FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-13175
VALERO ENERGY CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 74-1828067
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7990 West IH 10 78230
San Antonio, Texas (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code (210) 370-2000
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
Common Stock, $.01 Par Value New York Stock Exchange
Preferred Share Purchase Rights New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
NONE.
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
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value on January 30, 1998, of the registrant's
Common Stock, $.01 par value ("Common Stock"), held by nonaffiliates of the
registrant, based on the average of the high and low prices as quoted in the
New York Stock Exchange Composite Transactions listing for that date, was
approximately $1.75 billion. As of January 30, 1998, 55,882,057 shares
of the registrant's Common Stock were issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The Company intends to file with the Securities and Exchange Commission
(the "Commission") in March 1998 a definitive Proxy Statement (the "1998
Proxy Statement") for the Company's Annual Meeting of Stockholders scheduled
for April 30, 1998, at which directors of the Company will be elected.
Portions of the 1998 Proxy Statement are incorporated by reference in Part
III of this Form 10-K and shall be deemed to be a part hereof.
CROSS-REFERENCE SHEET
The following table indicates the headings in the 1998 Proxy Statement
where the information required in Part III of Form 10-K may be found.
Form 10-K Item No. and Caption Heading in 1998 Proxy Statement
10. "Directors and Executive Officers
of the Registrant" "Proposal No. 1 - Election of
Directors," and "Information
Concerning Nominees and Other
Directors" and "Section 16(a)
Beneficial Ownership Reporting
Compliance"
11. "Executive Compensation" "Executive Compensation," "Stock
Option Grants and Related
Information," "Report of the
Compensation Committee of the
Board of Directors on Executive
Compensation," "Retirement
Benefits," "Arrangements with
Certain Officers and Directors"
and "Performance Graph"
12. "Security Ownership of Certain
Beneficial Owners and Management" "Beneficial Ownership of Valero
Securities"
13. "Certain Relationships and Related
Transactions" "Transactions with Management
and Others"
Copies of all documents incorporated by reference, other than exhibits
to such documents, will be provided without charge to each person who receives
a copy of this Form 10-K upon written request to Jay D. Browning, Corporate
Secretary, Valero Energy Corporation, P.O. Box 500, San Antonio, Texas 78292.
CONTENTS
PAGE
Cross Reference Sheet
PART I
Item 1. Business
1997 Developments
Restructuring
Acquisition of Basis Petroleum, Inc.
Refining Operations
Corpus Christi Refinery
Acquired Refineries
Texas City Refinery
Houston Refinery
Krotz Springs Refinery
Selected Operating Results
Marketing
Feedstock Supply
Factors Affecting Operating Results
Competition
Environmental Matters
Executive Officers of the Registrant
Employees
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Item 8. Financial Statements
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
PART III
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
The following discussion contains certain estimates, predictions,
projections and other "forward-looking statements" (within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934) that involve various risks and uncertainties. While
these forward-looking statements, and any assumptions upon which they are
based, are made in good faith and reflect the Company's current judgment
regarding the direction of its business, actual results will almost always
vary, sometimes materially, from any estimates, predictions, projections,
assumptions, or other future performance suggested herein. Some important
factors (but not necessarily all factors) that could affect the Company's
sales volumes, growth strategies, future profitability and operating results,
or that otherwise could cause actual results to differ materially from those
expressed in any forward-looking statement are discussed in "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations" under the heading "Forward-Looking Statements." The Company
undertakes no obligation to publicly release the result of any revisions to
any such forward-looking statements that may be made to reflect events or
circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
PART I
ITEM 1. BUSINESS
Valero Energy Corporation is one of the United States' largest
independent refiners and marketers, and the largest on the Gulf Coast.
With the May 1, 1997 acquisition of Basis Petroleum, Inc., the Company
now owns and operates four refineries in Texas and Louisiana with a combined
throughput capacity of approximately 530,000 barrels per day ("BPD").
The Company principally produces premium, environmentally clean products
such as reformulated gasoline, low-sulfur diesel and oxygenates. The
Company also produces a substantial slate of middle distillates, jet fuel
and petrochemicals. The Company markets its products in 32 states and
selected export markets. Unless otherwise required by the context, the
term "Valero" as used herein refers to Valero Energy Corporation, and the
term "Company" refers to Valero and its consolidated subsidiaries.
Valero was incorporated in Delaware in 1981 under the name Valero
Refining and Marketing Company and became a publicly held corporation on
July 31, 1997. Its principal executive offices are located at 7990 West
I.H. 10, San Antonio, Texas, 78230 and its telephone number is (210) 370-2000.
For financial and statistical information regarding the Company's
operations, see "Management's Discussion and Analysis of Financial Condition
and Results of Operations." For a discussion of cash flows provided by and
used in the Company's operations, see "Management's Discussion and Analysis
of Financial Condition and Results of Operations - Liquidity and Capital
Resources."
1997 Developments
Restructuring
Prior to July 31, 1997, Valero was a wholly owned subsidiary of Valero
Energy Corporation ("Energy"). Energy was a diversified energy company
engaged in both the refining and marketing business and the natural gas
related services business. On July 31, 1997, pursuant to an agreement and
plan of distribution between Valero and Energy (the "Distribution Agreement"),
Energy spun off Valero to Energy's stockholders by distributing all of
Valero's $.01 par value common stock on a share for share basis to holders
of record of Energy common stock at the close of business on July 31, 1997
(the "Distribution"). Immediately after the Distribution, Energy, with its
remaining natural gas related services business, merged (the "Merger")
with a wholly owned subsidiary of PG&E Corporation ("PG&E"). The completion
of the Distribution and the Merger (collectively referred to as the
"Restructuring") finalized the restructuring of Energy previously announced
in January 1997. The Distribution and the Merger were approved by Energy
stockholders at their annual meeting held on June 18, 1997 and, in the
opinion of Energy's outside counsel, were tax-free transactions. Regulatory
approval of the Merger was received from the Federal Energy Regulatory
Commission on July 16, 1997. Upon completion of the Restructuring, Valero's
name was changed from Valero Refining and Marketing Company to Valero Energy
Corporation and its common stock was listed for trading on the New York Stock
Exchange under the symbol "VLO."
Immediately prior to the Distribution, the Company paid a dividend to
Energy of $210 million pursuant to the Distribution Agreement. In addition,
the Company paid to Energy approximately $5 million in settlement of the
intercompany note balance between the Company and Energy arising from certain
transactions during the period from January 1 through July 31, 1997. In
connection with the Merger, PG&E issued approximately 31 million shares of
its common stock in exchange for all of the issued and outstanding $1 par
value common shares of Energy, and assumed $785.7 million of Energy's debt.
Each Energy stockholder received .554 of one share of PG&E common stock,
trading on the New York Stock Exchange under the symbol "PCG," for each
Energy share owned on July 31, 1997. This fractional share amount was based
on the average price of PG&E common stock during a prescribed period
preceding the closing of the transaction and the number of Energy shares
issued and outstanding at the time of the closing.
Prior to the Restructuring, Energy, Valero and PG&E entered into a tax
sharing agreement ("Tax Sharing Agreement"), which sets forth each party's
rights and obligations with respect to payments and refunds, if any, of
federal, state, local, or other taxes for periods before the Restructuring.
In general, under the Tax Sharing Agreement, Energy and Valero are each
responsible for their allocable share of the federal, state and other taxes
incurred by the combined operations of Energy and Valero prior to the
Distribution. Furthermore, Valero is responsible for substantially all
tax liability in the event the Distribution or the Merger fails to qualify
as a tax-free transaction, except that Energy would be responsible for any
such tax liability attributable to certain actions by Energy and/or PG&E.
The separation of the Company from the natural gas business and
operations of Energy was structured as a spin-off of the Company for legal,
tax and other reasons. However, the Company succeeded to certain important
aspects of Energy's business, organization and affairs, namely: (i) the
Company succeeded to the name "Valero Energy Corporation" and the Company
retained the refining and marketing business of Energy which represented
approximately one-half of the assets, revenues, and operating income of the
businesses, operations and companies previously constituting Energy; (ii) the
Company's Board of Directors consists of those individuals formerly comprising
Energy's Board of Directors; and (iii) the Company's executive management
consists primarily of those individuals formerly comprising Energy's
executive management.
Acquisition of Basis Petroleum, Inc.
Effective May 1, 1997, Energy acquired all of the outstanding common
stock of Basis Petroleum, Inc. ("Basis"), a wholly owned subsidiary of
Salomon Inc ("Salomon"). The primary assets acquired with Basis include
three refineries located in Texas City, Texas (the "Texas City Refinery"),
Houston, Texas (the "Houston Refinery") and Krotz Springs, Louisiana (the
"Krotz Springs Refinery") (these three refineries are collectively referred
to as the "Acquired Refineries") and an extensive wholesale marketing
business. At the time of their acquisition, the Acquired Refineries had a
combined total throughput capacity in excess of 300,000 BPD. Prior to the
Restructuring, Energy transferred the stock of Basis to Valero. As a
result, Basis was a part of the Company at the time it was spun off to
Energy's stockholders pursuant to the Restructuring. Basis' name was
subsequently changed to Valero Refining Company-Texas and the Basis assets
located in Louisiana were transferred to a newly-formed subsidiary of the
Company, Valero Refining Company-Louisiana. Energy acquired the capital
stock of Basis for approximately $470 million which includes certain
post-closing adjustments and settlements. The purchase price was paid,
in part, with 3,429,796 shares of Energy common stock having a fair market
value of approximately $114 million with the remainder paid in cash from
borrowings under Energy's bank credit facilities. In addition, Salomon is
entitled to receive earn-out payments from the Company in any of the years
through 2007 if certain average refining margins during any of those years
are above a specified level. Any payments under this earn-out arrangement
are limited to $35 million in any year and $200 million in the aggregate
and are determined on May 1 of each year beginning in 1998.
For additional information concerning the Company's financing activities,
see Note 6 of Notes to Consolidated Financial Statements.
Refining Operations
The Company owns and operates four refineries located in the U.S. Gulf
Coast region having a combined total refining capacity of approximately
530,000 BPD, net of inter-refinery transfers averaging approximately
35,000 BPD. The Company's largest refinery is located on 254 acres in
Corpus Christi, Texas (the "Corpus Christi Refinery") along the Corpus
Christi Ship Channel and has a feedstock throughput capacity of
approximately 190,000 BPD. The Texas City Refinery is located on
290 acres along the Texas City Ship Channel and has a feedstock throughput
capacity of approximately 180,000 BPD. The Houston Refinery is located on
250 acres along the Houston Ship Channel with a feedstock throughput
capacity of approximately 115,000 BPD. The Krotz Springs Refinery is
located on 260 acres in Southern Louisiana along the Atchafalaya River
which has access to the Mississippi River and to the Colonial pipeline.
The feedstock throughput capacity of the Krotz Springs Refinery is
approximately 80,000 BPD.
In addition to more than tripling the Company's throughput capacity, the
Acquired Refineries have substantially diversified the Company's feedstock
slate, allowing it to process both medium sour crude oils and heavy sweet
crudes, both of which can typically be purchased at a discount to West Texas
Intermediate ("WTI"), a benchmark crude oil. The Company's primary feedstocks
are medium sour crude oil, heavy sweet crude oil and high-sulfur atmospheric
residual fuel oil ("resid").
In 1998, the Company plans to begin a capital expenditure program that
targets a system wide increase in total throughput capacity of approximately
140,000 BPD by early to mid-2000. The Company currently estimates the cost
of this expansion to be $250-275 million in the aggregate. The majority
of these capital expenditures are anticipated to be spent in 1999 on
upgrades and modifications to the Acquired Refineries and will be performed
during scheduled maintenance turnarounds. In addition to capital
expenditures related to this expansion program, other capital expenditures
are planned to improve system reliability and reduce emissions.
The Company has very few turnarounds scheduled for 1998. During 1999,
maintenance turnarounds for most of the Company's major refining units
are planned. Such turnarounds are scheduled to occur early in the first
quarter and in the fourth quarter when refining margins are historically
low so as to minimize the impact on the Company's operating results.
Corpus Christi Refinery
The Corpus Christi Refinery specializes in processing primarily resid
and heavy crude oil into premium products, such as reformulated gasoline
("RFG"). The Corpus Christi Refinery can produce approximately 117,000 BPD
of gasoline and gasoline-related products, 35,000 BPD of middle distillates
and 40,000 BPD of other products such as chemicals, asphalt and propane.
The Corpus Christi Refinery can produce all of its gasoline as RFG and all of
its diesel fuel as low-sulfur diesel. The Corpus Christi Refinery has
substantial flexibility to vary its mix of gasoline products to meet changing
market conditions.
The Corpus Christi Refinery produces oxygenates <F1> such as MTBE (methyl
tertiary butyl ether) and TAME (tertiary amyl methyl ether). MTBE is an
oxygen-rich, high-octane gasoline blendstock produced by reacting methanol
and isobutylene, and is used to manufacture oxygenated and reformulated
gasolines. TAME, like MTBE, is an oxygen-rich, high-octane gasoline
blendstock. The butane upgrade facility which produces MTBE (the "Corpus
Christi MTBE Plant") is located at the Corpus Christi Refinery and can
produce approximately 17,000 BPD of MTBE from butane and methanol feedstocks.
The MTBE/TAME Unit at the Corpus Christi Refinery converts light olefin
streams produced by the refinery's heavy oil cracker ("HOC") into MTBE and
TAME. The Corpus Christi MTBE Plant and MTBE/TAME Unit enable the Corpus
Christi Refinery to produce approximately 22,500 BPD of oxygenates, which
are blended into the Company's own gasoline production and sold separately.
Substantially all of the methanol feedstocks required for the production of
oxygenates at the Corpus Christi Refinery can normally be provided by a
methanol plant in Clear Lake, Texas owned by a joint venture between a
Valero subsidiary and Hoechst Celanese Chemical Group, Inc. (the "Clear Lake
Methanol Plant").
[FN]
<F1> "Oxygenates" are liquid hydrocarbon compounds containing oxygen.
Gasoline that contains oxygenates usually has lower carbon monoxide
emissions than conventional gasoline.
In January 1997, a mixed xylene fractionation facility ("Xylene Unit"),
which recovers the mixed xylene stream from the Corpus Christi Refinery's
reformate stream, was placed into service at the refinery. The fractionated
xylene is sold into the petrochemical feedstock market for use in the
production of paraxylene. The Corpus Christi MTBE Plant, the MTBE/TAME
Unit, the Xylene Unit and related facilities diversify the Corpus Christi
Refinery's operations, giving the Company the flexibility to pursue
higher-margin product markets.
In 1997, the Company completed a scheduled turnaround on the crude unit
at the Corpus Christi Refinery. The Company also completed a scheduled
turnaround of certain of the Corpus Christi Refinery's major refining units
in the first quarter of 1998. Modifications made during the 1998 turnaround
are expected to increase throughput by 5,000 to 10,000 BPD, depending upon
the type of feedstocks utilized. In addition, the hydrodesulfurization unit
("HDS") was modified to allow for the processing of approximately 25,000 BPD
of high sulfur crude oil, thereby increasing the Corpus Christi Refinery's
feedstock flexibility. The Corpus Christi Refinery experienced one
significant unscheduled shutdown of its HOC during the second quarter
resulting in a reduction of operating income for 1997 of approximately
$8 million. During this shutdown, certain debottlenecking modifications
were completed which have increased the capacity of the HOC by approximately
3,000 BPD. Other than the HOC downtime, the Corpus Christi Refinery's
principal refining units operated during 1997 without significant unscheduled
downtime. No further turnaround activity is scheduled for the Corpus Christi
Refinery during 1998. During 1999, the HOC is scheduled to be down for a
maintenance turnaround and to increase the unit's capacity and the HDS is
scheduled to be down for a maintenance turnaround and to replace the catalyst
in the unit.
Acquired Refineries
The acquisition of the Acquired Refineries significantly diversified
the Company's asset base and expanded and diversified its feedstock slate.
At the time of their acquisition, the Acquired Refineries had a combined
total throughput capacity of approximately 300,000 BPD. As a result of
upgrading and reconfiguration activities undertaken by the Company, the
aggregate throughput capacity of the Acquired Refineries has been increased
to approximately 340,000 BPD, net of inter-refinery transfers averaging
approximately 35,000 BPD. Much of this increased capacity has resulted
from efforts to optimize feedstock selection in order to capitalize on the
reconfiguration of the Acquired Refineries. In 1998, the Company plans to
begin a capital expenditure program designed to increase total system
capacity of the Acquired Refineries by converting the fluid catalytic
cracking units ("FCC Units") to HOCs and increasing their capacity,
expanding the crude unit capacities and various other expenditures to
enhance feedstock flexibility. In addition, expenditures to upgrade
instrumentation systems and modernize the control rooms at each of the
Acquired Refineries will continue over the next few years to improve plant
efficiency and management information systems.
Texas City Refinery
The Texas City Refinery is capable of refining lower-value, medium sour
crudes into a slate of gasolines, low-sulfur diesels and distillates,
including home heating oil, kerosene and jet fuel. The Texas City Refinery
typically produces approximately 55,000 BPD of gasoline and 60,000 BPD of
distillates. The Texas City Refinery also provides approximately 35,000 BPD
of intermediate feedstocks such as deasphalted oil to the Corpus Christi
Refinery and the Houston Refinery. The Texas City Refinery typically
receives its feedstocks and ships product by tanker via deep water docking
facilities along the Texas City Ship Channel, and also has access to the
Colonial, Explorer and TEPPCO pipelines for distribution of its products.
During the latter part of 1996, a Residfiner (which improves the
cracking characteristics of the feedstocks for the FCC Unit), and a Residual
Oil Supercritical Extraction ("ROSE") unit (which recovers deasphalted oil
from the vacuum tower bottoms for feed to the FCC Unit) were placed in
service at the Texas City Refinery, which significantly enhanced this
refinery's feedstock flexibility and product diversity. Certain intermediate
products produced from these units are also being utilized as feedstocks at
the Corpus Christi and Houston Refineries.
During 1997, the Texas City Refinery's principal refining units
operated without significant unscheduled downtime. A scheduled turnaround
was completed on the Residfiner in July 1997. During 1998, the Residfiner
is scheduled for a maintenance turnaround. During 1999, the FCC Unit, the
crude unit, Residfiner and ROSE unit are scheduled to be down for
maintenance turnarounds. At that time, the FCC Unit will be converted to
a heavy oil cracker and its capacity increased. The capacity of the crude
unit will also be increased at that time.
Houston Refinery
The Houston Refinery is capable of processing heavy sweet or medium
sour crude oil and produces approximately 54,000 BPD of gasoline and
37,000 BPD of distillates. The refinery typically receives its feedstocks
via tanker at deep water docking facilities along the Houston Ship Channel.
This facility also has access to major product pipelines, including the
Colonial, Explorer and TEPPCO pipelines.
The Houston Refinery experienced unplanned shutdowns of its FCC Unit
during the second and fourth quarters of 1997 for approximately 11 and 14
days, respectively, in order to make certain repairs and to replace a section
of its regenerator. Other than the FCC Unit repairs, the Houston Refinery's
primary refining units operated during 1997 without significant unscheduled
downtime. No turnaround activity is scheduled for the Houston Refinery
during 1998. During 1999, the FCC Unit, the crude unit and the ROSE Unit are
scheduled to be down for maintenance turnarounds. At that time, the FCC Unit
will be converted to a heavy oil cracker and its capacity increased. The
capacity of the crude unit will also be increased at that time.
Krotz Springs Refinery
The Krotz Springs Refinery processes primarily local, light Louisiana
sweet crude oil and produces approximately 34,000 BPD of gasoline and
38,000 BPD of distillates. As a result of recent modifications to its
FCC Unit, the Krotz Springs Refinery is also capable of processing resid.
The refinery is geographically located to benefit from access to upriver
markets on the Mississippi River and it has docking facilities along the
Atchafalaya River sufficiently deep to allow barge and light ship access.
The facility is also connected to the Colonial pipeline for product
transportation to the Southeast and Northeast. This refinery was built
during the 1979-1982 time period making it, like the Corpus Christi Refinery,
a relatively new facility compared to other Gulf Coast refineries. This
refinery also benefits from recently added MTBE/polymerization and
isomerization units.
The Krotz Springs Refinery's principal operating units operated during
1997 without significant unscheduled downtime. No turnaround activity is
scheduled for the Krotz Springs Refinery during 1998. During 1999, the
crude unit is scheduled to be down for a maintenance turnaround and to
increase the unit's capacity.
Selected Operating Results
The following table sets forth certain consolidated operating results
for the last three fiscal years. Amounts for 1997 include the results of
operations of the Acquired Refineries from May 1, 1997. Average throughput
margin per barrel is computed by subtracting total direct product cost of
sales from product sales revenues and dividing the result by throughput
volumes.
Year Ended December 31,
1997 1996 1995
Refinery Throughput Volumes (MBD) 392 <F2> 170 160
Sales Volumes (MBD) 630 <F2> 291 231
Average Throughput Margin per Barrel $4.64 $5.29 $6.25
Average Operating Cost per Barrel $2.78 $3.29 $3.34
<FN>
<F2> For the eight months following the acquisition of Basis, refinery
throughput volumes and sales volumes were 502 MBD and 780 MBD,
respectively.
