SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a)
of the Securities Exchange Act of 1934
(Amendment No. )
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[ ] Soliciting Material Pursuant to Section 240.14a-1(c) or
Section 14a-11(c) or Rule 14a-12
VALERO ENERGY CORPORATION
(Name of Registrant as Specified In Its Charter)
_________________________________________
(Name of Person(s) Filing Proxy Statement
if other than the Registrant)
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transaction applies:
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transaction computed pursuat to Exchange Act Rule
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<PAGE>
_____________________________________________________________________________
THE PROMPT RETURN OF PROXY CARDS WILL SAVE THE EXPENSE OF
FURTHER REQUESTS FOR PROXIES IN ORDER TO ASSURE A QUORUM.
_____________________________________________________________________________
VALERO
ENERGY CORPORATION
NOTICE OF 1998 ANNUAL MEETING OF STOCKHOLDERS
The Board of Directors has determined that the 1998 Annual Meeting of
Stockholders of Valero Energy Corporation ("Valero") will be held on Thursday,
April 30, 1998 at 10:00 a.m., Central Time, at the Hilton Airport and
Conference Center in San Antonio, Texas, 611 N.W. Loop 410, for the following
purposes:
(1) To elect two Class I directors as members of the Board of
Directors to serve until the 2001 Annual Meeting, or until their successors
are elected and have qualified;
(2) To ratify the appointment of Arthur Andersen LLP as
independent public accountants to examine Valero's accounts for the year 1998;
and
(3) To transact any other business properly brought before the
meeting.
By order of the Board of Directors,
Jay D. Browning
Corporate Secretary
San Antonio, Texas
March 20, 1998
<PAGE>
VALERO
ENERGY CORPORATION
PROXY STATEMENT
ANNUAL MEETING OF STOCKHOLDERS
General Information
This Proxy Statement is being mailed to stockholders beginning on or about
March 20, 1998 in connection with the solicitation of proxies by the Board of
Directors of Valero Energy Corporation ("Valero") to be voted at the 1998
Annual Meeting of Stockholders of Valero (the "Annual Meeting"). The
accompanying notice describes the time, place and purposes of the Annual
Meeting. Holders of record of Valero's Common Stock, $0.01 par value (the
"Common Stock"), at the close of business on March 2, 1998 are entitled to
vote on the matters presented at the Annual Meeting. On the record date,
55,878,775 shares of Common Stock were issued and outstanding, and entitled to
one vote per share. Action may be taken at the Annual Meeting on April 30,
1998 or on any date or dates to which the meeting may be adjourned. A
majority of such shares, present in person or represented by properly executed
proxy, shall constitute a quorum. If instructions to the contrary are not
given, shares will be voted as indicated on the proxy card.
A stockholder may revoke a proxy at any time before it is voted by submitting
a written revocation to Valero, returning a subsequently dated proxy to Valero
or by voting in person at the Annual Meeting.
Brokers holding shares must vote according to specific instructions they
receive from the beneficial owners. If specific instructions are not
received, brokers may generally vote these shares in their discretion,
depending on the type of proposal involved. However, the New York Stock
Exchange (the "Exchange") precludes brokers from exercising voting discretion
on certain proposals without specific instructions from the beneficial owner.
This results in a "broker non-vote" on such a proposal. A broker non-vote is
treated as "present" for purposes of determining the existence of a quorum,
has the effect of a negative vote when a majority of the shares issued and
outstanding is required for approval of a particular proposal and has no
effect when a majority of the shares present and entitled to vote or a
majority of the votes cast is required for approval. Pursuant to the rules of
the Exchange, brokers will have discretion to vote on the two items scheduled
to be presented at the Annual Meeting.
Valero and its consolidated subsidiaries are collectively referred to herein
and in the accompanying notice as the "Company."
Valero was incorporated on June 8, 1981, and prior to August 1, 1997 was named
"Valero Refining and Marketing Company" and was a wholly owned subsidiary of
the company then known as Valero Energy Corporation ("Old Valero"). On July
31, 1997, Old Valero spun off Valero by distributing all of the common stock
of Valero to the stockholders of Old Valero (the "Distribution"). Immediately
following the Distribution, on July 31, 1997, a wholly owned indirect
subsidiary of PG&E Corporation ("PG&E") was merged (the "Merger") into Old
Valero (which then consisted solely of Old Valero's natural gas and natural
gas liquids related businesses). Old Valero survived the Merger and became a
subsidiary of PG&E. Valero succeeded to the name "Valero Energy Corporation."
Unless the context otherwise requires, references to "Valero" or the "Company"
for periods prior to the Distribution are to Old Valero.
Information Regarding the Board of Directors
The business of Valero is managed by or under the direction of the Board of
Directors (the "Board"). The Board conducts its business through meetings of
the Board and its committees. Five meetings of Valero's Board were held in
1997, including two meetings held subsequent to the Distribution. In
addition, during 1997 the members of Valero's Board served as directors of Old
Valero, and held Board of Directors and committee meetings as set forth below.
No member of the Board attended less than 75% of the meetings of the Boards of
Directors and committees of which he or she was a member held by Valero and
Old Valero during the periods that he or she served on the respective Boards
of Directors and committees.
Valero's Restated Certificate of Incorporation requires the Board to be
divided into Class I, Class II and Class III directors, with each class
serving a staggered three-year term. The size of the Board is currently set
at eight members.
The Board has standing Audit, Compensation and Executive Committees. When
deemed necessary or advisable, the Board will form from its members a
Nominating Committee to consider and recommend candidates for election to the
Board. The standing committees of the Board and the number of meetings held
by each committee in 1997 are described below.
During 1997 and prior to the Distribution, the members of Valero's Board
served as directors of Old Valero, which held eight meetings of its Board of
Directors, two meetings of its Audit Committee, three meetings of its
Compensation Committee and one meeting of its Executive Committee prior to the
Distribution. (See page 1 of this Proxy Statement for a discussion of the
Distribution and Merger).
Audit Committee
The Audit Committee reviews and reports to the Board on various auditing and
accounting matters, including the quality and performance of the Company's
internal and external accountants and auditors, the adequacy of its financial
controls and the reliability of financial information reported to the public.
The Audit Committee also monitors the Company's efforts to comply with
environmental laws and regulations. Current members of the Audit Committee
are James L. Johnson (Chairman), Ruben M. Escobedo and Susan Kaufman Purcell.
No meetings of the Company's Audit Committee were held during 1997 subsequent
to the Distribution.
Compensation Committee
The Compensation Committee reviews and reports to the Board on matters related
to compensation strategies, policies and programs, including certain personnel
policies and policy controls, management development, management succession
and benefit programs. The Compensation Committee also approves and
administers the Company's stock option, restricted stock, incentive bonus and
other stock plans. See "Report of the Compensation Committee of the Board of
Directors on Executive Compensation." Current members of the Compensation
Committee are Lowell H. Lebermann (Chairman), Robert G. Dettmer and James L.
Johnson, none of whom are current or former employees or officers of the
Company. One Compensation Committee meeting was held during 1997 subsequent to
the Distribution.
There are no compensation committee interlocks. For the previous three fiscal
years, except for compensation arrangements disclosed herein, the Company has
not participated in any contracts, loans, fees, awards or financial interests,
direct or indirect, with any committee member, nor is the Company aware of any
means, directly or indirectly, by which a committee member could receive a
material benefit from the Company.
Executive Committee
The Executive Committee exercises the power and authority of the Board during
intervals between meetings of the Board. Actions taken by the Executive
Committee do not require Board ratification. Unless a separate Nominating
Committee is created, the Executive Committee may also review possible
director candidates for election as a director. Current members of the
Executive Committee are Robert G. Dettmer (Chairman), Ronald K. Calgaard,
William E. Greehey and Lowell H. Lebermann. No meetings of the Company's
Executive Committee were held during 1997 subsequent to the Distribution.
Nominating Committee
At its October 23, 1997 meeting, the Board created a special Nominating
Committee to review possible director candidates for the Annual Meeting. No
meetings of the Nominating Committee were held during 1997; however, the
Nominating Committee met on January 28, 1998. At such meeting, the Nominating
Committee reviewed and recommended director candidates for election at the
Annual Meeting, and also reviewed and recommended assignments for the
Committees of the Board following the Annual Meeting. The full Board reviewed
and approved the recommendations of the Nominating Committee on January 29,
1998.
Compensation of Directors
Non-employee directors receive a retainer fee of $18,000 per year, plus $1,000
for each Board and committee meeting attended. Each director is also
reimbursed for expenses of meeting attendance. Directors who are employees of
the Company receive no compensation (other than reimbursement of expenses) for
serving as directors.
Valero maintains the Restricted Stock Plan for Non-Employee Directors
("Director Stock Plan") and the Non-Employee Director Stock Option Plan
("Director Option Plan") to supplement the compensation paid to non-employee
directors and increase their identification with the interests of Valero's
stockholders through ownership of Common Stock. Under the Director Stock
Plan, non-employee directors receive grants of Common Stock that vest (become
nonforfeitable) in equal annual installments over a three-year period
("Director Stock"). Upon election to the Board, each non-employee director
receives a grant consisting of Director Stock valued at $45,000. Annual
installments usually vest on or about the date of the Annual Meeting. When
all of the Director Stock previously granted to a director under the Director
Stock Plan is fully vested and the director is continuing in office after such
Director Stock is fully vested, another similar grant is made. In addition to
the regular, periodic grants described above, Valero's non-employee directors
received a special grant in 1997 of 1,556 shares of Common Stock to recognize
the directors' service in connection with the Distribution and Merger.
