FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 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 78230
San Antonio, Texas (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code (210) 370-2000
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
Common Stock, $.01 Par Value New York Stock Exchange
Preferred Share Purchase Rights New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
NONE.
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
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value on January 30, 1998, of the registrant's
Common Stock, $.01 par value ("Common Stock"), held by nonaffiliates of the
registrant, based on the average of the high and low prices as quoted in the
New York Stock Exchange Composite Transactions listing for that date, was
approximately $1.75 billion. As of January 30, 1998, 55,882,057 shares
of the registrant's Common Stock were issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The Company intends to file with the Securities and Exchange Commission
(the "Commission") in March 1998 a definitive Proxy Statement (the "1998
Proxy Statement") for the Company's Annual Meeting of Stockholders scheduled
for April 30, 1998, at which directors of the Company will be elected.
Portions of the 1998 Proxy Statement are incorporated by reference in Part
III of this Form 10-K and shall be deemed to be a part hereof.
CROSS-REFERENCE SHEET
The following table indicates the headings in the 1998 Proxy Statement
where the information required in Part III of Form 10-K may be found.
Form 10-K Item No. and Caption Heading in 1998 Proxy Statement
10. "Directors and Executive Officers
of the Registrant" "Proposal No. 1 - Election of
Directors," and "Information
Concerning Nominees and Other
Directors" and "Section 16(a)
Beneficial Ownership Reporting
Compliance"
11. "Executive Compensation" "Executive Compensation," "Stock
Option Grants and Related
Information," "Report of the
Compensation Committee of the
Board of Directors on Executive
Compensation," "Retirement
Benefits," "Arrangements with
Certain Officers and Directors"
and "Performance Graph"
12. "Security Ownership of Certain
Beneficial Owners and Management" "Beneficial Ownership of Valero
Securities"
13. "Certain Relationships and Related
Transactions" "Transactions with Management
and Others"
Copies of all documents incorporated by reference, other than exhibits
to such documents, will be provided without charge to each person who receives
a copy of this Form 10-K upon written request to Jay D. Browning, Corporate
Secretary, Valero Energy Corporation, P.O. Box 500, San Antonio, Texas 78292.
CONTENTS
PAGE
Cross Reference Sheet
PART I
Item 1. Business
1997 Developments
Restructuring
Acquisition of Basis Petroleum, Inc.
Refining Operations
Corpus Christi Refinery
Acquired Refineries
Texas City Refinery
Houston Refinery
Krotz Springs Refinery
Selected Operating Results
Marketing
Feedstock Supply
Factors Affecting Operating Results
Competition
Environmental Matters
Executive Officers of the Registrant
Employees
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Item 8. Financial Statements
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
PART III
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
The following 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 are discussed in "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations" under the heading "Forward-Looking Statements." 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 I
ITEM 1. BUSINESS
Valero Energy Corporation is one of the United States' largest
independent refiners and marketers, and the largest on the Gulf Coast.
With the May 1, 1997 acquisition of Basis Petroleum, Inc., the Company
now owns and operates four refineries in Texas and Louisiana with a combined
throughput capacity of approximately 530,000 barrels per day ("BPD").
The Company principally produces premium, environmentally clean products
such as reformulated gasoline, low-sulfur diesel and oxygenates. The
Company also produces a substantial slate of middle distillates, jet fuel
and petrochemicals. The Company markets its products in 32 states and
selected export markets. Unless otherwise required by the context, the
term "Valero" as used herein refers to Valero Energy Corporation, and the
term "Company" refers to Valero and its consolidated subsidiaries.
Valero was incorporated in Delaware in 1981 under the name Valero
Refining and Marketing Company and became a publicly held corporation on
July 31, 1997. Its principal executive offices are located at 7990 West
I.H. 10, San Antonio, Texas, 78230 and its telephone number is (210) 370-2000.
For financial and statistical information regarding the Company's
operations, see "Management's Discussion and Analysis of Financial Condition
and Results of Operations." For a discussion of cash flows provided by and
used in the Company's operations, see "Management's Discussion and Analysis
of Financial Condition and Results of Operations - Liquidity and Capital
Resources."
1997 Developments
Restructuring
Prior to July 31, 1997, Valero was a wholly owned subsidiary of Valero
Energy Corporation ("Energy"). Energy was a diversified energy company
engaged in both the refining and marketing business and the natural gas
related services business. On July 31, 1997, pursuant to an agreement and
plan of distribution between Valero and Energy (the "Distribution Agreement"),
Energy spun off Valero to Energy's stockholders by distributing all of
Valero's $.01 par value common stock on a share for share basis to holders
of record of Energy common stock at the close of business on July 31, 1997
(the "Distribution"). Immediately after the Distribution, Energy, with its
remaining natural gas related services business, merged (the "Merger")
with a wholly owned subsidiary of PG&E Corporation ("PG&E"). The completion
of the Distribution and the Merger (collectively referred to as the
"Restructuring") finalized the restructuring of Energy previously announced
in January 1997. The Distribution and the Merger were approved by Energy
stockholders at their annual meeting held on June 18, 1997 and, in the
opinion of Energy's outside counsel, were tax-free transactions. Regulatory
approval of the Merger was received from the Federal Energy Regulatory
Commission on July 16, 1997. Upon completion of the Restructuring, Valero's
name was changed from Valero Refining and Marketing Company to Valero Energy
Corporation and its common stock was listed for trading on the New York Stock
Exchange under the symbol "VLO."
Immediately prior to the Distribution, the Company paid a dividend to
Energy of $210 million pursuant to the Distribution Agreement. In addition,
the Company paid to Energy approximately $5 million in settlement of the
intercompany note balance between the Company and Energy arising from certain
transactions during the period from January 1 through July 31, 1997. In
connection with the Merger, PG&E issued approximately 31 million shares of
its common stock in exchange for all of the issued and outstanding $1 par
value common shares of Energy, and assumed $785.7 million of Energy's debt.
Each Energy stockholder received .554 of one share of PG&E common stock,
trading on the New York Stock Exchange under the symbol "PCG," for each
Energy share owned on July 31, 1997. This fractional share amount was based
on the average price of PG&E common stock during a prescribed period
preceding the closing of the transaction and the number of Energy shares
issued and outstanding at the time of the closing.
Prior to the Restructuring, Energy, Valero and PG&E entered into a tax
sharing agreement ("Tax Sharing Agreement"), which sets forth each party's
rights and obligations with respect to payments and refunds, if any, of
federal, state, local, or other taxes for periods before the Restructuring.
In general, under the Tax Sharing Agreement, Energy and Valero are each
responsible for their allocable share of the federal, state and other taxes
incurred by the combined operations of Energy and Valero prior to the
Distribution. Furthermore, Valero is responsible for substantially all
tax liability in the event the Distribution or the Merger fails to qualify
as a tax-free transaction, except that Energy would be responsible for any
such tax liability attributable to certain actions by Energy and/or PG&E.
The separation of the Company from the natural gas business and
operations of Energy was structured as a spin-off of the Company for legal,
tax and other reasons. However, the Company succeeded to certain important
aspects of Energy's business, organization and affairs, namely: (i) the
Company succeeded to the name "Valero Energy Corporation" and the Company
retained the refining and marketing business of Energy which represented
approximately one-half of the assets, revenues, and operating income of the
businesses, operations and companies previously constituting Energy; (ii) the
Company's Board of Directors consists of those individuals formerly comprising
Energy's Board of Directors; and (iii) the Company's executive management
consists primarily of those individuals formerly comprising Energy's
executive management.
Acquisition of Basis Petroleum, Inc.
Effective May 1, 1997, Energy acquired all of the outstanding common
stock of Basis Petroleum, Inc. ("Basis"), a wholly owned subsidiary of
Salomon Inc ("Salomon"). The primary assets acquired with Basis include
three refineries located in Texas City, Texas (the "Texas City Refinery"),
Houston, Texas (the "Houston Refinery") and Krotz Springs, Louisiana (the
"Krotz Springs Refinery") (these three refineries are collectively referred
to as the "Acquired Refineries") and an extensive wholesale marketing
business. At the time of their acquisition, the Acquired Refineries had a
combined total throughput capacity in excess of 300,000 BPD. 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 it was spun off to
Energy's stockholders pursuant to the Restructuring. Basis' name was
subsequently changed to Valero Refining Company-Texas and the Basis assets
located in Louisiana were transferred to a newly-formed subsidiary of the
Company, Valero Refining Company-Louisiana. Energy acquired the capital
stock of Basis for approximately $470 million which includes certain
post-closing adjustments and settlements. The purchase price was paid,
in part, with 3,429,796 shares of Energy common stock having a fair market
value of approximately $114 million with the remainder paid in cash from
borrowings under Energy's bank credit facilities. In addition, Salomon is
entitled to receive earn-out payments from the Company in any of the years
through 2007 if certain average refining margins during any of those years
are above a specified level. Any payments under this earn-out arrangement
are limited to $35 million in any year and $200 million in the aggregate
and are determined on May 1 of each year beginning in 1998.
For additional information concerning the Company's financing activities,
see Note 6 of Notes to Consolidated Financial Statements.
Refining Operations
The Company owns and operates four refineries located in the U.S. Gulf
Coast region having a combined total refining capacity of approximately
530,000 BPD, net of inter-refinery transfers averaging approximately
35,000 BPD. The Company's largest refinery is located on 254 acres in
Corpus Christi, Texas (the "Corpus Christi Refinery") along the Corpus
Christi Ship Channel and has a feedstock throughput capacity of
approximately 190,000 BPD. The Texas City Refinery is located on
290 acres along the Texas City Ship Channel and has a feedstock throughput
capacity of approximately 180,000 BPD. The Houston Refinery is located on
250 acres along the Houston Ship Channel with a feedstock throughput
capacity of approximately 115,000 BPD. The Krotz Springs Refinery is
located on 260 acres in Southern Louisiana along the Atchafalaya River
which has access to the Mississippi River and to the Colonial pipeline.
The feedstock throughput capacity of the Krotz Springs Refinery is
approximately 80,000 BPD.
In addition to more than tripling the Company's throughput capacity, the
Acquired Refineries have substantially diversified the Company's feedstock
slate, allowing it to process both medium sour crude oils and heavy sweet
crudes, both of which can typically be purchased at a discount to West Texas
Intermediate ("WTI"), a benchmark crude oil. The Company's primary feedstocks
are medium sour crude oil, heavy sweet crude oil and high-sulfur atmospheric
residual fuel oil ("resid").
In 1998, the Company plans to begin a capital expenditure program that
targets a system wide increase in total throughput capacity of approximately
140,000 BPD by early to mid-2000. The Company currently estimates the cost
of this expansion to be $250-275 million in the aggregate. The majority
of these capital expenditures are anticipated to be spent in 1999 on
upgrades and modifications to the Acquired Refineries and will be performed
during scheduled maintenance turnarounds. In addition to capital
expenditures related to this expansion program, other capital expenditures
are planned to improve system reliability and reduce emissions.
The Company has very few turnarounds scheduled for 1998. During 1999,
maintenance turnarounds for most of the Company's major refining units
are planned. Such turnarounds are scheduled to occur early in the first
quarter and in the fourth quarter when refining margins are historically
low so as to minimize the impact on the Company's operating results.
Corpus Christi Refinery
The Corpus Christi Refinery specializes in processing primarily resid
and heavy crude oil into premium products, such as reformulated gasoline
("RFG"). The Corpus Christi Refinery can produce approximately 117,000 BPD
of gasoline and gasoline-related products, 35,000 BPD of middle distillates
and 40,000 BPD of other products such as chemicals, asphalt and propane.
The Corpus Christi Refinery can produce all of its gasoline as RFG and all of
its diesel fuel as low-sulfur diesel. The Corpus Christi Refinery has
substantial flexibility to vary its mix of gasoline products to meet changing
market conditions.
The Corpus Christi Refinery produces oxygenates <F1> such as MTBE (methyl
tertiary butyl ether) and TAME (tertiary amyl methyl ether). MTBE is an
oxygen-rich, high-octane gasoline blendstock produced by reacting methanol
and isobutylene, and is used to manufacture oxygenated and reformulated
gasolines. TAME, like MTBE, is an oxygen-rich, high-octane gasoline
blendstock. The butane upgrade facility which produces MTBE (the "Corpus
Christi MTBE Plant") is located at the Corpus Christi Refinery and can
produce approximately 17,000 BPD of MTBE from butane and methanol feedstocks.
The MTBE/TAME Unit at the Corpus Christi Refinery converts light olefin
streams produced by the refinery's heavy oil cracker ("HOC") into MTBE and
TAME. The Corpus Christi MTBE Plant and MTBE/TAME Unit enable the Corpus
Christi Refinery to produce approximately 22,500 BPD of oxygenates, which
are blended into the Company's own gasoline production and sold separately.
Substantially all of the methanol feedstocks required for the production of
oxygenates at the Corpus Christi Refinery can normally be provided by a
methanol plant in Clear Lake, Texas owned by a joint venture between a
Valero subsidiary and Hoechst Celanese Chemical Group, Inc. (the "Clear Lake
Methanol Plant").
[FN]
<F1> "Oxygenates" are liquid hydrocarbon compounds containing oxygen.
Gasoline that contains oxygenates usually has lower carbon monoxide
emissions than conventional gasoline.
In January 1997, a mixed xylene fractionation facility ("Xylene Unit"),
which recovers the mixed xylene stream from the Corpus Christi Refinery's
reformate stream, was placed into service at the refinery. The fractionated
xylene is sold into the petrochemical feedstock market for use in the
production of paraxylene. The Corpus Christi MTBE Plant, the MTBE/TAME
Unit, the Xylene Unit and related facilities diversify the Corpus Christi
Refinery's operations, giving the Company the flexibility to pursue
higher-margin product markets.
In 1997, the Company completed a scheduled turnaround on the crude unit
at the Corpus Christi Refinery. The Company also completed a scheduled
turnaround of certain of the Corpus Christi Refinery's major refining units
in the first quarter of 1998. Modifications made during the 1998 turnaround
are expected to increase throughput by 5,000 to 10,000 BPD, depending upon
the type of feedstocks utilized. In addition, the hydrodesulfurization unit
("HDS") was modified to allow for the processing of approximately 25,000 BPD
of high sulfur crude oil, thereby increasing the Corpus Christi Refinery's
feedstock flexibility. The Corpus Christi Refinery experienced one
significant unscheduled shutdown of its HOC during the second quarter
resulting in a reduction of operating income for 1997 of approximately
$8 million. During this shutdown, certain debottlenecking modifications
were completed which have increased the capacity of the HOC by approximately
3,000 BPD. Other than the HOC downtime, the Corpus Christi Refinery's
principal refining units operated during 1997 without significant unscheduled
downtime. No further turnaround activity is scheduled for the Corpus Christi
Refinery during 1998. During 1999, the HOC is scheduled to be down for a
maintenance turnaround and to increase the unit's capacity and the HDS is
scheduled to be down for a maintenance turnaround and to replace the catalyst
in the unit.
Acquired Refineries
The acquisition of the Acquired Refineries significantly diversified
the Company's asset base and expanded and diversified its feedstock slate.
At the time of their acquisition, the Acquired Refineries had a combined
total throughput capacity of approximately 300,000 BPD. As a result of
upgrading and reconfiguration activities undertaken by the Company, the
aggregate throughput capacity of the Acquired Refineries has been increased
to approximately 340,000 BPD, net of inter-refinery transfers averaging
approximately 35,000 BPD. Much of this increased capacity has resulted
from efforts to optimize feedstock selection in order to capitalize on the
reconfiguration of the Acquired Refineries. In 1998, the Company plans to
begin a capital expenditure program designed to increase total system
capacity of the Acquired Refineries by converting the fluid catalytic
cracking units ("FCC Units") to HOCs and increasing their capacity,
expanding the crude unit capacities and various other expenditures to
enhance feedstock flexibility. In addition, expenditures to upgrade
instrumentation systems and modernize the control rooms at each of the
Acquired Refineries will continue over the next few years to improve plant
efficiency and management information systems.
Texas City Refinery
The Texas City Refinery is capable of refining lower-value, medium sour
crudes into a slate of gasolines, low-sulfur diesels and distillates,
including home heating oil, kerosene and jet fuel. The Texas City Refinery
typically produces approximately 55,000 BPD of gasoline and 60,000 BPD of
distillates. The Texas City Refinery also provides approximately 35,000 BPD
of intermediate feedstocks such as deasphalted oil to the Corpus Christi
Refinery and the Houston Refinery. The Texas City Refinery typically
receives its feedstocks and ships product by tanker via deep water docking
facilities along the Texas City Ship Channel, and also has access to the
Colonial, Explorer and TEPPCO pipelines for distribution of its products.
During the latter part of 1996, a Residfiner (which improves the
cracking characteristics of the feedstocks for the FCC Unit), and a Residual
Oil Supercritical Extraction ("ROSE") unit (which recovers deasphalted oil
from the vacuum tower bottoms for feed to the FCC Unit) were placed in
service at the Texas City Refinery, which significantly enhanced this
refinery's feedstock flexibility and product diversity. Certain intermediate
products produced from these units are also being utilized as feedstocks at
the Corpus Christi and Houston Refineries.
