UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 333-27015
VALERO ENERGY CORPORATION
(Exact name of registrant as specified in its charter)
(formerly Valero Refining and Marketing Company)
Delaware 74-1828067
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
530 McCullough Avenue
San Antonio, Texas
(Address of principal executive offices)
78215
(Zip Code)
(210) 246-2000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days.
Yes X No
Indicated below is the number of shares outstanding of the
registrant's only class of common stock, as of August 1, 1997.
Number of
Shares
Title of Class Outstanding
Common Stock, $.01 Par Value 56,093,615
<PAGE>
VALERO ENERGY CORPORATION AND SUBSIDIARIES
(formerly Valero Refining and Marketing Company)
INDEX
Page
PART I. FINANCIAL INFORMATION
Consolidated Balance Sheets - June 30, 1997 and
December 31, 1996 . . . . . . . . . . . . . . . . . . . 3
Consolidated Statements of Income - For the Three Months
Ended and Six Months Ended June 30, 1997 and 1996 . . . . 5
Consolidated Statements of Cash Flows - For the
Six Months Ended June 30, 1997 and 1996 . . . . . . . .. . 6
Notes to Consolidated Financial Statements . . . . . . . . 7
Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . .. .. . 16
PART II. OTHER INFORMATION. . . . . . . . . . . .. . . . .. . 22
SIGNATURE. . . . . . . . . . . . . . . . . . . . . . . . ... . 23
<PAGE>
<TABLE>
PART I - FINANCIAL INFORMATION
VALERO ENERGY CORPORATION AND SUBSIDIARIES
(formerly Valero Refining and Marketing Company)
CONSOLIDATED BALANCE SHEETS
(Thousands of Dollars)
(Unaudited)
<CAPTION>
June 30, December 31,
1997 1996
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and temporary cash investments. . . . . . . . . $ 3,236 $ 10
Receivables, less allowance for doubtful
accounts of $1,124 (1997) and $975 (1996). . . . . 378,943 162,457
Inventories. . . . . . . . . . . . . . . . . . . . . 494,519 159,871
Current deferred income tax assets . . . . . . . . . 19,139 17,587
Prepaid expenses and other . . . . . . . . . . . . . 9,804 11,924
905,641 351,849
PROPERTY, PLANT AND EQUIPMENT - including
construction in progress of $55,150 (1997)
and $21,786 (1996), at cost. . . . . . . . . . . . . 2,075,862 1,708,106
Less: Accumulated depreciation. . . . . . . . . . 507,084 479,272
1,568,778 1,228,834
INVESTMENT IN AND ADVANCES TO JOINT VENTURES . . . . . 31,254 29,192
NET ASSETS OF DISCONTINUED OPERATIONS. . . . . . . . . 350,384 284,032
DEFERRED CHARGES AND OTHER ASSETS. . . . . . . . . . . 84,316 91,724
$2,940,373 $1,985,631
See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
<TABLE>
PART I - FINANCIAL INFORMATION
VALERO ENERGY CORPORATION AND SUBSIDIARIES
(formerly Valero Refining and Marketing Company)
CONSOLIDATED BALANCE SHEETS
(Thousands of Dollars)
(Unaudited)
<CAPTION>
June 30, December 31,
1997 1996
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term debt. . . . . . . . . . . . . . . . . . . $ 95,040 $ 57,728
Current maturities of long-term debt . . . . . . . . 24,701 26,037
Accounts payable . . . . . . . . . . . . . . . . . . 455,477 191,555
Accrued interest . . . . . . . . . . . . . . . . . . 6,431 5,088
Other accrued expenses . . . . . . . . . . . . . . . 56,811 20,176
638,460 300,584
LONG-TERM DEBT, less current maturities. . . . . . . . 786,825 353,307
DEFERRED INCOME TAXES. . . . . . . . . . . . . . . . . 230,814 224,548
DEFERRED CREDITS AND OTHER LIABILITIES . . . . . . . . 40,204 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, $1 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, $1 par value - 75,000,000
shares authorized; issued 55,369,487 (1997)
and 44,185,513 (1996) shares. . . . . . . . 55,369 44,186
Additional paid-in capital . . . . . . . . . . . . . 677,721 540,133
Unearned Valero Employees' Stock Ownership
Plan Compensation. . . . . . . . . . . . . . . . . - (8,783)
Retained earnings. . . . . . . . . . . . . . . . . . 511,535 496,839
Treasury stock, 15,350 (1997) and -0- (1996)
common shares, at cost . . . . . . . . . . . . . . (555) -
1,244,070 1,075,825
$2,940,373 $1,985,631
See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
<TABLE>
VALERO ENERGY CORPORATION AND SUBSIDIARIES
(formerly Valero Refining and Marketing Company)
CONSOLIDATED STATEMENTS OF INCOME
(Thousands of Dollars, Except Per Share Amounts)
(Unaudited)
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1997 1996 1997 1996
<S> <C> <C> <C> <C>
OPERATING REVENUES . . . . . . . . . . . . . . . . $ 1,362,624 $ 675,009 $ 2,184,426 $ 1,249,531
COSTS AND EXPENSES:
Cost of sales and operating expenses . . . . . . 1,280,244 616,348 2,040,509 1,159,020
Selling and administrative expenses. . . . . . . 10,404 8,506 19,460 16,655
Depreciation expense . . . . . . . . . . . . . . 16,176 13,621 30,244 27,217
Total. . . . . . . . . . . . . . . . . . . . . 1,306,824 638,475 2,090,213 1,202,892
OPERATING INCOME . . . . . . . . . . . . . . . . . 55,800 36,534 94,213 46,639
EQUITY IN EARNINGS OF JOINT VENTURES . . . . . . . 1,056 599 2,062 821
OTHER INCOME, NET. . . . . . . . . . . . . . . . . 1,003 397 952 2,445
INTEREST AND DEBT EXPENSE:
Incurred . . . . . . . . . . . . . . . . . . . . (14,571) (10,335) (24,577) (20,897)
Capitalized. . . . . . . . . . . . . . . . . . . 323 654 866 915
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES. . . . . . . . . . . . . . . 43,611 27,849 73,516 29,923
INCOME TAX EXPENSE . . . . . . . . . . . . . . . . 16,013 9,685 26,107 8,796
INCOME FROM CONTINUING OPERATIONS. . . . . . . . . 27,598 18,164 47,409 21,127
INCOME (LOSS) FROM DISCONTINUED OPERATIONS,
NET OF INCOME TAX EXPENSE (BENEFIT) OF
$(5,713), $1,615, $(7,807) AND $12,304,
RESPECTIVELY. . . . . . . . . . . . . . . . . . (10,869) 2,677 (15,240) 19,628
NET INCOME . . . . . . . . . . . . . . . . . . . . 16,729 20,841 32,169 40,755
Less: Preferred stock dividend requirements
and redemption premium . . . . . . . . . 1,826 2,841 4,592 5,682
NET INCOME APPLICABLE TO COMMON STOCK. . . . . . . $ 14,903 $ 18,000 $ 27,577 $ 35,073
EARNINGS (LOSS) PER SHARE OF COMMON STOCK:
Continuing operations. . . . . . . . . . . . . . $ .55 $ .41 $ 1.00 $ .48
Discontinued operations. . . . . . . . . . . . . (.26) - (.42) .32
Total. . . . . . . . . . . . . . . . . . . . . $ .29 $ .41 $ .58 $ .80
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING (in thousands) . . . . . . . . . . . 50,164 43,901 47,288 43,825
DIVIDENDS PER SHARE OF COMMON STOCK. . . . . . . . $ .13 $ .13 $ .26 $ .26