The Director Option Plan provides non-employee directors of Valero automatic
annual grants of stock options for Valero's Common Stock. To the extent
necessary, the plan is administered by the Compensation Committee of the
Board. The plan provides that each new non-employee director elected to the
Valero Board automatically receives an initial grant of 5,000 options. On the
date of each subsequent annual meeting of stockholders of Valero, each
non-employee director (who is not a new non-employee director) automatically
receives a grant of 1,000 additional options. Stock options awarded under the
Director Option Plan have an exercise price equal to the market price of the
Common Stock on the date of grant. The initial grant of options to each
non-employee director vests in three equal annual installments on each
anniversary date of the grant. The subsequent annual grants of 1,000 options
vest fully six months following the date of grant. All options expire ten
years following the date of grant. Options vest and remain exercisable in
accordance with their original terms in the case of a director retiring from
the Board. Options previously granted by Old Valero pursuant to a
corresponding plan were converted at the time of the Distribution into options
to acquire shares of Valero Common Stock pursuant to a formula described at
Note 1 under the table entitled "Option/SAR Grants in the Last Fiscal Year."
In the event of a "Change of Control" as defined in the Director Stock Plan
and Director Option Plan, all shares of Director Stock and options previously
granted under the plans immediately become vested or exercisable. The
Director Option Plan also contains anti-dilution provisions providing for an
adjustment in the number of options granted to prevent dilution of benefits or
potential benefits in the event any change in the capital structure of the
Company affects the Common Stock.
Under the Retirement Plan for Non-Employee Directors ("Retirement Plan"),
non-employee directors become entitled to a retirement benefit upon completion
of five years of service. The annual benefit at retirement is equal to 10% of
the highest annual cash retainer paid to the director during his or her
service on the Board, multiplied by the number of full and partial years of
service (not to exceed 10 years). Such benefit is then paid for up to 10
years or the director's lifetime, whichever is shorter. Service on the Board
of Directors of Old Valero is counted for purposes of computing benefits under
the Retirement Plan. The Retirement Plan provides no survivor benefits and is
an unfunded plan paid from the general assets of the Company.
PROPOSAL NO. 1. Election of Directors
The Company's Board is divided into three classes for purposes of election.
Two Class I directors will be elected at the Annual Meeting to serve until the
2001 Annual Meeting of Stockholders or until replaced by their respective
successors. Ruben M. Escobedo and Lowell H. Lebermann have been nominated for
election as Class I directors.
THE BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE "FOR" THE ELECTION OF
EACH SUCH NOMINEE.
Directors are elected by a plurality of the shares of Common Stock represented
at the Annual Meeting and entitled to vote. Votes "withheld" from a nominee
will not count against the election of the nominee, and the two nominees for
Class I director receiving the greatest number of votes, whether or not such
votes represent a majority of the shares present and voting at the Annual
Meeting, will be elected as Class I directors. If any nominee is unavailable
as a candidate at the time of the Annual Meeting, either the number of
directors constituting the full Board will be reduced to eliminate the
vacancy, or the persons named as proxies will use their best judgment in
voting for any available nominee. The Board has no reason to believe that any
current nominee will be unable to serve.
Information Concerning Nominees and Other Directors
The following table sets forth information concerning each nominee for
election as a director and the current directors whose terms expire in 1999
and 2000. The information provided regarding directors of Valero is based
partly on data furnished by the directors and partly on the Company's records.
There is no family relationship among any of the executive officers, directors
or nominees for director of Valero.
<TABLE>
<CAPTION>
__________________________________________________________________________________________________________________________
Executive
Officer Age as of Present Current
Position(s) Held or Director December 31, Term Director
Name with Valero Since(1) 1997 Expires Class
__________________________________________________________________________________________________________________________
<S> <C> <C> <C> <C> <C>
Nominees
Ruben M. Escobedo Director 1994 60 1998 I
Lowell H. Lebermann Director 1986 58 1998 I
Other Current Directors
Ronald K. Calgaard Director 1996 60 1999 II
William E. Greehey Director, Chairman 1979 61 1999 II
of the Board and
Chief Executive
Officer
Susan Kaufman Purcell Director 1994 55 1999 II
Edward C. Benninger Director, President 1979 55 2000 III
Robert G. Dettmer Director 1991 66 2000 III
James L. Johnson Director 1991 70 2000 III
__________________________________________________________________________________________________________________________
</TABLE>
<FN1>
(1) Dates reported include service with Old Valero prior to the Distribution.
All directors were elected to the Board of Valero in 1997 in connection
with the Distribution.
Nominees
Mr. Escobedo became a director of Valero in 1997, and previously served as a
director of Old Valero from 1994 until the Distribution. He has been with his
own public accounting firm, Ruben Escobedo & Company, CPAs, in San Antonio,
Texas since its formation in 1977. Mr. Escobedo also serves as a director of
Cullen/Frost Bankers, Inc. and previously served as a director of Valero
Natural Gas Company from 1989 to 1994.
Mr. Lebermann became a director of Valero in 1997, and previously served as a
director of Old Valero from 1979 to 1983 and from 1986 until the Distribution.
Mr. Lebermann has been President of Centex Beverage, Inc., a wholesale
beverage distributor, in Austin, Texas, since 1981. Mr. Lebermann is also a
director of Station Casinos, Inc.
Other Current Directors
Dr. Calgaard became a director of Valero in 1997, and previously served as a
director of Old Valero from 1996 until the Distribution. He has served as
President of Trinity University, San Antonio, Texas, since 1979. Dr. Calgaard
currently serves as a director of The Trust Company. He also served as a
director of Valero Natural Gas Company from 1987 until 1994.
Mr. Greehey served as Chief Executive Officer and a director of Old Valero
from 1979, and as Chairman of the Board of Old Valero from 1983. He retired
from his position as Chief Executive Officer of Old Valero in June 1996 but,
upon request of the Board of Directors, resumed this position in November 1996
and continued in such positions until the Distribution. Mr. Greehey also
served as Chairman of the Board and Chief Executive Officer of Valero prior to
the Distribution when Valero was a wholly owned subsidiary of Old Valero. Mr.
Greehey is a director of Weatherford Enterra, Inc. and Santa Fe Energy
Resources, Inc.
Dr. Purcell became a director of Valero in 1997, and previously served as a
director of Old Valero from 1994 until the Distribution. She has served as
Vice President of the Americas Society in New York, New York since 1989 and is
also Vice President of the Council of the Americas. She is a consultant for
several international and national firms and serves on the boards of several
mutual funds, including The Argentina Fund and Scudder Global High Income
Fund.
Mr. Benninger served as President and Chief Financial Officer of Old Valero
from 1996 and as a director of Old Valero since 1990, in each case until the
Distribution. Prior to that, he served in various other capacities with Old
Valero, its predecessors and subsidiaries since 1975, including Executive Vice
President and Treasurer. Mr. Benninger also served as President, Chief
Financial Officer and a director of Valero prior to the Distribution when
Valero was a wholly owned subsidiary of Old Valero.
Mr. Dettmer became a director of Valero in 1997, and previously served as a
director of Old Valero from 1991 until the Distribution. He retired from
PepsiCo, Inc. in 1996 after serving as Executive Vice President and Chief
Financial Officer since 1986.
Mr. Johnson became a director of Valero in 1997, and previously served as a
director of Old Valero from 1991 until the Distribution. He served as
Chairman and Chief Executive Officer of GTE Corporation from 1988 to 1992, and
since 1992 has served as Chairman Emeritus. Mr. Johnson also serves as a
director of CellStar Corporation, FINOVA Group, Inc., Harte-Hanks
Communications, Inc., The Mutual Life Insurance Company of New York and Walter
Industries, Inc.
For detailed information regarding the nominees' holdings of Common Stock,
compensation and other arrangements, see "Information Regarding the Board of
Directors," "Beneficial Ownership of Valero Securities," "Executive
Compensation," "Arrangements with Certain Officers and Directors" and
"Transactions with Management and Others."
Beneficial Ownership of Valero Securities
The following table sets forth information as of December 31, 1997, with
respect to each entity known to Valero to be the beneficial owner of more than
5% of its Common Stock, based solely upon a statement on Schedule 13G filed by
such entity with the Securities and Exchange Commission ("SEC"):
<TABLE>
<CAPTION>
____________________________________________________________________________________________________________________________
Shares
Name and Address Beneficially Percent
Title of Class of Beneficial Owner Owned of Class
____________________________________________________________________________________________________________________________
<S> <C> <C> <C>
Common Stock FMR Corp.(1) 4,784,221 8.53%
82 Devonshire Street
Boston, MA 02109
Common Stock Franklin Resources, Inc.(2) 3,601,351 6.4%
777 Mariners Island Blvd.
San Mateo, CA 94404
Common Stock The Capital Group Companies, Inc.(3) 2,957,450 5.3%
75 State Street
Boston, MA 02109
Common Stock J. P. Morgan & Co. Incorporated(4) 2,967,882 5.2%
60 Wall Street
New York, NY 10260
____________________________________________________________________________________________________________________________
</TABLE>
<FN1>
(1) FMR Corp. has reported that it and certain of its shareholders and
subsidiaries have sole voting power with respect to 408,900 shares and sole
dispositive power with respect to 4,784,221 shares. One such subsidiary,
Fidelity Management & Research Company, has reported that it has sole
dispositive power with respect to 4,220,921 shares.