During 1997, the Texas City Refinery's principal refining units
operated without significant unscheduled downtime. A scheduled turnaround
was completed on the Residfiner in July 1997. During 1998, the Residfiner
is scheduled for a maintenance turnaround. During 1999, the FCC Unit, the
crude unit, Residfiner and ROSE unit are scheduled to be down for
maintenance turnarounds. At that time, the FCC Unit will be converted to
a heavy oil cracker and its capacity increased. The capacity of the crude
unit will also be increased at that time.
Houston Refinery
The Houston Refinery is capable of processing heavy sweet or medium
sour crude oil and produces approximately 54,000 BPD of gasoline and
37,000 BPD of distillates. The refinery typically receives its feedstocks
via tanker at deep water docking facilities along the Houston Ship Channel.
This facility also has access to major product pipelines, including the
Colonial, Explorer and TEPPCO pipelines.
The Houston Refinery experienced unplanned shutdowns of its FCC Unit
during the second and fourth quarters of 1997 for approximately 11 and 14
days, respectively, in order to make certain repairs and to replace a section
of its regenerator. Other than the FCC Unit repairs, the Houston Refinery's
primary refining units operated during 1997 without significant unscheduled
downtime. No turnaround activity is scheduled for the Houston Refinery
during 1998. During 1999, the FCC Unit, the crude unit and the ROSE Unit are
scheduled to be down for maintenance turnarounds. At that time, the FCC Unit
will be converted to a heavy oil cracker and its capacity increased. The
capacity of the crude unit will also be increased at that time.
Krotz Springs Refinery
The Krotz Springs Refinery processes primarily local, light Louisiana
sweet crude oil and produces approximately 34,000 BPD of gasoline and
38,000 BPD of distillates. As a result of recent modifications to its
FCC Unit, the Krotz Springs Refinery is also capable of processing resid.
The refinery is geographically located to benefit from access to upriver
markets on the Mississippi River and it has docking facilities along the
Atchafalaya River sufficiently deep to allow barge and light ship access.
The facility is also connected to the Colonial pipeline for product
transportation to the Southeast and Northeast. This refinery was built
during the 1979-1982 time period making it, like the Corpus Christi Refinery,
a relatively new facility compared to other Gulf Coast refineries. This
refinery also benefits from recently added MTBE/polymerization and
isomerization units.
The Krotz Springs Refinery's principal operating units operated during
1997 without significant unscheduled downtime. No turnaround activity is
scheduled for the Krotz Springs Refinery during 1998. During 1999, the
crude unit is scheduled to be down for a maintenance turnaround and to
increase the unit's capacity.
Selected Operating Results
The following table sets forth certain consolidated operating results
for the last three fiscal years. Amounts for 1997 include the results of
operations of the Acquired Refineries from May 1, 1997. Average throughput
margin per barrel is computed by subtracting total direct product cost of
sales from product sales revenues and dividing the result by throughput
volumes.
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1996 1995
<S> <C> <C> <C>
Refinery Throughput Volumes (MBD) 392 <F2> 170 160
Sales Volumes (MBD) 630 <F2> 291 231
Average Throughput Margin per Barrel $4.64 $5.29 $6.25
Average Operating Cost per Barrel $2.78 $3.29 $3.34
<FN>
<F2> For the eight months following the acquisition of Basis, refinery
throughput volumes and sales volumes were 502 MBD and 780 MBD,
respectively.
</TABLE>
For additional information regarding the Company's operating results for
the three years ended December 31, 1997, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
Marketing
The Company's product slate is presently comprised of approximately 90%
gasoline and related components, distillates, chemicals and other light
products. The Company sells refined products under spot and term contracts
to bulk and truck rack customers at over 170 locations in 32 states throughout
the United States and selected export markets in Latin America. As a result
of the Basis acquisition, total product sales volumes increased from
approximately 291,000 BPD during 1996 to approximately 630,000 BPD during
1997. Sales volumes include amounts produced at the Company's refineries and
amounts purchased from third parties and resold in connection with the
Company's marketing activities. Currently, the Company markets approximately
170,000 BPD of gasoline and distillates through truck rack facilities.
Other sales are made to large oil companies and gasoline distributors and
transported by pipeline, barges and tankers. The principal purchasers of
the Company's products from truck racks have been wholesalers and jobbers
in the Northeast, Southeast, Midwest and Gulf Coast. No single purchaser
of the Company's products accounted for more than 10% of total sales during
1997. With its access to the Gulf of Mexico, the Company's refineries are
able to ship refined products to Latin American markets and the West Coast.
Interconnects with common-carrier pipelines give the Company the flexibility
to sell products in most major geographic regions of the United States.
Approximately 40,000 BPD of the Company's RFG production is under
contract to supply wholesale gasoline marketers in Texas at market-related
prices. In 1997, the Company also supplied approximately 1.5 million
barrels of CARB Phase II gasoline to West Coast markets in connection
with the commencement of California Air Resources Board's gasoline program.
The Company expects demand for RFG to continue to improve as a result of
increased demand in areas currently designated as non-attainment and more
cities across the United States "opting in" to the federal RFG program. For
further discussion, see "Factors Affecting Operating Results" and "Outlook"
under "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
Feedstock Supply
The acquisition of the Acquired Refineries expanded and diversified
the slate of feedstocks which the Company can process. Prior to the Basis
acquisition, the Company's primary feedstock was resid processed at the
Corpus Christi Refinery. Approximately 70% of the Company's feedstock slate
is now comprised of medium sour crude oil, heavy sweet crude oil and resid.
The remaining feedstocks are primarily comprised of intermediates, light
sweet crude oil, methanol and butane.
The Company has term feedstock contracts totaling approximately
300,000 BPD, or approximately 57% of its total feedstock requirements.
The remainder of its feedstock requirements are purchased on the spot
market. The term agreements include contracts to purchase medium sour
crude oil and resid from various foreign national oil companies, including
certain Middle Eastern suppliers, and various domestic integrated oil
companies.
In connection with the Distribution, the Company entered into several
contracts with its former affiliates, including a 10-year term contract
under which a former affiliate is to supply approximately 50% of the butane
required to operate the Corpus Christi MTBE Plant and natural gasoline for
blending. The Company obtains approximately 80% of its total methanol
requirements for all of its refineries through its 50% joint venture
interest in the Clear Lake Methanol Plant.
The Company owns feedstock and refined product storage facilities and
leases feedstock and refined product storage facilities in various locations.
The Company believes its storage facilities are generally adequate for its
refining and marketing operations.
Factors Affecting Operating Results
The Company's earnings and cash flow from operations are primarily
affected by the relationship between refined product prices and the prices
for crude oil and resid. The cost to acquire feedstocks and the price for
which refined products are ultimately sold depends on numerous factors
beyond the Company's control, including the supply and demand for crude
oil, gasoline and other refined products which in turn are dependent upon,
among other things, the availability of imports, the economies and production
levels of foreign suppliers, the marketing of competitive fuels, political
affairs and the extent of governmental regulation.
The prices received by the Company for its refined products are
affected by other factors, such as product pipeline capacity, local market
conditions and the operating levels of competing refineries. As a result of
the geographic location of the Company's refineries, the Company's
profitability is largely dependent upon Gulf Coast refining margins.
A large, rapid increase in crude oil prices or a decrease in refined product
prices in the Gulf Coast region could adversely affect the Company's
operating margins. Crude oil costs and the price of refined products have
historically been subject to wide fluctuation. Installation of additional
refinery crude distillation and upgrading facilities, price volatility,
international political developments and other factors beyond the control of
the Company are likely to continue to play an important role in refining
industry economics. The Company is aware, for example, of additional
capacity of up to 200,000 BPD from a refinery in Good Hope, Louisiana
which may become operational as early as late 1998. These factors can
impact, among other things, the level of inventories in the market resulting
in price volatility. Moreover, the industry typically experiences seasonal
fluctuations in demand for refined products, such as for gasoline during the
summer driving season and for home heating oil during the winter in the
Northeast.
A significant portion of the Company's feedstock supplies are secured
under term contracts. There is no assurance of renewal of such contracts
upon their expiration or that economically equivalent substitute supply
contracts can be secured. The term agreements include an agreement with
the Saudi Arabian Oil Company to provide an average of 36,000 BPD of resid
from its Ras Tanura refinery to the Company through mid-1998. The Saudi
Arabian Oil Company has advised the Company that it plans to begin
operation of certain new resid conversion units in 1998 at the Ras Tanura
refining complex in Saudi Arabia. As a result, the production of resid at
Ras Tanura for export would be significantly reduced, which could adversely
affect the price, terms or availability of high quality resid feedstocks in
the future. However, the Saudi Arabian Oil Company has indicated that they
are willing to provide an additional supply of resid to the Company from
their other refineries although no contract has yet been negotiated. The
availability of such supplies notwithstanding, the Company anticipates that
lower volumes of high quality resid will be available from Saudi Arabia in
the future.
The Company's feedstock supplies from international producers are
loaded aboard chartered vessels and are subject to the usual maritime
hazards. If the Company's foreign sources of crude oil or access to the
marine system for delivering crude oil were curtailed, the Company's
operations could be adversely affected. In addition, the loss of, or
an adverse change in the terms of, certain of its feedstock supply
agreements or the loss of sources or means of delivery of its feedstock
supplies, could have a material adverse effect on the Company's operating
results. The volatility of prices and quantities of feedstocks that may
be purchased on the spot market or pursuant to term contracts could also
have a material adverse effect on operating results.
Because the Company manufactures a substantial portion of its gasoline
as RFG and can produce approximately 26,000 BPD of total oxygenates, certain
federal and state clean-fuel programs significantly affect the operations of
the Company and the markets in which it sells its refined products. In the
future, the Company cannot control or with certainty predict the effect of
such clean-fuel programs on the cost to manufacture, demand for or supply
of refined products. Presently, the EPA's oxygenated fuel program under
the Clean Air Act requires that areas designated "nonattainment" for carbon
monoxide use gasoline that contains a prescribed amount of clean burning
oxygenates during certain winter months. Additionally, the EPA's RFG
program under the Clean Air Act requires year-round usage of RFG in areas
designated "extreme" or "severe" nonattainment for ozone. In addition to
these nonattainment areas, approximately 44 of the 87 areas that were
designated as "serious," "moderate" or "marginal" nonattainment for ozone
also "opted in" to the RFG program to decrease their emissions of
hydrocarbons and toxic pollutants. In 1996, California adopted a statewide,
year-round program requiring the use of gasoline that meets more restrictive
emissions specifications than the federally mandated RFG. Under the
California gasoline program, the entire state is required to use CARB
Phase II gasoline that meets the California emissions standards which
are higher than those set by the EPA. Based upon oxygenate supply and demand
data, it appears most California refiners are choosing to use oxygenates to
help them comply with the statewide emissions standards. In 1997, Phoenix,
Arizona adopted a year-round program requiring gasoline that meets either
the federal RFG standards or the CARB Phase II standards. For the first
time in many years, Phoenix had no ozone exceedances in 1997. Because
Phoenix previously used oxygenated gasoline only in the winter months
for carbon monoxide control, the Company estimates this change will increase
annualized U.S. oxygenate demand about one percent.
MTBE margins are affected by the price of MTBE and its feedstocks,
methanol and butane, as well as the demand for RFG, oxygenated gasoline and
premium gasoline. The worldwide movement to reduce lead in gasoline is
expected to increase worldwide demand for oxygenates to replace the octane
provided by lead-based compounds. The general United States growth in
gasoline demand as well as additional "opt-ins" by certain areas into the
EPA clean fuels programs are expected to continue to increase the demand for
MTBE as a component of these clean fuels. However, initiatives have been
presented in California which would restrict or potentially ban the use of
MTBE as a gasoline component. Based on available information, the Company
believes that numerous scientific studies commissioned by the EPA, CARB and
others will result in defeat of these initiatives. However, if MTBE were
to be restricted or banned, the Company believes that its MTBE-producing
facility could be modified to produce a product similar to alkylate or other
petrochemicals.
The Corpus Christi Refinery's operating results are affected by the
relationship between refined product prices and resid prices, which in turn
are largely determined by market forces. The price of resid is affected by
the relationship between the demand for refined products (increased refined
products demand increases crude oil demand, thereby increasing the supply of
resid as more crude oil is processed) and worldwide additions to resid
conversion capacity (which reduces the available supply of resid). The crude
oil and refined products markets typically experience periods of extreme price
volatility. During such periods, disproportionate changes in the prices of
refined products and resid usually occur. The potential impact of changing
crude oil and refined product prices on the Corpus Christi Refinery's results
of operations is further affected by the fact that the Company generally
buys a portion of its resid feedstocks approximately 45 to 50 days prior to
processing.
Because the Company's refineries are generally more complex than many
conventional refineries and are designed principally to process resid and
other heavy and/or sour crude oils, its operating costs per barrel are
generally higher than those of most conventional refiners. But because the
Company's primary feedstocks usually sell at discounts to benchmark crude oil,
it has been generally able to recover its higher operating costs and generate
higher margins than many conventional refiners that use lighter crude oil as
their principal feedstock. Moreover, through recent improvements in
technology and modifications to its operating units, the Company has improved
its ability to process different types of feedstocks, including synthetic
domestic heavy oil blends and heavy crude oils. The Company expects its
primary feedstocks to continue to sell at a discount to benchmark crude oil,
but is unable to predict future relationships between the supply of and
demand for its feedstocks.
In April 1995, six major oil refiners filed a lawsuit against Unocal
Corporation ("Unocal") in Los Angeles, California seeking a declaratory
judgment that Unocal's claimed patent on certain gasoline compositions was
invalid and unenforceable. The Company is not a party to this litigation.
Unocal's claimed patent covers a substantial portion of the reformulated
gasoline compositions required by the CARB Phase II regulations that went
into effect in March 1996. In October 1997, a federal court jury upheld
the validity of Unocal's patent. In November 1997, the jury awarded
Unocal royalty damages based on infringement of the patent. A final phase
of the trial involving the unenforceability of Unocal's patent due to
"inequitable conduct" was held in December 1997, but to date, no decision
on this issue has been reached. Any adverse judgment against the six oil
refiners will likely be appealed. If the Company were required to pay a
royalty on the compositions claimed by Unocal's patent, such amounts could
affect the operating results of the Company and alter the blending economics
for compositions not covered by the patent. The Company is unable to
predict the validity or effect of any claimed Unocal patent.
Competition
Many of the Company's competitors in the petroleum industry are fully
integrated companies engaged, on a national and/or international basis, in
many segments of the petroleum business, including exploration, production,
transportation, refining and marketing on scales much larger than the
Company's. Such competitors may have greater flexibility in responding to
or absorbing market changes occurring in one or more of such segments.
Substantially all of the Company's crude oil and feedstock supplies are
purchased from third party sources, while some competitors have proprietary
sources of crude oil available for their own refineries.
The refining industry is highly competitive with respect to both
feedstock supply and marketing. The Company competes with numerous other
companies for available supplies of resid and other feedstocks and for
outlets for its refined products. Many of the Company's competitors
obtain a significant portion of their feedstocks from company-owned
production and are able to dispose of refined products at their own
retail outlets. The Company does not have retail gasoline operations.
Competitors that have their own production or retail outlets (and
brand-name recognition) may be able to offset losses from refining
operations with profits from producing or retailing operations, and
may be better positioned to withstand periods of depressed refining
margins or feedstock shortages.
The Company expects a continuation of the trend of industry
restructuring and consolidation through mergers, acquisitions, divestitures,
joint ventures and similar transactions, making for a more competitive
business environment while providing the Company with opportunities to
expand its operations. As described above, the Company expects to
undertake a capital expansion program to increase the throughput capacity
of its refinery facilities by approximately 140,000 BPD, and increase their
operational flexibility. The Company also plans to continue evaluating and
pursuing potential acquisitions to add refining capacity, in any case,
depending upon the Company's assessment of an acquisition's potential for
accretive earnings, creating geographic diversity, providing enhanced
marketing opportunities and providing economies of scope and scale.
Environmental Matters
The Company's operations are subject to environmental regulation by
federal, state and local authorities, including but not limited to, the EPA,
the Texas Natural Resource Conservation Commission ("TNRCC") and the
Louisiana Department of Environmental Quality. The regulatory requirements
relate primarily to discharge of materials into the environment, waste
management and pollution prevention measures. Several of the more
significant federal laws applicable to the Company's operations include
the Clean Air Act, the Clean Water Act, the Comprehensive Environmental
Response, Compensation and Liability Act ("CERCLA") and the Solid Waste
Disposal Act, as amended by the Resource Conservation and Recovery Act
("RCRA"). The Clean Air Act establishes stringent criteria for regulating
conventional air pollutants as well as toxic pollutants at operating
facilities in addition to requiring refiners to market cleaner-burning
gasoline in specific regions of the country to reduce ozone forming
pollutants and toxic emissions.
