UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 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 REFINING AND MARKETING COMPANY
(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.)
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 No X
Indicated below is the number of shares outstanding of the
registrant's only class of common stock, as of June 25, 1997.*
Number of
Shares
Title of Class Outstanding
Common Stock, $1 Par Value 55,308,596
* Represents the outstanding shares of Valero Energy Corporation;
see Notes 1 and 4 of Notes to Consolidated Financial
Statements herein.
<PAGE>
VALERO REFINING AND MARKETING COMPANY AND SUBSIDIARIES
INDEX
Page
PART I. FINANCIAL INFORMATION
Consolidated Balance Sheets - March 31, 1997 and
December 31, 1996. . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Income - For the Three
Months Ended March 31, 1997 and 1996 . . . . . . . . . . . .
Consolidated Statements of Cash Flows - For the Three
Months Ended March 31, 1997 and 1996 . . . . . . . . . . . .
Notes to Consolidated Financial Statements . . . . . . . . . .
Management's Discussion and Analysis of Financial
Condition and Results of Operations. . . . . . . . . . . . .
PART II. OTHER INFORMATION. . . . . . . . . . . . . . . . . . .
SIGNATURE. . . . . . . . . . . . . . . . . . . . . . . . . . . .
<PAGE>
<TABLE>
PART I - FINANCIAL INFORMATION
VALERO REFINING AND MARKETING COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Thousands of Dollars)
(Unaudited)
<CAPTION>
March 31, December 31,
1997 1996
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and temporary cash investments. . . . . . . . . . . $ 11 $ 10
Receivables, less allowance for doubtful accounts of
$1,050 (1997) and $975 (1996). . . . . . . . . . . . . 136,996 162,457
Inventories. . . . . . . . . . . . . . . . . . . . . . . 180,871 159,871
Current deferred income tax assets . . . . . . . . . . . 20,628 17,587
Prepaid expenses and other . . . . . . . . . . . . . . . 7,543 11,924
346,049 351,849
PROPERTY, PLANT AND EQUIPMENT - including
construction in progress of $18,787 (1997)
and $21,786 (1996), at cost. . . . . . . . . . . . . . . 1,715,790 1,708,106
Less: Accumulated depreciation. . . . . . . . . . . . 493,220 479,272
1,222,570 1,228,834
INVESTMENT IN AND ADVANCES TO JOINT VENTURES . . . . . . . 30,198 29,192
NET ASSETS OF DISCONTINUED OPERATIONS. . . . . . . . . . . 309,418 284,032
DEFERRED CHARGES AND OTHER ASSETS. . . . . . . . . . . . . 85,697 91,724
$1,993,932 $1,985,631
<FN>
See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
<TABLE>
PART I - FINANCIAL INFORMATION
VALERO REFINING AND MARKETING COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Thousands of Dollars)
(Unaudited)
<CAPTION>
March 31, December 31,
1997 1996
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
CURRENT LIABILITIES:
Short-term debt. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 79,411 $ 57,728
Current maturities of long-term debt . . . . . . . . . . . . . . . . . . 26,098 26,037
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . 171,809 191,555
Accrued interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,776 5,088
Other accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . 17,375 20,176
301,469 300,584
LONG-TERM DEBT, less current maturities. . . . . . . . . . . . . . . . . . 334,993 353,307
DEFERRED INCOME TAXES. . . . . . . . . . . . . . . . . . . . . . . . . . . 227,627 224,548
DEFERRED CREDITS AND OTHER LIABILITIES . . . . . . . . . . . . . . . . . . 30,899 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
3,450,000 (1997 and 1996) shares ($172,500 aggregate
involuntary liquidation value) . . . . . . . . . . . . . . . . . . 3,450 3,450
Common stock, $1 par value - 75,000,000 shares authorized;
issued 44,872,062 (1997) and 44,185,513 (1996) shares. . . . . . . . . 44,872 44,186
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . 555,585 540,133
Unearned Valero Employees' Stock Ownership Plan
Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (7,655) (8,783)
Retained earnings. . . . . . . . . . . . . . . . . . . . . . . . . . . . 503,791 496,839
Treasury stock, 31,781 (1997) and -0- (1996)
common shares, at cost . . . . . . . . . . . . . . . . . . . . . . . . (1,099) -
1,098,944 1,075,825
$1,993,932 $1,985,631
<FN>
See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
<TABLE>
VALERO REFINING AND MARKETING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Thousands of Dollars, Except Per Share Amounts)
(Unaudited)
<CAPTION>
Three Months Ended
March 31,
1997 1996
<S> <C> <C>
OPERATING REVENUES . . . . . . . . . . . . . . . . . . . . . . . $ 821,802 $ 574,522
COSTS AND EXPENSES:
Cost of sales and operating expenses . . . . . . . . . . . . . 760,265 542,672
Selling and administrative expenses. . . . . . . . . . . . . . 9,056 8,149
Depreciation expense . . . . . . . . . . . . . . . . . . . . . 14,068 13,596
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . 783,389 564,417
OPERATING INCOME . . . . . . . . . . . . . . . . . . . . . . . . 38,413 10,105
EQUITY IN EARNINGS OF JOINT VENTURES . . . . . . . . . . . . . . 1,006 222
OTHER INCOME (EXPENSE), NET. . . . . . . . . . . . . . . . . . . (51) 2,048
INTEREST AND DEBT EXPENSE:
Incurred . . . . . . . . . . . . . . . . . . . . . . . . . . . (10,006) (10,562)
Capitalized. . . . . . . . . . . . . . . . . . . . . . . . . . 543 261
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES. . . . . . . . . . . . . . . . . . . . . . 29,905 2,074
INCOME TAX EXPENSE (BENEFIT) . . . . . . . . . . . . . . . . . . 10,094 (889)