See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
<TABLE>
VALERO ENERGY CORPORATION AND SUBSIDIARIES
(formerly Valero Refining and Marketing Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands of Dollars)
(Unaudited)
<CAPTION>
Six Months Ended
June 30,
1997 1996
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Income from continuing operations. . . . . . . . . $ 47,409 $ 21,127
Adjustments to reconcile income from
continuing operations to net cash provided
by (used in) continuing operations:
Depreciation expense . . . . . . . . . . . . 30,244 27,217
Amortization of deferred charges and
other, net. . . . . . . . . . . . . . . . . 17,768 16,159
Changes in current assets and current
liabilities . . . . . . . . . . . . . . . . (113,866) 9,289
Deferred income tax expense. . . . . . . . . 9,807 4,542
Equity in earnings of joint ventures . . . . (2,062) (821)
Changes in deferred items and other, net . . (4,572) 812
Net cash provided by (used in)
continuing operations . . . . . . . . . . (15,272) 78,325
Net cash provided by (used in)
discontinued operations . . . . . . . . . (26,655) 85,698
Net cash provided by (used in)
operating activities. . . . . . . . . . (41,927) 164,023
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures:
Continuing operations. . . . . . . . . . . . . (25,501) (34,772)
Discontinued operations. . . . . . . . . . . . (47,952) (32,617)
Deferred turnaround and catalyst costs . . . . . (4,097) (2,540)
Acquisition of Basis Petroleum, Inc. . . . . . . (362,060) -
Investment in and advances to joint
ventures, net . . . . . . . . . . . . . . . . . - 1,665
Dispositions of property, plant and
equipment . . . . . . . . . . . . . . . . . . . 30 39
Other, net . . . . . . . . . . . . . . . . . . . 394 (595)
Net cash used in investing activities. . . . . (439,186) (68,820)
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in short-term debt, net . . . . . . . . 37,312 11,186
Long-term borrowings . . . . . . . . . . . . . . 718,708 28,500
Long-term debt reduction . . . . . . . . . . . . (282,948) (122,754)
Common stock dividends . . . . . . . . . . . . . (12,054) (11,397)
Preferred stock dividends. . . . . . . . . . . . (5,419) (5,684)
Issuance of common stock . . . . . . . . . . . . 37,493 7,183
Purchase of treasury stock . . . . . . . . . . . (7,414) (2,239)
Redemption of preferred stock. . . . . . . . . . (1,339) -
Net cash provided by (used in) financing
activities. . . . . . . . . . . . . . . . . . 484,339 (95,205)
NET INCREASE (DECREASE) IN CASH AND TEMPORARY
CASH INVESTMENTS . . . . . . . . . . . . . . . . 3,226 (2)
CASH AND TEMPORARY CASH INVESTMENTS AT
BEGINNING OF PERIOD. . . . . . . . . . . . . . . 10 13
CASH AND TEMPORARY CASH INVESTMENTS AT
END OF PERIOD. . . . . . . . . . . . . . . . . . $ 3,236 $ 11
See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
VALERO ENERGY CORPORATION AND SUBSIDIARIES
(formerly Valero Refining and Marketing Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Subsequent Event - Restructuring
In the discussion below and Notes that follow, "Energy" refers
to Valero Energy Corporation and its consolidated subsidiaries,
both individually and collectively, for periods prior to the
restructuring, while the "Company" refers to the former Valero
Refining and Marketing Company ("VRMC"), which was renamed Valero
Energy Corporation ("VEC") on the date of the restructuring, and
its consolidated subsidiaries.
On July 31, 1997, Energy spun off the Company to Energy's
stockholders by distributing all of VRMC's common stock on a share
for share basis to holders of record of Energy common stock at the
close of business on such date (the "Distribution"). Immediately
after the Distribution, Energy merged its natural gas related
services business with a wholly owned subsidiary of PG&E
Corporation ("PG&E")(the "Merger"). The completion of the
Distribution and the Merger (collectively referred to as the
"Restructuring") finalizes the restructuring of Energy previously
announced in January 1997. The Distribution and the Merger were
tax-free transactions and were approved by Energy's stockholders at
Energy's annual meeting of stockholders held on June 18, 1997.
Regulatory approval of the Merger was received from the Federal
Energy Regulatory Commission (the "FERC") on July 16, 1997. VRMC
was renamed Valero Energy Corporation and is listed on the New York
Stock Exchange under the symbol "VLO."
Pursuant to a certain Restructuring agreement, immediately
prior to the Distribution the Company paid to Energy approximately
$195 million representing a $210 million dividend reduced by
approximately $15 million in connection with the preliminary
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. See Note 8.
In connection with the Merger, PG&E issued approximately
31 million shares of common stock in exchange for the outstanding
common shares of Energy, and assumed $785.7 million of 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.
2. Basis of Presentation
The consolidated financial statements included herein have
been prepared by the Company, without audit, pursuant to the rules
and regulations of the Securities and Exchange Commission
(the "Commission"). However, all adjustments have been made to the
accompanying financial statements which are, in the opinion of the
Company's management, necessary for a fair presentation of the
Company's results of operations for the periods covered. Certain
information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to
such rules and regulations, although the Company believes that the
disclosures are adequate to make the information presented herein
not misleading.
Prior to the Distribution, VRMC was a wholly owned subsidiary
of Energy. For financial reporting purposes under the federal
securities laws, VRMC (now VEC) is a "successor registrant" to
Energy. As a result, the historical financial information included
herein is the historical financial information of Energy, adjusted
to reflect Energy's natural gas related services business as
discontinued operations pursuant to the Restructuring of Energy
discussed above in Note 1. These consolidated financial statements
should be read in conjunction with the unaudited pro forma
condensed combined financial statements and the notes thereto of
VRMC and the consolidated financial statements and the notes
thereto of Energy included in VRMC's Form S-1 registration
statement filed with the Commission on May 13, 1997 ("Form S-1").
