UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 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 West IH 10
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 May 1, 1998.
Number of
Shares
Title of Class Outstanding
Common Stock, $.01 Par Value 56,195,070
<PAGE>
VALERO ENERGY CORPORATION AND SUBSIDIARIES
INDEX
Page
PART I. FINANCIAL INFORMATION
Consolidated Balance Sheets - March 31, 1998 and
December 31, 1997................................
Consolidated Statements of Income - For the Three
Months Ended March 31, 1998 and 1997.............
Consolidated Statements of Cash Flows - For the
Three Months Ended March 31, 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>
March 31, December 31,
1998 1997
(Unaudited)
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and temporary cash investments.......... $ 9,808 $ 9,935
Receivables, less allowance for
doubtful accounts of $1,425 (1998)
and $1,275 (1997).......................... 271,869 366,315
Inventories.................................. 334,311 369,355
Current deferred income tax assets........... 37,587 17,155
Prepaid expenses and other................... 33,634 26,265
687,209 789,025
PROPERTY, PLANT AND EQUIPMENT - including
construction in progress of $79,981 (1998)
and $66,636 (1997), at cost.................. 2,164,269 2,132,489
Less: Accumulated depreciation............ 557,441 539,956
1,606,828 1,592,533
DEFERRED CHARGES AND OTHER ASSETS.............. 137,125 111,485
$2,431,162 $2,493,043
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term debt.............................. $ 175,000 $ 122,000
Accounts payable............................. 338,836 414,305
Accrued expenses............................. 50,673 60,979
564,509 597,284
LONG-TERM DEBT, less current maturities........ 398,347 430,183
DEFERRED INCOME TAXES.......................... 269,280 256,858
DEFERRED CREDITS AND OTHER LIABILITIES......... 50,678 49,877
COMMON STOCKHOLDERS' EQUITY:
Common stock, $.01 par value - 150,000,000
shares authorized; issued 56,175,947 (1998)
and 56,136,032 (1997) shares............... 562 561
Additional paid-in capital................... 1,110,562 1,110,654
Retained earnings............................ 37,251 47,626
Treasury stock, 793 (1998) and -0- (1997)
shares, at cost............................ (27) -
1,148,348 1,158,841
$2,431,162 $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
March 31,
1998 1997
<S> <C> <C>
OPERATING REVENUES............................. $1,362,359 $ 821,802
COSTS AND EXPENSES:
Cost of sales and operating expenses......... 1,292,269 760,265
Write-down of inventories to market value.... 37,673 -
Selling and administrative expenses.......... 17,330 9,056
Depreciation expense......................... 17,504 14,068
Total...................................... 1,364,776 783,389
OPERATING INCOME (LOSS)........................ (2,417) 38,413
OTHER INCOME (EXPENSE), NET.................... (45) 955
INTEREST AND DEBT EXPENSE:
Incurred..................................... (7,576) (10,006)
Capitalized.................................. 754 543
INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES.......................... (9,284) 29,905
INCOME TAX EXPENSE (BENEFIT)................... (3,400) 10,094
INCOME (LOSS) FROM CONTINUING OPERATIONS....... (5,884) 19,811
LOSS FROM DISCONTINUED OPERATIONS,
NET OF INCOME TAX BENEFIT OF $2,094........... - (4,371)
NET INCOME (LOSS) (5,884) 15,440
Less: Preferred stock dividend requirements
and redemption premium................ - 2,766
NET INCOME (LOSS) APPLICABLE TO COMMON STOCK... $ (5,884) $ 12,674
EARNINGS (LOSS) PER SHARE OF COMMON STOCK:
Continuing operations........................ $ (.11) $ .45
Discontinued operations...................... - (.16)
Total...................................... $ (.11) $ .29
Weighted average common shares outstanding
(in thousands)............................. 56,149 44,412
EARNINGS (LOSS) PER SHARE OF COMMON STOCK -
ASSUMING DILUTION:
Continuing operations........................ $ (.11) $ .38
Discontinued operations...................... - (.08)
Total...................................... $ (.11) $ .30
Weighted average common shares outstanding
(in thousands).............................. 56,149 51,704
DIVIDENDS PER SHARE OF COMMON STOCK............ $ .08 $ .13