INCOME FROM CONTINUING OPERATIONS. . . . . . . . . . . . . . . . 19,811 2,963
INCOME (LOSS) FROM DISCONTINUED OPERATIONS,
NET OF INCOME TAX EXPENSE (BENEFIT) OF
$(2,094) (1997) AND $10,689 (1996). . . . . . . . . . . . . . . (4,371) 16,951
NET INCOME . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,440 19,914
Less: Preferred stock dividend requirements
and redemption premium . . . . . . . . . . . . . . . 2,766 2,841
NET INCOME APPLICABLE TO COMMON STOCK. . . . . . . . . . . . . . $ 12,674 $ 17,073
EARNINGS (LOSS) PER SHARE OF COMMON STOCK:
Continuing operations . . . . . . . . . . . . . . . . . . . . $ .45 $ .07
Discontinued operations . . . . . . . . . . . . . . . . . . . (.16) .32
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . $ .29 $ .39
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
(in thousands) . . . . . . . . . . . . . . . . . . . . . . . . 44,412 43,749
DIVIDENDS PER SHARE OF COMMON STOCK. . . . . . . . . . . . . . . $ .13 $ .13
<FN>
See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
<TABLE>
VALERO REFINING AND MARKETING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands of Dollars)
(Unaudited)
<CAPTION>
Three Months Ended
March 31,
1997 1996
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Income from continuing operations . . . . . . . . . . . . . . . . . $ 19,811 $ 2,963
Adjustments to reconcile income from continuing operations
to net cash provided by continuing operations:
Depreciation expense . . . . . . . . . . . . . . . . . . . . . 14,068 13,596
Amortization of deferred charges and other, net. . . . . . . . 8,249 8,074
Changes in current assets and current liabilities. . . . . . . (11,268) (24,494)
Deferred income tax expense. . . . . . . . . . . . . . . . . . 38 2,954
Equity in earnings of joint ventures . . . . . . . . . . . . . (1,006) (222)
Changes in deferred items and other, net . . . . . . . . . . . (84) 1,824
Net cash provided by continuing operations . . . . . . . . . 29,808 4,695
Net cash provided by discontinued operations . . . . . . . . 1,843 68,001
Net cash provided by operating activities. . . . . . . . . 31,651 72,696
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures:
Continuing operations. . . . . . . . . . . . . . . . . . . . . (7,733) (14,920)
Discontinued operations. . . . . . . . . . . . . . . . . . . . (32,148) (16,749)
Deferred turnaround and catalyst costs . . . . . . . . . . . . . . (1,409) (947)
Investment in and advances to joint ventures, net. . . . . . . . . - 1,665
Dispositions of property, plant and equipment. . . . . . . . . . . 15 27
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . 310 (268)
Net cash used in investing activities. . . . . . . . . . . . . . (40,965) (31,192)
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in short-term debt, net . . . . . . . . . . . . . . . . . 21,683 32,063
Long-term borrowings . . . . . . . . . . . . . . . . . . . . . . . 17,600 28,500
Long-term debt reduction . . . . . . . . . . . . . . . . . . . . . (35,200) (94,254)
Common stock dividends . . . . . . . . . . . . . . . . . . . . . . (5,761) (5,687)
Preferred stock dividends. . . . . . . . . . . . . . . . . . . . . (2,727) (2,842)
Issuance of common stock . . . . . . . . . . . . . . . . . . . . . 18,326 2,373
Purchase of treasury stock . . . . . . . . . . . . . . . . . . . . (3,410) (1,657)
Repurchase of Series A Preferred Stock . . . . . . . . . . . . . . (1,196) -
Net cash provided by (used in) financing activities. . . . . . . 9,315 (41,504)
NET INCREASE IN CASH AND TEMPORARY
CASH INVESTMENTS . . . . . . . . . . . . . . . . . . . . . . . . . 1 -
CASH AND TEMPORARY CASH INVESTMENTS AT
BEGINNING OF PERIOD. . . . . . . . . . . . . . . . . . . . . . . . 10 13
CASH AND TEMPORARY CASH INVESTMENTS AT
END OF PERIOD. . . . . . . . . . . . . . . . . . . . . . . . . . . $ 11 $ 13
<FN>
See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
VALERO REFINING AND MARKETING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The consolidated financial statements included herein have
been prepared by Valero Refining and Marketing Company ("VRMC") and
subsidiaries (collectively referred to as 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.
VRMC is a wholly owned subsidiary of Valero Energy
Corporation (unless otherwise required by the context, the term
"Energy" as used herein refers to Valero Energy Corporation and its
consolidated subsidiaries, both individually and collectively).
For financial reporting purposes under the federal securities laws,
VRMC 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 businesses as discontinued operations
in connection with the proposed restructuring of Energy. See Note
4. These consolidated financial statements should be read in
conjunction with the unaudited pro forma condensed combined
financial statements and the notes thereto of the Company and the
consolidated financial statements and the notes thereto of Energy
included in the Company's Form S-1 registration statement filed
with the Commission on May 13, 1997 ("Form S-1"), and with the
unaudited consolidated financial statements and the notes thereto
included in Energy's quarterly report on Form 10-Q for the period
ended March 31, 1997 filed with the Commission on May 15, 1997.
2. 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 under the weighted average
cost method. The excess of the replacement cost of the Company's
LIFO inventories over their LIFO values was approximately
$21 million at March 31, 1997. Materials and supplies are carried
principally at weighted average cost not in excess of market.