3. Discontinued Operations
Prior to the Restructuring, Energy's historical practice was
to utilize a centralized cash management system and to incur
certain indebtedness for its consolidated group at the parent
company level rather than at the operating subsidiary level.
Therefore, the accompanying consolidated financial statements
reflect 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 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 $13.7 million and $14.4 million for
the three months ended June 30, 1997 and 1996, respectively, and
$28 million and $29.6 million for the six months ended June 30,
1997 and 1996, respectively.
Revenues of the discontinued natural gas related services
business were $577.9 million and $417.1 million for the three
months ended June 30, 1997 and 1996, respectively, and $1.3 billion
and $909.7 million for the six months ended June 30, 1997 and 1996,
respectively. These amounts are not included in operating revenues
as reported in the accompanying Consolidated Statements of Income.
4. Acquisition of Basis Petroleum, Inc.
Effective May 1, 1997, Energy acquired the outstanding common
stock of Basis Petroleum, Inc. ("Basis"), a wholly owned subsidiary
of Salomon Inc ("Salomon"). Prior to the Restructuring, Energy
transferred the stock of Basis to VRMC. As a result, Basis was
spun off to Energy's stockholders pursuant to the Restructuring and
is currently an indirect wholly owned subsidiary of the Company.
The primary assets of Basis include three refineries in the U.S.
Gulf Coast area with total throughput capacity in excess of
300,000 barrels per day ("BPD") and an extensive wholesale marketing
business. The three refineries are comprised of a 160,000 BPD
facility in Texas City, Texas; an 85,000 BPD facility in Houston,
Texas; and a 65,000 BPD facility in Krotz Springs, Louisiana. With
the acquisition, the Company owns and operates four refineries with
total throughput capacity of about 500,000 BPD. The acquisition
was accounted for using the purchase method of accounting.
Therefore, the accompanying consolidated financial statements of
the Company include the results of operations of Basis for the
months of May and June 1997.
Energy acquired the stock of Basis for $476 million. The
purchase price was paid, in part, with 3,429,796 shares of Energy
common stock having a fair market value of $114 million, with the
remainder paid in cash from borrowings under Energy's bank credit
facilities (see Note 8). In addition, Salomon will be entitled to
receive payments in any of the next 10 years if certain average
refining margins during any of such years improve above a specified
level. These annual earn-out payments, which will be determined as
of May 1 of each year beginning in 1998, will be based on the
difference between a stated base refining "crack spread" and the
theoretical spread computed using actual average quoted prices, and
calculated using a nominal average annual throughput of 100 million
barrels. Any payments under this earn-out arrangement are limited
to $35 million in any year and $200 million in the aggregate and
will be accounted for by the Company as an additional cost of the
acquisition and depreciated over the remaining lives of the assets
to which the additional cost is allocated.
The following unaudited pro forma financial information of the
Company assumes that the acquisition of Basis occurred at the
beginning of each period presented. Such pro forma information is
not necessarily indicative of the results of future operations.
(Dollars in thousands, except per share amounts.)
<TABLE>
<CAPTION>
Six Months Ended June 30,
1997 1996
<S> <C> <C>
Operating revenues. . . . . . . . . . . . . . . $ 4,004,882 $ 4,959,326
Operating income (loss) . . . . . . . . . . . . 33,026 (12,064)
Income (loss) from continuing operations. . . . 8,909 (18,304)
Income (loss) from discontinued operations. . . (15,240) 19,628
Net income (loss) . . . . . . . . . . . . . . . (6,331) 1,324
Earnings (loss) per share of common stock:
Continuing operations . . . . . . . . . . . . .19 (.42)
Discontinued operations . . . . . . . . . . . (.42) .32
Net loss per share of common stock. . . . . . . (.23) (.10)
</TABLE>
5. Inventories
Refinery feedstocks and refined products and blendstocks are
carried at the lower of cost or market, with the cost of feedstocks
and produced products determined primarily under the last-in,
first-out ("LIFO") method of inventory pricing and the cost of
products purchased for resale determined primarily under the
weighted average cost method. The excess of the replacement cost
of the Company's LIFO inventories over their LIFO values was
approximately $41 million at June 30, 1997. Materials and supplies
are carried principally at weighted average cost not in excess of
market. Inventories as of June 30, 1997 and December 31, 1996 were
as follows (in thousands):
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
<S> <C> <C>
Refinery feedstocks . . . . . . . . . . . . $ 225,431 $ 42,744
Refined products and blendstocks. . . . . . 228,353 99,398
Materials and supplies. . . . . . . . . . . 40,735 17,729
$ 494,519 $ 159,871
</TABLE>
6. Statements of Cash Flows
In order to determine net cash provided by (used in)
continuing operations, income from continuing operations has been
adjusted by, among other things, changes in current assets and
current liabilities, excluding changes in cash and temporary cash
investments, current deferred income tax assets, short-term debt
and current maturities of long-term debt. The changes in the
Company's current assets and current liabilities, excluding the
items noted above, are shown in the following table as an
(increase)/decrease in current assets and an increase/(decrease) in
current liabilities. The Company's temporary cash investments are
highly liquid, low-risk debt instruments which have a maturity of
three months or less when acquired. (Dollars in thousands.)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
1997 1996
<S> <C> <C>
Receivables, net. . . . . . . . . . . . . . $ 23,659 $ 2,026
Inventories . . . . . . . . . . . . . . . . (106,233) (31,970)
Prepaid expenses and other. . . . . . . . . 3,972 10,934
Accounts payable. . . . . . . . . . . . . . (34,771) 32,467
Accrued interest. . . . . . . . . . . . . . 1,344 (606)
Other accrued expenses. . . . . . . . . . . (1,837) (3,562)
Total. . . . . . . . . . . . . . . . . . $(113,866) $ 9,289
</TABLE>
Noncash investing activities for the six months ended June 30,
1997 included the issuance of Energy common stock to Salomon as
partial consideration for the acquisition of the stock of Basis.
See Note 4.
The following table provides information related to cash
interest and income taxes paid for both continuing and discontinued
operations for the periods indicated (in thousands):
<TABLE>
<CAPTION>
Six Months Ended
June 30,
1997 1996
<S> <C> <C>
Interest (net of amount capitalized). . . . . $48,838 $50,025
Income taxes. . . . . . . . . . . . . . . . . 5,603 10,714
</TABLE>
7. Industrial Revenue Bonds
On April 16, 1997, the Industrial Development Corporation of
the Port of Corpus Christi issued and sold, for the benefit of the
Company, $98.5 million of tax-exempt Revenue Refunding Bonds (the
"Refunding Bonds"), with credit enhancement provided through a
letter of credit issued by the Bank of Montreal (see Note 8). The
Refunding Bonds were issued in four series with due dates ranging
from 2009 to 2027. The Refunding Bonds bear interest at floating
rates determined weekly, with the Company having the right to
convert such rates to a daily, weekly or commercial paper rate, or
to a fixed rate. Interest rates on the Refunding Bonds were
initially set at rates ranging from 3.85% to 3.95%. The Refunding
Bonds were issued to refund the Company's $98.5 million principal
amount of tax-exempt bonds which were issued in 1987 and were
guaranteed by Energy. In connection with the refinancing, both the
Energy guarantee, as well as a deed of trust and security agreement
covering the Company's refinery in Corpus Christi, Texas, were
released.
