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 September 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-13175
VALERO ENERGY CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 74-1828067
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7990 I.H. 10 West
San Antonio, Texas
(Address of principal executive offices)
78230
(Zip Code)
(210) 370-2000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days.
Yes X No
Indicated below is the number of shares outstanding of the
registrant's only class of common stock, as of November 1, 1998.
Number of
Shares
Title of Class Outstanding
Common Stock, $.01 Par Value 55,834,386
<PAGE>
VALERO ENERGY CORPORATION AND SUBSIDIARIES
INDEX
Page
PART I. FINANCIAL INFORMATION
Consolidated Balance Sheets - September 30, 1998
and December 31, 1997.............................
Consolidated Statements of Income - For the Three
Months Ended and Nine Months Ended
September 30, 1998 and 1997.......................
Consolidated Statements of Cash Flows - For the
Nine Months Ended September 30, 1998 and 1997.....
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 ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Thousands of Dollars)
<CAPTION>
September 30,
1998 December 31,
(Unaudited) 1997
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and temporary cash investments............... $ 8,196 $ 9,935
Receivables, less allowance for doubtful accounts
of $1,725 (1998) and $1,275 (1997).............. 272,569 366,315
Inventories....................................... 430,923 369,355
Current deferred income tax assets................ 16,109 17,155
Prepaid expenses and other........................ 21,988 26,265
749,785 789,025
PROPERTY, PLANT AND EQUIPMENT - including
construction in progress of $134,243 (1998)
and $66,636 (1997), at cost...................... 2,523,331 2,132,489
Less: Accumulated depreciation................ 594,978 539,956
1,928,353 1,592,533
DEFERRED CHARGES AND OTHER ASSETS.................. 125,671 111,485
$2,803,809 $2,493,043
<FN>
See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
<TABLE>
VALERO ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - (Continued)
(Thousands of Dollars)
<CAPTION>
September 30,
1998 December 31,
(Unaudited) 1997
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
CURRENT LIABILITIES:
Short-term debt.................................... $ 107,000 $ 122,000
Accounts payable................................... 386,279 414,305
Accrued expenses................................... 89,190 60,979
582,469 597,284
LONG-TERM DEBT, less current maturities.............. 697,673 430,183
DEFERRED INCOME TAXES................................ 263,564 256,858
DEFERRED CREDITS AND OTHER LIABILITIES............... 88,390 49,877
COMMON STOCKHOLDERS' EQUITY:
Common stock, $.01 par value - 150,000,000
shares authorized; issued 56,314,798 (1998)
and 56,136,032 (1997) shares..................... 563 561
Additional paid-in capital......................... 1,112,393 1,110,654
Retained earnings.................................. 72,506 47,626
Treasury stock, 499,374 (1998) and -0- (1997)
shares, at cost.................................. (13,749) -
1,171,713 1,158,841
$2,803,809 $2,493,043
<FN>
See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
<TABLE>
VALERO ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Thousands of Dollars, Except Per Share Amounts)
(Unaudited)
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
OPERATING REVENUES.................................. $1,338,649 $1,975,665 $4,149,112 $4,160,091
COSTS AND EXPENSES:
Cost of sales and operating expenses.............. 1,288,064 1,846,626 3,926,793 3,887,135
Write-down of inventories to market value......... - - 37,673 -
Selling and administrative expenses............... 16,753 17,502 52,668 36,962
Depreciation expense.............................. 20,106 17,430 56,345 47,674
Total........................................... 1,324,923 1,881,558 4,073,479 3,971,771
OPERATING INCOME.................................... 13,726 94,107 75,633 188,320
OTHER INCOME (EXPENSE), NET......................... (420) 1,461 17 4,475
INTEREST AND DEBT EXPENSE:
Incurred.......................................... (8,742) (12,601) (24,610) (37,178)
Capitalized....................................... 1,547 408 3,426 1,274
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES.............................. 6,111 83,375 54,466 156,891
INCOME TAX EXPENSE.................................. 1,800 31,382 16,100 57,489
INCOME FROM CONTINUING OPERATIONS................... 4,311 51,993 38,366 99,402
LOSS FROM DISCONTINUED OPERATIONS, NET OF INCOME
TAX BENEFIT OF $1,082 and $8,889, RESPECTIVELY.... - (432) - (15,672)
NET INCOME.......................................... 4,311 51,561 38,366 83,730
Less: Preferred stock dividend requirements
and redemption premium.................. - - - 4,592
NET INCOME APPLICABLE TO COMMON STOCK............... $ 4,311 $ 51,561 $ 38,366 $ 79,138
EARNINGS (LOSS) PER SHARE OF COMMON STOCK:
Continuing operations............................. $ .08 $ .93 $ .68 $ 1.98
Discontinued operations........................... - (.01) - (.40)
Total........................................... $ .08 $ .92 $ .68 $ 1.58
Weighted average common shares outstanding
(in thousands).................................. 56,096 55,950 56,149 50,175
EARNINGS (LOSS) PER SHARE OF COMMON STOCK -
ASSUMING DILUTION:
Continuing operations........................... $ .08 $ .91 $ .67 $ 1.83
Discontinued operations......................... - (.01) - (.29)
Total......................................... $ .08 $ .90 $ .67 $ 1.54
Weighted average common shares outstanding
(in thousands)................................. 56,651 56,965 57,121 54,415
DIVIDENDS PER SHARE OF COMMON STOCK................. $ .08 $ .08 $ .24 $ .34
<FN>
See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
<TABLE>
VALERO ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands of Dollars)
(Unaudited)
<CAPTION>
Nine Months Ended
September 30,
1998 1997
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Income from continuing operations........................... $ 38,366 $ 99,402
Adjustments to reconcile income from continuing operations
to net cash provided by continuing operations:
Depreciation expense.................................... 56,345 47,674
Amortization of deferred charges and other, net......... 31,176 19,289
Write-down of inventories to market value............... 37,673 -
Changes in current assets and current liabilities....... 98,111 50,500
Deferred income tax expense............................. 8,400 20,927
Changes in deferred items and other, net................ (1,979) (7,927)
Net cash provided by continuing operations............ 268,092 229,865
Net cash provided by discontinued operations.......... - 24,752
Net cash provided by operating activities........... 268,092 254,617
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures:
Continuing operations..................................... (113,473) (40,586)
Discontinued operations................................... - (52,674)
Deferred turnaround and catalyst costs...................... (41,316) (4,466)
Purchase of Paulsboro Refinery.............................. (330,798) -
Acquisition of Basis Petroleum, Inc. ....................... - (362,060)
Earn-out payment in connection with Basis acquisition....... (10,325) -
Dispositions of property, plant and equipment............... 346 28
Other, net.................................................. 511 (5)
Net cash used in investing activities..................... (495,055) (459,763)
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in short-term debt, net................. (15,000) 208,088
Long-term borrowings........................................ 403,656 1,300,068
Long-term debt reduction.................................... (137,000) (1,092,668)
Special spin-off dividend, including intercompany
note settlement............................................ - (214,653)
Common stock dividends...................................... (13,486) (16,541)
Preferred stock dividends................................... - (5,419)
Issuance of common stock.................................... 3,490 58,794
Purchase of treasury stock.................................. (16,436) (9,264)
Redemption of preferred stock............................... - (1,339)
Net cash provided by financing activities................. 225,224 227,066
NET INCREASE (DECREASE) IN CASH AND TEMPORARY
CASH INVESTMENTS............................................ (1,739) 21,920
CASH AND TEMPORARY CASH INVESTMENTS AT
BEGINNING OF PERIOD......................................... 9,935 10
CASH AND TEMPORARY CASH INVESTMENTS AT
END OF PERIOD............................................... $ 8,196 $ 21,930
<FN>
See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
VALERO ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The consolidated financial statements included herein have
been prepared by Valero Energy Corporation ("Valero") and
subsidiaries (collectively referred to as the "Company"), without
audit, pursuant to the rules and regulations of the Securities and
Exchange Commission ("SEC"). 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.