Inventories as of March 31, 1997 and December 31, 1996 were as
follows (in thousands):
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
<S> <C> <C>
Refinery feedstocks . . . . . . . . . . . $114,001 $ 42,744
Refined products and blendstocks. . . . . 48,740 99,398
Materials and supplies. . . . . . . . . . 18,130 17,729
$180,871 $159,871
</TABLE>
3. Statements of Cash Flows
In order to determine net cash provided by continuing
operations, income from continuing operations has been adjusted by,
among other things, changes in current assets and current
liabilities, excluding changes in cash and temporary cash
investments, current deferred income tax assets, short-term debt
and current maturities of long-term debt. The changes in the
Company's current assets and current liabilities, excluding the
items noted above, are shown in the following table as an
(increase)/decrease in current assets and an increase/(decrease) in
current liabilities. The Company's temporary cash investments are
highly liquid, low-risk debt instruments which have a maturity of
three months or less when acquired. (Dollars in thousands.)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1997 1996
<S> <C> <C>
Receivables, net. . . . . . . . . . . .$ 25,461 $ 20,172
Inventories . . . . . . . . . . . . . . (21,000) (48,631)
Prepaid expenses and other. . . . . . . 4,381 6,612
Accounts payable. . . . . . . . . . . . (19,898) (843)
Accrued interest. . . . . . . . . . . . 2,485 2,532
Other accrued expenses. . . . . . . . . (2,697) (4,336)
Total. . . . . . . . . . . . . . . .$ (11,268) $ (24,494)
</TABLE>
The following table provides information related to cash
interest and income taxes paid by the Company for the periods
indicated (in thousands):
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1997 1996
<S> <C> <C>
Interest - net of amount capitalized of $543 (1997)
and $261 (1996). . . . . . . . . . . . . . . . . . . . . $ 7,771 $14,906
Income taxes. . . . . . . . . . . . . . . . . . . . . . . . - -
</TABLE>
4. Proposed Restructuring
On January 31, 1997, Energy executed an agreement and plan of
merger with PG&E Corporation ("PG&E") to combine Energy's natural
gas related services business with PG&E following the spin-off of
the Company to Energy's stockholders (the "Restructuring"). Under
the terms of the merger agreement, Energy's natural gas related
services business will be merged with a wholly owned subsidiary of
PG&E. PG&E will acquire Energy's natural gas related services
business for approximately $1.5 billion, plus adjustments for
working capital and other considerations. PG&E will issue
$722.5 million of common stock, subject to certain closing
adjustments, in exchange for outstanding shares of Energy's common
stock, and will assume approximately $777.5 million of net debt and
other liabilities. Each Energy stockholder will receive a
fractional share of PG&E common stock (trading on the New York
Stock Exchange under the symbol "PCG") for each Energy share; the
amount of PG&E stock to be received will be based on the average
price of the PG&E common stock during a period preceding the
closing of the transaction and the number of Energy shares issued
and outstanding at the time of the closing. Energy's stockholders
will also receive one share of VRMC common stock for each share of
Energy common stock. VRMC will be renamed Valero Energy
Corporation and will apply to be listed on the New York Stock
Exchange. The spin-off of the Company and the merger with PG&E are
expected to be tax-free transactions. The Restructuring
transactions were approved by Energy's stockholders at Energy's
annual meeting of stockholders held on June 18, 1997, and are
expected to be completed in the third quarter of 1997, subject to
the receipt of certain regulatory approvals.
5. Acquisition of Basis Petroleum, Inc.
On March 13, 1997, Energy's Board of Directors approved a
letter of intent executed by Energy to acquire the outstanding
common stock of Basis Petroleum, Inc. ("Basis"), a wholly owned
subsidiary of Salomon Inc ("Salomon"). On May 1, 1997, the
transaction was completed. Energy subsequently transferred the
stock of Basis to the Company. As a result, Basis is an indirect
wholly owned subsidiary of VRMC and will be spun off to Energy's
stockholders pursuant to the Restructuring. 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. The three refineries are
projected to produce approximately 330,000 BPD of refined products,
including about 130,000 BPD of gasoline, about 130,000 BPD of
distillates and jet fuel, and about 20,000 BPD of chemical grade
propylene and liquefied petroleum gases. With the acquisition, the
Company now owns and operates four refineries with total throughput
capacity of about 500,000 BPD. The acquisition is being accounted
for using the purchase method of accounting. Therefore, the
results of operations of Basis will be included in the consolidated
financial statements of the Company commencing on May 1, 1997.
Energy acquired the stock of Basis for $285 million, plus
approximately $200 million representing the value of inventories
and other working capital acquired in the transaction. The
purchase price was paid, in part, with 3,429,796 shares of Energy
common stock having a current market value of $120 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 the
average refining margin during any of such years improves above a
specified level. These annual earn-out payments 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.
6. Industrial Revenue Bonds
On April 16, 1997, the Industrial Development Corporation of
the Port of Corpus Christi issued and sold for the benefit of VRMC
$90 million of tax-exempt Series 1997A, 1997B and 1997C Revenue
Refunding Bonds and $8.5 million of Series 1997D 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 Series A bonds are due in 2027, the Series B and C bonds
are due in 2018, and the Series D bonds are due in 2009. The
Refunding Bonds will initially bear interest at floating rates
determined weekly, with VRMC having the right to convert such rates
to a daily, weekly or commercial paper rate, or to a fixed rate.
Interest rates on the Series A, B and C bonds were initially set at
3.85%, while rates on the Series D bonds were initially set at
3.95%. The Refunding Bonds were issued to refund VRMC's
$90 million principal amount of 10.25% Series A bonds and
$8.5 million principal amount of 10.625% Series B bonds which were
originally 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 VRMC $25 million of
tax-exempt bonds which mature on December 1, 2031. Other terms and
conditions of these bonds are similar to those of the Refunding
Bonds described above.
7. 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.
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 5 and to provide credit enhancement for
VRMC's Refunding Bonds and revenue bonds as discussed above in
Note 6, and will be used to provide financing for other general
corporate purposes. The new facility will also be used to fund a
$210 million dividend payable by VRMC to Energy immediately prior
to the Restructuring pursuant to the terms of a certain Restructuring
agreement. Such dividend may be increased or decreased in connection
with the settlement of any intercompany note balances between VRMC and
Energy arising during the period from January 1, 1997 through the
date of the Restructuring from transactions other than the
acquisition of Basis and redemption of Energy's Convertible
Preferred Stock. Such intercompany note balance was approximately
$29 million as of March 31, 1997. Energy will be the borrower
under the new facility until the Company is spun off pursuant to
the Restructuring, at which time the facility will be assumed by
VRMC.