For additional information regarding the Company's operating results for
the three years ended December 31, 1997, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
Marketing
The Company's product slate is presently comprised of approximately 90%
gasoline and related components, distillates, chemicals and other light
products. The Company sells refined products under spot and term contracts
to bulk and truck rack customers at over 170 locations in 32 states throughout
the United States and selected export markets in Latin America. As a result
of the Basis acquisition, total product sales volumes increased from
approximately 291,000 BPD during 1996 to approximately 630,000 BPD during
1997. Sales volumes include amounts produced at the Company's refineries and
amounts purchased from third parties and resold in connection with the
Company's marketing activities. Currently, the Company markets approximately
170,000 BPD of gasoline and distillates through truck rack facilities.
Other sales are made to large oil companies and gasoline distributors and
transported by pipeline, barges and tankers. The principal purchasers of
the Company's products from truck racks have been wholesalers and jobbers
in the Northeast, Southeast, Midwest and Gulf Coast. No single purchaser
of the Company's products accounted for more than 10% of total sales during
1997. With its access to the Gulf of Mexico, the Company's refineries are
able to ship refined products to Latin American markets and the West Coast.
Interconnects with common-carrier pipelines give the Company the flexibility
to sell products in most major geographic regions of the United States.
Approximately 40,000 BPD of the Company's RFG production is under
contract to supply wholesale gasoline marketers in Texas at market-related
prices. In 1997, the Company also supplied approximately 1.5 million
barrels of CARB Phase II gasoline to West Coast markets in connection
with the commencement of California Air Resources Board's gasoline program.
The Company expects demand for RFG to continue to improve as a result of
increased demand in areas currently designated as non-attainment and more
cities across the United States "opting in" to the federal RFG program. For
further discussion, see "Factors Affecting Operating Results" and "Outlook"
under "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
Feedstock Supply
The acquisition of the Acquired Refineries expanded and diversified
the slate of feedstocks which the Company can process. Prior to the Basis
acquisition, the Company's primary feedstock was resid processed at the
Corpus Christi Refinery. Approximately 70% of the Company's feedstock slate
is now comprised of medium sour crude oil, heavy sweet crude oil and resid.
The remaining feedstocks are primarily comprised of intermediates, light
sweet crude oil, methanol and butane.
The Company has term feedstock contracts totaling approximately
300,000 BPD, or approximately 57% of its total feedstock requirements.
The remainder of its feedstock requirements are purchased on the spot
market. The term agreements include contracts to purchase medium sour
crude oil and resid from various foreign national oil companies, including
certain Middle Eastern suppliers, and various domestic integrated oil
companies.
In connection with the Distribution, the Company entered into several
contracts with its former affiliates, including a 10-year term contract
under which a former affiliate is to supply approximately 50% of the butane
required to operate the Corpus Christi MTBE Plant and natural gasoline for
blending. The Company obtains approximately 80% of its total methanol
requirements for all of its refineries through its 50% joint venture
interest in the Clear Lake Methanol Plant.
The Company owns feedstock and refined product storage facilities and
leases feedstock and refined product storage facilities in various locations.
The Company believes its storage facilities are generally adequate for its
refining and marketing operations.
Factors Affecting Operating Results
The Company's earnings and cash flow from operations are primarily
affected by the relationship between refined product prices and the prices
for crude oil and resid. The cost to acquire feedstocks and the price for
which refined products are ultimately sold depends on numerous factors
beyond the Company's control, including the supply and demand for crude
oil, gasoline and other refined products which in turn are dependent upon,
among other things, the availability of imports, the economies and production
levels of foreign suppliers, the marketing of competitive fuels, political
affairs and the extent of governmental regulation.
The prices received by the Company for its refined products are
affected by other factors, such as product pipeline capacity, local market
conditions and the operating levels of competing refineries. As a result of
the geographic location of the Company's refineries, the Company's
profitability is largely dependent upon Gulf Coast refining margins.
A large, rapid increase in crude oil prices or a decrease in refined product
prices in the Gulf Coast region could adversely affect the Company's
operating margins. Crude oil costs and the price of refined products have
historically been subject to wide fluctuation. Installation of additional
refinery crude distillation and upgrading facilities, price volatility,
international political developments and other factors beyond the control of
the Company are likely to continue to play an important role in refining
industry economics. The Company is aware, for example, of additional
capacity of up to 200,000 BPD from a refinery in Good Hope, Louisiana
which may become operational as early as late 1998. These factors can
impact, among other things, the level of inventories in the market resulting
in price volatility. Moreover, the industry typically experiences seasonal
fluctuations in demand for refined products, such as for gasoline during the
summer driving season and for home heating oil during the winter in the
Northeast.
A significant portion of the Company's feedstock supplies are secured
under term contracts. There is no assurance of renewal of such contracts
upon their expiration or that economically equivalent substitute supply
contracts can be secured. The term agreements include an agreement with
the Saudi Arabian Oil Company to provide an average of 36,000 BPD of resid
from its Ras Tanura refinery to the Company through mid-1998. The Saudi
Arabian Oil Company has advised the Company that it plans to begin
operation of certain new resid conversion units in 1998 at the Ras Tanura
refining complex in Saudi Arabia. As a result, the production of resid at
Ras Tanura for export would be significantly reduced, which could adversely
affect the price, terms or availability of high quality resid feedstocks in
the future. However, the Saudi Arabian Oil Company has indicated that they
are willing to provide an additional supply of resid to the Company from
their other refineries although no contract has yet been negotiated. The
availability of such supplies notwithstanding, the Company anticipates that
lower volumes of high quality resid will be available from Saudi Arabia in
the future.
The Company's feedstock supplies from international producers are
loaded aboard chartered vessels and are subject to the usual maritime
hazards. If the Company's foreign sources of crude oil or access to the
marine system for delivering crude oil were curtailed, the Company's
operations could be adversely affected. In addition, the loss of, or
an adverse change in the terms of, certain of its feedstock supply
agreements or the loss of sources or means of delivery of its feedstock
supplies, could have a material adverse effect on the Company's operating
results. The volatility of prices and quantities of feedstocks that may
be purchased on the spot market or pursuant to term contracts could also
have a material adverse effect on operating results.
Because the Company manufactures a substantial portion of its gasoline
as RFG and can produce approximately 26,000 BPD of total oxygenates, certain
federal and state clean-fuel programs significantly affect the operations of
the Company and the markets in which it sells its refined products. In the
future, the Company cannot control or with certainty predict the effect of
such clean-fuel programs on the cost to manufacture, demand for or supply
of refined products. Presently, the EPA's oxygenated fuel program under
the Clean Air Act requires that areas designated "nonattainment" for carbon
monoxide use gasoline that contains a prescribed amount of clean burning
oxygenates during certain winter months. Additionally, the EPA's RFG
program under the Clean Air Act requires year-round usage of RFG in areas
designated "extreme" or "severe" nonattainment for ozone. In addition to
these nonattainment areas, approximately 44 of the 87 areas that were
designated as "serious," "moderate" or "marginal" nonattainment for ozone
also "opted in" to the RFG program to decrease their emissions of
hydrocarbons and toxic pollutants. In 1996, California adopted a statewide,
year-round program requiring the use of gasoline that meets more restrictive
emissions specifications than the federally mandated RFG. Under the
California gasoline program, the entire state is required to use CARB
Phase II gasoline that meets the California emissions standards which
are higher than those set by the EPA. Based upon oxygenate supply and demand
data, it appears most California refiners are choosing to use oxygenates to
help them comply with the statewide emissions standards. In 1997, Phoenix,
Arizona adopted a year-round program requiring gasoline that meets either
the federal RFG standards or the CARB Phase II standards. For the first
time in many years, Phoenix had no ozone exceedances in 1997. Because
Phoenix previously used oxygenated gasoline only in the winter months
for carbon monoxide control, the Company estimates this change will increase
annualized U.S. oxygenate demand about one percent.
MTBE margins are affected by the price of MTBE and its feedstocks,
methanol and butane, as well as the demand for RFG, oxygenated gasoline and
premium gasoline. The worldwide movement to reduce lead in gasoline is
expected to increase worldwide demand for oxygenates to replace the octane
provided by lead-based compounds. The general United States growth in
gasoline demand as well as additional "opt-ins" by certain areas into the
EPA clean fuels programs are expected to continue to increase the demand for
MTBE as a component of these clean fuels. However, initiatives have been
presented in California which would restrict or potentially ban the use of
MTBE as a gasoline component. Based on available information, the Company
believes that numerous scientific studies commissioned by the EPA, CARB and
others will result in defeat of these initiatives. However, if MTBE were
to be restricted or banned, the Company believes that its MTBE-producing
facility could be modified to produce a product similar to alkylate or other
petrochemicals.
The Corpus Christi Refinery's operating results are affected by the
relationship between refined product prices and resid prices, which in turn
are largely determined by market forces. The price of resid is affected by
the relationship between the demand for refined products (increased refined
products demand increases crude oil demand, thereby increasing the supply of
resid as more crude oil is processed) and worldwide additions to resid
conversion capacity (which reduces the available supply of resid). The crude
oil and refined products markets typically experience periods of extreme price
volatility. During such periods, disproportionate changes in the prices of
refined products and resid usually occur. The potential impact of changing
crude oil and refined product prices on the Corpus Christi Refinery's results
of operations is further affected by the fact that the Company generally
buys a portion of its resid feedstocks approximately 45 to 50 days prior to
processing.
Because the Company's refineries are generally more complex than many
conventional refineries and are designed principally to process resid and
other heavy and/or sour crude oils, its operating costs per barrel are
generally higher than those of most conventional refiners. But because the
Company's primary feedstocks usually sell at discounts to benchmark crude oil,
it has been generally able to recover its higher operating costs and generate
higher margins than many conventional refiners that use lighter crude oil as
their principal feedstock. Moreover, through recent improvements in
technology and modifications to its operating units, the Company has improved
its ability to process different types of feedstocks, including synthetic
domestic heavy oil blends and heavy crude oils. The Company expects its
primary feedstocks to continue to sell at a discount to benchmark crude oil,
but is unable to predict future relationships between the supply of and
demand for its feedstocks.
In April 1995, six major oil refiners filed a lawsuit against Unocal
Corporation ("Unocal") in Los Angeles, California seeking a declaratory
judgment that Unocal's claimed patent on certain gasoline compositions was
invalid and unenforceable. The Company is not a party to this litigation.
Unocal's claimed patent covers a substantial portion of the reformulated
gasoline compositions required by the CARB Phase II regulations that went
into effect in March 1996. In October 1997, a federal court jury upheld
the validity of Unocal's patent. In November 1997, the jury awarded
Unocal royalty damages based on infringement of the patent. A final phase
of the trial involving the unenforceability of Unocal's patent due to
"inequitable conduct" was held in December 1997, but to date, no decision
on this issue has been reached. Any adverse judgment against the six oil
refiners will likely be appealed. If the Company were required to pay a
royalty on the compositions claimed by Unocal's patent, such amounts could
affect the operating results of the Company and alter the blending economics
for compositions not covered by the patent. The Company is unable to
predict the validity or effect of any claimed Unocal patent.
Competition
Many of the Company's competitors in the petroleum industry are fully
integrated companies engaged, on a national and/or international basis, in
many segments of the petroleum business, including exploration, production,
transportation, refining and marketing on scales much larger than the
Company's. Such competitors may have greater flexibility in responding to
or absorbing market changes occurring in one or more of such segments.
Substantially all of the Company's crude oil and feedstock supplies are
purchased from third party sources, while some competitors have proprietary
sources of crude oil available for their own refineries.
The refining industry is highly competitive with respect to both
feedstock supply and marketing. The Company competes with numerous other
companies for available supplies of resid and other feedstocks and for
outlets for its refined products. Many of the Company's competitors
obtain a significant portion of their feedstocks from company-owned
production and are able to dispose of refined products at their own
retail outlets. The Company does not have retail gasoline operations.
Competitors that have their own production or retail outlets (and
brand-name recognition) may be able to offset losses from refining
operations with profits from producing or retailing operations, and
may be better positioned to withstand periods of depressed refining
margins or feedstock shortages.
The Company expects a continuation of the trend of industry
restructuring and consolidation through mergers, acquisitions, divestitures,
joint ventures and similar transactions, making for a more competitive
business environment while providing the Company with opportunities to
expand its operations. As described above, the Company expects to
undertake a capital expansion program to increase the throughput capacity
of its refinery facilities by approximately 140,000 BPD, and increase their
operational flexibility. The Company also plans to continue evaluating and
pursuing potential acquisitions to add refining capacity, in any case,
depending upon the Company's assessment of an acquisition's potential for
accretive earnings, creating geographic diversity, providing enhanced
marketing opportunities and providing economies of scope and scale.
Environmental Matters
The Company's operations are subject to environmental regulation by
federal, state and local authorities, including but not limited to, the EPA,
the Texas Natural Resource Conservation Commission ("TNRCC") and the
Louisiana Department of Environmental Quality. The regulatory requirements
relate primarily to discharge of materials into the environment, waste
management and pollution prevention measures. Several of the more
significant federal laws applicable to the Company's operations include
the Clean Air Act, the Clean Water Act, the Comprehensive Environmental
Response, Compensation and Liability Act ("CERCLA") and the Solid Waste
Disposal Act, as amended by the Resource Conservation and Recovery Act
("RCRA"). The Clean Air Act establishes stringent criteria for regulating
conventional air pollutants as well as toxic pollutants at operating
facilities in addition to requiring refiners to market cleaner-burning
gasoline in specific regions of the country to reduce ozone forming
pollutants and toxic emissions.
CERCLA and RCRA, and related state law, subject the Company to the
potential obligation to remove or mitigate the environmental impact of the
disposal or release of certain pollutants at the Company's facilities and
at formerly owned sites. Under CERCLA, the Company is subject to potential
joint and several liability for the costs of remediation at "superfund"
sites at which it has been identified as a "potentially responsible party"
(a "PRP"). Pursuant to the terms of the Basis acquisition, Salomon agreed
to indemnify the Company from third party claims, including "superfund"
liability associated with any pre-closing activities with respect to the
Acquired Refineries, subject to certain terms, conditions and limitations.
As of December 31, 1997, the Company has not been designated as a PRP under
CERCLA for any sites or costs not covered by Salomon's indemnity.
Because the Corpus Christi Refinery was completed in 1984, it was
built under more stringent environmental requirements than many existing
refineries. The Corpus Christi Refinery currently meets EPA emissions
standards requiring the use of "best available control technology," and
is located in an area currently designated "attainment" for air quality.
Accordingly, the Corpus Christi Refinery may be able to comply with the
Clean Air Act and future environmental legislation more easily than older
refineries, and significant additional capital expenditures for environmental
compliance are not anticipated. In 1996, the Corpus Christi, Texas, area was
approved as a "flexible attainment region" ("FAR") by the EPA and the TNRCC.
Under the Clean Air Act, the FAR designation will allow local officials
to design and implement an ozone prevention strategy customized for the
community. This designation also prevents the EPA from designating the
Corpus Christi area as "nonattainment" for a five-year period while
agreed-upon control strategies are being initiated to reduce ozone
formation. The FAR designation should provide greater flexibility with
respect to possible future expansion projects at the Corpus Christi Refinery.
The Company is leading an industry initiative in the State of Texas to
voluntarily permit "grandfathered" emissions sources at the Houston and
Texas City Refineries by utilizing a flexible permitting process. The
flexible permit is a new permitting concept in Texas that allows companies
that have committed to install advanced pollution control technology greater
operational flexibility, including increased throughput capacities, as long
as a facility-wide emissions cap is not exceeded.
As part of the Company's efforts to convert all of its Texas refineries
to flexible permits and utilize "best available pollution control technology"
at all its refineries, the Company plans to install flue gas scrubbers on the
FCC Units at the Houston and Texas City Refineries and upgrade its waste
water treatment plants at the Houston and Corpus Christi Refineries. The
Company anticipates spending approximately $50 million in connection with
these efforts over the next two years. These expenditures are not included
in the estimate of capital expenditures to increase capacity discussed above
under the heading "Refining Operations."
In 1997, capital expenditures for the Company attributable to compliance
with environmental regulations were approximately $15 million and are
currently estimated to be $21 million for 1998 (including expenditures at
the Acquired Refineries). These amounts are exclusive of any amounts
related to constructed facilities for which the portion of expenditures
relating to compliance with environmental regulations is not determinable.
Governmental regulations are complex and subject to different
interpretations. Therefore, future action and regulatory initiatives
could result in changes to expected operating permits, additional remedial
actions or increased capital expenditures and operating costs that cannot
be assessed with certainty at this time. There are no material governmental
fines or corrective action requirements associated with the Company's
operations and the Company believes its operations are in substantial
compliance with current and applicable environmental laws and regulations.
Executive Officers of the Registrant
Name Age Positions Held with Valero Executive
Officer Since
William E. Greehey 61 Chairman of the Board and
Chief Executive Officer 1982
Edward C. Benninger 55 President 1986
E. Baines Manning 57 Senior Vice President 1987
Gregory C. King 37 Vice President and General Counsel 1997
John D. Gibbons 44 Chief Financial Officer, Vice
President - Finance and Treasurer 1997
Keith D. Booke 39 Vice President - Administration and
Human Resources 1997
S. Eugene Edwards 41 Vice President 1998
John F. Hohnholt 45 Vice President 1998
Mr. Greehey served as Chief Executive Officer and a director of Energy
from 1979, and as Chairman of the Board of Energy from 1983. He retired from
his position as Chief Executive Officer in June 1996 but, upon request of the
Board, resumed this position in November 1996 and continued in such positions
until the Restructuring. Mr. Greehey also served as Chairman of the Board
and Chief Executive Officer of Valero prior to the Restructuring when Valero
was a wholly owned subsidiary of Energy. Mr. Greehey is a director of
Weatherford Enterra, Inc. and Santa Fe Energy Resources, Inc.
Mr. Benninger served as President and Chief Financial Officer of Energy
from 1996 and as a director of Energy since 1990, in each case until the
Restructuring. Prior to that, he served in various other capacities with
Energy, its predecessors and subsidiaries since 1975, including Executive
Vice President and Treasurer. Mr. Benninger also served as President and
Chief Financial Officer of Valero prior to the Restructuring when Valero
was a wholly owned subsidiary of Energy.
Mr. Manning was elected Senior Vice President of the Company in 1997.
He joined the Company in 1986 as senior vice president of the refining and
marketing subsidiaries of Energy and held various other positions with
Energy and its subsidiaries prior to the Restructuring.
Mr. King was elected Vice President and General Counsel of Valero in
1997. He joined Energy in 1993 as Associate General Counsel and prior to
that was a partner in the Houston law firm of Bracewell and Patterson.
Mr. Gibbons was elected Chief Financial Officer of the Company in 1998.
Previously, he was elected Vice President - Finance and Treasurer of Valero
in 1997, and was elected Treasurer of Energy in 1992. He joined Energy in
1981 and held various other positions with Energy prior to the Restructuring.
Mr. Booke was elected Vice President-Administration and Human
Resources of the Company in 1998. Prior to that he served as Vice
President-Administration of the Company since 1997 and Vice
President-Investor Relations of Energy since 1994. He joined Energy in 1983
and held various other positions with Energy prior to the Restructuring.
Mr. Edwards was elected Vice President of the Company in January 1998
and functions as head of the Marketing, Supply and Logistics department.
Mr. Edwards joined Energy in 1982 and held various positions within Energy's
refining operations, refining planning, business development and marketing
departments prior to the Restructuring.
Mr. Hohnholt was elected Vice President of the Company in January 1998
and functions as the head of the Refining Operations and Planning department.
Prior to that he was General Manager of the Corpus Christi Refinery.
Mr. Hohnholt joined Energy in 1982 and held various positions within
Energy's refining operations department prior to the Restructuring.
Employees
As of January 31, 1998, the Company had 1,855 employees.
ITEM 2. PROPERTIES
The Company's properties include the Acquired Refineries, the Corpus
Christi Refinery, and related facilities located in the States of Texas and
Louisiana. See "Refining Operations" for additional information regarding
properties of the Company. The Company believes that its facilities are
generally adequate for their respective operations and that its facilities
are maintained in a good state of repair. The Company is the lessee under
a number of cancelable and non-cancelable leases for certain real properties,
including office facilities and various facilities and equipment used to
store, transport and produce refinery feedstocks and/or refined products.
See Note 14 of Notes to Consolidated Financial Statements.
ITEM 3. LEGAL PROCEEDINGS
Litigation Relating to Operations of Basis Prior to Acquisition
Basis has been named as a party to numerous claims and legal proceedings
which arose prior to its acquisition by the Company. Pursuant to the Stock
Purchase Agreement between Energy, the Company, Salomon, and Basis, Salomon
assumed the defense of all known suits, actions, claims and investigations
pending at the time of the acquisition and all obligations, liabilities and
expenses related to or arising therefrom. In addition, Salomon agreed to
assume all obligations, liabilities and expenses related to or resulting
from all private third-party suits, actions and claims which arise out of
a state of facts existing on or prior to the time of the acquisition
(including "superfund" liability), but which were not pending at such time,
subject to certain terms, conditions and limitations. In certain pending
matters, the plaintiffs are requesting injunctive relief which, if granted,
could potentially result in the operations acquired in connection with the
purchase of Basis being adversely affected through required reductions in
emissions, discharges or refinery throughput, which could be outside
Salomon's indemnity obligations. The Company and Salomon reached an
agreement in December 1997 whereby Salomon paid the Company $9.5 million
in settlement of certain of Salomon's contingent environmental obligations
assumed under the Stock Purchase Agreement. This settlement did not affect
Salomon's other indemnity obligations described in this paragraph.
