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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
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Commission file number 1-13175
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VALERO ENERGY CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 74-1828067
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Valero Place
San Antonio, Texas
(Address of principal executive offices)
78212
(Zip Code)
(210) 370-2000
(Registrant's telephone number, including area code)
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
Indicated below is the number of shares outstanding of the registrant's
only class of common stock, as of May 1, 2000.
Number of
Shares
Title of Class Outstanding
-------------- -----------
Common Stock, $.01 Par Value 55,987,730
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VALERO ENERGY CORPORATION AND SUBSIDIARIES
INDEX
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets - March 31, 2000 and December 31, 1999.................................... 3
Consolidated Statements of Income - For the Three Months Ended
March 31, 2000 and 1999........................................................................... 4
Consolidated Statements of Cash Flows - For the Three Months Ended
March 31, 2000 and 1999........................................................................... 5
Notes to Consolidated Financial Statements............................................................ 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................................................. 14
Item 3. Quantitative and Qualitative Disclosures About Market Risk....................................... 24
PART II. OTHER INFORMATION................................................................................. 27
Item 1. Legal Proceedings................................................................................ 27
Item 6. Exhibits and Reports on Form 8-K................................................................. 27
SIGNATURE................................................................................................... 28
2
3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
VALERO ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(THOUSANDS OF DOLLARS)
March 31,
2000 December 31,
(Unaudited) 1999
----------- ------------
ASSETS
CURRENT ASSETS:
Cash and temporary cash investments .............................. $ 8,509 $ 60,087
Receivables, less allowance for doubtful accounts of
$3,221 (2000) and $3,038 (1999) ................................ 403,557 372,542
Inventories ...................................................... 436,197 303,388
Current deferred income tax assets ............................... 89,477 79,307
Prepaid expenses and other ....................................... 22,591 13,534
----------- -----------
960,331 828,858
----------- -----------
PROPERTY, PLANT AND EQUIPMENT - including
construction in progress of $128,860 (2000)
and $114,747 (1999), at cost ..................................... 2,711,907 2,686,684
Less: Accumulated depreciation ................................. 726,723 702,170
----------- -----------
1,985,184 1,984,514
----------- -----------
DEFERRED CHARGES AND OTHER ASSETS .................................. 175,659 165,900
----------- -----------
$ 3,121,174 $ 2,979,272
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term debt .................................................. $ 126,500 $ --
Accounts payable ................................................. 732,561 616,895
Accrued expenses ................................................. 96,213 102,087
----------- -----------
955,274 718,982
----------- -----------
LONG-TERM DEBT ..................................................... 645,155 785,472
----------- -----------
DEFERRED INCOME TAXES .............................................. 296,628 275,521
----------- -----------
DEFERRED CREDITS AND OTHER LIABILITIES ............................. 115,413 114,528
----------- -----------
COMMON STOCKHOLDERS' EQUITY:
Common stock, $.01 par value - 150,000,000 shares authorized;
issued 56,331,166 (2000 and 1999) shares ....................... 563 563
Additional paid-in capital ....................................... 1,088,829 1,092,348
Retained earnings (accumulated deficit) .......................... 27,408 (3,331)
Treasury stock, 398,632 (2000) and 264,464 (1999) shares,
at cost ........................................................ (8,096) (4,811)
----------- -----------
1,108,704 1,084,769
----------- -----------
$ 3,121,174 $ 2,979,272
=========== ===========
See Notes to Consolidated Financial Statements.
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VALERO ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
Three Months Ended
March 31,
2000 1999
----------- -----------
OPERATING REVENUES ................................................. $ 2,928,617 $ 1,337,103
----------- -----------
COSTS AND EXPENSES:
Cost of sales and operating expenses ............................. 2,827,341 1,287,347
Selling and administrative expenses .............................. 19,669 18,188
Depreciation expense ............................................. 24,555 23,048
----------- -----------
Total .......................................................... 2,871,565 1,328,583
----------- -----------
OPERATING INCOME ................................................... 57,052 8,520
OTHER INCOME (EXPENSE), NET ........................................ 2,647 (79)
INTEREST AND DEBT EXPENSE:
Incurred ......................................................... (14,147) (14,288)
Capitalized ...................................................... 1,387 1,831
----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES .................................. 46,939 (4,016)
INCOME TAX EXPENSE (BENEFIT) ....................................... 16,200 (1,300)
----------- -----------
NET INCOME (LOSS) .................................................. $ 30,739 $ (2,716)
=========== ===========
EARNINGS (LOSS) PER SHARE OF COMMON STOCK .......................... $ .55 $ (.05)
Weighted average common shares outstanding (in thousands) ...... 55,874 56,057
EARNINGS (LOSS) PER SHARE OF COMMON STOCK -
ASSUMING DILUTION .............................................. $ .54 $ (.05)
Weighted average common shares outstanding (in thousands) ...... 57,234 56,057
DIVIDENDS PER SHARE OF COMMON STOCK ................................ $ .08 $ .08
See Notes to Consolidated Financial Statements.
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VALERO ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(THOUSANDS OF DOLLARS)
(UNAUDITED)
Three Months Ended
March 31,
------------------------------
2000 1999
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ................................................ $ 30,739 $ (2,716)
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation expense ......................................... 24,555 23,048
Amortization of deferred charges and other, net .............. 8,043 13,827
Changes in current assets and current liabilities ............ (63,089) 113,981
Deferred income tax expense (benefit) ........................ 11,200 (1,300)
Changes in deferred items and other, net ..................... (271) 1,579
----------- -----------
Net cash provided by operating activities .................. 11,177 148,419
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures ............................................. (25,229) (38,871)
Deferred turnaround and catalyst costs ........................... (16,741) (30,053)
Other, net ....................................................... 4 (150)
----------- -----------
Net cash used in investing activities .......................... (41,966) (69,074)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in short-term debt, net ...................... 126,500 (97,000)
Long-term borrowings ............................................. 60,000 448,323
Long-term debt reduction ......................................... (200,000) (426,000)
Common stock dividends ........................................... (4,469) (4,486)
Issuance of common stock ......................................... 5,912 2,586
Purchase of treasury stock ....................................... (8,732) (624)
----------- -----------
Net cash used in financing activities .......................... (20,789) (77,201)
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NET INCREASE (DECREASE) IN CASH AND TEMPORARY
CASH INVESTMENTS ................................................. (51,578) 2,144
CASH AND TEMPORARY CASH INVESTMENTS AT
BEGINNING OF PERIOD .............................................. 60,087 11,199
----------- -----------
CASH AND TEMPORARY CASH INVESTMENTS AT
END OF PERIOD .................................................... $ 8,509 $ 13,343
=========== ===========
See Notes to Consolidated Financial Statements.
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VALERO ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
As used in this report, the term "Valero" may, depending upon the
context, refer to Valero Energy Corporation, one or more of its consolidated
subsidiaries, or all of them taken as a whole.
The consolidated financial statements included in this report have been
prepared by Valero without audit, in accordance with the rules and regulations
of the Securities and Exchange Commission, or SEC. However, all adjustments have
been made to these financial statements which are, in the opinion of Valero's
management, necessary for a fair presentation of Valero's results of operations
for the periods covered. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted as permitted under the
SEC's rules and regulations, although Valero believes that the disclosures are
adequate to make the information presented not misleading.