<FN2>
(2) Franklin Resources, Inc. has reported that it and certain of its
shareholders and subsidiaries beneficially own 3,601,351 shares. One such
subsidiary, Templeton Global Advisors Limited has also reported that it has
sole voting power with respect to 3,186,570 shares and sole dispositive power
with respect to 3,190,770 shares.
<FN3>
(3) The Capital Group Companies, Inc. has reported that it and certain
investment management subsidiaries have sole voting power with respect to
9,200 shares and sole dispositive power with respect to 2,957,450 shares. One
such subsidiary, Capital Research and Management Company, has also reported
that it has sole dispositive power with respect to 2,948,250 of such shares.
(4) J. P. Morgan & Co. Incorporated has reported that it and certain of its
subsidiaries have sole voting power with respect to 2,212,732 shares, shared
voting power with respect to 3,750 shares, sole dispositive power with respect
to 2,941,832 and shared dispositive power with respect to 26,050 shares.
Except as otherwise indicated, the following table sets forth information as
of February 1, 1998 regarding Common Stock beneficially owned (or deemed to be
owned) by each nominee for director, each current director, each executive
officer named in the Summary Compensation Table and all current directors and
executive officers of Valero as a group. The persons listed below have
furnished this information to Valero and accordingly this information cannot
be independently verified by Valero.
<TABLE>
<CAPTION>
______________________________________________________________________________________________________________
Common Stock
Percent
Shares Shares Under of Class
Name of Beneficially Exercisable (Common
Beneficial Owner (1) Owned(2)(3) Options(4) Stock)(2)
______________________________________________________________________________________________________________
<S> <C> <C> <C>
Edward C. Benninger 135,004 94,841 *
Ronald K. Calgaard 2,850 7,468 *
Robert G. Dettmer(5) 7,433 10,456 *
Ruben M. Escobedo(6) 4,622 10,456 *
John D. Gibbons 27,534 9,521 *
William E. Greehey 454,153 665,897 2.0%
James L. Johnson 5,408 10,456 *
Gregory C. King 13,458 23,524 *
Lowell H. Lebermann 3,800 10,456 *
E. Baines Manning 55,761 169,145 *
Susan Kaufman Purcell 3,845 10,456 *
All executive officers and
directors as a group, including
the persons named above
(14 persons)(7) 758,063 1,102,781 3.3%
______________________________________________________________________________________________________________
* Indicates that the percentage of beneficial ownership does not exceed 1% of the class.
</TABLE>
<FN1>
(1) The business address for all beneficial owners listed above is 7990 West
I.H. 10, San Antonio, Texas 78230-4715.
<FN2>
(2) No executive officer, director or nominee for director of Valero owns any
class of equity securities of Valero other than Common Stock. The
calculation for Percent of Class includes shares listed under the captions
"Shares Beneficially Owned" and "Shares Under Exercisable Options."
<FN3>
(3) Includes shares allocated pursuant to the Valero Thrift Plan (the "Thrift
Plan") through December 31, 1997, as well as shares of restricted stock
granted under Valero's Executive Stock Incentive Plan ("ESIP") and the
Director Stock Plan. Except as otherwise noted, each person named in the
table, and each other executive officer, has sole power to vote or direct the
vote of all such shares beneficially owned by him or her. Except as otherwise
noted, each person named in the table, and each other executive officer, has
sole power to dispose or direct the disposition of shares beneficially owned
by him or her. Common Stock granted under the ESIP and the Director Stock
Plan may not be disposed of until vested. Does not include shares that could
be acquired under options, which information is set forth in the second
column.
<FN4>
(4) Includes shares subject to options that are exercisable within 60 days
from February 1, 1998. Such shares may not be voted unless the options are
exercised. Options that may become exercisable within such 60 day period only
in the event of a change of control of Valero are excluded. None of the
current executive officers, directors or nominees for director of Valero hold
any rights to acquire Common Stock except through exercise of stock options.
<FN5>
(5) Includes 500 shares held by spouse.
<FN6>
(6) Includes 350 shares held by spouse and 350 shares held in a trust.
<FN7>
(7) Certain officers of Valero not designated as executive officers by the
Board do not perform the duties of executive officers and are not classified
as "executive officers" for purposes of this Proxy Statement.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended ("Exchange
Act"), requires Valero's executive officers, directors and greater than 10%
stockholders to file certain reports of ownership and changes in ownership.
Based on a review of the copies of such forms received and written
representations from certain reporting persons, Valero believes that, during
the year ended December 31, 1997, its executive officers, directors and
greater than 10% stockholders were in compliance with applicable requirements
of Section 16(a).
Performance Graph
As a result of the Distribution and Merger, as well as the ongoing
consolidation in the domestic refining industry, the Company has reevaluated
its prior use of the S&P Oil (Domestic Integrated) Index in the performance
graph that follows. The Company determined that its current business
operations vary substantially from those of many of the companies in the S&P
Oil (Domestic Integrated) Index, and that use of an index of peer companies
(the "Peer Group") would result in a more accurate evaluation of the Company's
relative performance. The Peer Group selected by the Company consists of four
companies engaged in the domestic petroleum refining industry with business
operations, risks and markets comparable to the Company. The Peer Group
consists of Ashland Oil Company, Sun Company, Tosco Corporation and Ultramar
Diamond Shamrock Corporation.
Set forth below is a line graph which compares the Cumulative Total Return
(defined below) on an investment in Old Valero common stock, $1.00 par value
("Old Valero Common Stock"), against the cumulative total return of the S&P
500 Composite Index, and the Peer Group of comparable companies and the S&P
Oil (Domestic Integrated) Index for the period of five fiscal years commencing
December 31, 1992 and ending December 31, 1997. Use of the S&P Oil (Domestic
Integrated) Index will be discontinued in the Company's future proxy
statements.
Comparison of Five Year Cumulative Total Return*
Among Valero Energy Corporation, The S&P 500 Index,
The S&P Oil (Domestic Integrated) Index and the Peer Group
12/1992 12/1993 12/1994 12/1995 12/1996 12/1997
Valero Common
Stock 100 94 77 115 137 224
S&P 500 100 110 112 153 189 252
Peer Group 100 123 128 136 181 247
S&P Oil (Domestic
Integrated)** 100 105 111 126 159 189
_____________________
* Assumes that the value of the investment in Old Valero Common Stock and
each index was $100 on December 31, 1992. "Cumulative Total Return" on Old
Valero Common Stock is based on share price appreciation plus dividends for
the five years from December 31, 1992 through December 31, 1997 (assuming the
reinvestment of dividends over such period, including reinvestment of the
value of the PG&E shares received as a result of the Merger into shares of
Valero Common Stock).
** Comparison to former index as required by Item 402(l) of Regulation S-K.
The foregoing Performance Graph and related textual information are based on
historical data and are not necessarily indicative of future performance.
Report Of The Compensation Committee Of The Board of Directors On Executive
Compensation
The Company's executive compensation programs are administered by the
Compensation Committee (the "Committee") of Valero's Board. The Committee is
composed of three independent outside directors ineligible to participate in
the Company's executive compensation programs. The Committee's policies are
implemented by the Company's compensation and benefits staff under the
direction of the Director, Human Resources. The Company's executive
compensation programs are intended to provide strong incentives for high
performance, enabling the Company to recruit, retain and motivate the
executive talent necessary to its ongoing success.
Compensation Policies
The Company's executive compensation program is a continuation of the program
previously maintained by Old Valero, and amounts discussed herein include
amounts received as compensation from Old Valero prior to the Merger. The
executive compensation program includes base salary, an annual incentive bonus
opportunity and long-term, stock-based incentives. The CEO and other
executive officers also participate in benefit plans generally available to
employees of the Company. The Committee believes that the Company's direct
competition for executive talent is broader than the companies included in the
Peer Group established for purposes of comparing shareholder returns. To
assist in benchmarking the competitiveness of the Company's compensation
programs, the Company has retained Hewitt Associates, L.L.C. ("Hewitt"), an
independent compensation consultant. Hewitt has compiled a subgroup of
companies from a nationally recognized compensation database. The subgroup
consists of nine oil industry companies (the "Compensation Peer Group").
Thus, the Compensation Peer Group is not the same as the Peer Group presented
in the Comparison of Five Year Cumulative Total Return included above.
Hewitt's recommendation reflected consideration of each company's relative
revenue, asset base, employee population and capitalization, along with the
scope of managerial responsibility and reporting relationships. Base salary,
bonuses and other compensation recommendations are developed by the Company's
compensation and benefits staff, reviewed by Hewitt and submitted to the
Committee for consideration. Other nationally recognized compensation surveys
are utilized to validate the information provided by Hewitt. In establishing
and implementing executive compensation arrangements, the Committee reviews
and discusses the staff recommendations directly with representatives of
Hewitt.