During the period prior to the Restructuring, the pricing and
covenants under the new facility are substantially the same as
under the previous $300 million facility with total availability
limited to $600 million. Upon assumption by VRMC, total availability
will increase to the full $835 million. 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. Energy, prior to the
Restructuring, and VRMC, after the Restructuring, will pay various
fees and expenses 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.
After the Restructuring, VRMC's borrowings under the new
credit facility will 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 VRMC's long-term debt. VRMC's covenants will
include 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
VRMC's dividend payments or repurchases of common stock to $22
million for the period from VRMC's assumption of the facility
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 VRMC
subsequently 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 VRMC'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, VRMC will be 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. Employee Benefit Plans
In connection with effecting the Restructuring discussed in
Note 4, 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 are 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.
10. Litigation and Contingencies
Valero Javelina Company, an indirect wholly owned subsidiary
of VRMC, owns a 20% general partner interest in Javelina Company
("Javelina"), a general partnership that owns a refinery off-gas
processing plant in Corpus Christi. Javelina has been named as a
defendant in 11 lawsuits filed since 1993 in state district courts
in Nueces County and Duval County, Texas. Nine of the suits
include as defendants other companies that own refineries or other
industrial facilities in Nueces County. These suits were brought
by a number of plaintiffs who reside in neighborhoods near the
facilities. The plaintiffs claim injuries relating to an alleged
exposure to toxic chemicals, and generally claim that the
defendants were negligent, grossly negligent and committed
trespass. The plaintiffs claim personal injury and property
damages resulting from soil and ground water contamination and air
pollution allegedly caused by the operations of the defendants.
The plaintiffs seek an unspecified amount of actual and punitive
damages. The remaining two suits were brought by plaintiffs who
either live or have businesses near the Javelina plant. The
plaintiffs in these suits allege claims similar to those described
above and seek unspecified actual and punitive damages.
Basis Litigation
Basis is a defendant in numerous lawsuits brought by present
or former employees of Basis, by employees of Basis' customers or
contractors, or by other persons based on alleged negligence, gross
negligence, products liability, strict liability, breach of
warranty and other theories of recovery and claiming injuries,
including wrongful death, resulting from exposure to asbestos,
benzene and other allegedly toxic or carcinogenic compounds
allegedly processed, used, manufactured, distributed or sold by
Basis or its predecessors. Approximately 10 of the lawsuits
involve class or other actions involving numerous plaintiffs and
defendants, while the remaining actions have individual plaintiffs
and involve only Basis or a limited group of defendants. In most
such cases, discovery is underway and trial dates have not been
set.
In addition to the foregoing matters, Basis is a defendant in
a lawsuit filed in June 1994 in the United States District Court
for the Southern District of Texas, alleging, among other things,
that Basis has violated the terms of its National Pollutant
Discharge Elimination System permit for wastewater discharge at its
Houston, Texas refinery. Although the District Court granted Basis
a summary judgment, the United States Court of Appeals for the
Fifth Circuit reversed the summary judgment and remanded the case
to the trial court for further discovery. The case is currently
stayed by mutual agreement pending the decision of the United
States Court of Appeals for the Fifth Circuit in a similar case in
which the lower court granted summary judgment dismissing the case
for lack of standing by the plaintiffs.
Basis is also a defendant in a lawsuit pending in the United
States District Court for the Southern District of Texas (served
May 1996), which is a Comprehensive Environmental Response,
Compensation, and Liability Act ("CERCLA") cost recovery action
related to the Tex-Tin "superfund" site. This site is not owned by
Basis, and Basis has advised the Company that Basis has not
disposed of any material at the site. However, Basis has been
identified as a "generator defendant" with respect to the site, as
the successor to the previous refinery owner. Basis potentially
may be named as a defendant or "potentially responsible party" in
other similar pending or threatened superfund-related actions.
Basis is also a defendant in a lawsuit filed December 20,
1995 in the 11th Judicial District Court, Harris County, Texas,
involving alleged Texas Clean Air Act violations related to
allegedly excessive S02 emissions. Agreement among the various
parties has been reached to settle the action on terms and
conditions not material to Basis; however, this settlement is not
yet final.
Basis is also a defendant in a lawsuit filed April 29, 1997
by the U.S. Department of Justice in the United States District
Court for the Southern District of Texas which alleges violations
of the New Source Performance Standards ("NSPS") under the Clean
Air Act at the Texas City, Texas refinery. The suit alleges that
applicable NSPS requirements for a certain process unit, oil and
water separator and storage tank were not met on certain occasions
or during specified periods from May 1990 to April 1994.
Basis has also received Texas Natural Resources Conservation
Commission ("TNRCC") notices of violation ("NOV") and/or federal
Environmental Protection Agency ("EPA") NOVs or administrative
orders with respect to environmental matters at each of its three
refineries. Certain of such notices and orders may require
operational and capital improvements, and may involve the
assessment of substantial monetary penalties.
Basis is also a plaintiff in a lawsuit originally filed March
26, 1996 and pending in the 190th Judicial District Court, Harris
County, Texas, alleging generally that through a bribery and
kickback scheme, defendants destroyed plaintiff's independent
bargaining position with respect to construction work performed by
defendants, creating causes of action for fraud, tortious
interference with contract, breach of fiduciary duty, breach of
contract and negligent misrepresentation. The defendant has
asserted counterclaims for breach of contract, tortious
interference with contract, fraud, defamation, negligence and
quantum meruit aggregating in excess of $130 million.
The various lawsuits referred to herein seek actual and
punitive damages which, in most cases, are unspecified but which
may total several hundreds of millions of dollars, together, in
certain cases, with demands for injunctive relief. In certain of
the matters cited above, including cited TNRCC and EPA 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.