2. PROPOSED ACQUISITION OF CALIFORNIA REFINING AND MARKETING ASSETS
On March 2, 2000, Valero and Exxon Mobil Corporation executed a sale
and purchase agreement under which Valero agreed to acquire ExxonMobil's
Benicia, California refinery (the "Benicia Refinery") and Exxon-branded
California retail assets, which consist of approximately 80 service stations
(the "Service Station Assets") and branded supplier relationships with
approximately 260 Exxon-branded service stations (the "Distribution Assets")
(collectively, the "Benicia Acquisition"). The agreement provides for Valero to
acquire the Benicia Refinery, the Distribution Assets and the Service Station
Assets for a purchase price of $895 million plus an amount for refinery
inventories acquired in the transaction based on market-related prices at the
time of closing. ExxonMobil agreed to sell these assets as a result of consent
decrees issued by the Federal Trade Commission and the State of California
providing that certain assets be divested by ExxonMobil to satisfy
anticompetitive issues in connection with the recent merger of Exxon Corporation
and Mobil Corporation. The consummation of the Benicia Acquisition has been
approved by the Federal Trade Commission and the Office of the Attorney General
of the State of California. There are expected to be two closings for the
Benicia Acquisition. The acquisition of the Benicia Refinery and the
Distribution Assets is expected to close on or about May 15, 2000, and the
acquisition of the Service Station Assets is expected to close on or about June
15, 2000.
In connection with the Benicia Acquisition, Valero will assume the
environmental liabilities of ExxonMobil with certain exceptions. ExxonMobil will
retain liability for (i) pending penalties assessed for violations relating to
the Benicia Refinery, (ii) pending lawsuits, (iii) all costs associated with
compliance with a variance issued in connection with control of nitrogen oxides,
(iv) claims in connection with offsite transportation and disposal of wastes
prior to closing that are asserted within three years of closing or asserted
with
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VALERO ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
respect to abandoned disposal sites, (v) the capital costs incurred within five
years of closing for specified corrective action of groundwater and soil
contamination, (vi) all covered contamination at the Service Station Assets
caused by ExxonMobil or its lessees that is reflected in baseline reports
prepared prior to closing and (vii) the repair or replacement of any underground
storage tanks at the Service Station Assets found to be leaking prior to
closing. ExxonMobil has agreed to indemnify Valero for all losses related to
these retained liabilities, provided that ExxonMobil will indemnify Valero
for losses related to covered contamination at the Service Station Assets for a
period of five years from the date of closing. In addition, ExxonMobil will
indemnify Valero for breaches of its representations and warranties to the
extent that the aggregate amount of Valero's losses resulting from such
breaches exceeds $1 million and ExxonMobil receives notice of such losses
within one year after the closing date.
The Benicia Refinery is located on the Carquinez Straits of the San
Francisco Bay. It is considered a highly complex refinery and has a total
throughput capacity of 160,000 barrels per day, or "BPD." The Benicia Refinery
produces a high percentage of light products, with limited production of other
products. It can produce approximately 110,000 BPD of gasoline, 14,000 BPD of
jet fuel, 11,000 BPD of diesel and 8,000 BPD of natural gas liquids. Over 95%
of the gasoline produced by the Benicia Refinery meets the California Air
Resources Board ("CARB") II specifications for gasoline sold in California.
Valero believes that the Benicia Refinery could be modified to produce gasoline
meeting the CARB III specifications which become effective January 2003 with a
capital investment of approximately $20 million. The refinery has significant
liquid storage capacity including storage for crude oil and other feedstocks.
Also included with the refinery assets are a deepwater dock located offsite on
the Carquinez Straits which is capable of berthing large crude carriers,
petroleum coke storage silos located on an adjacent dock, a 20-inch crude
pipeline connecting the refinery to a southern California crude delivery
system, and an adjacent truck terminal for regional truck rack sales. Under the
consent decrees, ExxonMobil was required to offer the buyer of the divested
assets a crude oil supply contract. As a consequence, the sale and purchase
agreement provides for a ten-year term contract for ExxonMobil to supply and
for Valero to purchase 100,000 BPD of Alaska North Slope ("ANS") crude oil at
market-related prices, to be reduced to 65,000 BPD on January 1, 2001. Prior to
January 1, 2001, Valero will have an option to reduce the volume of ANS crude
to 65,000 BPD with 90 days prior notice. After January 1, 2001, Valero will
have an option to reduce the required volumes by an additional 20,000 BPD once
per year.
The Service Station Assets include 10 company-owned and operated
service stations and 70 company- owned lessee-dealer service stations, 75 of
which are in the San Francisco Bay area. Under the consent decrees, the Federal
Trade Commission and the State of California ordered that ExxonMobil withdraw
the "Exxon" brand name from the San Francisco Bay area. As a result, ExxonMobil
has notified the dealers in this market area that their franchise right to
market "Exxon" branded products is being terminated effective June 15, 2000.
Valero plans to introduce its own brand of retail petroleum products in the San
Francisco Bay area and
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VALERO ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
has offered to the dealers at these locations a franchise right to market
products under the new Valero brand. Due to the timing requirements of
ExxonMobil's franchise termination notice to the Bay-area dealers as described
above, ExxonMobil cannot close the acquisition of the Service Station Assets
until (i) all of the dealers agree to terminate their franchise agreements or
(ii) June 15, 2000, whichever comes first. Subsequent to the anticipated June
15, 2000 closing date, Valero plans to offer those dealers who accept Valero's
franchise offering an option to purchase the stations that they are currently
leasing. As part of the purchase option, the dealers must enter into a fuels
purchase agreement with Valero for a term of 15 years. The dealers will have 90
days to exercise or reject their purchase option.
The Distribution Assets include up to 260 independently-owned and
operated distributor facilities which are located outside of the San Francisco
Bay area. The distributor locations will retain the right to use the Exxon
brand, continue to accept the Exxon proprietary credit card and receive Exxon
brand support, while Valero will receive the exclusive rights to offer the Exxon
brand throughout the state (except for the San Francisco Bay area) for a
ten-year period. In connection with the Benicia Acquisition, ExxonMobil will
assign to Valero all of the existing Exxon California distributor contracts
under which the distributors will purchase Exxon-branded products from Valero
after the acquisition.
Valero established with a group of banks a $600 million bridge loan
facility to provide interim financing in connection with the Benicia
Acquisition. The bridge facility has a term of one year, and Valero has an
option to extend the term for an additional two years. The bridge facility has
covenants similar to those contained in Valero's $835 million revolving bank
credit and letter of credit facility. Any amounts borrowed under the bridge
facility bear interest at LIBOR plus an applicable margin. Additionally, Valero
has amended its existing bank credit and letter of credit facility to provide
for, among other things, higher debt-to- capitalization limits necessary to
complete the Benicia Acquisition. These amendments, which become effective upon
closing of the acquisition of the Benicia Refinery and the Distribution Assets,
increase the total debt-to-capitalization limit from 50% to 65%. This ratio will
decrease to 60% at the earlier of March 31, 2001 or upon the issuance of $300
million of certain equity securities, and will further decrease to 55% on
September 30, 2001.