CERCLA and RCRA, and related state law, subject the Company to the
potential obligation to remove or mitigate the environmental impact of the
disposal or release of certain pollutants at the Company's facilities and
at formerly owned sites. Under CERCLA, the Company is subject to potential
joint and several liability for the costs of remediation at "superfund"
sites at which it has been identified as a "potentially responsible party"
(a "PRP"). Pursuant to the terms of the Basis acquisition, Salomon agreed
to indemnify the Company from third party claims, including "superfund"
liability associated with any pre-closing activities with respect to the
Acquired Refineries, subject to certain terms, conditions and limitations.
As of December 31, 1997, the Company has not been designated as a PRP under
CERCLA for any sites or costs not covered by Salomon's indemnity.
Because the Corpus Christi Refinery was completed in 1984, it was
built under more stringent environmental requirements than many existing
refineries. The Corpus Christi Refinery currently meets EPA emissions
standards requiring the use of "best available control technology," and
is located in an area currently designated "attainment" for air quality.
Accordingly, the Corpus Christi Refinery may be able to comply with the
Clean Air Act and future environmental legislation more easily than older
refineries, and significant additional capital expenditures for environmental
compliance are not anticipated. In 1996, the Corpus Christi, Texas, area was
approved as a "flexible attainment region" ("FAR") by the EPA and the TNRCC.
Under the Clean Air Act, the FAR designation will allow local officials
to design and implement an ozone prevention strategy customized for the
community. This designation also prevents the EPA from designating the
Corpus Christi area as "nonattainment" for a five-year period while
agreed-upon control strategies are being initiated to reduce ozone
formation. The FAR designation should provide greater flexibility with
respect to possible future expansion projects at the Corpus Christi Refinery.
The Company is leading an industry initiative in the State of Texas to
voluntarily permit "grandfathered" emissions sources at the Houston and
Texas City Refineries by utilizing a flexible permitting process. The
flexible permit is a new permitting concept in Texas that allows companies
that have committed to install advanced pollution control technology greater
operational flexibility, including increased throughput capacities, as long
as a facility-wide emissions cap is not exceeded.
As part of the Company's efforts to convert all of its Texas refineries
to flexible permits and utilize "best available pollution control technology"
at all its refineries, the Company plans to install flue gas scrubbers on the
FCC Units at the Houston and Texas City Refineries and upgrade its waste
water treatment plants at the Houston and Corpus Christi Refineries. The
Company anticipates spending approximately $50 million in connection with
these efforts over the next two years. These expenditures are not included
in the estimate of capital expenditures to increase capacity discussed above
under the heading "Refining Operations."
In 1997, capital expenditures for the Company attributable to compliance
with environmental regulations were approximately $15 million and are
currently estimated to be $21 million for 1998 (including expenditures at
the Acquired Refineries). These amounts are exclusive of any amounts
related to constructed facilities for which the portion of expenditures
relating to compliance with environmental regulations is not determinable.
Governmental regulations are complex and subject to different
interpretations. Therefore, future action and regulatory initiatives
could result in changes to expected operating permits, additional remedial
actions or increased capital expenditures and operating costs that cannot
be assessed with certainty at this time. There are no material governmental
fines or corrective action requirements associated with the Company's
operations and the Company believes its operations are in substantial
compliance with current and applicable environmental laws and regulations.
Executive Officers of the Registrant
Name Age Positions Held with Valero Executive
Officer Since
William E. Greehey 61 Chairman of the Board and
Chief Executive Officer 1982
Edward C. Benninger 55 President 1986
E. Baines Manning 57 Senior Vice President 1987
Gregory C. King 37 Vice President and General Counsel 1997
John D. Gibbons 44 Chief Financial Officer, Vice
President - Finance and Treasurer 1997
Keith D. Booke 39 Vice President - Administration and
Human Resources 1997
S. Eugene Edwards 41 Vice President 1998
John F. Hohnholt 45 Vice President 1998
Mr. Greehey served as Chief Executive Officer and a director of Energy
from 1979, and as Chairman of the Board of Energy from 1983. He retired from
his position as Chief Executive Officer in June 1996 but, upon request of the
Board, resumed this position in November 1996 and continued in such positions
until the Restructuring. Mr. Greehey also served as Chairman of the Board
and Chief Executive Officer of Valero prior to the Restructuring when Valero
was a wholly owned subsidiary of Energy. Mr. Greehey is a director of
Weatherford Enterra, Inc. and Santa Fe Energy Resources, Inc.
Mr. Benninger served as President and Chief Financial Officer of Energy
from 1996 and as a director of Energy since 1990, in each case until the
Restructuring. Prior to that, he served in various other capacities with
Energy, its predecessors and subsidiaries since 1975, including Executive
Vice President and Treasurer. Mr. Benninger also served as President and
Chief Financial Officer of Valero prior to the Restructuring when Valero
was a wholly owned subsidiary of Energy.
Mr. Manning was elected Senior Vice President of the Company in 1997.
He joined the Company in 1986 as senior vice president of the refining and
marketing subsidiaries of Energy and held various other positions with
Energy and its subsidiaries prior to the Restructuring.
Mr. King was elected Vice President and General Counsel of Valero in
1997. He joined Energy in 1993 as Associate General Counsel and prior to
that was a partner in the Houston law firm of Bracewell and Patterson.
Mr. Gibbons was elected Chief Financial Officer of the Company in 1998.
Previously, he was elected Vice President - Finance and Treasurer of Valero
in 1997, and was elected Treasurer of Energy in 1992. He joined Energy in
1981 and held various other positions with Energy prior to the Restructuring.
Mr. Booke was elected Vice President-Administration and Human
Resources of the Company in 1998. Prior to that he served as Vice
President-Administration of the Company since 1997 and Vice
President-Investor Relations of Energy since 1994. He joined Energy in 1983
and held various other positions with Energy prior to the Restructuring.
Mr. Edwards was elected Vice President of the Company in January 1998
and functions as head of the Marketing, Supply and Logistics department.
Mr. Edwards joined Energy in 1982 and held various positions within Energy's
refining operations, refining planning, business development and marketing
departments prior to the Restructuring.
Mr. Hohnholt was elected Vice President of the Company in January 1998
and functions as the head of the Refining Operations and Planning department.
Prior to that he was General Manager of the Corpus Christi Refinery.
Mr. Hohnholt joined Energy in 1982 and held various positions within
Energy's refining operations department prior to the Restructuring.
Employees
As of January 31, 1998, the Company had 1,855 employees.
ITEM 2. PROPERTIES
The Company's properties include the Acquired Refineries, the Corpus
Christi Refinery, and related facilities located in the States of Texas and
Louisiana. See "Refining Operations" for additional information regarding
properties of the Company. The Company believes that its facilities are
generally adequate for their respective operations and that its facilities
are maintained in a good state of repair. The Company is the lessee under
a number of cancelable and non-cancelable leases for certain real properties,
including office facilities and various facilities and equipment used to
store, transport and produce refinery feedstocks and/or refined products.
See Note 14 of Notes to Consolidated Financial Statements.
ITEM 3. LEGAL PROCEEDINGS
Litigation Relating to Operations of Basis Prior to Acquisition
Basis has been 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. The Company and Salomon reached an
agreement in December 1997 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 previously acquired
Teco and now ultimately owns both Teco and Energy after the Restructuring,
PG&E's Teco acquisition agreement purports to assign the benefit or
detriment of this lawsuit to the former shareholders of Teco. Pursuant
to the Distribution Agreement by which the Company was spun off to Energy's
stockholders in connection with the Restructuring, the Company has agreed to
indemnify and hold harmless Energy with respect to this lawsuit to the
extent of 50% of the amount of any final judgment or settlement amount
not in excess of $30 million, and 100% of that part of any final judgment or
settlement amount in excess of $30 million.
General
The Company is also a party to additional claims and legal proceedings
arising in the ordinary course of business. The Company believes it is
unlikely that the final outcome of any of the claims or proceedings to
which the Company is a party 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
fourth quarter of 1997.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is listed under the symbol "VLO" on the New
York Stock Exchange, which is the principal trading market for this security.
As of January 30, 1998, there were approximately 6,000 holders of record and
an estimated 15,000 additional beneficial owners of the Company's Common
Stock. The Company's Common Stock began trading on the New York Stock
Exchange on August 1, 1997 (the business day immediately following the
Distribution).
The following table sets forth the range of the high and low sales
prices of the Common Stock as quoted in The Wall Street Journal New York
Stock Exchange-Composite Transactions listing, and the amount of per-share
dividends for each quarter in the preceding two years (i) for the Company
after the Distribution and Merger and (ii) for Energy prior to the
Distribution and Merger.
<TABLE>
<CAPTION>
Sales Prices
of the Dividends
Common Stock per
High Low Common Share
<S> <C> <C> <C>
Quarter Ended
1997:
March 31 $36 3/8 $28 5/8 $.13
June 30 38 1/2 34 1/4 .13
September 30 (through 7/31/97) 43 36 1/4 -
September 30 (after 7/31/97) 35 1/8 28 3/4 .08
December 31 34 26 15/16 .08
<S> <C> <C> <C>
1996:
March 31 $26 1/2 $22 1/8 $.13
June 30 29 24 1/2 .13
September 30 25 1/2 20 1/4 .13
December 31 30 21 7/8 .13
</TABLE>
The Company's Board of Directors declared a quarterly dividend of
$.08 per share of Common Stock at its January 29, 1998 meeting. Dividends
are considered quarterly by the Company's Board of Directors and may be paid
only when approved by the Board.
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data set forth below for the year ended
December 31, 1997 is derived from the Company's Consolidated Financial
Statements contained elsewhere herein. The selected financial data for the
years ended prior to December 31, 1997 is derived from the selected financial
data contained in the Company's Annual Report on Form 10-K for the year ended
December 31, 1996 except as noted below.
The following summaries are in thousands of dollars except for per
share amounts:
<TABLE>
<CAPTION>
Year Ended December 31,
1997(b) 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
OPERATING REVENUES (a) $5,756,220 $2,757,853 $1,772,638 $1,090,497 $1,044,811
OPERATING INCOME (a) $ 211,034 $ 89,748 $ 123,755 $ 63,611 $ 60,923
INCOME FROM CONTINUING OPERATIONS (a) $ 111,768 $ 22,472 $ 58,242 $ 18,511 $ 14,032
INCOME (LOSS) FROM DISCONTINUED
OPERATIONS, NET OF INCOME TAXES (a) $ (15,672) $ 50,229 $ 1,596 $ (1,229) $ 22,392
NET INCOME $ 96,096 $ 72,701 $ 59,838 $ 17,282 $ 36,424
Less: Preferred stock dividend
requirements and
redemption premium 4,592 11,327 11,818 9,490 1,262
NET INCOME APPLICABLE TO
COMMON STOCK $ 91,504 $ 61,374 $ 48,020 $ 7,792 $ 35,162
EARNINGS (LOSS) PER SHARE OF
COMMON STOCK:
Continuing operations (a) $ 2.16 $ .51 $ 1.33 $ .43 $ .33
Discontinued operations (a) (.39) .89 (.23) (.25) .49
Total $ 1.77 $ 1.40 $ 1.10 $ .18 $ .82
EARNINGS (LOSS) PER SHARE OF
COMMON STOCK - ASSUMING DILUTION:
Continuing operations (a) $ 2.03 $ .44 $ 1.16 $ .38 $ .33
Discontinued operations (a) (.29) .98 .01 (.05) .49
Total $ 1.74 $ 1.42 $ 1.17 $ .33 $ .82
TOTAL ASSETS (a) $2,493,043 $1,985,631 $1,904,655 $1,869,198 $1,574,293
LONG-TERM OBLIGATIONS AND
REDEEMABLE PREFERRED STOCK (a) $ 430,183 $ 354,457 $ 461,521 $ 449,717 $ 406,512
DIVIDENDS PER SHARE OF COMMON
STOCK $ .42 $ .52 $ .52 $ .52 $ .46
<FN>
(a) Amounts for the years ended prior to December 31, 1997 have been restated to reflect Energy's natural
gas related services business as discontinued operations pursuant to the Restructuring.
(b) Includes the operations of the Texas City, Houston and Krotz Springs refineries commencing May 1, 1997.
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESTRUCTURING
On July 31, 1997, Valero Energy Corporation ("Energy") completed the
spin-off of its refining and marketing subsidiary, Valero Refining and
Marketing Company, to its shareholders and the merger of its natural gas
related services business with PG&E Corporation ("PG&E")(collectively
referred to as the "Restructuring"). Upon completion of the Restructuring,
Valero Refining and Marketing Company was renamed Valero Energy Corporation
("Valero," and together with its consolidated subsidiaries, the "Company")
and is listed on the New York Stock Exchange under the symbol "VLO." The
Restructuring was the result of a management recommendation announced in
November 1996 to pursue strategic alternatives involving Energy's principal
business activities. See Note 1 of Notes to Consolidated Financial
Statements for additional information about the Restructuring.
For financial reporting purposes under the federal securities laws,
Valero is a "successor registrant" to Energy. As a result, the following
Management's Discussion and Analysis of Financial Condition and Results of
Operations, and the consolidated financial statements included elsewhere
herein reflect Energy's natural gas related services business as
discontinued operations of the Company. As the context requires,
references to "Energy" are to (i) Valero Energy Corporation and its
consolidated subsidiaries, both individually and collectively, for all
periods prior to the close of business on July 31, 1997, the effective
date of the Restructuring, and (ii) the natural gas related services
business which was merged with PG&E for all periods subsequent to
July 31, 1997. The following review of the Company's results of operations
and liquidity and capital resources should be read in conjunction
with the consolidated financial statements and the notes thereto of the
Company presented on pages 30 to 64.
EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 128,
"Earnings per Share," which became effective for the Company's financial
statements beginning with the period ending December 31, 1997. This
statement supersedes APB Opinion No. 15, "Earnings per Share," and
related interpretations and establishes new standards for computing and
presenting earnings per share, requiring a dual presentation for companies
with complex capital structures. In accordance with this new statement,
the Company has presented basic and diluted earnings per share on the
face of the accompanying Consolidated Statements of Income. References
to "per share" amounts in the following discussion of Results of Operations
are to basic earnings per share.
FORWARD-LOOKING STATEMENTS
The following 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 residual oil ("resid") feedstock
arrangements as well as market, political or other forces generally affecting
the pricing and availability of resid and other refinery feedstocks and
refined products; accidents or other unscheduled shutdowns affecting the
Company's, its suppliers' or its customers' pipelines, plants, machinery or
equipment; excess industry capacity; competition from products and services
offered by other energy enterprises; changes in the cost or availability of
third-party vessels, pipelines and other means of transporting feedstocks
and products; ability to implement the cost reductions and operational
changes related to, and realize the various assumptions and efficiencies
projected for, the operation of the Texas City, Houston and Krotz Springs
refineries; state and federal environmental, economic, safety and other
policies and regulations, any changes therein, and any legal or regulatory
delays or other factors beyond the Company's control; execution of planned
capital projects; weather conditions affecting the Company's operations or
the areas in which the Company's products are marketed; rulings, judgments,
or settlements in litigation or other legal matters, including unexpected
environmental remediation costs in excess of any reserves; the introduction
or enactment of 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
Form S-1 registration statement filed with the Securities and Exchange
Commission on May 13, 1997 ("Form S-1"). The Company undertakes no
obligation to publicly release the result of any revisions to any such
forward-looking statements that may be made to reflect events or
circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
FINANCIAL AND OPERATING HIGHLIGHTS
The following are the Company's financial and operating highlights for
each of the three years in the period ended December 31, 1997. Amounts for
1996 and 1995 have been restated to reflect Energy's natural gas related
services business as discontinued operations pursuant to the Restructuring.
The amounts in the following table are in thousands of dollars, unless
otherwise noted:
<TABLE>
<CAPTION>
Year Ended December 31,
1997 (1) 1996 1995
<S> <C> <C> <C>
Operating revenues $5,756,220 $2,757,853 $1,772,638
Operating income (loss):
Refining and marketing $ 254,896 $ 118,192 $ 150,300
Administrative expenses (43,862) (28,444) (26,545)
Total $ 211,034 $ 89,748 $ 123,755
Loss on investment in Proesa joint venture $ - $ (19,549) $ -
Other income, net $ 6,978 $ 7,418 $ 5,876
Interest and debt expense, net $ (42,455) $ (38,534) $ (40,935)
Income from continuing operations $ 111,768 $ 22,472 $ 58,242
Income (loss) from discontinued operations,
net of income taxes $ (15,672) $ 50,229 $ 1,596
Net income $ 96,096 $ 72,701 $ 59,838
Net income applicable to common stock $ 91,504 $ 61,374 $ 48,020
Earnings (loss) per share of common stock:
Continuing operations $ 2.16 $ .51 $ 1.33
Discontinued operations (.39) .89 (.23)
Total $ 1.77 $ 1.40 $ 1.10
Earnings (loss) per share of common stock -
assuming dilution:
Continuing operations $ 2.03 $ .44 $ 1.16
Discontinued operations (.29) .98 .01
Total $ 1.74 $ 1.42 $ 1.17
Earnings before interest, taxes, depreciation
and amortization ("EBITDA") $ 313,025 $ 164,958 $ 214,318
Ratio of EBITDA to interest expense (2) 7.1x 4.0x 4.8x
Operating statistics:
Corpus Christi refinery:
Throughput volumes (Mbbls per day) 180 170 160
Operating cost per barrel $ 3.34 $ 3.29 $ 3.34
Texas City/Houston/Krotz Springs refineries:
Throughput volumes (Mbbls per day) (3) 315 N/A N/A
Operating cost per barrel (3) $ 2.30 N/A N/A
Sales volumes (Mbbls per day) 630 291 231
Average throughput margin per barrel $ 4.64 $ 5.29 $ 6.25
<FN>
(1) Includes the operations of the Texas City, Houston and Krotz Springs
refineries commencing May 1, 1997.