Annual incentive bonuses, when awarded, are related both to measures of
Company financial performance and to individual performance. Long-term
incentives, consisting of performance shares, restricted stock and stock
option grants, as well as the noncash portion of annual incentive bonus
awards, are intended to balance executive management focus between short- and
long-term goals and provide capital accumulation linked directly to the
performance of Valero's Common Stock. Base salary levels are targeted at
approximately the 50th percentile of the Hewitt survey subgroup, while annual
incentive compensation and long-term incentive compensation, when awarded, are
targeted at the 65th percentile. While no specific percentile target is set
for overall compensation, the Committee intends that each executive's total
compensation package favor longer-term and variable compensation over fixed
compensation. For the five executives named in the Summary Compensation
Table, the average base salary component of total annual and long-term
compensation for 1997, as reported in the Summary Compensation Table, was
approximately 17%, while the average annual incentive and longer-term
compensation component was approximately 83%. For purposes of the preceding
sentence, stock options granted in 1997 have been valued using the "grant date
present value" set forth in the table below titled "Option/SAR Grants in the
Last Fiscal Year."
Base Salaries
Base salaries for each executive position are set based upon the compensation
survey data for positions having similar duties and levels of responsibility.
Base salaries are reviewed annually and may be adjusted to reflect promotions,
the assignment of additional responsibilities, individual performance or the
performance of the Company. Salaries are also periodically adjusted to remain
competitive with the survey data. Base salaries for the named executive
officers (other than Mr. Greehey and Mr. Benninger) were increased in mid-1997
by an average of approximately 17%, principally to reflect the assignment of
additional responsibilities as a result of the Distribution.
Annual Incentive Bonus
Executive officers have the opportunity to earn an annual incentive bonus
based on the following three factors:
- the position of the executive officer, which is used to determine
a targeted percentage of annual base salary that may be awarded as
incentive bonus ranging from a low of approximately 40% of base
salary to approximately 65% of base salary (for the CEO);
- realization by the Company of quantitative financial performance
targets approved by the Committee; and
- a qualitative evaluation of the individual's performance.
For each executive, the targeted percentage of base salary is adjusted,
upward or downward, based upon Company achievement of the financial
performance goals. In addition, the Committee considers the total amount of
executive bonuses in relation to earnings available to Common Stock. The
Committee retains discretion to adjust the bonus targets by up to
approximately 25%, based upon such factors as it deems to be appropriate, and
ultimately to determine whether to award a bonus to any individual. In
establishing incentive bonuses for 1997, the Company utilized the following
quantitative measures of Company financial performance:
- return on equity ("ROE") compared with the average ROE for a
group of five similarly-sized companies in the domestic oil
refining business (the "Target Group") for the 12-month period
ended September 30, 1997 (the "Target Period");
- return on investment ("ROI") for the Target Period compared with
that of the Target Group;
- earnings per share of Common Stock in 1997 (based on estimates
available at the time of computation) compared with 1996; and
- the daily average closing price of a share of Common Stock during
September 1997, compared with the daily average closing price,
adjusted for the Distribution, during the corresponding period in
the prior year.
In determining ROE, ROI and earnings per share for the Company, the
natural gas and natural gas related service businesses transferred to PG&E in
the Merger were treated as discontinued operations, and earnings attributable
to such operations were excluded. September 1996 was used as the beginning
date for the stock price comparison in order to exclude changes in the stock
price resulting from initial disclosures regarding the possibility of a
strategic transaction, such as the Distribution and Merger. For the ROE and
ROI financial performance measures, the targeted salary percentage is subject
to adjustment, upward or downward, depending upon whether the Company's ROE
and ROI exceeds, or falls short of, the average ROE and ROI for the Target
Group. For the earnings per share and stock price performance measures, the
Committee establishes a targeted performance range; the targeted salary
percentage is then subject to adjustment if the Company's performance exceeds
or falls short of the preestablished ranges. The four performance factors
were given approximately equal weight in determining potential adjustments to
the targeted salary percentages for 1997. In 1997, the Target Group was
reduced from 11 to 5 companies to reflect the deletion of several companies
with substantial natural gas operations with which the Company's operations
are no longer comparable, the elimination of two refining companies due to
mergers, and the addition of two other refining companies in order to more
closely focus the group on comparable domestic independent refining companies.
For 1997, the Company's performance was slightly above the Target Group
average for ROE, above the Target Group average for ROI, and substantially
above the earnings per share and stock price target ranges. Based on these
results, the bonus target amounts for the named executives (other than the
CEO) were increased by an average of approximately 50% from the originally
targeted amounts. In addition, the Committee and the Board adjusted certain
individual bonus amounts upward to reflect the Committee's or the Board's
subjective evaluation of individual performance.
To further emphasize the Company's goal of increasing stock ownership in both
short and long-term compensation, and to enhance the Company's ability to
retain key executives, the Committee offered eligible executives the
opportunity of taking annual bonuses either 20% in Company stock and 80% in
cash, or 50% in restricted shares of common stock ("Restricted Stock") vesting
50% annually over a two-year period and 50% in cash. Executives choosing the
50-50 option then received additional restricted shares vesting in full on the
second anniversary of the date of grant equal in value to 17.5% of their total
incentive award. Each of the executives listed in the summary compensation
table selected the 50-50 option.
Long-Term Incentive Awards
To provide stock-based longer-term compensation for executives, the Company
maintains the Executive Stock Incentive Plan ("ESIP") which is a continuation
of Old Valero's similar plan. The plan authorizes awards of performance shares
("Performance Shares"), which vest (become nonforfeitable) upon the
achievement of an objective performance goal, as well as grants of Restricted
Stock which vest over a period determined by the Committee. For each eligible
executive, a targeted number of Performance Shares is set with an aggregate
hypothetical market value at the date of grant targeted at the 65th percentile
of the Hewitt survey subgroup. Such targeted award can then be adjusted based
upon an individual subjective performance evaluation, which (for executives
other than the CEO) is based upon the recommendation of the CEO, and such
other factors as the Committee deems appropriate. As with the annual
incentive bonus, discretion is retained by the Committee ultimately to
determine whether an award, if any, should be made. The total number of
shares awarded is a function of the Common Stock price at the time of grant
and the number of shares required to achieve a percentage of compensation
target. In the past, the compensation committee of the Old Valero Board of
Directors has generally made awards of Performance Shares every year. The
Committee expects to continue this practice.
Performance Shares are earned only upon the achievement of an objective
performance measure. Total shareholder return ("TSR") was established as the
performance measure for determining what portion of the Performance Share
awards may vest. Each award is subject to vesting in three increments, based
upon the Company's TSR during three overlapping periods, ending December 31
for each year following the date of grant. At the end of each performance
period, the Company's TSR is compared to a target group of companies and
ranked by quartile. Participants then earn 0%, 50%, 100% or 150% of the
initial grant amount depending upon whether the Company's TSR is in the last,
3rd, 2nd or 1st quartile; 200% would be earned if the Company ranks highest in
the group. Amounts not earned in a given performance period can be carried
forward for one additional performance period and up to 100% of the carried
amount can still be earned, depending upon the quartile achieved for such
subsequent period. For the performance period ended December 31, 1997, the
Company's performance ranked in the first quartile, resulting in a vesting of
150% of the initial grant amounts for such period. The Committee believes
this type of incentive award strengthens the tie between pay and performance
for the Company's executive compensation program. Because Performance Share
awards are intended to provide an incentive for future performance, the amount
of awards is not based upon past Company performance. Additionally, in
determining individual awards, the Committee does not consider Performance
Shares or Restricted Stock previously awarded or currently held, because such
considerations are not reflected in the compensation survey information upon
which awards are based, and because the Company does not wish to encourage
executives to sell stock in order to qualify for additional awards.
Stock Options
Under the ESIP, the Committee may grant stock options to executive officers.
Procedures for determining the number of options to be granted are in all
material respects the same as for Performance Share awards. The option awards
made by the Compensation Committee of the Board of Directors of Old Valero in
1997 typically vested over a period of three-years in equal installments and
expire ten years from the date of grant. The Committee expects generally to
continue this practice. The award and vesting of stock options are not
contingent on achievement of any specified performance targets, but the
options will provide a benefit to the executive only to the extent that there
is appreciation in the market price of the Common Stock during the option
period.
Determination of the CEO's Compensation
The CEO's compensation is recommended by the Committee and established by the
Board of Directors.
In 1997, the Committee approved a new employment agreement between the Company
and Mr. Greehey as CEO. Under the new agreement, Mr. Greehey's base salary
was set at $900,000 based on the Committee's evaluation of the most recently
available Hewitt subgroup survey data. The 1997 compensation of the CEO was
also substantially affected by the Distribution and Merger. As a result of
the CEO's efforts in connection with the successful completion of the
Distribution and Merger, including the substantial enhancement to shareholder
value which resulted, the Compensation Committee of the Old Valero Board of
Directors determined that a special cash bonus recognizing his efforts was
appropriate. Accordingly, the Committee authorized the payment of a special
$585,000 cash bonus to Mr. Greehey. Base salary comprised approximately 22%
of Mr. Greehey's 1997 total annual and long-term compensation reported in the
Summary Compensation Table, versus approximately 78% for incentive and
long-term compensation. The base salary component comprised a larger
percentage of the total in 1997 compared with 1996 because of Mr. Greehey's
retirement at July 1, 1996. The CEO's base salary and annual incentive
bonus, when paid, are determined using the procedures described above. In
determining the CEO's regular incentive bonus for 1997, the Committee
considered the four financial performance measures discussed above. Based
upon these factors, the Committee recommended, and on January 29, 1998, the
Board of Directors approved, an incentive bonus for Mr. Greehey of $1,000,000,
which was $415,000 above his original bonus target.