On July 31, 1997, Energy (defined as Valero Energy
Corporation and its consolidated subsidiaries, both individually
and collectively, for periods prior to such date, and the natural
gas related services business of Energy for periods subsequent to
such date) spun off Valero to Energy's stockholders and merged its
natural gas related services business with a wholly owned
subsidiary of PG&E Corporation ("PG&E"). This spin-off of Valero
and merger of Energy's natural gas related services business with
PG&E are collectively referred to as the "Restructuring." As a
result of the Restructuring, Valero became a "successor registrant"
to Energy for financial reporting purposes under the federal
securities laws. Accordingly, the accompanying consolidated
financial information for periods prior to the Restructuring is the
consolidated financial information of Energy restated to reflect
Energy's natural gas related services business as discontinued
operations. The accompanying consolidated financial statements
should be read in conjunction with the consolidated financial
statements and related notes included in the Company's latest
Annual Report on Form 10-K. Certain prior period amounts have been
reclassified for comparative purposes.
2. Discontinued Operations
Revenues of the discontinued natural gas related services
business were $283.5 million and $1.7 billion for the one month
ended and seven months ended July 31, 1997, respectively. These
amounts are not included in operating revenues as reported in the
accompanying Consolidated Statements of Income.
Total interest expense for the discontinued natural gas
related services business was $4.7 million and $32.7 million for
the one month ended and seven months ended July 31, 1997,
respectively. Such amounts include an allocated portion of interest
on corporate debt plus interest specifically attributed to such
discontinued operations.
3. Acquisitions
Paulsboro Refinery
On September 16, 1998, the Company and Mobil Oil
Corporation ("Mobil") entered into an asset sale and purchase
agreement for the acquisition by the Company of substantially all
of the assets and the assumption of certain liabilities related to
Mobil's 155,000 barrel-per-day ("BPD") refinery in Paulsboro, New
Jersey ("Paulsboro Refinery"). The purchase price was $228 million
plus approximately $102 million representing the estimated value of
inventories and certain other items acquired in the transaction and
was paid in cash from borrowings under the Company's bank credit
facilities. The acquisition is being accounted for using the
purchase method of accounting. Accordingly, the accompanying
Consolidated Statements of Income for the three months ended and
nine months ended September 30, 1998 include the results of
operations of the Paulsboro Refinery for the period September 17
through September 30, 1998.
As part of the transaction, the Company and Mobil signed
long-term agreements for the Company to supply Mobil with fuels and
lubricant basestocks and for Mobil to continue to supply the
Paulsboro Refinery with high-quality crude feedstocks. In
addition, pursuant to the asset sale and purchase agreement, Mobil
is entitled to receive payments in any of the five years following
the acquisition if certain average refining margins during any of
such years exceed a specified level. Any payments under this
earn-out arrangement are limited to $20 million in any year and $50
million in the aggregate and will be accounted for by the Company
as an additional cost of the acquisition and depreciated over the
remaining lives of the assets to which the additional cost is
allocated. As a result of the acquisition of the Paulsboro
Refinery, the Company currently owns and operates five refineries
in the Gulf Coast and Northeast regions of the United States with a
combined throughput capacity of approximately 735,000 BPD.
In connection with the acquisition of the Paulsboro Refinery,
Mobil agreed to indemnify the Company for certain environmental
matters and conditions existing on or prior to the acquisition and
the Company agreed to assume Mobil's environmental liabilities, with
certain limited exceptions. Mobil's indemnities and the periods
of indemnification include (i) third party environmental claims for
a period of five years, (ii) governmental fines and/or penalties for
a period of five years, (iii) required remediation of known
environmental conditions for a period of five years, subject to
a cumulative deductible, and (iv) required remediation of unknown
environmental conditions for a period of seven years, subject to
a sharing arrangement with a cap on the Company's obligation and
subject to a cumulative deductible. The Company's assumed liabilities
include remediation obligations to the New Jersey Department of
Environmental Protection. These remediation obligations relate
primarily to clean-up costs associated with groundwater contamination,
landfill closure and post-closure monitoring costs, and tank farm
spill prevention costs. As of September 30, 1998, the Company has
recorded approximately $20 million in Accrued Expenses and
Deferred Credits and Other Liabilities representing its best estimate
of current and future costs to be borne by the Company related to
these remediation obligations. The majority of such costs are
expected to be incurred in relatively level amounts over the next 20 years.
Basis Petroleum, Inc.
Effective May 1, 1997, Energy acquired the outstanding
common stock of Basis Petroleum, Inc. ("Basis"), a wholly owned
subsidiary of Salomon Inc ("Salomon"). Prior to the Restructuring,
Energy transferred the stock of Basis to Valero. As a result,
Basis was a part of the Company at the time of the Restructuring.
The primary assets acquired in the Basis acquisition included
petroleum refineries located in Texas at Texas City and Houston and
in Louisiana at Krotz Springs, and an extensive wholesale marketing
business. The acquisition was accounted for using the purchase
method of accounting and the purchase price was allocated to the
assets acquired and liabilities assumed based on estimated fair
values as determined by an independent appraisal. Pursuant to the
purchase method of accounting, the accompanying Consolidated
Statements of Income for the 1997 periods include the results of
operations related to the Texas City, Houston and Krotz Springs
refineries for the months of May through September 1997.
Pursuant to the purchase agreement, Salomon is entitled to
receive payments in any of the 10 years following the acquisition
if certain average refining margins during any of such years exceed
a specified level. Any payments under this earn-out arrangement,
which are determined as of May 1 of each year beginning in 1998,
are limited to $35 million in any year and $200 million in the
aggregate and are accounted for by the Company as an additional
cost of the acquisition and depreciated over the remaining lives of
the assets to which the additional cost is allocated. The earn-out
amount for the year ended May 1, 1998 was $10.3 million and was
paid to Salomon on May 29, 1998.