The acquisition of the Benicia Refinery and the Distribution Assets
will be initially funded through interim financing consisting of (i) the $600
million bank bridge facility described above, (ii) borrowings under Valero's
existing bank credit facilities and (iii) an interim lease arrangement to
accommodate the acquisition of the Benicia Refinery's dock facility. It is
expected that this interim financing will be repaid and the acquisition of the
Service Station Assets will be funded through a mix of debt, equity and
structured lease financing.
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VALERO ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Although Valero anticipates that the acquisition will be completed as
described above, there can be no assurance that the transaction will close on
the above-noted dates, that it will be funded as described, or that all of the
conditions required to close the transaction will be met. If completed, this
acquisition will be accounted for under the purchase method of accounting.
Accordingly, the results of operations of the acquired refining and retail
assets will be included in the consolidated financial statements of Valero
beginning on the respective effective dates of the transaction.
On March 31, 2000, Valero filed a $1.3 billion universal shelf
registration statement on Form S-3 with the SEC, which has not yet been declared
effective, to register various securities including common stock, preferred
stock, warrants, debt securities and trust preferred securities.
3. INVENTORIES
Refinery feedstocks and refined products and blendstocks are carried at
the lower of cost or market, with the cost of feedstocks purchased for
processing and produced products determined primarily under the last-in,
first-out ("LIFO") method of inventory pricing, and the cost of feedstocks and
products purchased for resale determined under the weighted average cost method.
At March 31, 2000, the replacement cost of Valero's LIFO inventories exceeded
their LIFO carrying values by approximately $194 million. Materials and supplies
are carried principally at weighted average cost not in excess of market.
Inventories as of March 31, 2000 and December 31, 1999 were as follows (in
thousands):
March 31, December 31,
2000 1999
------------ ------------
Refinery feedstocks .................... $ 115,790 $ 61,649
Refined products and blendstocks ....... 264,417 183,519
Materials and supplies ................. 55,990 58,220
------------ ------------
$ 436,197 $ 303,388
============ ============
4. STATEMENTS OF CASH FLOWS
In order to determine net cash provided by operating activities, net
income (loss) has been adjusted by, among other things, changes in current
assets and current liabilities. The changes in Valero's current assets and
current liabilities are shown in the following table as an (increase)/decrease
in current assets and an increase/(decrease) in current liabilities (in
thousands). These amounts exclude changes in "Cash and temporary cash
investments," "Current deferred income tax assets" and "Short-term debt."
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10
VALERO ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Three Months Ended
March 31,
--------------------------------
2000 1999
------------ ------------
Receivables, net .................. $ (31,015) $ (13,463)
Inventories ....................... (132,809) 16,060
Prepaid expenses and other ........ (9,057) (1,543)
Accounts payable .................. 115,666 121,961
Accrued expenses .................. (5,874) (9,034)
------------ ------------
Total .......................... $ (63,089) $ 113,981
============ ============
Cash flows related to interest and income taxes were as follows (in
thousands):
Three Months Ended
March 31,
--------------------------------
2000 1999
------------ ------------
Interest paid (net of amount capitalized) ........ $ 13,621 $ 6,989
Income tax refunds received ...................... -- 7,212
Income taxes paid ................................ 3,051 5
5. EARNINGS PER SHARE
The computation of basic and diluted per-share amounts, as required by
the Financial Accounting Standards Board's ("FASB") Statement of Financial
Accounting Standards ("SFAS") No. 128, is as follows (dollars and shares in
thousands, except per-share amounts):
Three Months Ended March 31,
---------------------------------------------------------------
2000 1999
----------------------------- -----------------------------
Per- Per-
Net Share Net Share
Income Shares Amt. (Loss) Shares Amt.
------- -------- ------ -------- ------ -----
Net income (loss)......................... $30,739 $(2,716)
======= =======
BASIC EARNINGS PER SHARE:
Net income (loss) available to
common stockholders..................... $30,739 55,874 $.55 $(2,716) 56,057 $(.05)
==== =====
EFFECT OF DILUTIVE SECURITIES:
Stock options............................. -- 838 -- --
Performance awards........................ -- 522 -- --
------- ------ ------- ------
DILUTED EARNINGS PER SHARE:
Net income (loss) available to
common stockholders
plus assumed conversions................ $30,739 57,234 $.54 $(2,716) 56,057 $(.05)
======= ====== ==== ======= ====== =====
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VALERO ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Because Valero reported a net loss for the three months ended March 31,
1999, various stock options and performance awards which were granted to
employees in connection with Valero's stock compensation plans and were
outstanding during such period were not included in the computation of diluted
earnings per share because the effect would have been antidilutive. At March 31,
1999, options to purchase approximately 6.4 million common shares and
performance awards totaling approximately 317,000 common shares were
outstanding.
6. NEW ACCOUNTING PRONOUNCEMENTS
In March 2000, the FASB issued Interpretation No. 44, "Accounting for
Certain Transactions involving Stock Compensation." This interpretation
clarifies the application of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," for certain issues including, among
other things, (i) the definition of employee for purposes of applying Opinion
25, (ii) the criteria for determining whether a plan qualifies as a
noncompensatory plan, (iii) the accounting consequence of various modifications
to the terms of a previously fixed stock option or award, and (iv) the
accounting for an exchange of stock compensation awards in a business
combination. This interpretation will become effective for Valero's financial
statements beginning July 1, 2000, including the effects of applying this
interpretation to certain specific events that occur after either December 15,
1998 or January 12, 2000. The adoption of this interpretation is not expected to
have a material effect on Valero's consolidated financial statements.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards requiring that every derivative instrument (including
certain derivative instruments embedded in other contracts) be recorded in the
balance sheet as either an asset or liability measured at its fair value. The
statement requires that changes in a derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met. Special
accounting for qualifying hedges allows a derivative's gains and losses to
offset related results on the hedged item in the income statement, and requires
that a company must formally document, designate, and assess the effectiveness
of transactions that receive hedge accounting. As issued, this statement was to
become effective for Valero's financial statements beginning January 1, 2000.
However, in June 1999, the FASB issued SFAS No. 137 which delayed for one year
the effective date of SFAS No. 133. As a result, SFAS No. 133 will become
effective for Valero's financial statements beginning January 1, 2001 and is not
allowed to be applied retroactively to financial statements of prior periods. At
this effective date, SFAS No. 133 must be applied to (i) all freestanding
derivative instruments and (ii) all embedded derivative instruments required by
the statement to be separated from their host contracts (or, at Valero's
election, only those derivatives embedded in hybrid instruments issued, acquired
or substantively modified on or after either January 1, 1998 or January 1,
1999). Valero is currently evaluating the impact on its financial statements of
adopting this statement. Adoption of this statement could result in increased
volatility in Valero's earnings and other comprehensive income.
11
12
VALERO ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
7. LITIGATION AND CONTINGENCIES
Prior to July 31, 1997, Valero was a wholly owned subsidiary of Valero
Energy Corporation, referred to as Old Valero. Old Valero was engaged in both
the refining and marketing business and the natural gas related services
business. On July 31, 1997, Old Valero spun off Valero to Old Valero's
stockholders and, with its remaining natural gas related services business,
merged with a wholly owned subsidiary of PG&E Corporation (the "Restructuring").