Tax Policy
Under Section 162(m) of the Code, with certain exceptions, publicly held
corporations, including the Company, may not take a tax deduction for
compensation in excess of $1 million paid to the CEO or the other four most
highly compensated executive officers named in the Summary Compensation Table
and serving at year-end. Section 162(m) will not apply to limit the
deductibility of performance-based compensation exceeding $1 million if such
compensation is paid (i) solely upon attainment of one or more performance
goals, (ii) pursuant to a qualifying performance-based compensation plan
adopted by the Committee, and (iii) the material terms, including the
performance goals, of such plan are approved by the stockholders before
payment of the compensation. The Company believes that options granted under
its stock option plans (including stock option awards under the ESIP) qualify
as performance based compensation and are not subject to any deductibility
limitations under Section 162(m) of the Code. The Company believes that
Section 162(m) will not limit the deductibility of any compensation paid to
the CEO or any of the other executive officers named in the Summary
Compensation Table for the Company's 1997 taxable year. As a result of the
Distribution and the Merger, compensation paid to the CEO and the other
executive officers prior to August 1, 1997 are not included in determining
compensation paid to these persons by the Company in 1997. Bonus amounts
shown in the Summary Compensation Table, though attributable to 1997
performance, were not paid until February 1998 and are therefore not included
in determining 1997 compensation under Section 162(m). Similarly, awards of
Restricted Stock are included in compensation for purposes of Section 162(m)
only in the year in which they vest.
The Committee will consider deductibility under Section 162(m) with respect to
future compensation arrangements with executive officers. However, the
Committee and the Board believe that it is in the best interest of the
stockholders that the Committee retain its flexibility and discretion to make
compensation awards to foster other corporate goals, such as to encourage
employee retention or to reward achievement of nonquantifiable goals,
including achieving progress with specific projects. Accordingly, the
Committee may in the future approve incentive payments that do not qualify for
deduction if the recipient's compensation exceeds the $1 million limit.
Members of the Compensation Committee:
Lowell H. Lebermann, Chairman
Robert G. Dettmer
James L. Johnson
Notwithstanding anything to the contrary set forth in any of Valero's previous
filings under the Securities Act of 1933, as amended, or in the Exchange Act
that might incorporate future filings by reference, including this Proxy
Statement, in whole or in part, the Performance Graph and Report of the
Compensation Committee of the Board of Directors on Executive Compensation
shall not be incorporated by reference into any such filings. The foregoing
Performance Graph and Report of the Compensation Committee of the Board of
Directors on Executive Compensation shall not be deemed to be "soliciting
material" or to be "filed" with the SEC or subject to Regulations 14A or 14C
under the Exchange Act, or to the liabilities of Section 18 of the Exchange
Act.
Executive Compensation
The following table provides a summary of compensation paid for the last
three-years to Valero's CEO, and to its four other most highly compensated
executive officers. The table shows amounts earned by such persons or services
rendered to the Company in all capacities in which they served, including
compensation paid or accrued by Old Valero or by subsidiaries of Old Valero
(including Valero and subsidiaries of Valero) prior to the effective date of
the Distribution and Merger (see page 1 of this Proxy Statement for a
discussion of the Distribution and Merger). Benefits under health care,
disability, term life insurance, vacation and other plans available to
employees generally are not included herein.
<TABLE>
<CAPTION>
Summary Compensation Table (1995-1997)
Long-Term Compensation
Restricted Securities
Annual Compensation Stock Underlying All Other
Name and Bonus Awards Options/ LTIP Compensation
Position(s) Year Salary($) ($)(1) ($)(2) SARs(#)(3) Payouts($)(4) ($)(5)
<S> <C> <C> <C> <C> <C> <C> <C>
William E. Greehey 1997 $900,000 $1,085,000 $ 675,000 493,000 $718,750 $ 93,996
Director, Chairman 1996 497,337 670,739 1,545,362 5,000 325,000 928,949
of the Board and 1995 684,540 560,000 431,250 0 0 73,007
Chief Executive
Officer
Edward C. Benninger 1997 $400,008 $470,000 $ 337,500 185,000 $260,188 $49,298
Director and 1996 357,180 335,370 497,500 25,000 93,698 28,541
President 1995 342,600 210,000 189,750 0 0 27,016
E. Baines Manning 1997 $280,020 $102,500 $ 118,125 39,000 $162,532 $31,959
Senior Vice 1996 253,230 122,989 0 18,000 58,500 18,753
President 1995 231,420 120,000 51,750 0 0 12,468
Gregory C. King(6) 1997 $191,095 $272,500 $ 84,375 26,250 $37,500 $ 8,755
Vice President and
General Counsel
John D. Gibbons(6) 1997 $181,887 $260,004 $ 81,000 19,125 0 $13,450
Chief Financial
Officer and
Treasurer
</TABLE>
<FN1>
(1) For 1995, executives received bonuses payable 70% in cash and 30% in
Common Stock. For 1996, executives received bonuses payable 25% in cash and
75% in Common Stock. For 1997, bonus amounts include the cash portion of the
regular annual bonus under the Executive Incentive Bonus Plan which was paid
50% in cash and 50% in Restricted Stock, as well as a special cash bonus paid
upon completion of the Distribution and Merger. For further information,
see "Report of the Compensation Committee of the Board of Directors on
Executive Compensation" above.
<FN2>
(2) As of December 31, 1997, no shares of Restricted Stock were held by any
of the named executive officers. On January 29, 1998, each named executive
received a grant of restricted stock as a part of his annual incentive bonus
for 1997. The value of such stock is included in the Summary Compensation
Table. Dividends are paid on the Restricted Stock at the same rate as on
Valero's unrestricted Common Stock.
<FN3>
(3) The number of options granted in 1995, 1996 and 1997 consists of options
granted by Old Valero. Such options were subsequently converted pursuant to
the Distribution into options to purchase shares of Valero's Common Stock.
See Note 1 to the table entitled "Options/SAR Grants in the Last Fiscal Year."
<FN4>
(4) LTIP payouts are the number of performance share awards vested for 1997
multiplied by the market price per share of Old Valero Common Stock or Valero
Common Stock, as the case may be, on the vesting date. Amounts reported may
include awards the executive has elected to defer. For further information,
see the notes following the table entitled "Long Term Incentive Plans-Awards
in Last Fiscal Year."
<FN5>
(5) Amounts include Company contributions pursuant to the Thrift Plan and
Valero's Excess Thrift Plan, unused portions of amounts provided by the
Company under the Company's Flexible Benefits Plan and that portion of
interest accrued under the Executive Deferred Compensation Plan which is
deemed to be at "above-market" rates under applicable SEC rules. Messrs.
Greehey, Benninger, Manning, King and Gibbons, were allocated $63,203,
$30,055, $18,979, $6,373 and $10,301, respectively, as a result of Company
contributions to the Thrift Plan and Valero's Excess Thrift Plan for 1997,
$8,362, $0, $9,112, $100 and $0, respectively, as a result of unused Flexible
Benefits and $6,033, $1,927, $0, $0 and $0, respectively, as a result of
"above-market" allocations to the Executive Deferred Compensation Plan for
1997. Messrs. Manning, King and Gibbons do not participate in the Executive
Deferred Compensation Plan. Amounts for Mr. Greehey also include executive
insurance policy premiums with respect to cash value life insurance (not
split-dollar life insurance) in the amount of $13,000 for 1995, $7,583 for
1996 and $12,212 for 1997. The amounts reported as "All Other Compensation"
also include reimbursement of certain country club dues, unused vacation and
other insurance premiums.
<FN6>
(6) Messrs. King and Gibbons were not executive officers of Valero or Old
Valero for any part of 1995 or 1996.
Stock Option Grants and Related Information
The following table provides further information regarding the grants of stock
options to the named executive officers reflected in the Summary Compensation
Table.