Pro Forma Financial Information
The following unaudited pro forma financial information of
the Company for the nine months ended September 30, 1998 and 1997
assumes that the acquisition of the Paulsboro Refinery occurred at
the beginning of each period and that the acquisition of Basis
occurred at the beginning of the 1997 period. Such pro forma
information is not necessarily indicative of the results of future
operations. (Dollars in thousands, except per share amounts.)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1998 1997
<S> <C> <C>
Operating revenues.................. $4,856,556 $6,991,088
Operating income.................... 112,409 216,102
Income from continuing operations... 52,153 107,128
Loss from discontinued operations... - (15,672)
Net income.......................... 52,153 91,456
Earnings (loss) per common share:
Continuing operations............. .93 2.13
Discontinued operations........... - (.40)
Total........................... .93 1.73
Earnings (loss) per common share -
assuming dilution:
Continuing operations............. .91 1.97
Discontinued operations........... - (.29)
Total........................... .91 1.68
</TABLE>
4. Inventories
Refinery feedstocks and refined products and blendstocks
are carried at the lower of cost or market, with the cost of
feedstocks purchased for processing and produced products
determined primarily under the last-in, first-out ("LIFO") method
of inventory pricing and the cost of feedstocks and products
purchased for resale determined primarily under the weighted
average cost method. The replacement cost of the Company's LIFO
inventories approximated their LIFO carrying values at September
30, 1998. Materials and supplies are carried principally at
weighted average cost not in excess of market. Inventories as of
September 30, 1998 and December 31, 1997 were as follows (in
thousands):
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
<S> <C> <C>
Refinery feedstocks................... $186,420 $102,677
Refined products and blendstocks...... 182,926 210,196
Materials and supplies................ 61,577 56,482
$430,923 $369,355
</TABLE>
5. 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. The changes in the Company's current assets and
current liabilities are shown in the following table as an
(increase)/decrease in current assets and an increase/(decrease) in
current liabilities (in thousands). These amounts exclude (i) a
$37.7 million noncash write-down of inventories to market value in
the first quarter of 1998 and (ii) the current assets and current
liabilities of the Paulsboro Refinery and Basis as of their
acquisition dates in 1998 and 1997, respectively (see Note 3), both
of which are reflected separately in the Statement of Cash Flows.
Also excluded from the following table are changes in cash and
temporary cash investments, current deferred income tax assets,
short-term debt and current maturities of long-term debt. The
Company's temporary cash investments are highly liquid, low-risk
debt instruments which have a maturity of three months or less when
acquired.
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1998 1997
<S> <C> <C>
Receivables, net.................. $ 95,093 $ 50,182
Inventories....................... (18,775) 59,085
Prepaid expenses and other........ 4,949 3,091
Accounts payable.................. (13,406) (57,708)
Accrued expenses.................. 30,250 (4,150)
Total.......................... $ 98,111 $ 50,500
</TABLE>
Cash flows related to interest and income taxes, including
amounts related to discontinued operations, were as follows (in
thousands):
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1998 1997
<S> <C> <C>
Interest paid (net of amount capitalized)... $15,405 $60,055
Income tax refunds received................. 9,389 11
Income taxes paid........................... 9,950 5,612
</TABLE>
Noncash investing and financing activities for the nine
months ended September 30, 1997 included the issuance of Energy
common stock to Salomon as partial consideration for the
acquisition of the capital stock of Basis discussed in Note 3, and various
adjustments to debt and equity, including the assumption of certain
debt by PG&E that was previously allocated to the Company,
resulting from the Restructuring discussed in Note 1. In addition,
noncash investing activities for the nine months ended September
30, 1998 included various adjustments to property, plant and
equipment and certain current assets and current liabilities
resulting from the completion of an independent appraisal performed
in connection with the allocation of the Basis purchase price to
the assets acquired and liabilities assumed.
6. Industrial Revenue Bonds
In March 1998, the Company converted the interest rates on
its $98.5 million of tax-exempt Revenue Refunding Bonds (the
"Refunding Bonds") and $25 million of tax-exempt Waste Disposal
Revenue Bonds (the "Revenue Bonds") from variable rates to a
weighted average fixed rate of approximately 5.4%. Also in March
1998, the Gulf Coast Waste Disposal Authority issued and sold for
the benefit of the Company $25 million of new tax-exempt Waste
Disposal Revenue Bonds at a fixed interest rate of 5.6%, and $43.5
million of new taxable variable rate Waste Disposal Revenue Bonds
at an initial interest rate of 5.7%, both of which mature on April
1, 2032. The $43.5 million of taxable bonds bear interest at a
variable rate determined weekly, with the Company having the right
to convert such rate to a daily, weekly, short-term or long-term
rate, or to a fixed rate. These variable rate bonds are supported
by a letter of credit issued under the Company's revolving bank
credit facility. On October 28, 1998, the Company was selected in
the Texas Bond Review Board bond lottery and will receive a $25
million allocation on January 18, 1999. The Company will use this
allocation to refinance $25 million of its taxable Waste Disposal
Revenue Bonds with tax-exempt bonds. The refinancing can commence
after January 18, 1999 and is expected to be completed by the end
of the first quarter of 1999.
7. Earnings per Share
In accordance with the Financial Accounting Standards
Board's ("FASB") Statement of Financial Accounting Standards
("SFAS") No. 128, "Earnings per Share," which became effective for
the Company's financial statements beginning with the year ended
December 31, 1997, the Company has presented basic and diluted
earnings per share on the face of the accompanying income
statements. In determining basic earnings per share for the nine
months ended September 30, 1997, dividends on Energy's preferred
stock were deducted from income from discontinued operations as
such preferred stock was issued in connection with Energy's natural
gas related services business. A reconciliation of the basic and
diluted per-share computations for income from continuing
operations is as follows (dollars and shares in thousands, except
per share amounts):
<TABLE>
<CAPTION>
Three Months Ended September 30,
1998 1997
Per- Per-
Share Share
Income Shares Amt. Income Shares Amt.
<S> <C> <C> <C> <C> <C> <C>
Income from continuing operations... $ 4,311 $51,993
Basic earnings per share:
Income from continuing operations
available to common stockholders... $ 4,311 56,096 $ .08 $51,993 55,950 $ .93
Effect of dilutive securities:
Stock options....................... - 444 - 924
Performance awards.................. - 111 - 91
Diluted earnings per share:
Income from continuing operations
available to common stockholders
plus assumed conversions............ $ 4,311 56,651 $ .08 $51,993 56,965 $ .91
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended September 30,
1998 1997
Per- Per-
Share Share
Income Shares Amt. Income Shares Amt.
<S> <C> <C> <C> <C> <C> <C>
Income from continuing operations.... $38,366 $99,402
Basic earnings per share:
Income from continuing operations
available to common stockholders... $38,366 56,149 $ .68 $99,402 50,175 $1.98
Effect of dilutive securities:
Stock options........................ - 862 - 823
Performance awards................... - 110 - 91
Convertible preferred stock.......... - - - 3,326
Diluted earnings per share:
Income from continuing operations
available to common stockholders
plus assumed conversions........... $38,366 57,121 $ .67 $99,402 54,415 $1.83
</TABLE>
8. New Accounting Standards
SFAS No. 130, "Reporting Comprehensive Income," was
issued by the FASB in June 1997 and became effective for the
Company's financial statements beginning in 1998. SFAS No. 130
establishes standards for reporting and display of comprehensive
income and its components in a full set of general-purpose
financial statements and requires that all items that are required
to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements.