<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>
Three Months Ended
March 31,
1998 1997
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Income (loss) from continuing operations............... $ (5,884) $ 19,811
Adjustments to reconcile income (loss) from
continuing operations to net cash provided
by continuing operations:
Depreciation expense............................... 17,504 14,068
Amortization of deferred charges and other, net.... 8,108 7,243
Write-down of inventories to market value.......... 37,673 -
Changes in current assets and current liabilities.. (1,320) (11,268)
Deferred income tax expense (benefit).............. (7,700) 38
Changes in deferred items and other, net........... (1,039) (84)
Net cash provided by continuing operations....... 47,342 29,808
Net cash provided by discontinued operations..... - 1,843
Net cash provided by operating activities...... 47,342 31,651
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures:
Continuing operations................................ (33,158) (7,733)
Discontinued operations.............................. - (32,148)
Deferred turnaround and catalyst costs................. (32,140) (1,409)
Dispositions of property, plant and equipment.......... 10 15
Other, net............................................. 474 310
Net cash used in investing activities................ (64,814) (40,965)
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in short-term debt, net....................... 53,000 21,683
Long-term borrowings................................... 93,500 17,600
Long-term debt reduction............................... (125,000) (35,200)
Common stock dividends................................. (4,491) (5,761)
Preferred stock dividends.............................. - (2,727)
Issuance of common stock............................... 526 18,326
Purchase of treasury stock............................. (190) (3,410)
Redemption of preferred stock.......................... - (1,196)
Net cash provided by financing activities............ 17,345 9,315
NET INCREASE (DECREASE) IN CASH AND TEMPORARY
CASH INVESTMENTS....................................... (127) 1
CASH AND TEMPORARY CASH INVESTMENTS AT
BEGINNING OF PERIOD.................................... 9,935 10
CASH AND TEMPORARY CASH INVESTMENTS AT
END OF PERIOD.......................................... $ 9,808 $ 11
<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. 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 (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 the three months ended
March 31, 1997 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 the notes thereto 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 $767.4 million for the three months ended March 31,
1997. This amount is 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 $14.2 million for the three months
ended March 31, 1997. Such amount includes an allocated
portion of interest on corporate debt plus interest specifically
attributed to such discontinued operations.
3. Acquisition of Basis Petroleum, Inc.
Effective May 1, 1997, Energy acquired the outstanding common
stock of Basis Petroleum, Inc. ("Basis"), a wholly owned subsidiary
of Salomon Inc ("Salomon"). Prior to the Restructuring, Energy
transferred the stock of Basis to 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 has been accounted for using the
purchase method of accounting and the purchase price was allocated
to the assets acquired and liabilities assumed based on estimated
fair values, pending the determination of the effects of an
independent appraisal. Pursuant to the purchase method of
accounting, the accompanying Consolidated Statement of Income for
the three months ended March 31, 1997 does not include any results
of the operations acquired in connection with the purchase of
Basis.
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 approximately $10 million
and is payable to Salomon by May 30, 1998.
The following unaudited pro forma financial information of the
Company for the three months ended March 31, 1997 assumes that the
acquisition of Basis occurred at the beginning of such period.
Such pro forma information is not necessarily indicative of the
results of future operations. (Dollars in thousands, except per
share amounts.)
