of the Rights), the surrender for transfer of any
certificates for Common Shares outstanding as of the Rights Record Date, even
without such notation or a copy of this Summary of Rights being attached
thereto, also constitutes the transfer of the Rights associated with the
Common Shares represented by the certificate. As soon as practicable following
the Rights Distribution Date, separate certificates evidencing the Rights
("Right Certificates") will be mailed to holders of record of the Common
Shares as of the close of business on the Rights Distribution Date and such
separate Right Certificates alone will then evidence the Rights.

The Rights are not exercisable until the Rights Distribution Date. The
Rights will expire on November 25, 2005 (the "Final Expiration Date"), unless
the Final Expiration Date is extended or unless the Rights were redeemed
earlier or otherwise exchanged by Valero, in each case, as described below.

In the event that Valero is acquired in a merger or other business
combination transaction or 50% or more of its consolidated assets or earning
power are sold after a person or group has become an Acquiring Person, 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 an Acquiring Person, 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 Common Shares having a
market value of two times the exercise price of the Right.

At any time after any person or group becomes an Acquiring Person and prior
to the acquisition by such person or group of 50% or more of the outstanding
Common Shares, the Valero Board may exchange the Rights (other than Rights
owned by such person or group which will have become void), in whole or in
part, at an exchange ratio of one Common Share, or one one-hundredth of a
Preference Share (or of a share of a class or series of Valero's Serial
Preference Stock having equivalent rights, preferences and privileges), per
Right (subject to adjustment).

With certain exceptions, no adjustment in the Purchase Price will be
required until cumulative adjustments require an adjustment of at least 1% in
such Purchase Price. No fractional Shares will be issued (other than fractions
which are integral multiples of one one-hundredth of a Preference Share, which
may, at the election of Valero, be evidenced by depositary receipts) and in
lieu thereof, an adjustment in cash will be made based on the market price of
the Preference Shares on the last trading day prior to the date of exercise.

At any time prior to the acquisition by a person or group of affiliated or
associated persons of beneficial ownership of 20% or more of the outstanding
Common Shares, the Valero Board may redeem the Rights in whole, but not in
part, 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 with such
conditions as the Valero Board in its sole discretion 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.

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The terms of the Rights may be amended by the Valero Board without the
consent of the holders of the Rights, including an amendment to lower certain
thresholds described above to not less than the greater of (i) the sum of
.001% and the largest percentage of the outstanding Common Shares then known
to Valero to be beneficially owned by any person or group of affiliated or
associated persons and (ii) 10%, except that from and after such time as any
person or group of affiliated or associated persons becomes an Acquiring
Person, no such amendment may adversely affect the interests of the holders of
the Rights. Until a Right is exercised, the holder thereof will have no rights
as a stockholder, including, without limitation, the right to vote or to
receive dividends.

The Rights Agreement has been amended so as not to apply to the Merger.

PG&E Corp. does not have a shareholder rights plan.

EXPERTS

The financial statements of Valero as of December 31, 1996 and 1995, and for
each of the years in the three-year period ended December 31, 1996, included
or incorporated by reference in Valero's Annual Report on Form 10-K/A, which
is incorporated by reference in this Proxy Statement-Prospectus, have been
audited by Arthur Andersen LLP, independent public accountants, as indicated
in their report with respect thereto which is included in New Valero's
Registration Statement dated May 13, 1997, which is incorporated herein by
reference. The financial statements audited by Arthur Andersen LLP have been
included or incorporated by reference herein in reliance upon the authority of
said firm as experts in accounting and auditing in giving said report.

The financial statements of Basis as of December 31, 1996 and 1995, and for
each of the years in the three-year period ended December 31, 1996, which are
incorporated by reference in this Proxy Statement-Prospectus, have been
audited by Arthur Andersen LLP, independent public accountants, as indicated
in their report with respect thereto which is included in New Valero's
Registration Statement dated May 13, 1997, which is incorporated herein by
reference. The financial statements audited by Arthur Andersen LLP have been
included or incorporated by reference herein in reliance upon the authority of
said firm as experts in accounting and auditing in giving said report.

The consolidated financial statements and related schedule, included or
incorporated by reference in PG&E Corp.'s Annual Report on Form 10-K for the
year ended December 31, 1996, which is incorporated by reference in this Proxy
Statement-Prospectus, have been audited by Arthur Andersen LLP, independent
public accountants, as indicated in their reports with respect thereto, and
are included herein in reliance upon the authority of said firm as experts in
accounting and auditing in giving said reports.

Representatives of Arthur Andersen LLP are expected to be present at the
Annual Meeting. These representatives will have an opportunity to make
statements if they so desire and will be available to respond to appropriate
questions.

LEGAL MATTERS

The validity of the shares of PG&E Corp. Common Stock to be issued pursuant
to the Merger will be passed upon for PG&E Corp. by Orrick, Herrington &
Sutcliffe LLP, counsel for PG&E Corp.

SUBMISSION OF STOCKHOLDER PROPOSALS

Under Valero's By-laws, stockholders intending to bring any business before
an Annual Meeting of Stockholders, including nominations of persons for
election as directors, must give prior written notice to the Corporate
Secretary regarding the business to be presented or persons to be nominated.
The notice must be received at the principal executive office of Valero within
the time period and must be accompanied by the information and documents
specified in the By-laws. A copy of the By-laws may be obtained by writing to
the Corporate Secretary of Valero.

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The foregoing provisions of the By-laws do not affect the right of any
stockholder to request inclusion of proposals in the Proxy Statement pursuant
to Rule 14a-8 under the Exchange Act. However, the stockholder must also
comply with all applicable requirements of the Exchange Act and the rules and
regulations of the SEC thereunder.

If the Merger occurs, Valero would become a wholly owned subsidiary of PG&E
Corp. and would not hold an annual meeting of stockholders in 1998. If the
Merger Agreement and Distribution Agreement are not approved by the Valero
stockholders, or the Merger otherwise does not occur, Valero would anticipate
holding its 1998 Annual Meeting of Stockholders on or about April 30, 1998. In
such event, any proposals of stockholders intended to be presented at the 1998
annual meeting should be received by the Corporate Secretary of Valero no
later than March 1, 1998.

Valero will also consider recommendations by stockholders for directors to
be nominated at the 1998 Annual Meeting, if held. Recommendations must be in
writing and include sufficient biographical and other relevant information
such that an informed judgment as to the proposed nominee's qualifications can
be made. Recommendations must be accompanied by a notarized statement executed
by the proposed nominee consenting to be named in the Proxy Statement, if
nominated, and to serve as a director, if elected. Recommendations received in
proper order by the Corporate Secretary at Valero's principal executive office
at least six months prior to the meeting will be referred to, and considered
by, the Executive Committee or, if appointed, a Nominating Committee.

Stockholders are urged to review all applicable rules and, if questions
arise, to consult their own legal counsel before submitting a nomination or
proposal to Valero. No stockholder recommendations or proposals were received
within the required period before the Annual Meeting.

WHERE YOU CAN FIND MORE INFORMATION

PG&E Corp. and Valero file annual, quarterly and special reports, proxy
statements and other information with the SEC. Following the Distribution, New
Valero will also make these filings with the SEC. You may read and copy any
reports, statements or other information that the companies file at the SEC's
public reference rooms in Washington, D.C., New York, New York and Chicago,
Illinois. Please call the SEC at 1-800-SEC-0330 for further information on the
public reference rooms. Our SEC filings are also available to the public from
commercial document retrieval services and at the Internet web site maintained
by the SEC at "http://www.sec.gov." Reports, proxy statements and other
information may also be inspected at the New York Stock Exchange for Valero
and at the New York Stock Exchange and Pacific Stock Exchange for PG&E Corp.

PG&E Corp. has filed a Registration Statement on Form S-4 to register with
the SEC the PG&E Corp. Common Stock to be issued to Valero stockholders in the
Merger. This Proxy Statement-Prospectus is a part of that Registration
Statement and constitutes a prospectus of PG&E Corp., as well as being a proxy
statement of Valero for the Annual Meeting. In addition, New Valero has filed
a Registration Statement to register with the SEC under the Securities Act the
New Valero Common Stock to be issued to Valero stockholders in the
Distribution. The New Valero Prospectus mailed with this Proxy Statement-
Prospectus is part of New Valero's Registration Statement.

As allowed by SEC rules, this Proxy Statement-Prospectus does not contain
all the information you can find in PG&E Corp.'s Registration Statement or the
exhibits to that Registration Statement. Similarly, the New Valero Prospectus
does not contain all the information you can find in New Valero's Registration
Statement.

The SEC allows us to "incorporate by reference" information into this Proxy
Statement-Prospectus, which means that we can disclose important information
to you by referring you to another document filed separately with the SEC. The
information incorporated by reference is deemed to be part of this Proxy
Statement-Prospectus, except for any information superseded by information
contained directly in the Proxy Statement-

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Prospectus. This Proxy Statement-Prospectus incorporates by reference the
documents set forth below that we have previously filed with the SEC. These
documents contain important information about our companies and their
financial condition.

<TABLE>
<CAPTION>
PG&E CORP. SEC FILINGS (FILE NO. 1-
12609) PERIOD
- ----------------------------------- ------
<S> <C>
. Annual Report on Form 10-
K ........................ Year ended December 31, 1996
. Current Report on Form 8-
K......................... January 2, 1997, January 7, 1997, January 16, 1997,
January 31, 1997, February 19, 1997, March 3, 1997,
April 18, 1997, May 9, 1997
. A description of PG&E
Corp. Common Stock
contained in the PG&E
Corp. Registration
Statement on Form 8-B,
filed with the SEC on
December 23, 1996
<CAPTION>
VALERO SEC FILINGS (FILE NO. 1-
4718)
- -------------------------------
<S> <C>
. Annual Report on Form 10-
K and Form 10-K/A......... Year ended December 31, 1996
. Current Report on Form 8-
K......................... January 31, 1997, March 13, 1997, April 24, 1997
</TABLE>

In addition, we incorporate by reference New Valero's Registration Statement
dated May 13, 1997. We also incorporate by reference additional documents we
may file with the SEC from the date of this Proxy Statement-Prospectus to the
date of the Annual Meeting. These include periodic reports, such as Annual
Reports on Form 10-K, Quarterly Reports on Form 10-Q, and Current Reports on
Form 8-K, as well as proxy statements.

PG&E Corp. has supplied all information contained or incorporated by
reference in this Proxy Statement-Prospectus relating to PG&E Corp. and Valero
has supplied all such information relating to Valero.

If you are a stockholder, we may have sent you some of the documents
incorporated by reference, but you can obtain any of them through us, the SEC
or the SEC's Internet web site as described above. Documents incorporated by
reference are available from us without charge, excluding all exhibits unless
we have specifically incorporated by reference an exhibit in this Proxy
Statement-Prospectus. Stockholders may obtain documents incorporated by
reference in this Proxy Statement-Prospectus by requesting them in writing or
by telephone from the appropriate company at the following addresses:

PG&E Corporation
Mail Code B26B
P.O. Box 770000
San Francisco, California 94177-0001
Tel: (800) 333-4964
(Shareholder Services)

Valero Energy Corporation
530 McCullough Avenue
San Antonio, Texas 78215
Tel: (800) 531-7911
(Investor Relations Department)

If you would like to request documents from us, please do so by May 30, 1997
to receive them before the Annual Meeting.

YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED OR INCORPORATED BY
REFERENCE IN THIS PROXY STATEMENT-PROSPECTUS TO VOTE ON THE MERGER AND ON THE
DISTRIBUTION. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION
THAT IS DIFFERENT FROM WHAT IS CONTAINED IN THIS PROXY STATEMENT-PROSPECTUS.
THIS PROXY STATEMENT-PROSPECTUS IS DATED MAY 13, 1997. YOU SHOULD NOT ASSUME
THAT THE INFORMATION CONTAINED IN THE PROXY STATEMENT-PROSPECTUS IS ACCURATE
AS OF ANY DATE OTHER THAN THAT DATE, AND NEITHER THE MAILING OF THIS PROXY
STATEMENT-PROSPECTUS TO STOCKHOLDERS NOR THE ISSUANCE OF PG&E CORP. COMMON
STOCK IN THE MERGER SHALL CREATE ANY IMPLICATION TO THE CONTRARY.

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INDEX OF DEFINED TERMS

<TABLE>
<CAPTION>
PAGE
------
<S> <C>
Acquiring Person......................................................... 86
Acquisition Agreement.................................................... 46
Acquisition Proposal..................................................... 46
Ancillary Agreements..................................................... 42
Annual Meeting........................................................... 20
Annual Meeting Record Date............................................... 20
Averaging Period......................................................... 43
Basis Acquisition........................................................ 37
Basis.................................................................... 1
Bidding Procedures....................................................... 22
California Law........................................................... 79
Certificate of Merger.................................................... 44
CFFO..................................................................... 26
CPUC..................................................................... 17
Closing.................................................................. 21, 44
Closing Date............................................................. 44
Code..................................................................... 25
Committee................................................................ 64
Common Share............................................................. 85
Comparator Group......................................................... 64
Continuing Employees..................................................... 45
DCF Analysis............................................................. 26
Delaware Law............................................................. 30, 79
Diablo Canyon............................................................ 17
Director Option Plan..................................................... 58
Director Plan............................................................ 58
Director Stock........................................................... 58
Distribution............................................................. 20
Distribution Agreement................................................... 20
Distribution Proposal.................................................... 20
Distribution Record Date................................................. 21
DOJ...................................................................... 8
EBITDA................................................................... 26
ERISA.................................................................... 48
ESIP..................................................................... 62, 65
Effective Time........................................................... 20
Employee Benefits Agreement.............................................. 42
Employee Stock Plans..................................................... 62
Equity Consideration..................................................... 21
Events................................................................... 49
Exchange Act............................................................. 47
Exchange Agent........................................................... 51
</TABLE>

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INDEX OF DEFINED TERMS, CONTINUED

<TABLE>
<CAPTION>
PAGE
------
<S> <C>
FERC..................................................................... 7
FTC...................................................................... 8
Final Expiration Date.................................................... 86
GPM...................................................................... 26
HSR Act.................................................................. 8
Hewitt................................................................... 64
IRBs..................................................................... 41
IRS...................................................................... 29
Incentive Agreements..................................................... 76
Indemnification Agreements............................................... 82
Information.............................................................. 49
Kissel................................................................... 55
LTM...................................................................... 26
Lehman Brothers.......................................................... 23
Market Price............................................................. 21, 43
Maximum Price............................................................ 21, 43
Merger................................................................... 20
Merger Agreement......................................................... 20
Merger Proposal.......................................................... 20
Minimum Price............................................................ 21, 43
NYSE..................................................................... 21
Natural Gas Business..................................................... 5, 20
New Certificates......................................................... 51
New Valero............................................................... 20
New Valero Common Stock.................................................. 21
New Valero Prospectus.................................................... 6
Old Certificates......................................................... 43, 51
PBR...................................................................... 17
Pension Plan............................................................. 74
Performance Shares....................................................... 65, 73
Per Share Equity Value Range............................................. 26
Per Share Merger Consideration........................................... 21, 42
PG&E Acquisition......................................................... 20
PG&E Co.................................................................. 5
PG&E Corp................................................................ 20
PG&E Corp. Common Stock.................................................. 20, 78
PG&E Corp. Preferred Stock............................................... 78
PG&E Corp.'s Articles of Incorporation................................... 78
PG&E Corp.'s Bylaws...................................................... 78
PGT...................................................................... 45
Preference Shares........................................................ 85
</TABLE>

91
<PAGE>

INDEX OF DEFINED TERMS, CONTINUED

<TABLE>
<CAPTION>
PAGE
------
<S> <C>
Proxy Statement-Prospectus............................................... 20
Purchase Price........................................................... 85
ROE...................................................................... 65
ROI...................................................................... 65
Redemption Price......................................................... 86
Refining Business........................................................ 5, 20
Registration Statements.................................................. 47
resid.................................................................... 19
Restricted Stock......................................................... 62, 66
Restricted Stock Plan.................................................... 62
Retained Companies....................................................... 42
Retirement Plan.......................................................... 58
Right.................................................................... 85
Right Certificates....................................................... 86
Rights Agent............................................................. 85
Rights Agreement......................................................... 85
Rights Distribution Date................................................. 86
Rights Record Date....................................................... 85
SEC...................................................................... 47, 61
SERP..................................................................... 74
Salomon.................................................................. 37
Section 262.............................................................. 30
Securities Act........................................................... 47
Severance Agreements..................................................... 75
Stability Agreements..................................................... 76
Superior Proposal........................................................ 46
Surviving Corporation.................................................... 20, 42
Target Group............................................................. 65
Tax Sharing Agreement.................................................... 42
Termination Fee.......................................................... 50
Transactions............................................................. 21
TSR...................................................................... 66, 73
VESOP.................................................................... 36
Valero................................................................... 20
Valero Board............................................................. 20
Valero Convertible Preferred Stock....................................... 43
Valero Common Stock...................................................... 20
Valero Options........................................................... 42
Valero Preferred Stock................................................... 45
Valero's By-laws......................................................... 79
Valero's Certificate of Incorporation.................................... 79
</TABLE>

92
<PAGE>

APPENDIX A

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

AGREEMENT AND PLAN OF MERGER

DATED AS OF JANUARY 31, 1997, AS AMENDED

BETWEEN

VALERO ENERGY CORPORATION,

PG&E CORPORATION

AND

PG&E ACQUISITION CORPORATION

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>

TABLE OF CONTENTS

AGREEMENT AND PLAN OF MERGER

<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
ARTICLE I
DEFINITIONS..................................................... A-1
1.1. Definitions..................................................... A-1
ARTICLE II
THE MERGER...................................................... A-6
2.1. The Merger...................................................... A-6
2.2. Effective Time.................................................. A-6
2.3. Closing......................................................... A-6
2.4. Certificate of Incorporation of the Surviving Corporation....... A-6
2.5. By-laws of the Surviving Corporation............................ A-7
2.6. Directors....................................................... A-7
2.7. Officers........................................................ A-7
ARTICLE III
MERGER CONSIDERATION; CONVERSION OR CANCELLATION OF SHARES IN
THE MERGER...................................................... A-7
3.1. Merger Consideration; Conversion or Cancellation of Shares...... A-7
3.2. Exchange of Certificates........................................ A-9
ARTICLE IV
CERTAIN PRE-MERGER TRANSACTIONS................................. A-11
4.1. Reorganization Agreements and Interim Services Agreement........ A-11
4.2. Intercorporate Reorganization of Company........................ A-11
4.3. Distribution.................................................... A-11
4.4. Senior Notes.................................................... A-11
4.5. VESOP Notes..................................................... A-11
ARTICLE V
REPRESENTATIONS AND WARRANTIES.................................. A-11
5.1. Representations and Warranties of the Company................... A-11
5.2. Representations and Warranties of Acquiror and Sub.............. A-21
ARTICLE VI
COVENANTS....................................................... A-25
6.1. Covenants of the Company........................................ A-25
6.2. Covenants of Acquiror........................................... A-28
ARTICLE VII
ADDITIONAL AGREEMENTS........................................... A-28
7.1. Access.......................................................... A-28
7.2. Other Actions................................................... A-29
7.3. Acquisition Proposals; Board Recommendation..................... A-29
7.4. Tax Representation Letters...................................... A-30
7.5. Filings; Other Actions.......................................... A-30
7.6. Accountants' Letters............................................ A-31
</TABLE>

i
<PAGE>

TABLE OF CONTENTS, CONTINUED

AGREEMENT AND PLAN OF MERGER, CONTINUED

<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
7.7. Distribution Agreement......................................... A-32
7.8. Publicity...................................................... A-32
7.9. Employees and Employee Plans................................... A-32
7.10. Expenses....................................................... A-32
7.11. Takeover Statutes.............................................. A-33
7.12. Securities Act Compliance...................................... A-33
7.13. Stock Exchange Listing......................................... A-33
7.14. 1935 Act....................................................... A-33
7.15. Further Assurances............................................. A-33
ARTICLE VIII
CONDITIONS..................................................... A-34
8.1. Conditions to Each Party's Obligation to Effect the Merger..... A-34
8.2. Conditions to Obligation of the Company........................ A-34
8.3. Conditions to Obligations of Acquiror and Sub.................. A-35
ARTICLE IX
TERMINATION.................................................... A-36
9.1. Termination.................................................... A-36
9.2. Effect of Termination and Abandonment.......................... A-36
ARTICLE X
MISCELLANEOUS AND GENERAL...................................... A-37
10.1. Survival....................................................... A-37
10.2. Modification or Amendment...................................... A-37
10.3. Waiver; Remedies............................................... A-37
10.4. Counterparts................................................... A-37
10.5. Governing Law.................................................. A-37
10.6. Notices........................................................ A-37
10.7. Entire Agreement............................................... A-38
10.8. Certain Obligations............................................ A-38
10.9. Assignment..................................................... A-38
10.10. Captions....................................................... A-38
10.11. Severability................................................... A-38
10.12. No Third Party Beneficiaries................................... A-38
10.13. Annexes and Schedules.......................................... A-38
10.14. No Representations or Warranties............................... A-39
10.15. Tax Sharing Agreement.......................................... A-39
10.16. Consent to Jurisdiction........................................ A-39
</TABLE>

ii
<PAGE>

AGREEMENT AND PLAN OF MERGER dated as of January 31, 1997, as amended (this
"Agreement"), between Valero Energy Corporation, a Delaware corporation (the
"Company"), PG&E Corporation, a California corporation ("Acquiror") and PG&E
Acquisition Corporation, a Delaware corporation and a wholly-owned subsidiary
of Acquiror ("Sub") formed for the purpose of participating in the Merger
described herein.

W I T N E S S E T H:

WHEREAS, Acquiror desires to acquire the Retained Business (as herein
defined) but does not wish to acquire the other businesses conducted, or to be
conducted, by the Company;

WHEREAS, the Board of Directors of the Company has approved an agreement and
plan of distribution substantially in the form of Annex A attached hereto (the
"Distribution Agreement"), which will be entered into prior to the Effective
Time (as defined herein), pursuant to which and subject to the terms of which
among other things (a) the Company and Valero Refining and Marketing Company,
a Delaware corporation and wholly owned Subsidiary of the Company ("VRM"),
will consummate the transactions contemplated in Article II of the
Distribution Agreement and (b) all of the issued and outstanding shares of
common stock, par value $0.01 per share (the "VRM Common Stock") along with
the associated rights (the "VRM Rights") issued pursuant to the Rights
Agreement substantially in the form attached to the VRM Registration Statement
(as defined herein) between VRM and the rights agent named therein (the "VRM
Rights Agreement") of VRM will be distributed (the "Distribution") to the
holders of shares of common stock, par value $1.00 per share, of the Company.
Such common stock together with the rights issued pursuant to the Rights
Agreement dated as of October 26, 1995 between the Company and Harris Trust
and Savings Bank, as agent (the "Company Rights Agreement") being referred to
herein as "Company Common Stock";

WHEREAS, the respective Boards of Directors of the Company, Acquiror and Sub
have determined that, following the Distribution, a merger of Sub with and
into the Company (the "Merger"), with the Company as the surviving
corporation, would be in the best interests of their respective corporations
and stockholders; and

WHEREAS, it is the intention of the parties to this Agreement that for
Federal income tax purposes (a) the Distribution shall qualify as a
transaction described in Section 355 of the Internal Revenue Code of 1986, as
amended (the "Code") and a "reorganization" within the meaning of Section
368(a)(1)(D) of the Code, and (b) the Merger shall qualify as a
"reorganization" within the meaning of Section 368(a)(1)(B) of the Code;

NOW, THEREFORE, in consideration of the premises, and of the
representations, warranties, covenants and agreements set forth herein, the
parties hereto hereby agree as follows:

ARTICLE I
DEFINITIONS

1.1. Definitions. (a) As used in this Agreement the following terms shall
have the following respective meanings:

"Acquiror Common Stock" shall have the meaning set forth in Section
3.1(a)(ii).

"Acquiror Form S-4" shall have the meaning set forth in Section 5.1(g)(iii).

"Acquiror Pension Plan" shall mean the Retirement Plan for Employees of
Pacific Gas Transmission Company, as in effect as of the date hereof.

"Acquiror Thrift Plan" shall mean a defined contribution plan with a cash or
deferred arrangement sponsored by the Acquiror or an Affiliate and intended to
qualify under Sections 401(a) and (k) of the Code.

"Acquisition Proposal" shall mean any inquiry, proposal or offer for, or any
indication of interest in, from any person, either (A) a merger, acquisition,
business combination, consolidation or similar transaction involving,

A-1
<PAGE>

or any purchase of, more than 50% of the voting securities of the Company or
any Subsidiary, or all or substantially all of the assets of the Company or
any Subsidiary (excluding any such transaction relating solely to the assets
or voting securities of VRM or any of its Subsidiaries) or (B) an acquisition,
or similar transaction involving the purchase, of a substantial portion of the
assets of or a substantial equity interest in the Retained Business, other
than, in each case, the transactions contemplated by this Agreement.

"Affiliate" shall mean, with respect to any specified Person, a Person that
directly, or indirectly through one or more intermediaries, controls, is
controlled by, or is under common control with, such specified Person;
provided, however, that from and after the Time of Distribution, no member of
either Group shall be deemed to be an Affiliate of any member of the other
Group.

"Assignment and Assumption Agreements" shall mean any and all conveyance and
assumption instruments which may be entered into pursuant to any of the
Reorganization Agreements.

"Cash Dividend" shall have the meaning set forth in the Distribution
Agreement.

"Certificate of Merger" shall have the meaning set forth in Section 2.2.

"Closing" shall have the meaning set forth in Section 2.3.

"Closing Date" shall have the meaning set forth in Section 2.3.

"Code" shall mean the Internal Revenue Code of 1986, as amended.

"Certificate" shall have the meaning set forth in Section 3.1(b).

"Company By-laws" shall mean the by-laws of the Company, as amended.

"Company Charter" shall mean the certificate of incorporation of the
Company, as amended.

"Company Common Stock" shall have the meaning set forth in the third
paragraph of this Agreement.

"Company Convertible Preferred Stock" shall have the meaning set forth in
Section 5.1(e).

"Company Disclosure Schedule" shall have the meaning set forth in Section
5.1.

"Company Meeting" shall have the meaning set forth in Section 5.1(g)(iii).

"Company Options" shall have the meaning set forth in Section 3.1(a)(iii).

"Company Preferred Stock" shall have the meaning set forth in Section
5.1(e).

"Company Restricted Stock Plans" shall mean the Company's Restricted Stock
Bonus and Incentive Stock Plan, effective as of April 30, 1981 and amended and
restated effective as of November 21, 1996, the Restricted Stock Plan for Non-
employee Directors, effective as of November 14, 1990 and amended and restated
effective as of August 22, 1996 and/or the Executive Stock Incentive Plan,
effective as of July 21, 1994 and amended and restated effective as of
November 21, 1996.

"Company Rights Agreement" shall have the meaning set forth in the third
paragraph of this Agreement.

"Company Series A Preferred Stock" shall have the meaning set forth in
Section 5.1(e).

"Company SAR" shall have the meaning assigned to such term by the Employee
Benefits Agreement.

"Company Stock Plans" shall mean the Company's Stock Option Plan No. 3,
Stock Option Plan No. 4, Stock Option Plan No. 5, Company Restricted Stock
Plans, Non-Employee Director Stock Option Plan, Executive Incentive Bonus
Plan, Employee Thrift Plan, Benefits Trust, ESOP and VESOP, each as amended
and/or restated.

"Continuing Employee" shall have the meaning set forth in Section 7.9(b).

"Contract" shall have the meaning set forth in Section 5.1(d)(i).

A-2
<PAGE>

"Credit Facilities" shall mean the $835 million Revolving Credit Agreement,
dated as of May 1, 1997, among the Company, VRM, Morgan Guaranty Trust Company
of New York, as Administrative Agent, Bank of Montreal, as Syndication Agent,
and the banks listed therein (the "New Credit Facility"), and the Company's
uncommitted short-term bank credit lines and uncommitted bank letter of credit
facilities (the "Uncommitted Facilities").

"Deferred Compensation Plans" shall mean the Company's Executive Deferred
Compensation Plan, effective as of November 26, 1984 and amended and restated
effective as of October 21, 1986 and the Company Key Employee Deferred
Compensation Plan, effective as of August 20, 1985, and amended and restated
effective as of October 21, 1986.

"Distribution" shall have the meaning set forth in the third paragraph of
this Agreement.

"Distribution Agreement" shall have the meaning set forth in the third
paragraph of this Agreement.

"DGCL" shall mean the Delaware General Corporation Law.

"Effective Time" shall have the meaning set forth in Section 2.2.

"Employee Benefits Agreement" shall mean an employee benefits agreement
substantially in the form of Annex B attached hereto.

"Employee Plan" shall mean each "employee benefit plan," within the meaning
of Section 3(3) of ERISA, each Company Stock Plan, and each employment,
severance or other similar contract, arrangement or policy and each plan or
arrangement providing for insurance coverage (including any self-insured
arrangements), workers' compensation, disability benefits, supplemental
unemployment benefits, vacation benefits, retirement benefits or for deferred
compensation, profit-sharing, bonuses, or other forms of incentive
compensation or post-retirement insurance, compensation or benefits which is
maintained, administered or contributed to by the Company or any of its ERISA
Affiliates primarily for U.S. citizens or residents and which covers any
employee of the Company.

"Environmental Law" shall have the meaning set forth in the Distribution
Agreement.

"Environmental Permits" shall have the meaning set forth in Section 5.1(o).

"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.

"ERISA Affiliate" shall mean any entity (excluding any VRM Company) which,
together with the Company, would be treated as a single employer under Section
414(b) or (c) of the Code.

"ESOP" shall mean the Company's Employee Stock Ownership Plan.

"Exchange Act" shall mean the Securities Exchange Act of 1934, as amended.

"Exchange Agent" shall have the meaning set forth in Section 3.2(a).

"Expenses" shall mean documented out-of-pocket fees and expenses incurred by
the Company and its Subsidiaries in connection with efforts to consummate any
of the transactions contemplated by the Reorganization Agreements, including,
without limitation, financing fees (including, without limitation, financing
fees to refund or repay the IRBs), consent fees, printing costs and fees,
severance (including, without limitation severance payments to employees of
Valero Corporate Services Company or Valero Management Company incurred prior
to or after the Effective Time in connection with the transactions
contemplated by the Reorganization Agreements) and early retirement payments,
and payments pursuant to the Incentive Bonus Agreements, payments pursuant to
the Shareholder Value Bonus Plan, expenses of counsel, investment banking
firms, accountants, experts and consultants and the expenses incurred in
connection with printing and mailing the Proxy Statement-Prospectus, the
Acquiror Form S-4 and the VRM Registration Statement.

"Filed Acquiror SEC Documents" shall have the meaning set forth in Section
5.2(g).

A-3
<PAGE>

"Filed Company SEC Documents" shall have the meaning set forth in Section
5.1(i).

"GAAP" shall mean United States generally accepted accounting principles.

"Group" shall have the meaning set forth in the Distribution Agreement.

"Governmental Entity" shall have the meaning set forth in Section
5.1(d)(ii).

"Hazardous Substance" shall have the meaning set forth in the Distribution
Agreement.

"HSR Act" shall mean the Hart-Scott-Rodino Antitrust Improvements Act of
1976, as amended.

"Interim Services Agreement" shall mean the interim services agreement,
entered into by the Company and VRM.

"Intellectual Property" shall mean all intellectual property rights,
including domestic and foreign patents, patent applications, invention
disclosures to be filed or awaiting filing determinations, trademark and
service mark applications, registered trademarks, registered service marks,
registered copyrights, trademarks, servicemarks, tradenames, trade secrets and
other proprietary rights, inventions, know-how, formulae, processes,
procedures, research records, records of inventions, test information, market
surveys and marketing know-how and unregistered copyrights, together with
associated goodwill.

"Joint Ventures" shall mean the joint ventures set forth in Schedule
5.1(f)(ii).

"Lien" shall have the meaning set forth in Section 5.1(d)(i).

"Material Adverse Effect" shall mean with respect to any entity, or group of
entities taken as a whole, such state of facts, event, change, or effect that
has had, or would reasonably be expected to have, a material adverse effect on
the assets, business, properties, results of operations, or financial
condition of such entity, or group of entities taken as a whole, or the
ability of such entity, or group of entities, to consummate the transactions
contemplated by this Agreement, including without limitation the Distribution
and the Merger or to perform its obligations under the Reorganization
Agreements to which it is or will be a party.

"Merger" shall have the meaning set forth in the fourth paragraph of this
Agreement.

"New Certificates" shall have the meaning set forth in Section 3.2(a).

"Notice of Superior Proposal" means a written notice advising Acquiror that
the Board of Directors of the Company has received a Superior Proposal.

"NYSE" shall have the meaning set forth in Section 3.1(a)(ii).

"Per Share Merger Consideration" shall have the meaning set forth in Section
3.1(a)(ii).

"Permit" shall have the meaning set forth in Section 5.1(d)(i).

"Permitted Liens" shall mean, collectively, those Liens (A) set forth in
Schedule 1.1(a), (B) for Taxes not yet due or payable or being contested in
good faith, (C) that constitute mechanics', carriers', workers' or like liens
or (D) that individually or in the aggregate, would not have a Material
Adverse Effect on the Retained Companies, taken as a whole.

"Person" shall mean an individual, partnership, a joint venture, a
corporation, a limited liability entity, a trust, an unincorporated
organization or other entity or a government or any department or agency
thereof.

"Post-Signing Return" shall have the meaning set forth in Section 6.1(k).

"Proxy Statement-Prospectus" shall have the meaning set forth in Section
5.1(g)(iii).

A-4
<PAGE>

"Registration Statements" shall mean, collectively, the Acquiror Form S-4
and the VRM Registration Statement.

"Regulatory Filings" shall have the meaning set forth in Section 5.1(d)(ii).

"Release" shall have the meaning set forth in the Distribution Agreement.

"Reorganization Agreements" shall mean, collectively, this Agreement, the
Distribution Agreement, the Tax Sharing Agreement and the Employee Benefits
Agreement.

"Representatives" shall mean directors, officers, employees, agents,
consultants, advisors, accountants, attorneys and representatives.

"Retained Assets" shall have the meaning set forth in the Distribution
Agreement.

"Retained Business" shall have the meaning set forth in the Distribution
Agreement.

"Retained Company" or "Retained Companies" shall have the meaning set forth
in Section 1.1(b).

"SEC" shall mean the Securities and Exchange Commission.

"Securities Act" shall mean the Securities Act of 1933, as amended.

"SERP" shall mean the Company's Supplemental Executive Retirement Plan,
effective as of January 1, 1983 and amended and restated effective as of
January 1, 1996.

"Software" shall include all proprietary software programs, and the related
source code, system documentation, statements of principles of operation, and
schematics for all software programs, as well as any pertinent commentary or
explanation that may be necessary to render such materials understandable and
usable by a trained computer programmer.

"Subsidiary" shall mean any corporation or other organization (including
without limitation partnerships but as used in Section 5.1, excluding Joint
Ventures), whether incorporated or unincorporated, of which, directly or
indirectly, at least a majority of the securities or interests having by the
terms thereof ordinary voting power to elect at least a majority of the board
of directors or others performing similar functions with respect to such
corporation or other organization is directly or indirectly owned or
controlled by such party or by any one or more of its Subsidiaries, or by such
party and one or more of its Subsidiaries.

"Superior Proposal" shall mean any bona fide Acquisition Proposal made by a
third party on terms which the Board of Directors of the Company determines in
its good faith judgment to be more favorable to the Company's stockholders
than the Merger and the other transactions contemplated hereby.

"Surviving Corporation" shall have the meaning set forth in Section 2.1.

"Takeover Statute" shall have the meaning set forth in Section 5.1(p).

"Tax Authority" shall have the meaning set forth in the Tax Sharing
Agreement.

"Taxes" shall have the meaning set forth in the Tax Sharing Agreement.

"Tax Return" shall have the meaning set forth in the Tax Sharing Agreement.

"Tax Sharing Agreement" shall mean the tax sharing agreement substantially
in the form of Annex C attached hereto.

"Time of Distribution" shall have the meaning set forth in the Distribution
Agreement.

A-5
<PAGE>

"VESOP" shall mean the Valero Employees' Stock Ownership Plan.

"VNG" shall mean Valero Natural Gas Company, a Delaware corporation and a
wholly-owned Subsidiary of the Company and, with respect to the period prior
to June 30, 1996, shall be construed to include VNGC Holding Company, a
Delaware corporation and wholly owned subsidiary of the Company.

"VRM Common Stock" shall have the meaning set forth in the third paragraph
of this Agreement.

"VRM Registration Statement" shall have the meaning set forth in Section
5.1(g)(iii).

"VRM Rights" shall have the meaning set forth in the third paragraph of this
Agreement.

"VRM Rights Agreement" shall have the meaning set forth in the third
paragraph of this Agreement.

(b) As used in this Agreement, (i) any reference to the Company and its
Subsidiaries means the Company and each of its Subsidiaries, (ii) any
reference to the "Retained Company" and its Subsidiaries or the "Retained
Companies" means the Company (solely with respect to the Retained Business)
and those of its direct and indirect Subsidiaries included in the Retained
Business, (iii) any reference to the "Retained Subsidiaries" or "Retained
Subsidiary" means the direct and indirect Subsidiaries or Subsidiary of the
Company included in the Retained Business, (iv) any reference to VRM and its
Subsidiaries or the "VRM Companies" means VRM immediately after the Time of
Distribution and those entities that immediately after the Time of
Distribution will be direct or indirect Subsidiaries of VRM and (v) any
reference to Subsidiaries of VRM means those entities that immediately after
the Time of Distribution will be direct or indirect Subsidiaries of VRM. All
capitalized terms not otherwise defined herein shall have the meaning set
forth in the Distribution Agreement.

ARTICLE II
THE MERGER

2.1. The Merger. Upon the terms and subject to the conditions set forth in
this Agreement, at the Effective Time, Sub will be merged with and into the
Company, the separate corporate existence of Sub will thereupon cease and the
Company will be the surviving corporation (the "Surviving Corporation"). The
Merger will have the effects specified in the DGCL. Without limiting the
generality of the foregoing, and subject thereto, at the Effective Time, all
of the properties, rights, privileges, powers, franchises, debts, liabilities,
obligations and duties of the Company will continue in the Surviving
Corporation as provided for in the DGCL.

2.2. Effective Time. As soon as practicable following the satisfaction or
waiver of the conditions set forth in Article VIII, the parties will file a
certificate of merger (the "Certificate of Merger") executed in accordance
with the relevant provisions of the DGCL and will make all other filings or
recordings required under the DGCL to consummate the Merger. The Merger will
become effective upon the filing of the Certificate of Merger with the
Secretary of State of the State of Delaware or at such other time as the
parties hereto may agree and as may be specified in the Certificate of Merger
in accordance with applicable law. The date and time when the Merger becomes
effective is herein referred to as the "Effective Time".

2.3. Closing. The closing of the Merger (the "Closing") will take place (i)
at the offices of Wachtell, Lipton, Rosen & Katz, 51 West 52nd Street, New
York, New York 10021 at 9:00 A.M. on the first business day on which all the
conditions set forth in Article VIII (other than those that are waived by the
party or parties for whose benefit such conditions exist) are fulfilled or
(ii) at such other place, date and/or time as the parties hereto may agree.
The date upon which the Closing occurs is herein referred to as the "Closing
Date"; provided that the Closing shall not take place earlier than 10 business
days following the Company Meeting.

2.4. Certificate of Incorporation of the Surviving Corporation. At the
Effective Time, in accordance with the DGCL, the Certificate of Incorporation
of the Company in effect immediately prior to the Effective Time will be
amended as set forth in Annex G hereto and, as so amended, will be the
certificate of incorporation of

A-6
<PAGE>

the Surviving Corporation until amended in accordance with the terms thereof
and applicable law (the "Surviving Corporation's Certificate of
Incorporation").

2.5. By-laws of the Surviving Corporation. The Company By-laws will be the
by-laws of the Surviving Corporation until amended in accordance with the
terms thereof, the Surviving Corporation's Certificate of Incorporation and
applicable law.

2.6. Directors. The directors of Sub at the Effective Time will be the
directors of the Surviving Corporation until the earlier of their resignation
or removal or until their respective successors are duly elected and
qualified, as the case may be.

2.7. Officers. The officers of Sub at the Effective Time will be the
officers of the Surviving Corporation until the earlier of their resignation
or removal or until their respective successors are duly elected and
qualified, as the case may be.

ARTICLE III
MERGER CONSIDERATION; CONVERSION OR CANCELLATION OF SHARES IN THE MERGER

3.1. Merger Consideration; Conversion or Cancellation of Shares. (a) At the
Effective Time, by virtue of the Merger and without any further action on the
part of the holders of any shares of capital stock of the Company or any
shares of capital stock of Sub:

(i) Each share of Company Common Stock (A) issued and outstanding
immediately prior to the Effective Time and (1) owned by Acquiror or any of
its wholly-owned Subsidiaries (but not by any employee benefit plan of, or
any nuclear decommissioning trust for the benefit of, Acquiror or any of
its Subsidiaries) or (2) owned by any Subsidiary of the Company (but not by
any Employee Plan of the Company or any of its Subsidiaries) or (B) held in
the treasury of the Company immediately prior to the Effective Time will
cease to be outstanding, will be canceled and retired without payment of
any consideration therefor and will cease to exist.

(ii) Subject to Section 3.2(c), each share of Company Common Stock issued
and outstanding immediately prior to the Effective Time (other than shares
to be canceled in accordance with Section 3.1(a)(i)) will be converted into
the right to receive that number (the "Per Share Merger Consideration") of
duly authorized, validly issued, fully paid and nonassessable shares of
common stock, no par value, of Acquiror ("Acquiror Common Stock"), equal to
the quotient, rounded to the nearest thousandth, or if there shall not be a
nearest thousandth, the next higher thousandth, of (x) the quotient of (A)
$722.5 million (increased by the total amount of cash paid to the Company
between the execution of this Agreement and the Closing in order to
exercise the Company Options plus an amount equal to the total exercise
price of any unexercised Company Options and any unexercised Company SARs,
but reduced (I) by the total cash amount paid by the Retained Companies
between December 31, 1996 and the Closing in settlement of any stock
appreciation rights (including limited rights), Company Options or
performance shares, except to the extent such amounts have been recorded as
accrued liabilities on the 1996 balance sheet included in the Retained
Companies' Financial Statements, and (II) if applicable, in accordance with
the last sentence of this Section 3.1(a)(ii)) divided by (B) the sum of the
number of shares of Company Common Stock issued and outstanding immediately
prior to the Effective Time (including shares issued pursuant to the
conversion of Company Preferred Stock and other than shares to be canceled
in accordance with Section 3.1(a)(i)) plus the number of performance shares
(not otherwise reflected in the number of outstanding shares of Company
Common Stock), the number of shares subject to unexercised Company Options
and the number of any accompanying Company SARs at such time (each number
to be determined immediately prior to the Effective Time with the number of
Company Options and Company SARs to be increased to take into account the
adjustments required by Sections 3.01(a), (b) and (c) of the Employee
Benefits Agreement) divided by (y) the Market Price (as defined below) of
Acquiror Common Stock on the Closing Date. The

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"Market Price" of Acquiror Common Stock on any date means the average of
the daily closing prices per share of Acquiror Common Stock as reported on
the New York Stock Exchange ("NYSE") Composite Tape ("NYSE Tape") on each
of the last 15 consecutive full NYSE trading days (the "Averaging Period")
ending on and including the second trading day prior to such date; provided
that (A) if the Board of Directors of Acquiror declares a dividend on the
outstanding shares of Acquiror Common Stock having a record date after the
Effective Time but an ex-dividend date (based on "regular way" trading on
the NYSE of shares of Acquiror Common Stock, the "Ex-Date") that occurs
during the Averaging Period, then for purposes of computing the Market
Price, the closing price on the Ex-Date and any trading day in the
Averaging Period after the Ex-Date will be adjusted by adding thereto the
amount of such dividend and (B) if the Board of Directors of Acquiror
declares a dividend on the outstanding shares of Acquiror Common Stock
having a record date before the Effective Time and an Ex-Date that occurs
during the Averaging Period, then for purposes of computing the Market
Price, the closing price on any trading day before the Ex-Date will be
adjusted by subtracting therefrom the amount of such dividend.
Notwithstanding anything to the contrary contained herein, in the event
that the Market Price of Acquiror Common Stock on the Closing Date is less
than $19.125 (the "Minimum Price"), then solely for the purposes of
calculating the Per Share Merger Consideration, the Market Price of
Acquiror Common Stock on the Closing Date will be deemed to be the Minimum
Price, and in the event that the Market Price of Acquiror Common Stock on
the Closing Date is greater than $25.875 (the "Maximum Price"), then solely
for the purposes of calculating the Per Share Merger Consideration, the
Market Price of Acquiror Common Stock on the Closing Date will be deemed to
be the Maximum Price. If prior to the Effective Time Acquiror shall declare
a stock dividend or make distributions upon or subdivide, split up,
reclassify or combine Acquiror Common Stock or declare a dividend or make a
distribution on Acquiror Common Stock in any security convertible into
Acquiror Common Stock, appropriate adjustment or adjustments will be made
to the Per Share Merger Consideration; provided, however, that Acquiror not
take any such action that would occur during the Averaging Period. If the
aggregate amount of any adverse impact referred to in Section 9.1(d)(iii)
(calculated as set forth therein) exceeds $50 million, then the dollar
amount set forth in subsection (A) of this Section 3.1(a)(ii) shall be
reduced by an amount equal to the amount by which the amount of such
adverse impact exceeds $50 million provided, however, that in no event
shall such reduction exceed $50 million in the aggregate.

(iii) Each option granted by the Company to purchase shares of Company
Common Stock (the "Company Options") which is outstanding and unexercised
immediately prior to the Effective Time and after the Time of Distribution
shall cease to represent a right to acquire shares of Company Common Stock
and shall be converted automatically into an option (not intended to
qualify under section 422 of the Code) to purchase shares of Acquiror
Common Stock in an amount and at an exercise price determined as provided
below:

(A) the number of shares of Acquiror Common Stock to be subject to
the new option shall be equal to the product of the number of shares of
Company Common Stock subject to the original option and the Per Share
Merger Consideration; provided that in the case of any Company Option
which is accompanied by Company SARs, such Company SARs shall
automatically terminate and cease to represent a right to receive a
cash payment from the Company and, in lieu thereof, the total number of
shares of Acquiror Common Stock to be subject to the new option shall
be equal to the product of (I) the sum of (x) the number of shares of
Company Common Stock subject to the original option (as adjusted
pursuant to Sections 3.01(a), (b) and (c) of the Employee Benefits
Agreement) and (y) the number of Company SARs accompanying the original
option (as adjusted pursuant to Sections 3.01(a), (b) and (c) of the
Employee Benefits Agreement), and (II) the Per Share Merger
Consideration, and provided further that, in each case, any fractional
shares of Acquiror Common Stock resulting from such multiplication
shall be rounded up to the nearest share; and

(B) the exercise price per share of Acquiror Common Stock under the
new option shall be equal to the exercise price per share of Company
Common Stock or Company SAR, as the case may be, under the original
option divided by the Per Share Merger Consideration; provided that
such exercise price shall be rounded down to the nearest cent.

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(b) All shares of Company Common Stock referred to in Section 3.1(a)(ii)
will cease to be outstanding, will be canceled and retired and will cease to
exist, and each holder of a certificate (a "Certificate") formerly
representing such shares will thereafter cease to have any rights with respect
to such shares, except the right to receive, without interest, upon exchange
of such Certificate in accordance with Section 3.2, the shares of Acquiror
Common Stock and any payment to which such holder is entitled pursuant to this
Article III.

(c) At and after the Effective Time, by virtue of the Merger, each share of
capital stock of Sub issued and outstanding immediately prior to the Effective
Time will be converted into and become one fully paid and nonassessable share
of common stock, par value $0.01 per share, of the Surviving Corporation.

3.2. Exchange of Certificates. (a) Appointment of Exchange Agent. Prior to
the Effective Time, Acquiror shall appoint an exchange agent (the "Exchange
Agent") satisfactory to the Company for the purpose of exchanging all Company
Common Stock for Acquiror Common Stock in accordance with the terms of this
Agreement. As of the Effective Time, Acquiror will deposit with the Exchange
Agent, for the benefit of the holders of Certificates, for exchange in
accordance with this Article III, certificates ("New Certificates")
representing Acquiror Common Stock in amounts sufficient to allow the Exchange
Agent to make all deliveries of New Certificates that may be required in
exchange for Certificates pursuant to this Article III. Acquiror will provide
to the Exchange Agent on a timely basis funds necessary to pay any cash
payable in lieu of fractional shares of Acquiror Common Stock pursuant to
Section 3.2(c) and funds and other property necessary to pay or make any
dividends or distributions with respect to shares of Acquiror Common Stock
pursuant to Section 3.2(d).