This statement requires that an enterprise classify items of other
comprehensive income by their nature in a financial statement and
display the accumulated balance of other comprehensive income
separately from retained earnings and additional paid-in capital in
the equity section of a statement of financial position.
Reclassification of prior period financial statements presented
for comparative purposes is required. The Company had no items of
other comprehensive income during the three months ended and nine
months ended September 30, 1998 and 1997 and, accordingly, did not
report a total amount for comprehensive income in the accompanying
consolidated financial statements.
Also in June 1997, the FASB issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related
Information." SFAS No. 131 establishes new standards for reporting
information about operating segments in annual financial statements
and requires selected operating segment information to be reported
in interim financial reports issued to shareholders. It also
establishes standards for related disclosures about products and
services, geographic areas and major customers. This statement
becomes effective for the Company's financial statements beginning
with the year ended December 31, 1998 at which time restatement of
prior period segment information presented for comparative purposes
is required. Interim period information is not required until the
second year of application, at which time comparative information
is required.
In February 1998, the FASB issued SFAS No. 132,
"Employers' Disclosures about Pensions and Other Postretirement
Benefits." SFAS No. 132 standardizes the disclosure requirements
for pensions and other postretirement benefits to the extent
practicable, requires additional information on changes in the
benefit obligations and fair values of plan assets, and eliminates
certain disclosures that are no longer useful. This statement
becomes effective for the Company's financial statements beginning
with the year ended December 31, 1998 at which time restatement of
prior period disclosures presented for comparative purposes is
required unless the information is not readily available.
In June 1998, the FASB issued SFAS No. 133, "Accounting
for Derivative Instruments and Hedging Activities." SFAS No. 133
establishes accounting and reporting standards requiring that every
derivative instrument (including certain derivative instruments
embedded in other contracts) be recorded in the balance sheet as
either an asset or liability measured at its fair value. The
statement requires that changes in a derivative's fair value be
recognized currently in earnings unless specific hedge accounting
criteria are met. Special accounting for qualifying hedges allows
a derivative's gains and losses to offset related results on the
hedged item in the income statement, and requires that a company
must formally document, designate, and assess the effectiveness of
transactions that receive hedge accounting. This statement becomes
effective for the Company's financial statements beginning January
1, 2000 and is not allowed to be applied retroactively to financial
statements of prior periods. At such effective date, SFAS No. 133
must be applied to (a) all freestanding derivative instruments and
(b) certain derivative instruments embedded in hybrid contracts
that exist at such date and were issued, acquired, or substantially
modified after December 31, 1997 (and, at the Company's election,
that were issued or acquired before January 1, 1998 and not
substantively modified thereafter). The Company has not yet
determined the impact on its financial statements of adopting this
statement. However, adoption of this statement could result in
increased volatility in the Company's earnings and other
comprehensive income.
9. Litigation and Contingencies
Litigation Relating to Discontinued Operations
Energy and certain of its natural gas related
subsidiaries, as well as the Company, have been sued by Teco
Pipeline Company ("Teco") regarding the operation of the 340-mile
West Texas pipeline in which a subsidiary of Energy holds a 50%
undivided interest. In 1985, a subsidiary of Energy sold a 50%
undivided interest in the pipeline and entered into a joint venture
through an ownership agreement and an operating agreement, each
dated February 28, 1985, with the purchaser of the interest. In
1988, Teco succeeded to that purchaser's 50% interest. A
subsidiary of Energy has at all times been the operator of the
pipeline. Notwithstanding the written ownership and operating
agreements, the plaintiff alleges that a separate, unwritten
partnership agreement exists, and that the defendants have
exercised improper dominion over such alleged partnership's
affairs. The plaintiff also alleges that the
defendants acted in bad faith by negatively affecting the economics
of the joint venture in order to provide financial advantages to
facilities or entities owned by the defendants and by allegedly
usurping for the defendants' own benefit certain opportunities
available to the joint venture. The plaintiff asserts causes of
action for breach of fiduciary duty, fraud, tortious interference
with business relationships, professional malpractice and other
claims, and seeks unquantified actual and punitive damages.
Energy's motion to compel arbitration was denied, but Energy has
filed an appeal. Energy has also filed a counterclaim alleging
that the plaintiff breached its own obligations to the joint
venture and jeopardized the economic and operational viability of
the pipeline by its actions. Energy is seeking unquantified actual
and punitive damages. Although PG&E Corporation ("PG&E")
previously acquired Teco and now ultimately owns both Teco and
Energy after the Restructuring, PG&E's Teco acquisition agreement
purports to assign the benefit or detriment of this lawsuit to the
former shareholders of Teco. Pursuant to the agreement by which
the Company was spun off to Energy's stockholders in connection
with the Restructuring, the Company has agreed to indemnify Energy
with respect to this lawsuit to the extent of 50% of the amount of
any final judgment or settlement amount not in excess of $30
million, and 100% of that part of any final judgment or settlement
amount in excess of $30 million.
General
The Company is also a party to additional claims and
legal proceedings arising in the ordinary course of business. The
Company believes it is unlikely that the final outcome of any of
the claims or proceedings to which the Company is a party would
have a material adverse effect on the Company's financial
statements; however, due to the inherent uncertainty of litigation,
the range of possible loss, if any, cannot be estimated with a
reasonable degree of precision and there can be no assurance that
the resolution of any particular claim or proceeding would not have
an adverse effect on the Company's results of operations for the
interim period in which such resolution occurred.