(2) Interest expense includes $18,164, $30,642 and $34,362 for 1997, 1996 and
1995, respectively, of interest on corporate debt that was allocated to
continuing operations (see Note 3 of Notes to Consolidated Financial
Statements).
(3) 1997 amounts are for the eight months ended December 31, 1997.
</TABLE>
RESULTS OF OPERATIONS
1997 COMPARED TO 1996
General
The Company reported income from continuing operations of $111.8
million, or $2.16 per share, for the year ended December 31, 1997 compared
to $22.5 million, or $.51 per share, for the year ended December 31, 1996.
For the fourth quarter of 1997, income from continuing operations was
$12.4 million, or $.22 per share, compared to a loss from continuing
operations of $5.3 million, or $.12 per share, for the fourth quarter of
1996. Results from discontinued operations were a loss of $15.7 million,
or $.39 per share, for the seven months ended July 31, 1997, and income
of $24.1 million, or $.49 per share, and $50.2 million, or $.89 per share,
for the quarter and year ended December 31, 1996, respectively. In
determining earnings per share, 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.
The May 1, 1997 acquisition of the Texas City, Houston and Krotz Springs
refineries (individually, the "Texas City Refinery," the "Houston Refinery"
and the "Krotz Springs Refinery"), which were acquired from Salomon Inc in
connection with the purchase of Basis Petroleum, Inc. ("Basis")(see Note 4
of Notes to Consolidated Financial Statements), added significantly to the
Company's 1997 results. Income from continuing operations and related
earnings per share increased significantly during 1997 compared to 1996
due primarily to an increase in operating income, partially offset by an
increase in income tax expense. In addition, fourth quarter and total
year results for 1996 were negatively impacted by a $19.5 million pre-tax
loss resulting from the write-off of the Company's investment in its joint
venture project to design, construct and operate a plant in Mexico to
produce methyl tertiary butyl ether ("MTBE"). This loss reduced results
from continuing operations for such periods by approximately $.29 per share.
Operating Revenues
Operating revenues increased $3 billion, or 109%, to $5.8 billion
during 1997 compared to 1996 due to a 116% increase in average daily sales
volumes resulting primarily from additional throughput volumes attributable
to the May 1, 1997 acquisition of the Texas City, Houston and Krotz Springs
refineries. Also contributing, to a lesser extent, to the increase in sales
volumes was an increase in marketing activities and a 6% increase in
throughput volumes at the Company's Corpus Christi refinery ("Corpus Christi
Refinery") resulting from, among other things, various unit capacity
expansions completed in late 1996 and 1997 and less unit downtime
experienced in 1997 compared to 1996.
Operating Income
Operating income increased $121.3 million, or 135%, to $211 million
during 1997 compared to 1996 due to an approximate $84 million contribution
from the operations related to the Texas City, Houston and Krotz Springs
refineries, and to an approximate $67 million increase in total throughput
margins for the operations related to the Corpus Christi Refinery. Partially
offsetting these increases in operating income were an approximate
$15 million increase in operating costs at the Corpus Christi Refinery
(explained below) and an approximate $15 million increase in administrative
expenses resulting primarily from higher employee-related costs, including
the effect of additional personnel resulting from the acquisition of Basis
in May 1997. Total throughput margins for the operations related to the
Corpus Christi Refinery increased during 1997 compared to 1996 due to a
substantial improvement in the price differential between conventional
gasoline and crude oil, higher oxygenate margins resulting primarily
from a decrease in methanol feedstock costs as a result of lower production
costs at the Company's joint venture methanol plant in Clear Lake, Texas
("Clear Lake Methanol Plant"), and higher premiums on sales of reformulated
gasoline and petrochemical feedstocks, including a substantial benefit from
the sale of mixed xylenes produced from the xylene fractionation unit that
was placed in service at the Corpus Christi Refinery in January 1997. Total
throughput margins for the operations related to the Corpus Christi Refinery
were also higher in 1997 due to less unit downtime compared to 1996 as
described below. The increases resulting from these factors were partially
offset by lower discounts on purchases of resid feedstocks during the last
nine months of the year due to high demand for resid in the Far East and a
decrease in crude oil prices. The $15 million, or 7%, increase in operating
costs at the Corpus Christi Refinery was due primarily to increases in
maintenance and employee-related costs, incremental costs associated with
the xylene fractionation unit, and higher variable costs resulting from the
above noted increase in throughput volumes. However, due to such increase
in throughput volumes, operating costs per barrel at the Corpus Christi
Refinery increased only 2%.
At the Corpus Christi Refinery, turnarounds of the crude and vacuum
units were completed in April 1997 which increased the crude unit's capacity
by approximately 8,000 barrels per day. Also, in the second quarter of 1997,
the heavy oil cracking unit ("HOC") was shut down for approximately 14 days
as a result of various unit malfunctions. In 1996, a maintenance turnaround
and a catalyst change for the hydrodesulfurization ("HDS") unit were completed
in July, a turnaround of the MTBE Plant was completed in September during
which its capacity was increased by approximately 1,500 barrels per day, and
turnarounds of the hydrocracker and naphtha reformer units were completed in
December. Also, in the 1996 second quarter, two power outages resulted in
reduced run rates for several units. In addition, the Clear Lake Methanol
Plant was out of service for approximately three months beginning in
December 1996 as a result of an explosion that occurred as the plant was
being shut down for repairs. At the Texas City Refinery, a turnaround and
catalyst change for the residfiner unit was completed in July 1997. At the
Houston Refinery, the fluid catalytic cracking unit ("FCC Unit") was shut
down for repairs for approximately 11 days in the 1997 second quarter and
approximately 14 days in December 1997, during which times minor turnarounds
were completed. See "Outlook" for a discussion of maintenance turnarounds
scheduled at the Company's refineries in 1998.
The Company enters into various exchange-traded and over-the-counter
financial instrument contracts with third parties to manage price risk
associated with refining feedstock and fuel purchases, refined product
inventories and refining operating margins. Although such activities are
intended to limit the Company's exposure to loss during periods of declining
margins, such activities could tend to reduce the Company's participation in
rising margins. In 1997 and 1996, the effect of hedging activities on
refining throughput margins was not significant. In 1996, the Company
reduced its operating costs by approximately $2.8 million as a result of
hedges on refining natural gas fuel requirements. The effect of such
hedging activities on operating costs in 1997 was not significant. See
Note 2 under "Price Risk Management Activities" and Note 7 of Notes to
Consolidated Financial Statements.
Net Interest and Debt Expense
Net interest and debt expense increased $3.9 million, or 10%, to
$42.4 million during 1997 compared to 1996 due primarily to interest on
bank borrowings related to the acquisition of Basis and to the special
pre-Distribution dividend paid to Energy described in Note 1 of Notes to
Consolidated Financial Statements. The increase in net interest and debt
expense resulting from these factors was partially offset by a $12.5 million
decrease in interest expense on allocated corporate debt (see Notes 3 and 6
of Notes to Consolidated Financial Statements), and by a reduction in bank
borrowings resulting from cash provided by operations subsequent to the
Restructuring.
Income Tax Expense
Income tax expense increased $47.2 million to $63.8 million during 1997
compared to 1996 due primarily to higher pre-tax income from continuing
operations.
Discontinued Operations
The loss from discontinued operations in 1997 of $15.7 million (net of
an income tax benefit of $8.9 million), or $.39 per share, reflected the net
loss of Energy's natural gas related services business for the seven months
ended July 31, 1997, prior to consummation of the Restructuring. Income from
discontinued operations in 1996 of $50.2 million (net of income tax expense
of $24.4 million), or $.89 per share, reflected the net income of Energy's
natural gas related services business for all of such year. See Note 3 of
Notes to Consolidated Financial Statements for additional information.
1996 COMPARED TO 1995
General
The Company reported income from continuing operations of $22.5 million,
or $.51 per share, for the year ended December 31, 1996 compared to
$58.2 million, or $1.33 per share, for the year ended December 31, 1995.
For the fourth quarter of 1996, the Company reported a loss from continuing
operations of $5.3 million, or $.12 per share, compared to income from
continuing operations of $11.1 million, or $.25 per share, for the fourth
quarter of 1995. Results from discontinued operations were income of
$24.1 million, or $.49 per share, and $50.2 million, or $.89 per share,
for the quarter and year ended December 31, 1996, respectively, and income
(loss) of $1.8 million, or $(.02) per share, and $1.6 million, or $(.23)
per share, for the quarter and year ended December 31, 1995. In determining
earnings per share for the 1996 and 1995 periods, 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.
Income from continuing operations and related earnings per share
decreased during the 1996 fourth quarter and total year compared to the
same periods in 1995 due primarily to a decrease in refining and marketing
operating income, and a $19.5 million pre-tax loss recorded in the fourth
quarter of 1996 resulting from the write-off of the Company's investment in
its Mexico MTBE project which reduced results from continuing operations by
approximately $.29 per share.
Operating Revenues
Operating revenues increased $807.1 million, or 41%, to $2.8 billion
during 1996 compared to 1995 due primarily to a 26% increase in sales
volumes and a 12% increase in the average sales price per barrel. The
increase in sales volumes was due primarily to increased volumes from trading
and rack marketing activities, and a 6% increase in average daily throughput
volumes at the Corpus Christi Refinery resulting from various unit
improvements and enhancements made during 1995 and a reduced impact on
production due to unit turnarounds which occurred in 1996 compared to 1995,
partially offset by the effects of two second quarter 1996 power outages.
The average sales price per barrel increased due primarily to higher
gasoline and distillate prices which generally followed an increase
in crude oil prices during 1996.
Operating Income
Operating income decreased $34 million, or 27%, to $89.7 million during
1996 compared to 1995 due primarily to a decrease in total throughput margins
and higher operating costs. The decrease in total throughput margins was due
primarily to lower oxygenate margins resulting from higher butane feedstock
costs, particularly in the fourth quarter, lower margins on sales of
petrochemical feedstocks, and decreased results from price risk management
activities. These decreases in throughput margins were partially offset by
the increase in throughput volumes noted above in the discussion of operating
revenues, higher distillate margins, and an improvement in discounts on
purchases of resid feedstocks. Operating expenses increased due primarily
to costs associated with the Clear Lake Methanol Plant which was placed in
service in late August 1995 and higher variable costs resulting from
increased throughput at the Corpus Christi Refinery.
In 1996, refining throughput margins were reduced by $1.2 million as
a result of hedging activities compared to a $12.8 million benefit in 1995.
The 1995 benefit resulted primarily from favorable price swap contracts on
methanol, as methanol prices dropped by over 70% during that year. In 1996
and 1995, the Company reduced its operating costs by $2.8 million and
$1 million, respectively, as a result of hedges on refining natural gas
fuel requirements.
Net Interest and Debt Expense
Net interest and debt expense decreased $2.4 million to $38.5 million
during 1996 compared to 1995 due primarily to a decrease in bank borrowings.
Income Tax Expense
Income tax expense decreased $13.8 million in 1996 compared to 1995 due
primarily to lower pre-tax income.
Discontinued Operations
Income from discontinued operations in 1996 of $50.2 million (net of
income tax expense of $24.4 million), or $.89 per share, and in 1995 of
$1.6 million (net of income tax expense of $4.8 million), or a loss of
$.23 per share, reflected the net income of Energy's natural gas related
services business for all of such years. See Note 3 of Notes to Consolidated
Financial Statements for additional information.
OUTLOOK
Over the next few years, the Company anticipates a moderate improvement
in refining margins due to tightening refining capacity. Increased demand
for light products is expected to outpace capacity additions due to slow
growth in capacity additions resulting from poor margins experienced in
recent years. Excess conversion capacity triggered by enhanced conversion
capacity projects in the early to mid-1990's has now been fully absorbed,
and any such projects currently planned will not keep pace with an expected
increase in the supply of heavy crudes resulting from increased Middle East
and Latin American production. As a result, the spread between light and
heavy crudes is expected to increase. The quantity and quality of resid
feedstock is expected to decrease as conversion capacity expansions come
on-line in the Middle East and Asia.
Domestic gasoline demand, which increased 2.5% in 1997 versus only 1%
in 1996, is expected to continue to improve due to a strong economy and the
trend in recent years toward less fuel-efficient vehicles. Demand for
clean-burning fuels, such as RFG, is expected to continue to increase
resulting from the worldwide movement to reduce lead in gasoline. The
demand for RFG increased to 32.5% of the total demand for gasoline in the
U.S. in 1997, up from 30.3% in 1996, primarily due to the full-year
effect of the implementation in 1996 of the requirement for the use of
Phase II RFG in California and the opt-in to RFG by Phoenix in the summer
of 1997. The increasing demand for clean-burning fuels should sustain a
strong demand for oxygenates such as MTBE.
Certain initiatives have been presented in California which would
restrict or potentially ban the use of MTBE as a gasoline component.
Based on available information, the Company believes that numerous
scientific studies commissioned by the EPA, CARB, and others will result
in defeat of these initiatives. However, if MTBE were to be restricted
or banned, the Company believes that its MTBE-producing facility could be
modified to produce a product similar to alkylate or other petrochemicals.
The Company expects a continuation of the recent industry consolidations
through mergers and acquisitions, making for a more competitive business
environment while providing the Company with opportunities to expand its
operations. Beginning in 1998, the Company expects to undertake a capital
expansion program to increase the throughput capacity of its refinery
facilities by approximately 140,000 barrels per day, and increase the
operational flexibility of the refineries. The majority of such program
is anticipated to be performed in 1999 during scheduled maintenance
turnarounds.
The Company's turnaround schedule for 1998 is light. During
January 1998, catalyst change-outs in the HDS unit and the
hydrocracker/reformer complex, as well as a maintenance turnaround of
the MTBE Plant, were completed at the Corpus Christi Refinery. A
catalyst change in the residfiner at the Texas City Refinery is currently
scheduled to begin in late March 1998. During 1999, maintenance turnarounds
for most of the Company's major refining units are planned. Such turnarounds
are scheduled to occur early in the first quarter and in the fourth quarter
when refining margins are historically low so as to minimize the impact on
the Company's operating results.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by continuing operations increased $76.2 million to
$196.6 million during 1997 compared to 1996 due to the increase in income
from continuing operations discussed above under "Results of Operations,"
partially offset by the changes in current assets and current liabilities
detailed in Note 2 of Notes to Consolidated Financial Statements under
"Statements of Cash Flows." Included in the changes in current assets
and current liabilities for 1997 was a substantial decrease in accounts
payable offset to a large extent by decreases in accounts receivable
and inventories. Accounts payable and accounts receivable decreased in
1997 due to lower commodity prices. In 1996, inventories increased due
to increased wholesale marketing activities for the operations related
to the Corpus Christi Refinery. The inventory increase in 1996 was almost
entirely offset by the net change in accounts receivable and accounts
payable, both of which increased due to higher commodity prices and
increased purchase and sales volumes. During 1997, cash provided by
operating activities, along with net proceeds from bank and other
borrowings (see Note 6 of Notes to Consolidated Financial Statements),
and issuances of common stock related to Energy's benefit plans totaled
approximately $748 million. These funds were utilized to acquire Basis,
fund capital expenditures and deferred turnaround and catalyst costs, pay
common and preferred stock dividends, pay a special dividend to Energy
and settle the intercompany note balance with Energy pursuant to the
Distribution Agreement (see Note 1 of Notes to Consolidated Financial
Statements), purchase treasury stock, and redeem the remaining outstanding
shares of Energy's Series A Preferred Stock (see Note 8 of Notes to
Consolidated Financial Statements).
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,
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 December 31, 1997, the Company had approximately
$558 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 December 31, 1997, a minimum of
$120 million and a maximum of $313 million were available for additional
borrowings under the short-term bank credit facilities, and approximately
$232 million was available for additional letters of credit under the
uncommitted letter of credit facilities. As of December 31, 1997, the
Company's debt to capitalization ratio was 32.3%. The Company was in
compliance with all covenants contained in its bank credit and letter of
credit facilities, and other debt facilities noted below, as of
December 31, 1997. See Notes 5 and 6 of Notes to Consolidated Financial
Statements.