Litigation Relating to Discontinued Operations
Energy and certain of its natural gas related subsidiaries, as well as
the Company, have been sued by Teco Pipeline Company ("Teco") regarding the
operation of the 340-mile West Texas pipeline in which a subsidiary of
Energy holds a 50% undivided interest. In 1985, a subsidiary of Energy
sold a 50% undivided interest in the pipeline and entered into a joint
venture through an ownership agreement and an operating agreement, each
dated February 28, 1985, with the purchaser of the interest. In 1988,
Teco succeeded to that purchaser's 50% interest. A subsidiary of Energy
has at all times been the operator of the pipeline. Notwithstanding the
written ownership and operating agreements, the plaintiff alleges that a
separate, unwritten partnership agreement exists, and that the defendants
have exercised improper dominion over such alleged partnership's affairs.
The plaintiff also alleges that the defendants acted in bad faith by
negatively affecting the economics of the joint venture in order to provide
financial advantages to facilities or entities owned by the defendants and
by allegedly usurping for the defendants' own benefit certain opportunities
available to the joint venture. The plaintiff asserts causes of action for
breach of fiduciary duty, fraud, tortious interference with business
relationships, professional malpractice and other claims, and seeks
unquantified actual and punitive damages. Energy's motion to compel
arbitration was denied, but Energy has filed an appeal. Energy has also
filed a counterclaim alleging that the plaintiff breached its own
obligations to the joint venture and jeopardized the economic and
operational viability of the pipeline by its actions. Energy is seeking
unquantified actual and punitive damages. Although PG&E previously acquired
Teco and now ultimately owns both Teco and Energy after the Restructuring,
PG&E's Teco acquisition agreement purports to assign the benefit or
detriment of this lawsuit to the former shareholders of Teco. Pursuant
to the Distribution Agreement by which the Company was spun off to Energy's
stockholders in connection with the Restructuring, the Company has agreed to
indemnify and hold harmless Energy with respect to this lawsuit to the
extent of 50% of the amount of any final judgment or settlement amount
not in excess of $30 million, and 100% of that part of any final judgment or
settlement amount in excess of $30 million.
General
The Company is also a party to additional claims and legal proceedings
arising in the ordinary course of business. The Company believes it is
unlikely that the final outcome of any of the claims or proceedings to
which the Company is a party would have a material adverse effect on the
Company's financial statements; however, due to the inherent uncertainty
of litigation, the range of possible loss, if any, cannot be estimated with
a reasonable degree of precision and there can be no assurance that the
resolution of any particular claim or proceeding would not have an adverse
effect on the Company's results of operations for the interim period in
which such resolution occurred.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
fourth quarter of 1997.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is listed under the symbol "VLO" on the New
York Stock Exchange, which is the principal trading market for this security.
As of January 30, 1998, there were approximately 6,000 holders of record and
an estimated 15,000 additional beneficial owners of the Company's Common
Stock. The Company's Common Stock began trading on the New York Stock
Exchange on August 1, 1997 (the business day immediately following the
Distribution).
The following table sets forth the range of the high and low sales
prices of the Common Stock as quoted in The Wall Street Journal New York
Stock Exchange-Composite Transactions listing, and the amount of per-share
dividends for each quarter in the preceding two years (i) for the Company
after the Distribution and Merger and (ii) for Energy prior to the
Distribution and Merger.
Sales Prices
of the Dividends
Common Stock per
High Low Common Share
Quarter Ended
1997:
March 31 $36 3/8 $28 5/8 $.13
June 30 38 1/2 34 1/4 .13
September 30 (through 7/31/97) 43 36 1/4 -
September 30 (after 7/31/97) 35 1/8 28 3/4 .08
December 31 34 26 15/16 .08
1996:
March 31 $26 1/2 $22 1/8 $.13
June 30 29 24 1/2 .13
September 30 25 1/2 20 1/4 .13
December 31 30 21 7/8 .13
The Company's Board of Directors declared a quarterly dividend of
$.08 per share of Common Stock at its January 29, 1998 meeting. Dividends
are considered quarterly by the Company's Board of Directors and may be paid
only when approved by the Board.
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data set forth below for the year ended
December 31, 1997 is derived from the Company's Consolidated Financial
Statements contained elsewhere herein. The selected financial data for the
years ended prior to December 31, 1997 is derived from the selected financial
data contained in the Company's Annual Report on Form 10-K for the year ended
December 31, 1996 except as noted below.
The following summaries are in thousands of dollars except for per
share amounts:
Year Ended December 31,
1997(b) 1996 1995 1994 1993
OPERATING REVENUES (a) $5,756,220 $2,757,853 $1,772,638 $1,090,497 $1,044,811
OPERATING INCOME (a) $ 211,034 $ 89,748 $ 123,755 $ 63,611 $ 60,923
INCOME FROM CONTINUING OPERATIONS (a) $ 111,768 $ 22,472 $ 58,242 $ 18,511 $ 14,032
INCOME (LOSS) FROM DISCONTINUED
OPERATIONS, NET OF INCOME TAXES (a) $ (15,672) $ 50,229 $ 1,596 $ (1,229) $ 22,392
NET INCOME $ 96,096 $ 72,701 $ 59,838 $ 17,282 $ 36,424
Less: Preferred stock dividend
requirements and
redemption premium 4,592 11,327 11,818 9,490 1,262
NET INCOME APPLICABLE TO
COMMON STOCK $ 91,504 $ 61,374 $ 48,020 $ 7,792 $ 35,162
EARNINGS (LOSS) PER SHARE OF
COMMON STOCK:
Continuing operations (a) $ 2.16 $ .51 $ 1.33 $ .43 $ .33
Discontinued operations (a) (.39) .89 (.23) (.25) .49
Total $ 1.77 $ 1.40 $ 1.10 $ .18 $ .82
EARNINGS (LOSS) PER SHARE OF
COMMON STOCK - ASSUMING DILUTION:
Continuing operations (a) $ 2.03 $ .44 $ 1.16 $ .38 $ .33
Discontinued operations (a) (.29) .98 .01 (.05) .49
Total $ 1.74 $ 1.42 $ 1.17 $ .33 $ .82
TOTAL ASSETS (a) $2,493,043 $1,985,631 $1,904,655 $1,869,198 $1,574,293
LONG-TERM OBLIGATIONS AND
REDEEMABLE PREFERRED STOCK (a) $ 430,183 $ 354,457 $ 461,521 $ 449,717 $ 406,512
DIVIDENDS PER SHARE OF COMMON
STOCK $ .42 $ .52 $ .52 $ .52 $ .46
<FN>
(a) Amounts for the years ended prior to December 31, 1997 have been restated to reflect Energy's natural
gas related services business as discontinued operations pursuant to the Restructuring.
(b) Includes the operations of the Texas City, Houston and Krotz Springs refineries commencing May 1, 1997.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESTRUCTURING
On July 31, 1997, Valero Energy Corporation ("Energy") completed the
spin-off of its refining and marketing subsidiary, Valero Refining and
Marketing Company, to its shareholders and the merger of its natural gas
related services business with PG&E Corporation ("PG&E")(collectively
referred to as the "Restructuring"). Upon completion of the Restructuring,
Valero Refining and Marketing Company was renamed Valero Energy Corporation
("Valero," and together with its consolidated subsidiaries, the "Company")
and is listed on the New York Stock Exchange under the symbol "VLO." The
Restructuring was the result of a management recommendation announced in
November 1996 to pursue strategic alternatives involving Energy's principal
business activities. See Note 1 of Notes to Consolidated Financial
Statements for additional information about the Restructuring.
For financial reporting purposes under the federal securities laws,
Valero is a "successor registrant" to Energy. As a result, the following
Management's Discussion and Analysis of Financial Condition and Results of
Operations, and the consolidated financial statements included elsewhere
herein reflect Energy's natural gas related services business as
discontinued operations of the Company. As the context requires,
references to "Energy" are to (i) Valero Energy Corporation and its
consolidated subsidiaries, both individually and collectively, for all
periods prior to the close of business on July 31, 1997, the effective
date of the Restructuring, and (ii) the natural gas related services
business which was merged with PG&E for all periods subsequent to
July 31, 1997. The following review of the Company's results of operations
and liquidity and capital resources should be read in conjunction
with the consolidated financial statements and the notes thereto of the
Company presented on pages 30 to 64.
EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 128,
"Earnings per Share," which became effective for the Company's financial
statements beginning with the period ending December 31, 1997. This
statement supersedes APB Opinion No. 15, "Earnings per Share," and
related interpretations and establishes new standards for computing and
presenting earnings per share, requiring a dual presentation for companies
with complex capital structures. In accordance with this new statement,
the Company has presented basic and diluted earnings per share on the
face of the accompanying Consolidated Statements of Income. References
to "per share" amounts in the following discussion of Results of Operations
are to basic earnings per share.
FORWARD-LOOKING STATEMENTS
The following discussion contains certain estimates, predictions,
projections and other "forward-looking statements" (within the meaning
of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934) that involve various risks and uncertainties.
While these forward-looking statements, and any assumptions upon which they
are based, are made in good faith and reflect the Company's current judgment
regarding the direction of its business, actual results will almost always
vary, sometimes materially, from any estimates, predictions, projections,
assumptions, or other future performance suggested herein. Some important
factors (but not necessarily all factors) that could affect the Company's
sales volumes, growth strategies, future profitability and operating results,
or that otherwise could cause actual results to differ materially from those
expressed in any forward-looking statement include the following: renewal
or satisfactory replacement of the Company's 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; accidents or other unscheduled shutdowns affecting the
Company's, its suppliers' or its customers' pipelines, plants, machinery or
equipment; excess industry capacity; competition from products and services
offered by other energy enterprises; changes in the cost or availability of
third-party vessels, pipelines and other means of transporting feedstocks
and products; ability to implement the cost reductions and operational
changes related to, and realize the various assumptions and efficiencies
projected for, the operation of the Texas City, Houston and Krotz Springs
refineries; state and federal environmental, economic, safety and other
policies and regulations, any changes therein, and any legal or regulatory
delays or other factors beyond the Company's control; execution of planned
capital projects; weather conditions affecting the Company's operations or
the areas in which the Company's products are marketed; rulings, judgments,
or settlements in litigation or other legal matters, including unexpected
environmental remediation costs in excess of any reserves; the introduction
or enactment of federal or state legislation; and changes in the credit
ratings assigned to the Company's debt securities and trade credit.
Certain of these risk factors are more fully discussed in the Company's
Form S-1 registration statement filed with the Securities and Exchange
Commission on May 13, 1997 ("Form S-1"). The Company undertakes no
obligation to publicly release the result of any revisions to any such
forward-looking statements that may be made to reflect events or
circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
FINANCIAL AND OPERATING HIGHLIGHTS
The following are the Company's financial and operating highlights for
each of the three years in the period ended December 31, 1997. Amounts for
1996 and 1995 have been restated to reflect Energy's natural gas related
services business as discontinued operations pursuant to the Restructuring.
The amounts in the following table are in thousands of dollars, unless
otherwise noted:
Year Ended December 31,
1997 (1) 1996 1995
Operating revenues $5,756,220 $2,757,853 $1,772,638
Operating income (loss):
Refining and marketing $ 254,896 $ 118,192 $ 150,300
Administrative expenses (43,862) (28,444) (26,545)
Total $ 211,034 $ 89,748 $ 123,755
Loss on investment in Proesa joint venture $ - $ (19,549) $ -
Other income, net $ 6,978 $ 7,418 $ 5,876
Interest and debt expense, net $ (42,455) $ (38,534) $ (40,935)
Income from continuing operations $ 111,768 $ 22,472 $ 58,242
Income (loss) from discontinued operations,
net of income taxes $ (15,672) $ 50,229 $ 1,596
Net income $ 96,096 $ 72,701 $ 59,838
Net income applicable to common stock $ 91,504 $ 61,374 $ 48,020
Earnings (loss) per share of common stock:
Continuing operations $ 2.16 $ .51 $ 1.33
Discontinued operations (.39) .89 (.23)
Total $ 1.77 $ 1.40 $ 1.10
Earnings (loss) per share of common stock -
assuming dilution:
Continuing operations $ 2.03 $ .44 $ 1.16
Discontinued operations (.29) .98 .01
Total $ 1.74 $ 1.42 $ 1.17
Earnings before interest, taxes, depreciation
and amortization ("EBITDA") $ 313,025 $ 164,958 $ 214,318
Ratio of EBITDA to interest expense (2) 7.1x 4.0x 4.8x
Operating statistics:
Corpus Christi refinery:
Throughput volumes (Mbbls per day) 180 170 160
Operating cost per barrel $ 3.34 $ 3.29 $ 3.34
Texas City/Houston/Krotz Springs refineries:
Throughput volumes (Mbbls per day) (3) 315 N/A N/A
Operating cost per barrel (3) $ 2.30 N/A N/A
Sales volumes (Mbbls per day) 630 291 231
Average throughput margin per barrel $ 4.64 $ 5.29 $ 6.25
<FN>
(1) Includes the operations of the Texas City, Houston and Krotz Springs
refineries commencing May 1, 1997.
(2) Interest expense includes $18,164, $30,642 and $34,362 for 1997, 1996 and
1995, respectively, of interest on corporate debt that was allocated to
continuing operations (see Note 3 of Notes to Consolidated Financial
Statements).
(3) 1997 amounts are for the eight months ended December 31, 1997.
RESULTS OF OPERATIONS
1997 COMPARED TO 1996
General
The Company reported income from continuing operations of $111.8
million, or $2.16 per share, for the year ended December 31, 1997 compared
to $22.5 million, or $.51 per share, for the year ended December 31, 1996.
For the fourth quarter of 1997, income from continuing operations was
$12.4 million, or $.22 per share, compared to a loss from continuing
operations of $5.3 million, or $.12 per share, for the fourth quarter of
1996. Results from discontinued operations were a loss of $15.7 million,
or $.39 per share, for the seven months ended July 31, 1997, and income
of $24.1 million, or $.49 per share, and $50.2 million, or $.89 per share,
for the quarter and year ended December 31, 1996, respectively. In
determining earnings per share, dividends on Energy's preferred stock were
deducted from income from discontinued operations as such preferred stock
was issued in connection with Energy's natural gas related services business.
The May 1, 1997 acquisition of the Texas City, Houston and Krotz Springs
refineries (individually, the "Texas City Refinery," the "Houston Refinery"
and the "Krotz Springs Refinery"), which were acquired from Salomon Inc in
connection with the purchase of Basis Petroleum, Inc. ("Basis")(see Note 4
of Notes to Consolidated Financial Statements), added significantly to the
Company's 1997 results. Income from continuing operations and related
earnings per share increased significantly during 1997 compared to 1996
due primarily to an increase in operating income, partially offset by an
increase in income tax expense. In addition, fourth quarter and total
year results for 1996 were negatively impacted by a $19.5 million pre-tax
loss resulting from the write-off of the Company's investment in its joint
venture project to design, construct and operate a plant in Mexico to
produce methyl tertiary butyl ether ("MTBE"). This loss reduced results
from continuing operations for such periods by approximately $.29 per share.
Operating Revenues
Operating revenues increased $3 billion, or 109%, to $5.8 billion
during 1997 compared to 1996 due to a 116% increase in average daily sales
volumes resulting primarily from additional throughput volumes attributable
to the May 1, 1997 acquisition of the Texas City, Houston and Krotz Springs
refineries. Also contributing, to a lesser extent, to the increase in sales
volumes was an increase in marketing activities and a 6% increase in
throughput volumes at the Company's Corpus Christi refinery ("Corpus Christi
Refinery") resulting from, among other things, various unit capacity
expansions completed in late 1996 and 1997 and less unit downtime
experienced in 1997 compared to 1996.
Operating Income
Operating income increased $121.3 million, or 135%, to $211 million
during 1997 compared to 1996 due to an approximate $84 million contribution
from the operations related to the Texas City, Houston and Krotz Springs
refineries, and to an approximate $67 million increase in total throughput
margins for the operations related to the Corpus Christi Refinery. Partially
offsetting these increases in operating income were an approximate
$15 million increase in operating costs at the Corpus Christi Refinery
(explained below) and an approximate $15 million increase in administrative
expenses resulting primarily from higher employee-related costs, including
the effect of additional personnel resulting from the acquisition of Basis
in May 1997. Total throughput margins for the operations related to the
Corpus Christi Refinery increased during 1997 compared to 1996 due to a
substantial improvement in the price differential between conventional
gasoline and crude oil, higher oxygenate margins resulting primarily
from a decrease in methanol feedstock costs as a result of lower production
costs at the Company's joint venture methanol plant in Clear Lake, Texas
("Clear Lake Methanol Plant"), and higher premiums on sales of reformulated
gasoline and petrochemical feedstocks, including a substantial benefit from
the sale of mixed xylenes produced from the xylene fractionation unit that
was placed in service at the Corpus Christi Refinery in January 1997. Total
throughput margins for the operations related to the Corpus Christi Refinery
were also higher in 1997 due to less unit downtime compared to 1996 as
described below. The increases resulting from these factors were partially
offset by lower discounts on purchases of resid feedstocks during the last
nine months of the year due to high demand for resid in the Far East and a
decrease in crude oil prices. The $15 million, or 7%, increase in operating
costs at the Corpus Christi Refinery was due primarily to increases in
maintenance and employee-related costs, incremental costs associated with
the xylene fractionation unit, and higher variable costs resulting from the
above noted increase in throughput volumes. However, due to such increase
in throughput volumes, operating costs per barrel at the Corpus Christi
Refinery increased only 2%.
At the Corpus Christi Refinery, turnarounds of the crude and vacuum
units were completed in April 1997 which increased the crude unit's capacity
by approximately 8,000 barrels per day. Also, in the second quarter of 1997,
the heavy oil cracking unit ("HOC") was shut down for approximately 14 days
as a result of various unit malfunctions. In 1996, a maintenance turnaround
and a catalyst change for the hydrodesulfurization ("HDS") unit were completed
in July, a turnaround of the MTBE Plant was completed in September during
which its capacity was increased by approximately 1,500 barrels per day, and
turnarounds of the hydrocracker and naphtha reformer units were completed in
December. Also, in the 1996 second quarter, two power outages resulted in
reduced run rates for several units. In addition, the Clear Lake Methanol
Plant was out of service for approximately three months beginning in
December 1996 as a result of an explosion that occurred as the plant was
being shut down for repairs. At the Texas City Refinery, a turnaround and
catalyst change for the residfiner unit was completed in July 1997. At the
Houston Refinery, the fluid catalytic cracking unit ("FCC Unit") was shut
down for repairs for approximately 11 days in the 1997 second quarter and
approximately 14 days in December 1997, during which times minor turnarounds
were completed. See "Outlook" for a discussion of maintenance turnarounds
scheduled at the Company's refineries in 1998.
The Company enters into various exchange-traded and over-the-counter
financial instrument contracts with third parties to manage price risk
associated with refining feedstock and fuel purchases, refined product
inventories and refining operating margins. Although such activities are
intended to limit the Company's exposure to loss during periods of declining
margins, such activities could tend to reduce the Company's participation in
rising margins. In 1997 and 1996, the effect of hedging activities on
refining throughput margins was not significant. In 1996, the Company
reduced its operating costs by approximately $2.8 million as a result of
hedges on refining natural gas fuel requirements. The effect of such
hedging activities on operating costs in 1997 was not significant. See
Note 2 under "Price Risk Management Activities" and Note 7 of Notes to
Consolidated Financial Statements.
Net Interest and Debt Expense
Net interest and debt expense increased $3.9 million, or 10%, to
$42.4 million during 1997 compared to 1996 due primarily to interest on
bank borrowings related to the acquisition of Basis and to the special
pre-Distribution dividend paid to Energy described in Note 1 of Notes to
Consolidated Financial Statements. The increase in net interest and debt
expense resulting from these factors was partially offset by a $12.5 million
decrease in interest expense on allocated corporate debt (see Notes 3 and 6
of Notes to Consolidated Financial Statements), and by a reduction in bank
borrowings resulting from cash provided by operations subsequent to the
Restructuring.
Income Tax Expense
Income tax expense increased $47.2 million to $63.8 million during 1997
compared to 1996 due primarily to higher pre-tax income from continuing
operations.
Discontinued Operations
The loss from discontinued operations in 1997 of $15.7 million (net of
an income tax benefit of $8.9 million), or $.39 per share, reflected the net
loss of Energy's natural gas related services business for the seven months
ended July 31, 1997, prior to consummation of the Restructuring. Income from
discontinued operations in 1996 of $50.2 million (net of income tax expense
of $24.4 million), or $.89 per share, reflected the net income of Energy's
natural gas related services business for all of such year. See Note 3 of
Notes to Consolidated Financial Statements for additional information.
1996 COMPARED TO 1995
General
The Company reported income from continuing operations of $22.5 million,
or $.51 per share, for the year ended December 31, 1996 compared to
$58.2 million, or $1.33 per share, for the year ended December 31, 1995.
For the fourth quarter of 1996, the Company reported a loss from continuing
operations of $5.3 million, or $.12 per share, compared to income from
continuing operations of $11.1 million, or $.25 per share, for the fourth
quarter of 1995. Results from discontinued operations were income of
$24.1 million, or $.49 per share, and $50.2 million, or $.89 per share,
for the quarter and year ended December 31, 1996, respectively, and income
(loss) of $1.8 million, or $(.02) per share, and $1.6 million, or $(.23)
per share, for the quarter and year ended December 31, 1995. In determining
earnings per share for the 1996 and 1995 periods, dividends on Energy's
preferred stock were deducted from income from discontinued operations as
such preferred stock was issued in connection with Energy's natural gas
related services business.