<TABLE>
<CAPTION>
VALERO ENERGY CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FINANCIAL AND OPERATING HIGHLIGHTS
The following are the Company's financial and operating highlights for the three
months ended and nine months ended September 30, 1998 and 1997 (in thousands of dollars,
unless otherwise noted):
Three Months Ended Nine Months Ended
September 30, September 30,
1998 (1) 1997 (2) 1998 (1) 1997 (2)
<S> <C> <C> <C> <C>
Operating revenues..................................... $1,338,649 $1,975,665 $4,149,112 $4,160,091
Cost of sales.......................................... (1,173,717) (1,745,571) (3,595,819) (3,661,726)
Operating costs (operating expenses plus depreciation
expense related to refinery operations).............. (133,695) (117,869) (385,720) (271,224)
Selling and administrative expenses (including related
depreciation expense)................................ (17,511) (18,118) (54,267) (38,821)
Operating income, before inventory write-down.......... 13,726 94,107 113,306 188,320
Write-down of inventories to market value.............. - - (37,673) -
Total operating income............................... $ 13,726 $ 94,107 $ 75,633 $ 188,320
Interest and debt expense, net......................... $ (7,195) $ (12,193) $ (21,184) $ (35,904)
Income tax expense..................................... $ (1,800) $ (31,382) $ (16,100) $ (57,489)
Income from continuing operations...................... $ 4,311 $ 51,993 $ 38,366 $ 99,402
Loss from discontinued operations, net of
income tax benefit................................... $ - $ (432) $ - $ (15,672)
Net income............................................. $ 4,311 $ 51,561 $ 38,366 $ 83,730
Net income applicable to common stock.................. $ 4,311 $ 51,561 $ 38,366 $ 79,138
Earnings (loss) per share of common stock -
assuming dilution:
Continuing operations.............................. $ .08 $ .91 $ .67 $ 1.83
Discontinued operations............................ - (.01) - (.29)
Total............................................ $ .08 $ .90 $ .67 $ 1.54
Earnings before interest, taxes, depreciation
and amortization ("EBITDA").......................... $ 45,213 $ 117,484 $ 199,270(3) $ 262,522
Ratio of EBITDA to interest incurred................... 5.2x 9.3x 8.1x 7.1x
Operating statistics:
Sales volumes (Mbbls per day)........................ 884 774 858 578
Throughput volumes (Mbbls per day)................... 559 553 546 376
Average throughput margin per barrel................. $ 3.20 $ 4.51 $ 3.71 (4) $ 4.84
Operating cost per barrel............................ $ 2.60 $ 2.32 $ 2.59 $ 2.64
Charges:
Crude oils......................................... 70% 62% 67% 54%
Residual fuel oil ("resid")........................ 18 23 20 29
Other feedstocks and blendstocks................... 12 15 13 17
Total............................................ 100% 100% 100% 100%
Yields:
Gasoline and blending components................... 47% 44% 48% 49%
Distillates........................................ 28 26 28 24
Petrochemicals..................................... 4 5 4 6
Natural gas liquids ("NGLs") and naphtha........... 5 6 5 5
Heavy products.................................... 16 19 15 16
Total........................................... 100% 100% 100% 100%
<FN>
(1) Includes the operations of the Paulsboro Refinery commencing
September 17, 1998.
(2) Includes the operations of the Texas City, Houston and Krotz Springs
refineries commencing May 1, 1997.
(3) Excludes the $37.7 million pre-tax write-down of inventories
to market value in the first quarter.
(4) Excludes a $.25 per barrel reduction resulting from the $37.7
million pre-tax write-down of inventories to market value.
</TABLE>
RESULTS OF OPERATIONS
General
The Company reported net income of $4.3 million, or $.08
per share on a diluted basis, for the third quarter of 1998
compared to income from continuing operations of $52 million, or
$.91 per share on a diluted basis, for the third quarter of 1997.
For the first nine months of 1998, net income was $38.4 million, or
$.67 per share on a diluted basis, compared to income from
continuing operations of $99.4 million, or $1.83 per share on a
diluted basis, for the first nine months of 1997. The decline in
third quarter results was due primarily to a significant decrease
in operating income, partially offset by lower income tax expense
and net interest and debt expense. In addition to the weak 1998
third quarter, the year-to-date 1998 results were reduced by a
$37.7 million ($23.9 million after-tax) write-down in the carrying
amount of the Company's refinery inventories in the first quarter
resulting from a significant decline in feedstock and refined
product prices. Results from discontinued operations, reflecting
the results of Energy's natural gas related services business for
periods prior to consummation of the Restructuring, were losses of
$.5 million, or $.01 per share on a diluted basis, and $15.7
million, or $.29 per share on a diluted basis, for the third
quarter and first nine months of 1997, respectively. In
determining earnings per share for the first nine months of 1997,
dividends on Energy's preferred stock were deducted from income
from discontinued operations as such preferred stock was issued in
connection with Energy's natural gas related services business.
Third Quarter 1998 Compared to Third Quarter 1997
Operating revenues decreased $637.1 million, or 32%, to
$1.3 billion during the third quarter of 1998 compared to the same
period in 1997 due to a 41% decrease in the average sales price per
barrel partially offset by a 14% increase in average daily sales
volumes. The significant decrease in sales prices was attributable
to a continuing oversupply of crude oil due to lower worldwide
energy demand, particularly in Asia and Russia. Coupled with
continued high refinery utilization rates, the excess crude oil
supplies resulted in a build-up of gasoline and distillate
inventories and depressed refined product prices. The increase in
sales volumes was due primarily to an increase in marketing
activities and, to a lesser extent, to additional throughput
volumes attributable to the September 16, 1998 acquisition of the
Paulsboro Refinery.
Operating income decreased $80.4 million, or 85%, to
$13.7 million during the third quarter of 1998 compared to the same
period in 1997 due to an approximate $65 million decrease in total
throughput margins and higher operating costs of approximately $16
million. The decline in total throughput margins was due primarily
to substantial decreases in gasoline and distillate margins and
significantly lower premiums on sales of products used in the
petrochemical industry, such as propylene and xylene. Virtually
all refined product margins were depressed in the third quarter of
1998 due to the continuation of the Asian economic crisis which has
dramatically reduced the growth in worldwide energy demand and
contributed to the excessive crude oil and refined product
inventories discussed above. Partially offsetting the decreases in
total throughput margins resulting from these factors were
increases in throughput margins resulting from higher discounts on
purchases of crude oil feedstocks and increased benefits from price
risk management activities. Operating costs increased due
primarily to costs related to the Paulsboro Refinery acquired on
September 16, 1998, higher employee-related costs at the Company's
other refineries, increased catalyst and turnaround expenses at the
Texas City and Houston refineries, and higher depreciation expense
for the Corpus Christi, Texas City and Houston refineries resulting
primarily from the effect of capital additions.
Net interest and debt expense decreased $5 million, or
41%, to $7.2 million during the third quarter of 1998 compared to
the same period in 1997 due to the inclusion in the 1997 period of
allocated interest expense related to corporate debt that was
subsequently assumed by PG&E pursuant to the Restructuring on July
31, 1997 and to a reduction in average interest rates.
Income tax expense decreased $29.6 million during the
third quarter of 1998 compared to the same period in 1997 due
primarily to lower pre-tax income from continuing operations.
Year-to-Date 1998 Compared to Year-to-Date 1997
For the first nine months of 1998, operating revenues of
$4.1 billion were flat compared to the first nine months of 1997 as
a 48% increase in average daily sales volumes was offset by a 33%
decrease in the average sales price per barrel. The increase in
sales volumes was due primarily to additional volumes attributable
to the May 1, 1997 acquisition of the Texas City, Houston and
Krotz Springs refineries and to an increase in marketing
activities, while the decrease in sales prices was due to an
oversupply of crude oil and the resulting effect on refined product
inventory levels and prices as described above in the
quarter-to-quarter comparison.
Operating income decreased $112.7 million, or 60%, to
$75.6 million during the first nine months of 1998 compared to the
same period in 1997. The decrease in operating income was due to
an approximate $115 million increase in operating costs
(approximately $92 million of which was attributable to the four
additional months of operations during the 1998 period for the
Texas City, Houston and Krotz Springs refineries which were
acquired on May 1, 1997), the $37.7 million inventory write-down in
the first quarter of 1998 noted above under "General," and higher
selling and administrative expenses (including related depreciation
expense) of approximately $15 million. Selling and administrative
expenses increased due primarily to the four additional months of
operations during the 1998 period for the Texas City, Houston and
Krotz Springs refineries. Partially offsetting these decreases in
operating income was an approximate $55 million increase in total
throughput margins. Total throughput margins increased due to
higher throughput volumes resulting primarily from the May 1, 1997
acquisition of the Texas City, Houston and Krotz Springs refineries
and increased discounts on purchases of refinery feedstocks. The
increases in total throughput margins resulting from these factors
were partially offset by significantly lower margins for most
refined products due to the slowdown in worldwide energy demand as
discussed above in the quarter-to-quarter comparison.