During 1997, the Company undertook various initiatives to lower its
future interest payments and increase its financial flexibility. In
April 1997, the Company refinanced $98.5 million principal amount of
10 1/4% to 10 5/8% tax-exempt industrial revenue bonds, which had due
dates ranging from 2008 to 2017, with $98.5 million of variable rate
tax-exempt industrial revenue bonds which have due dates ranging from
2009 to 2027. These bonds bore interest at rates ranging from 3.65%
to 3.95% as of December 31, 1997. In May 1997, the Company issued
$25 million of new variable rate tax-exempt industrial revenue bonds
due in 2031 and used the proceeds to reduce bank borrowings. These bonds
bore interest at 3.8% as of December 31, 1997. In addition, in December
1997, the Company issued $150 million principal amount of notes ("Notes")
at an effective interest rate of 5.86% over the initial five years of their
term, also using the proceeds to reduce bank borrowings. If the 30-year
Treasury rate has decreased below 6.13% at the end of five years from the
date of issuance of the Notes, a third party will likely exercise its
option to purchase the Notes and the term of the Notes will be
extended thirty years at 6.13% plus the Company's prevailing credit spread.
If at the end of five years from the date of issuance of the Notes, the
30-year Treasury rate is higher than 6.13% and as a result the third party
does not exercise its purchase option, then the Company will be required
to repurchase the Notes at par. See Note 6 of Notes to Consolidated
Financial Statements.
In order to reduce the Company's exposure to increases in interest
rates, in January 1998, the Company's Board of Directors approved the
commencement of efforts to convert the interest rates on the Company's
$123.5 million of outstanding industrial revenue bonds from variable
rates to fixed rates. At the same time, the Board approved the issuance
of an additional $25 million of tax-exempt industrial revenue bonds at
a fixed interest rate and the issuance of up to $43.5 million of taxable
industrial revenue bonds at variable interest rates, both of which are
expected to mature in the year 2032. The $43.5 million of variable
rate bonds will be supported by a letter of credit issued under the
Company's $835 million revolving bank credit facility. The letters of
credit issued under such facility and associated with the above noted
$123.5 million of outstanding tax-exempt bonds will be released upon
conversion of the interest rates from variable to fixed. The interest
rate conversion of the outstanding bonds and the issuance of the new
bonds are expected to be completed by the end of the first quarter of 1998.
As described in Note 4 of Notes to Consolidated Financial Statements,
Energy acquired the outstanding common stock of Basis on May 1, 1997 for
approximately $356 million in cash, funded with borrowings under Energy's
bank credit facilities, and Energy common stock which had a fair market
value of $114 million on the date of issuance. Although Basis incurred
significant operating losses during 1995 and 1996, the Texas City, Houston
and Krotz Springs refineries and related marketing operations were able to
contribute approximately $84 million to the Company's operating income for
the months of May through December 1997, as described above under "Results
of Operations." The achievement of such results was due to, among other
things, refinery upgrading projects completed both prior to and after the
acquisition, favorable market conditions which existed throughout much
of the year, a reduction in depreciation and amortization expense due to
the acquisition cost of Basis being less than its net book value, and a
reduction in operating and overhead costs through various operational and
personnel-related changes implemented by the Company. The Company believes
that the operations related to the Texas City, Houston and Krotz Springs
refineries will continue to benefit the Company's consolidated cash flow
and earnings.
During 1997, the Company expended, exclusive of the Basis acquisition
cost, approximately $133 million for capital investments, including capital
expenditures of $122 million and deferred turnaround and catalyst costs of
$11 million. Of the total capital investment amount, $80 million related
to continuing refining and marketing operations while $53 million related to
the discontinued natural gas related services operations. Included in the
refining and marketing amount was approximately $21 million related to the
Texas City, Houston and Krotz Springs refineries for expenditures during
the months of May through December. For 1998, the Company currently expects
to incur approximately $175 to $225 million for capital investments,
including approximately $40 to $50 million for deferred turnaround and
catalyst costs.
Dividends on the Company's Common Stock are considered quarterly by
the Company's Board of Directors, and may be paid only when approved by the
Board. Prior to the Restructuring, Energy declared dividends on its common
stock of $.13 per share during each of the first two quarters of 1997.
Following the Restructuring, the Company declared dividends of $.08 per
common share during each of the last two quarters of 1997 and the first
quarter of 1998. Because appropriate levels of dividends are determined
by the Board on the basis of earnings and cash flows, the Company cannot
assure the continuation of Common Stock dividends at any particular level.
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 the new
issuances of industrial revenue bonds described above and borrowings
under bank credit agreements, the Company has no specific financing
plans as of the date hereof to increase the amount of debt outstanding.
The Company's refining and marketing operations have a concentration
of customers in the oil refining industry and spot and retail gasoline
markets. These concentrations of customers may impact the Company's
overall exposure to credit risk, either positively or negatively, in
that the customers in such industry and markets may be similarly affected
by changes in economic or other conditions. However, the Company believes
that its portfolio of accounts receivable is sufficiently diversified to
the extent necessary to minimize potential credit risk. Historically, the
Company has not had any significant problems collecting its accounts
receivable. The Company's accounts receivable are not collateralized.
The Company's refining and marketing operations are subject to
environmental regulation at the federal, state and local levels. Capital
expenditures for environmental control and protection for its refining and
marketing operations totaled approximately $15 million in 1997 and are
expected to be approximately $21 million in 1998. These amounts are
exclusive of any amounts related to constructed facilities for which the
portion of expenditures relating to environmental requirements is not
determinable. The Corpus Christi Refinery was completed in 1984 under
more stringent environmental requirements than many existing United States
refineries, which are older and were built before such environmental
regulations were enacted. As a result, the Company believes that it will
be able to more easily comply with present and future environmental
legislation with respect to such facility. Within the next several years,
all U.S. refineries must obtain federal operating permits under provisions
of the Clean Air Act Amendments of 1990 (the "Clean Air Act"). As new rules
are promulgated under the Clean Air Act, the recently acquired Texas City,
Houston and Krotz Springs refineries will require additional capital
investments to upgrade some of their pollution control technology. The
Refinery MACT II (Maximum Available Control Technology) standards are
anticipated to be published in proposed form during the second quarter
of 1998. These rules will require refiners to control toxic emissions
from fluid catalytic crackers, sulfur recovery units, and reformers.
Once the proposed rules are published, the Company will be able to determine
what, if any, capital improvements will be required at the Texas City,
Houston and Krotz Springs refineries. The final MACT II rules are
anticipated to be published in late 1998 with a three year compliance
schedule to install pollution control technology. The estimated amount of
1998 environmental expenditures noted above includes amounts for pollution
control equipment installation at the Texas City, Houston and Krotz Springs
refineries. Sulfur plant modifications are not anticipated for the Corpus
Christi or Texas City refineries; however, depending on the outcome of the
MACT II rules, sulfur plant control may be necessary for the Houston and
Krotz Springs refineries. The Clean Air Act is not expected to have any
significant adverse impact on the Company's operations and the Company
does not anticipate that it will be necessary to expend any material
amounts in 1998 in addition to those mentioned above for environmental
control and protection. The Company is not aware of any material
environmental remediation costs related to its operations. See Notes 4
and 15 of Notes to Consolidated Financial Statements for information
regarding the settlement of certain of Salomon's contingent environmental
obligations for which it was liable in connection with the Company's
acquisition of Basis.
NEW ACCOUNTING STANDARDS
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." 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. This statement becomes effective for
the Company's financial statements beginning in 1998 and requires that a
total for comprehensive income be reported in interim period financial
statements issued to shareholders. Based on current accounting standards,
the adoption of this statement is not expected to impact the Company's
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 statement disclosures beginning in 1998 and requires
restatement of prior period disclosures presented for comparative purposes
unless the information is not readily available.
The FASB had previously issued in February 1997 SFAS No. 128, "Earnings
per Share," (discussed above) and SFAS No. 129, "Disclosure of Information
about Capital Structure," both of which became effective for the Company's
financial statements beginning with the period ending December 31, 1997.
As the purpose of SFAS No. 129 was primarily to consolidate certain
disclosure requirements previously contained in other pronouncements with
which the Company was already in compliance, the adoption of this statement
had no effect on the Company's accompanying consolidated financial statements.
YEAR 2000 COMPUTER ISSUES
Historically, certain computer programs have been written using two
digits rather than four to define the applicable year, which could result
in the computer recognizing a date using "00" as the year 1900 rather than
the year 2000. This, in turn, could result in major system failures or
miscalculations, and is generally referred to as the "Year 2000" problem.
In late 1996, the Company began the implementation of new client/server
based systems which will run substantially all of the Company's principal
data processing and financial reporting software applications. These new
systems are Year 2000 compliant and are expected to be completed by the end
of 1998. The Company is also currently evaluating the computerized
production equipment at its refineries to ensure that the transition to the
Year 2000 will not disrupt the Company's processing capabilities. In
addition, the Company intends to communicate with, and evaluate the systems
of, its customers, suppliers, financial institutions and others with which
it does business to identify any Year 2000 issues. Presently, the Company
does not believe that Year 2000 compliance will result in material investments
by the Company, nor does the Company anticipate that the Year 2000 problem
will have a material adverse effect on the operations or financial
performance of the Company. There can be no assurance, however, that the
Year 2000 problem will not adversely affect the Company and its business.
ITEM 8. FINANCIAL STATEMENTS
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders
of Valero Energy Corporation:
We have audited the accompanying consolidated balance sheets of
Valero Energy Corporation (a Delaware corporation) and subsidiaries as of
December 31, 1997 and 1996, and the related consolidated statements of
income, common stock and other stockholders' equity and cash flows for
each of the three years in the period ended December 31, 1997. These
financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Valero Energy
Corporation and subsidiaries as of December 31, 1997 and 1996, and the
results of their operations and their cash flows for each of the three years
in the period ended December 31, 1997, in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
San Antonio, Texas
February 14, 1998
<TABLE>
<CAPTION>
VALERO ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Thousands of Dollars)
December 31,
1997 1996
A S S E T S
<S> <C> <C>
CURRENT ASSETS:
Cash and temporary cash investments $ 9,935 $ 10
Receivables, less allowance for doubtful accounts of
$1,275 (1997) and $975 (1996) 366,315 162,457
Inventories 369,355 159,871
Current deferred income tax assets 17,155 17,587
Prepaid expenses and other 26,265 11,924
789,025 351,849
PROPERTY, PLANT AND EQUIPMENT - including construction in
progress of $66,636 (1997) and $21,728 (1996), at cost 2,132,489 1,712,334
Less: Accumulated depreciation 539,956 480,124
1,592,533 1,232,210
NET ASSETS OF DISCONTINUED OPERATIONS - 280,515
DEFERRED CHARGES AND OTHER ASSETS 111,485 121,057
$2,493,043 $1,985,631
L I A B I L I T I E S A N D S T O C K H O L D E R S' E Q U I T Y
CURRENT LIABILITIES:
Short-term debt $ 122,000 $ 57,728
Current maturities of long-term debt - 26,037
Accounts payable 414,305 191,555
Accrued expenses 60,979 25,264
597,284 300,584
LONG-TERM DEBT, less current maturities 430,183 353,307
DEFERRED INCOME TAXES 256,858 224,548
DEFERRED CREDITS AND OTHER LIABILITIES 49,877 30,217
REDEEMABLE PREFERRED STOCK, SERIES A, issued 1,150,000 shares,
outstanding -0- (1997) and 11,500 (1996) shares - 1,150
COMMON STOCK AND OTHER STOCKHOLDERS' EQUITY:
Preferred stock, $.01 (1997) and $1 (1996) par value -
20,000,000 shares authorized including redeemable preferred
shares:
$3.125 Convertible Preferred Stock, issued and outstanding
-0- (1997) and 3,450,000 (1996) shares - 3,450
Common stock, $.01 (1997) and $1 (1996) par value -
150,000,000 shares authorized; issued 56,136,032 (1997)
and 44,185,513 (1996) shares 561 44,186
Additional paid-in capital 1,110,654 540,133
Unearned Valero Employees' Stock Ownership Plan Compensation - (8,783)
Retained earnings 47,626 496,839
1,158,841 1,075,825
$2,493,043 $1,985,631
</TABLE>
<TABLE>
<CAPTION>
VALERO ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Thousands of Dollars, Except Per Share Amounts)
Year Ended December 31,
1997 1996 1995
<S> <C> <C> <C>
OPERATING REVENUES $5,756,220 $2,757,853 $1,772,638
COSTS AND EXPENSES:
Cost of sales and operating expenses 5,426,438 2,581,836 1,560,324
Selling and administrative expenses 53,573 31,248 31,392
Depreciation expense 65,175 55,021 57,167
Total 5,545,186 2,668,105 1,648,883
OPERATING INCOME 211,034 89,748 123,755
LOSS ON INVESTMENT IN PROESA JOINT VENTURE - (19,549) -
OTHER INCOME, NET 6,978 7,418 5,876
INTEREST AND DEBT EXPENSE:
Incurred (44,150) (41,418) (45,052)
Capitalized 1,695 2,884 4,117
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES 175,557 39,083 88,696
INCOME TAX EXPENSE 63,789 16,611 30,454
INCOME FROM CONTINUING OPERATIONS 111,768 22,472 58,242
INCOME (LOSS) FROM DISCONTINUED OPERATIONS,
NET OF INCOME TAX EXPENSE (BENEFIT) OF
$(8,889), $24,389 AND $4,846, RESPECTIVELY (15,672) 50,229 1,596
NET INCOME 96,096 72,701 59,838
Less: Preferred stock dividend requirements
and redemption premium 4,592 11,327 11,818
NET INCOME APPLICABLE TO COMMON STOCK $ 91,504 $ 61,374 $ 48,020
EARNINGS (LOSS) PER SHARE OF COMMON STOCK:
Continuing operations $ 2.16 $ .51 $ 1.33
Discontinued operations (.39) .89 (.23)
Total $ 1.77 $ 1.40 $ 1.10
Weighted average common shares outstanding
(in thousands) 51,662 43,926 43,652
EARNINGS (LOSS) PER SHARE OF COMMON STOCK -
ASSUMING DILUTION:
Continuing operations $ 2.03 $ .44 $ 1.16
Discontinued operations (.29) .98 .01
Total $ 1.74 $ 1.42 $ 1.17
Weighted average common shares outstanding
(in thousands) 55,129 50,777 50,243
DIVIDENDS PER SHARE OF COMMON STOCK $ .42 $ .52 $ .52
</TABLE>
<TABLE>
<CAPTION>
VALERO ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMMON STOCK AND OTHER STOCKHOLDERS' EQUITY
(Thousands of Dollars)
Convertible Number of Additional Unearned
Preferred Common Common Paid-in VESOP Retained Treasury
Stock Shares Stock Capital Compensation Earnings Stock
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1994 $3,450 43,463,869 $43,464 $ 536,613 $(13,706) $433,059 $ -
Net income - - - - - 59,838 -
Dividends on Series A
Preferred Stock - - - - - (1,075) -
Dividends on Convertible
Preferred Stock - - - - - (10,781) -
Dividends on Common Stock - - - - - (22,698) -
Valero Employees' Stock
Ownership Plan
compensation earned - - - - 2,388 - -
Deficiency payment tax effect - - - (9,106) - - -
Shares repurchased and shares
issued pursuant to employee
stock plans and other - 275,511 275 2,670 - - (178)
BALANCE, December 31, 1995 3,450 43,739,380 43,739 530,177 (11,318) 458,343 (178)
Net income - - - - - 72,701 -
Dividends on Series A
Preferred Stock - - - - - (587) -
Dividends on Convertible
Preferred Stock - - - - - (10,781) -
Dividends on Common Stock - - - - - (22,837) -
Valero Employees' Stock
Ownership Plan
compensation earned - - - - 2,535 - -
Shares repurchased and shares
issued pursuant to employee
stock plans and other - 446,133 447 9,956 - - 178
BALANCE, December 31, 1996 3,450 44,185,513 44,186 540,133 (8,783) 496,839 -
Net income - - - - - 96,096 -
Dividends on Series A
Preferred Stock - - - - - (32) -
Dividends on Convertible
Preferred Stock - - - - - (5,387) -
Dividends on Common Stock - - - - - (21,031) -
Redemption/conversion of
Convertible Preferred Stock (3,450) 6,377,432 6,377 (3,116) - - -
Special spin-off dividend
to Energy - - - (210,000) - - -
Recapitalization pursuant to
the Restructuring - - (55,533) 622,500 - (518,859) -
Issuance of Common Stock in
connection with acquisition
of Basis Petroleum, Inc. - 3,429,796 3,430 110,570 - - -
Valero Employees' Stock Ownership
Plan compensation earned - - - - 8,783 - -
Shares repurchased and shares
issued pursuant to employee
stock plans and other - 2,143,291 2,101 50,567 - - -
BALANCE, December 31, 1997 $ - 56,136,032 $ 561 $1,110,654 $ - $ 47,626 $ -
</TABLE>
<TABLE>
<CAPTION>
VALERO ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands of Dollars)
Year Ended December 31,
1997 1996 1995
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Income from continuing operations $ 111,768 $ 22,472 $ 58,242
Adjustments to reconcile income from continuing operations
to net cash provided by continuing operations:
Depreciation expense 65,175 55,021 57,167
Loss on investment in Proesa joint venture - 19,549 -
Amortization of deferred charges and other, net 27,252 28,485 25,426
Changes in current assets and current liabilities (32,113) (7,796) 2,358
Deferred income tax expense 32,827 8,969 29,217
Changes in deferred items and other, net (8,264) (6,246) (6,479)
Net cash provided by continuing operations 196,645 120,454 165,931
Net cash provided by discontinued operations 24,452 126,054 792
Net cash provided by operating activities 221,097 246,508 166,723
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures:
Continuing operations (69,284) (59,412) (89,395)
Discontinued operations (52,674) (69,041) (35,224)
Deferred turnaround and catalyst costs (10,860) (36,389) (35,590)
Acquisition of Basis Petroleum, Inc. (355,595) - -
Investment in and advances to joint ventures, net 1,400 1,197 (2,018)
Dispositions of property, plant and equipment 28 93 49
Other, net 265 1,388 (1,226)
Net cash used in investing activities (486,720) (162,164) (163,404)
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in short-term debt, net 155,088 57,728 -
Long-term borrowings 1,530,809 44,427 366,095
Long-term debt reduction (1,217,668) (153,772) (335,816)
Special spin-off dividend, including intercompany
note settlement (214,653) - -
Common stock dividends (21,031) (22,837) (22,698)
Preferred stock dividends (5,419) (11,368) (11,856)
Issuance of common stock 59,054 11,225 6,129
Purchase of treasury stock (9,293) (4,000) (4,445)
Redemption of preferred stock (1,339) (5,750) (5,750)
Net cash provided by (used in) financing activities 275,548 (84,347) (8,341)
NET INCREASE (DECREASE) IN CASH AND TEMPORARY
CASH INVESTMENTS 9,925 (3) (5,022)
CASH AND TEMPORARY CASH INVESTMENTS AT
BEGINNING OF PERIOD 10 13 5,035
CASH AND TEMPORARY CASH INVESTMENTS AT
END OF PERIOD $ 9,935 $ 10 $ 13
</TABLE>
VALERO ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. RESTRUCTURING
In the discussion below and Notes that follow, the "Company" refers to
Valero Energy Corporation ("Valero") and its consolidated subsidiaries.