<TABLE>
<S> <C>
Operating revenues.................... $2,208,223
Operating income...................... 23,526
Income from continuing operations..... 7,684
Loss from discontinued operations..... (4,371)
Net income............................ 3,313
Earnings (loss) per common share:
Continuing operations............... .16
Discontinued operations............. (.15)
Total............................. .01
Earnings (loss) per common share -
assuming dilution:
Continuing operations............. .14
Discontinued operations........... (.08)
Total........................... .06
</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. Due to a significant decline in feedstock and
refined product prices during the first quarter of 1998, the
Company reduced the March 31, 1998 carrying amount of its refinery
inventories to market value resulting in a $37.7 million pre-tax
charge to earnings. Materials and supplies are carried principally
at weighted average cost not in excess of market. Inventories as
of March 31, 1998 and December 31, 1997 were as follows (in
thousands):
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
<S> <C> <C>
Refinery feedstocks................. $132,371 $102,677
Refined products and blendstocks.... 156,878 210,196
Materials and supplies.............. 45,062 56,482
$334,311 $369,355
</TABLE>
5. Statements of Cash Flows
In order to determine net cash provided by continuing
operations, income (loss) 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, excluding the noncash inventory write-down
to market described in Note 4 and changes in cash and temporary
cash investments, current deferred income tax assets, short-term
debt and current maturities of long-term debt, are shown in the
following table as an (increase)/decrease in current assets and an
increase/(decrease) in current liabilities. The Company's
temporary cash investments are highly liquid, low-risk debt
instruments which have a maturity of three months or less when
acquired. (Dollars in thousands.)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1998 1997
<S> <C> <C>
Receivables, net............. $ 94,763 $ 25,461
Inventories.................. (16,403) (21,000)
Prepaid expenses and other... (8,247) 4,381
Accounts payable............. (61,127) (19,898)
Accrued expenses............. (10,306) (212)
Total..................... $ (1,320) $ (11,268)
</TABLE>
Cash flows related to interest and income taxes, including
amounts related to discontinued operations for the three months
ended March 31, 1997, were as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1998 1997
<S> <C> <C>
Interest paid (net of amount
capitalized)................. $ 4,699 $ 7,771
Income tax refunds received.... 9,000 -
Income taxes paid.............. 3,504 777
</TABLE>
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.
Letters of credit previously associated with the $123.5 million of
outstanding Refunding Bonds and Revenue Bonds were released upon
conversion of the interest rates from variable to fixed.
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 three months ended
March 31, 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 numerators and denominators of
the basic and diluted per-share computations for income (loss) from
continuing operations is as follows (dollars and shares in
thousands, except per share amounts):
<TABLE>
<CAPTION>
Three Months Ended March 31,
1998 1997
Per- Per-
Share Share
Loss Shares Amt. Income Shares Amt.
<S> <C> <C> <C> <C> <C> <C>
Income (loss) from continuing operations..... $(5,884) $19,811
Basic earnings per share:
Income (loss) from continuing operations
available to common stockholders........... $(5,884) 56,149 $(.11) $19,811 44,412 $.45
Effect of dilutive securities:
Stock options................................ - - - 819
Performance awards........................... - - - 91
Convertible preferred stock.................. - - - 6,382
Diluted earnings per share:
Income (loss) from continuing operations
available to common stockholders
plus assumed conversions................... $(5,884) 56,149 $(.11) $19,811 51,704 $.38
</TABLE>
Various stock options and performance awards granted to
employees in connection with the Company's stock compensation plans
were outstanding during the three months ended March 31, 1998 but
were not included in the computation of diluted earnings per share
from continuing operations for such period because the effect would
have been antidilutive. Options to purchase approximately 4.4 million
shares of common stock and performance awards totaling
approximately 121,000 shares were outstanding at March 31, 1998.
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 March 31, 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. The adoption of this statement is not expected to
impact the Company's consolidated financial statement disclosures.
In February 1998, the FASB issued SFAS No. 132,
"Employers' Disclosures about Pensions and Other Postretirement
Benefits." SFAS No. 132 standardizes the disclosure requirements
for pensions and other postretirement benefits to the extent
practicable, requires additional information on changes in the
benefit obligations and fair values of plan assets, and eliminates
certain disclosures that are no longer useful. This statement
becomes effective for the Company's financial 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.
9. Litigation and Contingencies
Litigation Relating to Operations of Basis Prior to Acquisition
Basis was named as a party to numerous claims and legal
proceedings which arose prior to its acquisition by the Company.
Pursuant to the stock purchase agreement between Energy, the
Company, Salomon, and Basis, Salomon assumed the defense of all
known suits, actions, claims and investigations pending at the time
of the acquisition and all obligations, liabilities and expenses
related to or arising therefrom. In addition, Salomon agreed to
assume all obligations, liabilities and expenses related to or
resulting from all private third-party suits, actions and claims
which arise out of a state of facts existing on or prior to the
time of the acquisition (including "superfund" liability), but
which were not pending at such time, subject to certain terms,
conditions and limitations. In certain pending matters, the
plaintiffs are requesting injunctive relief which, if granted,
could potentially result in the operations acquired in connection
with the purchase of Basis being adversely affected through
required reductions in emissions, discharges, or refinery
throughput, which could be outside Salomon's indemnity obligations.