Net interest and debt expense decreased $14.8 million, or
41%, to $21.1 million during the first nine months of 1998 compared
to the same period in 1997 due primarily to the factors noted above
in the quarter-to-quarter comparison. Income tax expense decreased
$41.4 million during the same periods due primarily to lower
pre-tax income from continuing operations and, to a lesser extent,
to the effect of a research and experimentation tax credit
recognized in the 1998 period.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by continuing operations increased
$38.2 million to $268.1 million during the first nine months of
1998 compared to the same period in 1997 due primarily to a $47.6
million decrease in the amount of cash utilized for working capital
requirements, as detailed in Note 5 of Notes to Consolidated
Financial Statements, partially offset by a decrease in earnings,
excluding the effects of non-cash items. The decrease in the
amount of cash utilized for working capital purposes was due
primarily to an approximate $82 million net reduction in accounts
receivable and accounts payable in the 1998 period resulting from
the decreases in commodity prices discussed above under "Results of
Operations," as well as a $30 million increase in accrued expenses
in the 1998 period resulting from a statutorily mandated delay in
the payment of motor fuel taxes that were subsequently paid in the
fourth quarter. The comparable 1997 period reflected a $51 million
reduction in working capital requirements, due primarily to a $59
million reduction in inventories. During the first nine months of
1998, cash provided by operating activities and proceeds from the
issuance of new industrial revenue bonds as described in Note 6 of
Notes to Consolidated Financial Statements totaled approximately
$335 million. These funds, together with bank borrowings, proceeds
from issuances of common stock related to the Company's benefit
plans, and a portion of existing cash balances, were utilized to
fund capital expenditures, including the purchase of the Paulsboro
Refinery, and deferred turnaround and catalyst costs, fund a 1998
earn-out payment to Salomon in connection with the Basis
acquisition, fund repurchases of the Company's common stock, and
pay common stock dividends.
The Company currently maintains a five-year, unsecured
$835 million revolving bank credit and letter of credit facility
that matures in November 2002 and is available for general
corporate purposes including working capital needs and letters of
credit. Borrowings under this facility bear interest at either
LIBOR plus a margin, a base rate or a money market rate. The
Company is also charged various fees and expenses in connection
with this facility, including a facility fee and various letter of
credit fees. The interest rate and fees under the credit facility
are subject to adjustment based upon the credit ratings assigned to
the Company's long-term debt. The credit facility includes certain
restrictive covenants including a coverage ratio, a capitalization
ratio, and a minimum net worth test, none of which are expected to
limit the Company's ability to operate in the ordinary course of
business. As of September 30, 1998, outstanding borrowings and
letters of credit under this committed bank credit and letter of
credit facility totaled approximately $396 million. The Company
also has numerous uncommitted short-term bank credit facilities
under which amounts ranging from $135 million to $410 million may
be borrowed, along with several uncommitted letter of credit
facilities totaling $285 million. As of September 30, 1998, $107
million was outstanding under the short-term bank credit
facilities, and letters of credit totaling approximately $50
million were outstanding under the uncommitted letter of credit
facilities. As of September 30, 1998, the Company's debt to
capitalization ratio was 40.7% and the Company was in compliance
with all covenants contained in its various debt facilities.
During the first quarter of 1998, the Company reduced its
exposure to increases in interest rates by converting the interest
rate on $123.5 million of industrial revenue bonds from variable to
fixed. The Company also increased its financial flexibility by
issuing $68.5 million of new industrial revenue bonds, using the
proceeds to reduce bank borrowings incurred in connection with the
acquisition of Basis. During the first quarter of 1999, the
Company anticipates using a bond lottery allocation to refinance
$25 million of taxable industrial revenue bonds with tax-exempt
bonds. See Note 6 of Notes to Consolidated Financial Statements.
In June 1998, the Company also enhanced its financial
flexibility by filing a $600 million universal shelf registration
statement with the SEC. Securities registered pursuant to this
registration statement included common stock, preferred stock, debt
securities and depositary shares. The Company intends to use the
net proceeds from any offerings under this shelf registration for
general corporate purposes, including capital expenditures,
acquisitions, repayment of debt, additions to working capital or
other business purposes. The registration statement was declared
effective by the SEC on June 30, 1998.
During the first nine months of 1998, the Company
expended approximately $496 million for capital investments,
including (a) $331 million in connection with the purchase of the
Paulsboro Refinery, (b) capital expenditures of $114 million,
(c) deferred turnaround and catalyst costs of $41 million, and
(d) a $10.3 million earn-out payment to Salomon in May 1998 pursuant
to the terms of the Basis purchase agreement as described in Note 3 of
Notes to Consolidated Financial Statements. For total year 1998,
the Company currently expects to incur approximately $545 million
for capital investments. This amount includes the Paulsboro
Refinery purchase, the Salomon earn-out payment, approximately $145
million for capital expenditures (including approximately $10
million for computer systems), and approximately $60 million for
deferred turnaround and catalyst costs.
In the third quarter of 1998, the Company's Board of
Directors approved a stock repurchase program allowing the Company
to repurchase, from time to time, up to $100 million of the
Company's common stock. The Company intends to repurchase shares
under this authorization if the price of the Company's common stock
reaches levels which the management of the Company considers to be
undervalued. Through September 30, 1998, the Company has
repurchased and recorded as treasury stock approximately 550,000
shares to be used for employee benefit plans and other general
corporate purposes.
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 or offerings under the universal shelf
registration statement described above that may occur from time to
time, the Company currently has no specific financing plans.
NEW ACCOUNTING STANDARDS
As discussed in Note 8 of Notes to Consolidated Financial
Statements, various new statements of financial accounting
standards issued by the FASB became effective for the Company's
financial statements beginning in 1998 and one new statement
becomes effective in 2000. Based on information currently
available to the Company, except for SFAS No. 133 for which the
impact has not yet been determined, the adoption of these
statements is not expected to have a material effect on the
Company's consolidated financial statements.
YEAR 2000 READINESS DISCLOSURE
Background
The transition to January 1, 2000 poses problems for
almost all users of information technology ("IT"). These potential
problems result from the fact that many computer programs created
in the past were programmed to identify calendar dates with only
the last two digits of the year. As a result, such programs are
unable to distinguish between the year 1900 and the year 2000,
potentially resulting in miscalculations, malfunctions or failures
of such programs. In addition to its potential effect on computer
systems, the century date change may also result in malfunctions or
failures of non-IT equipment which contain embedded systems with
date-sensitive functions. These potential consequences are
generally referred to as the "Year 2000" problem.