(b) Exchange Procedures. As soon as reasonably practicable after the
Effective Time, Acquiror will cause the Exchange Agent to mail or deliver to
each Person, who was at the Effective Time a holder of record of a
Certificate, a letter of transmittal (which will specify that delivery will be
effected, and risk of loss and title to the Certificates will pass, only upon
delivery of the Certificates to the Exchange Agent and will be in such form
and contain such other provisions as Acquiror and VRM may reasonably specify)
containing instructions for use in effecting the surrender of Certificates in
exchange for New Certificates and payments pursuant to this Article III. Upon
surrender to the Exchange Agent of a Certificate for cancellation together
with such letter of transmittal, duly executed and completed in accordance
with the instructions thereto, the holder of such Certificate will be entitled
to receive in exchange therefor a New Certificate representing that number of
whole shares of Acquiror Common Stock which such holder has the right to
receive pursuant to the provisions of this Article III, a check in the amount
of any cash which such holder has the right to receive in lieu of fractional
shares of Acquiror Common Stock pursuant to Section 3.2(c) and any cash
dividends with respect to Acquiror Common Stock pursuant to Section 3.2(d) and
any other dividends or distributions with respect to Acquiror Common Stock
pursuant to Section 3.2(d), and the Certificate so surrendered will forthwith
be canceled. No interest will be paid or will accrue on the amount payable
upon surrender of Certificates. Until surrendered as contemplated by this
Section 3.2, each Certificate will be deemed at any time after the Effective
Time to represent only the right to receive, upon surrender of such
Certificate, the applicable New Certificate, cash in lieu of fractional shares
of Acquiror Common Stock and any dividends or distributions with respect to
shares of Acquiror Common Stock as contemplated by this Section 3.2. In the
event of a transfer of ownership of Company Common Stock that is not
registered on the transfer records of the Company, New Certificates
representing the proper number of shares of Acquiror Common Stock and any cash
in lieu of fractional shares of Acquiror Common Stock and any dividends or
distributions as aforesaid may be issued to a Person other than the Person in
whose name the Certificate so surrendered is registered, if such Certificate
is properly endorsed or otherwise in proper form for transfer and the Person
requesting such issuance pays any transfer or other taxes required by reason
of the issuance of shares of Acquiror Common Stock or establishes to the
satisfaction of Acquiror that such tax has been paid or is not applicable. Six
months after the Effective Time, Acquiror will be entitled to cause the
Exchange Agent to deliver to Acquiror any New Certificates, cash or other
property (including any interest thereon) deposited with the Exchange Agent
that is unclaimed by the former holders of Company Common Stock. Any such
former holders of Company Common Stock who have not theretofore exchanged
their Certificates for New Certificates and cash, if applicable, and other
property pursuant to this Article III will thereafter be entitled to look
exclusively to Acquiror and only as general creditors thereof for the Acquiror

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Common Stock and cash and other property to which they become entitled upon
exchange of their Certificates pursuant to this Article III (including cash in
lieu of fractional shares of Acquiror Common Stock pursuant to Section 3.2(c)
and any dividends or distributions with respect to Acquiror Common Stock
pursuant to Section 3.2(d)). Notwithstanding the foregoing, neither the
Exchange Agent nor any party hereto will be liable to any former holder of
Company Common Stock for any amount properly delivered to a public official
pursuant to applicable abandoned property, escheat or similar laws. Acquiror
will pay all charges and expenses, including those of the Exchange Agent, in
connection with the exchange of New Certificates and cash for Certificates as
contemplated hereby.

(c) Fractional Shares. Notwithstanding Section 3.1 or any other provision of
this Section 3.2, no fractional shares of Acquiror Common Stock will be issued
hereunder and any holder of Company Common Stock entitled hereunder to receive
a fraction of a share of Acquiror Common Stock but for this Section 3.2(c)
will be entitled hereunder to receive a cash payment in lieu thereof, without
interest, in an amount, less the amount of any withholding taxes which may be
required thereon, equal to the product of (i) the fraction of a share to which
such holder would otherwise have been entitled multiplied by (ii) the Market
Price of Acquiror Common Stock on the Closing Date determined in accordance
with Section 3.1(a)(ii), but without regard for the Minimum Price or the
Maximum Price. For purposes of paying such cash in lieu of fractional shares,
all Certificates representing shares of Company Common Stock surrendered for
exchange by a Company stockholder on the same letter of transmittal shall be
aggregated, and no such Company stockholder will receive cash in lieu of
fractional shares in an amount equal to or greater than the value of one full
share of Acquiror Common Stock with respect to such Certificates surrendered.

(d) Distributions with Respect to Unexchanged Shares. Notwithstanding any
other provisions of this Agreement, after the Effective Time no dividends or
other distributions with respect to Acquiror Common Stock with a record date
after the Effective Time will be paid to any Person holding a Certificate
until such Certificate is surrendered for exchange as provided herein. Subject
to the effect of applicable laws, following surrender of any such Certificate
by any holder thereof, there will be paid to the holder of the New Certificate
issued in exchange therefor, without interest, (i) at the time of such
surrender, the amount of dividends or other distributions with a record date
after the Effective Time theretofore payable with respect to the Acquiror
Common Stock represented thereby, less the amount of any withholding taxes
which may be required thereon, and (ii) at the appropriate payment date, the
amount of dividends or other distributions with a record date after the
Effective Time but prior to the time of such surrender and a payment date
subsequent to the time of such surrender payable with respect to the Acquiror
Common Stock represented thereby, less the amount of any withholding taxes
which may be required thereon.

(e) No Further Ownership Rights in Company Common Stock. All shares of
Acquiror Common Stock issued upon the surrender for exchange of Certificates
in accordance with the terms of this Article III, any cash in lieu of
fractional shares of Acquiror Common Stock paid pursuant to Section 3.2(c) or
any dividend or distribution paid or made with respect to Acquiror Common
Stock pursuant to Section 3.2(d) will be deemed to have been issued, paid and
made in full satisfaction of all rights pertaining to the shares of Company
Common Stock theretofore represented by such Certificates, and there will be
no further registration of transfers on the stock transfer books of the
Surviving Corporation of the shares of Company Common Stock which were
outstanding immediately prior to the Effective Time. If, after the Effective
Time, Certificates are presented to the Surviving Corporation or the Exchange
Agent for any reason, they will be canceled and exchanged as provided in this
Article III.

(f) No Liability. In the event that any Certificate has been lost, stolen or
destroyed, upon the making of an affidavit of that fact by the Person claiming
such Certificate to be lost, stolen or destroyed and, if required by the
Surviving Corporation, the posting by such Person of a bond in such reasonable
amount as the Surviving Corporation may direct as indemnity against any claim
that may be made against it with respect to such Certificate, the Surviving
Corporation will, in exchange for such lost, stolen or destroyed Certificate,
issue or cause to be issued the number of shares of Acquiror Common Stock and
pay or cause to be paid the amounts deliverable in respect thereof pursuant to
this Article III.

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(g) Withholding Rights. The Surviving Corporation will be entitled to deduct
and withhold from the consideration otherwise payable pursuant to this
Agreement to any holder of Company Common Stock such amounts as may be
required to be deducted and withheld with respect to the making of such
payment under the Code, or under any provision of state, local or foreign tax
law. To the extent that amounts are so withheld and paid over to the
appropriate taxing authority, such withheld amounts will be treated for all
purposes of this Agreement as having been paid to the holder of Company Common
Stock in respect of which such deduction and withholding was made.

ARTICLE IV
CERTAIN PRE-MERGER TRANSACTIONS

The following transactions shall occur prior to the Effective Time:

4.1. Reorganization Agreements and Interim Services Agreement. Prior to the
Distribution, the Company will (a) execute and deliver the other
Reorganization Agreements and the Interim Services Agreement and (b) cause VRM
to execute and deliver the other Reorganization Agreements and the Interim
Services Agreement, in each case to which it is a party. Prior to the
Distribution, Acquiror will execute the Tax Sharing Agreement and the Interim
Services Agreement. All the Reorganization Agreements and the Interim Services
Agreement shall be executed in substantially the form attached hereto, which
agreements shall not be altered without the consent of Acquiror.

4.2. Intercorporate Reorganization of Company. Prior to the Time of
Distribution and pursuant to the terms of the Distribution Agreement, the
Company and VRM will consummate the intercorporate transactions contemplated
by Article II of the Distribution Agreement.

4.3. Distribution. Prior to the Effective Time, subject to and pursuant to
the terms and conditions of the Distribution Agreement, the Company will
effect the Distribution and the other transactions contemplated by the
Distribution Agreement.

4.4. Senior Notes. Prior to the Time of Distribution, the Retained Company
will either (a) obtain the consents of the note purchasers under the Note
Purchase Agreement dated December 19, 1990 between the Company and the note
purchasers, in order to permit the Distribution and the Merger or (b) prepay
the notes in accordance with their terms.

4.5. VESOP Notes. Prior to the Effective Time, the Company will cause the
VESOP to prepay the VESOP Notes issued under the Note Purchase Agreement dated
as of March 17, 1989 and the VESOP Notes issued under the Note Purchase
Agreement dated as of August 15, 1991 in accordance with their terms and will
terminate the related guarantee of the Company.

ARTICLE V
REPRESENTATIONS AND WARRANTIES

5.1. Representations and Warranties of the Company. Except as set forth in
the disclosure schedule (the "Company Disclosure Schedule") delivered by the
Company to Acquiror simultaneously with the execution and delivery of this
Agreement, the Company hereby represents and warrants to Acquiror as follows:

(a) Corporate Organization. Each of the Company and VRM is a corporation
duly incorporated, validly existing and in good standing under the laws of the
State of Delaware. Each Retained Subsidiary is, or will be, a corporation or
limited partnership duly organized, validly existing and in good standing
under the laws of the jurisdiction of its incorporation or formation, as
applicable, as set forth in the Company Disclosure Schedule. Each of the
Retained Companies and VRM is duly qualified and in good standing as a foreign
corporation in each jurisdiction in which the properties owned, leased or
operated, or the business conducted, by it require such

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<PAGE>

qualification, except for any such failure so to qualify or be in good
standing which, individually or in the aggregate, would not have a Material
Adverse Effect on the Retained Companies, taken as a whole, or a material
adverse effect on the ability of the VRM Companies to consummate the
transactions contemplated by, or to satisfy their obligations under, the
Reorganization Agreements. Each of the Retained Companies and VRM has the
requisite corporate or other power and authority to carry on its businesses as
it is now being or will be (immediately after the Time of Distribution)
conducted. The Company has heretofore made available to Acquiror complete and
correct copies of the Company Charter and the Company By-laws and the
certificate of incorporation and by-laws, or the comparable organizational
documents, of each Retained Subsidiary, each as amended to date and currently
in full force and effect.

(b) Corporate Authority. Each of the Company and VRM has the requisite
corporate power and authority to execute, deliver and perform each
Reorganization Agreement and the Interim Services Agreement, in each case, to
which it is a party and to consummate the transactions contemplated thereby
(assuming, (i) with respect to the Merger and the Distribution, the approval
and adoption of this Agreement by the affirmative vote of the holders of a
majority of the outstanding shares of Company Common Stock entitled to vote
thereon and (ii) formal declaration of the Distribution by the Company's Board
of Directors). The execution, delivery and performance by the Company of each
Reorganization Agreement and the Interim Services Agreement, in each case, to
which it is a party and the consummation by the Company of the Distribution
and the Merger and of the other transactions contemplated thereby have been
duly authorized by the Company's Board of Directors, and no other corporate
proceedings on the part of the Company are or will be necessary to authorize
any Reorganization Agreement or the Interim Services Agreement, in each case,
to which it is a party or for the Company to consummate the transactions so
contemplated (other than, (i) with respect to the Merger and the Distribution,
the approval and adoption of this Agreement by the affirmative vote of the
holders of a majority of the outstanding shares of Company Common Stock
entitled to vote thereon and (ii) formal declaration of the Distribution by
the Company's Board of Directors). The execution, delivery and performance by
VRM of each Reorganization Agreement and the Interim Services Agreement to
which it is a party and the consummation by it of the transactions
contemplated thereby have been duly authorized by VRM's Board of Directors and
its stockholder, if required, and no other corporate proceedings on the part
of such entity will be necessary to authorize any Reorganization Agreement or
the Interim Services Agreement to which it is a party or for it to consummate
the transactions so contemplated. Each Reorganization Agreement or the Interim
Services Agreement, in each case, to which the Company or VRM is a party is,
or when executed and delivered will be, a valid and binding agreement of such
party, enforceable against such party in accordance with the terms thereof.

(c) The Company Charter Takeover Provisions. The Company's Board of
Directors has approved the execution, delivery and performance by the Company
of this Agreement and the other Reorganization Agreements and the consummation
of the transactions contemplated thereby, and, subject to the representation
of Acquiror contained in Section 5.2(o) being true and correct, such approval
is sufficient to render inapplicable to the Merger and the other transactions
contemplated by the Reorganization Agreements the provisions of Sections 1 and
2 of Article VI of the Company Charter.

(d) No Violations; Consents and Approvals.

(i) None of the execution, delivery or performance by each of the Company
and VRM of any Reorganization Agreement and the Interim Services Agreement,
in each case, to which it is a party or the consummation by each of the
Company and VRM of the transactions contemplated thereby (assuming, (i)
with respect to the Merger and the Distribution, the approval and adoption
of this Agreement by the affirmative vote of the holders of a majority of
the outstanding shares of Company Common Stock entitled to vote thereon and
(ii) formal declaration of the Distribution by the Company's Board of
Directors) (A) will conflict with, or result in a violation or breach of,
the Company Charter or the Company By-laws or the certificate of
incorporation or by-laws, or comparable organizational documents of VRM and
the Subsidiaries of the Company or (B) will conflict with, or result in a
violation or breach of, or constitute a default (with or without due notice
or lapse of time or both) under, or give rise to any right of termination,
amendment, cancellation or acceleration of any material obligation under,
or result in the creation of any

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<PAGE>

adverse claim, restriction on voting or transfer or pledge, lien, charge,
encumbrance or security interest of any kind (a "Lien") upon any of the
properties or assets of the Company or VRM or any Subsidiary of either
under (1) any of the terms, conditions or provisions of any note, bond,
mortgage, indenture, lease, contract, agreement, obligation, understanding,
commitment or other arrangement (a "Contract") to which the Company or any
of its Subsidiaries is a party or by which any of their properties or
assets may be bound or of any license, franchise, permit, concession,
certificate of authority, order, approval, application or registration
form, of or with a Governmental Entity (a "Permit") or (2) to the knowledge
of the Company and subject to the Regulatory Filings, any judgment, order,
decree, statute, law, regulation or rule applicable to the Company or any
of its Subsidiaries, except, in the case of clause (B), as set forth in the
Company Disclosure Schedule and for conflicts, violations, breaches,
defaults, rights, losses or Liens that, individually or in the aggregate,
would not have a Material Adverse Effect on the Retained Companies, taken
as a whole, or a material adverse effect on the ability of the VRM
Companies to consummate the transactions contemplated by, or to satisfy
their obligations under, the Reorganization Agreements. Schedule 5.1(d)(i)
of the Company Disclosure Schedule attached hereto lists all material
Contracts and material Permits of the Company and its Subsidiaries which
require consent of, or prior notice to, a third party in order to
consummate the transactions contemplated by this Agreement or the
Distribution Agreement.

(ii) Except for consents, approvals, orders, authorizations,
registrations, declarations or filings as may be required under, and other
applicable requirements of, the Exchange Act, the Securities Act, the HSR
Act, applications or filings with the Federal Energy Regulatory Commission
under Section 203 of the Federal Power Act, filings and/or notifications
under the Investment Canada Act, Competition Act and other applicable
Canadian laws, filings under state securities or "blue sky" laws and the
filing of the Certificate of Merger (collectively, the "Regulatory
Filings"), other consents, approvals, orders, authorizations,
registrations, declarations, filings and agreements expressly provided for
in the Reorganization Agreements, and any notice or other filings to be
made following the Effective Time, no consent, approval, order or
authorization of, or registration, declaration or filing with, any
government or any court, arbitral tribunal, administrative agency or
commission or other governmental or other regulatory authority or agency,
Federal, state, local or foreign (a "Governmental Entity") is required with
respect to the Company, VRM or any Subsidiary of either, in connection with
the execution, delivery or performance by the Company and VRM of any
Reorganization Agreement, the Interim Services Agreement or the Assignment
and Assumption Agreements, in each case, to which it is a party or the
consummation by the Company and VRM, as the case may be, of the
transactions contemplated thereby (except where the failure to obtain such
consents, approvals, orders or authorizations, or to make such
registrations, declarations, filings or agreements, individually or in the
aggregate, would not have a Material Adverse Effect on the Retained
Companies, taken as a whole, or a material adverse effect on the ability of
the VRM Companies to consummate the transactions contemplated by, or to
satisfy their obligations under, the Reorganization Agreements).

(e) Capital Stock. The authorized capital stock of the Company consists of
(i) 75,000,000 shares of Company Common Stock, of which 44,185,513 shares of
Company Common Stock were issued and outstanding as of the close of business
on December 31, 1996, (ii) 20,000,000 shares of preferred stock, par value
$1.00 per share ("Company Preferred Stock"), of which 11,500 of shares of
redeemable preferred stock, series A ("Company Series A Preferred Stock") and
3,450,000 shares of $3.125 convertible preferred stock ("Company Convertible
Preferred Stock") were issued and outstanding as of the close of business on
December 31, 1996 and (iii) 10,000,000 shares of serial preference stock, par
value $1.00 per share, none of which is issued and outstanding. As of the
close of business on December 31, 1996 there were outstanding under the
Company Stock Plans options to acquire an aggregate of 4,228,855 shares of
Company Common Stock (subject to adjustment on the terms set forth in the
Company Stock Plans). All of the outstanding shares of Company Common Stock
have been, and all shares of Company Common Stock which may be issued pursuant
to the terms of any options, securities or plans referred to above will be,
when issued, duly authorized and validly issued, and are or will be, when
issued, fully paid and nonassessable. The Company has outstanding no bonds,
debentures, notes or other obligations or securities (other than the Company
Common Stock and Company Preferred Stock) the holders of

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<PAGE>

which have the right to vote (or are convertible or exchangeable into or
exercisable for securities having the right to vote) with the stockholders of
the Company on any matter. Except as set forth above, as of the date of this
Agreement, there are no securities convertible into or exchangeable for, or
options, warrants, calls, subscriptions, rights or Contracts of any kind to
which the Company or any of its Subsidiaries is a party or by which any of
them is bound obligating the Company or any of its Subsidiaries to issue,
deliver or sell, or cause to be issued, delivered or sold, additional shares
of capital stock or other voting securities of the Company or of any of the
Retained Subsidiaries. There are no outstanding Contracts of the Company or
any of its Subsidiaries to repurchase, redeem or otherwise acquire any shares
of Company Common Stock.

(f) Subsidiaries; Investments; Joint Ventures; Partnerships.

(i) The Company Disclosure Schedule lists each Retained Subsidiary.
Except as set forth in the Company Disclosure Schedule each of the
outstanding shares of capital stock or other ownership interests of each of
the Retained Subsidiaries has been duly authorized and validly issued, is
fully paid and nonassessable and, is owned, either directly or indirectly,
by the Company free and clear of all Liens. Except as set forth in the
Company Disclosure Schedule there are no Contracts obligating the Company,
or restricting the Company's rights, to transfer, sell or vote, the capital
stock of the Retained Subsidiaries owned by it, directly or indirectly.

(ii) Except as set forth in the Company Disclosure Schedule, the Company
does not, directly or indirectly, own any capital stock or other ownership
interest in any corporation, partnership, joint venture or other entity
included in the Retained Business or have any Contract relating to the
issuance, sale or purchase of any ownership interest in any such entity.

(g) SEC Filings.

(i) The Company has timely filed all reports, schedules, forms,
statements and other documents required to be filed by it with the SEC
under the Securities Act and the Exchange Act since January 1, 1994 (the
"Company SEC Documents"). As of its filing date, each Company SEC Document
filed, as amended or supplemented, if applicable, (A) complied in all
material respects with the applicable requirements of the Securities Act or
the Exchange Act, as applicable, and the rules and regulations thereunder
and (B) did not, at the time it was filed (and at the effective date
thereof, in the case of a registration statement), contain any untrue
statement of a material fact or omit to state any material fact required to
be stated therein or necessary to make the statements therein, in light of
the circumstances under which they were made, not misleading.

(ii) The financial statements of the Company included in the Company SEC
Documents comply as to form in all material respects with applicable
accounting requirements and the published rules and regulations of the SEC
with respect thereto and have been prepared in accordance with GAAP
(except, in the case of unaudited statements, as permitted by Form 10-Q of
the SEC) applied on a consistent basis during the periods involved (except
as may be indicated in the notes thereto). Each of the consolidated balance
sheets of the Company and its Subsidiaries included in or incorporated by
reference into the Company SEC Documents (including any related notes and
schedules) fairly presents in all material respects the consolidated
financial position of the Company and its Subsidiaries as of its date and
each of the consolidated statements of income, cash flows and stockholders'
equity of the Company and its Subsidiaries included in or incorporated by
reference into the Company SEC Documents (including any related notes and
schedules) fairly presents in all material respects the consolidated
results of operations, cash flows and retained earnings, as the case may
be, of the Company and its Subsidiaries for the periods set forth therein
(subject, in the case of unaudited statements, to normal year-end
adjustments), in each case in accordance with GAAP.

(iii) None of the information supplied, or to be supplied, by the Company
or its representatives for inclusion or incorporation by reference in (A)
the registration statement on Form S-4 to be filed with the SEC by Acquiror
in connection with the issuance of shares of Acquiror Common Stock in the
Merger (the

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<PAGE>

"Acquiror Form S-4") or the registration statement to be filed with the SEC
by VRM in connection with the distribution of shares of VRM Common Stock,
with the associated VRM Rights, in the Distribution (the "VRM Registration
Statement") will, at the time such Registration Statements are filed with
the SEC, at any time they are amended or supplemented or at the time they
become effective under the Securities Act and at the Effective Time, in the
case of the Acquiror Form S-4, and at the time of the annual meeting of
holders of Company Common Stock to be held in connection with the Merger
and the Distribution (the "Company Meeting"), and at the Time of
Distribution, in the case of the VRM Registration Statement, contain any
untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which they were made, not misleading
and (B) the proxy statement-prospectus relating to the Company Meeting (the
"Proxy Statement-Prospectus") will, at the date mailed to the Company's
stockholders or at the time of the Company Meeting, contain any untrue
statement of a material fact or omit to state any material fact required to
be stated therein or necessary in order to make the statements therein, in
light of the circumstances under which they are made, not misleading. The
VRM Registration Statement will comply as to form in all material respects
with the provisions of the Securities Act or the Exchange Act, as
applicable, and the rules and regulations thereunder, and the Proxy
Statement-Prospectus will comply as to form in all material respects with
the provisions of the Exchange Act and the rules and regulations
thereunder, except that no representation is made by the Company with
respect to statements made therein based on information supplied by
Acquiror or any of its Subsidiaries for inclusion in the VRM Registration
Statement or the Proxy Statement-Prospectus, respectively, or with respect
to information concerning Acquiror or any of its Subsidiaries incorporated
by reference therein.

(h) The Company and VNG Financial Statements.

(i) Included in the Company Disclosure Schedule are (A) audited
consolidated statements of assets and liabilities as of December 31, 1995
and 1994 (the "Year End Balance Sheets") and statements of consolidated
income and consolidated cash flows for the years ended December 31, 1995
and 1994, in each case, for the Company (such financial statements, the
"Company Financial Statements"), and (B) an unaudited consolidated
statement of assets and liabilities as of September 30, 1996 (the "Interim
Balance Sheet"), and unaudited statements of consolidated income and
consolidated cash flows for the nine months ended, September 30, 1996 for
the Company (such financial statements, the "Company Interim Financial
Statements"). Each of the Year End Balance Sheets and the Interim Balance
Sheet (including in the case of the Year End Balance Sheets any related
notes and schedules) fairly presents in all material respects the financial
position of the Company as of its date, and each of the statements of
consolidated income and consolidated cash flows included in the Company
Financial Statements and the Company Interim Financial Statements
(including in the case of the Company Financial Statements any related
notes and schedules) fairly presents in all material respects the
consolidated results of operations and consolidated cash flows, as the case
may be, of the Company for the periods set forth therein in each case in
accordance with GAAP (subject in the case of the Company Interim Financial
Statements to normal year-end adjustments).

(ii) Included in the Company Disclosure Schedule are unaudited
consolidated statements of assets and liabilities as of December 31, 1996,
1995 and 1994 (collectively, the "VNG Year End Balance Sheets" and such
statement as of December 31, 1996 being referred to herein as the "VNG
December 31, 1996 Balance Sheet") and statements of consolidated income and
consolidated cash flows for the years ended December 31, 1996, 1995 and
1994, in each case, for VNG and its Subsidiaries (such financial
statements, the "VNG Financial Statements"). Each of the VNG Year End
Balance Sheets fairly presents in all material respects the financial
position of VNG and its Subsidiaries as of its date, and each of the
statements of consolidated income and consolidated cash flows included in
the VNG Financial Statements fairly presents in all material respects the
consolidated results of operations and consolidated cash flows, as the case
may be, of VNG and its Subsidiaries for the periods set forth therein in
each case in accordance with GAAP. Each of the VNG Year End Balance Sheets
has been prepared on a basis substantially consistent with the preparation
of the corresponding Year End Balance Sheets of the Company (or for the
year ended

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<PAGE>

December 31, 1996, the Interim Balance Sheet of the Company) and each of
the statements of consolidated income and consolidated cash flows included
in the VNG Financial Statements has been prepared on a basis substantially
consistent with the preparation of the corresponding Financial Statements
of the Company (or for the year ended December 31, 1996, the Company
Interim Financial Statements).

(iii) Schedule 5.1(h)(iii) set forth in the Company Disclosure Schedule
sets forth a consolidated balance sheet of the Retained Companies as at
December 31, 1996 on an historical basis and as adjusted to give effect to
the Distribution and the transactions contemplated by the Distribution
Agreement and Section 7.10(a) (but not as adjusted for the Merger); such
balance sheet fairly states in all material respects the consolidated
financial position of the Retained Companies in accordance with GAAP, and
has been prepared on a basis substantially consistent with the preparation
of the Interim Balance Sheet of the Company and other Company Interim
Financial Statements.

(i) Absence of Certain Events and Changes. Except as disclosed in the
Company SEC Documents filed with the SEC and publicly available prior to the
date hereof (the "Filed Company SEC Documents") or the Company Disclosure
Schedule or as otherwise contemplated by the Reorganization Agreements, since
December 31, 1996 the Company and its Subsidiaries have conducted the Retained
Business in the ordinary course, consistent with past practices, and there
have not been (i) any events, changes or developments which, individually or
in the aggregate, would have a Material Adverse Effect on the Retained
Companies or Retained Business, taken as a whole, or a material adverse effect
on the ability of the VRM Companies to consummate the transactions
contemplated by, or to satisfy their obligations under, the Reorganization
Agreements to which they are or will be a party, other than events, changes or
developments relating to the economy in general or resulting from industry-
wide developments affecting companies in similar businesses, (ii) any
declaration, setting aside or payment of any dividend or other distribution
with respect to the Company's capital stock (other than the regular quarterly
cash dividends consistent with amounts currently paid and at a rate no higher
than the last quarterly dividend prior to December 31, 1996) or any
redemption, purchase or other acquisition of any of the Company's capital
stock (excluding shares acquired in connection with employee tax withholding
elections, or elections to pay the exercise price of stock options with shares
of stock, under Company Stock Plans) or debt (except scheduled redemptions and
repayments under Credit Facilities), or (iii) (x) any granting by the Company
or any of its Subsidiaries to any officer of any Retained Company of any
increase in compensation, except in the ordinary course of business
(including, but not limited to, in connection with promotions) consistent with
past practice or as was required under employment agreements in effect as of
December 31, 1996, (y) any granting by the Company or any of its Subsidiaries
to any such officer of any increase in severance or termination pay, except as
was required under employment, severance or termination agreements in effect
as of December 31, 1996, or (z) any entry by the Company or any of its
Subsidiaries into any employment, consulting, severance, termination or
indemnification agreement with any officers of any Retained Company.

(j) Compliance with Applicable Laws. Except as disclosed in the Filed
Company SEC Documents, the Company and its Subsidiaries are in compliance with
all statutes, laws, regulations, rules, judgments, orders and decrees of all
Governmental Entities applicable to them that relate to the Retained Business,
except where the failure to be in compliance, individually or in the
aggregate, would not have a Material Adverse Effect on the Retained Companies,
taken as a whole. Except as set forth on the Company Disclosure Schedule,
since December 31, 1995, neither the Company nor any Subsidiary has received
any written notice of any administrative, civil or criminal investigation or
audit (other than tax audits) by any Governmental Entity relating to the
Retained Business that, individually or in the aggregate, would have a
Material Adverse Effect on the Retained Companies, taken as a whole. Each of
the Retained Companies has all Permits that are required in order to permit it
to carry on its business as it is presently conducted, except as set forth in
the Company Disclosure Schedule or where the failure to have such Permits,
individually or in the aggregate, would not have a Material Adverse Effect on
the Retained Companies, taken as a whole. All such Permits are in full force
and effect, and the Retained Companies are in compliance with the terms of
such Permits, except where the failure to be in full force and effect or in
compliance, individually or in the aggregate, would not have a Material
Adverse Effect on the Retained Companies, taken as a whole. This Section
5.1(j) does not relate to employee benefits matters (for

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<PAGE>

which Section 5.1(n) is applicable), environmental matters (for which Section
5.1(o) is applicable) or tax matters (for which Section 5.1(m) is applicable).

(k) Title to Assets.

(i) Each of the Retained Companies has good title to its personal
properties and assets reflected on the VNG December 31, 1996 Balance Sheet,
except for properties and assets disposed of in the ordinary course of
business and except for such defects in title which, individually or in the
aggregate, would not have a Material Adverse Effect on the Retained
Companies, taken as a whole, in each case, free and clear of any Liens
except for Permitted Liens.

(ii) The Retained Companies have (A) good, sufficient and legal title to
the real properties reflected on the VNG December 31, 1996 Balance Sheet
and (B) valid and subsisting leasehold interests in the leased properties
reflected on the VNG December 31, 1996 Balance Sheet or otherwise used in
connection with the Retained Business, and except for such defects in title
which, individually or in the aggregate, would not have a Material Adverse
Effect on the Retained Companies, taken as a whole, in each case, free and
clear of any Liens, except for (1) Permitted Liens, (2) easements,
covenants, rights-of-way, other matters of record and other matters subject
to which such leases are granted and (3) such state of facts as an accurate
survey would show.

(iii) Except as set forth in the Company Disclosure Schedule or
contemplated by the other Reorganization Agreements, the Retained Companies
will, at the Effective Time, include all the Company's right, title and
interest in and to (a) all assets of the Company or any of its
Subsidiaries, including the information systems, that are used primarily in
or that are being held primarily for use in or that are otherwise
sufficient for the operation, as currently conducted, of the Retained
Business, and (b) whether or not included within the assets set forth in
clause (a) above, all assets (including, without limitation, capital stock
and partnership interests) reflected on Schedule 5.1(h)(iii), as such
assets may have been added to, sold in the ordinary course of business or
otherwise changed since such date).

(l) Litigation. Except as disclosed in the Filed Company SEC Documents or as
set forth in the Company Disclosure Schedule, there are no civil, criminal or
administrative actions, suits, claims, hearings, investigations or proceedings
pending, or to the knowledge of the Company threatened, against any of the
Retained Companies that, individually or in the aggregate, would have a
Material Adverse Effect on the Retained Companies, taken as a whole or delay
the Distribution or Merger. Except as disclosed in the Filed Company SEC
Documents, there are no outstanding judgments, orders, decrees, stipulations
or awards against any of the Retained Companies or their respective properties
or businesses that, individually or in the aggregate, would have a Material
Adverse Effect on the Retained Companies, taken as a whole.

(m) Taxes.

(i) All Tax Returns required to be filed by or on behalf of the Company
and any of its Subsidiaries or any consolidated, combined, affiliated or
unitary group of which the Company or any of its Subsidiaries is or has
ever been a member before the date hereof have been timely filed or
appropriately extended, and all Taxes shown as due and payable on such Tax
Returns and all other Taxes for which the Company or any of its
Subsidiaries is or might otherwise be liable that are due and payable
(together, "Covered Taxes") have been timely paid in full or reflected on
the balance sheet set forth in Schedule 5.1(h)(iii), except to the extent
that (i) such Taxes are being contested in good faith by appropriate
proceedings promptly instituted and diligently conducted and such reserve
or other appropriate provision, if any, as shall be required in conformity
with GAAP shall have been made therefor and (ii) the failure to so file
such Tax Returns or to pay such Taxes would not, individually or in the
aggregate, have a Material Adverse Effect on the Retained Companies, taken
as a whole; provided, however, that no representation is made under this
Agreement with respect to any Tax or Tax Return which is (i) a subject of
the litigation set forth and described at Section I, paragraphs 3 through
6, of Schedule 5.1(l) (the "Existing Tax Claims"), or (ii) heretofore or
hereafter made

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<PAGE>

a subject of any claim, demand or litigation involving claims substantially
similar to those asserted in the Existing Tax Claims. The information
contained in such Tax Returns is true, complete and accurate in all
material respects.

(ii) The Tax Returns of the Company and its Subsidiaries have been
audited and settled by the Internal Revenue Service for all periods ended
through December 31, 1992 or the period for assessment of taxes in respect
of such periods has expired.

(iii) Except as set forth in the Company Disclosure Schedule, to the
Company's knowledge, there are no material claims or investigations pending
or threatened against the Company or its Subsidiaries for past Taxes.

(iv) Except as set forth in the Tax Sharing Agreement, there is no Tax
sharing or allocation agreement under which the Company or any of its
Retained Subsidiaries will have any obligations after the Effective Time.

(v) The charges, accruals and reserves for Taxes with respect to the
Company and its Subsidiaries reflected on the Retained Business Financial
Statements are adequate to cover such Taxes relating to periods, or portion
thereof, ending on or prior to the date of such financial statements.

(vi) All material Taxes due with respect to any completed and settled
audit, examination, or deficiency litigation with any taxing authority have
been paid in full.

(vii) No material income or gain would be recognized under Treasury
Regulation Sections 1.1502-13 or 1.1502-19 (or any corresponding provisions
of other applicable Tax laws) as a result of the transactions contemplated
by the Reorganization Agreements, if such transactions were to occur on the
date hereof.

(viii) There is no agreement or other document extending, or having the
effect of extending, the period of assessment or collection of any material
amount of Covered Taxes.

(ix) The Federal consolidated minimum tax credit carryforward allocated
to the Retained Companies as of December 31, 1996 is not less than
$6,000,000.

(x) None of the Retained Companies shall be required to include in a
taxable period ending after the Closing Date, a material amount of taxable
income attributable to income that economically accrued in a prior taxable
period as a result of Section 481 of the Code or any comparable provision
of state or local Tax law.

(xi) No person has made with respect to any of the Retained Companies, or
with respect to any property held by any of the Retained Companies, any
consent under Section 341 of the Code.

(xii) None of the Retained Companies is a party to any lease made
pursuant to Section 168(f)(8) of the Internal Revenue Code of 1954, as
amended and in effect prior to the date of enactment of the Tax Equity and
Fiscal Responsibility Act of 1982.

(xiii) Neither the Company nor any of its Subsidiaries, nor any member of
any controlled group (within the meaning of Section 993(a)(3) of the Code)
that includes the Company or any of its Subsidiaries, nor, to the knowledge
of the Company, any of their respective officers, directors, employees or
independent contractors acting on their behalf, has participated in or
cooperated with an international boycott (within the meaning of Section
999(b)(3) of the Code).

(xiv) No material Liens for Taxes exist with respect to any of the assets
or properties of any of the Retained Companies, except for statutory liens
for Taxes not yet due or payable or that are being contested in good faith.

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<PAGE>

(xv) Neither the Company nor any of its Subsidiaries has taken any action
that would disqualify the Distribution from being treated as a
"reorganization" within the meaning of Section 368(a)(1)(D) of the Code and
from being treated as a tax-free distribution within the meaning of Section
355 or 361(c) of the Code, or the Merger from being treated as a
"reorganization" within the meaning of Section 368(a)(1)(B) of the Code.

(n) Employee Benefit Plans.

(i) The Company Disclosure Schedule lists each Employee Plan which
relates to employees of the Retained Business. With respect to each such
Employee Plan, the Company has provided to Acquiror, or will prior to the
Effective Time provide, a true and complete copy of such plan document and
such other documents relating thereto as Acquiror may reasonably request.

(ii) A favorable determination letter has been issued by the Internal
Revenue Service with respect to each such Employee Plan which is intended
to be qualified under Section 401(a) of the Code, and, to the knowledge of
the Company, no event has occurred since the date of such determination
letter to affect adversely the qualified status of such Employee Plan. Each
Employee Plan which relates to employees of the Retained Business has been
maintained in compliance in all material respects with its terms and with
the requirements prescribed by any and all statutes, orders, rules and
regulations, including but not limited to ERISA and the Code, which are
applicable to such Employee Plan, except where the failure to so comply
would not have a negative effect on the tax-qualified status of such Plan,
result in the imposition of any material (to the Plan) fine, penalty or
excise tax under ERISA or the Code, or require any increased employer
contributions or increased benefits in order to avoid any such negative
effect, fine, penalty or excise tax.

(iii) Neither the Company nor any of its ERISA Affiliates has incurred
any liability under Title IV of ERISA arising in connection with the
termination of, or complete or partial withdrawal from, any plan covered or
previously covered by Title IV of ERISA that will become, after the
Effective Time, an obligation of the Company, the Acquiror or any of their
ERISA Affiliates.

(iv) No employee of the Retained Companies will become entitled to any
retirement, severance or similar benefit or enhanced benefit solely as a
result of the transactions contemplated hereby except that (i) all
restrictions on stock issued pursuant to the Company Restricted Stock Plans
shall, pursuant to the terms of the Company Restricted Stock Plans or
individual restricted stock agreements, terminate prior to or as a result
of the Merger, (ii) all awards heretofore granted pursuant to the Company
Stock Plans shall vest, (iii) benefits accrued pursuant to the SERP shall
vest, (iv) the deferral accounts of participants in the Deferred
Compensation Plan who terminate employment with the company within 18
months following the Effective Time, unless such termination is the result
of fraud, defalcation, misappropriation or other criminal conduct committed
by the participant against the Company, shall be credited as of the date of
termination with an additional three percentage points of imputed annual
interest, (v) payments will be payable under the Shareholder Value Bonus
Plan, the Incentive Bonus Agreements and (vi) accelerated vesting in
performance shares will occur.

(o) Environmental Matters. Except as disclosed in the Filed Company SEC
Documents or set forth in the Company Disclosure Schedule and except for such
matters that, individually or in the aggregate, would not have a Material
Adverse Effect on the Retained Companies, taken as a whole, (i) the Retained
Companies are in compliance with all applicable Environmental Laws, (ii) the
Retained Companies have all Permits required under Environmental Laws for the
operation of the Retained Business as presently conducted ("Environmental
Permits") and there are no violations, investigations or proceedings pending
with respect to such Environmental Permits, (iii) none of the Retained
Companies has received any written notices or demand letters from any
Governmental Entity or any other Person, or any requests for information from
any Governmental Entity which assert that any of the Retained Companies may be
in violation of, or liable under, any Environmental Law, (iv) no facts or
circumstances exist that impose or could reasonably be expected to impose
Environmental Liabilities

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<PAGE>

on any of the Retained Companies, and (v) the Retained Companies will not be
required under existing Environmental Laws to install prior to December 31,
1997 additional environmental or pollution control equipment or make other
capital expenditures in order to comply with Environmental Laws, except to the
extent set forth in the 1997 strategic capital budget for the Company and the
Retained Business as adopted by the Board of Directors of the Company on
October 25, 1996 and heretofore furnished to Acquiror.

(p) Takeover Statutes. Section 203 of the DGCL is inapplicable to the Merger
and the other transactions contemplated by the Reorganization Agreements. To
the knowledge of the Company, no other "fair price", "moratorium", "control
share acquisition" or other similar antitakeover statute, law, regulation or
rule of any Governmental Entity (each a "Takeover Statute") is applicable to
the transactions contemplated by the Reorganization Agreements.

(q) Brokers and Finders. Neither the Company nor any of its directors,
officers or employees has employed any broker or finder or incurred any
liability for any brokerage fees, commissions or finders' fees in connection
with the transactions contemplated hereby, except as set forth in the Company
Disclosure Schedule, the fees and expenses of which shall be paid in
accordance with Section 7.10(a).

(r) Employees. There is no labor strike or work stoppage pending or, to the
knowledge of the Company, threatened against any of the Retained Companies
which, in any case, individually or in the aggregate, would reasonably be
expected to have a Material Adverse Effect on the Retained Companies, taken as
a whole. None of the Retained Companies is as of the date hereof a party to
any collective bargaining agreement relating to its employees.

(s) Contracts. Except as set forth in the Company Disclosure Schedule, as of
the date hereof, neither the Company nor any Subsidiary is (with or without
the lapse of time or the giving of notice, or both) in breach or default in
any material respect under any Contract or Contracts that individually or in
the aggregate are material to the operation of the Retained Business. To the
Company's knowledge, as of the date of this Agreement, none of the other
parties to any Contract or Contracts that individually or in the aggregate are
material to the operation of the Retained Business is (with or without the
lapse of time or the giving of notice, or both) in breach or default in any
material respect thereunder.

(t) Opinion of Financial Advisor. The Company has received the opinion of
Lehman Brothers, Inc. to the effect that, as of the date hereof, the
consideration to be received by the Company's stockholders in the Distribution
and the Merger is fair to such stockholders from a financial point of view.

(u) Rights Agreement. The Company has taken all necessary action so that
entering into this Agreement and the other Reorganization Agreements, the
Merger and the other transactions contemplated by the Reorganization
Agreements will not result in the grant of any rights to any Person under the
Company Rights Agreement or enable or require the rights to be exercised,
distributed or triggered.

(v) Regulation as a Utility. Neither the Company nor any of its Subsidiaries
is a "holding company", a "subsidiary company" of a "holding company", an
"affiliate" of a "holding company" or of a "subsidiary company" of a "holding
company", or a "public utility", as each such term is defined in the Public
Utility Holding Company Act of 1935, as amended, and the rules and regulations
promulgated thereunder.

(w) Intellectual Property and Software. The Retained Company and its
Subsidiaries, after giving effect to the Merger and the Distribution, will own
or have the valid, legal right to use all Intellectual Property and Software
used in connection with the Retained Business as conducted on the date hereof
other than the Intellectual Property, Software, tradenames and related rights
to be distributed solely to VRM as provided in the Distribution Agreement. The
Company and its Subsidiaries have used commercially reasonable measures to
protect the secrecy, confidentiality and value of the Intellectual Property
used in connection with the Retained Business. To the Company's knowledge, no
material Intellectual Property (other than unregistered copyrights) or
material Software used in connection with the Retained Business has been
improperly used, divulged or

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appropriated for the benefit of any person other than the Company and its
Subsidiaries, except where such use, divulgence or appropriation would not,
individually or in the aggregate, have a Material Adverse Effect on the
Retained Companies, taken as a whole. As of the date hereof, neither the
Company nor any of its Subsidiaries has made any claim in writing of a
violation, infringement, misuse or misappropriation by others of rights of the
Company and its Subsidiaries to or in connection with any material
Intellectual Property used in connection with the Retained Business. There is
no pending or, to the knowledge of the Company, threatened claim by any third
person of a violation, infringement, misuse or misappropriation by any of the
Company or any of its Subsidiaries of any Intellectual Property or Software
owned by any third person, or of the invalidity of any patent used in
connection with the Retained Business, that would, individually or in the
aggregate, have a Material Adverse Effect on the Retained Companies, taken as
a whole.

5.2. Representations and Warranties of Acquiror and Sub. Acquiror and Sub
hereby represent and warrant to the Company as follows:

(a) Corporate Organization and Qualification. Each of Acquiror and Sub is a
corporation duly organized, validly existing and in good standing under the
laws of its jurisdiction of incorporation and is duly qualified and in good
standing as a foreign corporation in each jurisdiction in which the properties
owned, leased or operated, or the business conducted, by it require such
qualification, except for any such failure so to qualify or be in good
standing which, individually or in the aggregate, would not have a Material
Adverse Effect on Acquiror and its Subsidiaries, taken as a whole. Each of
Acquiror and Sub has the requisite corporate power and authority to carry on
its businesses as they are now being conducted. Acquiror has heretofore made
available to the Company complete and correct copies of the charter and bylaws
of Acquiror and Sub, each as amended to date and currently in full force and
effect.

(b) Corporate Authority. Each of Acquiror and Sub has the requisite
corporate power and authority to execute, deliver and perform each
Reorganization Agreement, and the Interim Services Agreement and the
Assignment and Assumption Agreements, in each case, to which it is a party and
to consummate the transactions contemplated thereby. The execution, delivery
and performance by each of Acquiror and Sub of each Reorganization Agreement,
the Interim Services Agreement and the Assignment and Assumption Agreements,
in each case, to which it is a party and the consummation by it of the
transactions contemplated hereby and thereby have been or will be duly
authorized by its Board of Directors, and no other corporate proceedings on
its part are or will be necessary to authorize any Reorganization Agreement or
the Assignment and Assumption Agreements to which it is a party or for it to
consummate the transactions so contemplated. Each of the Reorganization
Agreement, the Interim Services Agreement and the Assignment and Assumption
Agreements to which Acquiror or Sub is a party is, or when executed and
delivered will be, a valid and binding agreement of Acquiror or Sub, as the
case may be, enforceable against Acquiror or Sub, as the case may be, in
accordance with the terms thereof.

(i) None of the execution, delivery or performance by Acquiror and Sub of
any Reorganization Agreement or the Assignment and Assumption Agreements,
in each case, to which it is a party or the consummation by each of
Acquiror and Sub of the transactions contemplated thereby (A) will conflict
with, or result in a violation or breach of, the charter or by-laws of
Acquiror or Sub or (B) will conflict with, or result in a violation or
breach of, or constitute a default (with or without due notice or lapse of
time or both) under, or give rise to any right of termination, amendment,
cancellation or acceleration of any material obligation under, or result in
the creation of any Lien upon any of the properties or assets of Acquiror
or Sub under (1) any of the terms, conditions or provisions of any Contract
to which Acquiror or Sub is a party or by which any of their properties or
assets may be bound or of any Permit, or (2) to the knowledge of the
Acquiror subject to the Regulatory Filings, any judgment, order, decree,
statute, law, regulation or rule applicable to Acquiror or Sub, except, in
the case of clause (B), for conflicts, violations, breaches, defaults,
rights, losses or Liens that, individually or in the aggregate, would not
have a Material Adverse Effect on Acquiror and its Subsidiaries, taken as a
whole.

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(ii) Except for the Regulatory Filings, and other consents, approvals,
orders, authorizations, registrations, declarations, filings and agreements
expressly provided for in the Reorganization Agreements or set forth in
Section 5.1(d), and any notice or other filings to be made following the
Effective Time, no consent, approval, order or authorization of, or
registration, declaration or filing with, any Governmental Entity is
required with respect to Acquiror or Sub, in connection with the execution,
delivery or performance by each of Acquiror and Sub of any Reorganization
Agreement or the Assignment and Assumption Agreements, in each case, to
which it is a party or the consummation by Acquiror of the transactions
contemplated thereby (except where the failure to obtain such consents,
approvals, orders or authorizations, or to make such registrations,
declarations, filings or agreements, individually or in the aggregate,
would not have a Material Adverse Effect on Acquiror and its Subsidiaries,
taken as a whole).

(d) Capital Stock. The authorized capital stock of Acquiror consists of (i)
800,000,000 shares of Acquiror Common Stock, of which an aggregate of
409,120,387 shares were issued and outstanding as of the close of business on
January 1, 1997; and (ii) 85,000,000 shares of preferred stock, no par value,
of Acquiror, of which no shares were issued and outstanding as of the close of
business on January 1, 1997. As of the close of business on January 1, 1997,
there were outstanding under Acquiror's option plans options to purchase an
aggregate of 3,461,733 shares of Acquiror Common Stock (subject to adjustment
on the terms set forth in the Acquiror option plans). All of the outstanding
shares of Acquiror Common Stock have been, and all shares of Acquiror Common
Stock which may be issued pursuant to the terms of any options or plans
referred to above will be, when issued, duly authorized and validly issued,
and are, or will be, when issued, fully paid and non-assessable. Acquiror has
outstanding no bonds, debentures, notes or other obligations or securities
(other than Acquiror Common Stock) the holders of which have the right to vote
(or are convertible or exchangeable into or exercisable for securities having
the right to vote) with the stockholders of Acquiror on any matter. Except as
set forth above, as of the date of this Agreement, there are no securities
convertible into or exchangeable for, or options, warrants, calls,
subscriptions, rights or Contracts of any kind to which Acquiror or any of its
Subsidiaries is a party or by which any of them is bound obliging Acquiror or
its Subsidiaries to issue, deliver or sell, or cause to be issued, delivered
or sold, additional shares of capital stock or other voting securities of
Acquiror or of any of its Subsidiaries.