Old Valero and certain of its natural gas related subsidiaries, and Valero, have
been sued by Teco Pipeline Company regarding the operation of the 340-mile West
Texas Pipeline in which a subsidiary of Old Valero holds a 50% undivided
interest. In 1985, a subsidiary of Old Valero sold a 50% undivided interest in
the pipeline and entered into a joint venture with the purchaser of the 50%
interest through an ownership agreement and an operating agreement. In 1988,
Teco succeeded to that purchaser's 50% interest. A subsidiary of Old Valero has
at all times been the operator of the pipeline. Despite the written ownership
and operating agreements, the plaintiff contends that a separate, unwritten
partnership agreement exists, and that the defendants have exercised improper
control over this alleged partnership's affairs. The plaintiff also contends
that the defendants acted in bad faith by negatively affecting the economics of
the joint venture in order to provide financial advantages to facilities or
entities owned by the defendants, and by allegedly taking for the defendants'
own benefit certain opportunities available to the joint venture. The plaintiff
asserts causes of action for breach of fiduciary duty, fraud, tortious
interference with business relationships, professional malpractice and other
claims, and seeks unquantified actual and punitive damages. Old Valero's motion
to require arbitration of the case as required in the written agreements was
denied by the trial court, but Old Valero appealed, and in August 1999, the
court of appeals ruled in Old Valero's favor and ordered arbitration of the
entire dispute. Teco has since waived efforts to further appeal this ruling, and
an arbitration panel has been selected. Valero has been formally added to this
proceeding. The arbitration panel has scheduled the arbitration hearing for
October 2000. Although PG&E acquired Teco and now owns both Teco and Old Valero,
PG&E's Teco acquisition agreement purports to assign the benefit or detriment of
this lawsuit to the former shareholders of Teco. In connection with the
Restructuring, Valero has agreed to indemnify Old Valero with respect to this
lawsuit for 50% of any final judgment or settlement amount up to $30 million,
and 100% of that part of any final judgment or settlement amount over $30
million.
In 1986, Valero filed suit against M.W. Kellogg Company for damages
arising from certain alleged design and construction defects in connection with
a major construction project at the Corpus Christi Refinery. Ingersoll-Rand
Company was added as a defendant in 1989. In 1991, the trial court granted
summary judgment against Valero based in part on certain exculpatory provisions
in various agreements connected with the project. In 1993, the court of appeals
affirmed the summary judgment and the Texas Supreme Court denied review.
Subsequent to the summary judgment, Kellogg and Ingersoll-Rand brought indemnity
claims against Valero for attorneys' fees and expenses incurred in defending the
original action. In 1996, the trial court rendered summary judgment against
Kellogg and Ingersoll-Rand based on procedural grounds, and the court of appeals
12
13
VALERO ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
affirmed that ruling in 1997. However, in 1999, the Texas Supreme Court reversed
the court of appeals and remanded Kellogg's and Ingersoll-Rand's claims for
attorneys' fees and expenses to the trial court.
Valero is also a party to additional claims and legal proceedings
arising in the ordinary course of business. Valero believes it is unlikely that
the final outcome of any of the claims or proceedings to which it is a party
would have a material adverse effect on its financial statements; however, due
to the inherent uncertainty of litigation, the range of possible loss, if any,
cannot be estimated with a reasonable degree of precision and there can be no
assurance that the resolution of any particular claim or proceeding would not
have an adverse effect on Valero's results of operations or financial condition.
8. SUBSEQUENT EVENTS
On May 4, 2000, Valero's Board of Directors declared a regular
quarterly cash dividend of $.08 per common share payable June 14, 2000, to
holders of record at the close of business on May 30, 2000.
Valero disclosed in its Annual Report on Form 10-K for the year ended
December 31, 1999, that it had received two New Jersey Department of
Environmental Protection ("NJDEP") Administrative Orders and Notices of Civil
Administrative Penalty Assessment related to particulate emissions from the
fluid catalytic cracking unit ("FCC Unit") at Valero's Paulsboro Refinery. These
orders and assessments related to emissions from the FCC Unit that occurred
after Valero's acquisition of the refinery, but that related to conditions
existing prior to the acquisition. On May 5, 2000, Valero entered into a
comprehensive administrative consent order with the NJDEP to resolve all pending
enforcement actions and related but unasserted claims regarding particulate
emissions from the refinery. The order authorizes an expansion of the refinery
allowing for production of reformulated gasoline ("RFG"), provides for interim
emissions limits, and requires a penalty payment of $600,000 on the particulate
emissions issues. Under the order, Valero also agreed to install a wet- gas
scrubber on the refinery's FCC Unit by December 31, 2003. Valero believes that
the terms of the foregoing settlement will not have a material adverse effect on
its operations or financial condition.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS
This Form 10-Q contains certain estimates, predictions, projections and
other "forward-looking statements" (as defined in Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934) that involve
various risks and uncertainties. While these forward-looking statements, and any
assumptions upon which they are based, are made in good faith and reflect
Valero's current judgment regarding the direction of its business, actual
results will almost always vary, sometimes materially, from any estimates,
predictions, projections, assumptions, or other future performance suggested
herein. These forward- looking statements can generally be identified by the
words "anticipate," "believe," "expect," "plan," "intend," "estimate,"
"project," "budget," "forecast," "will," "could," "should," "may" and similar
expressions. These forward-looking statements include, among other things,
statements regarding:
o the Benicia Acquisition and Valero's results of operations following the
Benicia Acquisition;
o future refining margins, including gasoline and heating oil margins;
o the expected cost of feedstocks, including crude oil discounts, and
refining products;
o anticipated levels of crude oil and refined product inventories;
o Valero's anticipated level of capital investments, including deferred
turnaround and catalyst costs and capital expenditures for environmental
and other purposes, and the effect of these capital investments on Valero's
results of operations;
o refinery utilization rates;
o anticipated trends in the supply and demand for crude oil feedstocks and
refined products in the United States and elsewhere;
o expectations regarding environmental and other regulatory initiatives; and
o the effect of general economic and other conditions on refining industry
fundamentals.
Valero's forward-looking statements are based on its beliefs and
assumptions derived from information available at the time the statements are
made. Differences between actual results and any future performance suggested in
these forward-looking statements could result from a variety of factors,
including the following:
o the domestic and foreign supplies of refined products such as gasoline,
diesel, heating oil and petrochemicals;
o the domestic and foreign supplies of crude oil and other feedstocks;
o the ability of the members of the Organization of Petroleum Exporting
Countries to agree to and maintain oil price and production controls;
o the level of consumer demand, including seasonal fluctuations;
o refinery overcapacity or undercapacity;
o the actions taken by competitors, including both pricing and the expansion
and retirement of refining capacity in response to market conditions;
o environmental and other regulations at both the state and federal levels
and in foreign countries;
o political conditions in oil producing regions, including the Middle East;
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o the level of foreign imports;
o accidents or other unscheduled shutdowns affecting Valero's plants,
machinery, pipelines or equipment, or those of Valero's suppliers or
customers;
o changes in the cost or availability of transportation for feedstocks and
refined products;
o the price, availability and acceptance of alternative fuels;
o cancellation of or failure to implement planned capital projects and
realize the various assumptions and benefits projected for such projects;
o irregular weather, which can unforeseeably affect the price or availability
of feedstocks and refined products;
o rulings, judgments, or settlements in litigation or other legal matters,
including unexpected environmental remediation costs in excess of any
reserves;
o the introduction or enactment of federal or state legislation which may
adversely affect Valero's business or operations;
o changes in the credit ratings assigned to Valero's debt securities and
trade credit; and
o overall economic conditions.