State of Readiness
In 1996, in order to improve business processes, reduce
costs, integrate business information, improve access to such
information, and provide flexibility for ongoing business changes,
the Company began the implementation of new client/server based
systems which will run substantially all of the Company's principal
business software applications. These new systems have been
represented as Year 2000 compliant by their respective
manufacturers and are expected to be substantially implemented
by the end of 1998.
In order to verify the Year 2000 compliance of the above
noted systems, and address the Year 2000 problem with respect to
other IT systems and non-IT embedded systems, the Company has
developed a compliance plan with respect to those systems and
services that are deemed to be critical to the Company's operations
and safety of its employees. This plan is divided into the
following sections, which represent major business areas that are
potentially affected by the Year 2000 problem: Business Systems
(includes IT hardware, software and network systems serving the
Company's corporate, refining, and marketing and supply areas);
Plant Facilities (includes non-IT embedded systems such as process
control systems and the physical equipment and facilities at the
Company's refineries); and Office Facilities/Aviation (includes
telephone, security and environmental systems and office equipment
at the Company's office facilities and aviation-related equipment
and software). Implementation of the Company's Year 2000 compliance
plan is led by a Management Oversight Committee, which includes
members of executive management, and Year 2000 coordinators for
each of the business areas described above. The compliance plan is
monitored weekly by the business area coordinators and progress
reported monthly to the Management Oversight Committee. The
compliance plan includes the following phases and scheduled
completion dates:
Scheduled
Compliance Plan Phase Completion Date
- ---Form internal Year 2000 organizations,
both at the corporate and refinery level,
to pursue relevant action plans. Completed
- ---Inventory affected systems and services for
all business areas and prioritize the importance
of each particular system to the Company and its
operations as either high, medium, or low priority. Completed
- ---Assess the compliance of inventoried items by
contacting the vendor or manufacturer to determine
whether the system is Year 2000 compliant. 11/30/98
- --Develop action plans to remediate (fix, replace,
or discard) each of the non-compliant high and
medium priority items (those items believed by
the Company to have a risk involving the safety
of individuals, significant damage to equipment,
the environment or communications, or a
significant loss of revenues). 12/31/98
- ---Remediate the non-compliant high and medium
priority items by implementing the plans
developed above. 3/31/99
- ---Validate Year 2000 compliance by testing,
wherever possible, all high and medium priority
items. 6/30/99
- ---Develop contingency plans for all high and
medium priority items that cannot be tested. 6/30/99
The Company currently anticipates that completion of its
Year 2000 compliance plan will be performed primarily by Company
personnel. However, in certain cases, outside contractors or
consultants have been engaged to assist in the Company's Year 2000
efforts and may be required in the future. Presently, no
significant IT projects have been delayed due to the implementation
of the Company's Year 2000 compliance plan. The following table
indicates the current status of the Company's progress in
completing its compliance plan for all uncompleted phases (in
estimated percent complete):
<TABLE>
<CAPTION>
Develop
Assess Action Contingency
Compliance Plans Remediate Test Plan
<S> <C> <C> <C> <C> <C>
Business Systems............. 100% 100% 39% 19% 0%
Plant Facilities............. 72 17 14 13 13
Office Facilities/Aviation... 97 86 61 61 0
</TABLE>
In addition to the major business areas described above, the
Company's External Service Providers (third-party relationships
material to the Company's operations, including (i) service
providers for the Company's Business Systems, Plant Facilities and Office
Facilities/Aviation described above, (ii) "supply" relationships
such as major suppliers of refinery feedstocks, (iii) "marketing"
relationships such as major customers and pricing services, and
(iv) "logistics" relationships such as pipelines, terminals, ships,
barges and storage facilities) could equally be affected by the Year 2000
problem, which in turn could have an impact on the Company's
business. For that reason, Year 2000 compliance of the External
Service Providers which the Company believes to be critical is also
being assessed as part of the Company's Year 2000 compliance plan.
Year 2000 questionnaires have been sent to critical External
Service Providers with responses requested by December 1, 1998. An
assessment of the responses is expected to be completed by March
31, 1999 and contingency plans are expected to be developed for all
non-Year 2000 compliant External Service Providers by June 30, 1999.
Costs
Total costs incurred to date in connection with the
completion of the Company's Year 2000 compliance plan have been
insignificant. The estimated total hardware and software costs to
be incurred in testing the Company's Business Systems is currently
estimated to be less than $2 million. A determination of estimated
total costs to complete the Company's Year 2000 compliance plan will
be made after the completion of the assessment and action plan phases
for all business areas. The above amounts do not include costs
associated with the implementation of the new client/server based
systems described under "State of Readiness."
Risks
The scheduled completion dates and costs of compliance
noted above are the current best estimates of the Company's
management and are believed to be reasonably accurate. In the event
unanticipated problems are encountered which cause the compliance
plan to fall behind schedule, the Company may need to devote more
resources to completing the plan and additional costs may be
incurred. If the Company were not able to satisfactorily complete
its Year 2000 compliance plan, including identifying and resolving
problems encountered by the Company's External Service Providers,
potential consequences could include, among other things, unit
downtime at or damage to the Company's refineries, delays in
transporting refinery feedstocks and refined products, impairment of
relationships with significant suppliers or customers, loss of
accounting data or delays in processing such data, and loss of or
delays in internal and external communications. The occurrence of
any or all of the above could result in a material adverse effect on
the Company's results of operations, liquidity or financial
condition. Although the Company currently believes that it will
satisfactorily complete its Year 2000 compliance plan as described
above prior to January 1, 2000, there can be no assurance that the
plan will be completed by such time or that the Year 2000 problem
will not adversely affect the Company and its business.
Contingency Plans
As discussed above under "State of Readiness," the Company
currently anticipates developing its contingency plans by June 30,
1999 based on the results of the testing phase of its compliance plan
for the Business Systems, Plant Facilities and Office Facilities/Aviation
business areas and the results of its communications with critical
External Service Providers.
Year 2000 Information and Readiness Disclosure Act
To the maximum extent permitted by applicable law, the
above information is being designated as a "Year 2000 Readiness
Disclosure" pursuant to the "Year 2000 Information and Readiness
Disclosure Act" which was signed into law on October 19, 1998.
FORWARD-LOOKING STATEMENTS
The foregoing discussion contains certain estimates,
predictions, projections and other "forward-looking statements"
(within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934) that involve
various risks and uncertainties. While these forward-looking
statements, and any assumptions upon which they are based, are made
in good faith and reflect the Company's current judgment regarding
the direction of its business, actual results will almost always
vary, sometimes materially, from any estimates, predictions,
projections, assumptions, or other future performance suggested
herein. Some important factors (but not necessarily all factors)
that could affect the Company's sales volumes, growth strategies,
future profitability and operating results, or that otherwise could
cause actual results to differ materially from those expressed in any
forward-looking statement include the following: renewal or
satisfactory replacement of the Company's feedstock arrangements as
well as market, political or other forces generally affecting the
pricing and availability of 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; cancellation of or failure to
implement planned capital projects and realize the various
assumptions and benefits projected for such projects; the failure to
avoid or correct a material Year 2000 problem, including internal
problems or problems encountered by third parties; 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; weather conditions affecting
the Company's operations or the areas in which the Company's products
are marketed; rulings, judgments, or settlements in litigation or
other legal matters, including unexpected environmental remediation
costs in excess of any reserves; the introduction or enactment of
federal or state legislation which may adversely affect the Company's
business or operations; 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 Annual Report
on Form 10-K for the year ended December 31, 1997. 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.