On May 15, 1997, the Gulf Coast Industrial Development
Authority issued and sold, for the benefit of the Company,
$25 million of new Waste Disposal Revenue Bonds (the "Revenue Bonds")
which mature on December 1, 2031. Other terms and conditions of
these bonds are similar to those of the Refunding Bonds described
above.
8. New Bank Credit Facility
Effective May 1, 1997, Energy replaced its existing unsecured
$300 million revolving bank credit and letter of credit facility
with a new five-year, unsecured $835 million revolving bank credit
and letter of credit facility. The new credit facility has been
used to finance a portion of the acquisition cost of Basis as
discussed above in Note 4 and to provide credit enhancement for the
Company's Refunding Bonds and Revenue Bonds as discussed above in
Note 7, and will be used to provide financing for other general
corporate purposes. The new facility was also used to fund a
$210 million dividend payable by the Company to Energy immediately prior
to the Distribution pursuant to the terms of a certain
Restructuring agreement. Such dividend payment was reduced by
approximately $15 million, to approximately $195 million, in
connection with the preliminary settlement of the intercompany note
balance between the Company and Energy arising during the period
from January 1 through July 31, 1997 from transactions other than
the acquisition of Basis and the redemption of Energy's Convertible
Preferred Stock described below in Note 9. Energy was the borrower
under the new facility until the completion of the Restructuring on
July 31, 1997, at which time the facility was assumed by the
Company.
The facility amount reduces by $150 million at the end of each
of the third and fourth years. Availability under the facility is
also reduced by the proceeds from debt issuances and certain asset
sales, and by 75% of the proceeds from certain equity issuances.
Various fees and expenses are required to be paid in connection
with the new credit facility, including a facility fee, a letter of
credit issuance fee and a fee based on letters of credit
outstanding.
Borrowings under the new credit facility bear interest at
either LIBOR plus a margin, a base rate, or a money market rate,
with such interest rate and the fees noted above subject to
adjustment based upon the credit ratings assigned to the Company's
long-term debt. The new credit facility includes certain
restrictive covenants including a minimum fixed charge coverage
ratio of 1.8 to 1.0, a maximum debt to capitalization ratio of 45%,
a minimum net worth test, and certain restrictions on, among other
things, long-term leases and subsidiary debt. The new credit
facility also limits the Company's dividend payments or repurchases
of common stock to $22 million for the period from July 31, 1997
through April 30, 1998, and for any subsequent years to 25% of net
income for the prior year plus any unused portion of the original
$22 million. The dividend restriction will be eliminated if the
Company obtains an investment grade credit rating from either
Standard & Poor's or Moody's Investor Service.
The new credit facility also requires the completion, within
60 days of the Company's assumption of the facility, of an
inventory purchase agreement whereby the Company will receive up to
$150 million upon the sale of a portion of its base inventory to a
third party. In addition, the Company is required to have at least
25% of its debt effectively bear interest at fixed rates either
through the terms of the debt instrument or through interest rate
hedging arrangements.
9. Redemption of 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). On June 2, 1997, Energy redeemed
approximately 2,730 shares of Convertible Preferred Stock for
approximately $143,000. Prior to the redemption, 3,447,270 shares
of Convertible Preferred Stock were converted into 6,377,432 shares
of Energy common 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.
10. Employee Benefit Plans
In connection with effecting the Restructuring discussed in
Note 1, on April 11, 1997, Energy's Board of Directors approved the
termination of Energy's leveraged employee stock ownership plan
("VESOP"), in which Company employees were participants, and
subsequently directed the VESOP trustee to sell a sufficient amount
of Energy common stock held in the VESOP suspense account to repay
the outstanding amount of notes issued in connection with the VESOP
("VESOP Notes") and allocate the remaining stock in the suspense
account to the accounts of the VESOP participants. The VESOP Notes
were repaid in full in May 1997, after which 226,198 remaining
shares of Energy common stock were allocated to all VESOP
participants.
11. Litigation and Contingencies
Basis Litigation
Basis is a party to numerous claims and legal proceedings
which arose prior to its acquisition by the Company. Pursuant to
the stock purchase agreement between Energy, the Company, Salomon,
and Basis, Salomon assumed the defense of all known suits, actions,
claims and investigations pending at the time of the acquisition
and all obligations, liabilities and expenses related to or arising
therefrom. In addition, Salomon will assume all obligations,
liabilities and expenses related to or resulting from any suits,
actions, claims and investigations arising out of a state of facts
existing on or prior to the time of the acquisition, but which were
not pending at such time, subject to certain terms, conditions and
limitations. In connection with these matters, actual and punitive
damages are or may be sought which, in most cases, are unspecified
but which may total several hundreds of millions of dollars,
together with demands for injunctive relief in certain cases. In
certain matters, Basis could potentially be adversely affected
through required reductions in emissions or discharges, required
additions and improvements to refinery controls or other equipment,
required reductions in permit limits or refinery throughput, and
fines or penalties. Although Energy conducted a due diligence
investigation of Basis prior to the closing of the purchase of the
stock of Basis, the scope of such investigation, particularly in
light of the volume of environmental, litigation and other matters
to be investigated, was necessarily limited. As a result, there
can be no assurance that other material matters, not identified or
fully investigated in due diligence, will not be subsequently
identified.
Litigation Relating to Discontinued Operations
Energy and certain of its natural gas related subsidiaries, as
well as the Company, have been sued by Teco Pipeline Company
("Teco") regarding the operation of the 340-mile West Texas
pipeline in which a subsidiary of Energy holds a 50% undivided
interest. In 1985, a subsidiary of Energy sold a 50% undivided
interest in the pipeline and entered into a joint venture through
an ownership agreement and an operating agreement, each dated
February 28, 1985, with the purchaser of the interest. In 1988,
Teco succeeded to that purchaser's 50% interest. A subsidiary of
Energy has at all times been the operator of the pipeline.