Any one of these factors, or a combination of these factors, could
materially affect Valero's future results of operations and whether any
forward-looking statements ultimately prove to be accurate. Forward- looking
statements are not guarantees of future performance, and actual results and
future performance may differ materially from those suggested in any
forward-looking statement. Valero does not intend to update these statements
unless it is required by the securities laws to do so.
All subsequent written and oral forward-looking statements attributable
to Valero or persons acting on its behalf are expressly qualified in their
entirety by the foregoing. Valero undertakes no obligation to publicly release
the result of any revisions to any such forward-looking statements that may be
made to reflect events or circumstances after the date of this report or to
reflect the occurrence of unanticipated events.
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RESULTS OF OPERATIONS
FIRST QUARTER 2000 COMPARED TO FIRST QUARTER 1999
FINANCIAL HIGHLIGHTS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Three Months Ended March 31,
--------------------------------------------------------
Change
-------------------------
2000 1999 Amount %
------------ ------------ ------------ ----------
Operating revenues................................... $ 2,928,617 $ 1,337,103 $ 1,591,514 119%
Cost of sales........................................ (2,683,680) (1,154,960) (1,528,720) (132)
Operating costs:
Cash (fixed and variable)........................ (132,371) (119,442) (12,929) (11)
Depreciation and amortization.................... (34,477) (35,127) 650 2
Selling and administrative expenses (including
related depreciation expense).................... (21,037) (19,054) (1,983) (10)
----------- ------------ ------------
Total operating income....................... $ 57,052 $ 8,520 $ 48,532 570
=========== ============ ============
Other income (expense), net.......................... $ 2,647 $ (79) $ 2,726 -- (1)
Interest and debt expense, net....................... $ (12,760) $ (12,457) $ (303) (2)
Income tax (expense) benefit......................... $ (16,200) $ 1,300 $ (17,500) -- (1)
Net income (loss).................................... $ 30,739 $ (2,716) $ 33,455 -- (1)
Earnings (loss) per share of common stock -
assuming dilution................................ $ .54 $ (.05) $ .59 -- (1)
Earnings before interest, taxes, depreciation
and amortization ("EBITDA")...................... $ 95,950 $ 45,111 $ 50,839 113
Ratio of EBITDA to interest incurred................. 6.8x 3.2x 3.6x 113
- ----------
(1) Percentage variance is not meaningful.
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OPERATING HIGHLIGHTS
Three Months Ended March 31,
-------------------------------------------------------
Change
-----------------------
2000 1999 Amount %
-------- -------- -------- -------
Sales volumes (Mbbls per day) .............................. 1,002 1,050 (48) (5)%
Throughput volumes (Mbbls per day) ......................... 744 698 46 7
Average throughput margin per barrel ....................... $ 3.62 $ 2.90 $ .72 25
Operating costs per barrel:
Cash (fixed and variable) .............................. $ 1.95 $ 1.90 $ .05 3
Depreciation and amortization .......................... .51 .56 (.05) (9)
-------- -------- --------
Total operating costs per barrel ................... $ 2.46 $ 2.46 $ -- --
======== ======== ========
Charges:
Crude oils:
Sour ............................................... 52% 51% 1% 2
Heavy sweet ........................................ 9 11 (2) (18)
Light sweet ........................................ 9 10 (1) (10)
-------- -------- --------
Total crude oils ............................... 70 72 (2) (3)
High-sulfur residual fuel oil, or "resid" .............. 4 3 1 33
Low-sulfur resid ....................................... 4 4 -- --
Other feedstocks and blendstocks ....................... 22 21 1 5
-------- -------- --------
Total charges ...................................... 100% 100% -- % --
======== ======== ========
Yields:
Gasolines and blendstocks .............................. 50% 51% (1)% (2)
Distillates ............................................ 30 31 (1) (3)
Petrochemicals ......................................... 5 4 1 25
Lubes and asphalts ..................................... 3 2 1 50
Other products ......................................... 12 12 -- --
-------- -------- --------
Total yields ....................................... 100% 100% -- % --
======== ======== ========
AVERAGE MARKET REFERENCE PRICES AND DIFFERENTIALS (DOLLARS PER BARREL)
Three Months Ended March 31,
-------------------------------------------------------
Change
-----------------------
2000 1999 Amount %
-------- -------- -------- -------
Feedstocks:
West Texas Intermediate, or "WTI," crude oil........... $ 28.90 $ 13.05 $ 15.85 121%
WTI less sour crude oil (1) (3)........................ $ 2.38 $ 2.45 $ (.07) (3)
WTI less sweet crude oil (2) (3)....................... $ .45 $ .90 $ (.45) (50)
Products (U.S. Gulf Coast):
Conventional 87 gasoline less WTI...................... $ 4.27 $ 1.67 $ 2.60 156
No. 2 fuel oil less WTI................................ $ 1.84 $ .31 $ 1.53 494
Propylene less WTI..................................... $ 2.32 $ (.30) $ 2.62 873
- ----------
(1) The market reference differential for sour crude oil is based on U.S. Gulf
Coast posted prices for 50% Arab medium and 50% Arab light.
(2) The market reference differential for sweet crude oil is based on Platt's
posted prices for 50% light Louisiana sweet, or "LLS," and 50% Cusiana.
(3) The market reference differential for the 1999 period has been restated
from the amount reported in Valero's March 31, 1999 Form 10-Q to conform to
the components used in the 2000 period.
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Valero reported net income for the first quarter of 2000 of $30.7
million, or $.54 per share, compared to a net loss of $2.7 million, or $.05 per
share, for the first quarter of 1999. The increase in first quarter results was
due primarily to dramatically improved refining industry fundamentals which
resulted in a significant increase in refined product margins. Also contributing
to higher first quarter results was a 46,000 barrel-per- day increase in
throughput volumes. This was due in large part to the effect of a major
maintenance turnaround of the heavy oil cracker and related units at Valero's
Corpus Christi refinery in the first quarter of 1999, as well as certain unit
expansions implemented during that downtime. Partially offsetting the increases
in income resulting from these factors were higher cash operating costs, lower
income from trading activities, the nonrecurrence in 2000 of a benefit to income
in 1999 related to a permanent reduction in LIFO inventories, and an increase in
income tax expense.
Operating revenues increased $1.6 billion, or 119%, to $2.9 billion
during the first quarter of 2000 compared to the same period in 1999 due to a
$17.97, or 127%, increase in the average sales price per barrel, partially
offset by a 5% decrease in average daily sales volumes. The increase in sales
prices was due to significantly higher refined product prices resulting from
reduced refined product inventories which reached historically low levels in the
first quarter of 2000. This decline in inventory levels was attributable
primarily to lower crude oil supplies resulting from OPEC's decision in March
1999 to significantly reduce production, and to lower refinery utilization
rates. During most of the first quarter of 1999, sales prices were extremely
depressed due to excess refined product inventories prior to the OPEC decision
to curtail crude oil production.