Income from continuing operations and related earnings per share
decreased during the 1996 fourth quarter and total year compared to the
same periods in 1995 due primarily to a decrease in refining and marketing
operating income, and a $19.5 million pre-tax loss recorded in the fourth
quarter of 1996 resulting from the write-off of the Company's investment in
its Mexico MTBE project which reduced results from continuing operations by
approximately $.29 per share.
Operating Revenues
Operating revenues increased $807.1 million, or 41%, to $2.8 billion
during 1996 compared to 1995 due primarily to a 26% increase in sales
volumes and a 12% increase in the average sales price per barrel. The
increase in sales volumes was due primarily to increased volumes from trading
and rack marketing activities, and a 6% increase in average daily throughput
volumes at the Corpus Christi Refinery resulting from various unit
improvements and enhancements made during 1995 and a reduced impact on
production due to unit turnarounds which occurred in 1996 compared to 1995,
partially offset by the effects of two second quarter 1996 power outages.
The average sales price per barrel increased due primarily to higher
gasoline and distillate prices which generally followed an increase
in crude oil prices during 1996.
Operating Income
Operating income decreased $34 million, or 27%, to $89.7 million during
1996 compared to 1995 due primarily to a decrease in total throughput margins
and higher operating costs. The decrease in total throughput margins was due
primarily to lower oxygenate margins resulting from higher butane feedstock
costs, particularly in the fourth quarter, lower margins on sales of
petrochemical feedstocks, and decreased results from price risk management
activities. These decreases in throughput margins were partially offset by
the increase in throughput volumes noted above in the discussion of operating
revenues, higher distillate margins, and an improvement in discounts on
purchases of resid feedstocks. Operating expenses increased due primarily
to costs associated with the Clear Lake Methanol Plant which was placed in
service in late August 1995 and higher variable costs resulting from
increased throughput at the Corpus Christi Refinery.
In 1996, refining throughput margins were reduced by $1.2 million as
a result of hedging activities compared to a $12.8 million benefit in 1995.
The 1995 benefit resulted primarily from favorable price swap contracts on
methanol, as methanol prices dropped by over 70% during that year. In 1996
and 1995, the Company reduced its operating costs by $2.8 million and
$1 million, respectively, as a result of hedges on refining natural gas
fuel requirements.
Net Interest and Debt Expense
Net interest and debt expense decreased $2.4 million to $38.5 million
during 1996 compared to 1995 due primarily to a decrease in bank borrowings.
Income Tax Expense
Income tax expense decreased $13.8 million in 1996 compared to 1995 due
primarily to lower pre-tax income.
Discontinued Operations
Income from discontinued operations in 1996 of $50.2 million (net of
income tax expense of $24.4 million), or $.89 per share, and in 1995 of
$1.6 million (net of income tax expense of $4.8 million), or a loss of
$.23 per share, reflected the net income of Energy's natural gas related
services business for all of such years. See Note 3 of Notes to Consolidated
Financial Statements for additional information.
OUTLOOK
Over the next few years, the Company anticipates a moderate improvement
in refining margins due to tightening refining capacity. Increased demand
for light products is expected to outpace capacity additions due to slow
growth in capacity additions resulting from poor margins experienced in
recent years. Excess conversion capacity triggered by enhanced conversion
capacity projects in the early to mid-1990's has now been fully absorbed,
and any such projects currently planned will not keep pace with an expected
increase in the supply of heavy crudes resulting from increased Middle East
and Latin American production. As a result, the spread between light and
heavy crudes is expected to increase. The quantity and quality of resid
feedstock is expected to decrease as conversion capacity expansions come
on-line in the Middle East and Asia.
Domestic gasoline demand, which increased 2.5% in 1997 versus only 1%
in 1996, is expected to continue to improve due to a strong economy and the
trend in recent years toward less fuel-efficient vehicles. Demand for
clean-burning fuels, such as RFG, is expected to continue to increase
resulting from the worldwide movement to reduce lead in gasoline. The
demand for RFG increased to 32.5% of the total demand for gasoline in the
U.S. in 1997, up from 30.3% in 1996, primarily due to the full-year
effect of the implementation in 1996 of the requirement for the use of
Phase II RFG in California and the opt-in to RFG by Phoenix in the summer
of 1997. The increasing demand for clean-burning fuels should sustain a
strong demand for oxygenates such as MTBE.
Certain initiatives have been presented in California which would
restrict or potentially ban the use of MTBE as a gasoline component.
Based on available information, the Company believes that numerous
scientific studies commissioned by the EPA, CARB, and others will result
in defeat of these initiatives. However, if MTBE were to be restricted
or banned, the Company believes that its MTBE-producing facility could be
modified to produce a product similar to alkylate or other petrochemicals.
The Company expects a continuation of the recent industry consolidations
through mergers and acquisitions, making for a more competitive business
environment while providing the Company with opportunities to expand its
operations. Beginning in 1998, the Company expects to undertake a capital
expansion program to increase the throughput capacity of its refinery
facilities by approximately 140,000 barrels per day, and increase the
operational flexibility of the refineries. The majority of such program
is anticipated to be performed in 1999 during scheduled maintenance
turnarounds.
The Company's turnaround schedule for 1998 is light. During
January 1998, catalyst change-outs in the HDS unit and the
hydrocracker/reformer complex, as well as a maintenance turnaround of
the MTBE Plant, were completed at the Corpus Christi Refinery. A
catalyst change in the residfiner at the Texas City Refinery is currently
scheduled to begin in late March 1998. During 1999, maintenance turnarounds
for most of the Company's major refining units are planned. Such turnarounds
are scheduled to occur early in the first quarter and in the fourth quarter
when refining margins are historically low so as to minimize the impact on
the Company's operating results.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by continuing operations increased $76.2 million to
$196.6 million during 1997 compared to 1996 due to the increase in income
from continuing operations discussed above under "Results of Operations,"
partially offset by the changes in current assets and current liabilities
detailed in Note 2 of Notes to Consolidated Financial Statements under
"Statements of Cash Flows." Included in the changes in current assets
and current liabilities for 1997 was a substantial decrease in accounts
payable offset to a large extent by decreases in accounts receivable
and inventories. Accounts payable and accounts receivable decreased in
1997 due to lower commodity prices. In 1996, inventories increased due
to increased wholesale marketing activities for the operations related
to the Corpus Christi Refinery. The inventory increase in 1996 was almost
entirely offset by the net change in accounts receivable and accounts
payable, both of which increased due to higher commodity prices and
increased purchase and sales volumes. During 1997, cash provided by
operating activities, along with net proceeds from bank and other
borrowings (see Note 6 of Notes to Consolidated Financial Statements),
and issuances of common stock related to Energy's benefit plans totaled
approximately $748 million. These funds were utilized to acquire Basis,
fund capital expenditures and deferred turnaround and catalyst costs, pay
common and preferred stock dividends, pay a special dividend to Energy
and settle the intercompany note balance with Energy pursuant to the
Distribution Agreement (see Note 1 of Notes to Consolidated Financial
Statements), purchase treasury stock, and redeem the remaining outstanding
shares of Energy's Series A Preferred Stock (see Note 8 of Notes to
Consolidated Financial Statements).
The Company currently maintains a five-year, 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. The Company is also charged various fees and expenses,
including a facility fee and various letter of credit fees. The interest
rate and fees under the credit facility are subject to adjustment based
upon the credit ratings assigned to the Company's long-term debt. The
credit facility includes certain restrictive covenants including a coverage
ratio, a capitalization ratio, and a minimum net worth test, none of which
are expected to limit the Company's ability to operate in the ordinary
course of business. As of December 31, 1997, the Company had approximately
$558 million available under this committed bank credit facility for
additional borrowings and letters of credit. The Company also has numerous
uncommitted short-term bank credit facilities, along with several uncommitted
letter of credit facilities. As of December 31, 1997, a minimum of
$120 million and a maximum of $313 million were available for additional
borrowings under the short-term bank credit facilities, and approximately
$232 million was available for additional letters of credit under the
uncommitted letter of credit facilities. As of December 31, 1997, the
Company's debt to capitalization ratio was 32.3%. The Company was in
compliance with all covenants contained in its bank credit and letter of
credit facilities, and other debt facilities noted below, as of
December 31, 1997. See Notes 5 and 6 of Notes to Consolidated Financial
Statements.
During 1997, the Company undertook various initiatives to lower its
future interest payments and increase its financial flexibility. In
April 1997, the Company refinanced $98.5 million principal amount of
10 1/4% to 10 5/8% tax-exempt industrial revenue bonds, which had due
dates ranging from 2008 to 2017, with $98.5 million of variable rate
tax-exempt industrial revenue bonds which have due dates ranging from
2009 to 2027. These bonds bore interest at rates ranging from 3.65%
to 3.95% as of December 31, 1997. In May 1997, the Company issued
$25 million of new variable rate tax-exempt industrial revenue bonds
due in 2031 and used the proceeds to reduce bank borrowings. These bonds
bore interest at 3.8% as of December 31, 1997. In addition, in December
1997, the Company issued $150 million principal amount of notes ("Notes")
at an effective interest rate of 5.86% over the initial five years of their
term, also using the proceeds to reduce bank borrowings. If the 30-year
Treasury rate has decreased below 6.13% at the end of five years from the
date of issuance of the Notes, a third party will likely exercise its
option to purchase the Notes and the term of the Notes will be
extended thirty years at 6.13% plus the Company's prevailing credit spread.
If at the end of five years from the date of issuance of the Notes, the
30-year Treasury rate is higher than 6.13% and as a result the third party
does not exercise its purchase option, then the Company will be required
to repurchase the Notes at par. See Note 6 of Notes to Consolidated
Financial Statements.
In order to reduce the Company's exposure to increases in interest
rates, in January 1998, the Company's Board of Directors approved the
commencement of efforts to convert the interest rates on the Company's
$123.5 million of outstanding industrial revenue bonds from variable
rates to fixed rates. At the same time, the Board approved the issuance
of an additional $25 million of tax-exempt industrial revenue bonds at
a fixed interest rate and the issuance of up to $43.5 million of taxable
industrial revenue bonds at variable interest rates, both of which are
expected to mature in the year 2032. The $43.5 million of variable
rate bonds will be supported by a letter of credit issued under the
Company's $835 million revolving bank credit facility. The letters of
credit issued under such facility and associated with the above noted
$123.5 million of outstanding tax-exempt bonds will be released upon
conversion of the interest rates from variable to fixed. The interest
rate conversion of the outstanding bonds and the issuance of the new
bonds are expected to be completed by the end of the first quarter of 1998.
As described in Note 4 of Notes to Consolidated Financial Statements,
Energy acquired the outstanding common stock of Basis on May 1, 1997 for
approximately $356 million in cash, funded with borrowings under Energy's
bank credit facilities, and Energy common stock which had a fair market
value of $114 million on the date of issuance. Although Basis incurred
significant operating losses during 1995 and 1996, the Texas City, Houston
and Krotz Springs refineries and related marketing operations were able to
contribute approximately $84 million to the Company's operating income for
the months of May through December 1997, as described above under "Results
of Operations." The achievement of such results was due to, among other
things, refinery upgrading projects completed both prior to and after the
acquisition, favorable market conditions which existed throughout much
of the year, a reduction in depreciation and amortization expense due to
the acquisition cost of Basis being less than its net book value, and a
reduction in operating and overhead costs through various operational and
personnel-related changes implemented by the Company. The Company believes
that the operations related to the Texas City, Houston and Krotz Springs
refineries will continue to benefit the Company's consolidated cash flow
and earnings.
During 1997, the Company expended, exclusive of the Basis acquisition
cost, approximately $133 million for capital investments, including capital
expenditures of $122 million and deferred turnaround and catalyst costs of
$11 million. Of the total capital investment amount, $80 million related
to continuing refining and marketing operations while $53 million related to
the discontinued natural gas related services operations. Included in the
refining and marketing amount was approximately $21 million related to the
Texas City, Houston and Krotz Springs refineries for expenditures during
the months of May through December. For 1998, the Company currently expects
to incur approximately $175 to $225 million for capital investments,
including approximately $40 to $50 million for deferred turnaround and
catalyst costs.
Dividends on the Company's Common Stock are considered quarterly by
the Company's Board of Directors, and may be paid only when approved by the
Board. Prior to the Restructuring, Energy declared dividends on its common
stock of $.13 per share during each of the first two quarters of 1997.
Following the Restructuring, the Company declared dividends of $.08 per
common share during each of the last two quarters of 1997 and the first
quarter of 1998. Because appropriate levels of dividends are determined
by the Board on the basis of earnings and cash flows, the Company cannot
assure the continuation of Common Stock dividends at any particular level.
The Company believes it has sufficient funds from operations, and to
the extent necessary, from the public and private capital markets and bank
markets, to fund its ongoing operating requirements. The Company expects
that, to the extent necessary, it can raise additional funds from time to
time through equity or debt financings; however, except for the new
issuances of industrial revenue bonds described above and borrowings
under bank credit agreements, the Company has no specific financing
plans as of the date hereof to increase the amount of debt outstanding.
The Company's refining and marketing operations have a concentration
of customers in the oil refining industry and spot and retail gasoline
markets. These concentrations of customers may impact the Company's
overall exposure to credit risk, either positively or negatively, in
that the customers in such industry and markets may be similarly affected
by changes in economic or other conditions. However, the Company believes
that its portfolio of accounts receivable is sufficiently diversified to
the extent necessary to minimize potential credit risk. Historically, the
Company has not had any significant problems collecting its accounts
receivable. The Company's accounts receivable are not collateralized.
The Company's refining and marketing operations are subject to
environmental regulation at the federal, state and local levels. Capital
expenditures for environmental control and protection for its refining and
marketing operations totaled approximately $15 million in 1997 and are
expected to be approximately $21 million in 1998. These amounts are
exclusive of any amounts related to constructed facilities for which the
portion of expenditures relating to environmental requirements is not
determinable. The Corpus Christi Refinery was completed in 1984 under
more stringent environmental requirements than many existing United States
refineries, which are older and were built before such environmental
regulations were enacted. As a result, the Company believes that it will
be able to more easily comply with present and future environmental
legislation with respect to such facility. Within the next several years,
all U.S. refineries must obtain federal operating permits under provisions
of the Clean Air Act Amendments of 1990 (the "Clean Air Act"). As new rules
are promulgated under the Clean Air Act, the recently acquired Texas City,
Houston and Krotz Springs refineries will require additional capital
investments to upgrade some of their pollution control technology. The
Refinery MACT II (Maximum Available Control Technology) standards are
anticipated to be published in proposed form during the second quarter
of 1998. These rules will require refiners to control toxic emissions
from fluid catalytic crackers, sulfur recovery units, and reformers.
Once the proposed rules are published, the Company will be able to determine
what, if any, capital improvements will be required at the Texas City,
Houston and Krotz Springs refineries. The final MACT II rules are
anticipated to be published in late 1998 with a three year compliance
schedule to install pollution control technology. The estimated amount of
1998 environmental expenditures noted above includes amounts for pollution
control equipment installation at the Texas City, Houston and Krotz Springs
refineries. Sulfur plant modifications are not anticipated for the Corpus
Christi or Texas City refineries; however, depending on the outcome of the
MACT II rules, sulfur plant control may be necessary for the Houston and
Krotz Springs refineries. The Clean Air Act is not expected to have any
significant adverse impact on the Company's operations and the Company
does not anticipate that it will be necessary to expend any material
amounts in 1998 in addition to those mentioned above for environmental
control and protection. The Company is not aware of any material
environmental remediation costs related to its operations. See Notes 4
and 15 of Notes to Consolidated Financial Statements for information
regarding the settlement of certain of Salomon's contingent environmental
obligations for which it was liable in connection with the Company's
acquisition of Basis.
NEW ACCOUNTING STANDARDS
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." SFAS No. 130 establishes standards for reporting and display of
comprehensive income and its components in a full set of general-purpose
financial statements and requires that all items that are required to be
recognized under accounting standards as components of comprehensive
income be reported in a financial statement that is displayed with the
same prominence as other financial statements. This statement requires
that an enterprise classify items of other comprehensive income by their
nature in a financial statement and display the accumulated balance of
other comprehensive income separately from retained earnings and
additional paid-in capital in the equity section of a statement of financial
position. Reclassification of prior period financial statements presented
for comparative purposes is required. This statement becomes effective for
the Company's financial statements beginning in 1998 and requires that a
total for comprehensive income be reported in interim period financial
statements issued to shareholders. Based on current accounting standards,
the adoption of this statement is not expected to impact the Company's
consolidated financial statements.
Also in June 1997, the FASB issued SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." SFAS No. 131
establishes new standards for reporting information about operating
segments in annual financial statements and requires selected operating
segment information to be reported in interim financial reports issued to
shareholders. It also establishes standards for related disclosures about
products and services, geographic areas and major customers. This statement
becomes effective for the Company's financial statements beginning with the
year ended December 31, 1998 at which time restatement of prior period
segment information presented for comparative purposes is required. Interim
period information is not required until the second year of application, at
which time comparative information is required. The adoption of this
statement is not expected to impact the Company's consolidated financial
statement disclosures.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits." SFAS No. 132 standardizes
the disclosure requirements for pensions and other postretirement benefits
to the extent practicable, requires additional information on changes in the
benefit obligations and fair values of plan assets, and eliminates certain
disclosures that are no longer useful. This statement becomes effective for
the Company's financial statement disclosures beginning in 1998 and requires
restatement of prior period disclosures presented for comparative purposes
unless the information is not readily available.
The FASB had previously issued in February 1997 SFAS No. 128, "Earnings
per Share," (discussed above) and SFAS No. 129, "Disclosure of Information
about Capital Structure," both of which became effective for the Company's
financial statements beginning with the period ending December 31, 1997.
As the purpose of SFAS No. 129 was primarily to consolidate certain
disclosure requirements previously contained in other pronouncements with
which the Company was already in compliance, the adoption of this statement
had no effect on the Company's accompanying consolidated financial statements.
YEAR 2000 COMPUTER ISSUES
Historically, certain computer programs have been written using two
digits rather than four to define the applicable year, which could result
in the computer recognizing a date using "00" as the year 1900 rather than
the year 2000. This, in turn, could result in major system failures or
miscalculations, and is generally referred to as the "Year 2000" problem.
In late 1996, the Company began the implementation of new client/server
based systems which will run substantially all of the Company's principal
data processing and financial reporting software applications. These new
systems are Year 2000 compliant and are expected to be completed by the end
of 1998. The Company is also currently evaluating the computerized
production equipment at its refineries to ensure that the transition to the
Year 2000 will not disrupt the Company's processing capabilities. In
addition, the Company intends to communicate with, and evaluate the systems
of, its customers, suppliers, financial institutions and others with which
it does business to identify any Year 2000 issues. Presently, the Company
does not believe that Year 2000 compliance will result in material investments
by the Company, nor does the Company anticipate that the Year 2000 problem
will have a material adverse effect on the operations or financial
performance of the Company. There can be no assurance, however, that the
Year 2000 problem will not adversely affect the Company and its business.