Additionally, 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. The stock purchase
agreement between Energy, the seller, and Basis ("Stock Purchase
Agreement") provides for indemnification from the seller with
respect to suits, actions, claims and investigations pending at the
time of the acquisition and for additional indemnification, subject
to certain terms, conditions and limitations, with respect to other
matters. However, there can be no assurance that other material
matters, not identified or fully investigated in due diligence,
will not be subsequently identified or that the matters heretofore
identified will not prove to be more significant than currently
expected.
Litigation Relating to Discontinued Operations
Energy and certain of its natural gas related subsidiaries
and Southern Union Company ("Southern Union") are defendants in a
lawsuit brought by the City of Edinburg, Texas (the "City")
regarding certain ordinances of the City that granted franchises to
Rio Grande Valley Gas Company ("RGV") (a division of Southern
Union) and its predecessors allowing RGV to sell and distribute
natural gas within the City. RGV was formerly owned by Energy.
The City alleges that the defendants used RGV's facilities to sell
or transport natural gas in Edinburg in violation of the ordinances
and franchises granted by the City, and that RGV has not fully paid
all franchise fees due the City. The City also alleges that the
defendants used the public property of the City without
compensating the City for such use, and alleges conspiracy and
alter ego claims involving all defendants. The City seeks alleged
actual damages of $15 million and unspecified punitive damages
related to amounts allegedly due under the RGV franchise, City
ordinances and state law. The City of Edinburg lawsuit is
scheduled for trial on August 11, 1997. In connection with the
City of Edinburg lawsuit, Southern Union filed a cross-claim
against Energy, alleging, among other things, that Southern Union
is entitled to indemnification pursuant to the purchase agreement
under which Energy sold RGV to Southern Union. Southern Union also
asserts claims related to a 1985 settlement among Energy, RGV and
the Railroad Commission of Texas regarding certain gas contract
pricing terms. This pricing claim was recently severed into a
separate lawsuit. Southern Union's claims include, among other
things, damages for indemnification, breach of contract, negligent
misrepresentation and fraud. Six additional lawsuits have been
filed by other South Texas cities against Energy and/or certain of
its natural gas related subsidiaries asserting claims substantially
similar to those in the City of Edinburg litigation. Damages in
these lawsuits are not quantified.
Energy and certain of its natural gas related subsidiaries
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, 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. Pursuant to the
distribution agreement by which the Company will be spun off to
Energy's stockholders in connection with the Restructuring, VRMC
has agreed to indemnify and hold harmless Energy with respect to
this lawsuit after the Restructuring 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.
Approximately 15 lawsuits have been filed against various
pipeline owners and other parties arising from the rupture of
several pipelines and fire as a result of severe flooding of the
San Jacinto River in Harris County, Texas on October 20, 1994.
Energy and certain of its natural gas related subsidiaries are
defendants in 12 of these lawsuits. The plaintiffs are property
owners in surrounding areas who allege that the defendant pipeline
owners were negligent and grossly negligent in failing to bury the
pipelines at a proper depth to avoid rupture or explosion and in
allowing the pipelines to leak chemicals and hydrocarbons into the
flooded area. The plaintiffs assert claims for property damage,
costs for medical monitoring, personal injury and nuisance, and
seek an unspecified amount of actual and punitive damages.
Energy and certain of its natural gas related subsidiaries
are defendants in a lawsuit originally filed in January 1993. The
lawsuit is based upon construction work performed by the plaintiff
at one of such subsidiary's gas processing plants in 1991 and 1992.
The plaintiff alleges that it performed work for the defendants for
which it was not compensated. The plaintiff asserts claims for
fraud, quantum meruit, and numerous other tort claims. The
plaintiff seeks actual damages, on each of its causes of action, of
approximately $1.25 million, plus retainage, interest and attorneys
fees, and punitive damages of at least four times the amount of
actual damages. No trial date has been set.
Certain trusts have named Energy and certain of its natural
gas related subsidiaries as additional defendants (the "Valero
Defendants") to a lawsuit filed in 1989 by the trusts against a
supplier with whom certain of the Valero Defendants have
contractual relationships under gas purchase contracts. In order
to resolve certain potential disputes with respect to the gas
purchase contracts, such subsidiaries agreed to bear a substantial
portion of any settlement or any nonappealable final judgment
rendered against the supplier. In January 1993, the District Court
ruled in favor of the trusts' motion for summary judgment against
the supplier. Damages, if any, were not determined. The trusts
seek $50 million in damages from the Valero Defendants as a result
of the Valero Defendants' alleged interference between the trusts
and the supplier, plus punitive damages in excess of treble the
amount of actual damages proven at trial. The trusts also seek in
excess of $200 million from the Valero Defendants in claimed lost
profits. The trusts seek approximately $36 million in take-or-pay
damages from the supplier and unspecified damages for the
supplier's failure to take the trusts' gas ratably. Energy
believes that the claims brought by the trusts have been
significantly overstated, and that the supplier and the Valero
Defendants have a number of meritorious defenses to the claims. No
trial date has been set.
General
The Company, including Basis, and Energy and its natural gas
related subsidiaries are also parties 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 or Energy and its
natural gas related subsidiaries 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.