(e) The shares of Acquiror Common Stock to be issued in the Merger are duly
authorized and, when issued in accordance with the terms of this Agreement,
will be duly and validly issued, fully paid, non-assessable and free of
preemptive rights.

(f) SEC Filings.

(i) Acquiror and its wholly-owned subsidiary, Pacific Gas and Electric
Company have timely filed all reports, schedules, forms, statements and
other documents required to be filed with the SEC under the Securities Act
and the Exchange Act since January 1, 1994 (the "Acquiror SEC Documents").
As of its filing date, each Acquiror SEC Document filed, as amended or
supplemented, if applicable, (A) complied in all material respects with the
applicable requirements of the Securities Act or the Exchange Act, as
applicable, and the rules and regulations thereunder and (B) did not, at
the time it was filed (and at the effective date thereof, in the case of a
registration statement), contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary
to make the statements therein, in light of the circumstances under which
they were made, not misleading.

(ii) The financial statements of Acquiror included in the Acquiror SEC
Documents comply as to form in all material respects with applicable
accounting requirements and the published rules and regulations of the SEC
with respect thereto and have been prepared in accordance with GAAP
(except, in the case of unaudited statements, as permitted by Form 10-Q of
the SEC) applied on a consistent basis during the periods involved (except
as may be indicated in the notes thereto). Each of the consolidated balance
sheets included in or incorporated by reference into the Acquiror SEC
Documents (including any related notes and schedules) fairly presents in
all material respects the consolidated financial position of Acquiror and
its Subsidiaries as of its date and each of the consolidated statements of
income, cash flows and stockholders'

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equity included in or incorporated by reference into the Acquiror SEC
Documents (including any related notes and schedules) fairly presents in
all material respects the consolidated results of operations, retained
earnings and cash flows, as the case may be, of Acquiror and its
Subsidiaries for the periods set forth therein (subject, in the case of
unaudited statements, to normal year-end adjustments), in each case in
accordance with GAAP.

(iii) None of the information supplied or to be supplied by Acquiror or
its representatives for inclusion or incorporation by reference in (A) the
Acquiror Form S-4 or the VRM Registration Statement will, at the time such
Registration Statements are filed with the SEC, at any time they are
amended or supplemented, at the time they become effective under the
Securities Act and at the Effective Time, in the case of the Acquiror Form
S-4, and at the time of the Company Meeting and at the Time of
Distribution, in the case of the VRM Registration Statement, contain any
untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which they were made, not misleading
and (B) the Proxy Statement-Prospectus will, at the date mailed to the
Company's stockholders or at the time of the Company Meeting, contain any
untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they are made, not
misleading. The Acquiror Form S-4 will comply as to form in all material
respects with the provisions of the Securities Act or the Exchange Act, as
applicable, and the rules and regulations thereunder, and the Proxy
Statement-Prospectus will comply as to form in all material respects with
the provisions of the Exchange Act and the rules and regulations
thereunder, except that no representation is made by Acquiror with respect
to statements made therein based on information supplied by the Company or
any of its Subsidiaries for inclusion in the Acquiror Form S-4 or the Proxy
Statement-Prospectus, respectively, or with respect to information
concerning the Company or any of its Subsidiaries incorporated by reference
therein.

(g) Absence of Certain Events and Changes. Except as disclosed in the
Acquiror SEC Documents filed with the SEC and publicly available prior to the
date hereof (the "Filed Acquiror SEC Documents") or as otherwise contemplated
by the Reorganization Agreements, since September 30, 1996 Acquiror and its
Subsidiaries have conducted their respective businesses in the ordinary
course, consistent with past practices, and there have not been any events,
changes or developments which, individually or in the aggregate, would have a
Material Adverse Effect on Acquiror and its Subsidiaries, taken as a whole,
other than events, changes or developments relating to the economy in general
or resulting from industry-wide developments affecting companies in similar
businesses.

(h) Compliance with Applicable Laws. Except as disclosed in the Filed
Acquiror SEC Documents, Acquiror and its Subsidiaries are in compliance with
all statutes, laws, regulations, rules, judgments, orders and decrees of all
Governmental Entities applicable to them, except where the failure to be in
compliance, individually or in the aggregate, would not have a Material
Adverse Effect on Acquiror and its Subsidiaries, taken as a whole. Since
December 31, 1995 neither Acquiror nor any of its Subsidiaries has received
any written notice of any administrative, civil or criminal investigation or
audit (other than tax audits) by any Governmental Entity that, individually or
in the aggregate, would have a Material Adverse Effect on Acquiror and its
Subsidiaries, taken as a whole. Each of Acquiror and its Subsidiaries has all
Permits that are required in order to permit it to carry on its business as it
is presently conducted, except where the failure to have such Permits,
individually or in the aggregate, would not have a Material Adverse Effect on
Acquiror and its Subsidiaries, taken as a whole. All Permits are in full force
and effect and Acquiror and its Subsidiaries are in compliance with the terms
of the Permits, except where the failure to be in full force and effect or in
compliance, individually or in the aggregate, would not have a Material
Adverse Effect on Acquiror and its Subsidiaries, taken as a whole.

(i) Litigation. Except as disclosed in the Filed Acquiror SEC Documents,
there are no civil, criminal or administrative actions, suits, claims,
hearings, investigations or proceedings pending or, to the knowledge of
Acquiror, threatened, against Acquiror or any of its Subsidiaries that,
individually or in the aggregate, would have a Material Adverse Effect on
Acquiror and its Subsidiaries, taken as a whole or delay the Distribution or

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Merger. Except as disclosed in the Filed Acquiror SEC Documents, there are no
outstanding judgments, orders, decrees, stipulations or awards against
Acquiror or any of its Subsidiaries or their respective properties or
businesses that, individually or in the aggregate, would have a Material
Adverse Effect on Acquiror and its Subsidiaries, taken as a whole.

(j) Takeover Statutes. No California Takeover Statute is applicable to the
transactions contemplated by the Reorganization Agreements, and to the
knowledge of Acquiror, no other Takeover Statute is applicable to such
transactions.

(k) Employee Benefit Plans.

(i) The disclosure schedule delivered to the Company by Acquiror prior to
the date hereof (the "Acquiror Disclosure Schedule") lists each Employee
Plan of Pacific Gas Transmission Company ("PGT") and, if applicable, each
Employee Plan of the Acquiror or a Subsidiary in which one or more
Continuing Employees will be eligible to participate following the Closing.
With respect to each such Employee Plan, Acquiror has provided to the
Company, or will prior to the Effective Time provide, a true and complete
copy of such plan document and such other documents relating thereto as the
Company may reasonably request.

(ii) A favorable determination letter has been issued by the Internal
Revenue Service with respect to each such Employee Plan which is intended
to be qualified under Section 401(a) of the Code, and, to the knowledge of
PGT, no event has occurred since the date of such determination letter to
affect adversely the qualified status of such Employee Plan. Each Employee
Plan has been maintained in compliance in all material respects with its
terms and with the requirements prescribed by any and all statutes, orders,
rules and regulations, including but not limited to ERISA and the Code,
which are applicable to such Plan, except where the failure to so comply
would not have a negative effect on the tax-qualified status of such Plan,
result in the imposition of any material (to the Plan) fine, penalty or
excise tax under ERISA or the Code, or require any increased employer
contributions or increased benefits in order to avoid any such negative
effect, fine, penalty or excise tax.

(iii) Neither Acquiror nor any of its ERISA Affiliates has incurred any
liability under Title IV of ERISA arising in connection with the
termination of, or complete or partial withdrawal from, any plan covered or
previously covered by Title IV of ERISA that will become, after the
Effective Time, an obligation of Acquiror or any of its ERISA Affiliates.

(l) Brokers and Finders. Neither Acquiror nor any of its directors, officers
or employees has employed any broker or finder or incurred any liability for
any brokerage fees, commissions or finders' fees in connection with the
transactions contemplated hereby, except that Acquiror has retained Merrill
Lynch & Co. as its financial advisor, the fees and expenses of which shall be
paid by Acquiror.

(m) Regulation as a Utility. Acquiror is a holding company within the
meaning of the Public Utility Holding Company Act of 1935 (the "1935 Act"),
but Acquiror and its Subsidiaries are exempt from the provisions thereof,
except Section 9(a)(2) thereof, by virtue of having filed with the Securities
and Exchange Commission an exemption statement on Form U-3A-2, and to the
Company's knowledge, no proceedings to revoke or modify such exemption have
been instituted or are pending.

(n) Required Vote of Acquiror Stockholders. No vote of the stockholders of
Acquiror is required in connection with this Agreement, the Merger or any
Reorganization Agreements.

(o) Acquiror Ownership of Company Common Stock. Acquiror does not own, and
has not owned, 5% or more of the outstanding shares any class or series of
voting stock of the Company.

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ARTICLE VI
COVENANTS

6.1. Covenants of the Company. During the period from December 31, 1996 and
continuing until the Effective Time, the Company agrees as to itself and its
Subsidiaries that, except as set forth in the Company Disclosure Schedule, and
except for the Distribution and as required or otherwise expressly
contemplated by the Reorganization Agreements, or to the extent that Acquiror
otherwise consents in writing, which consent shall not be unreasonably
withheld (it being agreed that the following forward looking statements are
deemed to apply to a period prior to the date hereof which commences on
December 31, 1996 and ending at the Effective Time):

(a) Ordinary Course. The Retained Business will be conducted in the usual,
regular and ordinary course, consistent with past practice, including, without
limitation, with respect to the payment and administration of accounts
receivable, inventory management and control policies and implementation of
capital programs for the Retained Business in a timely manner, and the Company
will use reasonable efforts to preserve intact the present business
organization, maintain insurance policies, keep available the services of
present officers and employees engaged primarily in the Retained Business and
to preserve the relationships with key customers, suppliers and others having
business dealings with the Retained Business.

(b) Dividends; Changes in Stock. The Company shall not (i) declare or pay
any dividends (including dividends in Company Common Stock) on or make other
distributions in respect of any of its capital stock (including such a
distribution or dividend made in connection with a recapitalization,
reclassification, merger, consolidation, reorganization or similar
transaction), except for regular quarterly cash dividends consistent with
amounts currently paid and at a rate not higher than the last quarterly
dividend paid prior to the date hereof and the Distribution, (ii) split
(including a reverse stock split), combine or reclassify any of its capital
stock or issue or authorize or propose the issuance of any of its capital
stock or issue or authorize or propose the issuance of any other securities in
respect of, in lieu of or in substitution for shares of its capital stock, or
(iii) except as contemplated by the Reorganization Agreements, repurchase,
redeem or otherwise acquire, or permit any Subsidiary to repurchase, redeem or
otherwise acquire, any shares of capital stock (excluding shares acquired in
connection with employee tax withholding elections, or elections to pay the
exercise price of stock options with shares of stock, under Company Stock
Plans) or debt (except scheduled redemptions and repayments under Credit
Facilities) of the Company or any of its Subsidiaries.

(c) Issuance of Securities. The Company will not, nor will the Company
permit any of the Retained Subsidiaries to issue, transfer, sell or dispose
of, or authorize or agree to the issuance, transfer, sale or disposition by
any of the Retained Companies of (whether through the issuance or granting of
options, warrants, commitments, subscriptions, rights to purchase or
otherwise), any shares of capital stock or any voting securities of the
Company or any of the Retained Subsidiaries, or any options or other
securities convertible into or exchangeable for any such shares of capital
stock or any voting securities of the Company or amend any of the terms of any
such securities or agreements relating to such capital stock outstanding on
the date hereof, other than (i) the issuance, transfer, sale or disposition by
a wholly-owned Subsidiary of its capital stock to its parent, and (ii) the
issuance or transfer of shares of Company Common Stock (w) upon the exercise
of stock options or the vesting of performance shares pursuant to any Employee
Plan, (x) to make any payment under any Employee Plan that is required as of
the date of this Agreement or permitted under Section 6.1(h) to be made in the
form of shares of Company Common Stock, and (y) upon any conversion of shares
of Company Convertible Preferred Stock. Any income tax deduction with respect
to the delivery or vesting of shares pursuant to any Employee Plan, contract
or arrangement shall be allocated to the VRM Group or Company Group
corresponding to the business for which the employee (or former employee)
performed services or if the individual performed services for both the
Retained Business and the VRM Business, to such Groups in the same proportion
as the services were performed for such businesses, which determination shall
be made in good faith using a consistent and reasonable method.

(d) Indebtedness. The Company shall not, nor shall it permit any of its
Retained Subsidiaries to, incur any indebtedness for borrowed money or
guarantee any such indebtedness or issue or sell any debt securities or

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warrants or rights to acquire any debt securities of the Company or any of its
Retained Subsidiaries or guarantee any obligations of others, other than
pursuant to the existing Credit Facilities; provided, however, that the
Company, VRM and their respective Subsidiaries may enter into guarantees for
money borrowed or for obligations of Affiliates, if (i) such are entered into
in the ordinary course of business and in accordance and at levels consistent
with past practices and (ii) if such guarantees relate to VRM or any of its
Subsidiaries, then (x) any such guarantees entered into on or after 5 business
days following the date of this Agreement terminate on or prior to the Closing
Date or become the sole obligations of VRM or (y) the Retained Company and the
Retained Subsidiaries are expressly released therefrom on or prior to the
Closing Date.

(e) Governing Documents. The Company will not amend in any material respect
the Company Charter or the Company By-laws, nor will the Company permit any
Retained Subsidiary to amend in any material respect the certificate of
incorporation or by-laws or comparable organizational documents of any
Retained Subsidiary.

(f) No Acquisitions, Etc. The Company will not, nor will it permit any of
the Retained Subsidiaries to, (i) acquire or agree to acquire, by merging or
consolidating with, or by purchasing a substantial equity interest in or
substantial portion of the assets of, any business or any corporation,
partnership, association or other business organization or division thereof or
otherwise acquire or agree to acquire any assets (other than immaterial assets
or assets acquired from another Retained Subsidiary) that would be part of the
Retained Business, (ii) make or agree to make any other investment in any
Person (whether by means of loan, capital contribution, purchase of capital
stock or other securities or otherwise) that would be part of the Retained
Business, except for acquisitions or investments by the Company pursuant to
existing contractual obligations or investments in any entity that was a
Retained Subsidiary before giving effect to such investment, or (iii) make or
agree to make any capital expenditure that would be part of the Retained
Business, except, in each case, for acquisitions, investments and capital
expenditures contemplated in the 1997 strategic capital budget for the Company
and the Retained Business as adopted by the Board of Directors of the Company
on October 25, 1996 and heretofore furnished to Acquiror.

(g) No Dispositions. The Company will not, nor will it permit any of the
Retained Subsidiaries to, sell, lease, license, encumber or otherwise dispose
of, or agree to sell, lease, license, encumber or otherwise dispose of (other
than to the Company or to another Retained Subsidiary), any of the assets of
the Retained Business other than in the ordinary course of business consistent
with past practice.

(h) Employee Plans and Compensation. Except as described in the Company
Disclosure Schedule, or except as required by law, or in the ordinary course
of business consistent with past practice, the Company will not, nor will it
permit any of the Retained Subsidiaries to, adopt any plan, arrangement or
policy (including individual arrangements or contracts) which would become an
Employee Plan or amend any Employee Plan to the extent such adoption or
amendment would create a liability or obligation or increase an existing
liability or obligation on the part of the Retained Companies that will not be
assumed by VRM or one of its Subsidiaries pursuant to the Employee Benefits
Agreement. Except for (i) grants of options or performance shares which, at
the Time of Distribution, shall be fully assumed by VRM, (ii) grants of stock
options, performance shares, restricted stock or other stock-based awards
under which, by their terms, all stock issuable pursuant thereto shall be
vested and outstanding prior to the Effective Time, or (iii) grants described
in the Company Disclosure Schedule, the Company shall not grant any stock
option, performance share, stock appreciation right, restricted stock,
unrestricted stock or any other award under any equity-based compensation plan
or individual arrangement. Except as set forth in the Company Disclosure
Schedule or as consistent with past practice, the Company shall not, increase
the compensation payable or to become payable to any officer or employee other
than for increases in the ordinary course of business in accordance with past
practices, or grant any severance or termination pay to, or enter into any
employment or severance agreement with, or amend the terms of any existing
employment or severance agreements with, any officer of employee of the
Company and its Subsidiaries.

(i) Accounting Policies and Procedures. The Company (with respect to the
conduct of the Retained Business) will not, and will not permit any of the
Retained Subsidiaries to, change any of its accounting principles, policies,
practices or procedures, except as may be required by GAAP or Regulation S-X
of the SEC.

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(j) Liens. The Company will not, and will not permit any of its Subsidiaries
to, create, incur, suffer to exist or assume any Lien on any assets of the
Retained Companies, except for Liens described in subclauses (A) through (C)
of the defined term Permitted Liens.

(k) Taxes. Except where a failure to do so would not, individually or in the
aggregate, have a Material Adverse Effect on the Retained Companies, taken as
a whole, the Company will, and will cause each Subsidiary to, (i) prepare and
timely file with the relevant Taxing Authority all Tax Returns and reports
("Post-Signing Returns") required to be filed which include any of the
Retained Companies on a basis consistent with past practice, (ii) timely pay
all Taxes due and payable, or establish reserves therefor in the books and
records of the Company in accordance with GAAP and consistent with past
practice, (iii) promptly notify Acquiror of any action, suit, proceeding,
claim or audit pending against or with respect to the Company or any Retained
Subsidiary in respect of any Taxes where there is a reasonable possibility of
a determination or decision which would materially increase the Tax
liabilities, or materially decrease the Tax attributes, of any of the Retained
Companies (other than Taxes for which VRM will assume liability under the Tax
Sharing Agreement), (iv) not, without the prior written consent of Acquiror,
change any of the Tax elections, Tax accounting methods, Tax conventions or
Tax principles which relate to the Retained Companies, (v) not, without the
prior written consent of Acquiror, take any action (other than an action in
the ordinary course of business or an action contemplated by the
Reorganization Agreements) that would reasonably be expected to materially
increase the Tax liabilities, or materially decrease the Tax attributes, of
any of the Retained Companies, (vi) except as set forth in the Company
Disclosure Schedule, contemplated by the Reorganization Agreements or with the
prior written consent of Acquiror, not take any action that would increase the
amount of deferred tax liabilities, or decrease the amount of deferred tax
assets, of the Company and its Subsidiaries (as determined for financial
accounting purposes), other than an action (A) in the ordinary course of
business consistent with past practice or (B) as required by applicable law,
in each case which is either (x) based on events or circumstances occurring
after the date hereof or (y) a continuation of a course of action initiated
prior to the date of this Agreement, and (vii) except as set forth in the
Company Disclosure Schedule, contemplated by the Reorganization Agreements or
with the prior written consent of Acquiror, not take any action that would
increase the amount of income or gain that will be recognized under Treasury
Regulation Sections 1.1502-13 or 1.1502-19 (or any corresponding provisions of
other applicable Tax laws) as a result of the transactions contemplated by the
Reorganization Agreements.

(l) Maintenance of Properties. The Company will, and will cause the Retained
Subsidiaries to, continue to maintain and repair all property material to the
operation of the Retained Business in a manner consistent in all material
respects with past practice.

(m) Tax-Free Distribution and Merger. The Company will not, and will not
permit any of its Subsidiaries, including VRM and any of its Subsidiaries to,
take or cause or permit to be taken any action prior to the Effective Time
that would disqualify the Distribution from being treated as a
"reorganization" within the meaning of Section 368(a)(1)(D) of the Code and
from being treated as a tax-free distribution within the meaning of Section
355 or 361(c) of the Code, or the Merger from being treated as a
"reorganization" within the meaning of Section 368(a)(1)(B) of the Code with
respect to which no gain or loss is recognized by the Company or Acquiror. The
Company shall use reasonable best efforts to do everything reasonably
necessary to have the Distribution and the Merger qualify as aforesaid.

(n) Redemption of Company Preferred Stock. Prior to the Effective Time the
Company will redeem or convert all of the issued and outstanding shares of
Company Preferred Stock pursuant to the terms of the related certificate of
designation. The redemption of the Company Preferred Stock, if any, will be
funded by the Company with the proceeds of borrowings under the New Credit
Facility.

(o) Termination of the Uncommitted Facilities. The Company shall use the
proceeds of the Cash Dividend to repay the outstanding borrowings under the
Uncommitted Facilities and, if such borrowings are paid in full, terminate the
Uncommitted Facilities.

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(p) Operations of Business. The Company shall operate the Retained Business
and VRM Business separately. The Company shall account for all expenses and
liabilities for the Retained Business and VRM Business (including overhead
expenses), separately, and expenses and liabilities relating to overhead shall
be allocated to the VRM Business and Retained Business, based on services
provided, and in accordance with past practices.

6.2. Covenants of Acquiror. During the period from the date of this
Agreement and continuing until the Effective Time, Acquiror agrees as to
itself and its Subsidiaries that except as otherwise expressly contemplated by
the Reorganization Agreements or to the extent that the Company otherwise
consents in writing, which consent shall not be unreasonably withheld:

(a) Tax-Free Distribution and Merger. Acquiror will not, and will not permit
any of its Subsidiaries to, take or cause or permit to be taken any action
prior to the Effective Time that would disqualify the Distribution from being
treated as a "reorganization" within the meaning of Section 368(a)(1)(D) of
the Code and from being treated as a tax-free distribution within the meaning
of Section 355 of the Code, or the Merger from being treated as a
"reorganization" within the meaning of Section 368(a)(1)(B) of the Code. Prior
to the Effective Time, the Acquiror shall use its reasonable best efforts to
do everything reasonably necessary to have the Distribution and the Merger
qualify as aforesaid.

(b) Company Names. Acquiror acknowledges that the trademarks, trade names
and service marks, the federal registrations and applications, the Internet
domain registration and exclusive use of the name "Valero", and any and all
other designs, logos and slogans, related to the names "Valero" and "Valero
Energy Corporation" and the "Walking Flame" service mark, all as more
particularly set forth on Schedule 6.2(b), attached hereto, and all other
rights (whether tangible or intangible, statutory, at common law or otherwise)
in connection therewith, whether alone or in combination with one or more
other words or marks in connection therewith, are assets of the Company being
transferred to VRM or a VRM Subsidiary in connection with the Distribution;
provided that Acquiror shall be permitted to use the "Valero" name and related
marks for six (6) months after the Effective Time as provided below. At or
before the Closing, Company and Acquiror shall execute, acknowledge,
authenticate and deliver all such instruments of assignment or transfer as may
be requested by VRM to effect the complete assignment and transfer of such
trademarks, trade names, service marks, registrations, applications and other
associated rights to VRM or a VRM Subsidiary. As promptly as practicable after
the Effective Time, but in any event no later than six (6) months after the
Effective Time, Acquiror shall cease using the "Valero" name and mark or
service mark and the "Walking Flame" service mark, including without
limitation, on any signs, badges, parking stickers, letterhead, business
cards, invoices and other business forms, telephone directory listings, and
advertising and promotional materials using the "Valero" name or service mark;
provided, however, that nothing herein shall be construed to prohibit either
the Company Group or the VRM Group from using after the Effective Time, the
blue-green color (PMS 315) now utilized by both the Company Group and VRM
Group on their respective facilities.

(c) San Antonio Commitment. Recognizing that the Company's corporate
presence in San Antonio, Texas, is a key factor in maintaining the Company's
important customer relationship with San Antonio-City of Public Service and
other customers in the San Antonio, Texas, area, Acquiror agrees that, for a
period of not less than five years following the Effective Time, Acquiror will
cause one or more of its Subsidiaries (including the Retained Companies or
Retained Business) to have a substantial corporate presence in San Antonio,
Texas, or its metropolitan area by maintaining offices, and employing not less
than 340 employees on average over such five-year period, in such metropolitan
area.

ARTICLE VII
ADDITIONAL AGREEMENTS

7.1. Access. (a) Upon reasonable notice, and except as may otherwise be
required by applicable law, the Company agrees to (and will cause each of its
Subsidiaries to) afford Acquiror's Representatives reasonable

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access, during normal business hours throughout the period until the Closing
Date, to all its properties, books,
contracts, commitments, personnel and records, to the extent related to the
Retained Business, including access for training and education of personnel
and for environmental and other testing, each as may reasonably be requested,
and, during such period, will (and will cause each of its Subsidiaries to)
furnish promptly to Acquiror all information concerning its business,
properties and personnel, to the extent related to the Retained Business;
provided, however, that such access will not unreasonably interfere with the
normal operations of the Company and the reasonable out-of-pocket expenses of
the Company incurred in connection therewith will be paid by Acquiror. All
such information as may be furnished by or on behalf of the Company or any of
its Subsidiaries to Acquiror or its Representatives, or which is learned by
any of Acquiror's Representatives in the course of any visit to the Company or
any of its locations or contacts with any of its employees, pursuant to this
Section 7.1 will be subject to the terms of the confidentiality agreement
dated November 26, 1996 between the Company and Acquiror (the "Confidentiality
Agreement") the terms of which are incorporated herein by reference. The
Confidentiality Agreement shall terminate as of the Time of Distribution.
Acquiror hereby agrees to defend, indemnify and hold the Company and its
Subsidiaries harmless for, from and against all loss, cost, liability
(including death or bodily injury) or expense due to personal injury or
property damage resulting solely from Acquiror's inspections in connection
with this Section 7.1(a).

(b) During the period prior to the Effective Time, the Company and Acquiror
will promptly furnish to the other a copy of each report, schedule,
registration statement and other documents filed by it with the SEC during
such period pursuant to the requirements of Section 13(a) or 15(d) of the
Exchange Act.

7.2. Other Actions. Subject to Section 7.3(a) and the respective rights of
the parties to terminate this Agreement under Article IX, the Company and
Acquiror will use reasonable best efforts not to, and will cause their
respective Subsidiaries to use reasonable best efforts not to, take any action
that would, or that could reasonably be expected to, result directly or
indirectly in any of the conditions to the Merger set forth in Article VIII
not being satisfied or that would, or that reasonably could be expected to,
materially impair the ability of the Company to consummate the Distribution in
accordance with the terms of the Reorganization Agreements or the ability of
the Company, Acquiror and Sub to consummate the Merger in accordance with the
terms hereof or that would, or that reasonably could be expected to,
materially delay such consummation.

7.3. Acquisition Proposals; Board Recommendation. (a) The Company will, and
will direct and use reasonable efforts to cause its directors, officers,
employees, representatives and agents to, immediately cease any discussions or
negotiations with any parties that may be ongoing with respect to an
Acquisition Proposal. The Company will not, nor will it permit any of its
Subsidiaries to, nor will it authorize or permit any of its directors,
officers, or employees or any investment banker, financial advisor, attorney,
accountant or other representative retained by it or any of its Subsidiaries
to, directly or indirectly, (i) solicit, initiate or knowingly encourage
(including by way of furnishing confidential information), or take any other
action knowingly to facilitate, any inquiries or the making of any proposal
which constitutes, or may reasonably be expected to lead to, any Acquisition
Proposal or (ii) participate in any discussions or negotiations regarding any
Acquisition Proposal; provided, however, that if, the Board of Directors of
the Company determines in good faith, after consultation with outside counsel,
that it is necessary to do so in order to comply with its fiduciary duties to
the Company's stockholders under applicable law, the Company may, in response
to an Acquisition Proposal that was not solicited subsequent to the date
hereof, and subject to compliance with Section 7.3(c), (x) furnish information
to any person pursuant to a customary confidentiality agreement (as determined
by the Company after consultation with its outside counsel) and (y)
participate in discussions or negotiations regarding such Acquisition
Proposal.

(b) Except as set forth in this Section 7.3, neither the Board of Directors
of the Company nor any committee thereof will (i) withdraw or modify, or
propose publicly to withdraw or modify, in a manner adverse to Acquiror, the
approval or recommendation by such Board of Directors or such committee of the
Merger or this Agreement, (ii) approve or recommend, or propose publicly to
approve or recommend, any Acquisition Proposal or (iii) cause the Company to
enter into any letter of intent, agreement in principle, acquisition agreement
or other similar agreement (each, an "Acquisition Agreement") related to any
Acquisition Proposal.

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Notwithstanding the foregoing, in the event that the Board of Directors of the
Company determines in good faith, after consultation with outside counsel,
that it is necessary to do so in order to comply with its fiduciary duties to
the Company stockholders under applicable law, the Board of Directors of the
Company may (x) withdraw or modify its approval or recommendation of the
Merger and this Agreement or (y) approve or recommend a Superior Proposal or
(z) terminate this Agreement (and concurrently with or after such termination,
if it so chooses, cause the Company to enter into any Acquisition Agreement
with respect to any Superior Proposal), but in each case only at a time that
is following Acquiror's receipt of written notice (a "Notice of Superior
Proposal") advising Acquiror that the Board of Directors of the Company has
received a Superior Proposal, specifying the material terms and conditions of
such Superior Proposal and identifying the person making such Superior
Proposal.

(c) In addition to the obligations of the Company set forth in paragraphs
(a) and (b) of this Section 7.3, the Company will promptly advise Acquiror
orally and in writing of any request for confidential information in
connection with an Acquisition Proposal or of any Acquisition Proposal. The
Company will keep Acquiror reasonably informed of the status of and material
information concerning (including amendments or proposed amendments) any
Acquisition Proposal.

(d) Nothing contained in this Section 7.3 will prohibit the Company from
making any disclosure to the Company stockholders if, in the good faith
judgment of the Board of Directors of the Company, after consultation with
outside counsel, failure so to disclose would be inconsistent with applicable
law; provided, however, neither the Company nor its Board of Directors nor any
committee thereof shall, except as permitted by Section 7.3(b), withdraw or
modify, or propose publicly to withdraw or modify, its position with respect
to this Agreement or the Merger or approve or recommend, or propose publicly
to approve or recommend, an Acquisition Proposal.

7.4. Tax Representation Letters. For purposes of the tax opinions to be
delivered pursuant to Sections 8.2(c) and 8.3(c), respectively, (a) Acquiror
will deliver a representation letter substantially in the form of Annex D
attached hereto dated as of the Closing Date and (b) the Company will cause
VRM to deliver a representation letter substantially in the form of Annex E
attached hereto, dated as of the Closing Date, in each case, to Wachtell,
Lipton, Rosen & Katz, special counsel to the Company, and Orrick, Herrington &
Sutcliffe LLP, special counsel to Acquiror.

7.5. Filings; Other Actions. (a) The Company will use its reasonable best
efforts promptly to prepare and file with the SEC the Proxy Statement-
Prospectus.

(b) The Company will use its reasonable best efforts (i) promptly to prepare
and file with the SEC the VRM Registration Statement in connection with the
distribution of VRM Common Stock and associated VRM Rights in the
Distribution, and (ii) to cause the Proxy Statement-Prospectus to be mailed to
the Company's stockholders as promptly as practicable after the Proxy
Statement-Prospectus has been cleared by the SEC.

(d) None of the Registration Statements or the Proxy Statement-Prospectus
shall be filed with the SEC, and, prior to termination of this Agreement, no
amendment or supplement thereto shall be filed with the SEC, by the Company or
Acquiror without giving the other and its counsel a reasonable opportunity to
review and comment on such filings prior to the filing thereof. Each of the
Company and Acquiror agrees to use its reasonable best efforts, after
consultation with the other party, to respond promptly to any comments made by
the SEC with respect to all of its filings referred to in clauses (a), (b) and
(c) above, including the preparation and filing of any amendments or
supplements thereto, and to have all such filings declared effective under the
Securities Act and the Exchange Act, as applicable, or cleared by the SEC, in
each case as promptly as practicable after the filing thereof. Each of the
Company and Acquiror will, and the Company will cause VRM to, use its
reasonable best efforts to obtain all necessary state securities law or "Blue
Sky" permits and approvals

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required to carry out the transactions contemplated by the Reorganization
Agreements and each of the Company and Acquiror agrees to furnish all
information as may be reasonably requested in connection with any such action;
provided, however, that Acquiror will not be required to qualify to do
business in any jurisdiction in which it is not now so qualified.

(e) Each of the Company and Acquiror will promptly cooperate with and
furnish information to each other in connection with any such requirements
imposed upon any of them or any of their respective Subsidiaries in connection
with the Distribution or the Merger.

(f) Subject to Section 7.3(a) and its right to terminate this Agreement
pursuant to Section 9.1, the Company agrees to take, in accordance with the
DGCL, the Company Charter and the Company By-laws, all action necessary to
convene the Company Meeting within 45 days after the later of the date the
Acquiror S-4 is declared effective, the VRM Registration Statement is declared
effective, and the Proxy Statement-Prospectus is cleared, by the SEC, to
consider and vote upon the Distribution and the Merger and the Company shall,
through its Board of Directors, recommend to its stockholders approval of the
Distribution and the Merger.

(g) Upon the terms and subject to the conditions set forth in this
Agreement, each of the Company, Acquiror and Sub shall use its reasonable best
efforts to take, or cause to be taken, all actions, and to do, or cause to be
done, and to assist and cooperate with the other parties in doing, all things
necessary, proper or advisable to consummate and make effective, in the most
expeditious manner possible, the transactions contemplated by the
Reorganization Agreements.

(h) Each of the Company and Acquiror will promptly, and in any event within
15 days after execution and delivery of this Agreement, make all filings or
submissions as are required under the HSR Act. Each of the Company and
Acquiror will promptly furnish to the other such necessary information and
reasonable assistance as the other may request in connection with its
preparation of any filing or submission which is necessary under the HSR Act.
Without limiting the generality of the foregoing, each of the Company and
Acquiror will promptly notify the other of the receipt and content of any
inquiries or requests for additional information made by any Governmental
Entity in connection therewith and will promptly (i) comply with any such
inquiry or request and (ii) provide the other with a description of the
information provided to any Governmental Entity with respect to any such
inquiry or request. In addition, each of the Company and Acquiror will keep
the other apprised of the status of any such inquiry or request. Subject to
Section 7.5(j), each of the Company and Acquiror will take such actions as are
necessary to obtain any clearance required under the HSR Act for the
consummation of the transactions contemplated hereby.

(i) Each of the Company and Acquiror will promptly make all applications or
filings with the Federal Energy Regulatory Commission under Section 203 of the
Federal Power Act and any applications or filings with appropriate Canadian
authorities required in connection with the Merger. Each of the Company and
Acquiror will take such actions as are necessary to obtain any clearance
required under the Federal Power Act or applicable Canadian law.

(j) Notwithstanding any other provision of this Agreement (including
Sections 7.5(h) and 7.5(i) above), nothing in this Agreement shall require
Acquiror in order to obtain any approval or authorization under any Regulatory
Filing (i) to make any dispositions of any of its assets or any of the assets
of the Retained Business having an aggregate book value in excess of $100
million or (ii) to incur any other burdens which would impair the value of its
investment in the Company or the Retained Business. In addition, the Company
shall not, in order to obtain any approval or authorization under any
Regulatory Filing, make any such dispositions or incur such burdens, without
the consent of Acquiror.

7.6. Accountants' Letters. Each party hereto agrees to use its reasonable
efforts to cause to be delivered to the other parties hereto and their
respective directors a letter of its independent accountants, dated the date
on which each Registration Statement becomes effective, in form and substance
customary for "comfort" letters delivered by independent accountants in
connection with registration statements similar to the Registration
Statements.

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7.7. Distribution Agreement. The Company agrees that prior to the Effective
Time it will not waive or amend the terms of the Distribution Agreement
without the consent of Acquiror.

7.8. Publicity. The initial press release relating hereto shall be a joint
press release and thereafter the Company and Acquiror will consult with each
other prior to issuing any press releases or otherwise making public
statements with respect to the Reorganization Agreements and the transactions
contemplated thereby.

7.9. Employees and Employee Plans. (a) Acquiror and the Company agree to
cooperate in making all appropriate filings and taking all appropriate actions
required to implement the provisions of this Section 7.9.

(b) Acquiror shall for a period of two (2) years after the Merger: (i) take
all action necessary to extend coverage under the Acquiror Pension Plan to
those individuals employed by the Company immediately after the Distribution
and immediately before the Merger (all such individuals, "Continuing
Employees") who were participants in the Company Pension Plan immediately
before the Distribution; (ii) provide Continuing Employees with welfare
benefits (including retiree medical benefits) no less favorable than those
provided by Pacific Gas Transmission ("PGT") prior to the Effective Time to
its other similarly situated employees; (iii) provide Continuing Employees
with severance pay and other employee benefits that are no less favorable in
the aggregate than those provided by the Company prior to the Distribution
(other than any equity-based benefits including, without limitation, stock
options); and (iv) waive any limitations regarding pre-existing conditions
under any welfare or other employee benefit plan maintained by the Acquiror or
PGT.

(c) From and after the Effective Time, with respect to Continuing Employees
who do not elect in connection with the Distribution to receive a distribution
of the balance of their Company Thrift Plan accounts or to transfer their
accounts to the VRM Thrift Plan, Acquiror shall take all actions necessary to
permit such Continuing Employees to transfer their account balances in the
Company Thrift Plan to the Acquiror Thrift Plan. Such transfers shall be in
cash, except that the Acquiror Thrift also will accept promissory notes
evidencing any outstanding participant loans.

(d) For all purposes under all compensation and benefit plans and policies
applicable to employees of Acquiror, including those referred to in this
Section, Acquiror shall treat all service by Continuing Employees with the
Company prior to the Merger as service with Acquiror, except to the extent
such treatment would result in duplication of benefits. For example, but not
by way of limitation, benefits payable to Continuing Employees pursuant to the
Acquiror Pension Plan (and any other qualified or non-qualified plan,
arrangement or contract providing retirement benefits) shall be reduced (on an
actuarially equivalent basis) by benefits paid under the VRM Pension Plan (and
any other qualified or non-qualified plan, arrangement or contract providing
retirement benefits). VRM shall not amend or terminate any such plan,
arrangement or contract so as to reduce the accrued benefit of any Continuing
Employee. For the purpose of avoiding any such benefit duplication, each of
VRM and the Acquiror shall provide to the other all such information in its
possession as the other may reasonably request concerning each other's Pension
Plan (and any other qualified or nonqualified plan, arrangement or contract
providing retirement benefits) to enable VRM and Acquiror to fulfill their
obligations under their respective plans, arrangements and contracts.

(e) VRM and Acquiror shall use their best efforts to permit all employees of
the Company, including but not limited to the Continuing Employees, to
participate in VRM's Flex Plan through December 31, 1997, provided that the
Company shall reimburse VRM for the costs of such participation.

(f) Prior to the Effective Time, the Company and Acquiror will use their
best efforts to collaborate with respect to the design, implementation and
administration of an early retirement program.

7.10. Expenses. (a) All Expenses incurred in connection with the
Reorganization Agreements and the transactions contemplated thereby, shall be
paid by the Company or the Surviving Corporation; provided that the amount so
paid by the Company or the Surviving Corporation shall not exceed the sum of
the expenses set forth on Schedule 5.1(h)(iii) under the caption Transaction
Costs Payable, plus the amount of any redemption or

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prepayment penalty to be paid with respect to the 10.58% Senior Notes due
2000, under the Note Purchase Agreement, dated as of December 19, 1990, as
amended, from the Company to the Note Purchasers named therein, and any amount
in excess of such aggregate amount shall be paid by VRM.

(b) The Company will pay Acquiror $37.5 million (the "Termination Fee") if
(i) this Agreement is terminated pursuant to Section 9.1(c)(ii) or Section
9.1(d)(ii), (ii) prior to the termination of this Agreement, a bona fide
Acquisition Proposal was commenced, publicly proposed, publicly disclosed or,
in the case of clause (iii)(x) below, communicated to the Board of Directors
of the Company (or the willingness of any person to make such an Acquisition
Proposal was publicly disclosed or, in the case of clause (iii)(x) below,
communicated to the Board of Directors of the Company), and (iii)(x) the Board
of Directors of the Company, in accordance with Section 7.3, withdrew or
modified its approval or recommendation of this Agreement or the Merger in a
manner materially adverse to Acquiror, approved or recommended such
Acquisition Proposal, caused the Company to enter into an Acquisition
Agreement with respect to an Acquisition Proposal or terminated this Agreement
or (y) the requisite approval of the Company's stockholders for the
Distribution or the Merger was not obtained at the Company Meeting and, within
twelve months following the date of the Company Meeting (or following the date
of termination of this Agreement, if the Company Meeting was not held prior to
such termination), an Acquisition Proposal shall have been consummated or the
Company shall enter into a definitive agreement with respect to any
Acquisition Proposal; provided, however, the Termination Fee will not be
payable if, at the time of any action referred to in clause (iii)(x) above or
the Company Meeting (or on the date of the termination of this Agreement, if
the Company Meeting was not held prior to such termination), Acquiror shall be
in material breach of its covenants or agreements contained in this Agreement.
The Termination Fee will be paid (in same-day funds), in the case of clause
(iii)(x) above, on the second business day following the termination of this
Agreement, or in the case of clause (y) above, on the second business day
following the earlier of execution of such agreement or the consummation of
such Acquisition Proposal.

7.11. Takeover Statutes. If any Takeover Statute is or may become applicable
to the transactions contemplated by the Reorganization Agreements, each of the
Company and Acquiror and their respective Boards of Directors will grant such
approvals and take such actions as are necessary so that the transactions
contemplated by the Reorganization Agreements may be consummated as promptly
as practicable on the terms contemplated thereby and otherwise act to
eliminate or minimize the effects of any Takeover Statute on any of the
transactions contemplated by the Reorganization Agreements.

7.12. Securities Act Compliance. As soon as practicable after the date of
the Company Meeting, the Company will identify to Acquiror all individuals who
were reasonably believed by the Company to be, at the time of the Company
Meeting, an "affiliate" of the Company as that term is used in paragraphs (c)
and (d) of Rule 145 under the Securities Act (the "Rule 145 Affiliates"). The
Company will use its reasonable best efforts to obtain a written agreement in
the form of Annex F hereto from each Person who is so identified as a Rule 145
Affiliate and will deliver such written agreements to Acquiror as soon as
practicable after the Company Meeting.

7.13. Stock Exchange Listing. Acquiror will use its reasonable best efforts
to list on the NYSE prior to the Closing Date, subject to official notice of
issuance, the Acquiror Common Stock to be issued pursuant to the Merger.

7.14. 1935 Act. (a) The Company shall not, nor shall the Company permit any
of its Subsidiaries to, engage in any activities which reasonably could cause
any of them to become a "holding company" under the 1935 Public Utility
Holding Company Act, as amended.

(b) Acquiror shall not, nor shall Acquiror permit any of its Subsidiaries
to, engage in any activities which reasonably could cause the Acquiror or any
of its Subsidiaries prior to the Effective Time to lose their exemption from
the 1935 Act (except Section 9(a)(2) thereof).

7.15. Further Assurances. At and after the Effective Time, the officers and
directors of the Surviving Corporation will be authorized to execute and
deliver, in the name and on behalf of the Company, any deeds,

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<PAGE>

bills of sale, assignments or assurance and to take and do, in the name and on
behalf of the Company, any other actions and things reasonably necessary to
vest, perfect or confirm of record or otherwise any and all right, title and
interest in, to and under any of the rights, properties or assets of the
Company acquired or to be acquired by the Surviving Corporation or VRM, as the
case may be, as a result of or in connection with any of the transactions
contemplated by the Reorganization Agreements, including without limitation
the Merger and the Distribution.

ARTICLE VIII
CONDITIONS

8.1. Conditions to Each Party's Obligation to Effect the Merger. The
respective obligations of each party hereto to consummate the Merger are
subject to the satisfaction or waiver, on or prior to the Closing Date, of
each of the following conditions:

(a) Company Stockholder Approval. The Merger shall have been duly approved
by the affirmative vote of the holders of Company Common Stock representing at
least a majority of the outstanding shares thereof entitled to vote thereon.

(b) Acquiror Stockholder Approval. If required by applicable state laws or
the applicable rules of any securities exchange, the issuance of Acquiror
Common Stock in the Merger shall have been approved by the stockholders of the
Acquiror in accordance with such law or such rule.

(c) NYSE Listing. The shares of Acquiror Common Stock to be issued pursuant
to the Merger shall have been approved for listing on the NYSE prior to the
Closing Date, subject to official notice of issuance.

(d) HSR. The waiting period applicable to the consummation of the Merger
under the HSR Act shall have expired or been terminated.

(e) Litigation. No temporary restraining order, preliminary or permanent
injunction or other order issued by any court of competent jurisdiction or
other legal restraint or prohibition shall be in effect that prohibits
consummation of the transactions contemplated by the Reorganization
Agreements.

(f) Registration Statements. The Registration Statements shall have become
effective under the Securities Act or Exchange Act, as applicable, no stop
order suspending the effectiveness of the Registration Statements shall have
been issued and no proceedings for that purpose shall have been initiated or
threatened by the SEC.

(g) Pre-Merger Transactions. The transactions contemplated by Article IV
shall have been consummated in accordance with the terms of this Agreement and
the Distribution Agreement (which includes additional conditions to such
consummation).

(h) FERC. The Federal Energy Regulatory Commission and any applicable
Canadian authority shall have approved the Merger.

8.2. Conditions to Obligation of the Company. The obligation of the Company
to consummate the Merger is also subject to the satisfaction or waiver by the
Company on or prior to the Closing Date of each of the following conditions:

(a) Representations and Warranties. The representations and warranties of
Acquiror and Sub set forth in the Reorganization Agreements (x) that are
qualified as to materiality shall be true and correct and (y) that are not so
qualified shall be true and correct in all material respects, in each case as
of the date of this Agreement and as of the Closing Date as though made on and
as of the Closing Date (except (i) that the accuracy of

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representations and warranties that by their terms speak as of the date of
this Agreement or some other date will be determined as of such date and (ii)
for the effect of any activities or transactions which are contemplated by the
Reorganization Agreements), and the Company will have received a certificate
signed on behalf of Acquiror by an executive officer of Acquiror to such
effect.

(b) Performance of Obligations of Acquiror and Sub. Acquiror and Sub shall
have performed in all material respects all obligations required to be
performed by them under the Reorganization Agreements at or prior to the
Closing Date, and the Company shall have received a certificate signed on
behalf of Acquiror by an executive officer of Acquiror to such effect.

(c) Tax Opinions. The Company shall have received the opinion of Wachtell,
Lipton, Rosen & Katz, special counsel to the Company, dated the Closing Date,
to the effect that the Distribution qualifies as a transaction described in
Sections 355(a), 355(c)(1) and 368(a)(1)(D) of the Code in which no gain or
loss shall be recognized to the Company and that the Merger qualifies as a
"reorganization" within the meaning of Section 368(a)(1)(B) of the Code.

(d) Consents. All consents, approvals and authorizations required to be
obtained prior to the Closing Date from any Governmental Entity or third party
in connection with the execution, delivery and performance of the
Reorganization Agreements shall have been made or obtained, except where the
failure to make or obtain the same, individually or in the aggregate, would
not have a Material Averse Effect on the VRM Companies, taken as a whole.

8.3. Conditions to Obligations of Acquiror and Sub. The obligations of
Acquiror and Sub to consummate the Merger are also subject to the satisfaction
or waiver by Acquiror on or prior to the Closing Date of each of the following
conditions:

(a) Representations and Warranties. The representations and warranties of
the Company and VRM set forth in the Reorganization Agreements (x) that are
qualified as to materiality shall be true and correct and (y) that are not so
qualified shall be true and correct in all material respects, in each case as
of the date of this Agreement and as of the Closing Date as though made on and
as of the Closing Date (except (i) that the accuracy of representations and
warranties that by their terms speak as of the date of this Agreement or some
other date will be determined as of such date and (ii) for the effect of any
activities or transactions which are contemplated by the Reorganization
Agreements) and Acquiror will have received a certificate signed on behalf of
the Company by an executive officer of the Company to such effect.

(b) Performance of Obligations. Each of the Company and VRM shall have
performed in all material respects all obligations required to be performed by
it under the Reorganization Agreements at or prior to the Closing Date, and
Acquiror shall have received a certificate signed on behalf of the Company by
an executive officer of the Company to such effect.

(c) Tax Opinion. Acquiror shall have received an opinion of Orrick,
Herrington & Sutcliffe LLP, special counsel to Acquiror, dated the Closing
Date, to the effect that the Merger qualifies as a "reorganization" within the
meaning of Section 368(a)(1)(B) of the Code and shall have received an opinion
of Wachtell, Lipton, Rosen & Katz, reasonably satisfactory to Acquiror in form
and substance, to the effect that the Distribution qualifies as a transaction
described in Sections 355(a), 355(c)(1) and 368(a)(1)(D) of the Code in which
no gain or loss shall be recognized to the Company.