In December 1997, the Company and Salomon reached an
agreement whereby Salomon paid the Company $9.5 million in
settlement of certain of Salomon's contingent environmental
obligations assumed under the stock purchase agreement. This
settlement did not affect Salomon's other indemnity obligations
described in this paragraph.
Litigation Relating to Discontinued Operations
Energy and certain of its natural gas related subsidiaries, as
well as the Company, have been sued by Teco Pipeline Company
("Teco") regarding the operation of the 340-mile West Texas pipeline
in which a subsidiary of Energy holds a 50% undivided interest. In
1985, a subsidiary of Energy sold a 50% undivided interest in the
pipeline and entered into a joint venture through an ownership
agreement and an operating agreement, each dated February 28, 1985,
with the purchaser of the interest. In 1988, Teco succeeded to
that purchaser's 50% interest. A subsidiary of Energy has at all
times been the operator of the pipeline. Notwithstanding the
written ownership and operating agreements, the plaintiff alleges
that a separate, unwritten partnership agreement exists, and that
the defendants have exercised improper dominion over such alleged
partnership's affairs. The plaintiff also alleges that the
defendants acted in bad faith by negatively affecting the economics
of the joint venture in order to provide financial advantages to
facilities or entities owned by the defendants and by allegedly
usurping for the defendants' own benefit certain opportunities
available to the joint venture. The plaintiff asserts causes of
action for breach of fiduciary duty, fraud, tortious interference
with business relationships, professional malpractice and other
claims, and seeks unquantified actual and punitive damages.
Energy's motion to compel arbitration was denied, but Energy has
filed an appeal. Energy has also filed a counterclaim alleging
that the plaintiff breached its own obligations to the joint
venture and jeopardized the economic and operational viability of
the pipeline by its actions. Energy is seeking unquantified actual
and punitive damages. Although PG&E 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 and hold
harmless Energy with respect to this lawsuit to the extent of 50%
of the amount of any final judgment or settlement amount not in
excess of $30 million, and 100% of that part of any final judgment
or settlement amount in excess of $30 million.
General
The Company is also a party to additional claims and legal
proceedings arising in the ordinary course of business. The
Company believes it is unlikely that the final outcome of any of
the claims or proceedings to which the Company is a party would
have a material adverse effect on the Company's financial
statements; however, due to the inherent uncertainty of litigation,
the range of possible loss, if any, cannot be estimated with a
reasonable degree of precision and there can be no assurance that
the resolution of any particular claim or proceeding would not have
an adverse effect on the Company's results of operations for the
interim period in which such resolution occurred.
<PAGE>
<TABLE>
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 March 31, 1998 and 1997
(in thousands of dollars, unless otherwise noted):
<CAPTION>
Three Months Ended March 31,
1998 1997 (1)
<S> <C> <C>
Operating revenues................................. $1,362,359 $ 821,802
Operating income, before inventory write-down...... $ 35,256 $ 38,413
Write-down of inventories to market value.......... (37,673) -
Total operating income (loss).................... $ (2,417) $ 38,413
Interest and debt expense, net..................... $ (6,822) $ (9,463)
Income (loss) from continuing operations........... $ (5,884) $ 19,811
Loss from discontinued operations, net of
income tax benefit.............................. $ - $ (4,371)
Net income (loss).................................. $ (5,884) $ 15,440
Net income (loss) applicable to common stock....... $ (5,884) $ 12,674
Earnings (loss) per share of common stock:
Continuing operations............................ $ (.11) $ .45
Discontinued operations.......................... - (.16)
Total.......................................... $ (.11) $ .29
Earnings (loss) per share of common stock -
assuming dilution:
Continuing operations.......................... $ (.11) $ .38
Discontinued operations........................ - (.08)
Total........................................ $ (.11) $ .30
Earnings before interest, taxes, depreciation
and amortization ("EBITDA") (2).................. $ 60,758 $ 61,665
Ratio of EBITDA to interest incurred............... 8.0x 6.2x
Operating statistics:
Throughput volumes (Mbbls per day)............... 527 179
Average throughput margin per barrel (3)......... $ 3.68 $ 6.43
Operating cost per barrel........................ $ 2.57 $ 3.44
Sales volumes (Mbbls per day).................... 817 328
Charges:
Crude oils..................................... 66% 19%
Residual fuel oil ("resid").................... 18 50
Other feedstocks and blendstocks............... 16 31
Total........................................ 100% 100%
Yields:
Gasoline and blending components............... 48% 66%
Distillates.................................... 29 16
Petrochemicals................................. 5 10
Natural gas liquids ("NGLs") and naphtha....... 6 1
Heavy products................................. 12 7
Total........................................ 100% 100%
<FN>
(1) Excludes the operations of the Texas City, Houston and Krotz Springs
refineries which were acquired May 1, 1997.