Valero was formerly known as Valero Refining and Marketing Company prior to
the Restructuring described below. Upon completion of the Restructuring,
Valero Refining and Marketing Company was renamed Valero Energy Corporation.
"Energy" refers to Valero Energy Corporation and its consolidated
subsidiaries, both individually and collectively, for periods prior to the
Restructuring, and to the natural gas related services business of Energy for
periods subsequent to the Restructuring.
On July 31, 1997, pursuant to an agreement and plan of distribution
between Energy and Valero (the "Distribution Agreement"), Energy spun off
Valero to Energy's stockholders by distributing all of Valero's $.01 par
value common stock ("Common Stock") on a share for share basis to holders
of record of Energy common stock at the close of business on such date
(the "Distribution"). Immediately after the Distribution, Energy merged
its natural gas related services business with a wholly owned subsidiary
of PG&E Corporation ("PG&E") (the "Merger"). The Distribution and the
Merger (collectively referred to as the "Restructuring") were approved by
Energy's stockholders at Energy's annual meeting of stockholders held on
June 18, 1997 and, in the opinion of Energy's outside counsel, were tax-free
transactions. Regulatory approval of the Merger was received from the
Federal Energy Regulatory Commission (the "FERC") on July 16, 1997. Upon
completion of the Restructuring, Valero Refining and Marketing Company was
renamed Valero Energy Corporation and is listed on the New York Stock
Exchange under the symbol "VLO."
Immediately prior to the Distribution, the Company paid to Energy a
$210 million dividend pursuant to the Distribution Agreement. In addition,
the Company paid to Energy approximately $5 million in settlement of the
intercompany note balance between the Company and Energy arising from certain
transactions during the period from January 1 through July 31, 1997.
In connection with the Merger, PG&E issued approximately 31 million
shares of its common stock in exchange for the outstanding $1 par value
common shares of Energy, and assumed $785.7 million of Energy's debt.
Each Energy stockholder received .554 of a share of PG&E common stock
(trading on the New York Stock Exchange under the symbol "PCG") for each
Energy share owned. This fractional share amount was based on the average
price of PG&E common stock during a prescribed period preceding the closing
of the transaction and the number of Energy shares issued and outstanding at
the time of the closing.
Prior to the Restructuring, Energy, Valero, and PG&E entered into a tax
sharing agreement ("Tax Sharing Agreement"), which sets forth each party's
rights and obligations with respect to payments and refunds, if any, of
federal, state, local or other taxes for periods before the Restructuring.
In general, under the Tax Sharing Agreement, Energy and Valero are each
responsible for its allocable share of the federal, state and other taxes
incurred by the combined operations of Energy and Valero prior to the
Distribution. Furthermore, Valero is responsible for substantially all tax
liability resulting from the failure of the Distribution or the Merger to
qualify as a tax-free transaction, except that Energy will be responsible
for any such tax liability attributable to certain actions taken by Energy
and/or PG&E.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation and Basis of Presentation
Prior to the Restructuring, Valero was a wholly owned subsidiary of
Energy. For financial reporting purposes under the federal securities laws,
Valero is a "successor registrant" to Energy. As a result, for periods
prior to the Restructuring, the accompanying consolidated financial
statements include the accounts of Energy restated to reflect Energy's
natural gas related services business as discontinued operations. For
periods subsequent to the Restructuring, the accompanying consolidated
financial statements include the accounts of Valero and its consolidated
subsidiaries. All significant intercompany transactions have been
eliminated in consolidation.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Revenue Recognition
Revenues generally are recorded when products have been delivered.
Price Risk Management Activities
The Company enters into price swaps, options and futures contracts with
third parties to hedge refinery feedstock purchases and refined product
inventories in order to reduce the impact of adverse price changes on these
inventories before the conversion of the feedstock to finished products and
ultimate sale. Hedges of inventories are accounted for under the deferral
method with gains and losses included in the carrying amounts of inventories
and ultimately recognized in cost of sales as those inventories are sold.
The Company also hedges anticipated transactions. Price swaps, options
and futures contracts with third parties are used to hedge feedstock and
product purchases, product sales and refining operating margins by locking
in purchase or sales prices or components of the margins, including feedstock
discounts, the conventional crack spread and premium product differentials.
Hedges of anticipated transactions are also accounted for under the deferral
method with gains and losses on these transactions recognized in cost of
sales when the hedged transaction occurs.
The above noted contracts are designated at inception as a hedge when
there is a direct relationship to the price risk associated with the
Company's inventories, future purchases and sales of commodities used in
the Company's operations, or components of the Company's refining operating
margins. If such direct relationship ceases to exist, the related contract
is designated "for trading purposes" and accounted for as described below.
Gains and losses on early terminations of financial instrument contracts
designated as hedges are deferred and included in cost of sales in the
measurement of the hedged transaction. When an anticipated transaction being
hedged is no longer likely to occur, the related derivative contract is
accounted for similar to a contract entered into for trading purposes.
The Company also enters into price swaps, options, and futures contracts
with third parties for trading purposes using its fundamental and technical
analysis of market conditions to earn additional revenues. Contracts entered
into for trading purposes are accounted for under the fair value method.
Changes in the fair value of these contracts are recognized as gains or
losses in cost of sales currently and are recorded in the Consolidated
Balance Sheets in "Prepaid expenses and other" and "Accounts payable" at
fair value at the reporting date. The Company determines the fair value
of its exchange-traded contracts based on the settlement prices for open
contracts, which are established by the exchange on which the instruments
are traded. The fair value of the Company's over-the-counter contracts is
determined based on market-related indexes or by obtaining quotes from
brokers.
The Company's derivative contracts and their related gains and losses
are reported in the Consolidated Balance Sheets and Consolidated Statements
of Income as discussed above, depending on whether they are designated as a
hedge or for trading purposes. In the Consolidated Statements of Cash
Flows, cash transactions related to derivative contracts are included in
changes in current assets and current liabilities.
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 values at December 31, 1997. Materials and supplies
are carried principally at weighted average cost not in excess of market.
Inventories as of December 31, 1997 and 1996 were as follows (in thousands):
<TABLE>
<CAPTION>
December 31,
1997 1996
<S> <C> <C>
Refinery feedstocks $102,677 $ 42,744
Refined products and blendstocks 210,196 99,398
Materials and supplies 56,482 17,729
$369,355 $159,871
</TABLE>
Refinery feedstock and refined product and blendstock inventory volumes
totaled 15.7 million barrels ("MMbbls") and 7.4 MMbbls as of December 31,
1997 and 1996, respectively. See Note 7 for information concerning the
Company's hedging activities related to its refinery feedstock purchases
and refined product inventories.
Property, Plant and Equipment
Property additions and betterments include capitalized interest and
acquisition costs allocable to construction and property purchases.
The costs of minor property units (or components of property units),
net of salvage, retired or abandoned are charged or credited to accumulated
depreciation under the composite method of depreciation. Gains or losses
on sales or other dispositions of major units of property are credited or
charged to income.
<TABLE>
<CAPTION>
Major classes of property, plant and equipment as of December 31, 1997
and 1996 were as follows (in thousands):
December 31,
1997 1996
<S> <C> <C>
Crude oil processing facilities $1,522,409 $1,329,386
Butane processing facilities 351,594 233,457
Other processing facilities 80,197 80,000
Other 111,653 47,763
Construction in progress 66,636 21,728
$2,132,489 $1,712,334
</TABLE>
Provision for depreciation of property, plant and equipment is made
primarily on a straight-line basis over the estimated useful lives of the
depreciable facilities. During 1996, a detailed study of the Company's
fixed asset lives was completed by a third-party consultant for the
majority of the Company's then-existing processing facilities. As a
result of such study, the Company adjusted the weighted-average
remaining lives of the assets subject to the study, utilizing the
composite method of depreciation, to better reflect the estimated periods
during which such assets are expected to remain in service. The effect of
this change in accounting estimate was an increase in income from continuing
operations for 1996 of approximately $3.6 million, or $.08 per share. A
summary of the principal rates used in computing the annual provision for
depreciation, primarily utilizing the composite method and including
estimated salvage values, is as follows:
<TABLE>
<CAPTION>
Weighted
Range Average
<S> <C> <C>
Crude oil processing facilities 3.6% - 4.9% 4.6%
Butane processing facilities 3.7% 3.7%
Other processing facilities 3.6% 3.6%
Other 2.25% - 45% 22.5%
</TABLE>
Deferred Charges and Other Assets
Catalyst and Refinery Turnaround Costs
Catalyst costs are deferred when incurred and amortized over the
estimated useful life of that catalyst, normally one to three years.
Refinery turnaround costs are deferred when incurred and amortized over
that period of time estimated to lapse until the next turnaround occurs.
Technological Royalties and Licenses
Technological royalties and licenses are deferred when incurred and
amortized over the estimated useful life of each particular royalty or
license.
Other Deferred Charges and Other Assets
Other deferred charges and other assets include the Company's 20%
interest in Javelina Company ("Javelina"), a general partnership that
owns a refinery off-gas processing plant in Corpus Christi. The Company
accounts for its interest in Javelina on the equity method of accounting.
Also included in other deferred charges and other assets are prefunded
benefit costs and certain other costs.
Accrued Expenses
<TABLE>
<CAPTION>
Accrued expenses as of December 31, 1997 and 1996 were as
follows (in thousands):
December 31,
1997 1996
<S> <C> <C>
Accrued interest expense $ 1,766 $ 5,088
Accrued taxes 36,712 11,938
Accrued employee benefit costs (see Note 13) 18,122 93
Current portion of accrued pension cost
(see Note 13) 1,115 4,265
Other 3,264 3,880
$60,979 $25,264
</TABLE>
Fair Value of Financial Instruments
The carrying amounts of the Company's financial instruments approximate
fair value, except for certain long-term debt as of December 31, 1996 and
financial instruments used in price risk management activities. See Notes 6
and 7.
Stock-Based Compensation
The Company accounts for its employee stock compensation plans using
the "intrinsic value" method of accounting set forth in Accounting Principles
Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees,"
and related interpretations. Accordingly, compensation cost for stock
options is measured as the excess, if any, of the quoted market price of
the Company's common stock at the date of the grant over the amount an
employee must pay to acquire the stock. Statement of Financial Accounting
Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation,"
issued by the Financial Accounting Standards Board ("FASB") in October
1995, encourages, but does not require companies to measure and recognize
in their financial statements a compensation cost for stock-based employee
compensation plans based on the "fair value" method of accounting set forth
in the statement. See Note 13 for the pro forma effects on net income and
earnings per share had compensation cost for the Company's stock-based
compensation plans been determined consistent with SFAS No. 123.
Earnings Per Share
In February 1997, the FASB issued SFAS No. 128, "Earnings per Share,"
which became effective for the Company's financial statements beginning
with the period ending December 31, 1997. This statement supersedes APB
Opinion No. 15, "Earnings per Share," and related interpretations and
establishes new standards for computing and presenting earnings per share,
requiring a dual presentation for companies with complex capital structures.
In accordance with this new statement, the Company has presented basic
and diluted earnings per share on the face of the accompanying income
statements. Basic earnings per share is computed by dividing income
available to common stockholders by the weighted average number of common
shares outstanding for the period. Diluted earnings per share reflects
the potential dilution of the Company's Convertible Preferred Stock
(see Note 9) and outstanding stock options and performance awards granted
to employees in connection with the Company's stock compensation plans
(see Note 13). In determining basic earnings per share for the years
ended December 31, 1997, 1996 and 1995, 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. The weighted average number of common shares
outstanding for the years ended December 31, 1997, 1996 and 1995 was
51,662,449, 43,926,026 and 43,651,914, respectively.
A reconciliation of the numerators and denominators 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>
Year Ended December 31,
1997 1996 1995
Per- Per- Per-
Share Share Share
Income Shares Amt. Income Shares Amt. Income Shares Amt.
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Income from
continuing operations $111,768 $22,472 $58,242
Basic earnings per share:
Income available to
common stockholders $111,768 51,662 $2.16 $22,472 43,926 $.51 $58,242 43,652 $1.33
Effect of dilutive securities:
Stock options - 881 - 425 - 209
Performance awards - 91 - 44 - -
Convertible preferred stock - 2,495 - 6,382 - 6,382
Diluted earnings per share:
Income available to
common stockholders plus
assumed conversions $111,768 55,129 $2.03 $22,472 50,777 $.44 $58,242 50,243 $1.16
</TABLE>
Statements of Cash Flows
In order to determine net cash provided by continuing operations, income
from continuing operations has been adjusted by, among other things, changes
in current assets and current liabilities, excluding changes in cash and
temporary cash investments, current deferred income tax assets, short-term
debt and current maturities of long-term debt. The changes in the Company's
current assets and current liabilities, excluding the items noted above, are
shown in the following table as an (increase)/decrease in current assets and
an increase/(decrease) in current liabilities. The Company's temporary cash
investments are highly liquid, low-risk debt instruments which have a
maturity of three months or less when acquired. (Dollars in thousands.)
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1996 1995
<S> <C> <C> <C>
Receivables, net $ 36,287 $(33,653) $(51,120)
Inventories 37,007 (58,089) 40,723
Prepaid expenses and other (12,703) 3,243 (307)
Accounts payable (95,318) 88,182 4,132
Accrued expenses 2,614 (7,479) 8,930
Total $(32,113) $ (7,796) $ 2,358
</TABLE>
Cash interest and income taxes paid, including amounts related to
discontinued operations for periods up to and including July 31, 1997,
were as follows (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1996 1995
<S> <C> <C> <C>
Interest (net of amount capitalized) $66,008 $105,519 $86,553
Income taxes 24,526 19,043 23,935
</TABLE>
Noncash investing and financing activities for 1997 included the
issuance of Energy common stock to Salomon Inc ("Salomon") as partial
consideration for the acquisition of the stock of Basis Petroleum, Inc.
("Basis"), and an $18.3 million accrual as of December 31, 1997 related
to the Company's estimate of a contingent earn-out payment in 1998 in
conjunction with such acquisition. See Note 4. In addition, noncash
investing and financing activities for 1997 included 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 Merger discussed
in Note 1.
New Accounting Standards
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." 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. This statement becomes effective for
the Company's financial statements beginning in 1998 and requires that
a total for comprehensive income be reported in interim period financial
statements issued to shareholders. Based on current accounting standards,
the adoption of this statement is not expected to impact the Company's
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 statement disclosures beginning in
1998 and requires restatement of prior period disclosures presented for
comparative purposes unless the information is not readily available.
The FASB had previously issued in February 1997 SFAS No. 128, "Earnings
per Share," (discussed above) and SFAS No. 129, "Disclosure of Information
about Capital Structure," both of which became effective for the Company's
financial statements beginning with the period ending December 31, 1997.