<TABLE>
<CAPTION>
Option/SAR Grants in the Last Fiscal Year (1)
______________________________________________________________________________________________________________________________
Number of Percent of
Securities Total Options/ Market
Underlying SARs Granted Exercise or Price at Grant Date
Options/SARs to Employees Base Price Grant Date Expiration Present Value
Name Granted (#) in Fiscal Year ($/Sh)(1) ($/Sh) Date ($)(2)
______________________________________________________________________________________________________________________________
<S> <C> <C> <C> <C> <C> <C>
William E. Greehey 203,000 $32.4375 $32.4375 03/13/07 $1,618,722
290,000 35% 35.5938 35.5938 06/25/07 2,528,510
Edward C. Benninger 75,000 32.4375 32.4375 03/13/07 598,050
110,000 13% 35.5938 35.5938 06/25/07 959,090
E. Baines Manning 39,000 3% 32.4375 32.4375 03/13/07 310,986
Gregory C. King 26,250 2% 32.4375 32.4375 03/13/07 209,318
John D. Gibbons 19,125 1% 32.4375 32.4375 03/13/07 152,503
______________________________________________________________________________________________________________________________
</TABLE>
<FN1>
(1) All options included on the table were granted prior to the Distribution
by Old Valero and subsequently converted into options (the "Converted
Options") to purchase shares of Valero Common Stock. The conversion was made
pursuant to a formula under which the excess of the fair market value of the
shares of Valero Common Stock subject to the options (immediately following
the Distribution) over the aggregate option price of such shares of Valero
Common Stock is equivalent to the excess of the fair market value of the
shares of Old Valero Common Stock subject to Old Valero stock options
(immediately prior to the Distribution) over the aggregate option price of
such shares of Old Valero Common Stock. Pursuant to such formula, each option
to purchase one share of Old Valero Common Stock was converted into an option
to purchase 1.4935 shares of Valero Common Stock, the exercise price of
options expiring on March 13, 2007 was adjusted to $21.7186 per share and the
exercise price of options expiring June 25, 2007 was adjusted to $23.8318 per
share. Options granted to Messrs. Greehey and Benninger expiring on June 25,
2007 will vest (become exercisable and nonforfeitable) in two equal
installments on the first and second anniversaries of the Distribution. All
other options reported vest in equal increments over a three-year period from
the date of grant and did not vest upon consummation of the Distribution and
Merger. In the event of a change of control of Valero, such options would
become immediately exercisable pursuant to provisions of the plan under which
such options were granted or of an executive severance agreement. Under the
terms of the plan, the exercise price and tax withholding obligations related
to exercise may be paid by delivery of already owned shares or by offset of
the underlying shares, subject to certain conditions. The Converted Options
expire at the same times as the corresponding Old Valero options would have
expired, had they remained outstanding. With respect to the 1997 option
grants, the following table sets forth the resulting number of Converted
Options held by each of the named executive officers in the Summary
Compensation Table, after giving effect to the conversion of Old Valero
options as described above, together with the exercise price of such Converted
Options:
___________________________________________________________________________
Number of
Old Valero Number of Exercise Price of
Name Options Converted Options Converted Options ($/Sh)
___________________________________________________________________________
William E. 203,000 303,189 $21.7186
Greehey 290,000 433,126 23.8318
Edward C. 75,000 112,016 21.7186
Benninger 110,000 164,290 23.8318
E. Baines
Manning 39,000 58,248 21.7186
Gregory C.
King 26,250 39,206 21.7186
John D.
Gibbons 19,125 28,564 21.7186
___________________________________________________________________________
<FN2>
(2) A variation of the Black-Scholes option pricing model was used to
determine grant date present value. This model is designed to value publicly
traded options. Options issued under the Company's option plans are not
freely traded, and the exercise of such options is subject to substantial
restrictions. Moreover, the Black-Scholes model does not give effect to
either risk of forfeiture or lack of transferability. The estimated values
under the Black-Scholes model are based on assumptions as to variables such as
interest rates, stock price volatility and future dividend yield. The
estimated grant date present values presented in this table were calculated
using an expected average option term of 3.32 years, risk-free rates of return
of 6.36% (for the March 13, 1997 grants) and 6.51% (for the June 25, 1997
grants), an average volatility rate for the 3.32 years preceding such grant of
26.50% (for the March 13, 1997 grants) and 25.94% (for the June 25, 1997
grants) and a dividend yield of 1.60% (for the March 13, 1997 grants) and
1.46% (for the June 25, 1997 grants), which are the annualized quarterly
dividend rates in effect at the date of grant, expressed as a percentage of
the market value of the Common Stock at the date of grant. The actual value
of stock options could be zero; realization of any positive value depends upon
the actual future performance of the Common Stock, the continued employment of
the option holder throughout the vesting period and the timing of the exercise
of the option. Accordingly, the values set forth in this table may not be
achieved.
<TABLE>
<CAPTION>
Long Term Incentive Plans - Awards in Last Fiscal Year(1)
______________________________________________________________________________________________________________________________
Performance Estimated Future Payouts
Number of or Other Period Under Non-Stock Price-Based Plans
Shares, Units Until Maturation Threshold Target Maximum
Name or Other Rights(2) or Payout (# Shares) (# Shares) (# Shares)
______________________________________________________________________________________________________________________________
<S> <C> <C> <C> <C> <C>
William E. Greehey 5,334 12/31/97 0 5,334 10,668
5,333 12/31/98 0 5,333 10,666
5,333 12/31/99 0 5,333 10,666
Edward C. Benninger 2,667 12/31/97 0 2,667 5,334
2,667 12/31/98 0 2,667 5,334
2,666 12/31/99 0 2,666 5,332
E. Baines Manning 1,667 12/31/97 0 1,667 3,333
1,667 12/31/98 0 1,667 3,333
1,666 12/31/99 0 1,666 3,332
Gregory C. King 800 12/31/97 0 800 1,600
800 12/31/98 0 800 1,600
800 12/31/99 0 800 1,600
______________________________________________________________________________________________________________________________
</TABLE>
<FN1>
(1) Long-term incentive awards are grants of performance shares ("Performance
Shares") made under the Executive Stock Incentive Plan. Total shareholder
return ("TSR") during a specified "performance period" was established as the
performance measure for determining what portion of the 1997 Performance Share
awards may vest. For purposes of the Performance Share awards, TSR is
measured by dividing the sum of (a) the net change in the price of a share of
Valero's Common Stock between the beginning of the performance period and the
end of the performance period, and (b) the total dividends paid on the Common
Stock during the performance period, by (c) the price of a share of Valero's
Common Stock at the beginning of the performance period. Each 1997
Performance Share award is subject to vesting in three equal increments, based
upon the Company's TSR during three overlapping periods, with all such periods
beginning on the date of the Distribution and ending on December 31, 1997,
1998 and 1999, respectively. At the end of each performance period, the
Company's TSR is compared to the TSR for a target group of comparable
companies. Valero and the companies in the target group are then ranked by
quartile. At the end of each performance period, participants earn 0%, 50%,
100% or 150% of the initial grant amount for such period depending upon
whether the Company's TSR is in the last, 3rd, 2nd or 1st quartile of the
target group; 200% will be earned if the Company ranks highest in the group.
Amounts not earned in a given performance period can be carried forward for
one additional performance period and up to 100% of the carried amount can
still be earned, depending upon the quartile achieved for such subsequent
period.
<FN2>
(2) The grants reported were made prior to the Distribution in shares of Old
Valero Common Stock and have been converted into shares of Valero Common Stock
on a share-for-share basis pursuant to a waiver of the conversion formula set
forth in the Performance Share Awards Agreements. Mr. Gibbons did not receive
a Performance Share award in 1997.
The following table provides information regarding securities underlying
options exercisable at December 31, 1997, and options exercised during 1997,
for the executive officers named in the Summary Compensation Table:
<TABLE>
<CAPTION>
Aggregated Option/SAR Exercises in Last Fiscal Year
and FY-End Option/SAR Values
____________________________________________________________________________________________________________________________
Value of Unexercised
Shares Number of Securities In-the-Money
Acquired Value Underlying Unexercised Options/SARs at
on Exercise Realized Options/SARs at FY-End(#)(1) FY-End ($)(1)(2)
Name (#)(1) ($) Exercisable Unexercisable Exercisable Unexercisable
____________________________________________________________________________________________________________________________
<S> <C> <C> <C> <C> <C> <C>
William E. Greehey 137,000 $2,799,401 564,834 736,315 $10,186,300 $6,447,941
Edward C. Benninger 157,805 2,707,829 57,502 276,306 733,185 2,415,910
E. Baines Manning 10,800 248,891 149,729 58,248 2,533,224 582,486
Gregory C. King 20,777 359,748 10,455 39,206 138,677 392,064
John D. Gibbons 29,378 414,040 0 28,564 0 285,643
______________________________________________________________________________________________________________________________
</TABLE>
<FN1>
(1) The number of shares reported under "Shares Acquired on Exercise"
represents shares of Old Valero Common Stock. The number of options and their
value reported under "Number of Securities Underlying Unexercised Options/SARs
at FY-End" and "Value of Unexercised In-the-Money Option/SARs at FY-End"
consists of options granted by Old Valero as subsequently converted into
options to purchase Valero Common Stock at the time of the Distribution
pursuant to the formula described in Note 1 to the table entitled "Options/SAR
Grants in the Last Fiscal Year."
<FN2>
(2) Represents the dollar value obtained by multiplying the number of
unexercised options/SARs by the difference between the stated exercise price
per share of the options/SARs and the average market price per share of
Valero's Common Stock on December 31, 1997.
Retirement Benefits
The following table shows the estimated annual gross benefits payable under
Valero's Pension Plan ("Pension Plan"), Excess Pension Plan and Supplemental
Executive Retirement Plan ("SERP") upon retirement at age 65, based upon the
assumed compensation levels and years of service indicated and assuming an
election to have payments continue for the life of the participant only.