(d) Consents. All consents, approvals and authorizations required to be
obtained prior to the Closing Date from any Governmental Entity or third party
in connection with the execution, delivery and performance of the
Reorganization Agreements shall have been made or obtained, except where the
failure to make or obtain the same, individually or in the aggregate, would
not reasonably be expected to have a Material Adverse Effect on the Retained
Companies, taken as a whole, or on Acquiror and its Subsidiaries, taken as a
whole.

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(e) Redemption of Company Preferred Stock. The Company shall have redeemed
or converted all issued and outstanding shares of Company Preferred Stock
pursuant to the terms of the related certificate of designation.

ARTICLE IX
TERMINATION

9.1. Termination. This Agreement may be terminated and the Merger may be
abandoned at any time prior to the Effective Time, before or after the
approval by the stockholders of the Company:

(a) by the mutual written consent of the Company and Acquiror;

(b) by either the Company or Acquiror if (i) the Merger shall not have been
consummated by July 31, 1997 unless HSR or Federal Energy Regulatory
Commission approval has not been received in which case such date shall be
postponed until 10 business days after receipt of such approval, but in no
event later than December 31, 1997, or (ii) at the Company Meeting or at any
adjournment thereof, the approval of the Company's stockholders referred to in
Section 8.1(a) shall not have been obtained; provided that in the case of a
termination pursuant to clause (i) above, the terminating party and its
Subsidiaries shall not have breached in any material respect their respective
obligations under the Reorganization Agreements in any manner that shall have
caused or resulted in the failure referred to above;

(c) by the Company (i) if Acquiror or Sub shall have breached in any
material respect any of their respective covenants, representations,
warranties or agreements contained in any Reorganization Agreement, which
breach shall not have been cured within 30 days following written notice of
such breach, or (ii) pursuant to Section 7.3(b) of this Agreement; or

(d) by Acquiror:

(i) if the Company or VRM shall have breached in any material respect any
of the covenants, representations, warranties or agreements contained in
any Reorganization Agreement, which breach shall not have been cured within
30 days following written notice of such breach; or

(ii) if the Board of Directors of the Company shall have exercised any of
its rights set forth in the second sentence of Section 7.3(b) of this
Agreement;

(iii) if (A)(x) there has occurred since the date of this Agreement any
event, change, effect or state of facts (collectively "Events"), other than
Events which result from any action by Acquiror or any of its Subsidiaries,
Affiliates, officers, employees, agents or representatives or changes in
general economic, financial, market or business conditions, or (y)
Acquiror, in its ongoing due diligence investigation, shall uncover
information (collectively "Information") that, as of the date of this
Agreement, has not been previously disclosed in a Filed Company SEC
Document or has not been disclosed by the Company to Acquiror on or prior
to the date of this Agreement (including in the Company Disclosure
Schedules) and (B) such Events and Information in the aggregate would
reasonably be expected to result in an adverse impact on the Retained
Business of more than $100 million, which amount shall be net of income tax
effects and shall include the present value of any reasonably projected
costs, expenses or liabilities or losses of projected business revenue
caused by the occurrence of such Events or attributable to such
Information.

9.2. Effect of Termination and Abandonment. In the event of termination of
this Agreement and the abandonment of the Merger pursuant to this Article IX,
no party to the Reorganization Agreements (or any of its directors or
officers) shall have any liability or further obligation to any other party,
except as set forth in Sections 5.1(q), 5.2(l), 7.10 and 9.2, all of which
shall survive such termination, and except that nothing herein shall relieve
any party from liability for any material and willful breach of any of the
Reorganization Agreements.

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ARTICLE X
MISCELLANEOUS AND GENERAL

10.1. Survival. Except as set forth below in this Section 10.1, all
representations, warranties and agreements in this Agreement of Acquiror, Sub
and the Company or in any instrument delivered by Acquiror, Sub or the Company
pursuant to or in connection with this Agreement shall expire at the Effective
Time or upon termination of this Agreement in accordance with its terms or, in
the case of any other such instrument, in accordance with the terms of such
instrument. In the event of consummation of the Merger, the agreements
contained in or referred to in Article III, the last sentence of Section
6.1(c) and Sections 6.2(b), 6.2(c), 7.9, 7.15 and 10.1 shall survive the
Effective Time.

10.2. Modification or Amendment. Subject to the applicable provisions of the
DGCL, at any time prior to the Effective Time, the parties hereto may modify
or amend this Agreement by written agreement executed and delivered by duly
authorized officers of the respective parties.

10.3. Waiver; Remedies. The conditions to each party's obligation to
consummate the Merger are for the sole benefit of such party and may be waived
(in writing) by such party in whole or in part to the extent permitted by
applicable law. No delay on the part of either Acquiror or the Company in
exercising any right, power or privilege hereunder will operate as a waiver
thereof, nor will any waiver on the part of either Acquiror or the Company of
any right, power or privilege hereunder operate as a waiver of any other
right, power or privilege hereunder, nor will any single or partial exercise
of any right, power or privilege hereunder preclude any other or further
exercise thereof or the exercise of any other right, power or privilege
hereunder. Unless otherwise provided, the rights and remedies herein provided
are cumulative and are not exclusive of any rights or remedies which the
parties may otherwise have at law or in equity.

10.4. Counterparts. For the convenience of the parties, this Agreement may
be executed in any number of separate counterparts, each such counterpart
being deemed to be an original instrument, and all such counterparts shall
together constitute the same agreement.

10.5. Governing Law. This Agreement shall be governed by and construed in
accordance with the internal laws of the State of Delaware applicable to
contracts made and to be performed entirely within such State, without regard
to the conflicts of law principles of such State.

10.6. Notices. Any notice, request, instruction or other communication to be
given hereunder by any party to another shall be in writing and shall be
deemed to have been duly given (i) on the date of delivery if delivered
personally, or by telecopy or telefacsimile, upon confirmation of receipt,
(ii) on the first business day following the date of dispatch if delivered by
Federal Express or other nationally reputable next-day courier service, or
(iii) on the third business day following the date of mailing if delivered by
registered or certified mail, return receipt requested, postage prepaid. All
notices hereunder shall be delivered as set forth below, or pursuant to such
other instructions as may be designated in writing by the party to receive
such notice,

(a) If to the Company:

Valero Energy Corporation 530 McCullough Avenue San Antonio, Texas
78215
Attention: General Counsel Telecopy: (210) 246-2354

with copies to:

Wachtell, Lipton, Rosen & Katz
51 West 52nd Street New York, New York 10019 Attention: Edward D.
Herlihy, Esq. Telecopy: (212) 403-2000

A-37
<PAGE>

(b) if to Acquiror or Sub:

PG&E Corporation 77 Beale Street San Francisco, California 94105
Attention: General Counsel Telecopy: (415) 973-8083

with copies to:

Orrick, Herrington & Sutcliffe LLP 400 Sansome Street San Francisco,
California 94111
Attention: Leslie P. Jay, Esq. Telecopy: (415) 773-5759

10.7. Entire Agreement. The Reorganization Agreements including the Annexes
and Schedules thereto, the Interim Services Agreements including the Annexes
and Schedules thereto and the Confidentiality Agreement constitute the entire
agreement, and supersede all other prior agreements, understandings,
representations and warranties, both written and oral, among the parties, with
respect to the subject matter hereof and thereof. Any disclosure by the
Company, Acquiror or Sub in any portion of their respective disclosure
schedules shall be deemed disclosure in each other portion of such disclosure
schedule.

10.8. Certain Obligations. Whenever any Reorganization Agreement, the
Interim Services Agreement or the Assignment and Assumption Agreements
requires any of the Subsidiaries of any party to take any action, such
Agreement will be deemed to include an undertaking on the part of such party
to cause such Subsidiary to take such action.

10.9. Assignment. No party to this Agreement shall convey, assign or
otherwise transfer any of its rights or obligations under this Agreement
without the express written consent of each other party hereto in its sole and
absolute discretion.

10.10. Captions. The Article, Section and paragraph captions herein are for
convenience of reference only, do not constitute part of this Agreement and
shall not be deemed to limit or otherwise affect any of the provisions hereof.

10.11. Severability. If any provision of the Reorganization Agreements or
the application thereof to any Person or circumstance is determined by a court
of competent jurisdiction to be invalid, void or unenforceable, the remaining
provisions thereof, or the application of such provision to Persons or
circumstances other than those as to which it has been held invalid or
unenforceable, shall remain in full force and effect and shall in no way be
affected, impaired or invalidated thereby, so long as the economic or legal
substance of the transactions contemplated thereby is not affected in any
manner adverse to any party. Upon any such determination, the parties shall
negotiate in good faith in an effort to agree upon a suitable and equitable
substitute provision to effect the original intent of the parties.

10.12. No Third Party Beneficiaries. Nothing contained in this Agreement or
any other Reorganization Agreement is intended to confer upon any Person or
entity other than the parties thereto and their respective successors and
permitted assigns, any benefit, right or remedies under or by reason of the
Reorganization Agreement; provided, however, that VRM is an intended third
party beneficiary of the obligations of Acquiror specified in Section 6.2(b),
and is entitled to enforce the same to the same extent as if a party hereto.

10.13. Annexes and Schedules. All Annexes hereto and the Company Disclosure
Schedule (collectively, the "Schedules") attached hereto or referred to herein
are hereby incorporated in and made a part of this

A-38
<PAGE>

Agreement as if set forth in full herein. Matters reflected on the Schedules
are not necessarily limited to matters required by this Agreement to be
reflected on such Schedules. Such additional matters are set forth for
informational purposes only and do not necessarily include other matters of a
similar nature. Capitalized terms used in any Schedule but not otherwise
defined therein shall have the respective meanings assigned to such terms in
this Agreement.

10.14. No Representations or Warranties Acquiror and Sub acknowledge that
none of the Company or any of its Subsidiaries, any of their affiliates
(including the Retained Companies) or any other Person has made any
representation or warranty, expressed or implied, as to the accuracy or
completeness of any information regarding any of the Company, VRM, VRM's
Subsidiaries, the Retained Companies, the Retained Business or the Retained
Assets not included in the Reorganization Agreements, and none of the Company,
any of its Subsidiaries or Affiliates or any other Person will have or be
subject to any liability to Acquiror or any of its Subsidiaries, any of their
affiliates or any other Person resulting from the distribution to Acquiror or
Sub, or Acquiror's or Sub's use of, any such information. Acquiror and Sub
further acknowledge that, except as expressly set forth in the Reorganization
Agreements, the Company and VRM have not made, and hereby expressly disclaim
any representation or warranty, and there are no representations or warranties
of any kind, expressed or implied, with respect to any of the Company, VRM,
VRM's Subsidiaries, the Retained Companies, the Retained Business or the
Retained Assets.

10.15. Tax Sharing Agreement. With respect to Tax matters, if there is a
conflict between this Agreement and the Tax Sharing Agreement the Tax Sharing
Agreement shall control.

10.16. Consent to Jurisdiction. Each of the parties hereto irrevocably
submits to the exclusive jurisdiction of (i) the state courts of the State of
New York, County of New York and (ii) the United States District Court for the
Southern District of New York for the purposes of any suit, action or other
proceeding arising out of this Agreement or any transaction contemplated
hereby (and agrees not to commence any action, suit, or proceeding relating
hereto except in such courts). Each of the parties hereto further agrees that
service of any process, summons, notice or document hand delivered or sent by
registered mail to such party's respective address set forth in Section 10.6
will be effective service of process for any action, suit or proceeding in New
York, County of New York with respect to any matters to which it has submitted
to jurisdiction as set forth in the immediately preceding sentence. Nothing in
this Section, however, shall affect the right of any party hereto to serve
legal process in any other manner permitted by law. Each of the parties hereto
irrevocably and unconditionally waives any objection to the laying of venue of
any action, suit or proceeding arising out of this Agreement or the
transactions contemplated hereby in (i) the state courts of the State of New
York, New York County or (ii) the United States District Court for the
Southern District of New York, and hereby further irrevocably and
unconditionally waives and agrees not to plead or claim in any such court that
any such action, suit or proceeding brought in any such court has been brought
in an inconvenient forum.

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<PAGE>

IN WITNESS WHEREOF, this Agreement has been duly executed and delivered by
the duly authorized officers of the parties hereto on the date first
hereinabove written.

VALERO ENERGY CORPORATION

By /s/ Edward C. Benninger
______________________________________
Name:Edward C. Benninger
Title:President

PG&E CORPORATION

By /s/ Bruce R. Worthington
______________________________________
Name:Bruce R. Worthington
Title:General Counsel

PG&E ACQUISITION CORPORATION

By /s/ Bruce R. Worthington
______________________________________
Name:Bruce R. Worthington
Title:President

A-40
<PAGE>

APPENDIX B

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

AGREEMENT AND PLAN OF DISTRIBUTION

DATED AS OF , 1997

BETWEEN

VALERO ENERGY CORPORATION

AND

VALERO REFINING AND MARKETING COMPANY

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
ARTICLE I
DEFINITIONS
1.1. Definitions.................................................... B-1
ARTICLE II
TRANSACTIONS RELATING TO THE DISTRIBUTION
2.1. Intercorporate Reorganization.................................. B-6
2.2. Assumption of Liabilities...................................... B-8
2.3. Repayment of Intercompany Indebtedness and Cash Dividend....... B-9
2.4. Resignations................................................... B-10
VRM Certificate of Incorporation and By-Laws; Rights Plan; Name
2.5. Change......................................................... B-10
2.6. Insurance...................................................... B-10
2.7. Nonassignable Contracts........................................ B-11
2.8. Interim Services Agreement..................................... B-11
2.9. Company Guarantees............................................. B-11
2.10. Conduct of Businesses.......................................... B-12
ARTICLE III
MECHANICS OF DISTRIBUTION
3.1. Mechanics of Distribution...................................... B-12
3.2. Timing of Distribution......................................... B-12
ARTICLE IV
OTHER AGREEMENTS
4.1. Use of Names, Trademarks, etc.................................. B-12
4.2. Intercompany Accounts as of the Time of Distribution........... B-13
4.3. Hunting Lease.................................................. B-13
4.4. Airplanes...................................................... B-13
4.5. Intercompany Arrangements...................................... B-13
4.6. Further Assurances............................................. B-13
ARTICLE V
TAX AND EMPLOYEE MATTERS
5.1. Tax Sharing; Exclusivity of Tax Sharing Agreement.............. B-13
5.2. Employee Benefits.............................................. B-13
5.3. Employees...................................................... B-13
5.4. Non-Competition Covenants...................................... B-14
ARTICLE VI
ACCESS TO INFORMATION
6.1. Provision of Records and Information........................... B-15
6.2. Access to Information.......................................... B-15
6.3. Production of Witnesses........................................ B-15
6.4. Retention of Records........................................... B-15
6.5. Confidentiality................................................ B-16
</TABLE>

i
<PAGE>

TABLE OF CONTENTS, CONTINUED

<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
ARTICLE VII
CONDITIONS
7.1. Conditions to Obligations of the Company........................ B-16
ARTICLE VIII
INDEMNIFICATION
8.1. Indemnification by VRM.......................................... B-17
8.2. Indemnification by Retained Company............................. B-17
8.3. Procedures Relating to Indemnification.......................... B-18
8.4. Certain Limitations............................................. B-19
8.5. Express Negligence.............................................. B-19
ARTICLE IX
MISCELLANEOUS AND GENERAL
9.1. Modification or Amendment....................................... B-19
9.2. Waiver; Remedies................................................ B-19
9.3. Counterparts.................................................... B-20
9.4. Governing Law................................................... B-20
9.5. Notices......................................................... B-20
9.6. Entire Agreement................................................ B-21
9.7. Certain Obligations............................................. B-21
9.8. Assignment...................................................... B-21
9.9. Captions........................................................ B-21
9.10. Specific Performance............................................ B-21
9.11. Severability.................................................... B-21
9.12. Third Party Beneficiaries....................................... B-21
9.13. Schedules....................................................... B-21
9.14. Tax Sharing Agreement........................................... B-21
</TABLE>

ii
<PAGE>

AGREEMENT AND PLAN OF DISTRIBUTION, dated as of , 1997 (this
"Agreement"), between VALERO ENERGY CORPORATION, a Delaware corporation (the
"Company") and VALERO REFINING AND MARKETING COMPANY, a Delaware corporation
and as of the date hereof a wholly-owned subsidiary of the Company ("VRM").

W I T N E S S E T H :

WHEREAS, the Company, PG&E Corporation, a California corporation
("Acquiror"), and PG&E Acquisition Corporation, a Delaware corporation
("Sub"), have entered into an Agreement and Plan of Merger dated as of January
31, 1997 (the "Merger Agreement"), providing for the Merger (as defined in the
Merger Agreement) of Sub with and into the Company;

WHEREAS, immediately prior to the Effective Time (as defined in the Merger
Agreement), the Company's Board of Directors, subject to the approval of the
Company's stockholders, expects to distribute to the holders of common stock,
par value $1.00 per share, of the Company ("Company Common Stock"), other than
shares held in the treasury of the Company, on a pro rata basis all of the
issued and outstanding shares of common stock, par value $0.01 per share, of
VRM ("VRM Common Stock"), along with the associated VRM Rights (as defined in
the Merger Agreement) (the "Distribution");

WHEREAS, the purpose of the Distribution is to make possible the Merger by
divesting the Company of the businesses and operations to be conducted by VRM,
which Acquiror is unwilling to acquire;

WHEREAS, it is the intention of the parties to this Agreement that for
federal income tax purposes the Distribution shall qualify as a transaction
described in Section 355 of the Internal Revenue Code of 1986, as amended (the
"Code") and a "reorganization" within the meaning of Section 368(a)(1)(D) of
the Code; and

WHEREAS, this Agreement sets forth or provides for certain agreements by and
between the Company and VRM in consideration of the separation of the
ownership of the Company and VRM;

NOW, THEREFORE, in consideration of the premises, and of the respective
covenants and agreements set forth herein, the parties hereto hereby agree as
follows:

ARTICLE I
DEFINITIONS

1.1. Definitions. Capitalized terms used in this Agreement and not
otherwise defined herein shall have the meanings assigned to such terms in the
Merger Agreement. As used in this Agreement, the following terms shall have
the following respective meanings:

"Acts or Omissions" shall mean negligence, gross negligence, breaches of
express or implied warranties, premises liability, violations of the Texas
Deceptive Trade Practices Act, breaches of duties under the law of strict
liability in tort (including defects in design, manufacturing, marketing,
warnings, and distribution), defamation, false imprisonment or arrest,
malicious prosecution, or any other misfeasance, malfeasance, non-feasance,
breaches of legal duties, tortious conduct, intentional torts, malicious
conduct, false or misleading or deceptive or unconscionable conduct, or any
combination thereof.

"Airplanes" shall mean the airplanes to be co-owned by Valero Corporate
Services and Valero Management Company described on Schedule 2.1(b)(ii)(J).

"By-Laws" shall mean VRM's by-laws substantially in the form filed as an
Exhibit to the VRM Registration Statement.

B-1
<PAGE>

"Cash Dividend" shall have the meaning set forth in Section 2.3(a).

"Certificate of Incorporation" shall mean VRM's amended and restated
certificate of incorporation substantially in the form filed as an Exhibit to
the VRM Registration Statement.

"Company Group" shall mean the Retained Company and the Retained
Subsidiaries, whether now or hereafter existing.

"Company Guarantees" shall mean, collectively, the guarantees of obligations
of the VRM Group by the Company or the Retained Subsidiaries, a complete and
accurate list of which is set forth on Schedule 1.1(a).

"Contract Rights" shall mean, as of any given date, any and all right, title
and interest of the Company and any of its Subsidiaries (other than VRM and
its Subsidiaries) in and to any and all of the Project Contracts and other
rights under, in and to contracts and agreements, written or oral, express or
implied, legal and equitable, of every kind or description, pertaining or
related in any way to the MTBE Project; and all estates, rights, privileges,
claims and causes of action, immunities, and other appurtenances and rights,
and all assets subject to liabilities connected to the above and which, in any
such case, is either (i) in force and effective at the date hereof, or (ii)
arises under or with respect to any document, paper, instrument or other
intangible interest of any of the types specified above, in force and effect
at the date hereof and pursuant to which any reversion, remainder, contingent
or other residual right, title, interest or liability remains in the Company,
and which in each case pertains or relates in any way to the MTBE Project;
together with all tolls, rents, revenues, issues, earnings, income, products
and profits thereof accruing on or after the date hereof.

"Distribution Date" shall mean the date determined by the Board of Directors
of the Company on which the Distribution is to be effected.

"Environmental Law" shall mean any and all applicable laws, statutes,
ordinances, rules, regulations, orders, or permits of any Governmental Entity
or agency regulating, relating to or pertaining to the protection of health,
or the environment, or the use, storage, treatment, generation,
transportation, handling, Release or disposal of Hazardous Substances, in
effect in any and all jurisdictions in which the Company is conducting or at
any time has conducted the business, including without limitation, the Oil
Pollution Act of 1990, the Clean Air Act, as amended, the Comprehensive
Environmental Response, Compensation and Liability Act, as amended, the
Federal Water Pollution Control Act, as amended, the Occupational Safety and
Health Act of 1976, as amended, the Resource Conservation and Recovery Act of
1976, as amended, the Safe Drinking Water Act, as amended, the Toxic
Substances Control Act, as amended, the Superfund Amendments and
Reauthorization Act of 1986, as amended, the Emergency Planning and Community
Right-to-Know Act, the Hazardous Liquid Pipeline Safety Act, as amended, and
the Natural Gas Pipeline Safety Act of 1979, as amended, and regulations
adopted thereunder.

"Environmental Liabilities" shall mean all Liabilities relating to or
arising out of any Environmental Law or Environmental Permit or relating to
Hazardous Substances or environmental, health or safety matters (including
without limitation removal, remediation or cleanup costs, investigatory costs,
governmental response costs and administrative oversight costs, environmental
monitoring costs, natural resources damages, property damages, personal injury
damages, costs of compliance with any contractual obligation or settlement,
judgment or other determination of Liability and indemnity, contribution or
similar obligations).

"Filings" shall mean the Registration Statements, the Proxy Statement-
Prospectus, and any other document filed or required to be filed with the SEC
in connection with the transactions contemplated by the Reorganization
Agreements, or any preliminary or final form thereof or any amendment or
supplement thereto.

"Group" shall mean the Company Group or the VRM Group, as applicable.

"Hazardous Substance" shall mean any waste, substance, material, pollutant
or contaminant presently listed, defined, designated or classified as
hazardous or regulated, under any Environmental Law.

B-2
<PAGE>

"Hunting Lease" shall mean the hunting lease described on Schedule
2.1(b)(ii)(K) to be assigned to Valero Corporate Services.

"Indemnifiable Losses" shall mean, subject to Section 8.4, all losses,
Liabilities, damages, deficiencies, obligations, fines, expenses, claims,
demands, actions, suits, proceedings, judgments or settlements, whether or not
resulting from Third Party Claims, including interest and penalties recovered
by a third party with respect thereto and out-of-pocket expenses and
reasonable attorneys', experts' and accountants' fees and expenses incurred in
the investigation or defense of any of the same or in asserting, preserving or
enforcing any of the Indemnitee's rights hereunder, suffered by an Indemnitee.

"Indemnitee" shall mean any of the Retained Company Indemnitees or the VRM
Indemnitees, as applicable, who or which may seek indemnification under this
Agreement.

"Information" shall mean all records, books, subscriptions, contracts,
instruments, computer data and other data and information.

"Intercompany Arrangement" shall have the meaning set forth in Section 4.5.

"Intercompany Note" shall have the meaning set forth in Section 2.3(b).

"Intercompany Reorganization" shall mean the actions taken prior to the
Distribution to separate the VRM Business and the Retained Business, including
without limitation, the actions set forth in Article II.

"IRBs" shall mean the 10.25% Refunding Revenue Bonds Series 1987A and the
10.625% Revenue Bonds Series 1987B, issued by the Industrial Development
Corporation of Port Corpus Christi, with VRM as the borrower and the Company
as guarantor.

"Liabilities" shall mean with respect to any Person, any and all debts,
liabilities, commitments and obligations, whether fixed, contingent or
absolute, matured or unmatured, liquidated or unliquidated, accrued or
unaccrued, known or unknown, whenever or however arising, including, without
limitation, all costs and expenses relating thereto, and including, without
limitation, those debts, liabilities and obligations arising under law, rule,
regulation, permits, action or proceeding before any court or regulatory
agency or administrative agency, order or consent decree or any award of any
arbitrator of any kind, and those arising under contract, commitment or
undertaking.

"MTBE Project" shall mean the installation of a plant in Mexico to produce
methyl tertiary butyl ether and transactions related thereto described on
Schedule 1.1(b).

"Personal Property" shall mean, collectively, as of any given date, the
personal property owned by Valero Management Company including without
limitation computer hardware, communications equipment, auto, trucks, personal
computers, lamps, chairs, desks, artwork, office furniture, books and office
supplies.

"Project Contracts" shall mean, as of any given date, and include any
contract or agreement heretofore entered into for the provision of any money,
guarantee, debt, service, labor, materials or improvements, or any other good,
service, duty, obligation or thing of value pertaining or related to the MTBE
Project, including, without limitation, any and all contracts, agreements,
guarantees, letters, letters of intent, undertakings or understandings,
written or unwritten, in respect thereto, including, without limitation the
Letter of Intent, the Memorandum of Understanding, the PROESA-BANAMEX Letter,
the VEC-PEMEX Letter, the PIBSA Offer Letter, the GOLDMAN Letter, the
Association Agreement, the MTBE Sales Agreement, the Butane Supply Agreement,
the Construction Agreement, the Surety Agreement, the License Agreement, the
Technical Support Agreement, the PEMEX Option, the UOP Agreements and the
Negotiation Services Agreement (in each case, as defined on Schedule 1.1(b)).

"Record Date" shall have the meaning set forth in Section 3.1.

B-3
<PAGE>

"Release" shall have the meaning given such term in the Comprehensive
Environmental Response, Compensation and Liability Act 42 U.S.C. (S) 9601(22).

"Retained Assets" shall mean, collectively, as of any given date, any and
all of the assets, properties and rights, whether tangible or intangible,
whether real, personal or mixed, whether fixed, contingent or otherwise, and
wherever located, of the Company and its Subsidiaries (other than the VRM
Assets).

"Retained Business" shall mean the business heretofore and currently engaged
in by the Company and its Subsidiaries and their respective predecessors of
purchasing, gathering, processing, storing, transporting, selling, trading and
marketing natural gas, the business of extracting, processing, fractionating,
transporting, selling, trading and marketing natural gas liquids, and related
risk management, and the business of purchasing, wheeling, selling, marketing
and trading electric power and related risk management, each as currently
engaged in by the Company through VNG and its Subsidiaries.

"Retained Company Assumed Liabilities" shall mean, collectively, all
Liabilities relating to or arising in connection with the Retained Assets or
the Retained Business (other than such Liabilities expressly assumed or
retained by the VRM Group pursuant to this Agreement), whether arising before,
at or after the Time of Distribution, which are to be assumed by the Retained
Company or any Retained Subsidiary pursuant to the transactions contemplated
by this Agreement, including without limitation the Liabilities relating to or
arising out of the items set forth on Schedule 1.1(c), but in the any event,
excluding VRM Assumed Liabilities.

"Retained Company Indemnitees" shall mean the Retained Company (including
after the Effective Time the Acquiror), each Affiliate of the Retained
Company, including any of its direct or indirect Subsidiaries, and each of
their respective Representatives and each of the heirs, executors, successors
and assigns of any of the foregoing.

"Retained Liabilities" shall mean, collectively, all of (i) the
Environmental Liabilities relating to or arising in connection with the
Retained Business, (ii) the Liabilities of any member of the Company Group
under this Agreement, any other Reorganization Agreement or the Interim
Services Agreement, in each case, to which the Company is a party or will be a
party, (iii) the Liabilities relating to or arising in connection with the
businesses, assets or operations of the Company Group (other than the VRM
Assumed Liabilities), as heretofore, currently or hereafter conducted, (iv)
the Retained Company Assumed Liabilities and (v) the Liabilities retained or
assumed by the Company or any member of the Company Group pursuant to the
Employee Benefits Agreement.

"Tax" or "Taxes" shall have the meaning set forth in the Tax Sharing
Agreement.

"Teco Litigation" shall mean Teco Pipeline Company v. Valero Energy
Corporation, Valero Transmission, L.P., Valero Management Company, Valero
Hydrocarbons, L.P., VMGA Company, Valero Marketing, L.P., VNGC Holding
Company, Valero Industrial Gas, L.P., Valero Natural Gas Company, Valero Gas
Marketing, L.P., Valero Eastex Pipeline Company, VLDC, L.P., Valero
Transmission Company, Reata Industrial Gas, L.P., Valero Gas Marketing
Company, Valero Nortex, L.P., Valero Gas Storage Company, Valero Northern
Texas Company, Valero Hydrocarbons Company, West Texas Transmission Co., VT
Company, Valero Natural Gas Partners, L.P., Valero Management Partnership,
L.P., William E. Greehey and Stan L. McLelland; In the 215th Judicial District
Court of Harris County, Texas (Cause No. 96-020628) and any other action,
claim, lawsuit, arbitration or appeal to obtain or recover damages or any
other economic benefit as a result of any action or omission by any member of
the Company Group or any of its Representatives in connection with the
performance or exercise of duties or obligations, including statutory and
common law fiduciary duties, arising out of or related to the ownership,
operation, management or maintenance of the Valero-Teco West Texas System at
any time from February 28, 1985 to January 27, 1997.

"Third Party Claim" shall have the meaning set forth in Section 8.3(a).

"Time of Distribution" shall mean the time as of which the Distribution is
effective.

B-4
<PAGE>

"Transfer Agent" shall mean Harris Trust and Savings Bank, the transfer
agent for the Company Common Stock.

"UOP Agreements" shall mean, collectively, (a) the Engineering Agreement,
dated as of July 1, 1993, between UOP and PROESA, (b) the Oleflex Process
License Agreement, dated November 21, 1994, between UOP and PROESA, (c) the
Merox Process Licenses Agreement, dated November 21, 1994, between UOP and
PROESA, (d) the UOP Oxygenate Removal Process License Agreement, dated
November 21, 1994, between UOP and PROESA, (e) the Huels Complete Saturation
Process License Agreement, dated November 21, 1994, between UOP and PROESA,
(f) the Ethermax Process License Agreement, dated November 21, 1994, between
UOP and PROESA, (g) the Butamer Process License Agreement, dated November 21,
1994, between UOP and PROESA, (h) the Guarantee Agreement, dated November 21,
1994, between UOP and PROESA, and (i) the Supply Agreement, dated November 21,
1994, between UOP Equitec Services, Inc. and PROESA, as each of the same may
be from time to time amended, restated, supplemented, superseded or replaced.

"Valero Coal Company" shall mean Valero Coal Company, a Delaware corporation
and, as of the date of this Agreement, a wholly-owned Subsidiary of the
Company.

"Valero Corporate Services" shall mean Valero Corporate Services Company, a
Delaware corporation and, as of the date of this Agreement, a wholly-owned
Subsidiary of the Company.

"Valero Management Company" shall mean Valero Management Company, a Delaware
corporation and, as of the date of this Agreement, a wholly-owned Subsidiary
of the Company.

"Valero Producing Company" shall mean Valero Producing Company, a Delaware
corporation and, as of the date of this Agreement, a wholly-owned Subsidiary
of the Company.

"VMGA Company" shall mean the VMGA Company, a Texas corporation and, as of
the date of this Agreement, a wholly-owned Subsidiary of Valero Management
Company.

"VRM Assets" shall mean, collectively, (i) all assets currently owned by VRM
and any of its Subsidiaries (other than any such assets which pursuant to, or
as a consequence of, this Agreement are to be transferred to, or retitled in
the name of the Company or one of the Retained Subsidiaries) and which, as of
and after the Time of Distribution are to be owned by the VRM Group and (ii)
all assets which are currently owned by the Company or one or more of the
Retained Subsidiaries and which pursuant to, or as a consequence of, this
Agreement are to be transferred to VRM or any of its Subsidiaries and which as
of and after the Time of Distribution are to be owned by a member of the VRM
Group.

"VRM Assumed Liabilities" shall mean, collectively, the Liabilities set
forth in Section 2.2(a).

"VRM Business" shall mean (i) the business of purchasing, transporting,
storing, processing, selling, trading, marketing and refining crude oils,
residual fuel oils and other refinery feedstocks, and of manufacturing,
transporting, storing, selling, trading and marketing gasolines, gasoline
blendstocks, butanes, liquefied petroleum gases, other refined products and
petrochemicals, as currently conducted by the Company through VRM and its
Subsidiaries, and related risk management (ii) certain insurance-related
operations as currently conducted through VMGA Company, (iii) certain coal-
seam gas and other coal-related operations as currently conducted through
Valero Coal Company, (iv) certain oil and gas exploration and production
operations as currently conducted through Valero Producing Company, (v)
certain real estate leasing operations as currently conducted through Valero
Management Company, and (vi) the business conducted with the Butane Splitter
and Debutanizer (but excluding any business conducted with the assets of the
VRM Business transferred or to be transferred to the Company Group pursuant to
this Agreement).

"VRM Common Stock" shall have the meaning set forth in the third paragraph
of this Agreement.

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"VRM Group" shall mean VRM, its Subsidiaries, and that portion of any
Person, whether now or hereafter existing, which conduct the VRM Business
(after giving effect to the transfers set forth in Article II).

"VRM Indemnitees" shall mean VRM, each Affiliate of VRM from and after the
Time of Distribution and each of their respective Representatives and each of
the heirs, executors, successors and assigns of any of the foregoing.

"VRM Liabilities" shall mean, collectively, all of (i) the Environmental
Liabilities relating to or arising in connection with the VRM Business, (ii)
the Liabilities of any member of the VRM Group under this Agreement, any other
Reorganization Agreement, or the Interim Services Agreement and of VRM under
Section 7.10 of the Merger Agreement, in each case, to which VRM is a party or
will be a party, (iii) the Liabilities relating to or arising in connection
with the businesses, assets or operations of the VRM Group (other than the
Retained Company Assumed Liabilities), as heretofore, currently or hereafter
conducted, (iv) the VRM Assumed Liabilities, and (v) the Liabilities retained
or assumed by VRM or any member of the VRM Group pursuant to the Employee
Benefits Agreement.

ARTICLE II
TRANSACTIONS RELATING TO THE DISTRIBUTION

2.1. Intercorporate Reorganization.

(a) Prior to or at the Time of Distribution, the Company and VRM hereby
undertake to complete the actions specified in this Section 2.1, to (i)
transfer, or cause to be transferred, to VRM or one of its Subsidiaries, as
appropriate, effective as of or prior to the Time of Distribution, all of the
right, title and interest of the Company or any Retained Subsidiary (a list of
which is set forth on Schedule 2.1(a)), as appropriate, in any VRM Assets and
have VRM or one of its Subsidiaries, as appropriate, assume and agree to pay,
perform and discharge in due course each of the VRM Assumed Liabilities, and
(ii) transfer, or cause to be transferred, to the Company or a Retained
Subsidiary, as appropriate, effective as of or prior to the Time of
Distribution, all the right, title and interest of VRM or any VRM Subsidiary,
as appropriate, in any Retained Assets and have the Company or a Retained
Subsidiary, as appropriate, assume and agree to pay, perform and discharge in
due course each of the Retained Company Assumed Liabilities.

(b) Prior to the Time of Distribution, the Company and VRM each agree to
take, or cause to be taken, the following actions in connection with the
Distribution:

(i) Transfers of Capital Stock and Partnership Interests

(A) the Company shall transfer all of its right, title and interest in
the outstanding shares of capital stock of Valero Corporate Services to VRM
or one of its Subsidiaries;

(B) the Company shall cause Valero Management Company to transfer all of
its right, title and interest in the outstanding shares of capital stock of
VMGA Company to VRM or one of its Subsidiaries;

(C) the Company shall transfer all of its right, title and interest in
the outstanding shares of capital stock of Valero Coal Company to VRM or
one of its Subsidiaries;

(D) the Company shall transfer all of its right, title and interest in
the outstanding shares of capital stock of Valero Producing Company to VRM
or one of its Subsidiaries;

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(ii) Other Transfers

(A) the Company shall transfer all of its right, title and interest in
the name "Valero" and the "Walking Flame" trademark each as described on
Schedule 4.1 to VRM;

(B) Valero Management Company shall transfer all of its right, title and
interest in the real estate set forth on Schedule 2.1(b)(ii)(B) to Valero
Corporate Services;

(C) Valero Management Company shall transfer all of its right, title and
interest in the promissory notes set forth on Schedule 2.1(b)(ii)(C) to
Valero Corporate Services;

(D) Valero Management Company shall transfer all of its right, title and
interest in the leases set forth on Schedule 2.1(b)(ii)(D) to Valero
Corporate Services;

(E) the Company shall transfer all of its right, title and interest in
its limited partnership interest in the San Antonio Spurs professional
basketball team to Valero Corporate Services;

(F) the Company shall transfer all of its right, title and interest in
season tickets to San Antonio Spurs and Houston Rockets professional
basketball games to Valero Corporate Services;

(G) Valero Management Company and the Company shall transfer all of their
right, title and interest in the computer software set forth in items A
through E on Schedule 2.1(b)(ii)(G) to Valero Corporate Services, and
Valero Corporate Services will also grant to Valero Management a
nonexclusive, freely transferable, fully paid, perpetual license to the
software set forth in item E on Schedule 2.1(b)(ii)(G) which includes, or
at the Time of Distribution such schedule shall be amended to include, all
material software developed by the Company and its Subsidiaries which is
used in the Retained Business;

(H) VNG shall transfer all of its right, title and interest in the Butane
Splitter and Debutanizer set forth on Schedule 2.1(b)(ii)(H) to Valero
Refining Company;

(I) Valero Management Company shall transfer all of its right, title and
interest in the Personal Property as reflected on Schedule 2.1(b)(ii)(I),
to Valero Corporate Services;

(J) Valero Management Company shall transfer a 50% interest in the
Airplanes to Valero Corporate Services so that each will be co-owners of
the Airplanes on the terms as set forth on Schedule 2.1(b)(ii)(J);

(K) Valero Management Company shall assign all of its right, title and
interest in the Hunting Lease to Valero Corporate Services;

(L) VNG shall transfer all of its right, title and interest in the
methanol pipeline segments set forth on Schedule 2.1(b)(ii)(L) to Valero
Refining Company;

(M) The Company shall assign all of its right, title and interest in the
Contract Rights to VRM;

(N) The Company will cause Valero Marketing and Supply to assign all
commodity swap contracts and similar contracts entered into by Valero
Marketing and Supply on behalf of the Retained Companies to the appropriate
members of the Company Group;

(O) The Company will cause Valero Marketing and Supply to transfer to
accounts designated by the Retained Company all commodities, commodity
futures, commodity options and other similar commodity contracts held by
Valero Marketing and Supply on behalf of any of the Retained Companies;

(P) The Company will transfer each of the Valero Charitable Trust, the
Valero Scholarship Trust, the Rulaine Pittman Memorial Scholarship Trust,
and the Valero Political Action Committee (VALPAC) to VRM;

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<PAGE>

(Q) The Company will take all actions necessary (including, without
limitation, executing such documents as may be necessary to change the
beneficiary thereof) to transfer, and will cause Valero Management Company
to transfer, to VRM or its designated subsidiary, their respective rights
in and to all policies of life insurance covering participants in the
Company's Executive Deferred Compensation Plan and Key Employee Deferred
Compensation Plan; and

(R) The Company shall assign to VRM or its designated Subsidiary all of
its right, title and interest in and to that certain lease Agreement, dated
March 17, 1991, between The Manufacturers Life Insurance Company, as
landlord, and Valero Industrial Gas Company, as lessee, as amended by that
certain Lease Modification and Amendment Agreement, dated January 28, 1994,
as the same may heretofore have or hereafter be amended, restated, modified
or supplemented, relating to the lease of office space in Washington, D.C.

(c) In connection with the transfers of assets other than capital stock and
the assumptions of Liabilities contemplated by subsection (a) and subsection
(b) of this Section, the Company and VRM shall execute or cause to be executed
by the appropriate entities the conveyance and assumption instruments in such
forms as the Company, VRM and the Acquiror shall reasonably agree; provided
that, the transfer of the real property shall be by warranty deed. The
transfer of capital stock shall be effected by means of delivery of stock
certificates duly endorsed or accompanied by duly executed stock powers and
notation on the stock records books of the corporation or other legal entities
involved and, to the extent required by applicable law, by notation on
appropriate registries.

(d) Each of the parties hereto understands and agrees that no party hereto
is, in this Agreement or in any other agreement or document contemplated by
this Agreement or otherwise, representing and warranting in any way as to the
title, value or freedom from encumbrance of, or any other matter concerning,
any assets of such party, it being agreed and understood that all assets are
being transferred "as is, where is", and that the real estate on Schedule
2.1(b)(ii)(B) shall be transferred by warranty deed.

(e) Prior to the Time of Distribution, the Company and VRM shall take all
steps necessary to increase the outstanding shares of VRM Common Stock so that
immediately prior to the Distribution, the Company will hold a number of
shares of VRM Common Stock equal to the total number of shares of the Company
Common Stock outstanding on the Record Date.

(f) If any assets that are used primarily in the Retained Business
including, without limitation, information systems, intellectual property
(including software licenses), microwave and other communications systems and
trading and risk management operations, would otherwise be held in a
Subsidiary that would not be owned directly or indirectly by the Company after
the Time of Distribution, then, notwithstanding the foregoing allocation, VRM
shall cause each such Subsidiary to contribute such assets to the appropriate
Subsidiary of the Company or as the Company otherwise directs as part of the
Intercompany Reorganization; provided, however, that the Company shall be
responsible for establishing new commodity accounts to accommodate the
Retained Business, risk management activities and/or transferring the assets
described in Sections 2.1(b)(ii)(N) and (O) to Acquiror accounts. Neither any
existing commodities account, nor any New York Mercantile Exchange seat held
by Valero Marketing and Supply, shall be transferred so as to be a part of the
Retained Business.

(g) The Retained Companies will, at the Effective Time, include all the
Company's right, title and interest in and to (a) all assets of the Company or
any of its Subsidiaries, including the information systems, that are used
primarily in or that are being held primarily for use in or that are otherwise
sufficient (including for this purpose the services to be provided pursuant to
the Interim Services Agreement) for the operation, as currently conducted, of
the Retained Business.

2.2. Assumption of Liabilities. (a) Subject to Section 2.2(b), and effective
as of the time of the Intercompany Reorganization, VRM and the VRM Group, in
partial consideration for the transfers set forth in

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Section 2.1, hereby unconditionally assume and undertake to pay, satisfy and
discharge when due in accordance with their terms the VRM Assumed Liabilities,
including without limitation:

(i) all Liabilities relating to or arising from the VRM Assets or the VRM
Business (other than such Liabilities expressly assumed or retained by the
Company Group pursuant to this Agreement), whether arising before, at or
after the Time of Distribution;

(ii) all Liabilities (including, without limitation, indemnification
obligations) relating primarily to or arising primarily from (A) the
reports, registration statements and other documents filed by the Company
with the SEC prior to the Time of Distribution (including the Company's
consolidated financial statements for periods prior to the Time of
Distribution included or incorporated by reference therein) and (B) any
breach or alleged breach by any director or officer of the Company of his
fiduciary duties to the Company and its stockholders occurring at or prior
to the Effective Time;

(iii) any Liabilities to be assumed by VRM or any of its Subsidiaries
pursuant to the transactions contemplated by this Agreement, including
without limitation the Liabilities relating to or arising out of (A) the
MTBE Project, (B) the warranty deeds described in Sections 2.1(c) and
2.1(d) and (C) the VRM Assumed Liabilities set forth on Schedule 2.2(a);

(iv) the obligations of VRM pursuant to Section 2.2(c); and

(v) subject to Section 2.3(e) hereof, all Liabilities under the New
Credit Facility.

(b) Notwithstanding Section 2.2(a), the Company hereby retains, and the VRM
Group does not assume and will have no liability with respect to, the Retained
Liabilities.

(c) The provisions of Section 2.2(b) notwithstanding, within 45 days
following the entry of a final, nonappealable judgment in the TECO Litigation,
or execution of a settlement agreement with respect to the TECO Litigation
approved by VRM (such approval not to be unreasonably withheld or delayed),
VRM shall pay to Acquiror in immediately available funds an amount equal to
(i) 50% of the amount of such judgment or settlement with respect to that part
of any judgment or settlement amount not in excess of $30,000,000, and
(ii) 100% of that part of such judgment or settlement amount which is in
excess of $30,000,000, plus in each case interest thereon at the applicable
statutory rate from the date of such judgment until paid in full.

2.3. Repayment of Intercompany Indebtedness and Cash Dividend.

(a) Redemption Payment. Prior to the Time of Distribution, the Company will
redeem (or convert) the Company Convertible Preferred Stock in accordance with
Section 6.1(n) of the Merger Agreement. The redemption, if any, of the Company
Convertible Preferred Stock will be funded by the Company with the proceeds of
borrowings under the New Credit Facility.

(b) Dividend Payment. Prior to the Time of Distribution, VRM shall pay a
cash dividend (the "Cash Dividend") to the Company in an amount equal to
$210,000,000.

(c) Intercompany Note. The Company and VRM shall (a) eliminate without
payment the $212,450,000 net amount of the intercompany note (the
"Intercompany Note") owing from the Company to VRM as of December 31, 1996
(which amount reflects payment to VNG for the assets described in Section
2.1(b)(ii)(H); (b) refrain from creating any obligations under the
Intercompany Note after December 31, 1996, except in the ordinary course of
business consistent with past practice or as contemplated by the
Reorganization Agreements and (c) satisfy by cash payment at the Time of
Distribution the full net amount of such note for the period from January 1,
1997 to the Time of Distribution (which Intercompany Note, for purposes of
this Agreement, shall not reflect the assumption by VRM of Liabilities related
to the Company's acquisition of Basis Petroleum, Inc. and redemption of the
Company Convertible Preferred Stock). Prior to the Time of Distribution, the
Company

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and VRM shall agree on the estimate of the net amount so payable. The Company
and VRM shall use their reasonable efforts within 60 days after the Time of
Distribution to agree on the actual amount so payable. If the actual amount so
payable is different from such estimated amount, the Company or VRM will
promptly pay the difference to the other, plus interest thereon at a floating
rate equal to the prime rate (as in effect from time to time) as reported in
the Wall Street Journal from the Time of Distribution to the date of payment.
If the parties are unable to so agree on the actual amount, any disputes will
be resolved by an independent accounting firm selected by the Company and VRM,
the fees and expenses of which will be borne equally by the Company and VRM.
Once the actual amount is so agreed or resolved, such amount shall be final
and non-appealable.

(d) Cash Management. Prior to the Time of Distribution, the Company and VRM
shall establish and maintain a separate cash management system with respect to
the VRM Businesses in accordance with the terms set forth on Schedule 2.2(c)
so that bank accounts are accurately allocated and distributed to VRM and the
Company at the Time of Distribution.

(e) Intercompany Note Adjustment. Prior to the assumption by VRM of
Liabilities under the New Credit Facility as set forth in Section 2.2(a) (v),
all Liabilities under the New Credit Facility that are unrelated to (i) the
Company's acquisition of Basis Petroleum, Inc. or (ii) the redemption of the
Company Convertible Preferred Stock shall be transferred to the Uncommitted
Facilities or, to the extent capacity is not available thereunder, be borne by
the Company by reducing amounts owed by VRM (or increasing amounts owed by the
Company) under the Intercompany Note. Payments made under the New Credit
Facility shall be charged to VRM under the Intercompany Note to the extent
related to borrowings for (i) the Company's acquisition of Basis Petroleum,
Inc. or (ii) the redemption of the Company Convertible Preferred Stock.

2.4. Resignations. The Company shall cause all of its, and all the Company
Group entities', employees and directors to resign, not later than the Time of
Distribution, from all boards of directors or similar governing bodies of VRM
or any member of the VRM Group on which they serve, and from all positions as
officers of VRM or any member of the VRM Group in which they serve. VRM shall
cause all of its, and all VRM Group entities', employees and directors to
resign, not later than the Time of Distribution, from all boards of directors
or similar governing bodies of the Company or any member of the Company Group
on which they serve, and from all positions as officers of the Company or any
member of the Company Group in which they serve.

2.5. VRM Certificate of Incorporation and By-Laws; Rights Plan; Name
Change. Prior to the Distribution Date, (a) the VRM Board of Directors shall
(i) approve the Certificate of Incorporation and shall file the same with the
Secretary of State of the State of Delaware and (ii) adopt the By-Laws, and
(b) the Company, as sole stockholder of VRM, shall approve such Certificate of
Incorporation. Prior to the Distribution Date, VRM shall adopt the VRM Rights
Agreement. Prior to the Distribution Date, the Company shall approve as sole
stockholder VRM changing its name to "Valero Energy Corporation" following the
Effective Time and thereafter shall take any and all other action necessary to
be taken by the Company to effect such change.