<PAGE>
VALERO REFINING AND MARKETING COMPANY AND SUBSIDIARIES
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 March 31, 1997 and 1996. The
amounts in the following table are in thousands of dollars, unless
otherwise noted:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1997 1996
<S> <C> <C>
Operating revenues . . . . . . . . . . . . . . . . . . . . . . . . . $ 821,802 $ 574,522
Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . 38,413 10,105
Equity in earnings of joint ventures . . . . . . . . . . . . . . . . 1,006 222
Other income (expense), net. . . . . . . . . . . . . . . . . . . . . (51) 2,048
Interest and debt expense, net . . . . . . . . . . . . . . . . . . . 9,463 10,301
Income from continuing operations. . . . . . . . . . . . . . . . . . 19,811 2,963
Income (loss) from discontinued operations, net of income taxes. . . (4,371) 16,951
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,440 19,914
Net income applicable to common stock. . . . . . . . . . . . . . . . 12,674 17,073
Earnings (loss) per share of common stock:
Continuing operations . . . . . . . . . . . . . . . . . . . . . . $ .45 $ .07
Discontinued operations . . . . . . . . . . . . . . . . . . . . . (.16) .32
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ .29 $ .39
Operating statistics:
Throughput volumes (Mbbls per day) . . . . . . . . . . . . . . . 174 169
Average throughput margin per barrel . . . . . . . . . . . . . . $ 6.58 $ 4.55
Sales volumes (Mbbls per day). . . . . . . . . . . . . . . . . . 328 289
</TABLE>
The Company reported income from continuing operations of
$19.8 million, or $.45 per share, for the first quarter of 1997
compared to $3 million, or $.07 per share, for the same period in
1996. Results from discontinued operations were a loss of $4.4
million, or $.16 per share, for the first quarter of 1997 compared
to income of $17 million, or $.32 per share, for the same period in
1996. In determining earnings per share, dividends on Energy's
Convertible Preferred Stock have been 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. Net income was $15.4 million,
or $.29 per share, in the 1997 first quarter compared to $19.9
million, or $.39 per share, in the 1996 first quarter. Income from
continuing operations and related earnings per share increased due
primarily to a significant increase in operating income partially
offset by an increase in income tax expense resulting primarily
from higher pretax income.
Operating revenues increased $247.3 million, or 43%, to
$821.8 million during the first quarter of 1997 compared to the
same period in 1996 due primarily to a 28% increase in the average
sales price per barrel and, to a lesser extent, to a 13% increase
in sales volumes. The average sales price per barrel increased due
to higher gasoline and other refined product prices which followed
higher crude oil prices. Sales volumes increased due primarily to
higher gasoline sales volumes resulting from increased rack and
wholesale marketing activities and sales of "CARB II" gasoline into
the West Coast market in the 1997 period in connection with the
March 1, 1996 startup of the California Air Resources Board's
statewide CARB gasoline program.
Operating income increased $28.3 million to $38.4 million
during the first quarter of 1997 compared to the same period in
1996 due primarily to an approximate $33 million, or 48%, increase
in total throughput margins partially offset by an approximate
$5 million increase in operating expenses. The throughput margin
per barrel averaged $6.58 for the first quarter of 1997, an
improvement of $2.03 per barrel from the first quarter of 1996.
Total throughput margins increased due primarily to a significant
improvement in discounts on purchases of residual oil ("resid")
feedstocks due to an increase in resid supplies resulting from
greater worldwide production of heavier crude oils and a decrease
in worldwide demand for resid as a result of milder weather during
the 1997 period. Throughput margins also benefitted from the
differential between conventional gasoline and crude oil, higher
premiums on sales of mixed xylenes over their value as a gasoline
blendstock, and increased benefits from price risk management
activities. These increases in throughput margins were partially
offset by lower oxygenate margins resulting from higher methanol
and butane feedstock costs. Operating expenses increased due
primarily to higher fuel and electrical power costs resulting from
an increase in natural gas prices, and to costs associated with a
xylene fractionation unit which was placed in service in January
1997 at the Company's refinery in Corpus Christi, Texas.
Income from discontinued natural gas related services
operations decreased $21.3 million to a loss of $4.4 million during
the first quarter of 1997 compared to the same period in 1996 due
primarily to significantly lower natural gas sales margins
partially offset by higher margins on production of natural gas
liquids ("NGLs") and increased income from NGL trading activities.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by continuing operations increased
$25.1 million to $29.8 million during the first quarter of 1997
compared to the same period in 1996 due primarily to the increase
in income from continuing operations described above under "Results
of Operations" and to the changes in current assets and current
liabilities detailed in Note 3 of Notes to Consolidated Financial
Statements. Net cash provided by discontinued operations decreased
$66.2 million to $1.8 million during the first quarter 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 higher commodity deposits and
deferrals at the end of 1995 compared to the end of 1996. During
the 1997 period, cash provided by operating activities, proceeds
from issuances of common stock related to Energy's benefit plans,
and bank borrowings were utilized to fund capital expenditures and
deferred turnaround and catalyst costs, pay common and preferred
stock dividends, purchase treasury stock, and redeem the remaining
11,500 outstanding shares of Energy's Series A Preferred Stock as
described in Note 7 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. However, as described
in Note 8, borrowings and letters of credit are limited to $600
million until assumption of the facility by VRMC at the date of
the Restructuring. As of May 31, 1997, Energy had approximately
$5.3 million available under this committed bank credit facility
for additional borrowings and letters of credit. Energy also has
numerous uncommitted short-term bank credit lines and bank letter
of credit facilities. As of May 31, 1997, $115 million was available
for additional borrowings under short-term bank lines totaling $160
million, and approximately $50 million was available for additional
letters of credit under uncommitted letter of credit facilities
totaling $185 million. The above-noted remaining amounts available
under Energy's revolving bank credit facility and short-term bank
lines as of May 31 reflect, among other things, the effect of
borrowing $365 million to fund the acquisition of Basis
as discussed below and the use of the revolving bank credit
facility to provide credit enhancement for the Refunding Bonds as
discussed in Note 8. Energy and the Company were in compliance
with all covenants contained in their various debt facilities as of
May 31, 1997.
Energy's historical practice has been 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, a
portion of the borrowings under the various bank credit facilities
discussed above, as well as a portion of other corporate debt of
Energy, has been allocated 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 has also been allocated to the
discontinued natural gas related services business based on the
same net asset ratio.
As described in Note 5 of Notes to Consolidated Financial
Statements, Energy acquired the outstanding common stock of Basis
on May 1, 1997 for $365 million in cash, funded with borrowings
under Energy's bank credit facilities and $120 million in Energy
common stock. Although Basis incurred significant operating losses
during 1995 and 1996, the Company believes that the Basis
refineries can be operated profitably 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 projected reduction in
operating and overhead costs expected to be achieved through
various operational and personnel-related changes to be implemented
by the Company. The Company believes that, assuming the
realization of various assumptions including those discussed above,
the Basis refineries will be accretive to consolidated cash flow
and earnings beginning in 1997.