(2) EBITDA for the 1998 period excludes the effect of the $37.7 million
pre-tax write-down of inventories to market value.
(3) Throughput margin for the 1998 period excludes an $.80 per barrel
reduction resulting from the effect of the $37.7 million pre-tax
write-down of inventories to market value.
</TABLE>
<PAGE>
RESULTS OF OPERATIONS
The Company reported a net loss for the first quarter of 1998
of $5.9 million, or $.11 per share, compared to income from
continuing operations for the first quarter of 1997 of $19.8 million,
or $.45 per share ($.38 per share on a diluted basis). Results
from discontinued operations for the first quarter of 1997 were a
loss of $4.4 million, or $.16 per share. The first quarter 1998
results were reduced by a $37.7 million ($23.9 million after-tax,
or $.43 per share) write-down in the carrying amount of the
Company's refinery inventories. This write-down, primarily
attributable to inventories acquired in connection with the
purchase of Basis, resulted from a significant decline in feedstock
and refined product prices during the quarter. Excluding the
effect of the inventory write-down, income from continuing
operations decreased slightly during the first quarter of 1998
compared to the first quarter of 1997 as the effects of weak
refining industry fundamentals during the first quarter of
1998 were partially offset by the contribution from the operations
related to the Texas City, Houston and Krotz Springs refineries and
a decrease in interest expense. In determining earnings per share
for the first quarter 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.
Operating revenues increased $540.6 million, or 66%, to
$1.4 billion during the first quarter of 1998 compared to the same
period in 1997 due to a 149% increase in average daily sales
volumes partially 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 Basis, while the decrease in sales prices was due to depressed
refined product prices resulting from high levels of gasoline
inventories and lower crude oil prices.
Operating income decreased $40.8 million during the first
quarter of 1998 compared to the first quarter of 1997 due primarily
to the $37.7 million inventory write-down noted above. Excluding
the effect of the inventory write-down, operating income decreased
$3.1 million, or 8%, to $35.3 million during the first quarter of
1998 compared to the same period in 1997. This decrease was due to
an approximate $20 million reduction in total throughput margins
for the operations related to the Corpus Christi refinery and an
approximate $4 million increase in administrative expenses,
partially offset by an approximate $21 million contribution from
the operations related to the Texas City, Houston and Krotz Springs
refineries which were acquired on May 1, 1997. Total throughput
margins for the operations related to the Corpus Christi refinery
decreased due to a decline in the price differential between
conventional gasoline and crude oil resulting from the high levels
of gasoline inventories noted above which caused gasoline prices to
fall more than crude oil prices during the period. In addition,
total throughput margins for these operations decreased due to
lower premiums on sales of petrochemical feedstocks and reduced
results from price risk management activities. Partially
offsetting these factors were higher oxygenate margins resulting
primarily from a decrease in methanol and butane feedstock costs
and higher premiums on sales of reformulated gasoline. The $4 million
increase in administrative expenses was due primarily to the
effect of additional personnel resulting from the acquisition of
Basis in May 1997.
Net interest and debt expense decreased $2.7 million, or 28%,
to $6.8 million during the first quarter of 1998 compared to the
same period in 1997 due primarily to a reduction in average
interest rates, partially offset by an increase in average
borrowings resulting in large part from the acquisition of Basis
in May 1997.