Operating income increased $48.5 million to $57.1 million during the
first quarter of 2000 compared to the first quarter of 1999 due primarily to an
approximate $63 million increase in total throughput margins (discussed below),
partially offset by an approximate $13 million increase in cash operating costs
and an approximate $2 million increase in selling and administrative expenses
(including related depreciation expense). Cash operating costs were higher due
primarily to increased catalyst costs associated with processing more lower-cost
feedstocks, and higher fuel costs attributable mainly to an increase in natural
gas prices. Selling and administrative expenses (including related depreciation
expense) increased primarily as a result of an increase in employee-related
costs.
Total throughput margins (operating revenues less cost of sales)
increased due to (i) significantly higher gasoline and distillate margins
resulting primarily from the improved industry conditions noted above, (ii) the
increase in throughput volumes discussed above, and (iii) higher petrochemical
margins resulting from improving worldwide demand, most particularly in Asia.
Partially offsetting the increases in total throughput margins resulting from
these factors were (i) a decrease in feedstock discounts relative to WTI, (ii)
lower lube, fuel oil and other margins resulting mainly from higher crude oil
prices, (iii) a decrease in gains from trading activities from $12.8 million in
the first quarter of 1999 to $1.8 million in the first quarter of 2000, and (iv)
the nonrecurrence in 2000 of a $10.5 million benefit in the first quarter of
1999 resulting from the liquidation of LIFO inventories. The 1999 trading
profits and LIFO benefit were attributable to a steep increase in prices at the
end of the 1999 first quarter.
Other income (expense), net, increased by $2.7 million during the first
quarter of 2000 compared to the same period in 1999 due primarily to improved
results from Valero's 20% equity interest in the Javelina
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off-gas processing plant in Corpus Christi attributable primarily to higher
ethylene and other product prices, partially offset by higher natural gas
feedstock costs.
Income taxes increased from an income tax benefit of $1.3 million in
the first quarter of 1999 to income tax expense of $16.2 million in the first
quarter of 2000 due primarily to a significant increase in pre- tax income.
OUTLOOK
This "Outlook" section shall supercede the "Outlook" section contained
in Valero's Annual Report on Form 10-K for the year ended December 31, 1999
under "Management's Discussion and Analysis of Financial Condition and Results
of Operations."
During the last half of 1998 and throughout most of 1999, Valero
operated in an environment characterized by very weak refining industry
fundamentals. These weak industry fundamentals caused a significant increase in
refined product inventories and put extreme downward pressure on refined product
prices. OPEC's decision in March 1999 to curtail crude oil production resulted
in a reduced supply of the heavier crude oils which are Valero's primary
feedstocks, thus resulting in higher feedstock costs and lower discounts. These
conditions combined to create an exceptionally difficult period for refiners,
including Valero.
Beginning in late 1999, however, the weak refining industry
fundamentals that had prevailed during the latter half of 1998 and most of 1999
finally began to show signs of improvement. During the last several months of
1999 and into 2000, refined product inventories fell dramatically. According to
reports of the Department of Energy and other industry publications, the recent
decline in finished product inventory levels was attributable to the following
factors:
o Lower crude oil supplies resulting primarily from OPEC's decision in March
1999 to curtail production.
o Reduced refinery utilization rates in the U.S., to rates below 90% compared
to rates that were above 95% in early 1999.
o Colder weather in the Northeastern U.S. in early 2000.
o Strong economic growth in the U.S. and abroad.
Valero anticipates that refining industry margins for 2000 will benefit
from improved industry fundamentals. This expectation is based on several
assumptions, including the following:
o According to the International Energy Agency (April 2000 report), worldwide
crude oil demand for 2000 is projected to grow about 1.6 million barrels
per day, up from 1.2 million barrels per day growth in 1999. In March of
2000, OPEC met and agreed to increase crude oil production. Valero expects
that increased production resulting from the higher crude oil demand should
result in improved feedstock discounts, as the increased production is
expected to result in more production of heavy crude oils.
o The Department of Energy projects a growth in gasoline demand for 2000 of
over 1% as well as increased demand for low-sulfur diesel and jet fuel.
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o The International Energy Agency and the Department of Energy project a
stronger demand for light products in Europe and Asia, which in turn is
expected to result in reduced available volumes for imports into the U.S.
o More stringent fuel specifications in the U.S. and Europe became effective
at the beginning of 2000 and Valero expects that this should result in a
reduction in refinery light product yields.
o The Oil and Gas Journal (December 20, 1999 survey) projected a slowdown in
increases to industry refining capacity.
o Petrochemical margins have improved significantly in 2000 as a result of
the improving worldwide economy and increased demand for petrochemical
feedstocks, which are used in both the petrochemical industry and as
gasoline blendstocks.
Thus far in the second quarter of 2000, refining industry margins have
improved from the already strong conditions that existed during the first
quarter of 2000. Gasoline margins on average have increased from first quarter
levels, and are significantly in excess of second quarter 1999 margins, due to
low inventory levels and continued strong demand. Heating oil margins on average
have also dramatically improved from the negative margins experienced in the
second quarter of 1999 due to low inventories and cooler weather in the
Northeast. In addition, OPEC's agreement in March 2000 to increase crude oil
production has resulted in improved feedstock discounts and contributed, along
with improving supply and demand fundamentals, to higher petrochemical, lube oil
and other refined product margins.
During the second quarter of 2000, Valero incurred downtime in
connection with a scheduled maintenance turnaround of the fluid catalytic
cracking unit at its Paulsboro Refinery (approximately 43 days) and certain
unscheduled maintenance of the heavy oil cracker at its Corpus Christi Refinery
(approximately 11 days). Although this downtime will somewhat offset the
improvement in margins during the second quarter discussed above, Valero
believes that capacity expansions and operational improvements implemented
during this downtime will benefit future operations. As refining margins merit,
Valero expects to continue making capital improvements at its refinery
facilities to increase, among other things, throughput capacity, conversion
capability, operational efficiency and feedstock flexibility. The majority of
these capital improvements are expected to be performed during scheduled
maintenance turnarounds.
Valero expects demand, both domestically and worldwide, for
clean-burning fuels such as RFG to continue to increase as a result of the
worldwide movement to reduce lead and certain other pollutants and contaminants
in gasoline. Valero expects this increasing demand for clean-burning fuels to
sustain increased demand for oxygenates such as MTBE. However, certain
initiatives have been passed in California which would ban the use of MTBE as a
gasoline component by 2003. If MTBE were to be restricted or banned throughout
the U.S., Valero believes that its MTBE-producing facilities could be modified
to produce other gasoline blendstocks or other petrochemicals for a minimal
capital investment. Since the volume of alternative products that could be
produced would be less than the current production of MTBE and the price of such
alternative products is currently lower than the price of MTBE, Valero's results
of operations could potentially be adversely affected. Valero anticipates,
however, that if MTBE were to be restricted or banned, the resulting
industry-wide shortage in octane-enhancing components would cause a significant
change in the economics related to Valero's various alternative products, and as
a result, such an action would not be expected to have a material adverse effect
on Valero.