During the first quarter of 1997, the Company expended
approximately $41 million for capital investments, primarily
capital expenditures, $9 million of which related to the continuing
refining and marketing operations while $32 million related to the
discontinued natural gas related services operations. For total
year 1997, the Company currently expects to incur approximately
$125 million for capital expenditures and deferred turnaround and
catalyst costs related to its continuing refining and marketing
operations. Such estimate includes approximately $45 million
related to the operations of Basis for the eight months beginning
May 1.
As described in Note 6 of Notes to Consolidated Financial
Statements, VRMC 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
June 1, 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.
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, including tax legislation
affecting the proposed merger with PG&E; 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.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Basis Litigation.
Basis is a defendant in numerous lawsuits brought by present
or former employees of Basis, by employees of Basis' customers or
contractors, or by other persons based on alleged negligence, gross
negligence, products liability, strict liability, breach of
warranty and other theories of recovery and claiming injuries,
including wrongful death, resulting from exposure to asbestos,
benzene and other allegedly toxic or carcinogenic compounds
allegedly processed, used, manufactured, distributed or sold by
Basis or its predecessors. Approximately 10 of the lawsuits
involve class or other actions involving numerous plaintiffs and
defendants, while the remaining actions have individual plaintiffs
and involve only Basis or a limited group of defendants. In most
such cases, discovery is underway and trial dates have not been
set.
In addition to the foregoing matters, Basis is a defendant in
a lawsuit, Friends of the Earth, Inc. v. Phibro Energy USA, Inc.,
filed in the United States District Court for the Southern District
of Texas (filed June 1994), alleging, among other things, that
Basis has violated the terms of its National Pollutant Discharge
Elimination System permit for wastewater discharge at its Houston,
Texas refinery. Although the District Court granted Basis a
summary judgment, the United States Court of Appeals for the Fifth
Circuit reversed the summary judgment and remanded the case to the
trial court for further discovery. The case is currently stayed by
mutual agreement pending the decision of the United States Court of
Appeals for the Fifth Circuit in a similar case (Friends of the
Earth v. Chevron Chemical Co., Inc.) in which the lower court
granted summary judgment dismissing the case for lack of standing
by the plaintiffs.
Basis is also a defendant in a lawsuit, Amoco Chemical
Company, et al. v. United States of America, et al. pending in the
United States District Court for the Southern District of Texas
(served May 1996), which is a CERCLA cost recovery action related
to the Tex-Tin "superfund" site. This site is not owned by Basis,
and Basis has advised the Company that Basis has not disposed of
any material at the site. However, Basis has been identified as a
"generator defendant" with respect to the site, as the successor to
the previous refinery owner. Basis potentially may be named as a
defendant or "potentially responsible party" in other similar
pending or threatened superfund-related actions.
Basis is also a defendant in City of Houston v. Phibro Energy
USA, Inc., filed in the 11th Judicial District Court, Harris
County, Texas (filed December 20, 1995) involving alleged Texas
Clean Air Act violations related to allegedly excessive S02
emissions. Agreement among the various parties has been reached to
settle the City of Houston action on terms and conditions not
material to Basis; however, this settlement is not yet final.
Basis is also a defendant in a lawsuit, United States of
America v. Basis Petroleum, Inc., filed on April 29, 1997 by the
U.S. Department of Justice in the United States District Court for
the Southern District of Texas which alleges violations of the New
Source Performance Standards ("NSPS") under the Clean Air Act at
the Texas City, Texas refinery. The suit alleges that applicable
NSPS requirements for a certain process unit, oil and water
separator and storage tank were not met on certain occasions or
during specified periods from May 1990 to April 1994.
Basis has also received Texas Natural Resources Conservation
Commission ("TNRCC") notices of violation ("NOV") and/or federal
Environmental Protection Agency ("EPA") NOVs or administrative
orders with respect to environmental matters at each of its three
refineries. Certain of such notices and orders may require
operational and capital improvements, and may involve the
assessment of substantial monetary penalties.
Basis is also a plaintiff in a lawsuit, Phibro Energy USA,
Inc. v. Belmont Contractors, Inc. et al., pending in the 190th
Judicial District Court, Harris County, Texas (filed March 26,
1996) and alleging generally that through a bribery and kickback
scheme, defendants destroyed plaintiff's independent bargaining
position with respect to construction work performed by defendants,
creating causes of action for fraud, tortious interference with
contract, breach of fiduciary duty, breach of contract and
negligent misrepresentation. Defendant Belmont has asserted
counterclaims against Basis for breach of contract, tortious
interference with contract, fraud, defamation, negligence and
quantum meruit aggregating in excess of $130 million.
Basis is also a party to various other lawsuits arising in
the ordinary course of its business. The various lawsuits referred
to herein seek actual and punitive damages which, in most cases,
are unspecified but which may total several hundreds of millions of
dollars, together, in certain cases, with demands for injunctive
relief. In certain of the matters cited above, including cited
TNRCC and EPA 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.
Additionally, 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. The Stock Purchase
Agreement between Energy, the seller, and Basis ("Stock Purchase
Agreement") provides for indemnification from the seller with
respect to suits, actions, claims and investigations pending at the
time of the acquisition and for additional indemnification, subject
to certain terms, conditions and limitations, with respect to other
matters. However, there can be no assurance that other material
matters, not identified or fully investigated in due diligence,
will not be subsequently identified or that the matters heretofore
identified will not prove to be more significant than currently
expected.
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 three months ended
March 31, 1997).
27.2* Financial Data Schedule (reporting financial information
as of and for the year ended December 31, 1996).