As the purpose of SFAS No. 129 was primarily to consolidate certain disclosure
requirements previously contained in other pronouncements with which the
Company was already in compliance, the adoption of this statement had no
effect on the Company's accompanying consolidated financial statements.
3. DISCONTINUED OPERATIONS
Energy's historical practice was to utilize a centralized cash management
system and to incur certain indebtedness for its consolidated group at the
parent company level rather than at the operating subsidiary level.
Therefore, the accompanying consolidated financial statements reflect, for
periods prior to the Restructuring, the allocation of a portion of the
borrowings under Energy's various bank credit facilities, as well as a
portion of other corporate debt of Energy, to the discontinued natural gas
related services business based upon the ratio of such business' net assets,
excluding the amounts of intercompany notes receivable or payable, to
Energy's consolidated net assets. Interest expense related to corporate
debt was also allocated to the discontinued natural gas related services
business for periods prior to the Restructuring based on the same net asset
ratio. Total interest expense allocated to discontinued operations in the
accompanying Consolidated Statements of Income, including a portion of
interest on corporate debt allocated pursuant to the methodology described
above plus interest specifically attributed to discontinued operations,
was $32.7 million for the seven months ended July 31, 1997, and
$58.1 million and $60.9 million for the years ended December 31, 1996 and
1995, respectively.
Revenues of the discontinued natural gas related services business were
$1.7 billion for the seven months ended July 31, 1997, and $2.4 billion and
$1.4 billion for the years ended December 31, 1996 and 1995, respectively.
These amounts are not included in operating revenues as reported in the
accompanying Consolidated Statements of Income.
4. ACQUISITION OF BASIS PETROLEUM, INC.
Effective May 1, 1997, Energy acquired the outstanding common stock of
Basis, a wholly owned subsidiary of 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 it was spun off to Energy's stockholders
pursuant to 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 completion of an independent appraisal. The accompanying
Consolidated Statements of Income of the Company include the results of
the operations acquired in connection with the purchase of Basis for
the months of May through December 1997.
Energy acquired the stock of Basis for approximately $470 million.
This amount includes certain costs incurred in connection with the
acquisition and is net of $9.5 million received from Salomon in
December 1997 representing a final resolution between the parties relating
to certain contingent environmental obligations for which Salomon was
liable pursuant to the purchase agreement. The purchase price was paid,
in part, with 3,429,796 shares of Energy common stock having a fair market
value of $114 million, with the remainder paid in cash from borrowings
under Energy's bank credit facilities (see Note 6). Pursuant to the
purchase agreement, Salomon is also entitled to receive payments in
any of the next 10 years if certain average refining margins during any of
such years exceed a specified level. Any payments under this earn-out
arrangement, which will be 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 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 of December 31, 1997, the
Company accrued $18.3 million related to its estimate of the contingent
earn-out payment due in 1998.
The following unaudited pro forma financial information of the Company
assumes that the acquisition of Basis occurred at the beginning of each
period presented. Such pro forma information is not necessarily indicative
of the results of future operations. (Dollars in thousands, except per share
amounts.)
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1996
<S> <C> <C>
Operating revenues $7,576,676 $10,125,626
Operating income 149,847 8,362
Income (loss) from continuing operations 73,268 (35,821)
Income (loss) from discontinued operations (15,672) 50,229
Net income 57,596 14,408
Earnings (loss) per common share:
Continuing operations 1.42 (.82)
Discontinued operations (.39) .89
Total 1.03 .07
Earnings (loss) per common share - assuming
dilution:
Continuing operations 1.33 (.82)
Discontinued operations (.29) .89
Total 1.04 .07
</TABLE>
5. SHORT-TERM DEBT
The Company currently maintains seven separate short-term bank credit
facilities under which amounts ranging from $160 million to $435 million
may be borrowed. As of December 31, 1997, $122 million was outstanding
under these short-term bank credit facilities at a weighted average
interest rate of approximately 7.7%. Four of these credit facilities
are cancelable on demand, and the others expire at various times in 1998.
These short-term credit facilities bear interest at each respective bank's
quoted money market rate, have no commitment or other fees or compensating
balance requirements and are unsecured and unrestricted as to use.
6. LONG-TERM DEBT AND BANK CREDIT FACILITIES
Long-term debt balances as of December 31, 1997 and 1996 were as
follows (in thousands):
<TABLE>
<CAPTION>
December 31,
1997 1996
<S> <C> <C>
Industrial revenue bonds:
Variable rate Revenue Refunding Bonds:
Series 1997A, 3.85% at December 31, 1997, due April 1, 2027 $ 24,400 $ -
Series 1997B, 3.7% at December 31, 1997, due April 1, 2018 32,800 -
Series 1997C, 3.65% at December 31, 1997, due April 1, 2018 32,800 -
Series 1997D, 3.95% at December 31, 1997, due April 1, 2009 8,500 -
Variable rate Waste Disposal Revenue Bonds,
3.8% at December 31, 1997, due December 1, 2031 25,000 -
Marine terminal and pollution control revenue bonds,
Series 1987A, 10 1/4% - 90,000
Marine terminal revenue bonds, Series 1987B , 10 5/8% - 8,500
6.75% notes, due December 15, 2032 (notes are callable or putable
on December 15, 2002) 150,000 -
$835 million revolving bank credit and letter of credit facility,
approximately 6.25% at December 31, 1997, due
November 28, 2002 150,000 -
Allocated corporate debt obligations of Energy,
weighted average interest rate of approximately 8.97%
at December 31, 1996 - 280,844
Unamortized premium 6,683 -
Total long-term debt 430,183 379,344
Less current maturities - 26,037
$ 430,183 $ 353,307
</TABLE>
Effective May 1, 1997, Energy replaced its existing unsecured
$300 million revolving bank credit and letter of credit facility with a
new five-year, unsecured $835 million revolving bank credit and letter
of credit facility. The new credit facility was used to finance a portion
of the acquisition cost of Basis (see Note 4) and to fund a $210 million
dividend paid by the Company to Energy immediately prior to the Distribution
(see Note 1). The facility also provides continuing credit enhancement for
the Company's Refunding Bonds and Revenue Bonds as discussed below, and can
be used to provide financing for other general corporate purposes. Energy
was the borrower under the facility until the completion of the Restructuring
on July 31, 1997, at which time all obligations of Energy under the facility
were assumed by the Company. In November 1997, the facility was amended to
further enhance the Company's financial flexibility. Among other things,
the amendment extended the maturity to November 2002, eliminated provisions
restricting availability under the facility, and eliminated several
restrictive covenants.
Borrowings under the credit facility bear interest at either LIBOR plus
a margin, a base rate, or a money market rate. In addition, various fees
and expenses are required to be paid in connection with the credit facility,
including a facility fee, a letter of credit issuance fee and a fee based on
letters of credit outstanding. 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. As of December 31, 1997, the Company had
approximately $558 million available under this revolving bank credit
facility for additional borrowings and letters of credit. The Company
also has several uncommitted bank letter of credit facilities. As of
December 31, 1997, such facilities totaled $305 million of which
approximately $73 million was outstanding.
In April 1997, the Industrial Development Corporation of the Port of
Corpus Christi issued and sold, for the benefit of the Company,
$98.5 million of tax-exempt Revenue Refunding Bonds (the "Refunding Bonds"),
with credit enhancement provided through a letter of credit issued under the
revolving bank credit facility described above. The Refunding Bonds were
issued in four series with due dates ranging from 2009 to 2027. The
Refunding Bonds bear interest at variable rates determined weekly, with
the Company having the right to convert such rates to a daily, weekly or
commercial paper rate, or to a fixed rate. The Refunding Bonds were issued
to refund the Company's $98.5 million principal amount of tax-exempt bonds
which were issued in 1987. In May 1997, the Gulf Coast Industrial
Development Authority issued and sold, for the benefit of the Company,
$25 million of new Waste Disposal Revenue Bonds (the "Revenue Bonds")
which mature on December 1, 2031, with credit enhancement provided through
a letter of credit issued under the Company's revolving bank credit
facility. Other terms and conditions of these bonds are similar to those
of the Refunding Bonds. In January 1998, the Company's Board of Directors
approved the commencement of efforts to convert the interest rates on the
Refunding Bonds and Revenue Bonds from variable rates to fixed rates. At
the same time, the Board approved the issuance of an additional $25 million
of tax-exempt industrial revenue bonds at a fixed interest rate and the
issuance of up to $43.5 million of taxable industrial revenue bonds at
variable interest rates, both of which are expected to mature in the
year 2032. The $43.5 million of variable rate bonds will be supported
by a letter of credit issued under the Company's revolving bank credit
facility. The above noted letters of credit associated with the
$123.5 million of outstanding Refunding Bonds and Revenue Bonds will be
released upon conversion of the interest rates from variable to fixed.
The interest rate conversion of the outstanding bonds and the issuance
of the new bonds are expected to be completed by the end of the first
quarter of 1998.
In December 1997, the Company issued $150 million principal amount of
6.75% notes (the "Notes") for net proceeds of approximately $156 million.
The Notes are unsecured and unsubordinated and rank equally with all other
unsecured and unsubordinated obligations of the Company. The Notes were
issued to the Valero Pass-Through Asset Trust 1997-1 (the "Trust"), which
funded the acquisition of the Notes through a private placement of
$150 million principal amount of 6.75% Pass-Through Asset Trust Securities
("PATS"). The PATS represent a fractional undivided beneficial interest in
the Trust. In exchange for certain consideration paid to the Trust, a third
party has an option to purchase the Notes under certain circumstances at par
on December 15, 2002, at which time the term of the Notes would be extended
30 years to December 15, 2032. If the third party does not exercise its
purchase option, then under the terms of the Notes, the Company would be
required to repurchase the Notes at par on December 15, 2002.
The Company was in compliance with all covenants contained in its
various debt facilities as of December 31, 1997.
Based on long-term debt outstanding at December 31, 1997, the Company
has no maturities of long-term debt during the next five years except for
$150 million due in November 2002 under its revolving bank credit and
letter of credit facility. See above for maturities under the terms of
the Notes.
The carrying amounts of the Company's variable-rate industrial revenue
bonds and revolving bank credit and letter of credit facility approximate
fair value at December 31, 1997. The carrying amount of the Company's
6.75% Notes also approximates fair value at December 31, 1997 due to their
issuance on December 12, 1997. As of December 31, 1996, based on the
borrowing rates available to the Company for long-term debt with similar
terms and average maturities, the estimated fair value of the Company's
long-term debt, including current maturities, was $412.7 million.
7. PRICE RISK MANAGEMENT ACTIVITIES
Hedging Activities
The Company uses price swaps, options and futures to hedge refinery
feedstock purchases and refined product inventories in order to reduce the
impact of adverse price changes on these inventories before the conversion
of the feedstock to finished products and ultimate sale. Swaps, options
and futures contracts held to hedge refining inventories at the end of
1997 and 1996 had remaining terms of less than one year. As of
December 31, 1997 and 1996, 14% and 13%, respectively, of the Company's
refining inventory position was hedged. As of December 31, 1997,
$2.1 million of deferred hedge gains were included as a reduction of
refining inventories, while as of December 31, 1996, $.8 million of
deferred hedge losses were included as an increase to refining inventories.
The following table is a summary of the volumes and range of prices for the
Company's contracts held or issued to hedge refining inventories as of
December 31, 1997 and 1996. Volumes shown for swaps represent notional
volumes which are used to calculate amounts due under the agreements and
do not represent volumes exchanged.
<TABLE>
<CAPTION>
1997 1996
Payor Receiver Payor Receiver
<S> <C> <C> <C> <C>
Swaps:
Volumes (Mbbls) - 75 497 497
Price (per bbl) - $31.82 $17.50-$17.57 $17.31-$17.38
Options:
Volumes (Mbbls) 420 250 - -
Price (per bbl) $.38-$1.32 $.53-$.67 - -
Futures:
Volumes (Mbbls) 315 2,657 - 981
Price (per bbl) $20.87-$24.78 $17.64-$23.90 - $24.87-$29.65
</TABLE>
The Company also hedges anticipated transactions. Price swaps, options
and futures are used to hedge feedstock and product purchases, product sales
and refining operating margins for periods up to five years by locking in
purchase or sales prices or components of the margins, including the resid
discount, the conventional crack spread and premium product differentials.
There were no significant explicit deferrals of hedging gains or losses
related to these anticipated transactions as of either year end. The
following table is a summary of the volumes and range of prices for the
Company's contracts held or issued to hedge feedstock and product purchases,
product sales and refining margins as of December 31, 1997 and 1996.
Volumes shown for swaps represent notional volumes which are used to
calculate amounts due under the agreements and do not represent volumes
exchanged.
<TABLE>
<CAPTION>
1997 1996
Payor Receiver Payor Receiver
<S> <C> <C> <C> <C>
Swaps:
Volumes (Mbbls) 8,856 1,350 6,000 28,300
Price (per bbl) $.17-$25.23 $.29-$3.76 $.53 -$4.90 $.74-$3.55
Options:
Volumes (Mbbls) - - 750 -
Price (per bbl) - - $25.00-$32.76 -
Futures:
Volumes (Mbbls) 146 90 1,312 1,410
Price (per bbl) $17.60-$19.33 $19.22-$19.23 $26.46-$30.87 $21.74-$30.39
</TABLE>
The following table discloses the carrying amount and fair value of the
Company's contracts held or issued for non-trading purposes as of
December 31, 1997 and 1996 (dollars in thousands):
<TABLE>
<CAPTION>
1997 1996
Assets (Liabilities) Assets (Liabilities)
Carrying Fair Carrying Fair
Amount Value Amount Value
<S> <C> <C> <C> <C>
Swaps $ - $(4,021) $7,184 $6,390
Options - (1) (784) 617
Futures 1,849 1,849 (859) (859)
Total $ 1,849 $(2,173) $5,541 $6,148
</TABLE>
Trading Activities
The Company enters into transactions for trading purposes using its
fundamental and technical analysis of market conditions to earn additional
revenues. The types of instruments used include price swaps,
over-the-counter and exchange-traded options, and futures. These
contracts run for periods of up to 12 months. As a result, contracts
outstanding as of December 31, 1997 will mature in 1998. The following
table is a summary of the volumes and range of prices for the Company's
contracts held or issued for trading purposes as of December 31, 1997 and
1996. Volumes shown for swaps represent notional volumes which are used to
calculate amounts due under the agreements and do not represent volumes
exchanged.
<TABLE>
<CAPTION>
1997 1996
Payor Receiver Payor Receiver
<S> <C> <C> <C> <C>
Swaps:
Volumes (Mbbls) 4,475 2,175 400 400
Price (per bbl) $1.79-$27.51 $1.18-$19.02 $4.25-$4.55 $4.20-$4.72
Options:
Volumes (Mbbls) - - - 275
Price (per bbl) - - - $25.20
Futures:
Volumes (Mbbls) 653 544 - -
Price (per bbl) $17.63-$25.20 $18.10-$24.61 - -
</TABLE>
The following table discloses the fair values of contracts held or
issued for trading purposes and net gains (losses) from trading activities
as of or for the periods ended December 31, 1997 and 1996 (dollars in
thousands):
<TABLE>
<CAPTION>
Fair Value of Assets (Liabilities)
Average Ending Net Gains(Losses)
1997 1996 1997 1996 1997 1996
<S> <C> <C> <C> <C> <C> <C>
Swaps $ (95) $ 204 $ (235) $ 58 $(1,143) $ 94
Options (76) (37) (963) 7 (109) 131
Futures 7,292 910 3,965 - 661 (1,656)
Total $ 7,121 $ 1,077 $ 2,767 $ 65 $ (591) $(1,431)
</TABLE>
Market and Credit Risk
The Company's price risk management activities involve the receipt or
payment of fixed price commitments into the future. These transactions give
rise to market risk, the risk that future changes in market conditions may
make an instrument less valuable. The Company closely monitors and manages
its exposure to market risk on a daily basis in accordance with policies
limiting net open positions. Concentrations of customers in the refining
industry may impact the Company's overall exposure to credit risk, in that
the customers in such industry may be similarly affected by changes in
economic or other conditions. The Company believes that its counterparties
will be able to satisfy their obligations under contracts.
8. REDEEMABLE PREFERRED STOCK
On March 30, 1997, Energy redeemed the remaining 11,500 outstanding
shares of its Cumulative Preferred Stock, $8.50 Series A ("Series A
Preferred Stock"). The redemption price was $104 per share, plus dividends
accrued to the redemption date of $.685 per share.
9. CONVERTIBLE PREFERRED STOCK
In April 1997, Energy called all of its outstanding $3.125 convertible
preferred stock ("Convertible Preferred Stock") for redemption on
June 2, 1997. The total redemption price for the Convertible Preferred
Stock was $52.1966 per share (representing a per-share redemption price
of $52.188, plus accrued dividends in the amount of $.0086 per share for
the one-day period from June 1, 1997 to the June 2, 1997 redemption date).