Notwithstanding the written ownership and operating agreements, the
plaintiff alleges that a separate, unwritten partnership agreement
exists, and that the defendants have exercised improper dominion
over such alleged partnership's affairs. The plaintiff also
alleges that the defendants acted in bad faith by negatively
affecting the economics of the joint venture in order to provide
financial advantages to facilities or entities owned by the
defendants and by allegedly usurping for the defendants' own
benefit certain opportunities available to the joint venture. The
plaintiff asserts causes of action for breach of fiduciary duty,
fraud, tortious interference with business relationships,
professional malpractice and other claims, and seeks unquantified
actual and punitive damages. Energy's motion to compel arbitration
was denied, but has been appealed. Energy has 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,
including those described above, would have a material adverse
effect on the Company's financial statements; however, due to the
inherent uncertainty of litigation, the range of possible loss, if
any, cannot be estimated with a reasonable degree of precision and
there can be no assurance that the resolution of any particular
claim or proceeding would not have an adverse effect on the
Company's results of operations for the interim period in which
such resolution occurred.
12. Accounting Policies for Derivatives
The Company enters into over-the-counter price swaps, options
and futures contracts with third parties to hedge refinery
feedstock purchases and refined product inventories in order to
reduce the impact of adverse price changes on these inventories
before the conversion of the feedstock to finished products and
ultimate sale. Hedges of inventories are accounted for under the
deferral method with gains and losses included in the carrying
amounts of inventories and ultimately recognized in cost of sales
as those inventories are sold.
The Company also hedges anticipated transactions. Over-the-counter
price swaps, options and futures contracts with third parties are
used to hedge refining operating margins for periods up
to two years by locking in components of the margins, including the
resid discount, the conventional crack spread and the premium
product differentials. Hedges of anticipated transactions are also
accounted for under the deferral method with gains and losses on
these transactions recognized in cost of sales when the hedged
transaction occurs.
The above noted contracts are designated at inception as a
hedge where there is a direct relationship to the price risk
associated with the Company's inventories, future purchases and
sales of commodities used in the Company's operations, or
components of the Company's refining operating margins. If such
direct relationship ceases to exist, the related contract is
designated "for trading purposes" and accounted for as described
below.
Gains and losses on early terminations of financial instrument
contracts designated as hedges are deferred and included in cost of
sales in the measurement of the hedged transaction. When an
anticipated transaction being hedged is no longer likely to occur,
the related derivative contract is accounted for similarly to a
contract entered into for trading purposes.
The Company also enters into price swaps, over-the-counter and
exchange-traded options, and futures contracts with third parties
for trading purposes using its fundamental and technical analysis
of market conditions to earn additional revenues. Contracts
entered into for trading purposes are accounted for under the fair
value method. Changes in the fair value of these contracts are
recognized as gains or losses in cost of sales currently and are
recorded in the Consolidated Balance Sheets in "Prepaid expenses
and other" and "Accounts payable" at fair value at the reporting
date. The Company determines the fair value of its exchange-traded
contracts based on the settlement prices for open contracts, which
are established by the exchange on which the instruments are
traded. The fair value of the Company's over-the-counter contracts
is determined based on market-related indexes or by obtaining
quotes from brokers.
The Company's derivative contracts and their related gains and
losses are reported in the Consolidated Balance Sheets and
Consolidated Statements of Income as discussed above, depending on
whether they are designated as a hedge or for trading purposes. In
the Consolidated Statements of Cash Flows, recognized gains and
losses on derivative contracts are included in net income while
deferred gains and losses are included in changes in current assets
and current liabilities.
13. Recently Issued Accounting Standards
In June 1997, the Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standards
("SFAS") No. 130, "Reporting Comprehensive Income," and SFAS
No. 131, "Disclosures about Segments of an Enterprise and Related
Information," both of which become effective for the Company's
financial statements beginning in 1998. The FASB had previously
issued in March 1997 SFAS No. 128, "Earnings per Share," and SFAS
No. 129, "Disclosure of Information about Capital Structure," both
of which become effective for the Company's financial statements
beginning with the period ending December 31, 1997. Based on
information currently available to the Company, the adoption of
these statements will not have a material effect on the Company's
consolidated financial statements.
<PAGE>
VALERO ENERGY CORPORATION AND SUBSIDIARIES
(formerly Valero Refining and Marketing Company)
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following are the Company's financial and operating
highlights for the three months ended and six months ended June 30,
1997 and 1996. The amounts in the following table are in thousands
of dollars, unless otherwise noted:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1997 (1) 1996 1997 (1) 1996
<S> <C> <C> <C> <C>
Operating revenues . . . . . . . . . $1,362,624 $ 675,009 $2,184,426 $1,249,531
Operating income . . . . . . . . . . 55,800 36,534 94,213 46,639
Equity in earnings of joint
ventures . . . . . . . . . . . . . 1,056 599 2,062 821
Other income, net. . . . . . . . . . 1,003 397 952 2,445
Interest and debt expense, net . . . 14,248 9,681 23,711 19,982
Income from continuing
operations . . . . . . . . . . . . 27,598 18,164 47,409 21,127
Income (loss) from discontinued
operations, net of income
taxes. . . . . . . . . . . . . . . (10,869) 2,677 (15,240) 19,628
Net income . . . . . . . . . . . . . 16,729 20,841 32,169 40,755
Net income applicable to common
stock. . . . . . . . . . . . . . . 14,903 18,000 27,577 35,073
Earnings (loss) per share of
common stock:
Continuing operations. . . . . . . $ .55 $ .41 $ 1.00 $ .48
Discontinued operations. . . . . . (.26) - (.42) .32
Total. . . . . . . . . . . . . . $ .29 $ .41 $ .58 $ .80
Operating statistics:
Corpus Christi refinery:
Throughput volumes
(Mbbls per day) . . . . . . . . 168 168 171 169
Operating cost per barrel. . . . $ 3.63 $ 3.49 $ 3.58 $ 3.38
Texas City/Houston/Krotz
Springs refineries:
Throughput volumes
(Mbbls per day) (2). . . . . . . 302 N/A 302 N/A
Operating cost per barrel. . . . $ 2.31 N/A $ 2.31 N/A
Sales volumes (Mbbls per day). . . 627 271 478 280
Average throughput margin per
barrel. . . . . . . . . . . . . . $ 4.90 $ 6.43 $ 5.43 $ 5.49
(1) Includes the operations of Basis commencing May 1, 1997.
(2) For the months of May and June 1997.
</TABLE>
General
The Company reported income from continuing operations of
$27.6 million, or $.55 per share, for the second quarter of 1997
compared to $18.2 million, or $.41 per share, for the same period
in 1996. Results from discontinued operations were a loss of
$10.9 million, or $.26 per share, for the second quarter of 1997 compared
to income of $2.7 million for the same period in 1996. In
determining earnings per share, dividends on Energy's Convertible
Preferred Stock were deducted from income from discontinued
operations as the Convertible Preferred Stock was issued to fund
the repurchase of the publicly held units of Valero Natural Gas
Partners, L.P. in 1994, thus resulting in no per share effect for
the results of discontinued operations for the second quarter of
1996. For the first six months of 1997, income from continuing
operations was $47.4 million, or $1.00 per share, compared to
$21.1 million, or $.48 per share, for the first six months of 1996.