<TABLE>
<CAPTION>
Estimated Annual Pension Benefits at Age 65
_____________________________________________________________________________________
Years of Service
Covered
Compensation 15 20 25 30 35
_____________________________________________________________________________________
<S> <C> <C> <C> <C> <C>
$ 200,000 $ 55,000 $ 73,000 $ 92,000 $110,000 $128,000
250,000 70,000 93,000 116,000 139,000 162,000
300,000 84,000 112,000 140,000 168,000 196,000
400,000 113,000 151,000 189,000 227,000 265,000
500,000 143,000 190,000 238,000 285,000 333,000
600,000 172,000 229,000 287,000 344,000 401,000
700,000 201,000 268,000 335,000 402,000 469,000
800,000 230,000 307,000 384,000 461,000 538,000
900,000 260,000 346,000 433,000 519,000 606,000
1,000,000 289,000 385,000 482,000 578,000 674,000
1,100,000 318,000 424,000 530,000 636,000 742,000
1,200,000 347,000 463,000 579,000 695,000 811,000
1,300,000 377,000 502,000 628,000 753,000 879,000
1,400,000 406,000 541,000 677,000 812,000 947,000
_____________________________________________________________________________________
</TABLE>
Valero maintains a noncontributory defined benefit Pension Plan in which
virtually all employees are eligible to participate and under which
contributions for individual participants are not determinable. Valero also
maintains a noncontributory, non-qualified Excess Pension Plan and a
non-qualified SERP, which provide supplemental pension benefits to certain
highly compensated employees. The Pension Plan (supplemented, as necessary,
by the Excess Pension Plan) provides a monthly pension at normal retirement
equal to 1.6% of the participant's average monthly compensation (based upon
the participant's base earnings during the 60 consecutive months of the
participant's credited service, including service with Old Valero, affording
the highest such average) times the participant's years of credited service,
plus .35% times the product of the participant's years of credited service
(maximum 35 years) multiplied by the excess of the participant's average
monthly compensation over the lesser of 1.25 times the monthly average
(without indexing) of the social security wage bases for the 35-year period
ending with the year the participant attains social security retirement age,
or the monthly average of the social security wage base in effect for the year
that the participant retires.
Compensation for purposes of the Pension Plan and Excess Pension Plan includes
only salary as reported in the Summary Compensation Table and excludes
bonuses. For purposes of the SERP, the participant's most highly compensated
consecutive 36 months of service during the participant's last 10 years of
employment (rather than 60 months), including employment with Old Valero and
its subsidiaries, are considered, and bonuses are included. Accordingly, the
amounts reported in the Summary Compensation Table under the headings "Salary"
and "Bonus" constitute covered compensation for purposes of the SERP. Pension
benefits are not subject to any deduction for social security or other offset
amounts.
Credited years of service for the period ended December 31, 1997 for the
executive officers named in the Summary Compensation Table are as follows: Mr.
Greehey -- 34 years; Mr. Benninger -- 23 years; Mr. Manning -- 11 years; Mr.
Gibbons -- 17 years; and Mr. King -- 4 years.
Arrangements with Certain Officers and Directors
Old Valero entered into agreements (the "Severance Agreements") with Messrs.
Greehey, Benninger and Manning, which provide certain payments and other
benefits in the event of their termination of employment under certain
circumstances. The Severance Agreements provide that if the executive leaves
the Company for any reason (other than death, disability or normal retirement)
within two years after a "change of control," the executive will receive a
lump sum cash payment equal to three times, in the case of Mr. Greehey, and
two times, in the cases of Messrs. Benninger and Manning, his highest
compensation during any consecutive 12-month period in the prior three years.
The executive will also be entitled to accelerated vesting of all previously
granted stock options, SARs and restricted stock. The agreements also provide
for special retirement benefits if the executive would have qualified for
benefits under the Pension Plan had he remained with the Company for the
three-year period following such termination, continuance of life and health
insurance coverages, relocation assistance and other fringe benefits for such
three-year period. In connection with the Merger, Messrs. Greehey, Benninger
and Manning each executed a waiver providing that the consummation of the
transactions contemplated by the Merger would not constitute a "change of
control" for purposes of such Severance Agreements, and Valero assumed the
obligations of Old Valero under the Severance Agreements after the Merger.
Valero has entered into Management Stability Agreements ("Stability
Agreements") with various key executives, including Messrs. King and Gibbons.
These agreements are intended to assure the continued availability of these
executives in the event of certain transactions culminating in a "change of
control" of Valero and/or a divestiture of one of the Company's principal
businesses. Under the Stability Agreements, in the event Mr. King or Mr.
Gibbons is terminated within two years after a change of control or
divestiture transaction has occurred, and termination is not voluntary or the
result of death, permanent disability, retirement or certain other defined
circumstances, the executive would be entitled to receive (i) a lump sum cash
payment equal to two times the highest annual compensation paid to such
executive during the prior three-year period, and (ii) the continuation of
life, disability and health insurance coverages for two years. The executives
would also be entitled to accelerated vesting of all previously granted stock
options, SARs and restricted stock.
Valero has entered into an Employment Agreement with Mr. Greehey. The
agreement became effective July 31, 1997 and has an initial term of two
years, which may be extended on a month-to-month basis thereafter. Under the
agreement, Mr. Greehey agrees to serve as Chief Executive Officer of Valero
and receives a base salary of $900,000 per annum, subject to possible increase
adjustments by the Valero Board. The agreement also provides for Mr. Greehey
to receive an annual bonus in an amount to be determined by the Board. During
his employment, Mr. Greehey would also receive reimbursement for certain club
membership dues and fees, tax planning services and a permanent life insurance
benefit. In the event Mr. Greehey dies during employment, his base salary
shall be paid to his beneficiaries or estate for the remainder of the
agreement period.
The agreement provides that Mr. Greehey may retire at any time upon 90 days
prior notice. Upon his retirement from employment, Mr. Greehey has agreed to
continue to serve at the discretion of the Board as Chairman of the Board for
two additional years at a rate of compensation equal to one-half of his base
salary at the time of his retirement. Upon his retirement, in addition to
retiree medical and other benefits payable to retirees generally, Mr. Greehey
would also receive credit for eight additional years of service for purposes
of calculating his supplemental pension benefits under the SERP, vesting of
outstanding derivative securities, office and secretarial facilities
commensurate with his position as former Chief Executive Officer and $300,000
of permanent life insurance.
The Company may terminate Mr. Greehey's employment as Chief Executive Officer
at any time upon 90 days notice. Unless such termination is for cause, Mr.
Greehey would be entitled to receive a pro rata, lump sum cash settlement
equal to the sum of (i) Mr. Greehey's base salary for the remaining term of
the agreement, plus (ii) an amount equal to the highest annual bonus paid to
Mr. Greehey during the preceding five years. If Mr. Greehey's employment is
terminated by the Company, he would not be entitled to serve as Chairman or to
receive the compensation specified for such service. However, if Mr. Greehey
retires and commences service as Chairman of the Board, and is then removed
from such position by a majority of the remaining Board members, he would be
entitled to receive the balance of the two years compensation for serving as
Chairman of the Board.
Valero has also entered into an Employment Agreement with Mr. Benninger. The
agreement became effective July 31, 1997 and has an initial term of two
years, which may be extended on a month-to-month basis thereafter. Under the
agreement, Mr. Benninger agrees to serve as President of Valero and receives a
base salary of $400,000 per annum, subject to possible increase adjustments by
the Valero Board. The agreement also provides for Mr. Benninger to receive an
annual bonus in an amount to be determined by the Board. During his
employment, Mr. Benninger would also receive reimbursement for certain club
membership dues and fees and tax planning services. In the event Mr.
Benninger dies during employment, his base salary shall be paid to his
beneficiaries or estate for the remainder of the agreement period.
The agreement provides that Mr. Benninger may retire at any time upon 90 days
prior notice. Upon his retirement, in addition to retiree medical and other
benefits payable to retirees generally, Mr. Benninger would also receive
credit for eight additional years of service for purposes of calculating his
supplemental pension benefits under the SERP, vesting of outstanding
derivative securities, office and secretarial facilities commensurate with his
position as former President and assignment of a country club membership.
The Company may terminate Mr. Benninger's employment as President at any time
upon 90 days notice. Unless such termination is for cause, Mr. Benninger
would be entitled to receive a pro rata, lump sum cash settlement equal to the
sum of (i) Mr. Benninger's base salary for the remaining term of the
agreement, plus (ii) an amount equal to the highest annual bonus paid to Mr.
Benninger during the preceding five years.
Each of the above-described Employment Agreements provides that if the
executive receives a cash payment thereunder, and such payment is determined
to be subject to the excise tax required for certain "excess parachute
payments," then the executive shall receive a cash bonus to cover the amount
of any such excise tax payable, plus any taxes on such bonus amount. In
addition, amounts which Mr. Greehey or Mr. Benninger may receive under their
respective Severance Agreements shall be credited against amounts payable
under their Employment Agreement.