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Valero expects that various industry consolidations through mergers and
acquisitions will continue, making for a more competitive business environment
while providing Valero with potential opportunities to expand its operations.
With regard to the anticipated consummation of the acquisition of the Benicia
Refinery discussed in Note 2 of Notes to Consolidated Financial Statements,
Valero currently expects that the outlook for this refinery will be consistent
with the industry trends discussed above.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities decreased $137.2 million
during the first quarter of 2000 compared to the same period in 1999 due
primarily to a $177.1 million increase in the amount of cash utilized for
working capital purposes, as detailed in Note 4 of Notes to Consolidated
Financial Statements, partially offset by the increase in earnings discussed
above under "Results of Operations." In the first quarter of 2000, amounts
needed by Valero to finance feedstock and refined product inventories increased
significantly due to higher inventory levels as well as an increase in commodity
prices from December 31, 1999 to March 31, 2000. Although this increase in
inventories was somewhat offset by an increase in accounts payable resulting
from the higher volume of inventory purchases, Valero incurred a net increase in
cash utilized for working capital purposes in the 2000 period of approximately
$63 million. Included in the changes in current assets and current liabilities
for the 1999 period was an increase in both accounts receivable and accounts
payable due primarily to a significant increase in commodity prices during that
quarter. However, concerted efforts by Valero to collect accounts receivable and
reduce inventory levels resulted in a net decrease in cash utilized for working
capital purposes of approximately $114 million in the first quarter of 1999.
During the first quarter of 2000, cash provided by operating activities of $11.2
million, existing cash balances of $51.6 million and issuances of common stock
related to Valero's benefit plans of $5.9 million were utilized to reduce bank
borrowings by $13.5 million, fund capital expenditures and deferred turnaround
and catalyst costs of $42 million, repurchase $8.7 million of shares of Company
common stock and pay $4.5 million of common stock dividends.
Valero currently maintains an unsecured $835 million revolving bank
credit and letter of credit facility that matures in November 2002 and is
available for general corporate purposes including working capital needs and
letters of credit. Borrowings under this facility bear interest at either LIBOR
plus a margin, a base rate or a money market rate. Valero is also charged
various fees and expenses in connection with this facility, including a facility
fee and various letter of credit fees. The interest rate and fees under this
credit facility are subject to adjustment based upon the credit ratings assigned
to Valero's long-term debt. The credit facility includes certain restrictive
covenants including a coverage ratio, a capitalization ratio, and a minimum net
worth test. In connection with Valero's interim financing plan for the proposed
Benicia Acquisition, in April 2000, this credit facility was amended to, among
other things, increase the total debt-to-capitalization limit from 50% to 65%.
This ratio will decrease to 60% at the earlier of March 31, 2001 or upon the
issuance of $300 million of certain equity securities, and will further decrease
to 55% on September 30, 2001. These amendments to the credit facility become
effective upon closing of the acquisition of the Benicia Refinery and the
Distribution Assets. As of March 31, 2000, there were no outstanding borrowings
under this committed facility, while letters of credit outstanding were
approximately $115 million. Valero also has various uncommitted short-term bank
credit facilities under which amounts up
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to $235 million may be borrowed, along with uncommitted bank letter of credit
facilities totaling $285 million. As of March 31, 2000, $126.5 million was
outstanding under the short-term bank credit facilities, and letters of credit
totaling approximately $119 million were outstanding under the uncommitted
letter of credit facilities. As of March 31, 2000, Valero's debt to
capitalization ratio was 41%.
In connection with the funding of the proposed Benicia Acquisition as
discussed in Note 2 of Notes to Consolidated Financial Statements, Valero has
established a $600 million bridge loan facility. The bridge facility has a term
of one year with an option to extend for an additional two years, and has
covenants similar to the $835 million bank credit and letter of credit facility.
Any amounts borrowed under the bridge facility bear interest at LIBOR plus an
applicable margin. Borrowings under this facility, along with borrowings under
Valero's existing $835 million revolving bank credit and letter of credit
facility and an interim lease arrangement, will provide interim financing for
the acquisition of the Benicia Refinery and the Distribution Assets. Valero
expects that this interim financing will be repaid and the acquisition of the
Service Station Assets will be funded though a mix of debt, equity and
structured lease financing.
During the first quarter of 2000, Valero expended approximately $42
million for capital investments, including capital expenditures of $25 million
and deferred turnaround and catalyst costs of $17 million. For total year 2000,
Valero currently expects to incur approximately $235 million for capital
investments, including approximately $155 million for capital expenditures and
approximately $80 million for deferred turnaround and catalyst costs. The
capital expenditure estimate includes approximately $15 million for computer
system projects and approximately $5 million for projects related to
environmental control and protection. In addition to the above, subsequent to
the proposed Benicia Acquisition, Valero expects to incur approximately $40
million for the year 2000 for capital expenditures and deferred turnaround and
catalyst costs related to the Benicia Refinery and the Service Station Assets.
Any major upgrades in any of Valero's refineries could require additional
expenditures to comply with environmental laws and regulations. However, because
environmental laws and regulations are increasingly becoming more stringent and
new environmental laws and regulations are continuously being enacted or
proposed, Valero cannot predict with certainty the level of future expenditures
that will be required for environmental matters.
During the first quarter of 2000, Valero repurchased shares of its
common stock at a cost of approximately $7 million under a common stock
repurchase program approved by Valero's Board of Directors in the third quarter
of 1998 allowing repurchase of up to $100 million of common stock. The shares
repurchased will be used primarily to meet requirements under Valero's employee
benefit plans.
On March 31, 2000, Valero filed a $1.3 billion universal shelf
registration statement on Form S-3 with the SEC, which has not yet been declared
effective, to register various securities including common stock, preferred
stock, warrants, debt securities and trust preferred securities.
Valero believes it has sufficient funds from operations, and to the
extent necessary, from the public and private capital markets and bank markets,
to fund its ongoing operating requirements. Valero expects that, to the extent
necessary, it can raise additional funds from time to time through equity or
debt financings. However, there can be no assurances regarding the availability
of any future financings or whether such financings can be made available on
terms acceptable to Valero.
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NEW ACCOUNTING PRONOUNCEMENTS
As discussed in Note 6 of Notes to Consolidated Financial Statements,
certain new financial accounting pronouncements have been issued by the FASB
which will become effective for Valero's financial statements beginning in
either July 2000 or January 2001. Except for SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," for which the impact has not yet
been determined, the adoption of these pronouncements is not expected to have a
material effect on Valero's consolidated financial statements.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
COMMODITY PRICE RISK
Valero is exposed to market risks related to the volatility of crude
oil and refined product prices, as well as volatility in the price of natural
gas used in Valero's refining operations. In order to reduce the risks of these
price fluctuations, Valero uses derivative commodity instruments to hedge
certain refinery feedstock and refined product inventories. Valero also uses
derivative commodity instruments to hedge the price risk of anticipated
transactions such as anticipated feedstock, product and natural gas purchases,
product sales and refining operating margins. In addition, Valero uses
derivative commodity instruments for trading purposes using its fundamental and
technical analysis of market conditions to earn additional income.