27.3* Financial Data Schedule (reporting financial information
as of and for the three months ended March 31, 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 March 31,
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 REFINING AND MARKETING COMPANY
(Registrant)
By: /s/ Edward C. Benninger
Edward C. Benninger
President and Chief
Financial Officer
(Duly Authorized Officer and Principal
Financial and Accounting Officer)
Date: June 27, 1997
<TABLE>
EXHIBIT 11.1
VALERO REFINING AND MARKETING COMPANY AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE
(Thousands of Dollars, Except Per Share Amounts)
<CAPTION>
Three Months Ended
March 31,
1997 1996
<S> <C> <C>
COMPUTATION OF EARNINGS PER SHARE
ASSUMING NO DILUTION:
Income from continuing operations . . . . . . . . . . . . . . . . . . . . . . . $ 19,811 $ 2,963
Income (loss) from discontinued operations, net of income taxes . . . . . . . . $ (4,371) $ 16,951
Less: Preferred stock dividend requirements
and redemption premium . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,766) (2,841)
Income (loss) from discontinued operations applicable
to common stock. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (7,137) $ 14,110
Weighted average number of shares of common
stock outstanding. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44,411,705 43,748,550
Earnings (loss) per share assuming no dilution:
Continuing operations. . . . . . . . . . . . . . . . . . . . . . . . . . . . $ .45 $ .07
Discontinued operations. . . . . . . . . . . . . . . . . . . . . . . . . . . (.16) .32
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ .29 $ .39
COMPUTATION OF EARNINGS PER SHARE
ASSUMING FULL DILUTION:
Income from continuing operations assuming full dilution. . . . . . . . . . . . $ 19,811 $ 2,963
Income (loss) from discontinued operations, net of income taxes . . . . . . . . $ (4,371) $ 16,951
Less: Preferred stock dividend requirements
and redemption premium . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,766) (2,841)
Add: Reduction of preferred stock dividends
applicable to the assumed conversion of
Convertible Preferred Stock. . . . . . . . . . . . . . . . . . . . . . . . . 2,695 2,695
Income (loss) from discontinued operations applicable to
common stock assuming full dilution . . . . . . . . . . . . . . . . . . . . $ (4,442) $ 16,805
Weighted average number of shares of common
stock outstanding. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44,411,705 43,748,550
Weighted average common stock equivalents
applicable to stock options. . . . . . . . . . . . . . . . . . . . . . . . . 828,547 438,815
Weighted average shares issuable upon conversion
of Convertible Preferred Stock . . . . . . . . . . . . . . . . . . . . . . . 6,381,798 6,381,798
Weighted average shares used for computation. . . . . . . . . . . . . . . . . . 51,622,050 50,569,163
Earnings (loss) per share assuming full dilution:
Continuing operations. . . . . . . . . . . . . . . . . . . . . . . . . . . $ .38 $ .06
Discontinued operations. . . . . . . . . . . . . . . . . . . . . . . . . . $ (.08) $ .33
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ .30 (a) $ .39 (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 MARCH 31, 1997 AND THE CONSOLIDATED
STATEMENT OF INCOME FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 11
<SECURITIES> 0
<RECEIVABLES> 138,046
<ALLOWANCES> 1,050
<INVENTORY> 180,871
<CURRENT-ASSETS> 346,049
<PP&E> 1,715,790
<DEPRECIATION> 493,220
<TOTAL-ASSETS> 1,993,932
<CURRENT-LIABILITIES> 301,469
<BONDS> 334,993
0
3,450
<COMMON> 44,872
<OTHER-SE> 1,050,622
<TOTAL-LIABILITY-AND-EQUITY> 1,993,932
<SALES> 821,802
<TOTAL-REVENUES> 821,802
<CGS> 783,389
<TOTAL-COSTS> 783,389
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9,463
<INCOME-PRETAX> 29,905
<INCOME-TAX> 10,094
<INCOME-CONTINUING> 19,811
<DISCONTINUED> (4,371)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 15,440
<EPS-PRIMARY> .29
<EPS-DILUTED> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 10
<SECURITIES> 0
<RECEIVABLES> 163,432
<ALLOWANCES> 975
<INVENTORY> 159,871
<CURRENT-ASSETS> 351,849
<PP&E> 1,708,106
<DEPRECIATION> 479,272
<TOTAL-ASSETS> 1,985,631
<CURRENT-LIABILITIES> 300,584
<BONDS> 353,307
1,150
3,450
<COMMON> 44,186
<OTHER-SE> 1,028,189
<TOTAL-LIABILITY-AND-EQUITY> 1,985,631
<SALES> 2,757,853
<TOTAL-REVENUES> 2,757,853
<CGS> 2,668,105
<TOTAL-COSTS> 2,668,105
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 38,534
<INCOME-PRETAX> 39,083
<INCOME-TAX> 16,611
<INCOME-CONTINUING> 22,472
<DISCONTINUED> 50,229
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 72,701
<EPS-PRIMARY> 1.40
<EPS-DILUTED> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> MAR-31-1996
<CASH> 13
<SECURITIES> 0
<RECEIVABLES> 109,382
<ALLOWANCES> 750
<INVENTORY> 150,413
<CURRENT-ASSETS> 284,526
<PP&E> 1,664,973
<DEPRECIATION> 438,745
<TOTAL-ASSETS> 1,879,784
<CURRENT-LIABILITIES> 181,490
<BONDS> 392,761
6,900
3,450
<COMMON> 43,784
<OTHER-SE> 1,000,073
<TOTAL-LIABILITY-AND-EQUITY> 1,879,784
<SALES> 574,522
<TOTAL-REVENUES> 574,522
<CGS> 564,417
<TOTAL-COSTS> 564,417
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 10,301
<INCOME-PRETAX> 2,074
<INCOME-TAX> (889)
<INCOME-CONTINUING> 2,963
<DISCONTINUED> 16,951
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 19,914
<EPS-PRIMARY> .39
<EPS-DILUTED> 0
</TABLE>