Transactions with Management and Others
In 1992, a subsidiary of the Company invested approximately $9.7 million in a
program to drill coal seam gas wells in New Mexico. In order to share the
drilling and other risks inherent in this project, various officers and
employees of the Company were permitted to invest as general partners in a
partnership to which the subsidiary's interest was assigned. The Board
determined in 1992 that this transaction was fair to the Company. During 1992
and 1993 Messrs. Greehey, Benninger and Manning invested approximately
$207,000, $52,000 and $104,000, respectively, to acquire respective interests
of 2.0%, .50% and 1.0% in the project. During 1995, a company owned by Mr.
Manning purchased an additional .25% interest in the project from another
investor. During 1997, Messrs. Greehey, Benninger and Manning (including such
company) received cash distributions of $9,720, $2,430 and $6,075,
respectively, attributable to their investments. Additionally, all investors
in the project may be eligible to utilize certain federal income tax credits
applicable to the project.
See "Executive Compensation" for a discussion of compensation paid to certain
officers in connection with the successful completion of the Distribution and
Merger.
Except as disclosed above, no executive officer, director or nominee for
director of Valero has been indebted to the Company, or has acquired a
material interest in any transaction to which the Company is a party, during
the last fiscal year.
PROPOSAL NO. 2. Ratification of Independent Public Accountants
The Board requests stockholder approval of the following resolution adopted at
the Board meeting held on February 26, 1998, appointing Arthur Andersen LLP,
70 N.E. Loop 410, San Antonio, Texas 78216, as independent public accountants
for the Company for the year 1998. Arthur Andersen LLP has served
continuously in such capacity for Old Valero and the Company since 1979.
RESOLVED, that the appointment of the firm of Arthur Andersen LLP,
Certified Public Accountants, as the independent auditors
for the Company for the purpose of conducting an
examination and audit of the financial statements of
Valero and its subsidiaries for the fiscal year ending
December 31, 1998, is hereby approved and ratified.
THE BOARD RECOMMENDS THAT THE STOCKHOLDERS VOTE "FOR" THE PROPOSAL TO RATIFY
THE APPOINTMENT OF INDEPENDENT PUBLIC ACCOUNTANTS.
Passage of the proposal requires approval of a majority of the shares
represented and entitled to vote at the Annual Meeting. If the appointment is
not approved, the adverse vote will be considered as an indication to the
Board that it should select other independent public accountants for the
following year. Because of the difficulty and expense of making any
substitution of accountants so long after the beginning of the current year,
it is contemplated that the appointment for the year 1998 will be permitted to
stand unless the Board finds other good reason for making a change.
A representative of Arthur Andersen LLP is expected to be present at the
Annual Meeting to respond to appropriate questions raised at the Annual
Meeting or submitted to them in writing prior to the Annual Meeting. The
representative may also make a statement if he or she desires to do so.
PROPOSAL NO. 3. Other Business
If any matters not referred to in this Proxy Statement properly come before
the Annual Meeting, a majority of the persons named in the proxy (or, if one
such person acts, then that one) may vote the shares represented by proxy in
accordance with their best judgment. The Board was not aware at a reasonable
time before solicitation of proxies began of any other matters that would be
presented for action at the meeting.
Shareholder Proposals
Under Valero's By-Laws, stockholders intending to bring any business before an
Annual Meeting of Stockholders, including nominations of persons for election
as directors, must give prior written notice to the Corporate Secretary
regarding the business to be presented or persons to be nominated. The notice
must be received at the principal executive office of Valero within the time
period and must be accompanied by the information and documents specified in
the By-Laws. A copy of the By-Laws may be obtained by writing to the
Corporate Secretary of Valero.
The foregoing provisions of the By-Laws do not affect any stockholder's right
to request inclusion of proposals in the Proxy Statement pursuant to Rule
14a-8 under the Exchange Act. However, the stockholder must also comply with
all applicable requirements of the Exchange Act and the rules and regulations
of the SEC thereunder. Under the SEC's proxy solicitation rules, to be
considered for inclusion in the proxy materials for the 1999 Annual Meeting of
Stockholders, stockholder proposals must be received by the Corporate
Secretary at Valero's principal executive office by November 20, 1998.
Valero will consider recommendations by stockholders for directors to be
nominated at the 1999 Annual Meeting of Stockholders. Recommendations must be
in writing and include sufficient biographical and other relevant information
such that an informed judgment as to the proposed nominee's qualifications can
be made. Recommendations must be accompanied by a notarized statement
executed by the proposed nominee consenting to be named in the Proxy
Statement, if nominated, and to serve as a director, if elected.
Recommendations received in proper order by the Corporate Secretary at
Valero's principal executive office at least six months prior to the 1999
Annual Meeting of Stockholders will be referred to, and considered by, the
Executive Committee or, if appointed, a Nominating Committee.
Stockholders are urged to review all applicable rules and, if questions arise,
to consult their own legal counsel before submitting a nomination or proposal
to Valero. No stockholder recommendations or proposals were received within
the required period before the Annual Meeting.
Miscellaneous
Consolidated financial statements and related information for Valero,
including audited financial statements for the fiscal year ended December 31,
1997, are contained in the Company's Annual Report on Form 10-K which is
included with this Proxy Statement.
Valero's Annual Report to Stockholders (the "Annual Report") for the fiscal
year ended December 31, 1997, has simultaneously been mailed to stockholders
entitled to vote at the Annual Meeting. The Annual Report is not to be
treated as a part of the proxy materials.
Harris Trust and Savings Bank, Chicago, Illinois, serves as transfer agent,
registrar and dividend paying agent for Valero's Common Stock. Correspondence
relating to any stock accounts, dividends or transfers of stock certificates
should be addressed to:
Harris Trust and Savings Bank
Communications Team
P.O. Box A3504
Chicago, Illinois 60690-3504
(312) 360-5261
Valero pays for the cost of soliciting proxies and the Annual Meeting. In
addition to the solicitation of proxies by mail, proxies may be solicited by
personal interview, telephone and similar means by directors, officers or
employees of the Company, none of whom will be specially compensated for such
activities. Valero also intends to request that brokers, banks and other
nominees solicit proxies from their principals and will pay such brokers,
banks and other nominees certain expenses incurred by them for such
activities. The Company has retained Kissel-Blake, Inc., a proxy soliciting
firm, to assist in the solicitation of proxies, for an estimated fee of
$10,000, plus reimbursement of certain out-of-pocket expenses.
Participants in the Valero Thrift Plan please note:
In the case of participants in the Valero Thrift Plan, the proxy card will
represent (in addition to any shares held individually of record) the number
of shares allocated to the participant's account under the plan. For those
shares held under the plan, the proxy card will constitute an instruction to
the Trustee under the plan as to how such shares are to be voted. Shares for
which instructions are not received may be voted by the Trustee in accordance
with the plan.
By order of the Board of Directors,
Jay D. Browning
Corporate Secretary
San Antonio, Texas
March 20, 1998
<PAGE>
Valero Energy Corporation
PLEASE MARK VOTE IN OVAL IN THE FOLLOWING MANNER USING DARK INK ONLY.
<TABLE>
<S> <C> <C> <C> <C>
1. Election of Directors For For Withhold
Nominees: Ruben M. Escobedo All Except Nominee(s) Written Below
Lowell H. Lebermann _______________________________
2. Ratification of Arthur Andersen For Against Abstain
LLP as auditors for 1998
Sign here exactly as name(s) appear on this card:
Dated ____________________, 1998
(x)_____________________________
(x)_____________________________
I (we) hereby revoke all proxies previously given
to vote at the meeting or any adjournments
thereof and acknowledge receipt of the Notice of
Annual Meeting and Proxy Statement. If signing
for a corporation or partnership or as agent,
attorney or fiduciary, indicate full title or capacity
in which you are signing.
______________________________________________________________________________________________________________________________
FOLD AND DETACH HERE
</TABLE>
YOUR VOTE IS IMPORTANT. PLEASE VOTE, SIGN, DATE AND RETURN THIS PROXY FORM
PROMPTLY USING THE ENCLOSED ENVELOPE.
VALERO ENERGY CORPORATION
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
FOR THE ANNUAL MEETING OF STOCKHOLDERS TO BE HELD APRIL 30, 1998.
The undersigned hereby appoint(s) each of William E. Greehey, Edward C.
Benninger and Jay D. Browning as Proxies, with full power of substitution, to
represent and to vote all Common Stock of Valero Energy Corporation ("Valero")
owned by the undersigned at the Annual Meeting of Stockholders to be held in
San Antonio, Texas on Thursday, April 30, 1998, including any adjournment
thereof, with respect to the matters set forth in the Notice of Annual Meeting
and Proxy Statement. When properly executed, this proxy will be voted in
accordance with the directions indicated herein by the undersigned, or if no
direction is made, will be voted for Items 1 and 2. For shares allocated to a
participant's account pursuant to any Employee Stock Plan of Valero, this
proxy will constitute an instruction to the plan trustee as to how such shares
are to be voted. In their discretion, the Proxies are authorized to vote upon
such other business as may properly come before the meeting and to vote for a
substitute if a nominee named in Proposal 1 is unable to serve. The
undersigned authorize(s) the Proxies to cumulate the undersigned's votes and
distribute them among the nominees (excepting any nominee for which authority
to vote is withheld) in equal proportions or in such other proportions as the
Proxies shall direct.
The Board of Directors recommends a vote FOR the election of Directors and FOR
Item 2.