The types of instruments used in Valero's hedging and trading
activities described above include futures contracts, options, and price swaps
with third parties. Valero's positions in derivative commodity instruments are
monitored and managed on a daily basis by a risk control group to ensure
compliance with Valero's stated risk management policy which has been approved
by Valero's Board of Directors.
In the tables below detailing Valero's open derivative commodity
instruments as of March 31, 2000, the total gain or (loss) on price swaps is the
net of the fixed price payor and receiver fair value amounts, while the total
gain or (loss) on futures is (i) the excess of the fair value amount over the
contract amount for fixed price payor positions, combined with (ii) the excess
of the contract amount over the fair value amount for fixed price receiver
positions. Gains and losses on hedging activities are deferred and recognized
when the hedged transaction occurs while gains and losses on trading activities
are recognized currently.
HEDGING ACTIVITIES
The following table provides information about Valero's derivative
commodity instruments held to hedge refining inventories as of March 31, 2000
(which mature in 2000) (dollars in thousands, except amounts per barrel, or
bbl).
Mature in 2000
-------------------------------
Fixed Price
-------------------------------
Payor Receiver
------------ ------------
Futures:
Volumes (Mbbls) .............................. 9,384 12,686
Weighted average price (per bbl) ............. $ 27.76 $ 29.16
Contract amount .............................. $ 260,463 $ 369,916
Fair value ................................... $ 254,485 $ 364,368
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The following table provides information about Valero's derivative
commodity instruments held to hedge anticipated feedstock and product purchases,
product sales and refining margins as of March 31, 2000 (which mature in 2000)
(dollars in thousands, except amounts per barrel). Volumes shown for swaps
represent notional volumes which are used to calculate amounts due under the
agreements.
Mature in 2000
-------------------------------
Fixed Price
-------------------------------
Payor Receiver
------------ ------------
Swaps:
Notional volumes (Mbbls) ................... 1,275 2,275
Weighted average pay price (per bbl) ....... $ 4.01 $ 3.46
Weighted average receive price (per bbl) ... $ 3.77 $ 2.94
Fair value ................................. $ (301) $ (1,181)
Futures:
Volumes (Mbbls) ............................ 5 --
Weighted average price (per bbl) ........... $ 30.91 --
Contract amount ............................ $ 155 --
Fair value ................................. $ 155 --
In addition to the above, as of March 31, 2000, Valero was the fixed
price payor under certain swap contracts held to hedge anticipated purchases of
refinery feedstocks and refined products that mature in 2002, have notional
volumes totaling approximately 7.5 million barrels, and have a weighted average
pay price of $20.11 per barrel. As of March 31, 2000, these swaps had a weighted
average receive price of $20.69 per barrel and a net unrecognized fair value of
approximately $27.4 million.
TRADING ACTIVITIES
The following table provides information about Valero's derivative
commodity instruments held or issued for trading purposes as of March 31, 2000
(which mature in 2000 or 2001) (dollars in thousands, except amounts per
barrel). Volumes shown for swaps represent notional volumes which are used to
calculate amounts due under the agreements.
Mature in 2000 Mature in 2001
---------------------------- ----------------------------
Fixed Price Fixed Price
---------------------------- ----------------------------
Payor Receiver Payor Receiver
---------- ---------- ---------- ----------
Swaps:
Notional volumes (Mbbls) ..................... 28,500 23,700 2,550 2,100
Weighted average pay price (per bbl) ......... $ 2.55 $ 2.53 $ 2.36 $ 2.13
Weighted average receive price (per bbl) ..... $ 2.49 $ 2.69 $ 2.14 $ 2.28
Fair value ................................... $ (1,697) $ 3,810 $ (555) $ 309
Futures:
Volumes (Mbbls) .............................. 24,299 24,374 3,700 3,625
Weighted average price (per bbl) ............. $ 24.07 $ 24.21 $ 19.48 $ 18.92
Contract amount .............................. $ 584,811 $ 590,004 $ 72,074 $ 68,595
Fair value ................................... $ 677,474 $ 680,288 $ 86,696 $ 84,875
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INTEREST RATE RISK
Valero's primary market risk exposure for changes in interest rates
relates to its long-term debt obligations. Valero manages its exposure to
changing interest rates principally through the use of a combination of fixed
and floating rate debt and currently does not use derivative financial
instruments to manage such risk.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Valero disclosed in its Annual Report on Form 10-K for the year ended
December 31, 1999, that it had received two New Jersey Department of
Environmental Protection ("NJDEP") Administrative Orders and Notices of Civil
Administrative Penalty Assessment related to particulate emissions from the
fluid catalytic cracking unit ("FCC Unit") at Valero's Paulsboro Refinery. These
orders and assessments related to emissions from the FCC Unit that occurred
after Valero's acquisition of the refinery, but that related to conditions
existing prior to the acquisition. On May 5, 2000, Valero entered into a
comprehensive administrative consent order with the NJDEP to resolve all pending
enforcement actions and related but unasserted claims regarding particulate
emissions from the refinery. The order authorizes an expansion of the refinery
allowing for production of RFG, provides for interim emissions limits, and
requires a penalty payment of $600,000 on the particulate emissions issues.
Under the order, Valero also agreed to install a wet-gas scrubber on the
refinery's FCC Unit by December 31, 2003. Valero believes that the terms of the
foregoing settlement will not have a material adverse effect on its operations
or financial condition.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
2.7* Sale and Purchase Agreement For Exxon California Refining and
Marketing Assets, dated March 2, 2000, between Exxon Mobil
Corporation and Valero Refining Company-California.
27.1** Financial Data Schedule (reporting financial information as of
and for the three months ended March 31, 2000).
- ----------
* Filed herewith.
** The Financial Data Schedule shall not be deemed "filed" for purposes of
Section 11 of the Securities Act of 1933 or Section 18 of the Securities
Exchange Act of 1934, and is included as an exhibit only to the electronic
filing of this Form 10-Q in accordance with Item 601(c) of Regulation S-K
and Section 401 of Regulation S-T.
(b) Reports on Form 8-K. A Current Report on Form 8-K, dated March 17,
2000, was filed with the SEC on March 20, 2000 reporting information related to
Valero's pending acquisition of Exxon Mobil Corporation's Benicia, California
refinery and associated retail assets.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
VALERO ENERGY CORPORATION
(Registrant)
By: /s/ John D. Gibbons
-----------------------------------
John D. Gibbons
Chief Financial Officer, Vice President -
Finance
(Duly Authorized Officer and Principal
Financial and Accounting Officer)
Date: May 15, 2000
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EXHIBIT INDEX
EXHIBIT
NO. DESCRIPTION
- ------- -----------
2.7* Sale and Purchase Agreement For Exxon California Refining and
Marketing Assets, dated March 2, 2000, between Exxon Mobil
Corporation and Valero Refining Company-California.
27.1** Financial Data Schedule (reporting financial information as of
and for the three months ended March 31, 2000).
- ----------
* Filed herewith.
** The Financial Data Schedule shall not be deemed "filed" for purposes of
Section 11 of the Securities Act of 1933 or Section 18 of the Securities
Exchange Act of 1934, and is included as an exhibit only to the electronic
filing of this Form 10-Q in accordance with Item 601(c) of Regulation S-K
and Section 401 of Regulation S-T.