ITEM 8. FINANCIAL STATEMENTS
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders
of Valero Energy Corporation:
We have audited the accompanying consolidated balance sheets of
Valero Energy Corporation (a Delaware corporation) and subsidiaries as of
December 31, 1997 and 1996, and the related consolidated statements of
income, common stock and other stockholders' equity and cash flows for
each of the three years in the period ended December 31, 1997. These
financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Valero Energy
Corporation and subsidiaries as of December 31, 1997 and 1996, and the
results of their operations and their cash flows for each of the three years
in the period ended December 31, 1997, in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
San Antonio, Texas
February 14, 1998
VALERO ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Thousands of Dollars)
December 31,
1997 1996
A S S E T S
CURRENT ASSETS:
Cash and temporary cash investments $ 9,935 $ 10
Receivables, less allowance for doubtful accounts of
$1,275 (1997) and $975 (1996) 366,315 162,457
Inventories 369,355 159,871
Current deferred income tax assets 17,155 17,587
Prepaid expenses and other 26,265 11,924
789,025 351,849
PROPERTY, PLANT AND EQUIPMENT - including construction in
progress of $66,636 (1997) and $21,728 (1996), at cost 2,132,489 1,712,334
Less: Accumulated depreciation 539,956 480,124
1,592,533 1,232,210
NET ASSETS OF DISCONTINUED OPERATIONS - 280,515
DEFERRED CHARGES AND OTHER ASSETS 111,485 121,057
$2,493,043 $1,985,631
L I A B I L I T I E S A N D S T O C K H O L D E R S' E Q U I T Y
CURRENT LIABILITIES:
Short-term debt $ 122,000 $ 57,728
Current maturities of long-term debt - 26,037
Accounts payable 414,305 191,555
Accrued expenses 60,979 25,264
597,284 300,584
LONG-TERM DEBT, less current maturities 430,183 353,307
DEFERRED INCOME TAXES 256,858 224,548
DEFERRED CREDITS AND OTHER LIABILITIES 49,877 30,217
REDEEMABLE PREFERRED STOCK, SERIES A, issued 1,150,000 shares,
outstanding -0- (1997) and 11,500 (1996) shares - 1,150
COMMON STOCK AND OTHER STOCKHOLDERS' EQUITY:
Preferred stock, $.01 (1997) and $1 (1996) par value -
20,000,000 shares authorized including redeemable preferred
shares:
$3.125 Convertible Preferred Stock, issued and outstanding
-0- (1997) and 3,450,000 (1996) shares - 3,450
Common stock, $.01 (1997) and $1 (1996) par value -
150,000,000 shares authorized; issued 56,136,032 (1997)
and 44,185,513 (1996) shares 561 44,186
Additional paid-in capital 1,110,654 540,133
Unearned Valero Employees' Stock Ownership Plan Compensation - (8,783)
Retained earnings 47,626 496,839
1,158,841 1,075,825
$2,493,043 $1,985,631
VALERO ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Thousands of Dollars, Except Per Share Amounts)
Year Ended December 31,
1997 1996 1995
OPERATING REVENUES $5,756,220 $2,757,853 $1,772,638
COSTS AND EXPENSES:
Cost of sales and operating expenses 5,426,438 2,581,836 1,560,324
Selling and administrative expenses 53,573 31,248 31,392
Depreciation expense 65,175 55,021 57,167
Total 5,545,186 2,668,105 1,648,883
OPERATING INCOME 211,034 89,748 123,755
LOSS ON INVESTMENT IN PROESA JOINT VENTURE - (19,549) -
OTHER INCOME, NET 6,978 7,418 5,876
INTEREST AND DEBT EXPENSE:
Incurred (44,150) (41,418) (45,052)
Capitalized 1,695 2,884 4,117
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES 175,557 39,083 88,696
INCOME TAX EXPENSE 63,789 16,611 30,454
INCOME FROM CONTINUING OPERATIONS 111,768 22,472 58,242
INCOME (LOSS) FROM DISCONTINUED OPERATIONS,
NET OF INCOME TAX EXPENSE (BENEFIT) OF
$(8,889), $24,389 AND $4,846, RESPECTIVELY (15,672) 50,229 1,596
NET INCOME 96,096 72,701 59,838
Less: Preferred stock dividend requirements
and redemption premium 4,592 11,327 11,818
NET INCOME APPLICABLE TO COMMON STOCK $ 91,504 $ 61,374 $ 48,020
EARNINGS (LOSS) PER SHARE OF COMMON STOCK:
Continuing operations $ 2.16 $ .51 $ 1.33
Discontinued operations (.39) .89 (.23)
Total $ 1.77 $ 1.40 $ 1.10
Weighted average common shares outstanding
(in thousands) 51,662 43,926 43,652
EARNINGS (LOSS) PER SHARE OF COMMON STOCK -
ASSUMING DILUTION:
Continuing operations $ 2.03 $ .44 $ 1.16
Discontinued operations (.29) .98 .01
Total $ 1.74 $ 1.42 $ 1.17
Weighted average common shares outstanding
(in thousands) 55,129 50,777 50,243
DIVIDENDS PER SHARE OF COMMON STOCK $ .42 $ .52 $ .52
VALERO ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMMON STOCK AND OTHER STOCKHOLDERS' EQUITY
(Thousands of Dollars)
Convertible Number of Additional Unearned
Preferred Common Common Paid-in VESOP Retained Treasury
Stock Shares Stock Capital Compensation Earnings Stock
BALANCE, December 31, 1994 $3,450 43,463,869 $43,464 $ 536,613 $(13,706) $433,059 $ -
Net income - - - - - 59,838 -
Dividends on Series A
Preferred Stock - - - - - (1,075) -
Dividends on Convertible
Preferred Stock - - - - - (10,781) -
Dividends on Common Stock - - - - - (22,698) -
Valero Employees' Stock
Ownership Plan
compensation earned - - - - 2,388 - -
Deficiency payment tax effect - - - (9,106) - - -
Shares repurchased and shares
issued pursuant to employee
stock plans and other - 275,511 275 2,670 - - (178)
BALANCE, December 31, 1995 3,450 43,739,380 43,739 530,177 (11,318) 458,343 (178)
Net income - - - - - 72,701 -
Dividends on Series A
Preferred Stock - - - - - (587) -
Dividends on Convertible
Preferred Stock - - - - - (10,781) -
Dividends on Common Stock - - - - - (22,837) -
Valero Employees' Stock
Ownership Plan
compensation earned - - - - 2,535 - -
Shares repurchased and shares
issued pursuant to employee
stock plans and other - 446,133 447 9,956 - - 178
BALANCE, December 31, 1996 3,450 44,185,513 44,186 540,133 (8,783) 496,839 -
Net income - - - - - 96,096 -
Dividends on Series A
Preferred Stock - - - - - (32) -
Dividends on Convertible
Preferred Stock - - - - - (5,387) -
Dividends on Common Stock - - - - - (21,031) -
Redemption/conversion of
Convertible Preferred Stock (3,450) 6,377,432 6,377 (3,116) - - -
Special spin-off dividend
to Energy - - - (210,000) - - -
Recapitalization pursuant to
the Restructuring - - (55,533) 622,500 - (518,859) -
Issuance of Common Stock in
connection with acquisition
of Basis Petroleum, Inc. - 3,429,796 3,430 110,570 - - -
Valero Employees' Stock Ownership
Plan compensation earned - - - - 8,783 - -
Shares repurchased and shares
issued pursuant to employee
stock plans and other - 2,143,291 2,101 50,567 - - -
BALANCE, December 31, 1997 $ - 56,136,032 $ 561 $1,110,654 $ - $ 47,626 $ -
VALERO ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands of Dollars)
Year Ended December 31,
1997 1996 1995
CASH FLOWS FROM OPERATING ACTIVITIES:
Income from continuing operations $ 111,768 $ 22,472 $ 58,242
Adjustments to reconcile income from continuing operations
to net cash provided by continuing operations:
Depreciation expense 65,175 55,021 57,167
Loss on investment in Proesa joint venture - 19,549 -
Amortization of deferred charges and other, net 27,252 28,485 25,426
Changes in current assets and current liabilities (32,113) (7,796) 2,358
Deferred income tax expense 32,827 8,969 29,217
Changes in deferred items and other, net (8,264) (6,246) (6,479)
Net cash provided by continuing operations 196,645 120,454 165,931
Net cash provided by discontinued operations 24,452 126,054 792
Net cash provided by operating activities 221,097 246,508 166,723
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures:
Continuing operations (69,284) (59,412) (89,395)
Discontinued operations (52,674) (69,041) (35,224)
Deferred turnaround and catalyst costs (10,860) (36,389) (35,590)
Acquisition of Basis Petroleum, Inc. (355,595) - -
Investment in and advances to joint ventures, net 1,400 1,197 (2,018)
Dispositions of property, plant and equipment 28 93 49
Other, net 265 1,388 (1,226)
Net cash used in investing activities (486,720) (162,164) (163,404)
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in short-term debt, net 155,088 57,728 -
Long-term borrowings 1,530,809 44,427 366,095
Long-term debt reduction (1,217,668) (153,772) (335,816)
Special spin-off dividend, including intercompany
note settlement (214,653) - -
Common stock dividends (21,031) (22,837) (22,698)
Preferred stock dividends (5,419) (11,368) (11,856)
Issuance of common stock 59,054 11,225 6,129
Purchase of treasury stock (9,293) (4,000) (4,445)
Redemption of preferred stock (1,339) (5,750) (5,750)
Net cash provided by (used in) financing activities 275,548 (84,347) (8,341)
NET INCREASE (DECREASE) IN CASH AND TEMPORARY
CASH INVESTMENTS 9,925 (3) (5,022)
CASH AND TEMPORARY CASH INVESTMENTS AT
BEGINNING OF PERIOD 10 13 5,035
CASH AND TEMPORARY CASH INVESTMENTS AT
END OF PERIOD $ 9,935 $ 10 $ 13
VALERO ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. RESTRUCTURING
In the discussion below and Notes that follow, the "Company" refers to
Valero Energy Corporation ("Valero") and its consolidated subsidiaries.
Valero was formerly known as Valero Refining and Marketing Company prior to
the Restructuring described below. Upon completion of the Restructuring,
Valero Refining and Marketing Company was renamed Valero Energy Corporation.
"Energy" refers to Valero Energy Corporation and its consolidated
subsidiaries, both individually and collectively, for periods prior to the
Restructuring, and to the natural gas related services business of Energy for
periods subsequent to the Restructuring.
On July 31, 1997, pursuant to an agreement and plan of distribution
between Energy and Valero (the "Distribution Agreement"), Energy spun off
Valero to Energy's stockholders by distributing all of Valero's $.01 par
value common stock ("Common Stock") on a share for share basis to holders
of record of Energy common stock at the close of business on such date
(the "Distribution"). Immediately after the Distribution, Energy merged
its natural gas related services business with a wholly owned subsidiary
of PG&E Corporation ("PG&E") (the "Merger"). The Distribution and the
Merger (collectively referred to as the "Restructuring") were approved by
Energy's stockholders at Energy's annual meeting of stockholders held on
June 18, 1997 and, in the opinion of Energy's outside counsel, were tax-free
transactions. Regulatory approval of the Merger was received from the
Federal Energy Regulatory Commission (the "FERC") on July 16, 1997. Upon
completion of the Restructuring, Valero Refining and Marketing Company was
renamed Valero Energy Corporation and is listed on the New York Stock
Exchange under the symbol "VLO."
Immediately prior to the Distribution, the Company paid to Energy a
$210 million dividend pursuant to the Distribution Agreement. In addition,
the Company paid to Energy approximately $5 million in settlement of the
intercompany note balance between the Company and Energy arising from certain
transactions during the period from January 1 through July 31, 1997.
In connection with the Merger, PG&E issued approximately 31 million
shares of its common stock in exchange for the outstanding $1 par value
common shares of Energy, and assumed $785.7 million of Energy's debt.
Each Energy stockholder received .554 of a share of PG&E common stock
(trading on the New York Stock Exchange under the symbol "PCG") for each
Energy share owned. This fractional share amount was based on the average
price of PG&E common stock during a prescribed period preceding the closing
of the transaction and the number of Energy shares issued and outstanding at
the time of the closing.
Prior to the Restructuring, Energy, Valero, and PG&E entered into a tax
sharing agreement ("Tax Sharing Agreement"), which sets forth each party's
rights and obligations with respect to payments and refunds, if any, of
federal, state, local or other taxes for periods before the Restructuring.
In general, under the Tax Sharing Agreement, Energy and Valero are each
responsible for its allocable share of the federal, state and other taxes
incurred by the combined operations of Energy and Valero prior to the
Distribution. Furthermore, Valero is responsible for substantially all tax
liability resulting from the failure of the Distribution or the Merger to
qualify as a tax-free transaction, except that Energy will be responsible
for any such tax liability attributable to certain actions taken by Energy
and/or PG&E.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation and Basis of Presentation
Prior to the Restructuring, Valero was a wholly owned subsidiary of
Energy. For financial reporting purposes under the federal securities laws,
Valero is a "successor registrant" to Energy. As a result, for periods
prior to the Restructuring, the accompanying consolidated financial
statements include the accounts of Energy restated to reflect Energy's
natural gas related services business as discontinued operations. For
periods subsequent to the Restructuring, the accompanying consolidated
financial statements include the accounts of Valero and its consolidated
subsidiaries. All significant intercompany transactions have been
eliminated in consolidation.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Revenue Recognition
Revenues generally are recorded when products have been delivered.
Price Risk Management Activities
The Company enters into price swaps, options and futures contracts with
third parties to hedge refinery feedstock purchases and refined product
inventories in order to reduce the impact of adverse price changes on these
inventories before the conversion of the feedstock to finished products and
ultimate sale. Hedges of inventories are accounted for under the deferral
method with gains and losses included in the carrying amounts of inventories
and ultimately recognized in cost of sales as those inventories are sold.
The Company also hedges anticipated transactions. Price swaps, options
and futures contracts with third parties are used to hedge feedstock and
product purchases, product sales and refining operating margins by locking
in purchase or sales prices or components of the margins, including feedstock
discounts, the conventional crack spread and premium product differentials.
Hedges of anticipated transactions are also accounted for under the deferral
method with gains and losses on these transactions recognized in cost of
sales when the hedged transaction occurs.
The above noted contracts are designated at inception as a hedge when
there is a direct relationship to the price risk associated with the
Company's inventories, future purchases and sales of commodities used in
the Company's operations, or components of the Company's refining operating
margins. If such direct relationship ceases to exist, the related contract
is designated "for trading purposes" and accounted for as described below.
Gains and losses on early terminations of financial instrument contracts
designated as hedges are deferred and included in cost of sales in the
measurement of the hedged transaction. When an anticipated transaction being
hedged is no longer likely to occur, the related derivative contract is
accounted for similar to a contract entered into for trading purposes.
The Company also enters into price swaps, options, and futures contracts
with third parties for trading purposes using its fundamental and technical
analysis of market conditions to earn additional revenues. Contracts entered
into for trading purposes are accounted for under the fair value method.
Changes in the fair value of these contracts are recognized as gains or
losses in cost of sales currently and are recorded in the Consolidated
Balance Sheets in "Prepaid expenses and other" and "Accounts payable" at
fair value at the reporting date. The Company determines the fair value
of its exchange-traded contracts based on the settlement prices for open
contracts, which are established by the exchange on which the instruments
are traded. The fair value of the Company's over-the-counter contracts is
determined based on market-related indexes or by obtaining quotes from
brokers.
The Company's derivative contracts and their related gains and losses
are reported in the Consolidated Balance Sheets and Consolidated Statements
of Income as discussed above, depending on whether they are designated as a
hedge or for trading purposes. In the Consolidated Statements of Cash
Flows, cash transactions related to derivative contracts are included in
changes in current assets and current liabilities.
Inventories
Refinery feedstocks and refined products and blendstocks are carried
at the lower of cost or market, with the cost of feedstocks purchased for
processing and produced products determined primarily under the last-in,
first-out ("LIFO") method of inventory pricing and the cost of feedstocks
and products purchased for resale determined primarily under the weighted
average cost method. The replacement cost of the Company's LIFO inventories
approximated their LIFO values at December 31, 1997. Materials and supplies
are carried principally at weighted average cost not in excess of market.
Inventories as of December 31, 1997 and 1996 were as follows (in thousands):
December 31,
1997 1996
Refinery feedstocks $102,677 $ 42,744
Refined products and blendstocks 210,196 99,398
Materials and supplies 56,482 17,729
$369,355 $159,871
Refinery feedstock and refined product and blendstock inventory volumes
totaled 15.7 million barrels ("MMbbls") and 7.4 MMbbls as of December 31,
1997 and 1996, respectively. See Note 7 for information concerning the
Company's hedging activities related to its refinery feedstock purchases
and refined product inventories.
Property, Plant and Equipment
Property additions and betterments include capitalized interest and
acquisition costs allocable to construction and property purchases.
The costs of minor property units (or components of property units),
net of salvage, retired or abandoned are charged or credited to accumulated
depreciation under the composite method of depreciation. Gains or losses
on sales or other dispositions of major units of property are credited or
charged to income.
Major classes of property, plant and equipment as of December 31, 1997
and 1996 were as follows (in thousands):
December 31,
1997 1996
Crude oil processing facilities $1,522,409 $1,329,386
Butane processing facilities 351,594 233,457
Other processing facilities 80,197 80,000
Other 111,653 47,763
Construction in progress 66,636 21,728
$2,132,489 $1,712,334
Provision for depreciation of property, plant and equipment is made
primarily on a straight-line basis over the estimated useful lives of the
depreciable facilities. During 1996, a detailed study of the Company's
fixed asset lives was completed by a third-party consultant for the
majority of the Company's then-existing processing facilities. As a
result of such study, the Company adjusted the weighted-average
remaining lives of the assets subject to the study, utilizing the
composite method of depreciation, to better reflect the estimated periods
during which such assets are expected to remain in service. The effect of
this change in accounting estimate was an increase in income from continuing
operations for 1996 of approximately $3.6 million, or $.08 per share. A
summary of the principal rates used in computing the annual provision for
depreciation, primarily utilizing the composite method and including
estimated salvage values, is as follows:
Weighted
Range Average
Crude oil processing facilities 3.6% - 4.9% 4.6%
Butane processing facilities 3.7% 3.7%
Other processing facilities 3.6% 3.6%
Other 2.25% - 45% 22.5%
Deferred Charges and Other Assets
Catalyst and Refinery Turnaround Costs
Catalyst costs are deferred when incurred and amortized over the
estimated useful life of that catalyst, normally one to three years.
Refinery turnaround costs are deferred when incurred and amortized over
that period of time estimated to lapse until the next turnaround occurs.
Technological Royalties and Licenses
Technological royalties and licenses are deferred when incurred and
amortized over the estimated useful life of each particular royalty or
license.
Other Deferred Charges and Other Assets
Other deferred charges and other assets include the Company's 20%
interest in Javelina Company ("Javelina"), a general partnership that
owns a refinery off-gas processing plant in Corpus Christi. The Company
accounts for its interest in Javelina on the equity method of accounting.
Also included in other deferred charges and other assets are prefunded
benefit costs and certain other costs.
Accrued Expenses
Accrued expenses as of December 31, 1997 and 1996 were as
follows (in thousands):
December 31,
1997 1996
Accrued interest expense $ 1,766 $ 5,088
Accrued taxes 36,712 11,938
Accrued employee benefit costs (see Note 13) 18,122 93
Current portion of accrued pension cost
(see Note 13) 1,115 4,265
Other 3,264 3,880
$60,979 $25,264
Fair Value of Financial Instruments
The carrying amounts of the Company's financial instruments approximate
fair value, except for certain long-term debt as of December 31, 1996 and
financial instruments used in price risk management activities. See Notes 6
and 7.
Stock-Based Compensation
The Company accounts for its employee stock compensation plans using
the "intrinsic value" method of accounting set forth in Accounting Principles
Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees,"
and related interpretations. Accordingly, compensation cost for stock
options is measured as the excess, if any, of the quoted market price of
the Company's common stock at the date of the grant over the amount an
employee must pay to acquire the stock. Statement of Financial Accounting
Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation,"
issued by the Financial Accounting Standards Board ("FASB") in October
1995, encourages, but does not require companies to measure and recognize
in their financial statements a compensation cost for stock-based employee
compensation plans based on the "fair value" method of accounting set forth
in the statement. See Note 13 for the pro forma effects on net income and
earnings per share had compensation cost for the Company's stock-based
compensation plans been determined consistent with SFAS No. 123.
Earnings Per Share
In February 1997, the FASB issued SFAS No. 128, "Earnings per Share,"
which became effective for the Company's financial statements beginning
with the period ending December 31, 1997. This statement supersedes APB
Opinion No. 15, "Earnings per Share," and related interpretations and
establishes new standards for computing and presenting earnings per share,
requiring a dual presentation for companies with complex capital structures.
In accordance with this new statement, the Company has presented basic
and diluted earnings per share on the face of the accompanying income
statements. Basic earnings per share is computed by dividing income
available to common stockholders by the weighted average number of common
shares outstanding for the period. Diluted earnings per share reflects
the potential dilution of the Company's Convertible Preferred Stock
(see Note 9) and outstanding stock options and performance awards granted
to employees in connection with the Company's stock compensation plans
(see Note 13). In determining basic earnings per share for the years
ended December 31, 1997, 1996 and 1995, dividends on Energy's preferred
stock were deducted from income from discontinued operations as such
preferred stock was issued in connection with Energy's natural gas related
services business. The weighted average number of common shares
outstanding for the years ended December 31, 1997, 1996 and 1995 was
51,662,449, 43,926,026 and 43,651,914, respectively.
A reconciliation of the numerators and denominators of the basic and
diluted per-share computations for income from continuing operations is as
follows (dollars and shares in thousands, except per share amounts):
Year Ended December 31,
1997 1996 1995
Per- Per- Per-
Share Share Share
Income Shares Amt. Income Shares Amt. Income Shares Amt.
Income from
continuing operations $111,768 $22,472 $58,242
Basic earnings per share:
Income available to
common stockholders $111,768 51,662 $2.16 $22,472 43,926 $.51 $58,242 43,652 $1.33
Effect of dilutive securities:
Stock options - 881 - 425 - 209
Performance awards - 91 - 44 - -
Convertible preferred stock - 2,495 - 6,382 - 6,382
Diluted earnings per share:
Income available to
common stockholders plus
assumed conversions $111,768 55,129 $2.03 $22,472 50,777 $.44 $58,242 50,243 $1.16
Statements of Cash Flows
In order to determine net cash provided by continuing operations, income
from continuing operations has been adjusted by, among other things, changes
in current assets and current liabilities, excluding changes in cash and
temporary cash investments, current deferred income tax assets, short-term
debt and current maturities of long-term debt. The changes in the Company's
current assets and current liabilities, excluding the items noted above, are
shown in the following table as an (increase)/decrease in current assets and
an increase/(decrease) in current liabilities. The Company's temporary cash
investments are highly liquid, low-risk debt instruments which have a
maturity of three months or less when acquired. (Dollars in thousands.)