2.6. Insurance. The Company maintains various forms of insurance coverages
(the "Policies") applicable to both the Retained Business and the VRM Business
and in which VRM and/or other members of the VRM Group are included as
insureds or named insureds. Effective as of the Time of Distribution, all such
Policies (including all prepaid premiums, deposits, refunds, dividends,
accrued claims (excluding claims related solely to the Retained Business) and
other rights therein) shall be assigned or transferred to VRM and the coverage
of the Company and the Retained Subsidiaries under the Policies shall cease
under the Policies as of the Time of Distribution; provided however the
Retained Companies shall receive a cash payment from VRM equivalent to the
prepaid premiums, deposits, refunds and dividends with respect to such
Policies at the Time of Distribution to the extent attributable to expenses
which have been charged to the Retained Business. From and after the Time of
Distribution, the Company and the Retained Subsidiaries shall be responsible
for obtaining and maintaining insurance coverages for their own account.
Insofar as any existing Policies may provide "claims made" or equivalent
coverage, the VRM Group shall, if requested, use reasonable best efforts to
assist or cooperate with the Company in purchasing (to the extent obtainable,
and at the Retained Companies' sole cost

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and expense) continuing coverages for claims which are unknown, undiscovered
and/or unreported at the Time of Distribution (i.e. "long tail coverage").
Insofar as any claims made (in the case of "claims made" or equivalent
coverages) or accrued (in the case of "occurrence" or equivalent coverages)
under the Policies prior to the Time of Distribution relate solely to the
Retained Business, VRM shall use its reasonable best efforts to assure that
the Retained Company and the Retained Subsidiaries can continue to make and/or
pursue such claims under the Policies, or that VRM can continue to make and/or
pursue such claims on behalf of the Retained Companies, notwithstanding
assignment or transfer of the Policies to VRM.

2.7. Nonassignable Contracts. Anything contained herein to the contrary
notwithstanding, this Agreement shall not constitute an agreement to assign
any lease, license agreement, contract, agreement, sales order, purchase
order, open bid or other commitment or asset if an assignment or attempted
assignment of the same without the consent or waiver of the other party or
parties thereto would constitute a breach thereof or in any way impair the
rights of the VRM Group or the Company Group thereunder. If any such consent
or waiver is not obtained or if an attempted assignment would be ineffective
or would impair either Group's rights under any such lease, license agreement,
contract, agreement, sales order, purchase order, open bid or other commitment
or asset so that the Company or VRM or a Subsidiary of either, as applicable,
would not receive all such rights, then (x) the Company or VRM, as applicable,
shall use reasonable best efforts to provide or cause to be provided to the
other or its Subsidiary, to the extent permitted by law, the benefits of any
such lease, license agreement, contract, agreement, sales order, purchase
order, open bid or other commitment or asset and the Company or VRM, as
applicable, shall promptly pay or cause to be paid to the other or its
Subsidiary when received all moneys received by the Company Group or VRM
Group, as applicable, with respect to any such lease, license agreement,
contract, agreement, sales order, purchase order, open bid or other commitment
or asset and (y) in consideration thereof the other party or its Subsidiary
shall pay, perform and discharge on behalf of such Group all of such Group's
debts, liabilities, obligations and commitments with respect thereto in a
timely manner and in accordance with the terms thereof. In addition, the
Company or VRM, as applicable, shall take such other actions (at the expense
of the other) as may reasonably be requested by the other in order to place
the other, insofar as reasonably possible, in the same position as if such
lease, license agreement, contract, agreement, sales order, purchase order,
open bid or other commitment or asset had been transferred as contemplated
hereby and so all the benefits and burdens relating thereto, including
possession, use, risk of loss, potential for gain and dominion, control and
command, shall inure to the applicable Group. If and when such consents and
approvals are obtained, the transfer of the applicable lease, license
agreement, contract, agreement, sales order, purchase order, open end or other
commitment or asset shall be effected in accordance with the terms of this
Agreement.

2.8. Interim Services Agreement. In connection with the Intercompany
Reorganization the Company and VRM shall enter into an Interim Services
Agreement in form and substance substantially the same as the Interim Services
Agreement attached hereto as Annex A.

2.9. Company Guarantees. (a) Neither VRM nor any member of the VRM Group
shall increase its outstanding obligations in excess of the aggregate amounts
of all obligations under the Company Guarantees as of January 31, 1997, set
forth on Schedule 1.1(a), nor shall VRM or any of the VRM Group renew or enter
into any additional obligations for which the Company would act as guarantor
unless such guarantee by its terms expires as to the Company and its
Subsidiaries without further liability at or prior to the Time of
Distribution. VRM agrees to use its reasonable best efforts to obtain any
amendments to, or consents with respect to, the Company Guarantees that are
necessary in order that the Company be released no later than the Time of
Distribution from any liability or obligation under the Company Guarantees;
provided that if any such release has not been obtained by the Time of
Distribution, VRM shall: (i) pursuant to Section 8.1 provide the Company with
a full indemnity with respect thereto; and (ii) continue to use its best
efforts to obtain such release as soon as practicable thereafter.

(b) VRM shall use its reasonable best efforts to refund the IRBs with
replacement industrial revenue bonds prior to the Time of Distribution, which
refunding shall eliminate the guarantee by the Company of the IRBs. In the
event VRM is unable to so refund the IRBs prior to the Time of Distribution,
for a period of up to 120 days

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following the Time of Distribution VRM shall use its reasonable best efforts
to so refund the IRBs and shall pursuant to Section 8.1 provide the Company
with a full indemnity with respect to the Company's guarantee of the IRBs. In
the event VRM is unable to so refund the IRBs by the 120th day following the
Time of Distribution, VRM shall prepay the IRBs in full no later than such
120th day.

2.10. Conduct of Businesses. Except as otherwise provided in this Agreement
from and after December 31, 1996, the VRM Group and the Company Group have
carried on and shall carry on their respective businesses and activities
diligently and in substantially the same manner as they previously have been
carried out and neither the VRM Group nor the Company Group shall make or
institute any methods of operation or accounting that vary materially from the
methods used by the VRM Group and the Company Group prior to the date hereof.
Since December 31, 1996 all intercompany transactions, including without
limitation asset transfers and intercompany loans have, and after the date
hereof will until the Time of Distribution be accounted for through the
Intercompany Note.

ARTICLE III
MECHANICS OF DISTRIBUTION

3.1. Mechanics of Distribution. The Distribution shall be effected by the
distribution to each holder of record of Company Common Stock, as of the
record date designated for the Distribution by or pursuant to the
authorization of the Board of Directors of the Company (the "Record Date"), of
certificates representing one share of VRM Common Stock and associated VRM
Right for each share of Company Common Stock held by such holder.

3.2. Timing of Distribution. The Board of Directors of the Company shall
formally declare the Distribution and shall authorize the Company to pay it
immediately prior to the Effective Time, subject to the satisfaction or waiver
of the conditions set forth in Article VII, by delivery of certificates for
VRM Common Stock to the Transfer Agent for delivery to the holders entitled
thereto. The Distribution shall be deemed to be effective upon notification by
the Company to the Transfer Agent that the Distribution has been declared and
that the Transfer Agent is authorized to proceed with the distribution of VRM
Common Stock.

ARTICLE IV
OTHER AGREEMENTS

4.1. Use of Names, Trademarks, etc. (a) From and after the Time of
Distribution, VRM shall have all rights, including all intellectual property
rights in and exclusive use of the trademarks, trade names and service marks,
the U.S. federal and Mexican registrations and applications, the Internet
domain registration and exclusive use of the name "Valero", and any and all
other designs, logos and slogans, related to the names "Valero" and "Valero
Energy Corporation" and the "Walking Flame" service mark, all as more
particularly set forth on Schedule 4.1, attached hereto, and all other rights
(whether tangible or intangible, statutory, at common law or otherwise) in
connection therewith, whether alone or in combination with one or more other
words or marks in connection therewith. During the period from five business
days after January 31, 1997 to the Time of Distribution the VRM group shall
not affix the name "Valero" or any other design, logo, slogan, name related to
the names "Valero", or "Valero Energy Corporation" or the "Walking Flame"
service mark to any new or existing equipment (including without limitation
vehicles), or facilities which are Retained Assets. As promptly as practicable
after the Effective Time, but in any event no later than six months after the
Effective Time, the Company shall cease using the "Valero" name and mark or
service mark and the "Walking Flame" service mark, including without
limitation, on any signs, badges, parking stickers, letterhead, business
cards, invoices and other business forms, telephone directory listings, and
advertising and promotional materials; provided, however, that nothing herein
shall be construed to prohibit, and neither party shall hereafter take any
action which could have the effect of prohibiting, either the Company Group or
the VRM Group from continuing to use, after the Effective Time of the blue-
green color (PMS 315) now utilized by both the Company Group and the VRM Group
on their respective facilities.

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4.2. Intercompany Accounts as of the Time of Distribution. From and after
the Time of Distribution all receivables and payables between VRM and any of
its Subsidiaries, on the one hand, and the Company and any Retained
Subsidiaries, on the other hand, which were intercompany receivables or
payables prior to the Time of Distribution and not subject to the intercompany
note shall be handled pursuant to the terms of the applicable Intercompany
Arrangement.

4.3. Hunting Lease. Subject to any necessary consents, Valero Corporate
Services and Valero Management Company shall assign to VRM its leasehold
interest in the Hunting Leases set forth on Schedule 2.1(b)(ii)(K).

4.4. Airplanes. The terms of ownership of the Airplanes shall be in
accordance with the terms and provisions substantially similar to those set
forth on Schedule 2.1(b)(ii)(J).

4.5. Intercompany Arrangements. All agreements, contracts, arrangements and
commitments, between a member of the VRM Group on the one hand, and a member
of the Company Group on the other hand, entered into prior to the Closing Date
for the purchase or sale of goods or services ("Intercompany Arrangements")
set forth on Schedule 4.5, shall remain in effect as of and after the Time of
Distribution. To the knowledge of the Company, the Intercompany Arrangements
set forth on Schedule 4.5, the Reorganization Agreements and the Interim
Services Agreement collectively comprise all agreements, contracts,
arrangements and commitments between a member of the VRM Group on the one
hand, and a member of the Company Group on the other hand entered into prior
to the date hereof for the purchase or sale of goods or services, except for
such agreements, contracts, arrangements or commitments entered into in the
ordinary course in accordance with past practice which agreements, contracts,
arrangements or commitments will terminate at or before the Time of
Distribution. If following the Time of Distribution any other such agreements,
contracts, arrangements or commitments are identified by either Group, then
(i) if any such agreement, contract, arrangement or commitment is oral, it
shall terminate as of the Time of Distribution and be of no further force and
effect, and (ii) if any such agreement, contract, arrangement or commitment is
in writing, either party thereto may terminate such agreement, contract,
arrangement or commitment upon 45 days written notice to the other party
thereto. Each of the Intercompany Arrangements was based on market terms at
the date of its inception, other than any interest rates provided for therein.
Complete and correct copies of each of the Intercompany Arrangements have been
delivered to the Acquiror.

4.6. Further Assurances. Each of the parties hereto, at its own cost and
expense, promptly shall execute such documents and other instruments and take
such further actions as may be reasonably required or desirable to carry out
the provisions hereof and to consummate the transactions contemplated hereby.

ARTICLE V
TAX AND EMPLOYEE MATTERS

5.1. Tax Sharing; Exclusivity of Tax Sharing Agreement. Prior to the Time of
Distribution, VRM and the Company shall enter into a Tax Sharing Agreement in
substantially the form attached as Annex C to the Merger Agreement which
agreement shall, notwithstanding anything in this Agreement to the contrary,
be the exclusive agreement among the parties hereto with respect to all Tax
matters, including without limitation indemnification of Tax matters.

5.2. Employee Benefits. Prior to the Time of Distribution, VRM and the
Company shall enter into an Employee Benefits Agreement in substantially the
form attached as Annex B to the Merger Agreement.

5.3. Employees. (a) The Company has made available to Acquiror a list of the
employees currently employed exclusively or primarily in the Retained Business
indicating the positions which they now hold, their current rates of
compensation and which employees, if any, are on short or long term
disability, family and medical, military, workers' compensation, or any other
type of leave of absence; and copies of all employee handbooks, and policy and
procedure manuals. The VRM Group shall use its reasonable efforts to see that
the

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employees on such list shall be transferred to or retained in the Company
Group at the Time of Distribution and such employees as shall be transferred
to or retained in the Company Group at the Time of Distribution shall include
all of the employees necessary to conduct the Retained Business as conducted
in the past. The Company and the Acquiror shall cooperate in good faith to
reach a mutually satisfactory agreement with respect to the employment of
employees whose employment involves both the VRM Group and the Company Group.

(b) With respect to the Retained Business, neither the Company nor any of
its Subsidiaries is a party to, or is bound by, any collective bargaining
agreement, contract, or other agreement or understanding with a labor union or
labor organization, nor is the Company or any of its Subsidiaries the subject
of any proceeding or organizing activity asserting that it or any such
Subsidiary has committed an unfair labor practice or seeking to compel it or
such Subsidiary to bargain with any labor organization as to wages and
conditions of employment, nor is there any strike, labor dispute, slow down or
stoppage involving the Company or any of its Subsidiaries pending or, to the
knowledge of the Company, threatened that, individually or in the aggregate,
are reasonably likely to have a material adverse effect on the Retained
Business taken as a whole.

5.4. Non-Competition Covenants. (a) From and after Distribution until the
second anniversary of the Closing Date, VRM shall not, and shall cause its
Affiliates and Subsidiaries not to, directly or indirectly, within the
geographic area in which such businesses are currently conducted by the
Company Group (i) engage in marketing natural gas, or marketing and trading
electric power (a "Competitive Business") (provided, that nothing herein shall
be construed to preclude VRM from marketing surplus electric power generated
at its refineries), (iii) sell, assign or otherwise transfer the trademarks,
trade names, service marks, the use of the name "Valero" or any and all other
designs, logos and slogans, related to the names "Valero" and "Valero Energy
Corporation" and the "Walking Flame" service mark or any other right set forth
on Schedule 4.1 to a Competitive Business, or (iv) invest in, as principal,
partner or stockholder (otherwise than through the ownership of less than 4%
of the outstanding voting securities of any corporation which are listed on a
national securities exchange or accepted for quotation of The Nasdaq Stock
Market), any person, partnership, firm, corporation or other business entity
which is engaged in a Competitive Business; provided, that nothing herein
shall be construed to preclude VRM from acquiring (or, thereafter, from
operating) a Competitive Business if the operations constituting a Competitive
Business are incidental to a larger acquisition of a business or entity whose
principal operations do not constitute a Competitive Business. From and after
the Distribution, until the second anniversary of the Time of Distribution,
VRM shall not, and shall cause its Affiliates and Subsidiaries not to,
directly or indirectly, solicit (other than through a general solicitation not
directed at a particular individual or group of individuals employed by the
Retained Business) for hire any employee, officer, director, executive or
consultant currently employed primarily in activities related to the Retained
Business or encourage any such employee, officer, director, executive or
consultant to leave such employment. Following the Closing, VRM shall not, and
shall cause its Affiliates and Subsidiaries not to, directly or indirectly,
disclose, divulge, communicate, use to the detriment of Acquiror or the
Retained Business or for the benefit of any other person or persons, any
confidential, proprietary or sensitive information or trade secrets of the
Retained Business, including, without limitation, any and all personnel
information, know-how, customer lists, price lists or other financial and
operating data relating to the Retained Assets and the Retained Business,
unless required to do so by law or legal process. In the event that such
disclosure is required by law or legal process, VRM shall immediately notify
the Company of the existence, terms and circumstances surrounding such
disclosure so that the Company may seek an appropriate protective order prior
to the disclosure of such information.

(b) VRM expressly agrees and understands that the remedy at law for any
breach by it or its Affiliates or Subsidiaries of this Section 5.4 will be
inadequate and that the damages flowing from such breach are not readily
susceptible to being measured in monetary terms. Accordingly, VRM acknowledges
that upon a violation of any provision of this Section 5.4, the Company shall
be entitled to immediate injunctive relief and may obtain a temporary
restraining order restraining any threatened or further breach and the Company
shall be further entitled to require VRM to account for and pay over to the
Company all compensation, profits, monies, accruals, or other benefits derived
or received by VRM during the period of, and resulting from, the breach of any
of the provisions of this Section 5.4. Nothing contained in this Section 5.4
shall be deemed to limit the Company's remedies at

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law or in equity for any breach of the provisions of this Section 5.4 by VRM
or its Affiliates or Subsidiaries. Any covenant on VRM's part contained in
this Section 5.4 which may not be specifically enforceable shall nevertheless,
if breached, give rise to a cause of action for monetary damages.

(c) The parties hereto acknowledge that the covenants contained in this
Section 5.4 are independent covenants and shall not be affected by performance
or nonperformance of any other provision of this Agreement. VRM has carefully
considered the nature and extent of the restrictions upon them and their
Affiliates and Subsidiaries and the rights and remedies conferred upon the
Company under this Section 5.4, and VRM has independently consulted with their
counsel and after such consultation acknowledges and agrees that the covenants
set forth in this Section 5.4 are reasonable in time and territory, are
designed to eliminate competition that would otherwise be inequitable to the
Company and the Retained Business, are fully required to protect the
legitimate interests of the Company and do not confer a benefit upon the
Company disproportionate to the detriment to VRM and its Affiliates and
Subsidiaries. It is the desire and intent of the parties that the provisions
of this Section 5.4 shall be enforced to the fullest extent permissible under
applicable law.

ARTICLE VI
ACCESS TO INFORMATION

6.1. Provision of Records and Information. Prior to the Time of
Distribution: (i) the Company shall transfer to VRM all minute books and other
Information relating to the VRM Business, and (ii) the Company shall transfer
to VRM all Tax Records (as defined in the Tax Sharing Agreement) exclusively
related to the assets and activities of the VRM Group's Pre-Distribution
Periods (as defined in the Tax Sharing Agreement); provided that the
transferor of such documents may retain copies of such documents for its use.
The original minute books, Tax Records and Information shall be the property
of the transferee.

6.2. Access to Information. From and after the Time of Distribution, each of
the Company and VRM shall afford to the other and to the other's
Representatives reasonable access and duplicating rights (at the requesting
party's expense) during normal business hours and upon reasonable advance
notice to each such member all Information within the possession or control of
any member of the Company Group or the VRM Group, as the case may be, relating
to the business, assets or Liabilities as they existed prior to the Time of
Distribution or relating to or arising in connection with the relationship
between the constituent elements of the Groups on or prior to the Time of
Distribution, insofar as such access is reasonably required for a reasonable
business purpose. Without limiting the foregoing, Information may be requested
under this Section 6.2 for audit, accounting, claims, litigation and tax
purposes, as well as for purposes of fulfilling disclosure and reporting
obligations and for performing this Agreement and the other Reorganization
Agreements.

6.3. Production of Witnesses. After the Time of Distribution, each of the
Company and VRM shall, and shall cause each member of the Company Group and
the VRM Group, respectively, to, make available to VRM or any member of the
VRM Group or to the Company or any member of the Company Group, as the case
may be, upon written request and without charge (other than the reimbursement
by the requesting party of reasonable direct expenses incurred in performance
of the obligations described in this Section), such Group's directors,
officers, employees and agents as witnesses to the extent that any such Person
may reasonably be required in connection with any legal, administrative or
other proceedings in which the requesting party may from time to time be
involved and relating to the business of the VRM Group or the Company Group as
it existed prior to the Time of Distribution or relating to or in connection
with the relationship between the constituent elements of the Groups on or
prior to the Time of Distribution, provided that the same shall not
unreasonably interfere with the conduct of business by the Group of which the
request is made.

6.4. Retention of Records. Except as otherwise required by law or agreed to
in writing (including without limitation, in the Tax Sharing Agreement), if
any Information relating to the business, assets or Liabilities of a member of
a Group as they existed prior to the Time of Distribution is retained by a
member of the other Group, each of the Retained Company and VRM shall, and
shall cause the members of the Group of which it is a

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<PAGE>

member to, retain all such Information in such Group's possession or under its
control until such Information is at least six years old except that if, prior
to the expiration of such period, any member of either Group wishes to destroy
or dispose of any such Information that is at least three years old, prior to
destroying or disposing of any of such Information, (1) VRM or the Retained
Company, on behalf of the member of its Group that is proposing to dispose of
or destroy any such Information, shall provide no less than 30 days' prior
written notice to the other party, specifying the Information proposed to be
destroyed or disposed of, and (2) if, prior to the scheduled date for such
destruction or disposal, the other party requests in writing that any of the
Information proposed to be destroyed or disposed of be delivered to such other
party, the party whose Group is proposing to dispose of or destroy such
Information promptly shall arrange for the delivery of the requested
Information to a location specified by, and at the expense of, the requesting
party.

6.5. Confidentiality. From and after the Time of Distribution, each of the
Company Group and the VRM Group shall hold, and shall cause its Affiliates and
Representatives to hold, in strict confidence all Information concerning the
other party's Group obtained by it prior to the Time of Distribution or
furnished to it by such other party's Group pursuant to the Reorganization
Agreements and shall not release or disclose such Information to any other
Person, except its Affiliates and Representatives, who shall be bound by the
provisions of this Section 6.5, and each party shall be responsible for a
breach of this Section 6.5 by any of its Affiliates or Representatives;
provided, however, that any member of the Company Group or the VRM Group may
disclose such Information to the extent that (a) disclosure is compelled by
judicial or administrative process or, in the opinion of such Person's
counsel, by other requirements of law, or (b) such Person can show that such
Information was (i) available to such Person on a nonconfidential basis (other
than from a member of the other party's Group) prior to its disclosure by such
Person, (ii) in the public domain through no fault of such Person, (iii)
lawfully acquired by such Person from another source after the time that it
was furnished to such Person by the other party's Group, and not acquired from
such source subject to any confidentiality obligation on the part of such
source, or on the part of the acquiror, known to the acquiror, or (iv) treated
by such Person with the same care as such Person takes to preserve
confidentiality for its own similar Information; provided further that if
either Group is requested or required (by oral questions, interrogatories,
requests for information or documents in legal proceedings, subpoena, civil
investigative demand or other similar process) to disclose any such
Information, such Group shall provide the other Group with prompt written
notice of any such request or requirement so that such other Group may seek a
protective order or other appropriate remedy or waive compliance with the
provisions of this Agreement; if, in the absence of a protective order or
other remedy or the receipt of a waiver the Group which received such request
is, in the written opinion of its counsel, legally compelled to disclose
Information to any tribunal or else stand liable for contempt or suffer other
censure or penalty, such Group may, without liability hereunder, disclose to
such tribunal only that portion of the Information which such counsel advises
is legally required to be disclosed, provided that such Group exercises its
best efforts to preserve the confidentiality of the Information, including,
without limitation, by cooperating with the other Group to obtain an
appropriate protective order or other reliable assurance that confidential
treatment will be accorded the Information by such tribunal.

ARTICLE VII
CONDITIONS

7.1. Conditions to Obligations of the Company. The obligations of the
Company to consummate the Distribution hereunder shall be subject to the
fulfillment of each of the following conditions:

(a) Each of the covenants and provisions in this Agreement required to be
performed or complied with on or before the Time of Distribution shall have
been performed and complied with.

(b) Each condition to the Closing of the Merger Agreement set forth in
Article VIII thereof, other than the condition set forth in Sections 8.1(g)
thereof as to the consummation of the Distribution, shall have been fulfilled
or waived by the party for whose benefit such condition exists.

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<PAGE>

(c) The Board of Directors of the Company and the Acquiror shall be
satisfied that the Company's surplus would be sufficient to permit, without
violation of Section 170 of the DGCL, the Distribution and shall have given
final approval of the Distribution.

(d) The VRM Common Stock shall have been approved for listing, upon notice
of issuance, on the NYSE.

(e) The Distribution shall have been duly approved by the requisite vote of
the holders of Company Common Stock.

(f) The Intercompany Reorganization shall have been completed as
contemplated by the terms of this Agreement.

ARTICLE VIII
INDEMNIFICATION

8.1. Indemnification by VRM. From and after the Effective Time, subject to
the provisions of this Article VIII, VRM, its successors and assigns, shall
indemnify, defend and hold harmless the Retained Company Indemnitees from and
against, and pay or reimburse the Retained Company Indemnitees for, all
Indemnifiable Losses, as incurred:

(i) relating to or arising from the VRM Assets or the VRM Liabilities
(including the failure by VRM or any VRM Company, as applicable, to pay,
perform or otherwise discharge such Liabilities in accordance with their
terms), whether such Indemnifiable Losses relate to or arise from events,
occurrences, actions, omissions, facts or circumstances occurring, existing
or asserted before, at or after the Time of Distribution;

(ii) arising from or based upon any untrue statement of a material fact
contained in any of the Filings, or any omission to state therein a
material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were
made, not misleading; but only in each case with respect to information
provided by the Company relating to the VRM Group contained in or omitted
from the Filings;

(iii) relating to the Company Guarantees and the Company's guarantee of
the IRBs

(iv) relating to the warranty deeds described in Sections 2.1(c) and
2.1(d);

(v) relating to any breach or violation of this Agreement by VRM or,
prior to the Time of Distribution, by the Company; any breach by VRM or,
prior to the Time of Distribution; by the Company of any of the
representations, warranties or covenants made in this Agreement, or any
inaccuracy or misrepresentation in the Schedules hereto or in any
certificate or document delivered in accordance with the terms of this
Agreement;

(vi) incurred in connection with the enforcement by any Retained Company
Indemnitees of their rights to be indemnified, defended and held harmless
under this Agreement.

8.2. Indemnification by Retained Company. From and after the Effective Time,
subject to the provisions of this Article VIII, the Retained Company, its
successors and assigns, shall indemnify, defend and hold harmless the VRM
Indemnitees from and against, and pay or reimburse the VRM Indemnitees for,
all Indemnifiable Losses, as incurred:

(i) relating to or arising from the Retained Assets or the Retained
Liabilities (including the failure by the Retained Companies to pay,
perform or otherwise discharge such Liabilities in accordance with their
terms), whether such Indemnifiable Losses relate to or arise from events,
occurrences, actions, omissions, facts or circumstances occurring, existing
or asserted before, at or after the Time of Distribution;

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<PAGE>

(ii) arising from or based upon any untrue statement of a material fact
contained in any Filings, or any omission to state therein a material fact
required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which they were made, not misleading;
but only in each case with respect to information provided by Acquiror
relating to Acquiror or any of its Subsidiaries contained in or omitted
from the Filings;

(iii) incurred in connection with the enforcement by any VRM Indemnitees
of their rights to be indemnified, defended and held harmless under this
Agreement.

8.3. Procedures Relating to Indemnification. (a) In order for an Indemnitee
to be entitled to any indemnification provided for under this Agreement in
respect of, arising out of or involving a claim made by any Person who is not
an Indemnitee against the Indemnitee (a "Third Party Claim"), such Indemnitee
must notify the party who may become obligated to provide indemnification
hereunder (the "indemnifying party") in writing, and in reasonable detail, of
the Third Party Claim reasonably promptly, and in any event within 20 days
after receipt by such Indemnitee of written notice of the Third Party Claim;
provided, however, that failure to give such notification shall not affect the
indemnification provided hereunder except to the extent the indemnifying party
shall have been actually prejudiced as a result of such failure (except that
the indemnifying party shall not be liable for any expenses incurred during
the period in which the Indemnitee failed to give such notice). After any
required notification (if applicable), the Indemnitee shall deliver to the
indemnifying party, promptly after the Indemnitee's receipt thereof, copies of
all notices and documents (including court papers) received by the Indemnitee
relating to the Third Party Claim.

(b) If a Third Party Claim is made against an Indemnitee, the indemnifying
party will be entitled to participate in the defense thereof and, if it so
chooses, to assume the defense thereof (at the expense of the indemnifying
party) with counsel selected by the indemnifying party and reasonably
satisfactory to the Indemnitee. Should the indemnifying party so elect to
assume the defense of a Third Party Claim, the indemnifying party will not be
liable to the Indemnitee for any legal expenses subsequently incurred by the
Indemnitee in connection with the defense thereof; provided, however, that if
the indemnifying party fails to take reasonable steps necessary to defend
diligently such Third Party Claim within 30 calendar days after receiving
written notice from the Indemnitee that the Indemnitee believes the
indemnifying party has failed to take such steps or if the indemnifying party
has not undertaken fully to indemnify the Indemnitee in respect of all
Indemnifiable Losses relating to the matter, the Indemnitee may assume its own
defense, and the Indemnifying Party will be liable for all reasonable costs or
expenses paid or incurred in connection therewith. If the indemnifying party
assumes such defense, the Indemnitee shall have the right to participate in
the defense thereof and to employ counsel, at its own expense, separate from
the counsel employed by the indemnifying party, it being understood that the
indemnifying party shall control such defense. The indemnifying party shall be
liable for the fees and expenses of counsel employed by the Indemnitee for any
period during which the indemnifying party has not assumed the defense thereof
(other than during any period in which the Indemnitee shall have failed to
give notice of the Third Party Claim as provided above). If the indemnifying
party chooses to defend or prosecute a Third Party Claim, all the parties
hereto shall cooperate in the defense or prosecution thereof, which
cooperation shall include the retention in accordance with this Agreement and
(upon the indemnifying party's request) the provision to the indemnifying
party of records and information which are reasonably relevant to such Third
Party Claim, and making employees available on a mutually convenient basis to
provide additional information and explanation of any material provided
hereunder. If the indemnifying party chooses to defend or prosecute any Third
Party Claim, the Indemnitee will agree to any settlement, compromise or
discharge of such Third Party Claim which the indemnifying party may recommend
and which by its terms obligates the indemnifying party to pay the full amount
of liability in connection with such Third Party Claim; provided, however,
that, without the Indemnitee's consent, the indemnifying party shall not
consent to entry of any judgment or enter into any settlement that provides
for injunctive or other nonmonetary relief affecting the Indemnitee, that does
not include as an unconditional term thereof the giving by each claimant or
plaintiff to such Indemnitee of a release from all liability with respect to
such claim. Whether or not the indemnifying party shall have assumed the
defense of a Third Party Claim, the Indemnitee shall not admit any liability
with respect

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<PAGE>

to, or settle, compromise or discharge, such Third Party Claim without the
indemnifying party's prior written consent (which consent shall not be
unreasonably withheld).

(c) In order for an Indemnitee to be entitled to any indemnification
provided for under this Agreement in respect of a claim that does not involve
a Third Party Claim, the Indemnitee shall deliver notice of such claim with
reasonable promptness to the indemnifying party. The failure by any Indemnitee
so to notify the indemnifying party shall not relieve the indemnifying party
from any liability which it may have to such Indemnitee under this Agreement,
except to the extent that the indemnifying party shall have been actually
prejudiced by such failure. If the indemnifying party has within 30 business
days from the receipt of such notice disputed its liability with respect to
such claim, as provided above, the indemnifying party and the Indemnitee shall
proceed in good faith to negotiate a resolution of such dispute and, if not
resolved through negotiations, such dispute shall be resolved by litigation in
an appropriate court of competent jurisdiction.

8.4. Certain Limitations. (a) The amount of any Indemnifiable Losses or
other liability for which indemnification is provided under this Agreement
shall be net of any amounts actually recovered by the Indemnitee from third
parties (including, without limitation, amounts actually recovered under
insurance policies) with respect to such Indemnifiable Losses or other
liability. Any indemnifying party hereunder shall be subrogated to the rights
of the Indemnitee upon payment in full of the amount of the relevant
Indemnifiable Loss. An insurer who would otherwise be obligated to pay any
claim shall not be relieved of the responsibility with respect thereto or,
solely by virtue of the indemnification provisions hereof, have any
subrogation rights with respect thereto. If any Indemnitee recovers an amount
from a third party in respect of an Indemnifiable Loss for which
indemnification is provided in this Agreement after the full amount of such
Indemnifiable Loss has been paid by an indemnifying party or after an
indemnifying party has made a partial payment of such Indemnifiable Loss and
the amount received from the third party exceeds the remaining unpaid balance
of such Indemnifiable Loss, then the Indemnitee shall promptly remit to the
indemnifying party the excess (if any) of (A) the sum of the amount
theretofore paid by the indemnifying party in respect of such Indemnifiable
Loss plus the amount received from the third party in respect thereof, less
(B) the full amount of such Indemnifiable Loss or other liability.

(b) The amount of any Indemnifiable Losses or other Liability for which
indemnification is provided under this Agreement or any other amounts payable
or reimbursable by one party to another under this Agreement shall be
increased or decreased to take account of any net Tax cost or any net Tax
benefit in a manner analogous to that described in the Tax Sharing Agreement.

8.5. Express Negligence. INSOFAR AS TEXAS LAW MAY APPLY, THE PARTIES
EXPRESSLY INTEND AND AGREE THAT THE INDEMNIFICATION OBLIGATIONS OF EACH SET
FORTH IN SECTIONS 8.1 AND 8.2 SHALL EXTEND TO AND INCLUDE, WITHOUT LIMITATION,
ACTIONS FOR INJURIES OR DAMAGES TO ANY PERSON, PARTY OR PROPERTY THAT WERE
CAUSED IN WHOLE OR IN PART BY THE INDEMNITEE'S OWN ACTS OR OMISSIONS
(SPECIFICALLY INCLUDING, BUT NOT LIMITED TO, NEGLIGENCE AND ACTS OR OMISSIONS
GIVING RISE TO STRICT LIABILITY).

ARTICLE IX
MISCELLANEOUS AND GENERAL

9.1. Modification or Amendment. The parties hereto may modify or amend this
Agreement only by written agreement executed and delivered by duly authorized
officers of the respective parties, and the written consent of the Acquiror
thereto.

9.2. Waiver; Remedies. The conditions to the Company's obligation to
consummate the Distribution are for the benefit of the Company and the
Acquiror and may be waived in whole or in part as may be agreed by the Company
and the Acquiror in writing and to the extent permitted by applicable law. No
delay on the part of any party hereto in exercising any right, power or
privilege hereunder will operate as a waiver thereof, nor will any

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waiver on the part of any party hereto of any right, power or privilege
hereunder operate as a waiver of any other right, power or privilege
hereunder, nor will any single or partial exercise of any right, power or
privilege hereunder preclude any other or further exercise thereof or the
exercise of any other right, power or privilege hereunder. Unless otherwise
provided, the rights and remedies herein provided are cumulative and are not
exclusive of any rights or remedies which the parties may otherwise have at
law or in equity.

9.3. Counterparts. For the convenience of the parties, this Agreement may be
executed in any number of separate counterparts each such counterpart being
deemed to be an original instrument, and all such counterparts shall together
constitute the same agreement.

9.4. Governing Law. This Agreement shall be governed by and construed in
accordance with the internal laws of the State of Delaware applicable to
contracts made and to be performed entirely within such State, without regard
to the conflicts of law principles of such State.

9.5. Notices. Any notice, request, instruction or other communication to be
given hereunder by any party to any other party shall be in writing and shall
be deemed to have been duly given (i) on the date of delivery if delivered
personally, or by telecopy or telefacsimile, upon confirmation of receipt,
(ii) on the first business day following the date of dispatch if delivered by
Federal Express or other nationally reputable next-day courier service, or
(iii) on the third business day following the date of mailing if delivered by
registered or certified mail, return receipt requested, postage prepaid. All
notices hereunder shall be delivered as set forth below, or pursuant to such
other instructions as may be designated in writing by the party to receive
such notice:

(a) If to VRM:

Valero Refining and Marketing Company 530 McCullough Avenue San
Antonio, Texas 78215 Attention: General Counsel Telecopy: (210) 246-
2354

with copies to:

Wachtell, Lipton, Rosen & Katz 51 West 52nd Street New York, New York
10019 Attention: Edward D. Herlihy, Esq. Telecopy: (212) 403-2000

(b) If to the Company:

Valero Energy Corporation c/o PG&E Corporation 77 Beale Street San
Francisco, California 94105 Attention: General Counsel Telecopy: (415)
973-8083

with copies to:

Orrick, Herrington & Sutcliffe, LLP 400 Sansome Street San Francisco,
California 94111 Attention: Leslie P. Jay, Esq. Telecopy: (415) 773-
5759

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9.6. Entire Agreement. The Reorganization Agreements (including the Annexes
and Schedules thereto) and the Interim Services Agreement (including the
Annexes and Schedules thereto) constitute the entire agreement, and supersede
all other prior agreements, understandings, representations and warranties,
both written and oral, among the parties, with respect to the subject matter
hereof and thereof.

9.7. Certain Obligations. Whenever this Agreement requires any of the
Subsidiaries of any party to take any action, this Agreement will be deemed to
include an undertaking on the part of such party to cause such Subsidiary to
take such action.

9.8. Assignment. No party to this Agreement shall convey, assign or
otherwise transfer any of its rights or obligations under this Agreement
without the express written consent of the other party hereto, which shall not
be unreasonably withheld or delayed, except that the Company may assign its
rights hereunder to an Affiliate or to a successor to all or substantially all
of the business of the Company as conducted at the time of the Intercompany
Reorganization.

9.9. Captions. The Article, Section and paragraph captions herein are for
convenience of reference only, do not constitute part of this Agreement and
shall not be deemed to limit or otherwise affect any of the provisions hereof.

9.10. Specific Performance. In the event of any actual or threatened default
in, or breach of, any of the terms, conditions and provisions of this
Agreement, the party or parties who are or are to be thereby aggrieved shall
have the right of specific performance and injunctive relief giving effect to
its or their rights under this Agreement, in addition to any and all other
rights and remedies at law or in equity, and all such rights and remedies
shall be cumulative. The parties agree that the remedies at law for any breach
or threatened breach, including monetary damages, are inadequate compensation
for any loss and that any defense in any action for specific performance that
a remedy at law would be adequate is waived.

9.11. Severability. If any provision of this Agreement or the application
thereof to any person or circumstance is determined by a court of competent
jurisdiction to be invalid, void or unenforceable, the remaining provisions
hereof, or the application of such provision to persons or circumstances other
than those as to which it has been held invalid or unenforceable, shall remain
in full force and effect and shall in no way be affected, impaired or
invalidated thereby, so long as the economic or legal substance of the
transactions contemplated hereby is not affected in any manner adverse to any
party. Upon any such determination, the parties shall negotiate in good faith
in an effort to agree upon a suitable and equitable substitute provision to
effect the original intent of the parties.

9.12. Third Party Beneficiaries. Acquiror shall be a third party beneficiary
of this Agreement. Nothing contained in this Agreement is intended to confer
upon any Person or entity other than the parties hereto and their respective
successors and permitted assigns (other than Acquiror), any benefit, right or
remedies under or by reason of this Agreement, except that the provisions of
Article VIII hereof shall inure to the benefit of Indemnitees.

9.13. Schedules. All Schedules attached hereto or referred to herein are
hereby incorporated in and made a part of this Agreement as if set forth in
full herein. Matters reflected on the Schedules are not necessarily limited to
matters required by this Agreement to be reflected on such Schedules. Such
additional matters are set forth for informational purposes only and do not
necessarily include other matters of a similar nature. Capitalized terms used
in any Schedule but not otherwise defined therein shall have the respective
meanings assigned to such terms in this Agreement.

9.14. Tax Sharing Agreement. With respect to Tax matters, if there is a
conflict between this Agreement and the Tax Sharing Agreement the Tax Sharing
Agreement shall control.

B-21
<PAGE>

IN WITNESS WHEREOF, this Agreement has been duly executed and delivered by
the duly authorized officers of the parties hereto as of the date first
hereinabove written.

VALERO ENERGY CORPORATION

By:
Name:
Title:

VALERO REFINING AND MARKETING COMPANY

By:
Name:
Title:

B-22
<PAGE>

APPENDIX C

LEHMAN BROTHERS

January 31, 1997

Board of Directors
Valero Energy Corporation
530 McCullough Avenue
San Antonio, Texas 78215

Members of the Board:

We understand that the Board of Directors of Valero Energy Corporation
("Valero") has approved a Plan of Distribution pursuant to which all of the
stock of Valero's wholly-owned subsidiary, Valero Refining and Marketing
Company ("VRM") will be distributed on a pro rata basis to the shareholders of
Valero (the "Spin-off"). We further understand that the Board of Directors of
Valero also has approved an Agreement and Plan of Merger, dated as of January
31, 1997 (the "Merger Agreement"), among Valero, PG&E Corporation ("PG&E") and
PG&E Acquisition Corporation, a wholly owned subsidiary of PG&E ("Merger
Sub"), pursuant to which, following the Spin-off, PG&E will acquire Valero by
means of a merger of Merger Sub with and into Valero whereby PG&E will issue
shares of its common stock valued at $722.5 million (subject to adjustment) to
the shareholders of Valero and will assume debt which, on a pro forma basis at
December 31, 1996, was approximately $777.5 million (the "Merger" and,
together with the Spin-off, the "Proposed Transaction"). As set forth in the
Merger Agreement, the total number of the shares of PG&E common stock to be
issued to the shareholders of Valero in the Merger is subject to a minimum
number of shares to be issued if the Market Price (as defined in the Merger
Agreement) of PG&E's common stock exceeds $25.875 per share and maximum number
of shares to be issued if the Market Price of PG&E's common stock declines
below $19.125 per share. For the purposes of this opinion, the consideration
to be received by the shareholders of Valero in the Proposed Transaction shall
include the shares of VRM to be received in the Spin-off and the shares of
common stock of PG&E to be received in the Merger. The terms and conditions of
the Proposed Transaction are set forth in more detail in the form of Agreement
and Plan of Distribution, attached as Annex A to the Merger Agreement (the
"Distribution Agreement") and the Merger Agreement (together, the
"Agreements").

We have been requested by the Board of Directors of Valero to render our
opinion with respect to the fairness, from a financial point of view, to the
shareholders of Valero of the consideration to be received by such
shareholders in the Proposed Transaction. We have not been requested to opine
as to, and our opinion does not in any manner address, Valero's underlying
business decision to proceed with or effect the Spin-off or the Merger.

We understand that, in conducting the process for soliciting indications of
interest and proposals from third parties with respect to an acquisition of
Valero, the Board of Directors of Valero established a set of bidding
procedures which it required all potential acquirors to adhere to in
submitting proposals for an acquisition of Valero (the "Bidding Procedures").
In arriving at our opinion, we have been instructed by the Board of Directors
of Valero to consider only those proposals received by Valero which, in the
Board of Directors' judgment, complied with the Bidding Procedures.

In arriving at our opinion, we reviewed and analyzed: (1) the Agreements and
the specific terms of the Proposed Transaction, (2) publicly available
information concerning Valero that we believe to be relevant to our analysis,
(3) financial and operating information with respect to the business,
operations and prospects of Valero and VRM furnished to us by Valero, (4) a
trading history of Valero's common stock from January 1, 1996 to the

C-1
<PAGE>

present and a comparison of that trading history with those of other companies
that we deemed relevant, (5) a comparison of the historical financial results
and present financial condition of Valero and VRM with those of other
companies that we deemed relevant, (6) publicly available information with
respect to the business, operations and financial condition of PG&E that we
believe to be relevant to our analysis, (7) a trading history of PG&E's common
stock from January 1, 1996 to the present and a comparison of PG&E's common
stock price and valuation multiples with those of other companies that we
deemed relevant, (8) research analysts' reports and earnings estimates
regarding the business, financial condition and future financial performance
of PG&E, (9) a comparison of the financial terms of the Merger with the
financial terms of certain other transactions that we deemed relevant, and
(10) the results of efforts to solicit indications of interest and proposals
from third parties with respect to an acquisition of Valero (assuming the
prior completion of the Spin-off), including an indication of interest from a
third party which may have provided for consideration to be paid to the
shareholders of Valero which may have been in excess of the consideration to
be paid pursuant to the Proposed Transaction but which, in the judgment of the
Board of Directors, did not comply with the Bidding Procedures. In addition,
we have had discussions with the management of Valero concerning the business,
operations, assets, financial condition and prospects of Valero and VRM and
with the management of PG&E, concerning its business, operations, assets,
financial condition and prospects and have undertaken such other studies,
analyses and investigations as we deemed appropriate.

In arriving at our opinion, we have assumed and relied upon the accuracy and
completeness of the financial and other information used by us without
assuming any responsibility for independent verification of such information
and have further relied upon the assurances of the management of Valero that
they are not aware of any facts or circumstances that would make such
information inaccurate or misleading. With respect to the financial
projections of Valero and VRM, upon advice of Valero, we have assumed that
such projections have been reasonably prepared on a basis reflecting the best
currently available estimates and judgments of the management of Valero as to
the future financial performance of Valero and VRM and that Valero and VRM
will each perform substantially in accordance with such projections. In
arriving at our opinion, we have not conducted a physical inspection of the
properties and facilities of Valero or VRM and have not made or obtained any
evaluations or appraisals of the assets or liabilities of Valero or VRM. In
addition, in arriving at our opinion, with your consent, we were not provided
with and did not review any projections prepared by management of PG&E
regarding its future financial performance. However, based on discussions with
PG&E, we have assumed that the publicly available budgeted earnings targets
for 1997 are a reasonable basis to evaluate and analyze the future financial
performance of PG&E. We further assumed that PG&E will perform substantially
in accordance with such targets. Upon advice of Valero and its legal and
accounting advisors, we have assumed that the Proposed Transaction will
qualify as a tax-free transaction whereby the Spin-off will qualify as a tax-
free distribution within the meaning of Section 355 of the Internal Revenue
Code of 1986, as amended, (the "Code") and the Merger shall qualify as a
reorganization within the meaning of Section 368(a)(1)(B) of the Code, and
therefore represents a tax-free transaction to the shareholders of Valero. Our
opinion necessarily is based upon market, economic and other conditions as
they exist on, and can be evaluated as of, the date of this letter.

In addition, we express no opinion as to the prices at which shares of
common stock of VRM or PG&E actually will trade following the consummation of
the Spin-off and the Merger and this opinion should not be viewed as providing
any assurance that the combined market value of the shares of common stock of
VRM to be received by a shareholder of Valero pursuant to the Spin-off and
shares of common stock of PG&E to be received by a shareholder of Valero
pursuant to the Merger will be in excess of the market value of the shares of
common stock of Valero owned by such shareholder at any time prior to
announcement or consummation of the Proposed Transaction.

Based upon and subject to the foregoing, we are of the opinion as of the
date hereof that, from a financial point of view, the consideration to be
received by the shareholders of Valero in the Proposed Transaction is fair to
such shareholders.

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<PAGE>

We have acted as financial advisor to Valero in connection with the Proposed
Transaction and will receive a fee for our services which is contingent upon
the consummation of the Proposed Transaction. In addition, Valero has agreed
to indemnify us for certain liabilities that may arise out of the rendering of
this opinion. We also have performed various investment banking services for
Valero in the past and have received customary fees for such services. In the
ordinary course of our business, we actively trade in the debt and equity
securities of Valero and PG&E for our own account and for the accounts of our
customers and, accordingly, may at any time hold a long or short position in
such securities.

This opinion is for the use and benefit of the Board of Directors of Valero
and is rendered to the Board of Directors of Valero in connection with its
consideration of the Proposed Transaction. This opinion is not intended to be
and does not constitute a recommendation to any shareholder of Valero as to
how such shareholder should vote with respect to the Proposed Transaction.

Very truly yours,

LEHMAN BROTHERS

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<PAGE>

APPENDIX D

The Comparator Group, as identified in the Report of the Compensation
Committee of the Board of Directors on Executive Compensation, included the
following companies for 1996:

Atlantic Richfield Company

Burlington Resources, In.

Citgo Petroleum Corp.

Consolidated Natural Gas Co.

Diamond Shamrock, Inc.

Enron Corp.

Freeport-McMoran Inc.

The Louisiana Land and Exploration Company

MAPCO, Inc.

Occidental Petroleum Corporation

PanEnergy Corp.

Phillips Petroleum Co.

Sonat Inc.

Tenneco, Inc.

Unocal Corporation

The Williams Company, Inc.

D-1
<PAGE>

PART II

INFORMATION NOT REQUIRED IN THE PROSPECTUS

ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS

Section 317 of the California Corporation Law (the "California Law")
provides that a corporation shall have the power to indemnify any person who
was or is a party or is threatened to be made a party to any proceeding or
action by reason of the fact that he or she is or was a director, officer,
employee or other agent of such corporation. Section 317 also grants authority
to a corporation to include in its articles of incorporation indemnification
provisions in excess of that permitted in Section 317, subject to certain
limitations.

Article SIXTH of the Registrant's Articles of Incorporation authorizes the
Registrant to provide indemnification of directors and officers through
bylaws, resolutions, agreements with agents, vote of shareholders or
disinterested directors, or otherwise, in excess of the indemnification
otherwise permitted by Section 317 of the California Law, subject only to the
applicable limits set forth in Section 204 of the California Law.