In connection with the acquisition of the Paulsboro Refinery
from Mobil, Valero Refining Company-New Jersey, a wholly-owned
subsidiary of the Company, assumed certain environmental liabilities
associated with the refinery, including obligations under the New
Jersey Department of Environmental Protection Administrative Consent
Orders (dated September 10, 1979, September 29, 1980, May 10, 1991,
and August 27, 1998, related to ongoing site remediation), and the
New Jersey Department of Environmental Protection Administrative
Order and Notice of Civil Administrative Penalty Assessment (Log
#A960262 dated September 27, 1996, related to particulate emissions
from the Paulsboro Refinery fluid catalytic cracking unit.) These
proceedings potentially involve the imposition of monetary sanctions
in excess of $100,000, although the Company is not currently aware of
the existence of, or of any governmental determination to impose, any
such sanctions. Pursuant to the terms of the purchase agreement,
Mobil agreed to indemnify Valero Refining Company-New Jersey for a
period of five years from the closing of the acquisition for any
governmental environmental fines or penalties assessed against the
Company that relate to events that occurred prior to September 17,
1998. The Company believes that the foregoing proceedings are not of
material importance to the business or financial condition of the
Company.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
11.1 Computation of Earnings Per Share.
27.1* Financial Data Schedule (reporting financial
information as of and for the nine months ended
September 30, 1998).
27.2* Restated Financial Data Schedule (reporting financial
information as of and for the nine months ended
September 30, 1997).
__________
* The Financial Data Schedule and Restated Financial Data
Schedule shall not be deemed "filed" for purposes of
Section 11 of the Securities Act of 1933 or Section 18 of
the Securities Exchange Act of 1934, and are included as
exhibits only to the electronic filing of this Form 10-Q in
accordance with Item 601(c) of Regulation S-K and
Section 401 of Regulation S-T.
(b) Reports on Form 8-K. A Current Report on Form 8-K was
filed by the Company on September 30, 1998 reporting the Company's
acquisition of substantially all of the assets and the assumption of
certain liabilities related to Mobil's 155,000 barrel-per-day
refinery in Paulsboro, New Jersey.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
VALERO ENERGY CORPORATION
(Registrant)
By: /s/ John D. Gibbons
John D. Gibbons
Chief Financial Officer,
Vice President -
Finance and Treasurer
(Duly Authorized Officer and
Principal Financial and
Accounting Officer)
Date: November 13, 1998
<TABLE>
<CAPTION>
EXHIBIT 11.1
VALERO ENERGY CORPORATION AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE
(Thousands of Dollars, Except Per Share Amounts)
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
COMPUTATION OF BASIC EARNINGS PER SHARE:
Income from continuing operations....................... $ 4,311 $ 51,993 $ 38,366 $ 99,402
Loss from discontinued operations, net of income
tax benefit........................................... $ - $ (432) $ - $ (15,672)
Less: Preferred stock dividend requirements
and redemption premium............................... - - - (4,592)
Loss from discontinued operations applicable to
common stock......................................... $ - $ (432) $ - $ (20,264)
Weighted average number of shares of
common stock outstanding............................. 56,095,739 55,949,765 56,148,665 50,175,077
Earnings (loss) per share:
Continuing operations................................ $ .08 $ .93 $ .68 $ 1.98
Discontinued operations.............................. - (.01) - (.40)
Total............................................. $ .08 $ .92 $ .68 $ 1.58
COMPUTATION OF EARNINGS PER SHARE
ASSUMING DILUTION:
Income from continuing operations assuming dilution..... $ 4,311 $ 51,993 $ 38,366 $ 99,402
Loss from discontinued operations, net of income
tax benefit.......................................... $ - $ (432) $ - $ (15,672)
Less: Preferred stock dividend requirements
and redemption premium............................... - - - (4,592)
Add: Reduction of preferred stock dividends applicable
to the assumed conversion of convertible preferred
stock at the beginning of the period................. - - - 4,522
Loss from discontinued operations applicable to
common stock assuming full dilution.................. $ - $ (432) $ - $ (15,742)
Weighted average number of shares of
common stock outstanding............................. 56,095,739 55,949,765 56,148,665 50,175,077
Effect of dilutive securities:
Stock options........................................ 444,696 924,578 862,060 822,289
Performance awards................................... 110,809 91,151 110,036 91,151
Convertible preferred stock.......................... - - - 3,326,006
Weighted average number of shares of
common stock outstanding assuming dilution.......... 56,651,244 56,965,494 57,120,761 54,414,523
Earnings (loss) per share - assuming dilution:
Continuing operations................................ $ .08 $ .91 $ .67 $ 1.83
Discontinued operations.............................. - (.01) - (.29)
Total............................................. $ .08 $ .90 $ .67 $ 1.54
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AS OF SEPTEMBER 30, 1998 AND THE CONSOLIDATED
STATEMENT OF INCOME FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 8,196
<SECURITIES> 0
<RECEIVABLES> 274,294
<ALLOWANCES> 1,725
<INVENTORY> 430,923
<CURRENT-ASSETS> 749,785
<PP&E> 2,523,331
<DEPRECIATION> 594,978
<TOTAL-ASSETS> 2,803,809
<CURRENT-LIABILITIES> 582,469
<BONDS> 697,673
0
0
<COMMON> 563
<OTHER-SE> 1,171,150
<TOTAL-LIABILITY-AND-EQUITY> 2,803,809
<SALES> 4,149,112
<TOTAL-REVENUES> 4,149,112
<CGS> 4,073,479
<TOTAL-COSTS> 4,073,479
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 21,184
<INCOME-PRETAX> 54,466
<INCOME-TAX> 16,100
<INCOME-CONTINUING> 38,366
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 38,366
<EPS-PRIMARY> .68
<EPS-DILUTED> .67
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 21,930
<SECURITIES> 0
<RECEIVABLES> 353,620
<ALLOWANCES> 1,200
<INVENTORY> 347,277
<CURRENT-ASSETS> 746,895
<PP&E> 2,083,151
<DEPRECIATION> 524,831
<TOTAL-ASSETS> 2,418,701
<CURRENT-LIABILITIES> 661,179
<BONDS> 323,500
0
0
<COMMON> 561
<OTHER-SE> 1,150,139
<TOTAL-LIABILITY-AND-EQUITY> 2,418,701
<SALES> 4,160,091
<TOTAL-REVENUES> 4,160,091
<CGS> 3,971,771
<TOTAL-COSTS> 3,971,771
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 35,904
<INCOME-PRETAX> 156,891
<INCOME-TAX> 57,489
<INCOME-CONTINUING> 99,402
<DISCONTINUED> (15,672)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 83,730
<EPS-PRIMARY> 1.58
<EPS-DILUTED> 1.54
</TABLE>