Year Ended December 31,
1997 1996 1995
Receivables, net $ 36,287 $(33,653) $(51,120)
Inventories 37,007 (58,089) 40,723
Prepaid expenses and other (12,703) 3,243 (307)
Accounts payable (95,318) 88,182 4,132
Accrued expenses 2,614 (7,479) 8,930
Total $(32,113) $ (7,796) $ 2,358
Cash interest and income taxes paid, including amounts related to
discontinued operations for periods up to and including July 31, 1997,
were as follows (in thousands):
Year Ended December 31,
1997 1996 1995
Interest (net of amount capitalized) $66,008 $105,519 $86,553
Income taxes 24,526 19,043 23,935
Noncash investing and financing activities for 1997 included the
issuance of Energy common stock to Salomon Inc ("Salomon") as partial
consideration for the acquisition of the stock of Basis Petroleum, Inc.
("Basis"), and an $18.3 million accrual as of December 31, 1997 related
to the Company's estimate of a contingent earn-out payment in 1998 in
conjunction with such acquisition. See Note 4. In addition, noncash
investing and financing activities for 1997 included various adjustments
to debt and equity, including the assumption of certain debt by PG&E that
was previously allocated to the Company, resulting from the Merger discussed
in Note 1.
New Accounting Standards
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." SFAS No. 130 establishes standards for reporting and display of
comprehensive income and its components in a full set of general-purpose
financial statements and requires that all items that are required to be
recognized under accounting standards as components of comprehensive income
be reported in a financial statement that is displayed with the same
prominence as other financial statements. This statement requires that
an enterprise classify items of other comprehensive income by their nature
in a financial statement and display the accumulated balance of other
comprehensive income separately from retained earnings and additional
paid-in capital in the equity section of a statement of financial position.
Reclassification of prior period financial statements presented for
comparative purposes is required. This statement becomes effective for
the Company's financial statements beginning in 1998 and requires that
a total for comprehensive income be reported in interim period financial
statements issued to shareholders. Based on current accounting standards,
the adoption of this statement is not expected to impact the Company's
consolidated financial statements.
Also in June 1997, the FASB issued SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." SFAS No. 131
establishes new standards for reporting information about operating
segments in annual financial statements and requires selected operating
segment information to be reported in interim financial reports issued to
shareholders. It also establishes standards for related disclosures about
products and services, geographic areas and major customers. This statement
becomes effective for the Company's financial statements beginning with the
year ended December 31, 1998 at which time restatement of prior period
segment information presented for comparative purposes is required.
Interim period information is not required until the second year of
application, at which time comparative information is required. The
adoption of this statement is not expected to impact the Company's
consolidated financial statement disclosures.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits." SFAS No. 132 standardizes
the disclosure requirements for pensions and other postretirement benefits
to the extent practicable, requires additional information on changes in
the benefit obligations and fair values of plan assets, and eliminates
certain disclosures that are no longer useful. This statement becomes
effective for the Company's financial statement disclosures beginning in
1998 and requires restatement of prior period disclosures presented for
comparative purposes unless the information is not readily available.
The FASB had previously issued in February 1997 SFAS No. 128, "Earnings
per Share," (discussed above) and SFAS No. 129, "Disclosure of Information
about Capital Structure," both of which became effective for the Company's
financial statements beginning with the period ending December 31, 1997.
As the purpose of SFAS No. 129 was primarily to consolidate certain disclosure
requirements previously contained in other pronouncements with which the
Company was already in compliance, the adoption of this statement had no
effect on the Company's accompanying consolidated financial statements.
3. DISCONTINUED OPERATIONS
Energy's historical practice was to utilize a centralized cash management
system and to incur certain indebtedness for its consolidated group at the
parent company level rather than at the operating subsidiary level.
Therefore, the accompanying consolidated financial statements reflect, for
periods prior to the Restructuring, the allocation of a portion of the
borrowings under Energy's various bank credit facilities, as well as a
portion of other corporate debt of Energy, to the discontinued natural gas
related services business based upon the ratio of such business' net assets,
excluding the amounts of intercompany notes receivable or payable, to
Energy's consolidated net assets. Interest expense related to corporate
debt was also allocated to the discontinued natural gas related services
business for periods prior to the Restructuring based on the same net asset
ratio. Total interest expense allocated to discontinued operations in the
accompanying Consolidated Statements of Income, including a portion of
interest on corporate debt allocated pursuant to the methodology described
above plus interest specifically attributed to discontinued operations,
was $32.7 million for the seven months ended July 31, 1997, and
$58.1 million and $60.9 million for the years ended December 31, 1996 and
1995, respectively.
Revenues of the discontinued natural gas related services business were
$1.7 billion for the seven months ended July 31, 1997, and $2.4 billion and
$1.4 billion for the years ended December 31, 1996 and 1995, respectively.
These amounts are not included in operating revenues as reported in the
accompanying Consolidated Statements of Income.
4. ACQUISITION OF BASIS PETROLEUM, INC.
Effective May 1, 1997, Energy acquired the outstanding common stock of
Basis, a wholly owned subsidiary of Salomon. Prior to the Restructuring,
Energy transferred the stock of Basis to Valero. As a result, Basis was a
part of the Company at the time it was spun off to Energy's stockholders
pursuant to the Restructuring. The primary assets acquired in the Basis
acquisition included petroleum refineries located in Texas at Texas City
and Houston and in Louisiana at Krotz Springs, and an extensive wholesale
marketing business. The acquisition has been accounted for using the
purchase method of accounting and the purchase price was allocated to
the assets acquired and liabilities assumed based on estimated fair values,
pending the completion of an independent appraisal. The accompanying
Consolidated Statements of Income of the Company include the results of
the operations acquired in connection with the purchase of Basis for
the months of May through December 1997.
Energy acquired the stock of Basis for approximately $470 million.
This amount includes certain costs incurred in connection with the
acquisition and is net of $9.5 million received from Salomon in
December 1997 representing a final resolution between the parties relating
to certain contingent environmental obligations for which Salomon was
liable pursuant to the purchase agreement. The purchase price was paid,
in part, with 3,429,796 shares of Energy common stock having a fair market
value of $114 million, with the remainder paid in cash from borrowings
under Energy's bank credit facilities (see Note 6). Pursuant to the
purchase agreement, Salomon is also entitled to receive payments in
any of the next 10 years if certain average refining margins during any of
such years exceed a specified level. Any payments under this earn-out
arrangement, which will be determined as of May 1 of each year beginning
in 1998, are limited to $35 million in any year and $200 million in the
aggregate and will be accounted for by the Company as an additional cost
of the acquisition and depreciated over the remaining lives of the assets
to which the additional cost is allocated. As of December 31, 1997, the
Company accrued $18.3 million related to its estimate of the contingent
earn-out payment due in 1998.
The following unaudited pro forma financial information of the Company
assumes that the acquisition of Basis occurred at the beginning of each
period presented. Such pro forma information is not necessarily indicative
of the results of future operations. (Dollars in thousands, except per share
amounts.)
Year Ended December 31,
1997 1996
Operating revenues $7,576,676 $10,125,626
Operating income 149,847 8,362
Income (loss) from continuing operations 73,268 (35,821)
Income (loss) from discontinued operations (15,672) 50,229
Net income 57,596 14,408
Earnings (loss) per common share:
Continuing operations 1.42 (.82)
Discontinued operations (.39) .89
Total 1.03 .07
Earnings (loss) per common share - assuming
dilution:
Continuing operations 1.33 (.82)
Discontinued operations (.29) .89
Total 1.04 .07
5. SHORT-TERM DEBT
The Company currently maintains seven separate short-term bank credit
facilities under which amounts ranging from $160 million to $435 million
may be borrowed. As of December 31, 1997, $122 million was outstanding
under these short-term bank credit facilities at a weighted average
interest rate of approximately 7.7%. Four of these credit facilities
are cancelable on demand, and the others expire at various times in 1998.
These short-term credit facilities bear interest at each respective bank's
quoted money market rate, have no commitment or other fees or compensating
balance requirements and are unsecured and unrestricted as to use.
6. LONG-TERM DEBT AND BANK CREDIT FACILITIES
Long-term debt balances as of December 31, 1997 and 1996 were as
follows (in thousands):
December 31,
1997 1996
Industrial revenue bonds:
Variable rate Revenue Refunding Bonds:
Series 1997A, 3.85% at December 31, 1997, due April 1, 2027 $ 24,400 $ -
Series 1997B, 3.7% at December 31, 1997, due April 1, 2018 32,800 -
Series 1997C, 3.65% at December 31, 1997, due April 1, 2018 32,800 -
Series 1997D, 3.95% at December 31, 1997, due April 1, 2009 8,500 -
Variable rate Waste Disposal Revenue Bonds,
3.8% at December 31, 1997, due December 1, 2031 25,000 -
Marine terminal and pollution control revenue bonds,
Series 1987A, 10 1/4% - 90,000
Marine terminal revenue bonds, Series 1987B , 10 5/8% - 8,500
6.75% notes, due December 15, 2032 (notes are callable or putable
on December 15, 2002) 150,000 -
$835 million revolving bank credit and letter of credit facility,
approximately 6.25% at December 31, 1997, due
November 28, 2002 150,000 -
Allocated corporate debt obligations of Energy,
weighted average interest rate of approximately 8.97%
at December 31, 1996 - 280,844
Unamortized premium 6,683 -
Total long-term debt 430,183 379,344
Less current maturities - 26,037
$ 430,183 $ 353,307
Effective May 1, 1997, Energy replaced its existing unsecured
$300 million revolving bank credit and letter of credit facility with a
new five-year, unsecured $835 million revolving bank credit and letter
of credit facility. The new credit facility was used to finance a portion
of the acquisition cost of Basis (see Note 4) and to fund a $210 million
dividend paid by the Company to Energy immediately prior to the Distribution
(see Note 1). The facility also provides continuing credit enhancement for
the Company's Refunding Bonds and Revenue Bonds as discussed below, and can
be used to provide financing for other general corporate purposes. Energy
was the borrower under the facility until the completion of the Restructuring
on July 31, 1997, at which time all obligations of Energy under the facility
were assumed by the Company. In November 1997, the facility was amended to
further enhance the Company's financial flexibility. Among other things,
the amendment extended the maturity to November 2002, eliminated provisions
restricting availability under the facility, and eliminated several
restrictive covenants.
Borrowings under the credit facility bear interest at either LIBOR plus
a margin, a base rate, or a money market rate. In addition, various fees
and expenses are required to be paid in connection with the credit facility,
including a facility fee, a letter of credit issuance fee and a fee based on
letters of credit outstanding. The interest rate and fees under the credit
facility are subject to adjustment based upon the credit ratings assigned to
the Company's long-term debt. The credit facility includes certain
restrictive covenants including a coverage ratio, a capitalization ratio,
and a minimum net worth test. As of December 31, 1997, the Company had
approximately $558 million available under this revolving bank credit
facility for additional borrowings and letters of credit. The Company
also has several uncommitted bank letter of credit facilities. As of
December 31, 1997, such facilities totaled $305 million of which
approximately $73 million was outstanding.
In April 1997, the Industrial Development Corporation of the Port of
Corpus Christi issued and sold, for the benefit of the Company,
$98.5 million of tax-exempt Revenue Refunding Bonds (the "Refunding Bonds"),
with credit enhancement provided through a letter of credit issued under the
revolving bank credit facility described above. The Refunding Bonds were
issued in four series with due dates ranging from 2009 to 2027. The
Refunding Bonds bear interest at variable rates determined weekly, with
the Company having the right to convert such rates to a daily, weekly or
commercial paper rate, or to a fixed rate. The Refunding Bonds were issued
to refund the Company's $98.5 million principal amount of tax-exempt bonds
which were issued in 1987. In May 1997, the Gulf Coast Industrial
Development Authority issued and sold, for the benefit of the Company,
$25 million of new Waste Disposal Revenue Bonds (the "Revenue Bonds")
which mature on December 1, 2031, with credit enhancement provided through
a letter of credit issued under the Company's revolving bank credit
facility. Other terms and conditions of these bonds are similar to those
of the Refunding Bonds. In January 1998, the Company's Board of Directors
approved the commencement of efforts to convert the interest rates on the
Refunding Bonds and Revenue Bonds from variable rates to fixed rates. At
the same time, the Board approved the issuance of an additional $25 million
of tax-exempt industrial revenue bonds at a fixed interest rate and the
issuance of up to $43.5 million of taxable industrial revenue bonds at
variable interest rates, both of which are expected to mature in the
year 2032. The $43.5 million of variable rate bonds will be supported
by a letter of credit issued under the Company's revolving bank credit
facility. The above noted letters of credit associated with the
$123.5 million of outstanding Refunding Bonds and Revenue Bonds will be
released upon conversion of the interest rates from variable to fixed.
The interest rate conversion of the outstanding bonds and the issuance
of the new bonds are expected to be completed by the end of the first
quarter of 1998.
In December 1997, the Company issued $150 million principal amount of
6.75% notes (the "Notes") for net proceeds of approximately $156 million.
The Notes are unsecured and unsubordinated and rank equally with all other
unsecured and unsubordinated obligations of the Company. The Notes were
issued to the Valero Pass-Through Asset Trust 1997-1 (the "Trust"), which
funded the acquisition of the Notes through a private placement of
$150 million principal amount of 6.75% Pass-Through Asset Trust Securities
("PATS"). The PATS represent a fractional undivided beneficial interest in
the Trust. In exchange for certain consideration paid to the Trust, a third
party has an option to purchase the Notes under certain circumstances at par
on December 15, 2002, at which time the term of the Notes would be extended
30 years to December 15, 2032. If the third party does not exercise its
purchase option, then under the terms of the Notes, the Company would be
required to repurchase the Notes at par on December 15, 2002.
The Company was in compliance with all covenants contained in its
various debt facilities as of December 31, 1997.
Based on long-term debt outstanding at December 31, 1997, the Company
has no maturities of long-term debt during the next five years except for
$150 million due in November 2002 under its revolving bank credit and
letter of credit facility. See above for maturities under the terms of
the Notes.
The carrying amounts of the Company's variable-rate industrial revenue
bonds and revolving bank credit and letter of credit facility approximate
fair value at December 31, 1997. The carrying amount of the Company's
6.75% Notes also approximates fair value at December 31, 1997 due to their
issuance on December 12, 1997. As of December 31, 1996, based on the
borrowing rates available to the Company for long-term debt with similar
terms and average maturities, the estimated fair value of the Company's
long-term debt, including current maturities, was $412.7 million.
7. PRICE RISK MANAGEMENT ACTIVITIES
Hedging Activities
The Company uses price swaps, options and futures to hedge refinery
feedstock purchases and refined product inventories in order to reduce the
impact of adverse price changes on these inventories before the conversion
of the feedstock to finished products and ultimate sale. Swaps, options
and futures contracts held to hedge refining inventories at the end of
1997 and 1996 had remaining terms of less than one year. As of
December 31, 1997 and 1996, 14% and 13%, respectively, of the Company's
refining inventory position was hedged. As of December 31, 1997,
$2.1 million of deferred hedge gains were included as a reduction of
refining inventories, while as of December 31, 1996, $.8 million of
deferred hedge losses were included as an increase to refining inventories.
The following table is a summary of the volumes and range of prices for the
Company's contracts held or issued to hedge refining inventories as of
December 31, 1997 and 1996. Volumes shown for swaps represent notional
volumes which are used to calculate amounts due under the agreements and
do not represent volumes exchanged.
1997 1996
Payor Receiver Payor Receiver
Swaps:
Volumes (Mbbls) - 75 497 497
Price (per bbl) - $31.82 $17.50-$17.57 $17.31-$17.38
Options:
Volumes (Mbbls) 420 250 - -
Price (per bbl) $.38-$1.32 $.53-$.67 - -
Futures:
Volumes (Mbbls) 315 2,657 - 981
Price (per bbl) $20.87-$24.78 $17.64-$23.90 - $24.87-$29.65
The Company also hedges anticipated transactions. Price swaps, options
and futures are used to hedge feedstock and product purchases, product sales
and refining operating margins for periods up to five years by locking in
purchase or sales prices or components of the margins, including the resid
discount, the conventional crack spread and premium product differentials.
There were no significant explicit deferrals of hedging gains or losses
related to these anticipated transactions as of either year end. The
following table is a summary of the volumes and range of prices for the
Company's contracts held or issued to hedge feedstock and product purchases,
product sales and refining margins as of December 31, 1997 and 1996.
Volumes shown for swaps represent notional volumes which are used to
calculate amounts due under the agreements and do not represent volumes
exchanged.
1997 1996
Payor Receiver Payor Receiver
Swaps:
Volumes (Mbbls) 8,856 1,350 6,000 28,300
Price (per bbl) $.17-$25.23 $.29-$3.76 $.53 -$4.90 $.74-$3.55
Options:
Volumes (Mbbls) - - 750 -
Price (per bbl) - - $25.00-$32.76 -
Futures:
Volumes (Mbbls) 146 90 1,312 1,410
Price (per bbl) $17.60-$19.33 $19.22-$19.23 $26.46-$30.87 $21.74-$30.39
The following table discloses the carrying amount and fair value of the
Company's contracts held or issued for non-trading purposes as of
December 31, 1997 and 1996 (dollars in thousands):
1997 1996
Assets (Liabilities) Assets (Liabilities)
Carrying Fair Carrying Fair
Amount Value Amount Value
Swaps $ - $(4,021) $7,184 $6,390
Options - (1) (784) 617
Futures 1,849 1,849 (859) (859)
Total $ 1,849 $(2,173) $5,541 $6,148
Trading Activities
The Company enters into transactions for trading purposes using its
fundamental and technical analysis of market conditions to earn additional
revenues. The types of instruments used include price swaps,
over-the-counter and exchange-traded options, and futures. These
contracts run for periods of up to 12 months. As a result, contracts
outstanding as of December 31, 1997 will mature in 1998. The following
table is a summary of the volumes and range of prices for the Company's
contracts held or issued for trading purposes as of December 31, 1997 and
1996. Volumes shown for swaps represent notional volumes which are used to
calculate amounts due under the agreements and do not represent volumes
exchanged.
1997 1996
Payor Receiver Payor Receiver
Swaps:
Volumes (Mbbls) 4,475 2,175 400 400
Price (per bbl) $1.79-$27.51 $1.18-$19.02 $4.25-$4.55 $4.20-$4.72
Options:
Volumes (Mbbls) - - - 275
Price (per bbl) - - - $25.20
Futures:
Volumes (Mbbls) 653 544 - -
Price (per bbl) $17.63-$25.20 $18.10-$24.61 - -
The following table discloses the fair values of contracts held or
issued for trading purposes and net gains (losses) from trading activities
as of or for the periods ended December 31, 1997 and 1996 (dollars in
thousands):
Fair Value of Assets (Liabilities)
Average Ending Net Gains(Losses)
1997 1996 1997 1996 1997 1996
Swaps $ (95) $ 204 $ (235) $ 58 $(1,143) $ 94
Options (76) (37) (963) 7 (109) 131
Futures 7,292 910 3,965 - 661 (1,656)
Total $ 7,121 $ 1,077 $ 2,767 $ 65 $ (591) $(1,431)
Market and Credit Risk
The Company's price risk management activities involve the receipt or
payment of fixed price commitments into the future. These transactions give
rise to market risk, the risk that future changes in market conditions may
make an instrument less valuable. The Company closely monitors and manages
its exposure to market risk on a daily basis in accordance with policies
limiting net open positions. Concentrations of customers in the refining
industry may impact the Company's overall exposure to credit risk, in that
the customers in such industry may be similarly affected by changes in
economic or other conditions. The Company believes that its counterparties
will be able to satisfy their obligations under contracts.
8. REDEEMABLE PREFERRED STOCK
On March 30, 1997, Energy redeemed the remaining 11,500 outstanding
shares of its Cumulative Preferred Stock, $8.50 Series A ("Series A
Preferred Stock"). The redemption price was $104 per share, plus dividends
accrued to the redemption date of $.685 per share.
9. CONVERTIBLE PREFERRED STOCK
In April 1997, Energy called all of its outstanding $3.125 convertible
preferred stock ("Convertible Preferred Stock") for redemption on
June 2, 1997. The total redemption price for the Convertible Preferred
Stock was $52.1966 per share (representing a per-share redemption price
of $52.188, plus accrued dividends in the amount of $.0086 per share for
the one-day period from June 1, 1997 to the June 2, 1997 redemption date).
The Convertible Preferred Stock was convertible into Energy common stock at
a conversion price of $27.03 per share (equivalent to a conversion rate
of approximately 1.85 shares of common stock for each share of Convertible
Preferred Stock). Prior to the redemption, substantially all of the
outstanding shares of Convertible Preferred Stock were converted into
shares of Energy common stock.
10. PREFERRED SHARE PURCHASE RIGHTS
In connection with the Distribution, the Company's Board of Directors
declared a dividend distribution of one Preferred Share Purchase Right
("Right") for each outstanding share of the Company's Common Stock
distributed to Energy stockholders pursuant to the Distribution. Except
as set forth below, each Right entitles the registered holder to purchase
from the Company one one-hundredth of a share of the Company's Junior
Participating Preferred Stock, Series I, ("Junior Preferred Stock") at
a price of $100 per one one-hundredth of a share, subject to adjustment.
Until the earlier to occur of (i) 10 days following a public announcement
that a person or group of affiliated or associated persons (an "Acquiring
Person") has acquired beneficial ownership of 15% or more of the outstanding
shares of the Company's Common Stock, (ii) 10 business days (or such later date
as may be determined by action of the Company's Board of Directors) following
the initiation of a tender offer or exchange offer which would result in the
beneficial ownership by an Acquiring Person of 15% or more of such outstanding
Common Stock (the earlier of such dates being called the "Rights Separation
Date"), or (iii) the earlier redemption or expiration of the Rights, the
Rights will be transferred only with the Common Stock. The Rights are not
exercisable until the Rights Separation Date. At any time prior to the
acquisition by an Acquiring Person of beneficial ownership of 15% or more
of the outstanding Common Stock, the Company's Board of Directors may
redeem the Rights at a price of $.01 per Right. The Rights will expire
on June 30, 2007, unless such date is extended or unless the Rights are
earlier redeemed or exchanged by the Company.