The Board of Directors of the Registrant has adopted a resolution
implementing the authority granted in Article SIXTH of the Articles of
Incorporation. The resolution provides for the indemnification of any director
and officer of the Registrant for any threatened, pending or completed action,
suit or proceeding to the fullest extent permissible under California Law and
the Articles of Incorporation, subject to the terms of any agreement between
the Registrant and such a person; provided that, no such person shall be
indemnified: (i) except to the extent that the aggregate of losses to be
indemnified exceeds the amount of such losses for which the director or
officer is paid pursuant to any director's or officer's liability insurance
policy maintained by the Registrant; (ii) for any suit or judgment resulting
from an accounting of profits made through the purchase or sale of securities
of the Registrant pursuant to Section 16(b) of the Securities Exchange Act of
1934; (iii) if a court of competent jurisdiction determines that the
indemnification is unlawful; (iv) for any acts or omissions involving
intentional misconduct or knowing and culpable violation of law; (v) for acts
or omissions that the director or officer believes to be contrary to the best
interests of the Registrant or its shareholders, or that involve the absence
of good faith; (vi) for any transaction from which the director or officer
derived an improper personal benefit; (vii) for acts or omissions that show a
reckless disregard for the director's or officer's duty to the Registrant or
its shareholders in circumstances in which the director or officer was aware,
or should have been aware, in the ordinary course of performing his or her
duties, of a risk of serious injury to the Registrant or its shareholders;
(viii) for acts or omissions that constitute an unexcused pattern of
inattention that amount to an abdication of the director's or officer's duties
to the Registrant or its shareholders; (ix) for costs, charges, expenses,
liabilities and losses arising under Section 310 or 316 of the California Law;
or (x) as to circumstances in which indemnity is expressly prohibited by
Section 317. The exclusions set forth in clauses (iv) through (x) above shall
apply only to indemnification for acts, omissions or transactions involving
breach of duty to the Registrant or its shareholders. The resolution also
provides that the Registrant shall indemnify any director or officer in
connection with (a) a proceeding (or part thereof) initiated by him or her
only if such proceeding (or part thereof) was authorized by the Board of
Directors or (b) a proceeding (or part thereof), other than a proceeding by or
in the name of the Registrant to procure a judgment in its favor, only if any
settlement of such a proceeding is approved in writing by the Registrant.
Indemnification shall cover all costs, charges, expenses, liabilities and
losses, including, without limitation, attorneys' fees, judgments, fines,
ERISA excise taxes, or penalties and amounts paid or to be paid in settlement,
reasonably incurred or suffered by the director or officer.

The Registrant has directors' and officers' liability insurance policies in
force insuring directors and officers of the Registrant and its subsidiaries.

II-1
<PAGE>

ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a) Exhibits.

<C> <S>
2.1 Agreement and Plan of Merger, dated as of January 31, 1997, as amended,
by and among Valero, the Registrant and PG&E Acquisition, included as
Appendix A in the Proxy Statement-Prospectus included as part of this
Registration Statement. The Registrant agrees to furnish supplementally
a copy of any omitted exhibit or schedule to the Commission upon
request.
2.2 Form of Distribution Agreement between Valero and New Valero included as
Appendix B in the Proxy Statement-Prospectus included as part of this
Registration Statement. The Registrant agrees to furnish supplementally
a copy of any omitted exhibit or schedule to the Commission upon
request.
2.3 Form of Tax Sharing Agreement among Registrant, Valero and New Valero.
The Registrant agrees to furnish supplementally a copy of any omitted
exhibit or schedule to the Commission upon request.
2.4 Form of Employee Benefits Agreement between Valero and New Valero. The
Registrant agrees to furnish supplementally a copy of any omitted
exhibit or schedule to the Commission upon request.
3.1 Registrant's Restated Articles of Incorporation, as amended to date
(Registration Statement on Form 8-B (File No. 1-12609), Exhibit 3.1).
3.2 Registrant's ByLaws, as amended to date (Registration Statement on Form
8-B (File No. 1-12609), Exhibit 3.2).
5.1 Opinion of Orrick, Herrington & Sutcliffe LLP as to the legality of the
shares being issued.
8.1 Opinion of Wachtell, Lipton, Rosen & Katz as to certain tax matters.
8.2 Opinion of Orrick, Herrington & Sutcliffe LLP as to certain tax matters.
10.1 Firm Transportation Service Agreement between Pacific Gas and Electric
Company and Pacific Gas Transmission Company dated October 26, 1993
(PG&E Co.'s Form 10-K for fiscal year 1993 (File No. 1-2348), Exhibit
10.4), rate schedule FTS-1, and general terms and conditions.
10.2 Transportation Service Agreement as Amended and Restated between Pacific
Gas and Electric Company and El Paso Natural Gas Company dated November
1, 1993 (PG&E Co.'s Form 10-K for fiscal year 1993 (File No. 1-2348),
Exhibit 10.5), rate schedule FT-1, and general terms and conditions.
(PG&E Co.'s Form 10-K for fiscal year 1995 (File No. 1-2348, Exhibit
10.2)
10.3 Diablo Canyon Settlement Agreement (Diablo Settlement) dated June 24,
1988 (PG&E Co.'s Form 8-K dated June 27, 1988) (File No. 1-2348),
Exhibit 10.1), Implementing Agreement dated July 15, 1988 (PG&E Co.'s
Form 10-Q for the quarter ended June 30, 1988 (File No. 1-2348), Exhibit
10.1), portions of the California Public Utilities Commission Decision
No. 88-12-083, dated December 19, 1988, interpreting the Diablo
Settlement (PG&E Co.'s Form 10-K for fiscal year 1988 (File No. 1-2348),
Exhibit 10.4) and Settlement Agreement dated December 14, 1994,
modifying the Diablo Settlement (PG&E Co.'s Form 10-K for fiscal year
1995 (File No. 1-2348), Exhibit 10.3).
*10.4 Pacific Gas and Electric Company Deferred Compensation Plan for
Directors (PG&E Co.'s Form 10-K for fiscal year 1992 (File No. 1-2348),
Exhibit 10.5).
*10.5 PG&E Corporation Deferred Compensation Plan for Directors (Registration
Statement on Form 8-B (File No. 1-12609), Exhibit 10.5).
*10.6 Pacific Gas and Electric Company Deferred Compensation Plan for Officers
(PG&E Co.'s Form 10-K for fiscal year 1991 (File No. 102348), Exhibit
10.6).
*10.7 Savings Fund Plan for Employees of Pacific Gas and Electric Company
applicable to non-union employees, as amended and restated effective as
of January 1, 1997. (Registration Statement on Form 8-B (File No. 1-
12609), Exhibit 10.7).
</TABLE>

II-2
<PAGE>

<C> <S>
*10.8 Short-Term Incentive Plan for Officers of Pacific Gas and Electric
Company, effective January 1, 1996 (PG&E Co.'s Form 10-K for fiscal
year 1995 (File No. 1-2348), Exhibit 10.7).
*10.9 The Pacific Gas and Electric Company Retirement Plan applicable to non-
union employees, as amended October 18, 1995, effective January 1, 1996
(PG&E Co.'s Form 10-K for fiscal year 1995
(File No. 1-2348), Exhibit 10.8).
*10.10 Pacific Gas and Electric Company Supplemental Executive Retirement
Plan, as amended through October 16, 1991 (PG&E Co.'s Form 10-K for
fiscal year 1991 (File No. 1-2348), Exhibit 10.11).
*10.11 Pacific Gas and Electric Company Relocation Assistance Program for
Officers (PG&E Co.'s Form 10-K for fiscal year 1993 (File No. 1-2348),
Exhibit 10.16).
*10.12 Pacific Gas and Electric Company Executive Flexible Perquisites Program
(PG&E Co.'s Form 10-K for fiscal year 1993 (File No. 1-2348), Exhibit
10.16).
*10.13 Pacific Gas and Electric Company Postretirement Life Insurance Plan
(PG&E Co.'s Form 10-K for fiscal year 1991 (File No. 1-2348), Exhibit
10.16).
*10.14 PG&E Corporation Retirement Plan for Non-Employee Directors
(Registration Statement on Form 8-B (File No. 1-12609), Exhibit 10.14).
*10.15 Pacific Gas and Electric Company Retirement Plan for Non-Employee
Directors (Registration Statement on Form 8-B (File No. 1-12609),
Exhibit 10.15).
*10.16 Executive Compensation Insurance Indemnity in respect of Deferred
Compensation Plan for Directors, Deferred Compensation Plan for
Officers, Supplemental Executive Retirement Plan and Retirement Plan
for Non-Employee Directors (PG&E Co.'s Form 10-K for fiscal year 1991
(File No. 1-2348), Exhibit 10.19).
*10.17 PG&E Corporation Long-Term Incentive Program, as amended and restated
effective as of January 1, 1997, including the PG&E Corporation Stock
Option Plan, Performance Unit Plan and Restricted Stock Plan for Non-
Employee Directors (Registration Statement on Form 8-B (File No. 1-
12609), Exhibit 10.17).
11. Computation of Earnings Per Common Share (Form 10-K for fiscal year
1996 (File No. 1-12609), Exhibit 11).
21. List of Subsidiaries of Registrant (Form 10-K for fiscal year 1996
(File No. 1-12609), Exhibit 21).
23.1 Consent of Arthur Andersen LLP with respect to Registrant.
23.2 Consent of Arthur Andersen LLP with respect to Valero.
23.3 Consent of Arthur Andersen LLP with respect to Basis Petroleum.
23.4 Consent of Orrick, Herrington & Sutcliffe LLP (included in Exhibit
5.1).
23.5 Consent of Wachtell, Lipton, Rosen & Katz (included in Exhibit 8.1).
23.6 Consent of Orrick, Herrington & Sutcliffe LLP (included in Exhibit
8.2).
23.7 Consent of Lehman Brothers, Inc.
24.1 Powers of Attorney.
24.2 Resolution of the Board of Directors of Registrant.
</TABLE>
- --------
* Management contract or compensatory plan or arrangement required to be
filed as an exhibit to this Registration Statement pursuant to Item 21(a)
of Form S-4.

(b) Financial Statement Schedules.

Not applicable.

Opinion of Lehman Brothers, Inc. (included as Appendix C in the Proxy
Statement-Prospectus included as part of this Registration Statement).

II-3
<PAGE>

ITEM 22. UNDERTAKINGS

(a) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the provisions described under Item 20, or
otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer
or controlling person of the Registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication
of such issue.

(b) The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
Registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
Registration Statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.

(c) The undersigned Registrant hereby undertakes as follows: that prior to
any public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this Registration Statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c),
the issuer undertakes that such reoffering prospectus will contain the
information called for by the applicable registration form with respect to
reofferings by persons who may be deemed underwriters, in addition to the
information called for by the other items of the applicable form.

(d) The Registrant undertakes that every prospectus: (i) that is filed
pursuant to paragraph (c) immediately preceding, or (ii) that purports to meet
the requirements of Section 10(a)(3) of the Act and is used in connection with
an offering of securities subject to Rule 415, will be filed as a part of an
amendment to the Registration Statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities offering
therein, and the offering of such securities at that time shall be deemed to
be the initial bona fide offering thereof.

(e) The undersigned Registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Item 4, 10(b), 11 or 13 of this Form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the Registration Statement through
the date of responding to the request.

(f) The undersigned Registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the Registration Statement when it became effective.

(g) The undersigned Registrant hereby undertakes:

1. To file during any period in which offers and sales are being made, a
post-effective amendment to this Registration Statement:

(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;

(ii) To reflect in the prospectus any facts or events arising after
the effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in

II-4
<PAGE>

the aggregate, represent a fundamental change in the information set
forth in the Registration Statement; and

(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the Registration Statement or
any material change to such information in the Registration Statement.

2. That for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.

3. To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination
of the offering.

II-5
<PAGE>

SIGNATURES

Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of San Francisco, State of
California, on May 13, 1997.

PG&E CORPORATION

Gary P. Encinas
By: _________________________________
(Gary P. Encinas, Attorney-in-Fact)

Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
A.PRINCIPAL EXECUTIVE OFFICER OR OFFICERS

<S> <C> <C>
*STANLEY T. SKINNER Chairman of the Board, May 13, 1997
Chief Executive Officer
and Director

B.PRINCIPAL FINANCIAL OFFICER
*GORDON R. SMITH Chief Financial Officer May 13, 1997

C.PRINCIPAL ACCOUNTING OFFICER
*CHRISTOPHER P. JOHNS Controller May 13, 1997

D.DIRECTORS

*ROBERT D. GLYNN, JR.
*RICHARD A. CLARKE
*H. M. CONGER
*MARY S. METZ
*C. LEE COX
*BARRY LAWSON WILLIAMS
Directors May 13, 1997
*REBECCA Q. MORGAN
*RICHARD B. MADDEN
*JOHN C. SAWHILL
*DAVID M. LAWRENCE
*ALAN SEELENFREUND
*SAMUEL T. REEVES
*CARL E. REICHARDT
</TABLE>

Gary P. Encinas
*By: ____________________________
(Gary P. Encinas, Attorney-in-
Fact)

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<PAGE>

EXHIBIT INDEX

Exhibits required by S-K item 601:

<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
-------------- -----------
<C> <S>
2.1 Agreement and Plan of Merger, dated as of January 31, 1997, as
amended, by and among Valero, the Registrant and PG&E
Acquisition, included as Appendix A in the Proxy Statement-
Prospectus included as part of this Registration Statement. The
Registrant agrees to furnish supplementally a copy of any
omitted exhibit or schedule to the Commission upon request.
2.2 Form of Distribution Agreement between Valero and New Valero
included as Appendix B in the Proxy Statement-Prospectus
included as part of this Registration Statement. The Registrant
agrees to furnish supplementally a copy of any omitted exhibit
or schedule to the Commission upon request.
2.3 Form of Tax Sharing Agreement among Registrant, Valero and New
Valero. The Registrant agrees to furnish supplementally a copy
of any omitted exhibit or schedule to the Commission upon
request.
2.4 Form of Employee Benefits Agreement between Valero and New
Valero. The Registrant agrees to furnish supplementally a copy
of any omitted exhibit or schedule to the Commission upon
request.
3.1 Registrant's Restated Articles of Incorporation, as amended to
date (Registration Statement on Form 8-B (File No. 1-12609),
Exhibit 3.1).
3.2 Registrant's ByLaws, as amended to date (Registration Statement
on Form 8-B (File No. 1-12609), Exhibit 3.2).
5.1 Opinion of Orrick, Herrington & Sutcliffe LLP as to the
legality of the shares being issued.
8.1 Opinion of Wachtell, Lipton, Rosen & Katz as to certain tax
matters.
8.2 Opinion of Orrick, Herrington & Sutcliffe LLP as to certain tax
matters.
10.1 Firm Transportation Service Agreement between Pacific Gas and
Electric Company and Pacific Gas Transmission Company dated
October 26, 1993 (PG&E Co.'s Form 10-K for fiscal year 1993
(File No. 1-2348), Exhibit 10.4), rate schedule FTS-1, and
general terms and conditions.
10.2 Transportation Service Agreement as Amended and Restated
between Pacific Gas and Electric Company and El Paso Natural
Gas Company dated November 1, 1993 (PG&E Co.'s Form 10-K for
fiscal year 1993 (File No. 1-2348), Exhibit 10.5), rate
schedule FT-1, and general terms and conditions. (PG&E Co.'s
Form 10-K for fiscal year 1995 (File No. 1-2348, Exhibit 10.2)
10.3 Diablo Canyon Settlement Agreement (Diablo Settlement) dated
June 24, 1988 (PG&E Co.'s Form 8-K dated June 27, 1988) (File
No. 1-2348), Exhibit 10.1), Implementing Agreement dated July
15, 1988 (PG&E Co.'s Form 10-Q for the quarter ended June 30,
1988 (File No. 1-2348), Exhibit 10.1), portions of the
California Public Utilities Commission Decision No. 88-12-083,
dated December 19, 1988, interpreting the Diablo Settlement
(PG&E Co.'s Form 10-K for fiscal year 1988 (File No. 1-2348),
Exhibit 10.4) and Settlement Agreement dated December 14, 1994,
modifying the Diablo Settlement (PG&E Co.'s Form 10-K for
fiscal year 1995 (File No. 1-2348), Exhibit 10.3).
*10.4 Pacific Gas and Electric Company Deferred Compensation Plan for
Directors (PG&E Co.'s Form 10-K for fiscal year 1992 (File No.
1-2348), Exhibit 10.5).
*10.5 PG&E Corporation Deferred Compensation Plan for Directors
(Registration Statement on Form 8-B (File No. 1-12609), Exhibit
10.5).
</TABLE>

1
<PAGE>

<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
-------------- -----------
<C> <S>
*10.6 Pacific Gas and Electric Company Deferred Compensation Plan for
Officers (PG&E Co.'s Form 10-K for fiscal year 1991 (File No.
102348), Exhibit 10.6).
*10.7 Savings Fund Plan for Employees of Pacific Gas and Electric
Company applicable to non-union employees, as amended and
restated effective as of January 1, 1997. (Registration
Statement on Form 8-B (File No. 1-12609), Exhibit 10.7).
*10.8 Short-Term Incentive Plan for Officers of Pacific Gas and
Electric Company, effective January 1, 1996 (PG&E Co.'s Form
10-K for fiscal year 1995 (File No. 1-2348), Exhibit 10.7).
*10.9 The Pacific Gas and Electric Company Retirement Plan applicable
to non-union employees, as amended October 18, 1995, effective
January 1, 1996 (PG&E Co.'s Form 10-K for fiscal year 1995
(File No. 1-2348), Exhibit 10.8).
*10.10 Pacific Gas and Electric Company Supplemental Executive
Retirement Plan, as amended through October 16, 1991 (PG&E
Co.'s Form 10-K for fiscal year 1991 (File No. 1-2348), Exhibit
10.11).
*10.11 Pacific Gas and Electric Company Relocation Assistance Program
for Officers (PG&E Co.'s Form 10-K for fiscal year 1993 (File
No. 1-2348), Exhibit 10.16).
*10.12 Pacific Gas and Electric Company Executive Flexible Perquisites
Program (PG&E Co.'s Form 10-K for fiscal year 1993 (File No. 1-
2348), Exhibit 10.16).
*10.13 Pacific Gas and Electric Company Postretirement Life Insurance
Plan (PG&E Co.'s Form 10-K for fiscal year 1991 (File No. 1-
2348), Exhibit 10.16).
*10.14 PG&E Corporation Retirement Plan for Non-Employee Directors
(Registration Statement on Form 8-B (File No. 1-12609), Exhibit
10.14).
*10.15 Pacific Gas and Electric Company Retirement Plan for Non-
Employee Directors (Registration Statement on Form 8-B (File
No. 1-12609), Exhibit 10.15).
*10.16 Executive Compensation Insurance Indemnity in respect of
Deferred Compensation Plan for Directors, Deferred Compensation
Plan for Officers, Supplemental Executive Retirement Plan and
Retirement Plan for Non-Employee Directors (PG&E Co.'s Form 10-
K for fiscal year 1991 (File No. 1-2348), Exhibit 10.19).
*10.17 PG&E Corporation Long-Term Incentive Program, as amended and
restated effective as of January 1, 1997, including the PG&E
Corporation Stock Option Plan, Performance Unit Plan and
Restricted Stock Plan for Non-Employee Directors (Registration
Statement on Form 8-B (File No. 1-12609), Exhibit 10.17).
11. Computation of Earnings Per Common Share (Form 10-K for fiscal
year 1996 (File No. 1-12609), Exhibit 11).
21. List of Subsidiaries of Registrant (Form 10-K for fiscal year
1996 (File No. 1-12609), Exhibit 21).
23.1 Consent of Arthur Andersen LLP with respect to Registrant.
23.2 Consent of Arthur Andersen LLP with respect to Valero.

23.3 Consent of Arthur Andersen LLP with respect to Basis Petroleum.

23.4 Consent of Orrick, Herrington & Sutcliffe LLP (included in
Exhibit 5.1).
23.5 Consent of Wachtell, Lipton, Rosen & Katz (included in Exhibit
8.1).
23.6 Consent of Orrick, Herrington & Sutcliffe LLP (included in
Exhibit 8.2).
23.7 Consent of Lehman Brothers, Inc.
24.1 Powers of Attorney.
24.2 Resolution of the Board of Directors of Registrant.
</TABLE>
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* Management contract or compensatory plan or arrangement required to be filed
as an exhibit to this Registration Statement pursuant to Item 21(a) of Form
S-4.

<PAGE>

EXHIBIT 2.3

TAX SHARING AGREEMENT

among

Valero Energy Corporation

Valero Refining and Marketing Company

and

PG&E Corporation
<PAGE>

TABLE OF CONTENTS
<TABLE>
<CAPTION>

Page

<S> <C> <C>
SECTION 1. DEFINITION OF TERMS............................................ 1

SECTION 2. ALLOCATION OF TAX LIABILITIES.................................. 6

2.01 General Rule................................................... 6
2.02 Allocation of Federal Income Tax............................... 6
2.03 Allocation of State Income Taxes............................... 7
2.04 Allocation of Other Taxes...................................... 8
2.05 Transaction Taxes.............................................. 9

SECTION 3. ALLOCATION OF TAX CREDIT CARRYFORWARDS......................... 10

3.01 Allocation of Alternative Minimum Tax
Credit Carryforwards.......................................... 10
3.02 Allocation of Other Credit Carryforwards....................... 10

SECTION 4. PREPARATION AND FILING OF TAX RETURNS.......................... 11

4.01 General........................................................ 11
4.02 Refining's Responsibility...................................... 11
4.03 Valero's Responsibility........................................ 11
4.04 Consistent Tax Accounting Practices............................ 12
4.05 Consolidated or Combined Return................................ 12
4.06 Right to Review Tax Returns.................................... 12
4.07 Claims for Refund, Carrybacks, and Self-Audit Adjustments...... 13

SECTION 5. TAX PAYMENTS AND INTERCOMPANY BILLINGS......................... 14

5.01 Payment of Taxes with Respect to Valero Federal
Consolidated Income Tax Returns Filed After the Time of
Distribution.................................................. 14
5.02 Payment of Federal Income Tax Related to Adjustments........... 15
5.03 Payment of Consolidated or Combined State Income Tax
With Respect to Returns Filed After the Time of Distribution.. 16
5.04 Payment of State Income Taxes Related to Adjustments........... 16
5.05 Payment of Separate Company Taxes.............................. 17

SECTION 6. TAX BENEFITS FOR ACCOUNT OF OTHER PARTY........................ 17

SECTION 7. ASSISTANCE AND COOPERATION..................................... 18

7.01 General........................................................ 18
7.02 Income Tax Return Information.................................. 18
</TABLE>

i
<PAGE>

<TABLE>
<S> <C> <C>
SECTION 8. TAX RECORDS.................................................... 18

SECTION 9. TAX CONTESTS................................................... 19

9.01 Notices........................................................ 19
9.02 Control of Tax Contest......................................... 20

SECTION 10. EFFECTIVE DATE; TERMINATION OF PRIOR INTERCOMPANY TAX
ALLOCATION AGREEMENTS

SECTION 11. NO INCONSISTENT ACTIONS........................................ 20

SECTION 12. SURVIVAL OF OBLIGATIONS........................................ 21

SECTION 13. EMPLOYEE MATTERS............................................... 22

SECTION 14. TREATMENT OF PAYMENTS; TAX GROSS UP............................ 22

SECTION 15. DISAGREEMENTS.................................................. 22

SECTION 16. LATE PAYMENTS.................................................. 23

SECTION 17. EXPENSES....................................................... 23

SECTION 18. GENERAL PROVISIONS............................................. 23
</TABLE>

ii
<PAGE>

TAX SHARING AGREEMENT

This Agreement is made and entered into as of ______________, 1997 by
and between Valero Energy Corporation, a Delaware corporation ("Valero"), Valero
Refining and Marketing Company, a Delaware corporation ("Refining") and PG&E
Corporation, a California corporation ("Acquiror"). Valero and Refining are
sometimes collectively referred to herein as the "Companies." Capitalized terms
used in this Agreement are defined in Section 1 below. Unless otherwise
indicated, all "Section" references in this Agreement are to sections of this
Agreement.

RECITALS

WHEREAS, as of the date hereof, Valero is the common parent of an
affiliated group of corporations, including Refining, which has elected to file
consolidated federal income tax returns; and

WHEREAS, the Companies have entered into a Distribution Agreement
setting forth the corporate transaction pursuant to which Valero will distribute
Refining's common stock to Valero shareholders in a transaction intended to
qualify as a tax-free distribution under Section 355 of the Code; and

WHEREAS, as a result of the Distribution, Refining and its respective
subsidiaries, will cease to be members of the affiliated group of which Valero
is the common parent, effective as of the Time of Distribution; and

WHEREAS, the Companies desire to provide for and agree upon the
allocation between the parties of liabilities for Taxes arising prior to, as a
result of, and subsequent to the transaction contemplated by the Distribution
Agreement, and to provide for and agree upon other matters relating to Taxes;

NOW THEREFORE, in consideration of the mutual promises, covenants and
conditions contained herein, the Companies and Acquiror hereby agree as follows:

SECTION 1. DEFINITION OF TERMS. For purposes of this Agreement
(including the recitals hereof), the following terms have the following
meanings.

"ACCOUNTING FIRM" shall have the meaning provided in Section 15.

"ACQUIROR" means PG&E Corporation, a California corporation.

"ADJUSTMENT REQUEST" means any formal or informal claim or request
filed with any Tax Authority or with any ad-

-1-
<PAGE>

ministrative agency or court, for the adjustment, refund, or credit of Taxes,
including (a) any amended Tax Return claiming adjustment to the Taxes as
reported on the Tax Return or, if applicable, as previously adjusted, or (b) any
claim for refund or credit of Taxes previously paid.

"AGREEMENT" shall mean this Tax Sharing Agreement.

"ALLOCATED FEDERAL TAX LIABILITY" shall have the meaning provided in
Section 5.01(b)(i).

"CARRYBACK" means any net operating loss, net capital loss, excess tax
credit or other similar Tax Item which may or must be carried from one Tax
Period to another Tax Period under the Code or other applicable Tax Law.

"CODE" means the United States Internal Revenue Code of 1986, as
amended, or any successor law.

"COMPANIES" means Valero and Refining, collectively, and "COMPANY"
means any one of Valero or Refining.

"CONSOLIDATED OR COMBINED INCOME TAX" means any Income Tax computed by
reference to the assets and activities of members of more than one Group.

"CONSOLIDATED TAX LIABILITY" means, with respect to any Valero Federal
Consolidated Income Tax Return, the "tax liability of the group" as that term is
used in Treasury Regulation Section 1.1552-1(a) and any interest, penalties,
additions to tax, or additional amounts in respect thereto; provided that such
tax liability shall be treated as including any alternative minimum tax
liability under Code Section 55; and provided further that in the case of the
Tax Period which includes the Time of Distribution, the Consolidated Tax
Liability shall be computed as if the Time of Distribution were the last day of
the Tax Period.

"CUMULATIVE FEDERAL TAX PAYMENT" shall have the meaning provided in
Section 5.01(b)(ii).

"DISTRIBUTION AGREEMENT" means the agreement setting forth the
corporate transaction required to effect the distribution to Valero
shareholders of all the outstanding common stock of Refining, and to which this
Agreement is attached as an exhibit.

"DISTRIBUTION" means the distribution to Valero shareholders at the
Time of Distribution of all of the outstanding common stock of Refining owned
by Valero.

"EFFECTIVE TIME" shall have the meaning provided in the Merger
Agreement.

"FEDERAL INCOME TAX" means any Tax imposed by Subtitle A of the Code.

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<PAGE>

"GROUP" means the Valero Group or the Refining Group, as the context
requires.

"INCOME TAX" means any Federal Income Tax or State Income Tax.

"MERGER" means the merger of [PG&E SubCo] with and into Valero as
described in the Merger Agreement.

"MERGER AGREEMENT" means the Agreement and Plan of Merger between
Valero and Acquiror and [PG&E SubCo] dated as of ____________ 1997.

"PAYMENT DATE" means (i) with respect to any Valero Federal
Consolidated Income Tax Return, the due date for any required installment of
estimated taxes determined under Code Section 6655, the due date (determined
without regard to extensions) for filing the return determined under Code
Section 6072, and the date the return is filed, and (ii) with respect to any Tax
Return for any Consolidated or Combined State Income Tax, the corresponding
dates determined under the applicable Tax Law.

"POST-DISTRIBUTION PERIOD" means any Tax Period beginning after the
Time of Distribution.

"PRE-DISTRIBUTION PERIOD" means any Tax Period ending on or before the
Time of Distribution.

"PRIME RATE" means the base rate on corporate loans charged by
Citibank, N.A., New York, New York from time to time, compounded daily on the
basis of a year of 365 or 366 (as applicable) days and actual days elapsed.

"PRIOR INTERCOMPANY TAX ALLOCATION AGREEMENTS" means any written or
oral agreement or any other arrangements relating to allocation of Taxes
existing between or among the Valero Group, and the Refining Group as of the
Time of Distribution (other than this Agreement and other than any such
agreement or arrangement between or among persons who are members of a single
Group).

"PROHIBITED ACTION" shall have the meaning provided in Section 11.

"REFINING" means Valero Refining and Marketing Company, a Delaware
corporation, and any successor.

"REFINING ADJUSTMENT" means any proposed adjustment by a Tax Authority
or any claim for a Tax refund to the extent the Refining Group would be
exclusively liable for any resulting Tax under this Agreement and exclusively
entitled to receive any resulting Tax Benefit under this Agreement.

"REFINING GROUP" means the VRM Group as that term is defined in the
Distribution Agreement.

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<PAGE>

"REFINING GROUP PRIOR FEDERAL TAX LIABILITY" shall have the meaning
provided in Section 2.02(b)(ii).

"REFINING GROUP PRIOR STATE TAX LIABILITY" shall have the meaning
provided in Section 2.03(b)(ii)(B).

"REFINING GROUP RECOMPUTED FEDERAL TAX LIABILITY" shall have the
meaning provided in Section 2.02(b)(i).

"REFINING GROUP RECOMPUTED STATE TAX LIABILITY" shall have the meaning
provided in Section 2.03(b)(ii)(A).

"RESPONSIBLE COMPANY" means, with respect to any Tax Return, the
Company having responsibility for preparing and filing such Tax Return under
this Agreement.

"SEPARATE COMPANY TAX" means any Tax computed by reference to the
assets and activities of a member or members of a single Group.

"STATE INCOME TAX" means any Tax imposed by any State of the United
States or by any political subdivision of any such State which is imposed on or
measured by net income, including state and local franchise or similar Taxes
measured by net income.

"SUBSIDIARY" shall have the meaning set forth in the Merger Agreement.

"TAX" or "TAXES" means any income, gross income, gross receipts,
profits, capital stock, franchise, withholding, payroll, social security,
workers compensation, unemployment, disability, property, ad valorem, stamp,
excise, occupation, service, sales, use, license, lease, transfer, import,
export, value added, alternative minimum, estimated or other similar tax
(including any fee, assessment, or other charge in the nature of or in lieu of
any tax) imposed by any governmental entity or political subdivision thereof,
and any interest, penalties, additions to tax, or additional amounts in respect
of the foregoing.

"TAX AUTHORITY" means, with respect to any Tax, the governmental
entity or political subdivision thereof that imposes such Tax and the agency (if
any) charged with the collection of such Tax for such entity or subdivision.

"TAX BENEFIT" means any refund, credit, or other reduction in
otherwise required Tax payments (including any reduction in estimated tax
payments).

"TAX CONTEST" means an audit, review, examination, or any other
administrative or judicial proceeding with the purpose or effect of
redetermining Taxes of any of the Companies or their Subsidiaries (including any
administrative or judicial review of

-4-
<PAGE>

any claim for refund) for any Tax Period ending on or before the Time of
Distribution.

"TAX ITEM" means, with respect to any Income Tax, any item of income,
gain, loss, expense, or credit.

"TAX LAW" means the law of any governmental entity or political
subdivision thereof relating to any Tax.

"TAX OPINION" means the opinion letter to be issued by Valero's tax
counsel as required by the Merger Agreement.

"TAX PERIOD" means, with respect to any Tax, the period for which the
Tax is reported as provided under the Code or other applicable Tax Law.

"TAX RECORDS" means Tax Returns, Tax Return work-papers, documentation
relating to any Tax Contests, and any other books of account or records required
to be maintained, or that have been maintained, under the Code or other
applicable Tax Laws or under any record retention agreement with any Tax
Authority.

"TAX RETURN" means any report of Taxes due, any claims for refund of
Taxes paid, any information return with respect to Taxes, or any other similar
report, statement, declaration, or document required to be filed under the Code
or other Tax Law, including any attachments, exhibits, or other materials
submitted with any of the foregoing and including any amendments or supplements
to any of the foregoing.

"TIME OF DISTRIBUTION" means the Time of Distribution as that term is
defined in the Distribution Agreement.

"TRANSACTION" means the events contemplated by the Distribution
Agreement and by the Merger Agreement.

"TREASURY REGULATIONS" means the regulations promulgated from time to
time under the Code as in effect for the relevant Tax Period.

"VALERO" means Valero Energy Corporation, a Delaware corporation, and
any successor.

"VALERO ADJUSTMENT" means any proposed adjustment by a Tax Authority
or any claim for a Tax refund to the extent the Valero Group would be
exclusively liable for any resulting Tax under this agreement and exclusively
entitled to receive any resulting Tax Benefit under this Agreement.

"VALERO FEDERAL CONSOLIDATED INCOME TAX RETURN" means any United
States federal Tax Return for the affiliated group (as that term is defined in
Code Section 1504) that includes Valero as the common parent and includes any
member of the Refining Group.

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<PAGE>

"VALERO GROUP" means the Company Group as that term is defined in the
Distribution Agreement.

"VNG DECEMBER 31, 1996 BALANCE SHEET" means the VNG December 31, 1996
Balance Sheet as that term is defined in the Merger Agreement.

SECTION 2. ALLOCATION OF TAX LIABILITIES. The provisions of this
Section 2 are intended to determine each Company's liability for Taxes with
respect to Pre-Distribution Periods. Once the liability has been determined
under this Section 2, Section 5 determines the time when payment of the
liability is to be made, and whether the payment is to be made to the Tax
Authority directly or to another Company.

2.01 GENERAL RULE.

(a) Valero Liability. The Valero Group shall be liable for all Taxes
not specifically allocated to the Refining Group under this Section 2. Valero
shall indemnify and hold harmless the Refining Group from and against any
liability for Taxes for which the Valero Group is liable under this Section
2.01(a).

(b) Refining Liability. Refining shall be liable for, and shall
indemnify and hold harmless the Valero Group from and against any liability for
Taxes which are allocated to the Refining Group under this Section 2.

2.02 ALLOCATION OF FEDERAL INCOME TAX. Except as provided in
Sections 2.04 and 2.05, Federal Income Tax shall be allocated as follows:

(a) Allocation of Tax Reported on Valero Federal Consolidated Income
Tax Returns Filed After the Time of Distribution. With respect to any Valero
Federal Consolidated Income Tax Return filed after the Time of Distribution, the
Consolidated Tax Liability shall be allocated among the Valero and Refining
Groups in accordance with the method prescribed in Treasury Regulation Sections
1.1502-33(d)(3) and 1.1552-1(a)(2) (as in effect on the date hereof) determined
by treating each Group as a single member of the consolidated group. For
purposes of such allocation the fixed percentage of additional amounts to be
allocated under Treasury Regulation Section 1.1502-33(d)(3)(i) shall be 100%.
Any amount so allocated to the Refining Group shall be a liability of Refining
to Valero under this Section 2. Amounts described in Code Section 1561 (relating
to limitations on certain multiple benefits) shall be divided equally among the
Valero Group and the Refining Group to the extent permitted by the Code.

(b) Allocation of Valero Federal Consolidated Income Tax Return Tax
Adjustments. If there is any adjustment to the reported Consolidated Tax
Liability with respect to any Valero

-6-
<PAGE>

Federal Consolidated Income Tax Return, or to such Consolidated Tax Liability as
previously adjusted, Refining shall be liable to Valero for the excess (if any)
of:

(i) the Consolidated Tax Liability that would have been allocated to
the Refining Group in accordance with Section 2.02(a), taking into account
any adjustments to the reported Consolidated Tax Liability, or to such
Consolidated Tax Liability as previously adjusted (the "Refining Group
Recomputed Federal Tax Liability"); over

(ii) the Consolidated Tax Liability allocated to the Refining Group in
accordance with Section 2.02(a) based on the return as filed (or if
applicable, as previously adjusted) (the "Refining Group Prior Federal Tax
Liability").

If the Refining Group Prior Federal Tax Liability exceeds the Refining Group
Recomputed Federal Tax Liability, Valero shall be liable to Refining for such
excess.

2.03 ALLOCATION OF STATE INCOME TAXES. Except as provided in
Sections 2.04 and 2.05, State Income Taxes shall be allocated as follows:

(a) Separate Company Taxes. In the case of any State Income Tax which
is a Separate Company Tax, Refining shall be liable for such Tax imposed on any
members of the Refining Group, and Valero shall be liable for such Tax imposed
on any members of the Valero Group.

(b) Consolidated or Combined State Income Taxes. In the case of any
Consolidated or Combined State Income Tax, the liability of Refining with
respect to such Tax for any Tax Period shall be computed as follows:

(i) Allocation of Tax Reported on Tax Returns Filed after the Time of
Distribution. In the case of any Consolidated or Combined State Income
Tax reported on any Tax Return filed after the Time of Distribution,
Refining shall be liable to Valero for the excess (if any) of:

(A) the State Income Tax liability computed by including all
members of the Valero and Refining Groups in the filing of a
Consolidated or Combined Tax Return based on the income, apportionment
factors, and other items of such members; over

(B) the State Income Tax liability computed as if only the Valero
Group members had filed a Consolidated or Combined Tax Return based
upon the income, apportionment factors, and other items of such
members.

(ii) Allocation of Consolidated or Combined State Income Tax
Adjustments. If there is any adjustment to the amount of Consolidated or
Combined State Income Tax reported

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<PAGE>

on any Tax Return (or as previously adjusted), Refining shall be liable to
Valero for the excess (if any) of:

(A) the State Income Tax liability computed as if all members of
the Refining Group included in the Tax Return had filed a Consolidated
or Combined Tax Return based upon the income, apportionment factors,
and other items of such members as so adjusted (the "Refining Group
Recomputed State Tax Liability"); over

(B) the State Income Tax liability computed as if all members of
the Refining Group included in the Tax Return had filed a Consolidated
or Combined Tax Return based upon the income, apportionment factors,
and other items of such members as previously reported (or, if
applicable, as previously adjusted) (the "Refining Group Prior State
Tax Liability").

If the Refining Group Prior State Tax Liability exceeds the Refining Group
Recomputed State Tax Liability, Valero shall be liable to Refining for such
excess.

2.04 ALLOCATION OF OTHER TAXES. Except as provided in this Section
2.04 or Section 2.05, all Taxes other than those specifically allocated pursuant
to Section 2.02 or 2.03 shall be allocated based on the legal entity on which
the legal incidence of the Tax is imposed. Refining shall be liable for all
Taxes imposed on any member of the Refining Group and Valero shall be liable for
all Taxes imposed on any member of the Valero Group, except that Refining shall
be liable for all Taxes (other than Income Taxes) with respect to Tax Periods
ending on or before December 31, 1996 (or, with respect to Taxes that are not
assessed with respect to periods, such Taxes due and payable on or before
December 31, 1996), except for such Taxes provided for in the VNG December 31,
1996 Balance Sheet, but only to the extent such Taxes exceed $5,000,000 in the
aggregate, and except that Refining shall not be liable with respect to any Tax
or Tax Return which is (i) the subject of the litigation set forth and described
in Section I, paragraphs 3 through 6, of Schedule 5.1(l) of the Merger Agreement
(the "Existing Tax Claims"), or (ii) heretofore or hereafter made a subject of
any claim, demand or litigation involving claims substantially similar to those
asserted in the Existing Tax Claims. The Companies believe that there is no Tax
not specifically allocated pursuant to Section 2.02 or 2.03 which is legally
imposed on more than one legal entity (e.g., joint and several liability);
however, if there is any such Tax, it shall be allocated in accordance with past
practices as reasonably determined by the affected Companies, or in the absence
of such practices, in accordance with any allocation method agreed upon by the
affected Companies.

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<PAGE>

2.05 TRANSACTION TAXES.

(a) Refining Liability. Except with respect to any liability with
respect to any Tax that is reflected on the VNG December 31, 1996 Balance Sheet,
and except to the extent of Valero's liability pursuant to Section 2.05(b)
below, Refining shall be liable for all Taxes resulting from the Transaction
including:

(i) Any sales and use, gross receipts, or other transfer
Taxes resulting from the Transaction;

(ii) any Tax resulting from any income or gain recognized
under Treasury Regulation Sections 1.1502-13 or 1.1502-19 (or any
comparable provisions of other applicable Tax Laws) as a result of the
Transaction;

(iii) any Tax resulting from any income or gain recognized as
a result of the Transaction contemplated by the Distribution
Agreement failing to qualify for tax-free treatment under Code Section
355 or 361(c), or other provisions of the Code or other applicable
Tax Laws, or as a result of the Merger failing to constitute a
"reorganization" under Code Section 368 or any comparable provisions
of other applicable Tax Laws (as contemplated in the Merger
Agreement);

provided, however, that Refining shall be liable for Taxes described in Section
- -------- -------
2.05(a)(i) and Section 2.05(a)(ii) only to the extent that the aggregate amount
of such Taxes exceeds $3,000,000. For purposes of this Section 2.05(a),any
increase in Tax resulting from any disallowance of deductions pursuant to
Section 162(m) of the Code or Section 280G of the Code shall be treated as a Tax
resulting from the Transaction and described in Section 2.05(a)(ii); provided,
--------
however, that this sentence shall not apply to any such Tax reflected on the VNG
- -------
December 31, 1996 Balance Sheet.

(b) Indemnity for Inconsistent Acts and Misrepresentations. Valero
shall be liable for, and shall indemnify and hold harmless the Refining Group
from and against any liability for, any Tax (described in subparagraph (a)(iii))
above but only to the extent resulting solely from any breach of Valero's
covenants under Section 11 of this Agreement. Acquiror shall be liable for, and
shall indemnify and hold harmless the Refining Group from and against any
liability for, any Tax described in subparagraph (a)(iii) above but only to the
extent resulting either (x) from any breach of Acquiror's representations or
covenants under Section 11 of this Agreement or (y) from the inaccuracy of any
factual statements or representations made by Acquiror and relating to Acquiror
or its Subsidiaries (other than the Valero Group) in connection with the Tax
Opinion.

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<PAGE>

SECTION 3. ALLOCATION OF TAX CREDIT CARRYFORWARDS.

3.01 ALLOCATION OF ALTERNATIVE MINIMUM TAX CREDIT CARRYFORWARDS.
With respect to the Valero Federal Consolidated Income Tax Return filed for
calendar year 1995, the consolidated minimum tax credit carryforward
("Consolidated MTC") reported therein is allocated among the Valero and Refining
Groups as follows:
<TABLE>

<S> <C>
Valero Group $ 6,049,232
Refining Group 15,266,111
-----------
Total $21,315,343
</TABLE>

Valero and Refining mutually represent that no additional amount of Consolidated
MTC is expected to be generated nor is any Consolidated MTC expected to be
utilized on the Valero Federal Consolidated Income Tax Return for calendar year
1996. Any adjustments to the above amounts for Tax Periods ending after 1995
and on or before the Time of Distribution shall be allocated among the Valero
and Refining Groups in accordance with the principles of Code Section 53 and
Proposed Treasury Regulation 1.1502-55(h)(6)(ii).

3.02 ALLOCATION OF OTHER CREDIT CARRYFORWARDS. With respect to the
Valero Federal Consolidated Income Tax Return filed for calendar year 1995, the
consolidated general business credit carryforward ("Consolidated GBC") reported
therein is allocated among the Valero and Refining Groups as follows:
<TABLE>
<CAPTION>

<S> <C>
Valero Group $ 4,920,738
Refining Group 11,119,818
-----------
Total $16,040,556
</TABLE>

Any adjustments to the above amounts of Consolidated GBC or any other credits
allowable against any Tax for Tax Periods ending after 1995 and on or before the
Time of Distribution shall be allocated among the Valero and Refining Groups in
accordance with past tax accounting practices used with respect to such credits
(unless such past practices are no longer permissible under the Code or other
applicable Tax Law). Based upon the Companies' latest estimate of 1996 taxable
income, the Consolidated GBC at the end of calendar year 1996 is as follows:
<TABLE>
<CAPTION>

<S> <C>
Valero Group $245,621
Refining Group 274,349
--------
Total $519,970

</TABLE>

SECTION 4. PREPARATION AND FILING OF TAX RETURNS.

4.01 GENERAL. Except as otherwise provided in this Section 4, Tax
Returns shall be prepared and filed when due (including extensions) by the
person obligated to file such Tax Return under the Code or applicable Tax Law.
The Companies shall provide, and shall cause their Subsidiaries to provide,

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<PAGE>

assistance and cooperate with one another in accordance with Section 7 with
respect to the preparation and filing of Tax Returns, including providing
information required to be provided in Section 7.

4.02 REFINING'S RESPONSIBILITY. Refining shall have the exclusive
obligation and right to properly prepare and timely file, or to cause to be
properly prepared and timely filed:

(a) Valero Federal Consolidated Income Tax Returns for Tax Periods
ending on or before the end of the day on which the Time of Distribution occurs.

(b) Tax Returns for State Income Taxes (excluding any amended returns,
but including Tax Returns with respect to State Income Taxes that are Separate
Company Taxes) which the Companies reasonably determine are required to be filed
by the Companies or any of their Subsidiaries for Tax Periods ending on or
before the end of the day on which the Time of Distribution occurs.

Nothing in this Section 4.02 shall impose on Refining any liability for any
failure to file any Tax Return, or for failure to file any Tax Return when due,
with respect to any Pre-Dis tribution Period if the due date for such return
(including extensions) was prior to the Time of Distribution.

4.03 VALERO'S RESPONSIBILITY. Valero shall prepare and file, or
shall cause to be prepared and filed, Tax Returns required to be filed by or
with respect to members of the Valero Group other than those Tax Returns which
Refining is required to prepare and file under Section 4.02. The Tax Returns
required to be prepared and filed by Valero under this Section shall include Tax
Returns for Federal or State Income Taxes (excluding any amended returns, but
including Tax Returns with respect to State Income Taxes that are Separate
Company Taxes) which the Companies reasonably determine, in accordance with
Valero's past practices, are required to be filed by any member of the Valero
Group for Tax Periods ending after the end of the day on which the Time of
Distribution occurs.

4.04 CONSISTENT TAX ACCOUNTING PRACTICES. Any Tax Return for any
Pre-Distribution Period and any Tax Return for any Post-Distribution Period to
the extent items reported on such Tax Return might reasonably be expected to
affect Tax Items reported on any Tax Return for any Pre-Distribution Period,
shall be prepared in accordance with past Tax accounting practices used with
respect to the Tax Returns in question (unless such past practices are no longer
permissible under the Code or other applicable Tax Law), and to the extent any
items are not covered by past practices (or in the event such past practices are
no longer permissible under the Code or other applicable Tax Law), in accordance
with reasonable Tax accounting practices selected by the Company whose Tax
liability for such Tax Period will be most affected by such selection.

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<PAGE>

4.05 CONSOLIDATED OR COMBINED RETURN. The Companies will elect and
join, and will cause their respective Subsidiaries to elect and join, in filing
consolidated, unitary, combined, or other similar Tax Returns with respect to
any Tax Period ending on or before the end of the day on which the Time of
Distribution occurs, to the extent each entity is eligible to join in such Tax
Returns, if the Companies reasonably determine that the filing of such Tax
Returns is consistent with past reporting practices, or in the absence of
applicable past practices, will result in the minimization of the net present
value of the aggregate Tax to the entities eligible to join in such Tax Returns.

4.06 RIGHT TO REVIEW TAX RETURNS.

(a) General. The Responsible Company with respect to any Tax Return
shall make such Tax Return and related work-papers available for review by the
other Companies during regular business hours, if requested, in the event (i)
such Tax Return relates to Taxes for which the requesting party may be liable,
(ii) such Tax Return relates to Taxes for which the requesting party may be
liable in whole or in part for any additional Taxes owing as a result of
adjustments to the amount of Taxes reported on such Tax Return, (iii) such Tax
Return relates to Taxes for which the requesting party may have a claim for Tax
Benefits under this Agreement, or (iv) the requesting party reasonably
determines that it must inspect such Tax Return to confirm compliance with the
terms of this Agreement. The Responsible Company shall use its reasonable best
efforts to make such Tax Return available for review as required under this
paragraph sufficiently in advance of, but in any event no later than thirty
calendar days prior to, the due date for filing such Tax Returns to provide the
requesting party with a meaningful opportunity to analyze and comment on such
Tax Returns and have such Tax Returns modified before filing, taking into
account the person responsible for payment of the Tax (if any) reported on such
Tax Return and the materiality of the amount of Tax liability with respect to
such Tax Return. The Companies shall attempt in good faith to resolve any
issues arising out of the review of such Tax Returns.