Results from discontinued operations were a loss of $15.2 million,
or $.42 per share, for the first six months of 1997 compared to
income of $19.7 million, or $.32 per share, for the same period in
1996.
On May 1, 1997, the acquisition of Basis Petroleum was
completed, adding significantly to the Company's second quarter and
year-to-date results. Income from continuing operations and
related earnings per share increased during the quarter and year-to-date
periods due primarily to significant increases in operating
income, partially offset by increases in interest and income tax
expense. The 1997 second quarter results from continuing
operations were adversely impacted by the effect of unanticipated
unit downtimes at the Corpus Christi and Houston refineries and a
scheduled maintenance turnaround at the Texas City refinery which
reduced operating income by an estimated $13 million or
approximately $.17 per share on an after-tax basis. The 1996
second quarter results from continuing operations were adversely
affected by two power outages at the Corpus Christi refinery which
reduced operating income by an estimated $12 million or
approximately $.18 per share on an after-tax basis.
Second Quarter 1997 Compared to Second Quarter 1996
Operating revenues increased $687.6 million, or 102%, to
$1.4 billion during the second quarter of 1997 compared to the same
period in 1996 due to a 131% increase in average daily sales
volumes resulting primarily from additional volumes attributable to
the May 1, 1997 acquisition of Basis. Partially offsetting the
increase in sales volumes was a 13% decrease in the average sales
price per barrel due primarily to a higher percentage of lower-value
distillate and other sales resulting from the addition of the
Basis refineries, and to lower refined product prices resulting
from a decrease in the price of crude oil.
Operating income increased $19.3 million, or 53%, to
$55.8 million during the second quarter of 1997 compared to the same
period in 1996 due primarily to an approximate $23 million
contribution from the operations of Basis for the months of May and
June 1997, partially offset by an increase in operating expenses
relating to the Company's previously existing refining operations.
Total throughput margins for the Company's previously existing
refining and marketing operations were basically unchanged during
the second quarter of 1997 compared to the same period in 1996.
Such margins benefitted from several favorable market and
operational factors, including improvement in the differentials
between conventional refined products and crude oil, and higher
premiums on sales of petrochemical feedstocks, including a benefit
from the sale of mixed xylenes produced from the xylene
fractionation unit that was placed in service at the Corpus Christi
refinery in January 1997. The increases resulting from these
factors were offset by lower discounts on purchases of residual oil
("resid") feedstocks due primarily to higher demand for resid in
the Far East and the decrease in crude oil prices noted above, and
lower oxygenate margins resulting from a decrease in sales prices.
Operating expenses relating to the Company's previously existing
refining operations increased due primarily to higher maintenance
costs resulting from certain unit repairs required at the Corpus
Christi refinery during the 1997 period, higher natural gas fuel
costs, and costs associated with the xylene fractionation unit.
Net interest and debt expense increased $4.6 million to
$14.3 million during the second quarter of 1997 compared to the same
period in 1996 due primarily to an increase in bank borrowings
related to the acquisition of Basis. Income tax expense increased
$6.4 million to $16 million during the same periods due primarily
to higher pre-tax income from continuing operations.
Income from discontinued natural gas related services
operations decreased $13.6 million to a loss of $10.9 million
during the second quarter of 1997 compared to the same period in
1996 due primarily to significantly lower margins on sales of
natural gas liquids ("NGLs") and lower natural gas sales and
transportation margins. The decline in income from discontinued
operations included an approximate $12 million decrease in benefits
from price risk management activities.
Year-to-Date 1997 Compared to Year-To-Date 1996
For the first six months of 1997, operating revenues increased
$934.9 million, or 75%, to $2.2 billion compared to the first six
months of 1996 due to a 71% increase in average daily sales volumes
resulting primarily from additional volumes attributable to the
Basis acquisition as noted above and to a lesser extent to
increased wholesale marketing activities relating to the Company's
previously existing refining and marketing operations.
Operating income increased $47.6 million, or 102%, to
$94.2 million during the first six months of 1997 compared to the
same period in 1996 due to the approximate $23 million contribution
from the operations of Basis noted above, and to an approximate
$33 million increase in total throughput margins, partially offset by
an approximate $7 million increase in operating expenses, relating
to the Company's previously existing refining and marketing
operations. Total throughput margins for previously existing
refining and marketing operations increased due primarily to
increased differentials between conventional gasoline and crude
oil, higher resid discounts, increased benefits from price risk
management activities and premiums on sales of mixed xylenes in
1997, partially offset by lower oxygenate margins. Operating
expenses relating to the Company's previously existing refining
operations increased due primarily to the factors noted above in
the quarter-to-quarter comparison.
Net interest and debt expense increased $3.7 million to
$23.7 million during the first six months of 1997 compared to the same
period in 1996 due primarily to an increase in bank borrowings
related to the acquisition of Basis. Income tax expense increased
$17.3 million to $26.1 million during the same periods due
primarily to higher pre-tax income from continuing operations.
Income from discontinued natural gas related services
operations decreased $34.9 million to a loss of $15.2 million
during the first six months of 1997 compared to the same period in
1996 due primarily to significantly lower natural gas sales
margins. The decline in income from discontinued operations for
the six-month period included an approximate $19 million decrease
in benefits from price risk management activities.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by continuing operations decreased
$93.6 million to $(15.3) million during the first six months of
1997 compared to the same period in 1996 due primarily to the
changes in current assets and current liabilities detailed in
Note 6 of Notes to Consolidated Financial Statements, partially offset
by the increase in income from continuing operations described
above under "Results of Operations." Included in the changes in
current assets and current liabilities was a $106.2 million
increase in inventories in the first six months of 1997 compared to
a $32 million increase in inventories in the first six months of
1996. The increase in inventories for the 1997 period was
primarily attributable to higher feedstock inventories initially
maintained to ensure smooth operation of the Basis refineries
pending a determination of optimal inventory levels, and to the
effects of the unanticipated unit downtimes and scheduled
maintenance turnaround described above under Results of Operations
- - General. Inventories increased in the 1996 period in advance of
a scheduled turnaround of the hydrodesulfurization unit at the
Corpus Christi refinery which began in mid-July. Net cash provided
by discontinued operations decreased $112.4 million to
$(26.7) million during the first six months of 1997 compared to the
same period in 1996 due primarily to the decrease in operating
results from such operations described above under "Results of
Operations" and to an increase in commodity deposits and deferrals
in the 1997 period compared to a decrease in the 1996 period.