In the event that after the Rights Separation Date, the Company is
acquired in a merger or other business combination transaction, or if 50%
or more of its consolidated assets or earning power are sold, each holder
of a Right will have the right to receive, upon the exercise thereof at
the then current exercise price of the Right, that number of shares of
common stock of the acquiring company which at the time of such transaction
will have a market value of two times the exercise price of the Right. In
the event that any person or group of affiliated or associated persons
becomes the beneficial owner of 15% or more of the outstanding Common
Stock, each holder of a Right, other than Rights beneficially owned by the
Acquiring Person (which will thereafter be void), will thereafter have the
right to receive upon exercise that number of shares of Common Stock having
a market value of two times the exercise price of the Right.
At any time after the acquisition by an Acquiring Person of beneficial
ownership of 15% or more of the outstanding Common Stock and prior to the
acquisition by such Acquiring Person of 50% or more of the outstanding
Common Stock, the Company's Board of Directors may exchange the Right
(other than Rights owned by such Acquiring Person which have become void),
at an exchange ratio of one share of Common Stock, or one one-hundredth of
a share of Junior Preferred Stock, per Right (subject to adjustment).
Until a Right is exercised, the holder will have no rights as a
stockholder of the Company including, without limitation, the right to
vote or to receive dividends.
The Rights may have certain anti-takeover effects. The Rights will
cause substantial dilution to a person or group that attempts to acquire
the Company on terms not approved by the Company's Board of Directors,
except pursuant to an offer conditioned on a substantial number of Rights
being acquired. The Rights should not interfere with any merger or other
business combination approved by the Company's Board of Directors since
the Rights may be redeemed by the Company prior to the time that a person
or group has acquired beneficial ownership of 15% or more of the Common
Stock.
11. INDUSTRY SEGMENT INFORMATION
Subsequent to the Restructuring, the Company operates in one industry
segment encompassing the refining and marketing of premium, environmentally
clean products such as reformulated gasoline, CARB Phase II gasoline,
low-sulfur diesel and oxygenates. The Company also produces a substantial
slate of middle distillates, jet fuel and petrochemicals. The Company's
operations consist primarily of four petroleum refineries located in Texas
at Corpus Christi, Texas City and Houston, and in Louisiana at Krotz Springs
which have a combined throughput capacity of approximately 530,000 BPD.
The Company also has certain marketing operations located in Houston. The
Company currently markets its products to wholesale customers in 32 states,
including California and other states located in the Northeast,
Midwest, Southeast and Gulf Coast, and selected export markets in
Latin America. In 1997, 1996 and 1995, the Company had no significant
amount of export sales and no significant foreign operations. In 1997,
no single customer accounted for more than 10% of the Company's
consolidated operating revenues, while in 1996 and 1995, approximately 11%
and 17%, respectively, of the Company's consolidated operating revenues were
derived from a major domestic oil company.
12. INCOME TAXES
Components of income tax expense applicable to continuing operations
were as follows (in thousands):
Year Ended December 31,
1997 1996 1995
Current:
Federal $29,501 $ 7,902 $ 425
State 1,461 (260) 812
Total current 30,962 7,642 1,237
Deferred:
Federal 32,827 8,969 29,217
Total income tax expense $63,789 $16,611 $30,454
The following is a reconciliation of total income tax expense to income
taxes computed by applying the statutory federal income tax rate (35% for
all years presented) to income before income taxes (in thousands):
Year Ended December 31,
1997 1996 1995
Federal income tax expense at the
statutory rate $61,445 $13,679 $31,044
State income taxes, net of federal income
tax benefit 950 (169) 528
Other - net 1,394 3,101 (1,118)
Total income tax expense $63,789 $16,611 $30,454
The tax effects of significant temporary differences representing
deferred income tax assets and liabilities are as follows (in thousands):
December 31,
1997 1996
Deferred income tax assets:
Tax credit carryforwards $ 14,287 $ 15,540
Other 19,627 26,915
Total deferred income tax assets $ 33,914 $ 42,455
Deferred income tax liabilities:
Depreciation $(257,102) $(234,031)
Other (16,515) (15,385)
Total deferred income tax liabilities $(273,617) $(249,416)
At December 31, 1997, the Company had an alternative minimum tax ("AMT")
credit carryforward of approximately $14.3 million which is available to
reduce future federal income tax liabilities. The AMT credit carryforward
has no expiration date. The Company has not recorded any valuation
allowances against deferred income tax assets as of December 31, 1997.
The Company's taxable years through 1993 are closed to adjustment by
the Internal Revenue Service. The Company believes that adequate provisions
for income taxes have been reflected in its consolidated financial statements.
13. EMPLOYEE BENEFIT PLANS
Pension Plans
Prior to the Restructuring, Energy maintained a defined benefit pension
plan. Pursuant to an "Employee Benefits Agreement" entered into between the
Company and Energy in connection with the Restructuring, effective at the
time of the Distribution, the Company became the sponsor of Energy's pension
plan and became solely responsible for (i) pension liabilities existing
immediately prior to the time of the Distribution to, or relating to,
individuals employed by Energy which became employees of PG&E after the
Distribution, which liabilities will become payable upon the retirement of
such individuals, (ii) all liabilities to, or relating to, former employees
of Energy and the Company, and (iii) all liabilities to, or relating to,
current employees of the Company. Also pursuant to the Employee Benefits
Agreement, the Company became the sponsor of Energy's nonqualified
Supplemental Executive Retirement Plan ("SERP"), which provided additional
pension benefits to executive officers and certain other employees, and
assumed all liabilities with respect to current and former employees
of both Energy and the Company under such plan.
The Company's pension plan, which is subject to the provisions of the
Employee Retirement Income Security Act of 1974, is designed to provide
eligible employees with retirement income. Participation in the plan
commences upon attaining age 21 and the completion of one year of continuous
service. A participant vests in plan benefits after five years of vesting
service or upon reaching normal retirement date. Employees of the Company
who were formerly employees of Basis commenced participation in the plan
effective January 1, 1998 under the same service requirements as required
for other Company employees. For such employees, prior employment with
Basis is considered in determining vesting service, but credited
service for the accrual of benefits did not begin until January 1, 1998.
The pension plan provides a monthly pension payable upon normal
retirement of an amount equal to a set formula which is based on the
participant's 60 consecutive highest months of compensation during the
latest 10 years of credited service under the plan. Contributions to the
plan by the Company, when permitted, are actuarially determined in an amount
sufficient to fund the currently accruing benefits and amortize any prior
service cost over the expected life of the then current work force. The
Company's contributions to the pension plan and SERP in 1997, 1996 and 1995
were approximately $8.8 million, $14.2 million and $4.3 million,
respectively, and are currently estimated to be $1.1 million in 1998.
In connection with the Restructuring, Energy approved the establishment
of a supplement to the pension plan (the "1997 Window Plan") which permitted
certain employees to retire from employment during 1997.
The following table sets forth for the pension plans of the Company,
including the SERP, the funded status and amounts recognized in the
Company's consolidated financial statements at December 31, 1997 and
1996 (in thousands):
December 31,
1997 1996
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including vested
benefits of $112,411 (1997) and $76,448 (1996) $114,296 $78,441
Projected benefit obligation for services rendered to date $129,430 $99,435
Plan assets at fair value 121,393 92,486
Projected benefit obligation in excess of plan assets 8,037 6,949
Unrecognized net gain (loss) from past experience different
from that assumed (1,442) 5,700
Prior service cost not yet recognized in net periodic
pension cost (4,985) (5,305)
Unrecognized net asset at beginning of year 1,199 1,341
Accrued pension cost $ 2,809 $ 8,685
Net periodic pension cost for the years ended December 31, 1997, 1996
and 1995 included the following components (in thousands):
Year Ended December 31,
1997 1996 1995
Service cost - benefits earned during the period $ 3,710 $ 4,622 $ 3,465
Interest cost on projected benefit obligation 7,298 6,309 5,455
Actual (return) loss on plan assets (24,698) (12,424) (14,376)
Net amortization and deferral 15,542 6,651 9,637
Net periodic pension cost 1,852 5,158 4,181
Additional expense resulting from 1997 Window Plan 3,168 - -
Curtailment gain resulting from Restructuring (see Note 1) (2,083) - -
Total pension expense $ 2,937 $ 5,158 $ 4,181
The weighted-average discount rate used in determining the actuarial
present value of the projected benefit obligation was 7% and 7.25% as of
December 31, 1997 and 1996, respectively. The rate of increase in
future compensation levels used in determining the projected benefit
obligation as of December 31, 1997 and 1996 was 4% for nonexempt personnel
and 4% and 3%, respectively, for exempt personnel. The expected long-term
rate of return on plan assets was 9.25% as of December 31, 1997 and 1996.
Postretirement Benefits Other Than Pensions
The Company provides certain health care and life insurance benefits for
retired employees, referred to herein as "postretirement benefits other than
pensions." Substantially all of the Company's employees may become eligible
for those benefits if, while still working for the Company, they either reach
normal retirement age or take early retirement. Health care benefits are
offered by the Company through a self-insured plan and a health maintenance
organization while life insurance benefits are provided through an insurance
company. The Company funds its postretirement benefits other than pensions
on a pay-as-you-go basis. Pursuant to the Employee Benefits Agreement,
effective at the time of the Distribution, the Company became responsible
for all liabilities to former employees of both Energy and the Company as
well as current employees of the Company arising under Energy's health care
and life insurance programs. Employees of the Company who were formerly
employees of Basis became eligible for postretirement benefits other than
pensions under the Company's plan effective January 1, 1998.
The following table sets forth for the Company's postretirement benefits
other than pensions, the funded status and amounts recognized in the Company's
consolidated financial statements at December 31, 1997 and 1996 (in thousands):
December 31,
1997 1996
Accumulated benefit obligation:
Retirees $14,256 $11,930
Other fully eligible plan participants 848 390
Other active plan participants 17,617 17,571
Total accumulated benefit obligation 32,721 29,891
Unrecognized loss (2,918) (4,498)
Unrecognized prior service cost (1,786) (3,909)
Unrecognized transition obligation (4,705) (10,334)
Accrued postretirement benefit cost $23,312 $11,150
Net periodic postretirement benefit cost for the years ended
December 31, 1997, 1996 and 1995 included the following components
(in thousands):
December 31,
1997 1996 1995
Service cost - benefits attributed to service
during the period $1,028 $1,091 $ 860
Interest cost on accumulated benefit obligation 1,842 1,716 1,769
Amortization of unrecognized transition obligation 513 653 766
Amortization of prior service cost 184 - -
Amortization of unrecognized net loss 46 110 -
Net periodic postretirement benefit cost 3,613 3,570 3,395
Additional expense resulting from 1997 Window Plan 171 - -
Curtailment loss resulting from Restructuring (see Note 1) 576 - -
Total postretirement benefit cost $4,360 $3,570 $3,395
For measurement purposes, the assumed health care cost trend rate was 5%
in 1997, remaining level thereafter. The health care cost trend rate
assumption has a significant effect on the amount of the obligation and
periodic cost reported. An increase in the assumed health care cost trend
rate by 1% in each year would increase the accumulated postretirement benefit
obligation as of December 31, 1997 by $5.8 million and the aggregate of the
service and interest cost components of net periodic postretirement benefit
cost for the year then ended by $.8 million. The weighted average discount
rate used in determining the accumulated postretirement benefit obligation
as of December 31, 1997 and 1996 was 7% and 7.25%, respectively.
Profit-Sharing/Savings Plans
Prior to the Restructuring, Energy maintained a qualified profit-sharing
plan (the "Thrift Plan"). Effective at the time of the Distribution, the
Company became the sponsor of the Thrift Plan and became solely responsible
for all liabilities arising under the Thrift Plan after the time of the
Distribution with respect to current Company employees and former employees
of both Energy and the Company. Each Energy employee participating in the
Thrift Plan prior to the Distribution who became a PG&E employee subsequent
to the Distribution transferred their account balance to the PG&E thrift
plan.
The purpose of the Thrift Plan is to provide a program whereby
contributions of participating employees and their employers are
systematically invested to provide the employees an interest in the Company
and to further their financial independence. Participation in the Thrift
Plan is voluntary and is open to employees of the Company who become
eligible to participate upon attaining age 21 and the completion of one
year of continuous service. Employees of the Company who were formerly
Basis employees became eligible to participate in the Thrift Plan on
January 1, 1998 under the same service requirements as required for other
Company employees, with service including prior employment with Basis.
Basis's previously existing 401(k) profit-sharing and retirement savings
plan was maintained for such employees through December 31, 1997 and was
merged into the Company's Thrift Plan effective January 1, 1998.
Participating employees may contribute from 2% up to 22% of their total
annual compensation, subject to certain limitations, to the Thrift Plan.
Participants may elect to make such contributions on either a before-tax or
after-tax basis, with federal income taxes on before-tax contributions being
deferred until such time as a distribution is made to the participant.
Participants' contributions to the Thrift Plan of up to 8% of their base
annual compensation are matched 75% by the Company, with an additional match
of up to 25% subject to certain conditions. Participants' contributions in
excess of 8% of their base annual compensation are not matched by the
Company. Up until termination of the VESOP (see below) in 1997, the Company
made contributions to the Thrift Plan to the extent 75% of participants' base
contributions (from 2% up to 8% of total base salary) exceeded the amount
of the Company's contribution to the VESOP for debt service. Subsequent
to the VESOP termination, all Company contributions were made to the Thrift
Plan. Company contributions to the Thrift Plan were $2,253,000 in 1997.
There were no Company contributions to the Thrift Plan in 1996 or 1995.
In 1989, Energy established the Valero Employees' Stock Ownership Plan
("VESOP") which was a leveraged employee stock ownership plan. Pursuant to
a private placement in 1989, the VESOP issued notes in the principal amount
of $15 million. The net proceeds from this private placement were used
by the VESOP trustee to fund the purchase of Energy common stock. During
1991, Energy made an additional loan of $8 million to the VESOP which was
also used by the trustee to purchase Energy common stock. The 1989 and
1991 VESOP loans are referred to herein as the "VESOP Notes." In connection
with effecting the Restructuring, on April 11, 1997, Energy's Board of
Directors approved the termination of the VESOP and subsequently directed
the VESOP trustee to sell a sufficient amount of Energy common stock held
in the VESOP suspense account to repay the outstanding amount of VESOP Notes
and allocate the remaining stock in the suspense account to the accounts of
the VESOP participants. The VESOP Notes were repaid in full in May 1997,
after which 226,198 remaining shares of Energy common stock were allocated
to all VESOP participants.
As noted above, prior to termination of the VESOP, the Company's annual
contribution to the Thrift Plan was reduced by the Company's contribution to
the VESOP for debt service. During 1997, 1996 and 1995, the Company
contributed $586,000, $3,372,000 and $3,170,000, respectively, to the VESOP,
comprised of $58,000, $525,000 and $678,000, respectively, of interest on the
VESOP Notes and $541,000, $3,072,000 and $2,918,000, respectively, of
compensation expense. Compensation expense was based on the VESOP debt
principal payments for the portion of the VESOP established in 1989 and on
the cost of the shares allocated to participants for the portion of the
VESOP established in 1991. Dividends on VESOP shares of common stock were
recorded as a reduction of retained earnings. Dividends on allocated shares
of common stock were paid to participants. Dividends paid on unallocated
shares were used to reduce the Company's contributions to the VESOP during
1997, 1996 and 1995 by $13,000, $225,000 and $426,000, respectively.
VESOP shares of common stock were considered outstanding for earnings per
share computations. As of December 31, 1996 and 1995, the number of
allocated shares was 1,052,454 and 940,470, respectively, the number of
committed-to-be-released shares was 62,918 for both years, and the number
of suspense shares was 583,301 and 772,055, respectively.
Stock Compensation Plans
Prior to the Restructuring, Energy maintained various stock
compensation plans. In connection with the Restructuring, all stock
options held by Energy employees under any of such stock compensation plans
that were granted prior to January 1, 1997 became 100% vested and immediately
exercisable upon the approval of the Restructuring by Energy's stockholders
on June 18, 1997. For all options still outstanding at the time of the
Distribution, pursuant to the Employee Benefits Agreement, each option
to purchase Energy Common Stock held by a current or former employee of
the Company was converted into an option to acquire shares of Company Common
Stock, and each option held by a current or former employee of Energy's
natural gas related services business was converted into an option to
acquire shares of PG&E common stock. In each case, the number of options
and related exercise prices were converted in such a manner so that the
aggregate option value for each holder immediately after the Restructuring
was equal to the aggregate option value immediately prior to the
Restructuring. The other terms and conditions of any such converted
option remained essentially unchanged. All restricted stock issued
pursuant to Energy's stock compensation plans became fully vested either
upon the approval of the Restructuring by Energy's stockholders on
June 18, 1997 or upon the completion of the Restructuring on July 31, 1997.
As of December 31, 1997, the Company had various fixed and
performance-based stock compensation plans. The Company's Executive
Stock Incentive Plan (the "ESIP"), which was maintained by Energy prior
to the Restructuring, authorizes the grant of various stock and
stock-related awards to executive officers and other key employees.
Awards available under the ESIP include options to purchase shares
of Common Stock, restricted stock which vests over a period determined
by the Company's compensation committee, and performance shares which
vest upon the achievement of an objective performance goal. A total of
2,500,000 shares of Company Common Stock may be issued under the ESIP, of
which no more than 1,000,000 shares may be issued as restricted stock.
Under the ESIP, 6,250 shares of restricted stock were granted during the
period August 1, 1997 through December 31, 1997 at a weighted average
grant-date fair value of $31.78 per share and 24,563 performance shares
were granted during the period January 1, 1997 through July 31, 1997 at
a weighted average grant-date fair value of $34.58 per share. The Company
also has a non-qualified stock option plan (the "Stock Option Plan") which,
at the date of the Restructuring, replaced three non-qualified stock option
plans previously maintained by Energy. Awards under the Stock Option Plan
are granted to key officers, employees and prospective employees of the
Company. A total of 2,000,000 shares of Company Common Stock may be
issued under the Stock Option Plan. The Company also maintains an
Executive Incentive Bonus Plan, under which 200,000 shares of Company
Common Stock may be issued, that provides bonus compensation to key
employees of the Company based on individual contributions to Company
profitability. Bonuses are payable either in cash or in whole or in
part in Company Common Stock. No grants of Common Stock were made under
this plan in 1997. The Company also has a non-employee director stock
option plan, under which 200,000 shares of Company Common Stock may be
issued, and a non-employee director restricted stock plan, under
which 100,000 shares of Company Common Stock may be issued. During the
period August 1, 1997 through December 31, 1997, 9,336 shares were granted
under the non-employee director restricted stock plan at a weighted average
grant-date fair value of $28.94 per share.
Under the terms of the ESIP, the Stock Option Plan and the non-employee
director stock option plan, the exercise price of the options granted will
not be less than the fair market value of Common Stock at the date of grant.
Stock options become exercisable pursuant to the individual written agreements
between the Company and the participants, generally in three equal annual
installments beginning one year after the date of grant, with unexercised
options expiring ten years from the date of grant. A summary of the status
of the Company's stock option plans, including options granted under the
ESIP, the Stock Option Plan, the non-employee director stock option plan
and Energy's previously existing stock compensation plans, as of
December 31, 1997, 1996, and 1995, and changes during the years then ended
is presented in the table below. (Note: Shares outstanding at July 31, 1997
prior to the Restructuring differs from shares outstanding at August 1, 1997
after the Restructuring because the August 1 amount: (i) excludes options
held by current or former employees of Energy's natural gas related services
business which were converted to PG&E options and (ii) reflects the
conversion of Energy options held by current or former employees of the
Company to an equivalent number of Company options.)
1997 1996 1995
August 1-December 31 January 1-July 31
Weighted- Weighted- Weighted- Weighted-
Average Average Average Average
Exercise Exercise Exercise Exercise
Shares Price Shares Price Shares Price Shares Price
Outstanding at
beginning of
period 3,802,584 $19.05 4,229,092 $22.02 3,928,267 $20.69 2,575,902 $21.51
Granted 36,550 29.35 1,365,875 33.71 757,920 27.44 1,599,463 18.99
Exercised (44,144) 17.21 (2,925,687) 21.81 (418,117) 19.28 (171,604) 17.08
Forfeited (14,572) 23.07 (17,028) 25.84 (38,978) 22.17 (74,428) 21.12
Expired - - - - - - (1,066) 18.36
Outstanding at
end of period 3,780,418 19.15 2,652,252 28.25 4,229,092 22.02 3,928,267 20.69
Exercisable
at end of
period 1,758,479 15.08 1,288,977 22.47 2,525,957 21.71 1,531,718 22.30
Weighted-average
fair value of
options granted $ 6.86 $ 8.09 $ 6.25 $ 4.50
The following table summarizes information about stock options
outstanding under the ESIP, the Stock Option Plan and the non-employee
director stock option plan as of December 31, 1997:
Options Outstanding Options Exercisable
Range Number Weighted-Avg. Number
of Outstanding Remaining Weighted-Avg. Exercisable Weighted-Avg.