Income taxes decreased $13.5 million during the first quarter
of 1998 compared to the same period in 1997 due primarily to lower
pre-tax income from continuing operations.
The loss from discontinued operations in the first quarter of
1997 of $4.4 million (net of an income tax benefit of $2.1 million)
reflected the net loss of Energy's natural gas related services
business for such period prior to consummation of the
Restructuring.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by continuing operations increased
$17.5 million to $47.3 million during the first quarter of 1998
compared to the same period in 1997 due primarily to a $9.9 million
decrease in the amount of cash utilized for working capital
requirements, as detailed in Note 5 of Notes to Consolidated
Financial Statements, and to an increase in earnings, excluding the
effects of non-cash items. Included in the changes in current
assets and current liabilities for the 1998 period was a
substantial decrease in accounts receivable offset entirely by
decreases in accounts payable and accrued expenses and increases in
inventories and prepaid expenses and other. Accounts receivable
and accounts payable decreased due primarily to lower commodity
prices. During the first quarter 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 $116 million.
These funds were utilized to reduce bank borrowings, fund
capital expenditures and deferred turnaround and catalyst costs,
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 March 31, 1998, the Company had approximately $739 million
available under this committed bank credit facility for additional
borrowings and letters of credit. The Company also has numerous
uncommitted short-term bank credit facilities, along with several
uncommitted letter of credit facilities. As of March 31, 1998, a
minimum of $70 million and a maximum of $260 million were available
for additional borrowings under the short-term bank credit
facilities, and approximately $202 million was available for
additional letters of credit under the uncommitted letter of credit
facilities. As of March 31, 1998, the Company's debt to
capitalization ratio was 33.3%. The Company was in compliance with
all covenants contained in its various debt facilities as of
March 31, 1998.
During the first quarter of 1998, the Company reduced its
exposure to increases in interest rates and increased its financial
flexibility by converting the interest rates on $123.5 million of
industrial revenue bonds from variable rates to fixed rates and
issuing $68.5 million of new industrial revenue bonds, using the
proceeds to reduce bank borrowings incurred in connection with the
acquisition of Basis. See Note 6 of Notes to Consolidated
Financial Statements.
During the first quarter of 1998, the Company expended
approximately $65 million for capital investments, including
capital expenditures of $33 million and deferred turnaround and
catalyst costs of $32 million. For total year 1998, the Company
currently expects to incur approximately $200 million for capital
investments, including approximately $150 million for capital
expenditures and approximately $50 million for deferred turnaround
and catalyst costs.
The Company believes it has sufficient funds from operations,
and to the extent necessary, from the public and private capital
markets and bank markets, to fund its ongoing operating
requirements. The Company expects that, to the extent necessary,
it can raise additional funds from time to time through equity or
debt financings; however, except for borrowings under bank credit
agreements, the Company has no specific financing plans as of the
date hereof.
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. Based on information
currently available to the Company, the adoption of these
statements is not expected to have a material effect on the
Company's consolidated financial statements.
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; ability to
implement planned capital projects and realize the various
assumptions and benefits projected for such projects; 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; 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.
<PAGE>
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
11.1 Computation of Earnings Per Share.
27.1* Financial Data Schedule (reporting financial
information as of and for the three months ended
March 31, 1998).
27.2* Restated Financial Data Schedule (reporting financial
information as of and for the three months ended
March 31, 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. The Company did not file any
Current Reports on Form 8-K during the quarter ended March 31, 1998.