During the 1997 period, proceeds from bank borrowings and issuances
of common stock related to Energy's benefit plans were utilized to
fund the acquisition of Basis, cash requirements from operating
activities, capital expenditures and deferred turnaround and
catalyst costs, pay common and preferred stock dividends, purchase
treasury stock, and redeem the remaining outstanding shares of
Energy's Series A Preferred Stock and Convertible Preferred Stock
as described in Note 9 of Notes to Consolidated Financial
Statements.
As described in Note 8 of Notes to Consolidated Financial
Statements, effective May 1, 1997, the financial flexibility and
liquidity of the Company was significantly increased through the
replacement of Energy's existing $300 million revolving bank credit
and letter of credit facility with a new $835 million revolving
bank credit and letter of credit facility. Such facility was
assumed by the Company on the July 31, 1997 Restructuring date at
which time total availability increased to the full $835 million.
As of August 1, 1997, subsequent to completion of the
Restructuring, approximately $527 million was outstanding under
this committed bank credit and letter of credit facility. The
Company also has numerous uncommitted short-term bank credit lines
and bank letter of credit facilities. As of August 1, 1997,
subsequent to completion of the Restructuring, $185 million was
outstanding under such short-term bank lines, and approximately
$85 million was outstanding under such uncommitted letter of credit
facilities. The above-noted outstanding amounts under the
Company's revolving bank credit facility and short-term bank lines
as of August 1 reflect, among other things, the effects of
borrowing $362 million to fund the acquisition of Basis as
discussed below, the borrowing of $195 million to fund the payment
of a dividend from the Company to Energy, net of the preliminary
settlement of intercompany accounts, in connection with the
Restructuring as described in Note 8, and the use of the revolving
bank credit facility to provide credit enhancement for the
Refunding Bonds and Revenue Bonds as discussed in Note 7. The
Company was in compliance with all covenants contained in its
various debt facilities as of August 1, 1997.
As described in Note 4 of Notes to Consolidated Financial
Statements, Energy acquired the outstanding common stock of Basis
on May 1, 1997 for approximately $362 million in cash, funded with
borrowings under Energy's bank credit facilities, and Energy common
stock which had a fair market value of $114 million on the date of
issuance. Although Basis incurred significant operating losses
during 1995 and 1996, the Basis refining and marketing operations
were able to generate a positive contribution to operating income
of approximately $23 million for the months of May and June 1997,
as described above under "Results of Operations," due to recently
completed refinery upgrading projects, a reduction in depreciation
and amortization expense due to the acquisition cost of Basis being
less than its net book value, and a reduction in operating and
overhead costs through various operational and personnel-related
changes implemented by the Company. The Company believes that the
Basis operations will continue to be accretive to consolidated cash
flow and earnings throughout the remainder of 1997.
During the first six months of 1997, the Company expended
approximately $78 million for capital investments, primarily
capital expenditures, $30 million of which related to continuing
refining and marketing operations while $48 million related to the
discontinued natural gas related services operations. For total
year 1997, the Company currently expects to incur approximately
$115 million for capital expenditures and deferred turnaround and
catalyst costs related to its continuing refining and marketing
operations. Such estimate includes approximately $55 million
related to the operations of Basis for the eight months beginning
May 1.
As described in Note 7 of Notes to Consolidated Financial
Statements, the Company refinanced its outstanding $98.5 million
principal amount of industrial revenue bonds in April 1997 at
substantially lower interest rates. Based on the floating rates in
effect as of July 31, 1997, the Company expects the reduction in
interest expense resulting from such refinancing to be in excess of
$5 million per year.
The Company believes it has sufficient funds from operations,
and to the extent necessary, from the public and private capital
markets and bank markets, to fund its ongoing operating
requirements. The Company expects that to the extent necessary, it
can raise additional funds from time to time through equity or debt
financings; however, except for borrowings under bank credit
agreements, the Company has no specific financing plans as of the
date hereof.
As discussed in Note 13 of Notes to Consolidated Financial
Statements, the FASB issued various new statements of financial
accounting standards in the second quarter of 1997 which require
adoption at various times in the future. Based on information
currently available to the Company, the future adoption of these
statements is not expected to have a material effect on the
Company's consolidated financial statements.
The foregoing discussion contains certain estimates,
predictions, projections and other "forward-looking statements"
(within the meaning of Section 27A of the Securities Act of 1933
and Section 21E of the Securities Exchange Act of 1934) that
involve various risks and uncertainties. While these forward-looking
statements, and any assumptions upon which they are based,
are made in good faith and reflect the Company's current judgment
regarding the direction of its business, actual results will almost
always vary, sometimes materially, from any estimates, predictions,
projections, assumptions, or other future performance suggested
herein. Some important factors (but not necessarily all factors)
that could affect the Company's sales volumes, growth strategies,
future profitability and operating results, or that otherwise could
cause actual results to differ materially from those expressed in
any forward-looking statement include the following: renewal or
satisfactory replacement of the Company's resid feedstock
arrangements as well as market, political or other forces generally
affecting the pricing and availability of resid and other refinery
feedstocks and refined products; accidents or other unscheduled
shutdowns affecting the Company's, its suppliers' or its customers'
pipelines, plants, machinery or equipment; excess industry
capacity; competition from products and services offered by other
energy enterprises; changes in the cost or availability of third-party
vessels, pipelines and other means of transporting feedstocks
and products; ability to implement the cost reductions and
operational changes related to, and realize the various assumptions
and efficiencies projected for, the operation of the Basis
refineries; state and federal environmental, economic, safety and
other policies and regulations, any changes therein, and any legal
or regulatory delays or other factors beyond the Company's control;
execution of planned capital projects; weather conditions affecting
the Company's operations or the areas in which the Company's
products are marketed; rulings, judgments, or settlements in
litigation or other legal matters, including unexpected
environmental remediation costs in excess of any reserves; the
introduction or enactment of legislation; and changes in the credit
ratings assigned to the Company's debt securities and trade credit.
Certain of these risk factors are more fully discussed in the
Company's Form S-1. The Company undertakes no obligation to
publicly release the result of any revisions to any such forward-looking
statements that may be made to reflect events or
circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
<PAGE>
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
On May 8, 1997, Valero Energy Corporation, as sole stockholder
of the Company, in anticipation of the Restructuring, approved by
unanimous consent in lieu of a special meeting, the adoption by the
Company of certain stock option and bonus plans. Under these
plans, the Company will from time to time declare bonuses to
eligible employees and make grants of stock options and other forms
of stock awards to the employees, executives and non-employee
directors of the Company. The timing and amount of awards under
these plans will be determined by the Compensation Committee of
the Board of Directors of the Company.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
11.1 Computation of Earnings Per Share.
27.1* Financial Data Schedule (reporting financial
information as of and for the six months ended
June 30, 1997).