Exercise Prices at 12/31/97 Contractual Life Exercise Price at 12/31/97 Exercise Price
$11.47-$16.95 1,246,320 6.4 years $13.42 1,245,691 $13.43
$18.45-$33.81 2,534,098 8.9 21.97 512,788 19.11
$11.47-$33.81 3,780,418 8.1 19.15 1,758,479 15.08
The fair value of each option grant was estimated on the date of
grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions used for grants in 1997, 1996 and 1995,
respectively: risk-free interest rates of 6.3 percent, 6.4 percent and
6.7 percent; expected dividend yields of 1.5 percent, 1.9 percent and 2.8
percent; expected lives of 3.2 years, 3.1 years and 3.2 years; and expected
volatility of 26.2 percent, 25.5 percent and 29.5 percent.
For each share of stock that can be purchased thereunder pursuant to a
stock option, the Stock Option Plan provides, and the predecessor stock
option plans of Energy provided, that a SAR may also be granted. A SAR is
a right to receive a cash payment equal to the difference between the fair
market value of Common Stock on the exercise date and the option price of
the stock to which the SAR is related. SARs are exercisable only upon the
exercise of the related stock options. At the end of each reporting
period within the exercise period, the Company recorded an adjustment to
compensation expense based on the difference between the fair market value
of Common Stock at the end of each reporting period and the option price
of the stock to which the SAR was related. During the January 1, 1997
through July 31, 1997 period prior to the Restructuring, 88,087 SARs
were exercised at a weighted-average exercise price of $14.52 per share,
and no SARs related to Company Common Stock remained outstanding as of
July 31, 1997. During the August 1, 1997 through December 31, 1997
period subsequent to the Restructuring, no SARs were granted.
The Company applies APB Opinion No. 25 and related Interpretations
in accounting for its plans. Accordingly, no compensation cost has been
recognized for its fixed stock option plans. The after-tax compensation
cost reflected in net income for stock-based compensation plans was
$4.6 million, $2.6 million and $1.7 million for 1997, 1996 and 1995,
respectively. Of these amounts, $2.1 million, $1.4 million and
$.9 million related to the discontinued natural gas related services
business. Had compensation cost for the Company's stock-based
compensation plans been determined based on the fair value at the grant
dates for 1997, 1996 and 1995 awards under those plans consistent with
the method of SFAS No. 123, the Company's net income and earnings per
share for the years ended December 31, 1997, 1996 and 1995 would have
been reduced to the pro forma amounts indicated below:
Year Ended December 31,
1997 1996 1995
Net Income As Reported $96,096 $72,701 $59,838
Pro Forma $92,304 $70,427 $58,373
Earnings per share As Reported $ 1.77 $ 1.40 $ 1.10
Pro Forma $ 1.70 $ 1.35 $ 1.07
Earnings per share - assuming dilution As Reported $ 1.74 $ 1.42 $ 1.17
Pro Forma $ 1.67 $ 1.38 $ 1.14
Because the SFAS No. 123 method of accounting has not been applied to
awards granted prior to January 1, 1995, the resulting pro forma compensation
cost may not be representative of that to be expected in future years.
14. LEASE AND OTHER COMMITMENTS
The Company has long-term operating lease commitments in connection
with land, office facilities and equipment, and various facilities and
equipment used in the storage, transportation and production of refinery
feedstocks and/or refined products. Long-term leases for land have
remaining primary terms of up to 26.7 years, while long-term leases for
office facilities have remaining primary terms of up to 4.5 years. The
Company's long-term leases for production equipment, feedstock and refined
product storage facilities and transportation assets have remaining primary
terms of up to 14.1 years and in certain cases provide for various
contingent payments based on, among other things, throughput volumes in
excess of a base amount.
Future minimum lease payments and minimum rentals to be received under
subleases as of December 31, 1997 for operating leases having initial or
remaining noncancelable lease terms in excess of one year are as follows
(in thousands):
1998 $23,779
1999 22,654
2000 16,492
2001 11,924
2002 4,438
Remainder 18,843
98,130
Less future minimum rentals to be received
under subleases 1,354
$96,776
Consolidated rental expense under operating leases for continuing
operations amounted to approximately $39,805,000, $26,739,000, and
$24,177,000 for 1997, 1996 and 1995, respectively. Such amounts are
included in the accompanying Consolidated Statements of Income in cost of
sales and operating expenses and in selling and administrative expenses
and include various month-to-month and other short-term rentals in
addition to rents paid and accrued under long-term lease commitments.
The Company has a product supply arrangement which requires the
payment of a reservation fee of approximately $10.4 million annually
through August 2002.
15. LITIGATION AND CONTINGENCIES
Litigation Relating to Operations of Basis Prior to Acquisition
Basis was named as a party to numerous claims and legal proceedings
which arose prior to its acquisition by the Company. Pursuant to the
stock purchase agreement between Energy, the Company, Salomon, and Basis,
Salomon assumed the defense of all known suits, actions, claims and
investigations pending at the time of the acquisition and all obligations,
liabilities and expenses related to or arising therefrom. In addition,
Salomon agreed to assume all obligations, liabilities and expenses related
to or resulting from all private third-party suits, actions and claims which
arise out of a state of facts existing on or prior to the time of the
acquisition (including "superfund" liability), but which were not pending
at such time, subject to certain terms, conditions and limitations. In
certain pending matters, the plaintiffs are requesting injunctive relief
which, if granted, could potentially result in the operations acquired in
connection with the purchase of Basis being adversely affected through
required reductions in emissions, discharges, or refinery throughput,
which could be outside Salomon's indemnity obligations. As discussed in
Note 4, the Company and Salomon reached an agreement in December 1997
whereby Salomon paid the Company $9.5 million in settlement of certain
of Salomon's contingent environmental obligations assumed under the stock
purchase agreement. This settlement did not affect Salomon's other
indemnity obligations described in this paragraph.
Litigation Relating to Discontinued Operations
Energy and certain of its natural gas related subsidiaries, as well as
the Company, have been sued by Teco Pipeline Company ("Teco") regarding the
operation of the 340-mile West Texas pipeline in which a subsidiary of Energy
holds a 50% undivided interest. In 1985, a subsidiary of Energy sold a 50%
undivided interest in the pipeline and entered into a joint venture through
an ownership agreement and an operating agreement, each dated
February 28, 1985, with the purchaser of the interest. In 1988, Teco
succeeded to that purchaser's 50% interest. A subsidiary of Energy has
at all times been the operator of the pipeline. Notwithstanding the written
ownership and operating agreements, the plaintiff alleges that a separate,
unwritten partnership agreement exists, and that the defendants
have exercised improper dominion over such alleged partnership's affairs.
The plaintiff also alleges that the defendants acted in bad faith by
negatively affecting the economics of the joint venture in order to provide
financial advantages to facilities or entities owned by the defendants and by
allegedly usurping for the defendants' own benefit certain opportunities
available to the joint venture. The plaintiff asserts causes of action for
breach of fiduciary duty, fraud, tortious interference with business
relationships, professional malpractice and other claims, and seeks
unquantified actual and punitive damages. Energy's motion to compel
arbitration was denied, but Energy has filed an appeal. Energy has also
filed a counterclaim alleging that the plaintiff breached its own
obligations to the joint venture and jeopardized the economic and
operational viability of the pipeline by its actions. Energy is seeking
unquantified actual and punitive damages. Although PG&E previously acquired
Teco and now ultimately owns both Teco and Energy after the Restructuring,
PG&E's Teco acquisition agreement purports to assign the benefit or
detriment of this lawsuit to the former shareholders of Teco. Pursuant
to the Distribution Agreement by which the Company was spun off to Energy's
stockholders in connection with the Restructuring, the Company has agreed to
indemnify and hold harmless Energy with respect to this lawsuit to the
extent of 50% of the amount of any final judgment or settlement amount
not in excess of $30 million, and 100% of that part of any final judgment
or settlement amount in excess of $30 million.
General
The Company is also a party to additional claims and legal proceedings
arising in the ordinary course of business. The Company believes it is
unlikely that the final outcome of any of the claims or proceedings to
which the Company is a party would have a material adverse effect on the
Company's financial statements; however, due to the inherent uncertainty
of litigation, the range of possible loss, if any, cannot be estimated
with a reasonable degree of precision and there can be no assurance
that the resolution of any particular claim or proceeding would not have
an adverse effect on the Company's results of operations for the interim
period in which such resolution occurred.
16. QUARTERLY RESULTS OF OPERATIONS (Unaudited)
The results of operations by quarter for the years ended
December 31, 1997 and 1996 were as follows (in thousands of dollars,
except per share amounts):
1997 - Quarter Ended (a)
March 31 June 30 (b) September 30(b) December 31 (b) Total
Operating revenues $821,802 $1,362,624 $1,975,665 $1,596,129 $5,756,220
Operating income 38,413 55,800 94,107 22,714 211,034
Income from continuing operations 19,811 27,598 51,993 12,366 111,768
Income (loss) from discontinued
operations (4,371) (10,869) (432) - (15,672)
Net income 15,440 16,729 51,561 12,366 96,096
Earnings (loss) per common share:
Continuing operations .45 .55 .93 .22 2.16
Discontinued operations (.16) (.26) (.01) - (.39)
Total .29 .29 .92 .22 1.77
Earnings (loss) per common share -
assuming dilution:
Continuing operations .38 .50 .91 .22 2.03
Discontinued operations (.08) (.20) (.01) - (.29)
Total .30 .30 .90 .22 1.74
1996 - Quarter Ended (a)
March 31 June 30 September 30 December 31 Total
Operating revenues $574,522 $675,009 $678,059 $830,263 $2,757,853
Operating income 10,105 36,534 23,060 20,049 89,748
Income from continuing operations 2,963 18,164 6,630 (5,285) 22,472
Income (loss) from discontinued
operations 16,951 2,677 6,516 24,085 50,229
Net income 19,914 20,841 13,146 18,800 72,701
Earnings (loss) per common share:
Continuing operations .07 .41 .15 (.12) .51
Discontinued operations .32 - .08 .49 .89
Total .39 .41 .23 .37 1.40
Earnings (loss) per common share -
assuming dilution:
Continuing operations .06 .36 .13 (.12) .44
Discontinued operations .33 .05 .13 .49 .98
Total .39 .41 .26 .37 1.42
<FN>
(a) Amounts reflect Energy's natural gas related services business as discontinued operations pursuant to the Restructuring.
(b) Includes the operations of the Texas City, Houston and Krotz Springs refineries commencing May 1, 1997.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information on directors required by Items 401 and 405 of Regulation
S-K is incorporated herein by reference to the Company's definitive Proxy
Statement which will be filed with the Commission by April 30, 1998.
Information concerning the Company's executive officers appears in Part I
of this Annual Report on Form 10-K.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) 1. Financial Statements. The following Consolidated Financial
Statements of Valero Energy Corporation and its subsidiaries are included
in Part II, Item 8 of this Form 10-K:
Page
Report of independent public accountants
Consolidated balance sheets as of December 31, 1997 and 1996
Consolidated statements of income for the years ended
December 31, 1997, 1996 and 1995
Consolidated statements of common stock and other stockholders'
equity for the years ended December 31, 1997, 1996 and 1995
Consolidated statements of cash flows for the years ended
December 31, 1997, 1996 and 1995
Notes to consolidated financial statements
2. Financial Statement Schedules and Other Financial Information.
No financial statement schedules are submitted because either they are
inapplicable or because the required information is included in the
Consolidated Financial Statements or notes thereto.
3. Exhibits. Filed as part of this Form 10-K are the following
exhibits:
2.1 -- Agreement and Plan of Merger, dated as of January 31, 1997, as
amended, by and among Valero Energy Corporation, PG&E
Corporation, and PG&E Acquisition Corporation--incorporated
by reference from Exhibit 2.1 to the Company's Registration
Statement on Form S-1 (File No. 333-27013, filed May 13, 1997).
2.2 -- Form of Agreement and Plan of Distribution between Valero Energy
Corporation and Valero Refining and Marketing Company--
incorporated by reference from Exhibit 2.2 to the Company's
Registration Statement on Form S-1 (File No. 333-27013, filed
May 13, 1997).
2.3 -- Form of Tax Sharing Agreement among Valero Energy Corporation,
Valero Refining and Marketing Company and PG&E Corporation--
incorporated by reference from Exhibit 2.3 to the Company's
Registration Statement on Form S-1 (File No. 333-27013, filed
May 13, 1997).
2.4 -- Form of Employee Benefits Agreement between Valero Energy
Corporation and Valero Refining and Marketing Company--
incorporated by reference from Exhibit 2.4 to the Company's
Registration Statement on Form S-1 (File No. 333-27013, filed
May 13, 1997).
2.5 -- Form of Interim Services Agreement between Valero Energy
Corporation and Valero Refining and Marketing Company--
incorporated by reference from Exhibit 2.5 to the Company's
Registration Statement on Form S-1 (File No. 333-27013, filed
May 13, 1997).
2.6 -- Stock Purchase Agreement dated as of April 22, 1997, among
Valero Energy Corporation, Valero Refining and Marketing
Company, Salomon Inc and Basis Petroleum, Inc.--incorporated
by reference from Exhibit 2.1 to the Company's Current Report
on Form 8-K.
3.1 -- Amended and Restated Certificate of Incorporation of Valero
Energy Corporation (formerly known as Valero Refining and
Marketing Company)--incorporated by reference from Exhibit
3.1 to the Company's Registration Statement on Form S-1 (File
No. 333-27013, filed May 13, 1997).
3.2 -- By-Laws of Valero Energy Corporation (formerly known as Valero
Refining and Marketing Company)--incorporated by reference
from Exhibit 3.2 to the Company's Registration Statement on
Form S-1 (File No. 333-27013, filed May 13, 1997).
4.1 -- Rights Agreement between Valero Refining and Marketing
Company and Harris Trust and Savings Bank, as Rights
Agent--incorporated by reference from Exhibit 4.1 to the
Company's Registration Statement on Form S-8 (File No. 333-31709,
filed July 21, 1997).
*4.2 -- Amended and Restated Credit Agreement dated as of November 28,
1997, among Valero Energy Corporation, the Banks listed therein,
Morgan Guaranty Trust Company of New York, as Administrative
Agent, and Bank of Montreal, as Syndicating Agent and Issuing
Bank.
+10.1 -- Valero Energy Corporation Executive Incentive Bonus Plan, as
amended, dated as of April 23, 1997--incorporated by reference
from Exhibit 10.1 to the Company's Registration Statement on
Form S-1 (File No. 333-27013, filed May 13, 1997).
+10.2 -- Valero Energy Corporation Executive Stock Incentive Plan, as
amended, dated as of April 23, 1997--incorporated by reference
from Exhibit 10.2 to the Company's Registration Statement on
Form S-1 (File No. 333-27013, filed May 13, 1997).
+10.3 -- Valero Energy Corporation Stock Option Plan, as amended, dated
as of April 23, 1997--incorporated by reference from Exhibit 10.3
to the Company's Registration Statement on Form S-1
(File No. 333-27013, filed May 13, 1997).
+10.4 -- Valero Energy Corporation Restricted Stock Plan for Non-Employee
Directors, as amended, dated as of April 23, 1997--incorporated
by reference from Exhibit 10.4 to the Company's Registration
Statement on Form S-1 (File No. 333-27013, filed May 13, 1997).
+10.5 -- Valero Energy Corporation Non-Employee Director Stock Option
Plan, as amended, dated as of April 23, 1997--incorporated by
reference from Exhibit 10.5 to the Company's Registration
Statement on Form S-1 (File No. 333-27013, filed May 13, 1997).
+10.6 -- Executive Severance Agreement between Valero Energy Corporation
and William E. Greehey, dated as of December 15, 1982, as
adopted and ratified by Valero Refining and Marketing
Company--incorporated by reference from Exhibit 10.6 to the
Company's Registration Statement on Form S-1 (File No. 333-27013,
filed May 13, 1997).
+10.7 -- Schedule of Executive Severance Agreements--incorporated by
reference from Exhibit 10.7 to the Company's Registration
Statement on Form S-1 (File No. 333-27013, filed May 13, 1997).
+10.8 -- Form of Indemnity Agreement between Valero Refining and
Marketing Company and William E. Greehey--incorporated by
reference from Exhibit 10.8 to the Company's Registration
Statement on Form S-1 (File No. 333-27013, filed May 13, 1997).
+10.9 -- Schedule of Indemnity Agreements--incorporated by reference
from Exhibit 10.9 to the Company's Registration Statement on
Form S-1 (File No. 333-27013, filed May 13, 1997).
+10.10 -- Form of Incentive Bonus Agreement between Valero Refining and
Marketing Company and Gregory C. King--incorporated by
reference from Exhibit 10.10 to the Company's Registration
Statement on Form S-1 (File No. 333-27013, filed May 13, 1997).
+10.11 -- Schedule of Incentive Bonus Agreements--incorporated by
reference from Exhibit 10.11 to the Company's Registration
Statement on Form S-1 (File No. 333-27013, filed May 13, 1997).
*+10.12 -- Employment Agreement between Valero Refining and Marketing
Company and William E. Greehey, dated as of June 18, 1997.
*+10.13 -- Employment Agreement between Valero Refining and Marketing
Company and Edward C. Benninger, dated as of June 18, 1997.
*+10.14 -- Form of Management Stability Agreement between Valero Energy
Corporation and Gregory C. King.
*+10.15 -- Schedule of Management Stability Agreements.
*11.1 -- Computation of Earnings Per Share.
*21.1 -- Valero Energy Corporation subsidiaries, including state or other
jurisdiction of incorporation or organization.
*23.1 -- Consent of Arthur Andersen LLP, dated February 26, 1998.
*24.1 -- Power of Attorney, dated February 26, 1998 (set forth on the
signatures page of this Form 10-K).
**27.1 -- Financial Data Schedule (reporting financial information as of
and for the year ended December 31, 1997).
**27.2 -- Restated Financial Data Schedule (reporting financial information
as of and for the year ended December 31, 1996).
**27.3 -- Restated Financial Data Schedule (reporting financial information
as of and for the year ended December 31, 1995).
______________
* Filed herewith
+ Identifies management contracts or compensatory plans or arrangements
required to be filed as an exhibit hereto pursuant to Item 14(c)
of Form 10-K.
** The Financial Data Schedule and Restated 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 are included as exhibits only to the electronic filing of this
Form 10-K in accordance with Item 601(c) of Regulation S-K and
Section 401 of Regulation S-T.
Copies of exhibits filed as a part of this Form 10-K may be obtained by
stockholders of record at a charge of $.15 per page, minimum $5.00 each
request. Direct inquiries to Jay D. Browning, Corporate Secretary,
Valero Energy Corporation, P.O. Box 500, San Antonio, Texas 78292.
Pursuant to paragraph 601(b)(4)(iii)(A) of Regulation S-K, the
registrant has omitted from the foregoing listing of exhibits, and hereby
agrees to furnish to the Commission upon its request, copies of certain
instruments, each relating to long-term debt not exceeding 10% of the total
assets of the registrant and its subsidiaries on a consolidated basis.
(b) Reports on Form 8-K. The Company did not file any Current Reports
on Form 8-K during the quarter ended December 31, 1997.
For the purposes of complying with the rules governing Form S-8 under
the Securities Act of 1933, the undersigned registrant hereby undertakes
as follows, which undertaking shall be incorporated by reference into
registrant's Registration Statements on Form S-8 No. 333-31709
(filed July 21, 1997), No. 333-31721 (filed July 21, 1997), No. 333-31723
(filed July 21, 1997) and No. 333-31727 (filed July 21, 1997):
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 foregoing provisions,
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 Securities Act of 1933 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 of 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.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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/ William E. Greehey
(William E. Greehey)
Chairman of the Board and
Chief Executive Officer
Date: February 26, 1998
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below hereby constitutes and appoints William E. Greehey, Edward
C. Benninger and Jay D. Browning, or any of them, each with power to act
without the other, his true and lawful attorney-in-fact and agent, with
full power of substitution and resubstitution, for him and in his name,
place and stead, in any and all capacities, to sign any or all subsequent
amendments and supplements to this Annual Report on Form 10-K, and to
file the same, or cause to be filed the same, with all exhibits thereto,
and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto each said attorney-in-fact and agent
full power to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully to all intents
and purposes as he might or could do in person, hereby qualifying and
confirming all that said attorney-in-fact and agent or his substitute
or substitutes may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates indicated.
Signature Title Date
Director, Chairman of the
Board and Chief Executive
Officer (Principal
/s/ William E. Greehey Executive Officer) February 26, 1998
(William E. Greehey)
Chief Financial Officer
(Principal Financial and
/s/ John D. Gibbons Accounting Officer) February 26, 1998
(John D. Gibbons)
/s/ Edward C. Benninger Director and President February 26, 1998
(Edward C. Benninger)
/s/ Ronald K. Calgaard Director February 26, 1998
(Ronald K. Calgaard)
/s/ Robert G. Dettmer Director February 26, 1998
(Robert G. Dettmer)
/s/ Ruben M. Escobedo Director February 26, 1998
(Ruben M. Escobedo)
/s/ James L. Johnson Director February 26, 1998
(James L. Johnson)
/s/ Lowell H. Lebermann Director February 26, 1998
(Lowell H. Lebermann)
/s/ Susan Kaufman Purcell Director February 26, 1998
(Susan Kaufman Purcell)