(b) Reporting of Transaction Tax Items. The Companies agree that the
tax treatment reported on any Tax Return of Tax Items relating to the
Transaction shall be consistent with the treatment of such item in the Tax
Opinion. To the extent there is a Tax Item relating to the Transaction which is
not covered by the Tax Opinion, the Companies shall agree on the tax treatment
of any such Tax Item reported on any Tax Return. For this purpose, the tax
treatment of such Tax Items on a Tax Return by the Responsible Company with
respect to such Tax Return shall be agreed to by the other Company unless either
(i) such other Company reasonably believes that such tax treatment may result in
a penalty or addition to Tax under applicable Tax Law, or (ii) such tax
treatment is inconsistent with the tax treatment contemplated in the Tax
Opinion. Such Tax Return shall be submitted for review pursuant to Section
4.06(a), and any dispute regarding

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<PAGE>

such proper tax treatment shall be referred for resolution pursuant to Section
15, sufficiently in advance of the filing date of such Tax Return (including
extensions) to permit timely filing of the return.

(c) Execution of Returns Prepared by Other Party. In the case of any
Tax Return which is required to be prepared and filed by one Company under this
Agreement and which is required by law to be signed by another Company (or by
its authorized representative), the Company which is legally required to sign
such Tax Return (the "Signatory Company") shall not be required to sign such Tax
Return under this Agreement if the Signatory Company reasonably believes that
the tax treatment of the items reported on the Tax Return may result in a
penalty or addition to Tax under applicable Tax Law.

4.07 CLAIMS FOR REFUND, CARRYBACKS, AND SELF-AUDIT ADJUSTMENTS.

(a) Consent Required for Adjustment Requests Related to Consolidated
or Combined Income Taxes. Except as provided in paragraph (b) below, each of
the Companies hereby agrees that, unless the other Company consents in writing,
which consent shall not be unreasonably withheld, (i) no Adjustment Request with
respect to any Consolidated or Combined Income Tax for a Pre-Distribution Period
shall be filed, and (ii) any available elections to waive the right to claim,
in any Pre-Distribution Period with respect to any Consolidated or Combined
Income Tax, any Carryback arising in a Post-Distribution Period shall be made,
and no affirmative election shall be made to claim any such Carryback. Any
Adjustment Request which Valero consents to make under this Section 4.07 shall
be prepared and filed by Refining under Section 4.02. Valero shall provide to
Refining all information required for the preparation and filing of such
Adjustment Request in such form and detail as reasonably requested by Refining.

(b) Exception for Adjustment Requests Related to Audit Adjustments.
Each of the Companies shall be entitled, without the consent of the other
Company, to require Refining to file an Adjustment Request to take into account
any net operating loss, net capital loss, deduction, credit, or other adjustment
attributable to such Company or any member of its Group corresponding to any
adjustment resulting from any audit by the Internal Revenue Service or other Tax
Authority with respect to Consolidated or Combined Income Taxes for any Pre-
Distribution Period. For example, if the Internal Revenue Service requires
either Company to capitalize an item deducted for the taxable year 1993, the
Company shall be entitled, without the consent of the other Company, to require
Refining to file an Adjustment Request for the taxable year 1994 (and later
years) to take into account any depreciation or amortization deductions in such
years directly related to the item capitalized in 1993.

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<PAGE>

(c) Other Adjustment Requests Permitted. Nothing in this Section 4.07
shall prevent either Company or its Subsidiaries from filing any Adjustment
Request with respect to Income Taxes which are not Consolidated or Combined
Income Taxes or with respect to any Taxes other than Income Taxes. Any refund
or credit obtained as a result of any such Adjustment Request (or otherwise)
shall be for the account of the person liable for the Tax under this Agreement.

(d) Payment of Refunds. Any refunds or other Tax Benefits received by
either Company (or any of its Subsidiaries) as a result of any Adjustment
Request which are for the account of the other Company (or member of such other
Company's Group) shall be paid by the Company receiving (or whose Subsidiary
received) such refund or Tax Benefit to such other Company in accordance with
Section 6.

SECTION 5. TAX PAYMENTS AND INTERCOMPANY BILLINGS

5.01 PAYMENT OF TAXES WITH RESPECT TO VALERO FEDERAL CONSOLIDATED
INCOME TAX RETURNS FILED AFTER THE TIME OF DISTRIBUTION. In the case of any
Valero Federal Consolidated Income Tax Return the due date for which (including
extensions) is after the Time of Distribution,

(a) Computation and Payment of Tax Due. At least thirty calendar days
prior to any Payment Date, Refining shall compute the amount of Tax required to
be paid to the Internal Revenue Service (taking into account the requirements of
Section 4.04 relating to consistent accounting practices) with respect to such
Tax Return and shall notify Valero in writing of the amount of Tax required to
be paid on or before such due date. Valero will pay such amount to the Internal
Revenue Service on or before the due date.

(b) Computation and Payment of Refining Liability With Respect to Tax
Due. At least three business days before any Payment Date, Refining will pay to
Valero the excess (if any) of --

(i) the Consolidated Tax Liability determined as of such
Payment Date with respect to the applicable Tax Period allocable to
the members of the Refining Group as determined by Refining in a
manner consistent with the provisions of Section 2.02(a) (relating to
allocation of the Consolidated Tax Liability --) (the "Allocated
Federal Tax Liability"), over

(ii) the cumulative net payments with respect to such Tax
Return prior to such Payment Date by the members of Refining Group
(the "Cumulative Federal Tax Payment").

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<PAGE>

If the Refining Group Cumulative Federal Tax Payment is greater than the
Refining Group Allocated Federal Tax Liability, then Valero shall pay such
excess to Refining within 10 business days following such Payment Date.

(c) Deemed Cumulative Federal Tax Payment for First Payment Date After
the Time of Distribution. For purposes of Section 5.01(b)(ii), the Refining
Group's Cumulative Federal Tax Payment as of the first Payment Date after the
Time of Distribution shall be deemed equal to the portion of the total payments
of Tax by the affiliated group with respect to the Tax Return allocated to the
Refining Group in accordance with Section 2.02(a) determined by substituting for
the "tax liability of the group" as such term is used in Treasury Regulation
Section 1.1552-1(a)(2) the amount of such total payments of Tax. For example, if
the Time of Distribution is March 1, 1997, and prior to April 15, 1997 (i.e.,
the first Payment Date after the Time of Distribution) the total payments of Tax
by the affiliated group with respect to Valero's Federal Consolidated Income Tax
Return for the year ended December 31, 1996 is $100x, the portion of such $100x
deemed paid by the Refining Group as of April 15, 1997 (excluding the payment to
be made on that date) would be determined under Section 2.02(a).

(d) Interest on Intergroup Tax Allocation Payments. In the case of
any payments required under paragraph (b) of this subsection 5.01, the payor
shall also pay to the payee an amount of interest computed at the Prime Rate on
the amount of the payment required under paragraph (b), as applicable, based on
the number of days from the applicable Payment Date to the date of payment of
the amount determined under such paragraph (b).

5.02 PAYMENT OF FEDERAL INCOME TAX RELATED TO ADJUSTMENTS.

(a) Adjustments Resulting in Underpayments. Valero shall pay to the
Internal Revenue Service when due any additional Federal Income Tax required to
be paid as a result of any adjustment to the Consolidated Federal Income Tax
Liability with respect to any Valero Federal Consolidated Income Tax Return for
any Pre-Distribution Period. Refining shall pay to Valero the Refining Group's
share of any such additional Tax payment determined in accordance with Section
2.02(a) within 30 days from the later of (i) the date the additional Tax was
paid by Valero or (ii) the date of receipt by Refining of a written notice and
demand from Valero for payment of the amount due, accompanied by evidence of
payment and a statement detailing the Taxes paid and describing in reasonable
detail the particulars relating thereto. Refining shall also pay to Valero
interest on the Refining Group's respective share of such Tax computed at the
Prime Rate based on the number of days from the date the additional Tax was paid
by Valero to the date of its payment to Valero under this Section 5.02(a).

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<PAGE>

(b) Adjustments Resulting in Overpayments. Within 30 days of receipt
by Valero of any Tax Benefit resulting from any adjustment to the Consolidated
Federal Income Tax Liability with respect to any Valero Federal Consolidated
Income Tax Return for any Pre-Distribution Period, Valero shall pay to Refining
the Refining Group's respective share of any such Tax Benefit determined in
accordance with Section 2.02(a). Valero shall also pay to Refining interest on
Refining Group's respective share of such Tax Benefit computed at the Prime Rate
based on the number of days from the date the Tax Benefit was received by Valero
to the date of payment to Refining under this Section 5.02(b).

5.03 PAYMENT OF CONSOLIDATED OR COMBINED STATE INCOME TAX WITH
RESPECT TO RETURNS FILED AFTER THE TIME OF DISTRIBUTION. In the case of any Tax
Return for any Consolidated or Combined State Income Tax the due date for filing
of which (including extensions) is after the Time of Distribution, at least
thirty calendar days prior to any Payment Date with respect to such Tax Return,
Refining shall compute the amount of Tax required to be paid to the applicable
Tax Authority (taking into account the requirements of Section 4.04 relating to
consistent accounting practices) and shall notify Valero in writing of the
amount of Tax required to be paid on or before such due date. Valero will pay
such amount to such Tax Authority on or before the due date. At least three
business days before such Payment Date, Refining shall pay to Valero the Tax
liability allocable to the Refining Group as determined under the provisions of
Section 2.03(b)(i).

5.04 PAYMENT OF STATE INCOME TAXES RELATED TO ADJUSTMENTS.

(a) Adjustments Resulting in Underpayments. Valero shall pay to the
applicable Tax Authority when due any additional State Income Tax required to be
paid as a result of any adjustment to the Tax liability with respect to any Tax
Return for any Consolidated or Combined State Income Tax for any Pre-
Distribution Period. Refining shall pay to Valero the Refining Group's share of
any such additional Tax payment determined in accordance with Section
2.03(b)(ii) within 30 days from the later of (i) the date the additional Tax was
paid by Valero or (ii) the date of receipt by Refining of a written notice and
demand from Valero for payment of the amount due, accompanied by evidence of
payment and a statement detailing the Taxes paid and describing in reasonable
detail the particulars relating thereto. Refining shall also pay to Valero
interest on the Refining Group's respective share of such Tax computed at the
Prime Rate based on the number of days from the date the additional Tax was paid
by Valero to the date of its payment to Valero under this Section 5.04(a).

(b) Adjustments Resulting in Overpayments. Within 30 days of receipt
by Valero of any Tax Benefit resulting from any adjustment to the Tax liability
with respect to any Tax Return for any Consolidated or Combined State Income Tax
for any Pre-

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<PAGE>

Distribution Period, Valero shall pay to Refining the Refining Group's share of
any such Tax Benefit determined in accordance with Section 2.03(b)(ii). Valero
shall also pay to Refining interest on the Refining Group's share of such Tax
Benefit computed at the Prime Rate based on the number of days from the date the
Tax Benefit was received by Valero to the date of payment to Refining under this
Section 5.04(b).

5.05 PAYMENT OF SEPARATE COMPANY TAXES. Each Company shall pay, or
shall cause to be paid, to the applicable Tax Authority when due all Separate
Company Taxes owed by such Company or a member of such Company's Group.

5.06 INDEMNIFICATION PAYMENTS. If any Company (the "payor") is
required to pay to such Tax Authority a Tax that another Company (the
"responsible party") is required to pay to such Tax Authority under this
Agreement, the responsible party shall reimburse the payor within 30 days of
delivery by the payor to the responsible party of an invoice for the amount due,
accompanied by evidence of payment and a statement detailing the Taxes paid and
describing in reasonable detail the particulars relating thereto. The
reimbursement shall include interest on the Tax payment computed at the Prime
Rate based on the number of days from the date of the payment to the Tax
Authority to the date or reimbursement under this Section 5.06.

SECTION 6. TAX BENEFITS FOR ACCOUNT OF OTHER PARTY. If a member of
one Group receives any Tax Benefit with respect to any Taxes for which a member
of another Group is liable hereunder, the Company receiving such Tax Benefit
shall make a payment to the Company who is liable for such Taxes hereunder
within 30 days following receipt of the Tax Benefit in an amount equal to the
Tax Benefit (including any Tax Benefit realized as a result of the payment) plus
interest on such amount computed at the Prime Rate based on the number of days
from the date of receipt of the Tax Benefit to the date of payment of such
amount under this Section 6.

SECTION 7. ASSISTANCE AND COOPERATION.

7.01 GENERAL. After the Time of Distribution, each of the Companies
shall cooperate (and cause their respective Subsidiaries to cooperate) with each
other and with each other's agents, including accounting firms and legal
counsel, in connection with Tax matters relating to the Companies and their
Subsidiaries including (i) preparation and filing of Tax Returns (including,
where necessary, preparation of Tax Returns by one Company for signature by the
other Company), (ii) determining the liability for and amount of any Taxes due
(including estimated Taxes) or the right to and amount of any refund of Taxes,
(iii) examinations of Tax Returns, and (iv) any administrative or judicial
proceeding in respect of Taxes assessed or proposed to be assessed. Such
cooperation shall include making all

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<PAGE>

information and documents in their possession relating to the Companies and
their Subsidiaries available to such other Companies as provided in Section 8.
Each of the Companies shall also make available to each other, as reasonably
requested and available, personnel (including officers, directors, employees and
agents of the Companies or their respective Subsidiaries) responsible for
preparing, maintaining, and interpreting information and documents relevant to
Taxes, and personnel reasonably required as witnesses or for purposes of
providing information or documents in connection with any administrative or
judicial proceedings relating to Taxes. Any information or documents provided
under this Section 7 shall be kept confidential by the Company receiving the
information or documents, except as may otherwise be necessary in connection
with the filing of Tax Returns or in connection with any administrative or
judicial proceedings relating to Taxes.

7.02 INCOME TAX RETURN INFORMATION. Each Company will provide to
each other Company information and documents relating to their respective Groups
required by the other Companies to prepare Tax Returns. The Responsible Company
shall determine a reasonable compliance schedule for such purpose in accordance
with Valero's past practices. Any additional information or documents the
Responsible Company requires to prepare such Tax Returns will be provided in
accordance with past practices, if any, or as the Responsible Company reasonably
requests and in sufficient time for the Responsible Company to file such Tax
Returns timely.

SECTION 8. TAX RECORDS.

(a) Retention of Tax Records. Except as provided in paragraph (b),
Refining shall preserve and keep all Tax Records exclusively relating to the
assets and activities of the Refining Group's Pre-Distribution Periods, and
Valero shall preserve and keep all other Tax Records relating to Taxes for so
long as the contents thereof may become material in the administration of any
matter under the Code or other applicable Tax Law, but in any event until the
later of (i) the expiration of any applicable statutes of limitation, and (ii)
seven years after the Time of Distribution. If prior to the expiration of the
applicable statute of limitation and such seven-year period Refining or Valero
reasonably determines that any Tax Records which it is required to preserve and
keep under this Section 8 are no longer material in the administration of any
matter under the Code or other applicable Tax Law, such Company may dispose of
such records upon 90 days prior written notice to the other Company. Such notice
shall include a list of the records to be disposed of describing in reasonable
detail each file, book or other record accumulation being disposed. The notified
Company shall have the opportunity, at its cost and expense, to copy or remove,
within such 90-day period, all or any part of such Tax Records.

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<PAGE>

(b) State Income Tax Returns. Tax Returns with respect to State
Income Taxes and workpapers prepared in connection with preparing such Tax
Returns shall be preserved and kept, in accordance with the guidelines of
paragraph (a), by the Company responsible for preparing and filing the
applicable Tax Return.

(c) Access to Tax Records. The Companies and their respective
Subsidiaries shall make available to each other for inspection and copying
during normal business hours upon reasonable notice all Tax Records in their
possession to the extent reasonably required by the other Company in connection
with the preparation of Tax Returns, audits, litigation, or the resolution of
items under this Agreement.

SECTION 9. TAX CONTESTS.

9.01 NOTICES. Each of the parties shall provide prompt notice to the
other parties of any pending or threatened Tax audit, assessment or proceeding
or other Tax Contest of which it becomes aware related to Taxes for Tax Periods
for which it is indemnified by one or more other parties hereunder. Such notice
shall contain factual information (to the extent known) describing any asserted
Tax liability in reasonable detail and shall be accompanied by copies of the
relevant portions of any notice and other documents received from any Tax
Authority in respect of any such matters. If an indemnified party has knowledge
of an asserted Tax liability with respect to a matter for which it is to be
indemnified hereunder and such party fails to give the indemnifying party prompt
notice of such asserted Tax liability, then if the indemnifying party is
precluded from contesting the asserted Tax liability in any forum as a result
of the failure to give prompt notice, the indemnifying party shall have no
obligation to indemnify the indemnified party for any Taxes arising out of such
asserted Tax liability.

9.02 CONTROL OF TAX CONTEST.

(a) Separate Company Taxes. In the case of any Tax Contest with
respect to any Separate Company Tax, the Company having liability for the Tax
shall have exclusive control over the Tax Contest, including exclusive authority
with respect to any settlement of such Tax liability.

(b) Consolidated or Combined Income Taxes. In the case of any Tax
Contest with respect to any Consolidated or Combined Income Tax, Refining shall
control the defense or prosecution of the portion of the Tax Contest directly
and exclusively related to any Refining Adjustment, including settlement of
any such Refining Adjustment, and Valero shall control the defense or
prosecution of all other portions of the Tax Contest, including settlement of
any Valero Adjustment. A Company shall not agree to any Tax liability for which
the other Company may be liable under this Agreement, or compromise any claim
for any Tax Benefit which the other Company may be entitled under

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<PAGE>

this Agreement, without such other Company's written consent (which consent may
be given or withheld at the sole discretion of the Company from which the
consent would be required). Notwithstanding any other provision contained in
this Section 9, the indemnified party may settle any claim otherwise
indemnifiable hereunder for any Tax Period (x) if the indemnified party waives
the indemnification payment that might otherwise be payable under this Agreement
in respect of such claim for such Tax Period and any other claim the contest of
which is precluded by such settlement or (y) the party responsible for payment
hereunder consents in writing to such settlement, such consent not to be
unreasonably withheld based solely on the merits of the items indemnifiable
hereunder.

SECTION 10. EFFECTIVE DATE; TERMINATION OF PRIOR INTERCOMPANY TAX
ALLOCATION AGREEMENTS. This Agreement shall be effective at the Time of
Distribution. Immediately prior to the close of business at the Time of
Distribution (i) all Prior Intercompany Tax Allocation Agreements shall be
terminated, and (ii) amounts due under such agreements as of the Time of
Distribution shall be settled as of the Time of Distribution (including
capitation or distribution of amounts due or receivable under such agreements).
Upon such termination and settlement, no further payments by or to Valero, or by
or to the Refining Group with respect to such agreements shall be made, and all
other rights and obligations resulting from such agreements between the
Companies and their Subsidiaries shall cease at such time. Any payments pursuant
to such agreements shall be ignored for purposes of computing amounts due under
this Agreement.

SECTION 11. NO INCONSISTENT ACTIONS. Each of the Companies and the
Acquiror covenants and agrees that it will not take any action, and it will
cause its Subsidiaries to refrain from taking any action, which is inconsistent
with the Tax treatment of the Transaction contemplated in the Tax Opinion (any
such act or failure to act is referred to in this Section 11 as a "Prohibited
Action"), unless such Prohibited Action is required by law, or the person acting
has obtained the prior written consent of each of the other parties (which
consent shall not be unreasonably withheld). With respect to any Prohibited
Action proposed by a Company or the Acquiror (the "Requesting Party"), each of
the other parties (the "Requested Parties") shall grant its consent to such
Prohibited Action if the Requesting Party either obtains a ruling from the
Internal Revenue Service or other applicable Tax Authority or an opinion of
independent tax counsel with respect to the Prohibited Action that is reasonably
satisfactory to each of the Requested Parties (except that the Requesting Party
shall not submit any such ruling request if a Requested Party determines in good
faith that filing such request might have a materially adverse affect upon such
Requested Party). Without limiting the foregoing:

(i) Refining represents and warrants that neither it nor any
of its Subsidiaries nor, to the best

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<PAGE>

knowledge of Refining, any other person or entity, has any plan or
intent to take any action which is inconsistent with any factual
statements or representations made in connection with the Tax Opinion.
Regardless of any change in circumstances, Refining covenants and
agrees that it will not take, and it will cause its Subsidiaries to
refrain from taking, any such inconsistent action on or before the
last day of the calendar year ending after the second anniversary of
the Time of Distribution other than as permitted in this Section 11.
For purposes of applying this Section 11 to any such inconsistent
action prior to the Effective Time, the members of the Valero Group
shall be treated as Subsidiaries of Refining.

(ii) Acquiror represents and warrants that neither it nor any
of its Subsidiaries has any plan or intent to take any action which is
inconsistent with any factual statements or representations made in
connection with the Tax Opinion. Regardless of any change in
circumstances, Acquiror covenants and agrees that it will not take,
and it will cause Valero and the other Subsidiaries of Acquiror to
refrain from taking, any such inconsistent action on or before the
last day of the calendar year ending after the second anniversary of
the Time of Distribution other than as permitted in this Section 11.

SECTION 12. SURVIVAL OF OBLIGATIONS. The obligations and liabilities
of the parties, as well as the representations, warranties, covenants and
agreements, set forth in this Agreement shall be unconditional and absolute and
shall remain in effect without limitation as to time.

SECTION 13. EMPLOYEE MATTERS. Each of the Companies agrees to
utilize, or cause its Subsidiaries to utilize, the alternative procedure set
forth in Revenue Procedure 84-77, 1984-2 C.B. 753, with respect to wage
reporting.

SECTION 14. TREATMENT OF PAYMENTS; TAX GROSS UP.

(a) Treatment of Tax Indemnity and Tax Benefit Payments. In the
absence of any change in tax treatment under the Code or other applicable Tax
Law:

(i) any Tax indemnity payments made by a Company under Section
5 shall be reported for Tax purposes by the payor and the recipient
as distributions or capital contribution, as appropriate, occurring
immediately before the Distribution but only to the extent the payment
does not relate to a Tax allocated to the payor in accordance with
Treasury Regulation

-21-
<PAGE>

Section 1.1502-33(d) (or under corresponding principles of other
applicable Tax Laws), and

(ii) any Tax Benefit payments made by a Company under Section
6, shall be reported for Tax purposes by the payor and the recipient
as distributions or capital contributions, as appropriate, occurring
immediately before the Distribution but only to the extent payment
does not relate to a Tax allocated to the payor in accordance with
Treasury Regulation Section 1.1502-33(d) (or under corresponding
principles of other applicable Tax Laws).

(b) Tax Gross Up. If, notwithstanding the manner in which Tax
indemnity payments and Tax Benefit payments were reported, there is an
adjustment to the Tax liability of a Company as a result of its receipt of a
payment or its payment pursuant to this Agreement, such payment shall be
appropriately adjusted so that the amount of such payment, reduced by the amount
of all Income Taxes payable with respect to the receipt thereof (but taking into
account all correlative Tax Benefits resulting from the payment of such Income
Taxes), shall equal the amount of the payment which the Company receiving such
payment would otherwise be entitled to receive pursuant to this Agreement.

SECTION 15. DISAGREEMENTS. If after good faith negotiations the
parties cannot agree on the application of this Agreement to any matter, then
the matter will be referred to a nationally recognized accounting firm
acceptable to each of the parties (the "Accounting Firm"). The Accounting Firm
shall furnish written notice to the parties of its resolution of any such
disagreement as soon as practical, but in any event no later than 45 days after
its acceptance of the matter for resolution. Any such resolution by the
Accounting Firm will be conclusive and binding on all parties to this Agreement.
In accordance with Section 17, each party shall pay its own fees and expenses
(including the fees and expenses of its representatives) incurred in connection
with the referral of the matter to the Accounting Firm. All fees and expenses of
the Accounting Firm in connection with such referral shall be shared equally by
the parties affected by the matters.

SECTION 16. LATE PAYMENTS. Any amount owed by one party to another
party under this Agreement which is not paid when due shall bear interest at the
Prime Rate plus three percent, compounded semiannually, from the due date of the
payment to the date paid. To the extent interest required to be paid under this
Section 16 duplicates interest required to be paid under any other provision of
this Agreement, interest shall be computed at the higher of the interest rate
provided under this Section or the interest rate provided under such other
provision.

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<PAGE>

SECTION 17. EXPENSES. Except as otherwise provided in this
Agreement, each party and its Subsidiaries shall bear its own expenses incurred
in connection with preparation of Tax Returns and other matters related to Taxes
under the provisions of this Agreement.

SECTION 18. GENERAL PROVISIONS.

(a) Addresses and Notices. Any notice, demand, request or report
required or permitted to be given or made to any party under this Agreement
shall be in writing and shall be deemed given or made when delivered in part or
when sent by first class mail or by other commercially reasonable means of
written communication (including delivery by an internationally recognized
courier service or by facsimile transmission) to the party at the party's
address as follows:

If to Refining: ________________________
________________________
________________________
________________________

If to Valero: ________________________
________________________
________________________
________________________

If to Acquiror: ________________________
________________________
________________________
________________________

A party may change the address for receiving notices under this Agreement by
providing written notice of the change of address to the other parties.

(b) Binding Effect. This Agreement shall be binding upon and inure to
the benefit of the parties hereto and their successors and assigns.

(c) Waiver. No failure by any party to insist upon the strict
performance of any obligation under this Agreement or to exercise any right or
remedy under this Agreement shall constitute waiver of such obligation, right,
or remedy or any other obligation, rights, or remedies under this Agreement.

(d) Invalidity of Provisions. If any provision of this Agreement is
or becomes invalid, illegal or unenforceable in any respect, the validity,
legality, and enforceability of the remaining provisions contained herein shall
not be affected thereby.

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<PAGE>

(e) Further Action. The parties shall execute and deliver all
documents, provide all information, and take or refrain from taking action as
may be necessary or appropriate to achieve the purposes of this Agreement,
including the execution and delivery to the other parties and their Subsidiaries
and representatives of such powers of attorney or other authorizing
documentation as is reasonably necessary or appropriate in connection with Tax
Contests (or portions thereof) under the control of such other parties in
accordance with Section 9.

(f) Integration. This Agreement constitutes the entire agreement
among the parties pertaining to the subject matter of this Agreement and
supersedes all prior agreements and understandings pertaining thereto. In the
event of any inconsistency between this Agreement and the Distribution Agreement
or any other agreements relating to the transactions contemplated by the
Distribution Agreement, the provisions of this Agreement shall control.

(g) Construction. The language in all parts of this Agreement shall
in all cases be construed according to its fair meaning and shall not be
strictly construed for or against any party.

(h) No Double Recovery; Subrogation. No provision of this Agreement
shall be construed to provide an indemnity or other recovery for any costs,
damages, or other amounts for which the damaged party has been fully compensated
under any other provision of this Agreement or under any other agreement or
action at law or equity. Unless expressly required in this Agreement, a party
shall not be required to exhaust all remedies available under other agreements
or at law or equity before recovering under the remedies provided in this
Agreement. Subject to any limitations provided in this Agreement (for example,
the limitation on filing claims for refund in Section 4.08), the indemnifying
party shall be subrogated to all rights of the indemnified party for recovery
from any third party.

(i) Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, and all of which taken
together shall constitute one and the same instrument.

(j) Governing Law. This Agreement shall be governed by and construed
in accordance with the laws of the State of Delaware applicable to contracts
executed in and to be performed in that State.

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<PAGE>

IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed by the respective officers as of the date set forth above.

VALERO ENERGY CORPORATION

By:
----------------------------
Its:
----------------------------

VALERO REFINING AND MARKETING
COMPANY

By:
----------------------------
Its:
----------------------------

PG&E CORPORATION

By:
----------------------------
Its:
----------------------------

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<PAGE>

EXHIBIT 2.4

EMPLOYEE BENEFITS AGREEMENT

BETWEEN

VALERO ENERGY CORPORATION

AND

VALERO REFINING AND MARKETING COMPANY

DATED AS OF ______, 1997
<PAGE>

TABLE OF CONTENTS

Page
----

ARTICLE I

DEFINITIONS................................................... 2
1.01. Definitions.......................................... 2
1.02. Schedules, etc....................................... 6

ARTICLE II

GENERAL....................................................... 7
2.01. Transfers of Employees............................... 7
2.02. Liabilities Under Plans.............................. 7

ARTICLE III

STOCK-BASED PLANS............................................. 7
3.01. Stock Options........................................ 7

ARTICLE IV

RETIREMENT PLANS.............................................. 8
4.01. Pension Plan......................................... 8
4.02. Non-Employee Directors Pension Plan.................. 9
4.03. Thrift Plan.......................................... 9
4.04. Excess Thrift Plan................................... 10
4.05. Supplemental Retirement Plan and Supple-
mental Executive Retirement Agreements.............. 11
4.06. Other Postemployment Benefits........................ 12

ARTICLE V

OTHER PLANS AND ARRANGEMENTS.................................. 12
5.01. Deferred Compensation................................ 12
5.02. Severance Pay........................................ 12
5.03. VESOP................................................ 13
5.04. ESOP................................................. 14
5.05. Reimbursement Account Plan........................... 14

ARTICLE VI

OTHER LIABILITIES............................................. 14
6.01. Other Liabilities and Obligations.................... 14

ARTICLE VII

MISCELLANEOUS................................................. 15
7.01. Recognition of Company Employment
Service, etc. ...................................... 15

{i)
<PAGE>

7.02. Indemnification...................................... 15
7.03. Guarantee of Subsidiaries' Obligations............... 15
7.04. Sharing of Information............................... 15
7.05. Amendments........................................... 15
7.06. Successors and Assigns............................... 16
7.07. Termination.......................................... 16
7.08. Rights to Amend or Terminate Plans; No
Third Party Beneficiaries........................... 16
7.09. Transfer of Reserves................................. 16
7.10. Further Transfers.................................... 16
7.11. Payment Under Other Agreements....................... 17
7.12. Incorporation by Reference........................... 17

SCHEDULE A

LIST OF COMPANY PLANS....................................... A-1

SCHEDULE B

EMPLOYEES TRANSFERRING TO VRM............................... B-1

{ii)
<PAGE>

EMPLOYEE BENEFITS AGREEMENT

EMPLOYEE BENEFITS AGREEMENT, dated as of _______, 1997 (this "Agreement"),
by and between Valero Energy Corporation, a Delaware corporation (the
"Company"), and Valero Refining and Marketing Company, a Delaware corporation
and a wholly owned Subsidiary of the Company ("VRM").

RECITALS

A. The Merger Transaction. The Company, PG&E Corporation, a California
----------------------
corporation ("Acquiror"), and [PG&E SubCo.], a Delaware corporation ("Sub") have
entered into a Plan and Agreement of Merger, dated as of January 31, 1997 (the
"Merger Agreement"), providing for the Merger (as defined in the Merger
Agreement) of Sub with and into the Company, with the Company as the surviving
corporation.

B. The Distribution. Immediately prior to the Effective Time (as defined
----------------
in the Merger Agreement), the Company intends to distribute (the "Distribution")
to the holders of the Company's common stock, par value $1.00 per share
("Company Common Stock"), on a pro rata basis, all of the then outstanding
shares of common stock, par value $0.01 per share ("VRM Common Stock"), of VRM.

C. Purpose. The purpose of the Distribution is to facilitate the
-------
reorganization of the Company, wherein the stockholders of the Company will
continue to own and operate VRM, and to make possible the Merger by divesting
the Company of the businesses and operations conducted by VRM in a tax-free
distribution to the Company's stockholders. The Company and VRM have entered
into an Agreement and Plan of Distribution (the "Distribution Agreement"), which
sets forth or provides for certain agreements between the Company and VRM in
consideration of the separation of their ownership.

D. This Agreement. Among other things, the Distribution Agreement
--------------
provides that the Company and VRM will enter into this Employee Benefits
Agreement regarding certain liabilities and obligations relating to employees.

NOW, THEREFORE, in consideration of the premises and of the respective
covenants and agreements set forth herein, the parties hereto hereby agree as
follows:
<PAGE>

ARTICLE I

DEFINITIONS

1.01. Definitions. As used in this Agreement, the following terms shall
-----------
have the following respective meanings (capitalized terms used but not defined
herein (other than the names of Company employee benefit plans) shall have the
respective meanings ascribed thereto in the Distribution Agreement):

"Agreement" shall have the meaning specified in the first paragraph
hereof.

"Code" shall mean the Internal Revenue Code of 1986, as amended.

"Company" shall have the meaning specified in the first paragraph
hereof.

"Company Annual Bonus Plan" shall mean the Company's Executive
Incentive Bonus Plan effective on or about February 27, 1980 and amended
and restated effective as of January 23, 1997.

"Company Common Stock" shall have the meaning specified in paragraph
B of the recitals to this Agreement.

"Company Deferred Compensation Plans" shall mean the Company's
Executive Deferred Compensation Plan, effective as of November 26, 1984 and
amended and restated effective as of October 21, 1986, and the Company's
Key Employee Deferred Compensation Plan, effective as of August 20, 198_,
and amended and restated effective as of October 21, 1986.

"Company Employee" shall mean any individual who is employed by any
member of the Company Group immediately before the Time of Distribution and
who is not a VRM Employee.

"Company ESIP" shall mean the Executive Stock Incentive Plan,
effective as of July 21, 1994 and amended and restated effective as of
November 21, 1996.

"Company Excess Thrift Plan" shall mean the Company Excess Thrift
Plan, effective as of January 1, 1990.

"Company Former Employee" shall mean any individual who is,
immediately before the Time of Distribution, a former employee of any
member of the Company Group who has not been an employee of any member of
the VRM Group since

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<PAGE>

his or her most recent active employment with any member of the
Company Group.

"Company Group" shall have the meaning set forth in the Distribution
Agreement.

"Company Non-Employee Director Retirement Plan" shall mean the Non-
Employee Director Retirement Plan, effective as of January 1, 1991.

"Company Participants" shall mean Company Employees, Company Former
Employees and their respective beneficiaries and dependents.

"Company Pension Plan" shall mean the Company's Pension Plan,
effective as of March 1, 1985 and amended and restated effective as of
January 1, 1994.

"Company Performance Shares" shall have the meaning set forth in the
Company ESIP for "Performance Shares."

"Company Plan" shall mean any plan, policy, program, payroll practice,
on-going arrangement, trust, insurance policy or other agreement or funding
vehicle maintained by, contributed to or sponsored by any member of the
Company Group providing benefits to employees, former employees or non-
employee directors of any member of the Company Group, including without
limitation the plans listed on Schedule A hereto; provided, however, that
the term "Company Plans" shall not include any VRM Plans.

"Company Reimbursement Account Plan" shall mean the Company's
Reimbursement Account Plan, effective as of November 29, 1983.

"Company Restricted Stock" shall mean restricted shares of Company
Common Stock granted pursuant to, and subject to forfeiture under, the
Company's Restricted Stock Bonus and Incentive Stock Plan, effective as of
April 30, 1981 and amended and restated effective as of November 21, 1996,
the 1990 Restricted Stock Plan for Non-employee Directors, effective as of
November 14, 1990 and amended and restated effective as of August 22, 1996,
or the Company ESIP.

"Company SAR" or "stock appreciation right" shall mean the right,
subject to the provisions of the applicable Company plan, to receive a
payment in cash equal to the difference between the specified exercise
price of

-3-
<PAGE>

the SAR and the fair market value (as defined in the applicable plan) of
one share of Company Common Stock.

"Company SERA" shall mean any Supplemental Executive Retirement
Agreement entered into prior to the Time of Distribution between the
Company and either a Company Participant or a VRM Participant.

"Company Stock Option" shall mean an option to purchase shares of
Company Common Stock, granted pursuant to the Company's Stock Option Plan
No. 3, effective as of January 21, 1986 and amended and restated effective
as of August 22, 1996; Stock Option Plan No. 4, effective as of January 1,
1990 and amended and restated effective as of August 22, 1996; Stock Option
Plan No. 5, effective as of September 16, 1992 and amended and restated
effective as of August 22, 1996; the Company ESIP; or the Non-Employee
Director Stock Option Plan, effective as of July 25, 1995 and amended and
restated effective as of November 21, 1996.

"Company Supplemental Retirement Plan" shall mean the Company's
Supplemental Executive Retirement Plan, effective as of January 1, 1983 and
amended and restated effective as of January 1, 1996.

"Company Thrift Plan" shall mean the Company's Thrift Plan, effective
as of December 31, 1979 and amended and restated effective as of January 1,
1994.

"Distribution" shall have the meaning specified in paragraph B of the
recitals to this Agreement.

"Distribution Agreement" shall have the meaning specified in paragraph
C of the recitals to this Agreement.

"Distribution Year" shall mean the calendar year in which the Time of
Distribution occurs.

"ESOP" shall mean the Company's Employees' Stock Ownership Plan,
effective as of January 1, 1983 and amended and restated effective as of
January 1, 1994.

"ERISA" shall mean the Employee Retirement Income Security Act of
1974, as amended.

"Liabilities" shall have the meaning set forth in the Distribution
Agreement.

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<PAGE>

"Merger Agreement" shall have the meaning specified in paragraph A of
the recitals to this Agreement.

"Merger Partner Common Stock" shall mean the common stock, 0 par
value, of PG&E Corporation.

"Merger Partner Thrift Plan" shall mean the [name] Plan, a defined
contribution plan intended to qualify under Section 401(a) of the Code.

"Notes" shall mean the 9.14% Senior ESOP Notes Due 1999 and the 9.85%
VESOP Note Due 2001, together with any amendments thereto, issued by Frost
National Bank of San Antonio, N.A., in its capacity as trustee for the
VESOP Trust forming part of the VESOP.

"Pre-Distribution Year" shall mean the calendar year immediately
preceding the Distribution Year.

"Rabbi Trust" shall mean a grantor trust subject to (S)(S) 671 et seq.
of the Code.

"Ratio" shall mean the amount obtained by dividing the average of the
daily high and low trading prices on the New York Stock Exchange for the
Company Common Stock on each of the fifteen trading days prior to the ex-
dividend date for the Distribution by the average of the daily high and low
trading prices on the New York Stock Exchange for the VRM Common Stock on
each of the fifteen trading days beginning with either (a) in the event the
VRM Common Stock trades on a "when-issued" basis prior to the Time of the
Distribution, the ex-dividend date for the Distribution or (b) in the event
the VRM Common Stock does not trade on a "when-issued" basis prior to the
Time of the Distribution, the Time of Distribution.

"Subsidiary" shall have the meaning set forth in the Merger Agreement.

"Thrift Plan Transfer" shall have the meaning set forth in Section
4.03(b) of this Agreement.

"VESOP" shall mean the Valero Employees' Stock Ownership Plan of
Valero Energy Corporation, effective as of February 15, 1989.

"VESOP Stock Sale" shall have the meaning set forth in Section 5.03(a)
of this Agreement.

-5-
<PAGE>

"VRM" shall have the meaning set forth in the first paragraph of this
Agreement.

"VRM Assumed Plans" shall have the meaning set forth in Section 2.02.

"VRM Common Stock" shall have the meaning specified in paragraph B of
the recitals to this Agreement.

"VRM Employee" shall mean any individual who, immediately before the
Time of Distribution, is employed by any member of the VRM Group.

"VRM Former Employee" shall mean any individual who is, immediately
before the Time of Distribution, a former employee of any member of the VRM
Group who has not been an employee of any member of the Company Group since
his or her most recent active employment with any member of the VRM Group.

"VRM Group" shall have the meaning set forth in the Distribution
Agreement.

"VRM SAR" or "VRM stock appreciation right" shall mean the right,
subject to the provisions of the applicable VRM plan, to receive a payment
in cash equal to the difference between the specified exercise price of the
VRM SAR and the fair market value (as defined in the applicable plan) of
one share of VRM Common Stock.

"VRM Stock Option" shall mean an option to purchase from VRM shares of
VRM Common Stock provided to a VRM Participant pursuant to Section 3.01.

"VRM Participants" shall mean VRM Employees, VRM Former Employees, and
their respective beneficiaries and dependents.

"VRM Plans" shall mean any plan, policy, program, payroll practice,
on-going arrangement, trust, insurance policy or other agreement or funding
vehicle maintained by, contributed to or sponsored by any member of the VRM
Group providing benefits to employees, former employees or non-employee
directors of any member of the VRM Group, but excluding any Company Plan.

"VRM Thrift Plan" shall have the meaning set forth in Section 4.03(a)
of this Agreement.

1.02. Schedules, etc. References to a "Schedule" are, unless otherwise
---------------
specified, to one of the Schedules attached to this Agreement, and references to
a "Section" are, unless otherwise specified, to one of the Sections of this
Agreement.

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<PAGE>

ARTICLE II

GENERAL

2.01. Transfers of Employees. Within thirty days of the effective date of
----------------------
the Merger Agreement, the Company, VRM and Acquiror will mutually consent to a
decision-making procedure for the purpose of determining the identity of
individuals who shall be transferred from the employ of members of the Company
Group to the employ of VRM or any of its affiliated companies designated by VRM,
which individuals shall be listed on Schedule B hereto; provided, however,
that the consent of the Company, VRM or the Acquiror to any proposal for such
decision-making procedure shall not be unreasonably withheld. Schedule B hereto
may be amended by VRM or the Company at any time or from time to time before the
Time of Distribution with the consent of the other party and the Acquiror, which
consent shall not be unreasonably withheld.

2.02. Liabilities Under Plans. From and after the Time of Distribution,
-----------------------
except as otherwise specifically set forth in this Agreement, VRM shall (a)
sponsor and (b) assume or retain, as the case may be, and be solely responsible
for all Liabilities arising under, resulting from or relating to, the VRM Plans
and the Company Plans marked with an asterisk on Schedule A (the "VRM Assumed
Plans") (whether to Company Participants or to VRM Participants), whether
incurred before, on or after the Time of Distribution, and the Company shall
assume or retain, as the case may be, and shall be solely responsible for, all
Liabilities arising under the other Company Plans to Company Participants
incurred before, on or after the Time of Distribution; provided, however,
--------
that VRM shall be under no obligation (except with respect to any obligation
specifically described in this Agreement or the Merger Agreement) to permit
Continuing Employees (as such term is defined in the Merger Agreement) to
continue to participate in the VRM Assumed Plans after the Time of Distribution.

ARTICLE III

STOCK-BASED PLANS

3.01. Stock Options and SARS. (a) The Company and VRM shall take all
----------------------
action necessary or appropriate (including amending appropriate Company Plans,
if required) so that each Company Stock Option held by a VRM Participant or by a
non-employee director of the Company that is outstanding as of the Time of
Distribution shall be replaced as of the Time of Distribution with a VRM Stock
Option with respect to a number of shares of VRM Common Stock equal to the
number of shares of

-7-
<PAGE>

Company Common Stock subject to such Company Stock Option immediately before
such replacement, multiplied by the Ratio (rounded up to the nearest whole share
if necessary), and with a per-share exercise price equal to the per-share
exercise price of such Company Stock Option immediately before such
replacement, divided by the Ratio (rounded down to the nearest cent). Such VRM
Stock Option shall otherwise have the same terms and conditions as the
corresponding Company Stock Option, except that references to the Company shall
be changed to refer to VRM. Each Company SAR which is held by a VRM Participant
which is outstanding of the Time of Distribution shall be replaced as of the
Time of Distribution with a number of VRM SARs equal to the number of Company
SARs held by the VRM Participant immediately before such replacement, multiplied
by the Ratio (rounded up to the nearest whole share if necessary), and with a
per-SAR exercise price equal to the per-SAR exercise price of such Company SAR
immediately before such replacement, divided by the Ratio (rounded down to the
nearest cent); such VRM SAR shall otherwise have the same terms and conditions
as the corresponding Company SAR, except that references to the Company shall be
changed to refer to VRM.

(b) Effective as of the Time of Distribution, VRM shall assume and be
solely responsible for all Liabilities of the Company to or with respect to VRM
Employees, VRM Former Employees and non-employee directors of the Company
arising out of or relating to Company Stock Options and Company SARs that are
outstanding as of the Time of Distribution. VRM shall be solely responsible for
all Liabilities arising out of or relating to VRM Stock Options and VRM SARs.

(c) The Company shall take all action necessary or appropriate (including
amending appropriate Company Plans, if required) so that the terms of each
Company Stock Option or Company SAR held by a Company Participant that is
outstanding immediately after the Time of Distribution shall be appropriately
adjusted, either immediately prior to or in connection with the Merger (based
upon when-issued trading and in a manner similar to paragraph (a) hereof), to
take into account the impact of the Distribution upon the capitalization of the
Company.

(d) Any adjustments to Company Stock Options or Company SARs (other than
those provided by, or necessary to implement, this Section 3.01 and Section
3.1(a)(iii) of the Merger Agreement) shall be subject to the approval of the
Acquiror. VRM shall indemnify, defend and hold harmless the Retained Companies
(as defined in the Distribution Agreement) from any and all claims by any holder
of any Company Stock Option or Company SAR (or replacement option or SAR
thereto) that such holder is entitled to any securities (or other property,
including without limitation, cash) other than the securities expressly provided
by the adjustments specified by this Section 3.01 and Section 3.1(a)(iii) of the
Merger Agreement.

ARTICLE IV

RETIREMENT PLANS

4.01. Pension Plan. (a) The Company and VRM shall take all action
------------
necessary or appropriate (including amending appropriate Company Plans,
including, without limitation, the

-8-
<PAGE>

Company Pension Plan) so that, effective as of the Time of Distribution, VRM
shall become the Sponsor (as defined in the Company Pension Plan) of the Company
Pension Plan and in such capacity assume responsibility for maintaining the
Company Pension Plan. Except as specifically set forth in this Section, from and
after the Time of Distribution the VRM Group shall assume, and shall be solely
responsible for all Liabilities existing under the Company Pension Plan as of
the Time of Distribution to or with respect to Company and VRM Participants.
Each Company Participant in the Company Pension Plan shall become entitled to
all benefits accrued and vested under the Company Pension Plan as of the Time of
Distribution pursuant to the terms and conditions of the Company Pension Plan
upon termination of his or her employment with the Company, but (except in the
case of the death of the Participant) no earlier than the date of the
Participant's attainment of the Early Retirement Age (as defined in Section 1.16
of the Company Pension Plan).

4.02. Non-Employee Directors Pension Plan. The Company and VRM shall take
-----------------------------------
all action necessary or appropriate (including amending appropriate Company
Plans, including, without limitation, the Non-Employee Directors Pension Plan)
so that, effective as of the Time of Distribution, VRM shall assume and be
solely responsible for all Liabilities existing under the Non-Employee Directors
Pension Plan as of the Time of Distribution. VRM and the Company shall
cooperate in taking all actions necessary or appropriate to accomplish the
foregoing.

4.03. Thrift Plan. (a) The Company and VRM shall take all action necessary
-----------
or appropriate (including amending appropriate Company Plans, including,
without limitation, the Company Thrift Plan) so that (i) effective as of the
Time of Distribution, VRM shall become the Sponsor (as defined in the Company
Thrift Plan) of the Company Thrift Plan (such plan, following such event, is
hereinafter referred to as the "VRM Thrift Plan"), and in such capacity assume
responsibility for maintaining the VRM Thrift Plan, and (ii) immediately
following the Time of Distribution, each Company Employee in the VRM Thrift Plan
shall be entitled, in connection with the transactions contemplated by the
Merger Agreement and to the extent permissible by applicable law and the Plan,
to direct the trustee of the VRM Thrift Plan to take any of the following
actions with respect to the Company Employee's account (including all Company
contributions thereto, whether previously vested or nonvested, and the earnings
thereon) in the VRM Thrift Plan: (A) maintain the account in the VRM Thrift
Plan; (B) transfer the account to a qualified Individual Retirement Account
held in the name of such Participant; (C) transfer the account to the Merger
Partner Thrift Plan; or (D) receive a distribution

-9-
<PAGE>

of the account. The transfers described in clauses (ii)(B) and (C) of this
paragraph (each a "Thrift Plan Transfer") shall be effected in cash, except that
the Merger Partner Thrift Plan may accept promissory notes evidencing any
outstanding participant loans. As a condition to the Merger Partner Thrift Plan
accepting any transfer under this Section 4.03, VRM shall provide Acquiror with
an IRS letter ruling addressed to VRM, an IRS Determination Letter or an opinion
of counsel satisfactory to Acquiror confirming the permissibility of the
transfers under applicable law.

(b) VRM and the Company shall cooperate in making all appropriate filings
required under the Code or ERISA, and the regulations thereunder and any
applicable securities laws, implementing all appropriate communications with
Company Thrift Plan participants, transferring appropriate records, and taking
all such other actions as may be necessary and appropriate to implement the
provisions of this Section and to permit the timely effectuation of Thrift Plan
Transfers.