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
VALERO ENERGY CORPORATION
(Registrant)
By: /s/ John D. Gibbons
John D. Gibbons
Chief Financial Officer,
Vice President - Finance and Treasurer
(Duly Authorized Officer and Principal
Financial and Accounting Officer)
Date: May 15, 1998
<TABLE>
EXHIBIT 11.1
VALERO ENERGY CORPORATION AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE
(Thousands of Dollars, Except Per Share Amounts)
<CAPTION>
Three Months Ended
March 31,
1998 1997
<S> <C> <C>
COMPUTATION OF BASIC EARNINGS PER SHARE:
Income (loss) from continuing operations............. $ (5,884) $ 19,811
Loss from discontinued operations, net of
income tax benefit................................ $ - $ (4,371)
Less: Preferred stock dividend requirements
and redemption premium............................ - (2,766)
Loss from discontinued operations applicable
to common stock................................... $ - $ (7,137)
Weighted average number of shares of
common stock outstanding.......................... 56,148,924 44,411,705
Earnings (loss) per share:
Continuing operations............................. $ (.11) $ .45
Discontinued operations........................... - (.16)
Total.......................................... $ (.11) $ .29
COMPUTATION OF EARNINGS PER SHARE
ASSUMING DILUTION:
Income (loss) from continuing operations
assuming dilution.................................. $ (5,884) $ 19,811
Loss from discontinued operations, net of
income tax benefit................................ $ - $ (4,371)
Less: Preferred stock dividend requirements
and redemption premium............................ - (2,766)
Add: Reduction of preferred stock dividends
applicable to the assumed conversion of
convertible preferred stock at the beginning
of the period..................................... - 2,695
Loss from discontinued operations applicable to
common stock assuming full dilution............... $ - $ (4,442)
Weighted average number of shares of
common stock outstanding.......................... 56,148,924 44,411,705
Effect of dilutive securities:
Stock options..................................... - (a) 819,124
Performance awards................................ - (a) 91,151
Convertible preferred stock....................... - 6,381,798
Weighted average number of shares of
common stock outstanding assuming dilution....... 56,148,924 51,703,778
Earnings (loss) per share - assuming dilution:
Continuing operations............................. $ (.11) $ .38
Discontinued operations........................... - (.08)
Total.......................................... $ (.11) $ .30
<FN>
(a) Various stock options and performance awards granted to employees in
connection with the Company's stock compensation plans were outstanding during
the three months ended March 31, 1998 but were not included in the computation
of diluted earnings per share from continuing operations for such period
because the effect would have been antidilutive. See Note 7 of Notes to
Consolidated Financial Statements.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE CONSOLIDATED BALANCE SHEET AS OF MARCH 31, 1998 AND THE
CONSOLIDATED STATEMENT OF INCOME FOR THE THREE MONTHS ENDED MARCH 31, 1998
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 9,808
<SECURITIES> 0
<RECEIVABLES> 273,294
<ALLOWANCES> 1,425
<INVENTORY> 334,311
<CURRENT-ASSETS> 687,209
<PP&E> 2,164,269
<DEPRECIATION> 557,441
<TOTAL-ASSETS> 2,431,162
<CURRENT-LIABILITIES> 564,509
<BONDS> 398,347
0
0
<COMMON> 562
<OTHER-SE> 1,147,786
<TOTAL-LIABILITY-AND-EQUITY> 2,431,162
<SALES> 1,362,359
<TOTAL-REVENUES> 1,362,359
<CGS> 1,364,776
<TOTAL-COSTS> 1,364,776
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,822
<INCOME-PRETAX> (9,284)
<INCOME-TAX> (3,400)
<INCOME-CONTINUING> (5,884)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,884)
<EPS-PRIMARY> (.11)
<EPS-DILUTED> (.11)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 11
<SECURITIES> 0
<RECEIVABLES> 138,046
<ALLOWANCES> 1,050
<INVENTORY> 180,871
<CURRENT-ASSETS> 346,049
<PP&E> 1,715,790
<DEPRECIATION> 493,220
<TOTAL-ASSETS> 1,993,932
<CURRENT-LIABILITIES> 301,469
<BONDS> 334,993
0
3,450
<COMMON> 44,872
<OTHER-SE> 1,050,622
<TOTAL-LIABILITY-AND-EQUITY> 1,993,932
<SALES> 821,802
<TOTAL-REVENUES> 821,802
<CGS> 783,389
<TOTAL-COSTS> 783,389
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9,463
<INCOME-PRETAX> 29,905
<INCOME-TAX> 10,094
<INCOME-CONTINUING> 19,811
<DISCONTINUED> (4,371)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 15,440
<EPS-PRIMARY> .29
<EPS-DILUTED> .30
</TABLE>