27.2* Financial Data Schedule (reporting financial
information as of and for the six months ended
June 30, 1996).
__________
* The Financial Data Schedules shall not be deemed "filed"
for purposes of Section 11 of the Securities Act of 1933
or Section 18 of the Securities Exchange Act of 1934, and
are included as exhibits only to the electronic filing of
this Form 10-Q in accordance with Item 601(c) of
Regulation S-K and Section 401 of Regulation S-T.
(b) Reports on Form 8-K. The Company did not file any
Current Reports on Form 8-K during the quarter ended June 30, 1997.
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
VALERO ENERGY CORPORATION
(Registrant)
By: /s/ Edward C. Benninger
Edward C. Benninger
President and Chief
Financial Officer
(Duly Authorized Officer and
Principal Financial and
Accounting Officer)
Date: August 14, 1997
<TABLE>
EXHIBIT 11.1
VALERO ENERGY CORPORATION AND SUBSIDIARIES
(formerly Valero Refining and Marketing Company)
COMPUTATION OF EARNINGS PER SHARE
(Thousands of Dollars, Except Per Share Amounts)
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1997 1996 1997 1996
<S> <C> <C> <C> <C>
COMPUTATION OF EARNINGS PER
SHARE ASSUMING NO DILUTION:
Income from continuing
operations. . . . . . . . . . . . . . . $ 27,598 $ 18,164 $ 47,409 $ 21,127
Income (loss) from discontinued
operations, net of income taxes. . . . $ (10,869) $ 2,677 $ (15,240) $ 19,628
Less: Preferred stock dividend
requirements and redemption
premium. . . . . . . . . . . . . . . . (1,826) (2,841) (4,592) (5,682)
Income (loss) from discontinued
operations applicable to common
stock. . . . . . . . . . . . . . . . . $ (12,695) $ (164) $ (19,832) $ 13,946
Weighted average number of shares of
common stock outstanding . . . . . . . 50,163,762 43,901,049 47,287,734 43,824,800
Earnings (loss) per share assuming
no dilution:
Continuing operations. . . . . . . . . $ .55 $ .41 $ 1.00 $ .48
Discontinued operations. . . . . . . . (.26) - (.42) .32
Total . . . . . . . . . . . . . . . $ .29 $ .41 $ .58 $ .80
COMPUTATION OF EARNINGS PER
SHARE ASSUMING FULL DILUTION:
Income from continuing operations
assuming full dilution . . . . . . . . $ 27,598 $ 18,164 $ 47,409 $ 21,127
Income (loss) from discontinued
operations, net of income taxes . . . . $ (10,869) $ 2,677 $ (15,240) $ 19,628
Less: Preferred stock dividend
requirements and redemption
premium. . . . . . . . . . . . . . . . (1,826) (2,841) (4,592) (5,682)
Add: Reduction of preferred stock
dividends applicable to the
assumed conversion of Convertible
Preferred Stock at the beginning
of the period. . . . . . . . . . . . . 1,826 2,696 4,522 5,391
Income (loss) from discontinued
operations applicable to common
stock assuming full dilution . . . . . $ (10,869) $ 2,532 $ (15,310) $ 19,337
Weighted average number of shares of
common stock outstanding . . . . . . . 50,163,762 43,901,049 47,287,734 43,824,800
Weighted average common stock
equivalents applicable to stock
options. . . . . . . . . . . . . . . . 584,107 553,341 561,703 496,078
Weighted average shares issuable upon
assumed conversion of Convertible
Preferred Stock at the beginning
of the period. . . . . . . . . . . . . 3,596,219 6,381,798 4,989,009 6,381,798
Weighted average shares used for
computation . . . . . . . . . . . . . . 54,344,088 50,836,188 52,838,446 50,702,676
Earnings (loss) per share assuming
full dilution:
Continuing operations. . . . . . . . . $ .51 $ .36 $ .90 $ .42
Discontinued operations. . . . . . . . (.20) .05 (.29) .38
Total . . . . . . . . . . . . . . . $ .31 (a) $ .41 (b) $ .61 (a) $ .80 (b)
<FN>
(a) This calculation is submitted in accordance with paragraph 601(b)(11) of Regulation S-K although
it is contrary to APB Opinion No. 15 because it produces an antidilutive result.
(b) This calculation is submitted in accordance with paragraph 601(b)(11) of Regulation S-K although
it is not required by APB Opinion No. 15 because it results in dilution of less than 3%.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE CONSOLIDATED BALANCE SHEET AS OF JUNE 30, 1997 AND THE
CONSOLIDATED STATEMENT OF INCOME FOR THE SIX MONTHS ENDED JUNE 30, 1997
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 3,236
<SECURITIES> 0
<RECEIVABLES> 380,067
<ALLOWANCES> 1,124
<INVENTORY> 494,519
<CURRENT-ASSETS> 905,641
<PP&E> 2,075,862
<DEPRECIATION> 507,084
<TOTAL-ASSETS> 2,940,373
<CURRENT-LIABILITIES> 638,460
<BONDS> 786,825
0
0
<COMMON> 55,369
<OTHER-SE> 1,188,701
<TOTAL-LIABILITY-AND-EQUITY> 2,940,373
<SALES> 2,184,426
<TOTAL-REVENUES> 2,184,426
<CGS> 2,090,213
<TOTAL-COSTS> 2,090,213
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 23,711
<INCOME-PRETAX> 73,516
<INCOME-TAX> 26,107
<INCOME-CONTINUING> 47,409
<DISCONTINUED> (15,240)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 32,169
<EPS-PRIMARY> .58
<EPS-DILUTED> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 11
<SECURITIES> 0
<RECEIVABLES> 127,603
<ALLOWANCES> 825
<INVENTORY> 133,752
<CURRENT-ASSETS> 282,436
<PP&E> 1,676,413
<DEPRECIATION> 449,371
<TOTAL-ASSETS> 1,885,952
<CURRENT-LIABILITIES> 198,758
<BONDS> 364,261
6,900
3,450
<COMMON> 44,024
<OTHER-SE> 1,017,838
<TOTAL-LIABILITY-AND-EQUITY> 1,885,952
<SALES> 1,249,531
<TOTAL-REVENUES> 1,249,531
<CGS> 1,202,892
<TOTAL-COSTS> 1,202,892
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 19,982
<INCOME-PRETAX> 29,923
<INCOME-TAX> 8,796
<INCOME-CONTINUING> 21,127
<DISCONTINUED> 19,628
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 40,755
<EPS-PRIMARY> .80
<EPS-DILUTED> 0
</TABLE>