(c) From and after the time when VRM becomes Sponsor of the Company Thrift
Plan, VRM and the VRM Thrift Plan shall be solely responsible for all
Liabilities of the Company under the Company Thrift Plan arising after the Time
of Distribution to or with respect to VRM Participants, Company Former
Employees, and Company Employees who have elected to maintain their account
balances in the VRM Thrift Plan, except that the Company shall be responsible
------
for any Liabilities arising under Section 5.2 of the Company Thrift Plan with
respect to any Participant Basic Contribution (as such term is defined in the
Company Thrift Plan) for any Company Employee made with respect to any period of
employment prior to the Time of Distribution. The VRM Group and the VRM
Thrift Plan shall be solely responsible for all Liabilities arising out of or
relating to the VRM Thrift Plan.

4.04. Excess Thrift Plan. (a) The Company and VRM shall take all action
------------------
necessary or appropriate (including amending appropriate Company Plans,
including, without limitation, the Company Excess Thrift Plan) so that,
effective as of the Time of Distribution, VRM shall become the Sponsor (as
defined in the Company Excess Thrift Plan) of the Company Excess Thrift Plan
(such plan, following such event, is hereinafter referred to as the "VRM Excess
Thrift Plan"), and in such capacity assume responsibility for maintaining the
VRM Excess Thrift Plan and for all Liabilities of the Company under the Company
Excess Thrift Plan arising after the Time of Distribution to or with respect to
VRM Participants and Company Participants, except
------

-10-
<PAGE>

that the Company shall be responsible for any Liabilities arising under the
Company Excess Thrift Plan with respect to any Participant Basic Contribution
(as such term is defined in the Company Thrift Plan) for any Company Employee
made with respect to any period of employment prior to the Time of Distribution.
The VRM Group and the VRM Excess Thrift Plan shall be solely responsible for all
Liabilities arising out of or relating to the VRM Excess Thrift Plan.

4.05. Supplemental Retirement Plan and Supplemental Executive Retirement
------------------------------------------------------------------
Agreements. (a) Effective as of the Time of Distribution, the Company shall
- ----------
amend the Company Supplemental Retirement Plan, if necessary, so that (i) no VRM
Employee who is a participant therein shall be deemed to have terminated
employment as a result of the Distribution or as a result of becoming a VRM
Employee in connection with the Distribution and (ii) from and after the Time
of Distribution, VRM shall become the sponsor of the Company Supplemental
Retirement Plan and assume and remain solely responsible for all Liabilities of
the Company arising under the Company Supplemental Retirement Plan to or
relating to both Company Participants and VRM Participants.

(b) Effective as of the Time of Distribution, the Company shall amend such
Company SERAs as may be necessary so that (i) no VRM Employee who is a signatory
to a SERA shall be deemed to have terminated employment as a result of the
Distribution or as a result of becoming a VRM Employee in connection with the
Distribution, and (ii) from and after the Time of Distribution, VRM shall assume
and remain solely responsible for all Liabilities of the Company arising under
Company SERAs to or relating to both Company Participants and VRM Participants.

(c) VRM and the Company shall cooperate in taking all actions necessary or
appropriate to accomplish the foregoing and to ensure that as of the Time of
Distribution, the Company ceases to have any Liabilities to or relating to
Company Participants and VRM Participants under the Company Supplemental
Retirement Plan and any Company SERA, including, but not limited to, the
following: (i) amending the Company Supplemental Retirement Plan or any grant
thereunder; (ii) obtaining any necessary consents of affected Company or VRM
Employees; and (iii) effective as of the Time of Distribution, transferring to
VRM control of the Rabbi Trust formed by that certain Trust Agreement, dated as
of September 1, 1996, between the Company and Frost National Bank of San
Antonio, N.A., as trustee.

-11-
<PAGE>

4.06. Other Postemployment Benefits. The Company and VRM shall take all
-----------------------------
action necessary or appropriate so that effective at the Time of Distribution,
VRM shall assume and be solely responsible for all Liabilities to Company Former
Employees and VRM Former Employees and (except with respect to any period after
such persons subsequently recommence active employment with the Company) all
Company and VRM Employees who at the Time of Distribution are not actively at
work (excluding Company Employees who are on vacation at such time) under the
Company's health care and life insurance programs.

ARTICLE V

OTHER PLANS AND ARRANGEMENTS

5.01. Deferred Compensation. Effective as of the Time of Distribution, the
---------------------
Company shall amend the Company Deferred Compensation Plans, if necessary, so
that (a) no VRM Employee who is a participant therein shall be deemed to have
terminated employment as a result of the Distribution or as a result of becoming
a VRM Employee in connection with the Distribution and (b) from and after the
Time of Distribution, VRM shall become the sponsor of the Deferred Compensation
Plans and assume and remain solely responsible for all Liabilities of the
Company arising under the Company Deferred Compensation Plans to or relating to
both Company Participants and VRM Participants. VRM and the Company shall
cooperate in taking all actions necessary or appropriate to accomplish the
foregoing and to ensure that, as of the Time of Distribution, the Company ceases
to have any Liabilities to or relating to Company Participants or VRM
Participants under the Company Deferred Compensation Plans, including, but not
limited to, the following: (i) amending the Company Deferred Compensation Plans
or any grant thereunder and (ii) obtaining any necessary consents of affected
participants, and (iii) causing the insurance policies referred to in Section
2.1(b)(ii)(Q) of the Distribution Agreement to be assigned to VRM.

5.02. Severance Pay. (a) VRM and the Company agree that individuals who,
-------------
on or prior to the Time of Distribution, in connection with the Distribution,
cease to be Company Employees and become VRM Employees shall not be deemed to
have experienced a termination or severance of employment from the Company and
its Subsidiaries for purposes of any policy, plan, program or agreement of the
Company or any of its Subsidiaries that provides for the payment of severance,
salary continuation or similar benefits.

-12-
<PAGE>

(b) VRM shall assume and be solely responsible for all Liabilities of the
Company in connection with claims made by or on behalf of VRM Employees in
respect of severance pay, salary continuation and similar obligations relating
to the termination or alleged termination of any such person's employment on
or after the Time of Distribution.

5.03 VESOP. (a) At a date sufficiently in advance of the Time of
-----
Distribution to permit the requirements of paragraph (b) of this Section to be
met, the Company shall direct the trustee of the Company's VESOP to sell an
amount of the Company's Common Stock maintained in the Exempt Loan Suspense
Account (as described in Section 5.4(a)(1) of the VESOP) such that the proceeds
from such sale (the "VESOP Stock Sale") are sufficient to prepay the Notes in
whole; provided, however, that the VESOP Stock Sale shall occur via transactions
-------- -------
on a national exchange or in the over-the-counter market, to parties other than
a "party in interest," as defined in ERISA Section 3(14), and for "adequate
consideration," as defined in ERISA Section 3(18).

(b) After the VESOP Stock Sale, but prior to the Thrift Plan Transfer, the
Company shall (i) direct the trustee of the VESOP to release the stock remaining
in the Exempt Loan Suspense Account, if any, and allocate such stock to Company
Participants and VRM Participants in the VESOP in the manner prescribed by
Section 5.5 of the VESOP, as amended, and (ii) following such release and
allocation, the Company shall cause the VESOP to be terminated and/or merged
into the Company Thrift Plan, in a transaction consistent (in the case of a
merger) with the requirements of Section 414(1) of the Code.

(c) If the VESOP is merged into the Company Thrift Plan, immediately after
receipt from the VESOP of the accounts of Company and VRM Participants in the
VESOP, the trustee of the Company Thrift Plan shall allocate the stock thus
transferred to the Participants' respective Thrift Plan accounts; provided that,
in the case of any VESOP Participant who, as of the date of such allocation, is
not participating in the Company Thrift Plan, the Company and the trustee of the
Company Thrift Plan shall take all action necessary to establish a Company
Thrift Plan account for such Participant, to which the stock transferred from
the VESOP shall be allocated.

(d) VRM and the Company shall cooperate in making all appropriate filings
required under the Code or ERISA and the regulations thereunder and any
applicable securities laws, implementing all appropriate communications with
VESOP participants, transferring records, and taking all such other

-13-
<PAGE>

actions as may be necessary and appropriate to implement the provisions of this
Section.

5.04. ESOP. (a) Prior to the Thrift Plan Transfer, the Company shall
----
cause the ESOP to be terminated and/or merged into the Company Thrift Plan, in a
transaction consistent (in the case of a merger) with the requirements of
Section 414(1) of the Code.

(b) If the ESOP is merged into the Company Thrift Plan, immediately after
receipt from the ESOP of the accounts of Company and VRM Participants in the
ESOP, the trustee of the Company Thrift Plan shall allocate the stock thus
transferred to the Participants' respective Thrift Plan accounts; provided that,
in the case of any ESOP Participant who, as of the date of such allocation, is
not participating in the Company Thrift Plan, the Company and the trustee of the
Company Thrift Plan shall take all action necessary to establish a Company
Thrift Plan account for such Participant, to which the stock transferred from
the ESOP shall be allocated.

(c) VRM and the Company shall cooperate in making all appropriate filings
required under the Code or ERISA and the regulations thereunder and any
applicable securities laws, implementing all appropriate communications with
ESOP participants, transferring records, and taking all such other actions as
may be necessary and appropriate to implement the provisions of this Section.

5.05. Reimbursement Account Plan. Effective as of the Time of
--------------------------
Distribution, the Company shall amend the Company Reimbursement Account Plan, if
necessary, so that: (a) effective as of the Time of Distribution, VRM shall have
responsibility for administering and maintaining such plan and thereby assume,
and be solely responsible for, all Liabilities existing under the Reimbursement
Account Plan to or with respect to Company Participants and VRM Participants;
and (b) any Company Employee shall be entitled to continue to receive
reimbursements for the 1997 plan year pursuant to the terms of the Company
Reimbursement Account Plan and such transaction rules as VRM may adopt until
[April 30, 1998].

ARTICLE VI

OTHER LIABILITIES

6.01. Other Liabilities and Obligations. As of the Time of Distribution:
---------------------------------
(i) VRM shall assume and be solely responsible for all Liabilities of the
Company not otherwise provided for in this Agreement to or relating to VRM
Employees and VRM

-14-
<PAGE>

Former Employees arising out of or relating to employment by any of the Company
or VRM, or any predecessors thereof; and (ii) the Company shall assume and be
solely responsible for all Liabilities of VRM not otherwise provided for in
this Agreement to or relating to Company Participants arising out of or relating
to employment by any of the Company or VRM, or any predecessors thereof.

ARTICLE VII

MISCELLANEOUS

7.01. Recognition of Company Employment Service, etc. To the extent
----------------------------------------------
applicable, the VRM Plans shall recognize service by a VRM Employee before the
Distribution with the Company as service with VRM. The foregoing provision
shall not, however, be construed to require VRM or any member of the VRM Group
to adopt or continue any specific employee benefit plans or arrangements.

7.02. Indemnification. All Liabilities retained or assumed by or
---------------
allocated to VRM pursuant to this Agreement shall be deemed to be Indemnifiable
Losses arising out of the VRM Business, as defined in the Distribution
Agreement, and all Liabilities retained or assumed by or allocated to the
Company pursuant to this Agreement shall be deemed to be Indemnifiable Losses
arising out of the Company Business, as defined in the Distribution Agreement
and, in each case, shall be subject to the indemnification provisions set forth
in Article VIII thereof.

7.03. Guarantee of Subsidiaries' Obligations. Each of the parties hereto
--------------------------------------
shall cause to be performed, and hereby guarantees the performance and payment
of, all actions, agreements, obligations and liabilities set forth herein to
be performed or paid by any Subsidiary of such party which is contemplated
by the Distribution Agreement to be a Subsidiary of such party on or after the
Time of Distribution.

7.04. Sharing of Information. Each of the Company and VRM shall provide
----------------------
to the other all such information in its possession as the other may reasonably
request to enable it to administer its employee benefit plans and programs, and
to determine the scope of, and fulfill, its obligations under this Agreement.
Such information shall, to the extent reasonably practicable, be provided in
the format and at the times and places requested, but in no event shall the
party providing such information be obligated to incur any direct expense not
reimbursed by the party making such request, nor to make such

-15-
<PAGE>

information available outside its normal business hours and premises.

7.05. Amendments. This Agreement may be amended, modified or
----------
supplemented only by a written agreement signed by the parties hereto and the
Acquiror.

7.06. Successors and Assigns. This Agreement and all of the provisions
----------------------
hereof shall be binding upon and inure to the benefit of the parties and their
respective successors and permitted assigns.

7.07. Termination. This Agreement shall be terminated in the event that
-----------
the Distribution Agreement is terminated and the Distribution abandoned prior to
the Time of Distribution. In the event of such termination, neither party shall
have any liability of any kind to the other party.

7.08. Rights to Amend or Terminate Plans; No Third Party Beneficiaries.
----------------------------------------------------------------
No provision of this Agreement shall be construed (a) to limit the right of any
member of the Company Group or any member of the VRM Group to amend any plan or
terminate any plan, or (b) to create any right or entitlement whatsoever in
any employee or beneficiary including, without limitation, a right to continued
employment or to any benefit under a plan or any other benefit or compensation
(it being understood that this Agreement will also not be construed to limit any
right or entitlement of any employee or beneficiary existing without reference
to this Agreement). This Agreement is solely for the benefit of the parties
hereto and their respective Subsidiaries and should not be deemed to confer
upon third parties any remedy, claim, liability, reimbursement, claim of action
or other right in excess of those existing without reference to this Agreement.

7.09. Transfer of Reserves. To the extent that any Liability assumed by
--------------------
VRM hereunder is secured by a reserve on the books of the Company, such reserve
shall be transferred from the Company to the books of VRM as soon as practicable
on or following the Time of Distribution.

7.10. Further Transfers. The Company and VRM recognize that there may be
-----------------
VRM Employees who will, after the Time of Distribution, become employed by the
Company and there may be Company Employees who become employed, after the Time
of Distribution, by VRM. If the Company and VRM (each in their sole
discretion) so agree with respect to any such individuals, the assets and
liabilities with respect to such employees which are associated with the plans
and programs described in this Agreement may be transferred and assumed in a
manner consistent with

-16-
<PAGE>

this Agreement and such employees will be treated as Company Employees or VRM
Employees, as the case may be. Any such transfers or assumptions will be
considered to be governed by the terms of this Agreement and shall not require
the agreement of the Company and VRM if they occur within 3 months of the Time
of Distribution.

7.11. Payment Under Other Agreements. No payment made by one party to the
------------------------------
other pursuant to this Agreement will affect in any manner any payments required
to be made under the Distribution Agreement or any other agreement between the
parties hereto, including, without limitation, the settlement of intercompany
payables and receivables provided for in the Distribution Agreement.

7.12. Incorporation by Reference. The following provisions of the
--------------------------
Distribution Agreement are hereby incorporated into this Agreement by reference
(except that references therein to the Distribution Agreement shall be deemed to
be references to this Agreement): Section 6.5 (Confidentiality); Section 9.4
(Governing Law); Section 9.5 (Notices); Section 9.3 (Counterparts); Section 9.10
(Severability); and Section 9.9 (Captions).

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the date first above written.

VALERO ENERGY CORPORATION

By:___________________________________
Name:
Title:

VALERO REFINING AND MARKETING
COMPANY

By:___________________________________
Name:
Title:

-17-
<PAGE>

SCHEDULE A

LIST OF COMPANY PLANS

EMPLOYEE BENEFIT PLANS/AGREEMENTS/INSURANCE POLICIES

Benefit Plans
- -------------
*Valero Energy Corporation Thrift Plan
*Excess Thrift Plan
*Employees Stock Ownership Plan
*Pension Plan
*Supplemental Pension Plan
*Valero Employees' Stock Ownership Plan (VESOP)
Restricted Stock Bonus and Incentive Stock Plan
Stock Option Plan No. 3
Stock Option Plan No. 4
Stock Option Plan No. 5
Executive Stock Incentive Plan
*Executive Incentive Bonus Plan
*Supplemental Executive Retirement Plan (SERP)
*Key Employee Deferred Compensation Plan
*Executive Deferred Compensation Plan
*Non-Employee Director Stock Option Plan
*Non-Employee Director Retirement Plan
*1990 Restricted Stock Plan for Non-Employee Directors
All-Employee Incentive Bonus Plan
Shareholder Value Bonus Plan
*Flex Plan
*Comprehensive Health Care Plan - Active/Retiree
- Pacific Care/PCA/Principal
*Survivor Income Benefit Plan
*Life (Basic, Supplemental, & Retiree) and Accidental Death & Dismemberment
Plan
*Long-Term Disability Plan/LTD ASO - Administrative
*Reimbursement Account Plan
*Dependent Life Plan
*Vision Care
*Dental
*Business Travel Accident Plan
*Educational Assistance Program
Severance Pay Plan
*Workers' Compensation
*Fireman's Accidental Death & Dismemberment
*Executive Liability Insurance

A-1
<PAGE>

*Stop Loss Insurance
Incentive Bonus Agreements
Management Stability Agreements

______________________
* All Liabilities (with respect to Company Participants and VRM Participants)
to be the sole responsibility of VRM.

A-2
<PAGE>

INDIVIDUAL INDEMNIFICATION AGREEMENTS WITH EFFECTIVE DATES

Consulting Agreements - Leroy Lamprecht (pending)
Part-time Employment Agreements
Executive Separation Agreements
Joe Becraft (11/20/96) Palmer Moe

SERA participants
Curt Wilker (11/1/92) James Strickland (11/1/92)
Leroy Lamprecht - pending Geoff Willig (pending)

Canadian Employees - Special benefit arrangement included in offer letter
Leslee Horniacheck (1/8/96) Robert Fougere (4/17/96)

Part-time Employees with special benefit arrangements
- -----------------------------------------------------
Stephanie Baller (7/1/96)
Cindy Baldwin (6/16/96)
Pat Barela (4/1/96)
Susie Gold (7/1/96)
Liza Holmes (2/1/96)
Jeanine Leeder (7/16/96)
Joanne Poss (7/16/96)
Becky Richard (5/1/96)

Individual Retirement Arrangements
- ----------------------------------
William E. Greehey
Edward C. Benninger, Jr.
Stan L. McLelland
John Ehlers

Indemnification Agreements
- --------------------------

Valero Energy Corporation -- Current Directors
- ----------------------------------------------
Edward C. Benninger, Jr., dated February 24, 1987
Ronald K. Calgaard, dated February 16, 1996
Robert G. Dettmer, dated October 17, 1991
A. Ray Dudley, dated July 21, 1988
Ruben M. Escobedo, dated October 1, 1994
William E. Greehey, dated February 24, 1987
James L. Johnson, dated April 25, 1991
Lowell H. Lebermann, dated February 24, 1987
Susan Kaufman Purcell, dated October 1, 1994

Valero Energy Corporation -- Former Directors
- ---------------------------------------------
F. Joseph Becraft, dated February 24, 1987
W. Richard Gingham, dated February 24, 1987
Jack T. Currie, dated February 24, 1987
Joe B. Foster, dated May 17, 1990
Robert B. Gilmore, dated February 24, 1987
John C. Holmgreen, dated February 24, 1987

A-3
<PAGE>

INDIVIDUAL INDEMNIFICATION AGREEMENTS WITH EFFECTIVE DATES

Palmer L. Moe, dated February 24, 1987
Mayfield R. Shilling, February 24, 1987
Philip K. Verleger, dated April 25, 1991
Harry E. Walker, February 24, 1987

Valero Energy Corporation -- Current Officers
- ---------------------------------------------
G. G. Beem, dated February 24, 1987
John D. Gibbons, dated October 15, 1992
John H. Krueger, dated September 17, 1992
Stan L. McLelland, dated February 24, 1987
Roberta M. Rossi, dated January 21, 1993
Rand C. Schmidt, dated February 24, 1987
Diana J. Shiller, dated February 24, 1987
William H. Zesch, dated February 24, 1987

Valero Energy Corporation -- Former Officers
- --------------------------------------------
James W. Allen, dated February 24, 1987
Luis A. de la Garza, dated February 24, 1987
Steven E. Fry, dated February 24, 1987
Jerry J. Fulton, dated February 24, 1987
Don M. Heep, dated February 22, 1990
Wayne H. King, dated February 24, 1987
Earl K. Lance, dated February 24, 1987
Bruce A. Smith, dated February 24, 1987
Richard A. Upton, dated February 24, 1987
Martin P. Zanotti, dated February 24, 1987

Valero Energy Corporation -- Former Directors of VNGC
- -----------------------------------------------------
Mack Wallace, dated December 21, 1987
Ronald K. Calgaard, dated December 21, 1987
Glenn Biggs, dated December 21, 1987

Valero Natural Gas Company -- Current Directors
- -----------------------------------------------
Edward C. Benninger, dated March 23, 1987
Stan L. McLelland, dated March 23, 1987

Valero Natural Gas Company -- Former Directors
- ----------------------------------------------
F. Joseph Becraft, dated March 23, 1987
E. Glenn Biggs, dated March 23, 1987
Ronald K. Calgaard, dated October 29, 1987
Ruben M. Escobedo, dated April 11, 1989
William E. Greehey, dated March 23, 1987
Palmer L. Moe, dated March 23, 1987
Mack Wallace, dated October 29, 1987

A-4
<PAGE>

INDIVIDUAL INDEMNIFICATION AGREEMENTS WITH EFFECTIVE DATES

Valero Natural Gas Company -- Current Officers
- -----------------------------------------------
G. G. Beem, dated March 23, 1987
John D. Gibbons, dated October 20, 1992
John H. Krueger, dated October 20, 1992
Rand C. Schmidt, dated March 23, 1987

Valero Natural Gas Company -- Former Officers
- ---------------------------------------------
James W. Allen, dated March 23, 1987
Luis de la Garza, dated March 23, 1987
Steven E. Fry, dated March 23, 1987
Jerry J. Fulton, dated March 23, 1987
Don M. Heep, dated June 22, 1988
Wayne H. King, dated March 23, 1987
Don E. Newquist, dated March 23, 1987
Roberta M. Rossi, dated January 20, 1993
Bruce A. Smith, dated March 23, 1987

A-5
<PAGE>

SCHEDULE B

EMPLOYEES TRANSFERRING TO VRM

B-1

<PAGE>

EXHIBIT 5.1

May 13, 1997

PG&E Corporation
77 Beale Street
San Francisco, CA 94105

Re: Registration Statement on Form S-4 of PG&E Corporation

Ladies and Gentlemen:

At your request, we have examined the Registration Statement on Form S-4
(the "Registration Statement") with respect to the shares of Common Stock, no
par value, (the "PG&E Corp. Common Stock") of PG&E Corporation ("PG&E Corp.")
proposed to be issued in connection with the merger (the "Merger") of PG&E
Acquisition Corporation, a Delaware corporation and wholly owned subsidiary of
PG&E Corp. ("PG&E Acquisition"), with Valero Energy Corporation, a Delaware
corporation ("Valero"), upon the terms and subject to the conditions set forth
in the Agreement and Plan of Merger by and among PG&E Corp., PG&E Acquisition
and Valero, dated as of January 31, 1997, as amended (the "Merger Agreement").

We examined instruments, documents, and records which we deemed relevant
and necessary for the basis of our opinion hereinafter expressed.

Based on such examination, we are of the opinion that when the shares of
PG&E Corp. Common Stock being registered under the Registration Statement have
been issued in connection with the Merger pursuant to the terms of the Merger
Agreement, the shares of PG&E Corp. Common Stock will be validly issued, fully
paid and nonassessable.

We express no opinion as to matters of law in jurisdictions other than the
State of California and the federal law of the United States.

We hereby consent to the filing of this opinion as an exhibit to the above-
referenced Registration Statement and to the use of our name wherever it appears
in the Registration Statement and in any amendment thereto. In giving such
consent, we do not consider ourselves "experts" within the meaning of that term
as used in the Securities Act of 1933, as amended, or the rules and regulations
of the Securities and Exchange Commission issued thereunder with respect to any
part of the Registration Statement, including this opinion as an exhibit or
otherwise.

Very truly yours,

ORRICK, HERRINGTON & SUTCLIFFE LLP

<PAGE>

EXHIBIT 8.1

[LETTERHEAD OF WACHTELL, LIPTON, ROSEN & KATZ]

Dated the Effective Date of the Registration Statement

Valero Energy Corporation
530 McCullough Avenue
San Antonio, Texas 78215

PG&E Corporation
77 Beale Street
San Francisco, California 94105

Dear Sirs:

We have acted as counsel to Valero Energy Corporation ("Valero") and Valero
Refining and Marketing Company ("New Valero") in connection with:

(i) the pro rata distribution (the "Distribution") of all the issued and
outstanding shares of common stock, par value $0.01 per share, of New Valero
("New Valero Common Stock"), along with the associated New Valero Rights (as
defined in the Merger Agreement, defined below), to the holders of common
stock, par value $1.00 per share, of Valero ("Valero Common Stock") in
accordance with the terms of the Agreement and Plan of Distribution to be
entered into between Valero and New Valero (the "Distribution Agreement"),
substantially in the form of Annex A to the Merger Agreement (as defined below);
and

(ii) following the Distribution, the proposed merger of PG&E Acquisition
Corporation ("Merger Sub"), a Delaware corporation and a wholly-owned subsidiary
of PG&E Corporation, a California corporation ("PG&E Corp."), with and into
Valero (the "Merger") and the conversion of each share of Valero Common Stock
outstanding immediately prior to the Merger into a fraction of a share of common
stock of PG&E Corp. ("PG&E Common Stock"), determined pursuant to a formula set
forth in the

<PAGE>

Valero Energy Corporation
PG&E Corporation
Page 2

Agreement and Plan of Merger dated as of January 31, 1997, as amended as of May
8, 1997 (the "Merger Agreement") among Valero, PG&E Corp., and Merger Sub.

Capitalized terms used herein and not otherwise defined shall have the
meanings attributed thereto in the Merger Agreement and the Distribution
Agreement.

In rendering our opinion, we have examined and relied upon the accuracy and
completeness of the facts, information, covenants and representations contained
in originals or copies, certified or otherwise identified to our satisfaction,
of the Distribution Agreement, the Merger Agreement, the Tax Sharing Agreement,
the PG&E Corp. Tax Representation Letter, the New Valero Tax Representation
Letter, the Proxy Statement-Prospectus (the "Proxy Statement-Prospectus") filed
as part of the Registration Statement of PG&E Corp. on Form S-4 (the
"Registration Statement") and such other documents as we have deemed necessary
or appropriate as a basis for the opinion set forth below. We have assumed that
(i) the Cash Dividend will be used solely to repay, in connection with the
Distributions outstanding borrowings of Valero, (ii) the Distribution Agreement
will be executed substantially in the form of Annex A to the Merger Agreement
and (iii) the Distribution and the Merger will be consummated in accordance with
the Distribution Agreement, the Merger Agreement, the Tax Sharing Agreement, the
PG&E Corp. Tax Representation Letter, the New Valero Tax Representation Letter
and as described in the Proxy Statement-Prospectus.

In rendering our opinion, we have considered the applicable provisions of
the Internal Revenue Code of 1986, as amended (the "Code"), Treasury Regulations
promulgated thereunder, pertinent judicial authorities, interpretive rulings of
the Internal Revenue Service and such other authorities as we have considered
relevant, in each case as in effect on the date hereof.

Based solely on the foregoing and legal considerations which we deem
relevant, we are of the opinion that the Distribution qualifies as a transaction
described in Section 355 of the Code and/or as a "reorganization" within the
meaning of Section 368(a)(1)(D) of the Code and the Merger qualifies as a
"reorganization" within the meaning of Section 368(a)(1)(B) of the Code and
accordingly that:

(a) No gain or loss will be recognized by Valero or New Valero as a result
of the Distribution (other than income, if any, recognized by Valero or its
subsidiaries in connection with deferred intercompany transactions under
Treasury regulation section 1.1502-13 or excess loss accounts under regulation
section 1.1502-19);

<PAGE>

Valero Energy Corporation
PG&E Corporation
Page 3

(b) No gain or loss will be recognized by (and no amount will be included
in the income of) the Valero stockholders as a result of their receipt of New
Valero Common Stock (and the associated stock purchase rights) in the
Distribution;

(c) The aggregate basis of New Valero Common Stock and Valero Common Stock
in the hands of each Valero stockholder immediately after the Distribution will
be the same as the aggregate basis of Valero Common Stock held immediately
before the Distribution and such tax basis will be allocated between the New
Valero Common Stock and Valero Common Stock based upon relative fair market
values at the time of the Distribution;

(d) The holding period of New Valero Common Stock received by a stockholder
in the Distribution will include the period during which the stockholder held
Valero Common Stock, provided that the Valero Common Stock was held as a capital
asset;

(e) Except for any cash received in lieu of fractional shares, a
stockholder will not recognize any income, gain or loss as a result of the
receipt of PG&E Corp. Common Stock in the Merger;

(f) A stockholder's tax basis for shares of PG&E Corp. Common Stock
received in the Merger, including any fractional share interest for which cash
is received, will equal such stockholder's basis in Valero Common Stock
surrendered (as determined immediately following the Distribution pursuant to
(c) above); and

Except as set forth above, we express no opinion as to the tax
consequences, whether Federal, state, local or foreign, of the Distribution or
the Merger or of any transactions related thereto. Our opinion is not binding on
the Internal Revenue Service or the courts.

We hereby consent to the filing of this opinion as Exhibit 8.1 to the
Registration Statement and to the references to this firm which appear in the
Registration Statement. In giving this consent, we do not thereby admit that we
come within the category of a person whose consent is required under Section 7
of the Securities Act of 1933, as amended, or the

<PAGE>

Valero Energy Corporation
PG&E Corporation
Page 4

rules and regulations of the Securities and Exchange Commission thereunder.

Very truly yours,

WACHTELL, LIPTON, ROSEN & KATZ

<PAGE>

EXHIBIT 8.2

May 13, 1997

PG&E Corporation
77 Beale Street
San Francisco, CA 94105

Ladies and Gentlemen:

We have acted as your counsel in connection with the transactions
contemplated by the Agreement and Plan of Merger among Valero Energy Corporation
("Valero"), PG&E Corporation ("PG&E Corp.") and PG&E Acquisition Corporation
("Acquisition"), dated as of January 31, 1997, as amended (the "Merger
Agreement"). Pursuant to the Merger Agreement, Acquisition will merge with and
into Valero (the "Merger"). In that connection, we have participated in the
preparation of a registration statement under the Securities Act of 1933, as
amended, of PG&E Corp. on Form S-4 in the form thereof filed with the Securities
and Exchange Commission (the "Registration Statement"), including a Joint Proxy
Statement/Prospectus forming Part I of the Registration Statement (the "Proxy
Statement"). Capitalized terms not otherwise defined herein shall have the
meaning specified in the Proxy Statement.

We have examined the Merger Agreement, the Proxy Statement, and such
other documents and corporate records as we have deemed necessary or appropriate
for purposes of this opinion. In addition, we have assumed that (i) the
Distribution and the Merger will be consummated in the manner contemplated in
the Proxy Statement and in accordance with the provisions of the Distribution
Agreement and the Merger Agreement, (ii) the statements concerning the
Distribution and the Merger set forth in the Proxy Statement, the Merger
Agreement, the Distribution Agreement and the Tax Sharing Agreement are accurate
and complete, and (iii) the statements and representations set forth in the tax
representation letters provided to us by Valero and PG&E Corp. are accurate and
complete.

This opinion is based on the Internal Revenue Code of 1986, as
amended, Treasury regulations promulgated thereunder, and judicial and
administrative interpretations thereof, all as in effect on the date hereof.
All of the foregoing are subject to change, perhaps with retroactive effect; any
such change may require modification of some or all of the conclusions set forth
in our opinion.

Based upon the foregoing and legal considerations that we deem
relevant, it is our opinion that:

(i) the Merger will qualify as a "reorganization" under Section
368(a)(1)(B) of the Code;

(ii) except for any cash received in lieu of fractional shares, a
stockholder of Valero will not recognize any
<PAGE>

PG&E Corporation
May 13, 1997
Page 2

income, gain or loss as a result of the receipt of PG&E Corp. Common Stock in
the Merger;

(iii) a Valero stockholder's tax basis for shares of PG&E Corp.
Common Stock received in the Merger, including any fractional share interest for
which cash is received, will equal such stockholder's basis in Valero Common
Stock surrendered; and

(iv) the holding period for the shares of PG&E Corp. Common Stock
received in the Merger, including any fractional share interest for which cash
is received, will include the period during which the Valero stockholder held
Valero Common Stock, provided such shares were held as capital assets.

Our opinion is limited to tax matters specifically addressed hereby.
The delivery of this opinion is not intended to satisfy the condition to the
closing of the Merger set forth in Section 8.3(c) of the Merger Agreement.

We hereby consent to the filing of this opinion as Exhibit 8.2 to the
Registration Statement and to the references to this firm in the sections
captioned "The Proposed Transactions -- Material Federal Income Tax
Consequences" and "Legal Matters" in the Proxy Statement. In giving this
consent, we do not thereby admit that we come within the category of a person
whose consent is required under Section 7 of the Securities Act of 1933, as
amended, or the rules and regulations of the Securities and Exchange Commission
thereunder.

Very truly yours,

ORRICK, HERRINGTON & SUTCLIFFE LLP

<PAGE>

EXHIBIT 23.1

CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS

As independent public accountants, we hereby consent to the incorporation
by reference in this Registration Statement of our report dated February 10,
1997 included or incorporated by reference in PG&E Corporation's Form 10-K for
the year ended December 31, 1996 and to all references to our firm included in
this Registration Statement.

/s/ Arthur Andersen LLP

San Francisco, California,
May 9, 1997

<PAGE>

EXHIBIT 23.2

CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS

As independent public accountants, we hereby consent to the incorporation
by reference in this Registration Statement of our report dated February 14,
1997 included in Valero Energy Corporation's Form 10-K and Form 10-K/A for the
year ended December 31, 1996, the incorporation by reference in this
Registration Statement of our report dated February 14, 1997 (except with
respect to the matters discussed in Notes 1, 2 and 3 as to which the date is May
9, 1997) included in Valero Refining and Marketing Company's Form S-1 dated May
13, 1997 and to all references to our firm included in this Registration
Statement.

/s/ Arthur Andersen LLP

San Antonio, Texas
May 13, 1997

<PAGE>

EXHIBIT 23.3

CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS

As independent public accountants, we hereby consent to the incorporation
by reference in this Registration Statement of our report dated January 31, 1997
(except with respect to the matter discussed in Note 15, as to which the date is
March 17, 1997) on the financial statements of Basis Petroleum, Inc. and
subsidiaries for the periods indicated in said report included in Valero
Refining and Marketing Company's Form S-1 dated May 13, 1997 and to all
references to our firm included in this Registration Statement.

/s/ Arthur Andersen LLP

Houston, Texas
May 13, 1997

<PAGE>

EXHIBIT 23.7

CONSENT OF LEHMAN BROTHERS INC.

We hereby consent to the use of our opinion letter dated January 31, 1997
to the Board of Directors of Valero Energy Corporation included as Appendix C to
the Proxy Statement/Prospectus which forms a part of PG&E Corporation's
Registration Statement on Form S-4 relating to the proposed Spin-Off of Valero
Refining and Marketing Company from Valero Energy Corporation and the merger of
Valero Energy Corporation with a subsidiary of PG&E Corporation and to the
references to such opinion in such Proxy. In giving such consent, we do not
admit that we come within the category of persons whose consent is required
under Section 7 of the Securities Act of 1933, as amended, or the rules and
regulations of the Securities and Exchange Commission thereunder, no do we
thereby admit that we are experts with respect to any part of such Registration
Statement within the meaning of the term "experts" as used in the Securities Act
of 1933, as amended, or the rules and regulations of the Securities and Exchange
Commission thereunder.

LEHMAN BROTHERS

By: /s/ Roy W. Jageman
------------------
Roy W. Jageman
Vice President

April, 1997

<PAGE>

EXHIBIT 24.1

POWER OF ATTORNEY

STANLEY T. SKINNER, the undersigned, Chairman of the Board, Chief
Executive Officer, and Director of PG&E Corporation, hereby constitutes and
appoints BRUCE R. WORTHINGTON, LESLIE H. EVERETT, LINDA Y.H. CHENG, ERIC
MONTIZAMBERT, KATHLEEN RUEGER, GARY P. ENCINAS, CRAIG M. BUCHSBAUM, or GRACE U.
SHIN his attorneys with full power of substitution to sign and file with the
Securities and Exchange Commission in his capacity as Chairman of the Board,
Chief Executive Officer, and Director of said corporation the registration
statement or statements covering the issuance of shares of said corporation's
common stock pursuant to the Agreement and Plan of Merger dated January 31,
1997, as may be amended or modified hereafter, in connection with the
acquisition of Valero Energy Corporation, and any and all amendments or
supplements thereto, and hereby ratifies all that said attorneys or any of them
may do or cause to be done by virtue hereof.

IN WITNESS WHEREOF, I have signed these presents this 19th day of
February, 1997.

STANLEY T. SKINNER
----------------------
STANLEY T. SKINNER
<PAGE>

POWER OF ATTORNEY

GORDON R. SMITH, the undersigned, Chief Financial Officer of PG&E
Corporation, hereby constitutes and appoints BRUCE R. WORTHINGTON, LESLIE H.
EVERETT, LINDA Y.H. CHENG, ERIC MONTIZAMBERT, KATHLEEN RUEGER, GARY P. ENCINAS,
CRAIG M. BUCHSBAUM, or GRACE U. SHIN his attorneys with full power of
substitution to sign and file with the Securities and Exchange Commission in his
capacity as Chief Financial Officer of said corporation the registration
statement or statements covering the issuance of shares of said corporation's
common stock pursuant to the Agreement and Plan of Merger dated January 31,
1997, as may be amended or modified hereafter, in connection with the
acquisition of Valero Energy Corporation, and any and all amendments or
supplements thereto, and hereby ratifies all that said attorneys or any of them
may do or cause to be done by virtue hereof.

IN WITNESS WHEREOF, I have signed these presents this 19th day of
February, 1997.

GORDON R. SMITH
---------------------
GORDON R. SMITH
<PAGE>

POWER OF ATTORNEY

CHRISTOPHER P. JOHNS, the undersigned, Controller of PG&E Corporation,
hereby constitutes and appoints BRUCE R. WORTHINGTON, LESLIE H. EVERETT, LINDA
Y.H. CHENG, ERIC MONTIZAMBERT, KATHLEEN RUEGER, GARY P. ENCINAS, CRAIG M.
BUCHSBAUM, or GRACE U. SHIN his attorneys with full power of substitution to
sign and file with the Securities and Exchange Commission in his capacity as
Controller of said corporation the registration statement or statements covering
the issuance of shares of said corporation's common stock pursuant to the
Agreement and Plan of Merger dated January 31, 1997, as may be amended or
modified hereafter, in connection with the acquisition of Valero Energy
Corporation, and any and all amendments or supplements thereto, and hereby
ratifies all that said attorneys or any of them may do or cause to be done by
virtue hereof.

IN WITNESS WHEREOF, I have signed these presents this 19th day of
February, 1997.

CHRISTOPHER P. JOHNS
---------------------
CHRISTOPHER P. JOHNS
<PAGE>

POWER OF ATTORNEY

Each of the undersigned Directors of PG&E Corporation hereby
constitutes and appoints BRUCE R. WORTHINGTON, LESLIE H. EVERETT, LINDA Y.H.
CHENG, ERIC MONTIZAMBERT, KATHLEEN RUEGER, GARY P. ENCINAS, CRAIG M. BUCHSBAUM,
or GRACE U. SHIN his or her attorneys with full power of substitution to sign
and file with the Securities and Exchange Commission in his or her capacity as
Director of said corporation the registration statement or statements covering
the issuance of shares of said corporation's common stock pursuant to the
Agreement and Plan of Merger dated January 31, 1997, as may be amended or
modified hereafter, in connection with the acquisition of Valero Energy
Corporation, and any and all amendments or supplements thereto, and hereby
ratifies all that said attorneys or any of them may do or cause to be done by
virtue hereof.

IN WITNESS WHEREOF, I have signed these presents this 19th day of
February, 1997.

STANLEY T. SKINNER RICHARD B. MADDEN
- ------------------------- ------------------------
ROBERT D. GLYNN, JR. JOHN C. SAWHILL
- ------------------------- ------------------------
RICHARD A. CLARKE DAVID M. LAWRENCE
- ------------------------- ------------------------
H. M. CONGER ALAN SEELENFREUND
- ------------------------- ------------------------
MARY S. METZ SAMUEL T. REEVES
- ------------------------- ------------------------
REBECCA Q. MORGAN CARL E. REICHARDT
- ------------------------- ------------------------
C. LEE COX BARRY LAWSON WILLIAMS
- ------------------------- ------------------------

<PAGE>

EXHIBIT 24.2

RESOLUTION OF THE
-----------------
BOARD OF DIRECTORS OF
---------------------
PG&E CORPORATION
----------------

February 19, 1997
-----------------

WHEREAS, on January 23, 1997, this Board of Directors approved the
acquisition of 100 percent of the outstanding stock of Valero Energy Corporation
("Valero Energy") through an exchange of shares of Valero Energy common stock
for shares of common stock of this corporation, immediately following a planned
spin-off by Valero Energy to its shareholders of Valero Refinery and Marketing
Company ("Valero R&M") subject to certain terms and conditions, including the
receipt of a fairness opinion from the investment banking firm of Merrill Lynch,
Pierce, Fenner & Smith Incorporated ("Merrill Lynch");

WHEREAS, this corporation formed a subsidiary, PG&E Acquisition
Corporation ("Merger Sub"), to be merged with and into Valero Energy (the
"Merger") to effectuate the acquisition of Valero Energy;

WHEREAS, this corporation and Merger Sub entered into an Agreement and
Plan of Merger, dated as of January 31, 1997 (the "Merger Agreement"), for the
acquisition of 100 percent of the stock of Valero Energy in exchange for
consideration predicated on a total enterprise value of approximately $1.5
billion following the planned spin-off of Valero R&M;

WHEREAS, pursuant to the Merger, all shares of Valero Energy common
stock and options to purchase Valero Energy common stock (collectively, "Valero
Energy Stock") outstanding immediately prior to the Merger shall be converted
into shares of this corporation's common stock or options to purchase such
shares (as the case may be) in accordance with the terms of the Merger
Agreement, and each share of the common stock of Merger Sub outstanding
immediately prior to the Merger shall be converted into one share of common
stock of Valero Energy, the surviving corporation; and

WHEREAS, Merrill Lynch has issued a fairness opinion concluding that
the proposed consideration to be paid by this corporation pursuant to the
Merger, taken as a whole, is fair to the corporation from a financial point of
view;

NOW, THEREFORE, BE IT RESOLVED that the Merger Agreement is hereby
approved, and that actions of the officers, counsel, and agents of this
corporation on behalf of this corporation in connection with the Merger
Agreement and the acquisition of Valero Energy are hereby ratified and confirmed
in all respects; and

BE IT FURTHER RESOLVED that the Chairman of the Board, the President,
the Chief Financial Officer, the Treasurer, and the General Counsel of this
corporation, and the Chairman of the Board of Pacific Gas Transmission Company
(collectively, the
<PAGE>

"Delegated Officers") each are hereby authorized to execute and deliver any
amendments or modifications to the Merger Agreement as such officers may
determine to be advisable, provided that the Delegated Officers shall not be
authorized to amend or modify the Merger Agreement to provide for additional
consideration to be paid by this corporation in connection with the Merger; and

BE IT FURTHER RESOLVED that, in connection with the Merger, this
corporation shall issue such number of shares of this corporation's common stock
(the "Stock") to the holders of the Valero Energy Stock outstanding immediately
prior to the Merger as provided for by the terms of the Merger Agreement, as may
be amended or modified by any of the Delegated Officers, subject to the
limitations herein; and

BE IT FURTHER RESOLVED that the officers and counsel of this
corporation are hereby authorized, jointly and severally, to take such actions
and execute and deliver such agreements and documents on behalf of this
corporation as may in their judgment be necessary, convenient, or appropriate to
carry out these resolutions, including, without limitation, the preparation,
execution, and filing of a registration statement or statements under the
Securities Act of 1933 with the Securities and Exchange Commission, and any
necessary amendments or supplements thereto, with respect to the Stock (the
"Registration Statement"); and

BE IT FURTHER RESOLVED that each of BRUCE R. WORTHINGTON, LESLIE H.
EVERETT, LINDA Y.H. CHENG, ERIC MONTIZAMBERT, KATHLEEN RUEGER, GARY P. ENCINAS,
CRAIG M. BUCHSBAUM, and GRACE U. SHIN is hereby authorized to sign the
Registration Statement on behalf of this corporation and all amendments or
supplements thereto, and to do any and all acts necessary to satisfy the
requirements of the Securities Act of 1933 and the regulations of the Securities
and Exchange Commission adopted pursuant thereto with regard to the filing of
the Registration Statement and all amendments or supplements thereto; and

BE IT FURTHER RESOLVED that each of the Delegated Officers, the
Corporate Secretary, each Assistant Corporate Secretary, and the Assistant
Treasurer of this corporation is hereby authorized on behalf of this corporation
to sign any applications to be made to the New York Stock Exchange, the Pacific
Stock Exchange, and any other stock exchange as may be deemed appropriate by any
of the foregoing officers for the listing thereon of the Stock, and any
documents or agreements relating thereto, and to make such changes therein, as
may be necessary to conform with requirements for listing, to appear, if
necessary, before the officials of an exchange, and to appoint an agent for this
corporation to carry out necessary acts in connection with such listing, if
determined by such officer to be necessary or advisable; and

BE IT FURTHER RESOLVED that this corporation shall issue and deliver,
at or after the closing and at such other times as contemplated by the Merger
Agreement,

-2-
<PAGE>

certificates representing the shares of Stock in the form heretofore approved by
this Board and in accordance with said Merger Agreement; and

BE IT FURTHER RESOLVED that the certificates representing said Stock
may be executed and authenticated by facsimile signatures of the Chairman of the
Board and of the Corporate Secretary of this corporation; and

BE IT FURTHER RESOLVED that the Transfer Agent of this corporation is
hereby authorized and requested to countersign, by manual or facsimile
signature, and deliver in accordance with directions of the Corporate Secretary
of this corporation fullpaid certificates representing whole shares only for all
or any part of said Stock when such certificates are duly executed and
authenticated in the manner provided for in the resolutions of this Board, and
also to countersign, by manual or facsimile signature, and deliver additional
new fullpaid certificates representing all or any part of such Stock, upon
receiving and cancelling therefor fullpaid certificates representing a like
number of shares of such Stock duly assigned and transferred by the registered
owner or owners thereof, their successors, or assigns; and

BE IT FURTHER RESOLVED that WELLS FARGO BANK, N.A., Registrar of
Transfers, is hereby authorized and requested to register and countersign, by
manual signature, fullpaid certificates for all or any part of said Stock when
such certificates, duly executed and authenticated in the manner provided for in
the resolutions of this Board and countersigned, by manual or facsimile
signature, by its Transfer Agent are presented for registration, and also to
register and countersign additional new fullpaid certificates representing all
or any part of such Stock when executed, authenticated, and countersigned as
above described and accompanied by cancelled old certificates representing a
like number of shares of such Stock, in lieu of which such new certificates are
to be issued; and

BE IT FURTHER RESOLVED that the officers, employees, and agents of
this corporation, including the Transfer Agent and WELLS FARGO BANK, N.A., as
Registrar of Transfers, are hereby authorized and directed to do any and all
things necessary in order so to issue and deliver said shares and the
certificates representing said shares; and

BE IT FURTHER RESOLVED that the appropriate officers of this
corporation are authorized to prepare, execute, and file all necessary other
documents, and to take all action which, as a result of the proposed issuances
of the Stock herein authorized, may be required to comply with the securities or
blue sky laws of the various states and jurisdictions of the United States; and
that this Board of Directors hereby adopts the form of any resolutions required
by any such authority to be filed in connection with any applications, consents
to service, issuers' covenants, or other documents if (1) in the opinion of the
officers of this corporation executing the same, adoption of such resolutions is
necessary or appropriate, and (2) the Corporate Secretary or an Assistant
Corporate Secretary of this corporation evidences such adoption by inserting in
the minutes of this meeting copies of

-3-
<PAGE>

such resolutions, which will thereupon be deemed to be adopted by this Board of
Directors with the same force and effect as if presented at this meeting; and

BE IT FURTHER RESOLVED that the officers, counsel, and Transfer Agent
of this corporation each are authorized to perform and to do such acts and
things and to execute and deliver such other agreements, undertakings,
documents, instruments, or certificates as such officer may deem necessary,
desirable, or appropriate in order to carry out the intent of the foregoing
resolutions and fully to perform the obligations of this corporation under the
agreements executed and delivered on behalf of this corporation pursuant to such
resolutions.

-4-