The Convertible Preferred Stock was convertible into Energy common stock at
a conversion price of $27.03 per share (equivalent to a conversion rate
of approximately 1.85 shares of common stock for each share of Convertible
Preferred Stock). Prior to the redemption, substantially all of the
outstanding shares of Convertible Preferred Stock were converted into
shares of Energy common stock.
10. PREFERRED SHARE PURCHASE RIGHTS
In connection with the Distribution, the Company's Board of Directors
declared a dividend distribution of one Preferred Share Purchase Right
("Right") for each outstanding share of the Company's Common Stock
distributed to Energy stockholders pursuant to the Distribution. Except
as set forth below, each Right entitles the registered holder to purchase
from the Company one one-hundredth of a share of the Company's Junior
Participating Preferred Stock, Series I, ("Junior Preferred Stock") at
a price of $100 per one one-hundredth of a share, subject to adjustment.
Until the earlier to occur of (i) 10 days following a public announcement
that a person or group of affiliated or associated persons (an "Acquiring
Person") has acquired beneficial ownership of 15% or more of the outstanding
shares of the Company's Common Stock, (ii) 10 business days (or such later date
as may be determined by action of the Company's Board of Directors) following
the initiation of a tender offer or exchange offer which would result in the
beneficial ownership by an Acquiring Person of 15% or more of such outstanding
Common Stock (the earlier of such dates being called the "Rights Separation
Date"), or (iii) the earlier redemption or expiration of the Rights, the
Rights will be transferred only with the Common Stock. The Rights are not
exercisable until the Rights Separation Date. At any time prior to the
acquisition by an Acquiring Person of beneficial ownership of 15% or more
of the outstanding Common Stock, the Company's Board of Directors may
redeem the Rights at a price of $.01 per Right. The Rights will expire
on June 30, 2007, unless such date is extended or unless the Rights are
earlier redeemed or exchanged by the Company.
In the event that after the Rights Separation Date, the Company is
acquired in a merger or other business combination transaction, or if 50%
or more of its consolidated assets or earning power are sold, each holder
of a Right will have the right to receive, upon the exercise thereof at
the then current exercise price of the Right, that number of shares of
common stock of the acquiring company which at the time of such transaction
will have a market value of two times the exercise price of the Right. In
the event that any person or group of affiliated or associated persons
becomes the beneficial owner of 15% or more of the outstanding Common
Stock, each holder of a Right, other than Rights beneficially owned by the
Acquiring Person (which will thereafter be void), will thereafter have the
right to receive upon exercise that number of shares of Common Stock having
a market value of two times the exercise price of the Right.
At any time after the acquisition by an Acquiring Person of beneficial
ownership of 15% or more of the outstanding Common Stock and prior to the
acquisition by such Acquiring Person of 50% or more of the outstanding
Common Stock, the Company's Board of Directors may exchange the Right
(other than Rights owned by such Acquiring Person which have become void),
at an exchange ratio of one share of Common Stock, or one one-hundredth of
a share of Junior Preferred Stock, per Right (subject to adjustment).
Until a Right is exercised, the holder will have no rights as a
stockholder of the Company including, without limitation, the right to
vote or to receive dividends.
The Rights may have certain anti-takeover effects. The Rights will
cause substantial dilution to a person or group that attempts to acquire
the Company on terms not approved by the Company's Board of Directors,
except pursuant to an offer conditioned on a substantial number of Rights
being acquired. The Rights should not interfere with any merger or other
business combination approved by the Company's Board of Directors since
the Rights may be redeemed by the Company prior to the time that a person
or group has acquired beneficial ownership of 15% or more of the Common
Stock.
11. INDUSTRY SEGMENT INFORMATION
Subsequent to the Restructuring, the Company operates in one industry
segment encompassing the refining and marketing of premium, environmentally
clean products such as reformulated gasoline, CARB Phase II gasoline,
low-sulfur diesel and oxygenates. The Company also produces a substantial
slate of middle distillates, jet fuel and petrochemicals. The Company's
operations consist primarily of four petroleum refineries located in Texas
at Corpus Christi, Texas City and Houston, and in Louisiana at Krotz Springs
which have a combined throughput capacity of approximately 530,000 BPD.
The Company also has certain marketing operations located in Houston. The
Company currently markets its products to wholesale customers in 32 states,
including California and other states located in the Northeast,
Midwest, Southeast and Gulf Coast, and selected export markets in
Latin America. In 1997, 1996 and 1995, the Company had no significant
amount of export sales and no significant foreign operations. In 1997,
no single customer accounted for more than 10% of the Company's
consolidated operating revenues, while in 1996 and 1995, approximately 11%
and 17%, respectively, of the Company's consolidated operating revenues were
derived from a major domestic oil company.
12. INCOME TAXES
Components of income tax expense applicable to continuing operations
were as follows (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1996 1995
<S> <C> <C> <C>
Current:
Federal $29,501 $ 7,902 $ 425
State 1,461 (260) 812
Total current 30,962 7,642 1,237
Deferred:
Federal 32,827 8,969 29,217
Total income tax expense $63,789 $16,611 $30,454
</TABLE>
The following is a reconciliation of total income tax expense to income
taxes computed by applying the statutory federal income tax rate (35% for
all years presented) to income before income taxes (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1996 1995
<S> <C> <C> <C>
Federal income tax expense at the
statutory rate $61,445 $13,679 $31,044
State income taxes, net of federal income
tax benefit 950 (169) 528
Other - net 1,394 3,101 (1,118)
Total income tax expense $63,789 $16,611 $30,454
</TABLE>
The tax effects of significant temporary differences representing
deferred income tax assets and liabilities are as follows (in thousands):
<TABLE>
<CAPTION>
December 31,
1997 1996
<S> <C> <C>
Deferred income tax assets:
Tax credit carryforwards $ 14,287 $ 15,540
Other 19,627 26,915
Total deferred income tax assets $ 33,914 $ 42,455
Deferred income tax liabilities:
Depreciation $(257,102) $(234,031)
Other (16,515) (15,385)
Total deferred income tax liabilities $(273,617) $(249,416)
</TABLE>
At December 31, 1997, the Company had an alternative minimum tax ("AMT")
credit carryforward of approximately $14.3 million which is available to
reduce future federal income tax liabilities. The AMT credit carryforward
has no expiration date. The Company has not recorded any valuation
allowances against deferred income tax assets as of December 31, 1997.
The Company's taxable years through 1993 are closed to adjustment by
the Internal Revenue Service. The Company believes that adequate provisions
for income taxes have been reflected in its consolidated financial statements.
13. EMPLOYEE BENEFIT PLANS
Pension Plans
Prior to the Restructuring, Energy maintained a defined benefit pension
plan. Pursuant to an "Employee Benefits Agreement" entered into between the
Company and Energy in connection with the Restructuring, effective at the
time of the Distribution, the Company became the sponsor of Energy's pension
plan and became solely responsible for (i) pension liabilities existing
immediately prior to the time of the Distribution to, or relating to,
individuals employed by Energy which became employees of PG&E after the
Distribution, which liabilities will become payable upon the retirement of
such individuals, (ii) all liabilities to, or relating to, former employees
of Energy and the Company, and (iii) all liabilities to, or relating to,
current employees of the Company. Also pursuant to the Employee Benefits
Agreement, the Company became the sponsor of Energy's nonqualified
Supplemental Executive Retirement Plan ("SERP"), which provided additional
pension benefits to executive officers and certain other employees, and
assumed all liabilities with respect to current and former employees
of both Energy and the Company under such plan.
The Company's pension plan, which is subject to the provisions of the
Employee Retirement Income Security Act of 1974, is designed to provide
eligible employees with retirement income. Participation in the plan
commences upon attaining age 21 and the completion of one year of continuous
service. A participant vests in plan benefits after five years of vesting
service or upon reaching normal retirement date. Employees of the Company
who were formerly employees of Basis commenced participation in the plan
effective January 1, 1998 under the same service requirements as required
for other Company employees. For such employees, prior employment with
Basis is considered in determining vesting service, but credited
service for the accrual of benefits did not begin until January 1, 1998.
The pension plan provides a monthly pension payable upon normal
retirement of an amount equal to a set formula which is based on the
participant's 60 consecutive highest months of compensation during the
latest 10 years of credited service under the plan. Contributions to the
plan by the Company, when permitted, are actuarially determined in an amount
sufficient to fund the currently accruing benefits and amortize any prior
service cost over the expected life of the then current work force. The
Company's contributions to the pension plan and SERP in 1997, 1996 and 1995
were approximately $8.8 million, $14.2 million and $4.3 million,
respectively, and are currently estimated to be $1.1 million in 1998.
In connection with the Restructuring, Energy approved the establishment
of a supplement to the pension plan (the "1997 Window Plan") which permitted
certain employees to retire from employment during 1997.
The following table sets forth for the pension plans of the Company,
including the SERP, the funded status and amounts recognized in the
Company's consolidated financial statements at December 31, 1997 and
1996 (in thousands):
<TABLE>
<CAPTION>
December 31,
1997 1996
<S> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including vested
benefits of $112,411 (1997) and $76,448 (1996) $114,296 $78,441
Projected benefit obligation for services rendered to date $129,430 $99,435
Plan assets at fair value 121,393 92,486
Projected benefit obligation in excess of plan assets 8,037 6,949
Unrecognized net gain (loss) from past experience different
from that assumed (1,442) 5,700
Prior service cost not yet recognized in net periodic
pension cost (4,985) (5,305)
Unrecognized net asset at beginning of year 1,199 1,341
Accrued pension cost $ 2,809 $ 8,685
Net periodic pension cost for the years ended December 31, 1997, 1996
and 1995 included the following components (in thousands):
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1996 1995
<S> <C> <C> <C>
Service cost - benefits earned during the period $ 3,710 $ 4,622 $ 3,465
Interest cost on projected benefit obligation 7,298 6,309 5,455
Actual (return) loss on plan assets (24,698) (12,424) (14,376)
Net amortization and deferral 15,542 6,651 9,637
Net periodic pension cost 1,852 5,158 4,181
Additional expense resulting from 1997 Window Plan 3,168 - -
Curtailment gain resulting from Restructuring (see Note 1) (2,083) - -
Total pension expense $ 2,937 $ 5,158 $ 4,181
</TABLE>
The weighted-average discount rate used in determining the actuarial
present value of the projected benefit obligation was 7% and 7.25% as of
December 31, 1997 and 1996, respectively. The rate of increase in
future compensation levels used in determining the projected benefit
obligation as of December 31, 1997 and 1996 was 4% for nonexempt personnel
and 4% and 3%, respectively, for exempt personnel. The expected long-term
rate of return on plan assets was 9.25% as of December 31, 1997 and 1996.
Postretirement Benefits Other Than Pensions
The Company provides certain health care and life insurance benefits for
retired employees, referred to herein as "postretirement benefits other than
pensions." Substantially all of the Company's employees may become eligible
for those benefits if, while still working for the Company, they either reach
normal retirement age or take early retirement. Health care benefits are
offered by the Company through a self-insured plan and a health maintenance
organization while life insurance benefits are provided through an insurance
company. The Company funds its postretirement benefits other than pensions
on a pay-as-you-go basis. Pursuant to the Employee Benefits Agreement,
effective at the time of the Distribution, the Company became responsible
for all liabilities to former employees of both Energy and the Company as
well as current employees of the Company arising under Energy's health care
and life insurance programs. Employees of the Company who were formerly
employees of Basis became eligible for postretirement benefits other than
pensions under the Company's plan effective January 1, 1998.
The following table sets forth for the Company's postretirement benefits
other than pensions, the funded status and amounts recognized in the Company's
consolidated financial statements at December 31, 1997 and 1996 (in thousands):
<TABLE>
<CAPTION>
December 31,
1997 1996
<S> <C> <C>
Accumulated benefit obligation:
Retirees $14,256 $11,930
Other fully eligible plan participants 848 390
Other active plan participants 17,617 17,571
Total accumulated benefit obligation 32,721 29,891
Unrecognized loss (2,918) (4,498)
Unrecognized prior service cost (1,786) (3,909)
Unrecognized transition obligation (4,705) (10,334)
Accrued postretirement benefit cost $23,312 $11,150
</TABLE>
Net periodic postretirement benefit cost for the years ended
December 31, 1997, 1996 and 1995 included the following components
(in thousands):
<TABLE>
<CAPTION>
December 31,
1997 1996 1995
<S> <C> <C> <C>
Service cost - benefits attributed to service
during the period $1,028 $1,091 $ 860
Interest cost on accumulated benefit obligation 1,842 1,716 1,769
Amortization of unrecognized transition obligation 513 653 766
Amortization of prior service cost 184 - -
Amortization of unrecognized net loss 46 110 -
Net periodic postretirement benefit cost 3,613 3,570 3,395
Additional expense resulting from 1997 Window Plan 171 - -
Curtailment loss resulting from Restructuring (see Note 1) 576 - -
Total postretirement benefit cost $4,360 $3,570 $3,395
</TABLE>
For measurement purposes, the assumed health care cost trend rate was 5%
in 1997, remaining level thereafter. The health care cost trend rate
assumption has a significant effect on the amount of the obligation and
periodic cost reported. An increase in the assumed health care cost trend
rate by 1% in each year would increase the accumulated postretirement benefit
obligation as of December 31, 1997 by $5.8 million and the aggregate of the
service and interest cost components of net periodic postretirement benefit
cost for the year then ended by $.8 million. The weighted average discount
rate used in determining the accumulated postretirement benefit obligation
as of December 31, 1997 and 1996 was 7% and 7.25%, respectively.
Profit-Sharing/Savings Plans
Prior to the Restructuring, Energy maintained a qualified profit-sharing
plan (the "Thrift Plan"). Effective at the time of the Distribution, the
Company became the sponsor of the Thrift Plan and became solely responsible
for all liabilities arising under the Thrift Plan after the time of the
Distribution with respect to current Company employees and former employees
of both Energy and the Company. Each Energy employee participating in the
Thrift Plan prior to the Distribution who became a PG&E employee subsequent
to the Distribution transferred their account balance to the PG&E thrift
plan.
The purpose of the Thrift Plan is to provide a program whereby
contributions of participating employees and their employers are
systematically invested to provide the employees an interest in the Company
and to further their financial independence. Participation in the Thrift
Plan is voluntary and is open to employees of the Company who become
eligible to participate upon attaining age 21 and the completion of one
year of continuous service. Employees of the Company who were formerly
Basis employees became eligible to participate in the Thrift Plan on
January 1, 1998 under the same service requirements as required for other
Company employees, with service including prior employment with Basis.
Basis's previously existing 401(k) profit-sharing and retirement savings
plan was maintained for such employees through December 31, 1997 and was
merged into the Company's Thrift Plan effective January 1, 1998.
Participating employees may contribute from 2% up to 22% of their total
annual compensation, subject to certain limitations, to the Thrift Plan.
Participants may elect to make such contributions on either a before-tax or
after-tax basis, with federal income taxes on before-tax contributions being
deferred until such time as a distribution is made to the participant.
Participants' contributions to the Thrift Plan of up to 8% of their base
annual compensation are matched 75% by the Company, with an additional match
of up to 25% subject to certain conditions. Participants' contributions in
excess of 8% of their base annual compensation are not matched by the
Company. Up until termination of the VESOP (see below) in 1997, the Company
made contributions to the Thrift Plan to the extent 75% of participants' base
contributions (from 2% up to 8% of total base salary) exceeded the amount
of the Company's contribution to the VESOP for debt service. Subsequent
to the VESOP termination, all Company contributions were made to the Thrift
Plan. Company contributions to the Thrift Plan were $2,253,000 in 1997.
There were no Company contributions to the Thrift Plan in 1996 or 1995.
In 1989, Energy established the Valero Employees' Stock Ownership Plan
("VESOP") which was a leveraged employee stock ownership plan. Pursuant to
a private placement in 1989, the VESOP issued notes in the principal amount
of $15 million. The net proceeds from this private placement were used
by the VESOP trustee to fund the purchase of Energy common stock. During
1991, Energy made an additional loan of $8 million to the VESOP which was
also used by the trustee to purchase Energy common stock. The 1989 and
1991 VESOP loans are referred to herein as the "VESOP Notes." In connection
with effecting the Restructuring, on April 11, 1997, Energy's Board of
Directors approved the termination of the VESOP and subsequently directed
the VESOP trustee to sell a sufficient amount of Energy common stock held
in the VESOP suspense account to repay the outstanding amount of VESOP Notes
and allocate the remaining stock in the suspense account to the accounts of
the VESOP participants. The VESOP Notes were repaid in full in May 1997,
after which 226,198 remaining shares of Energy common stock were allocated
to all VESOP participants.
As noted above, prior to termination of the VESOP, the Company's annual
contribution to the Thrift Plan was reduced by the Company's contribution to
the VESOP for debt service. During 1997, 1996 and 1995, the Company
contributed $586,000, $3,372,000 and $3,170,000, respectively, to the VESOP,
comprised of $58,000, $525,000 and $678,000, respectively, of interest on the
VESOP Notes and $541,000, $3,072,000 and $2,918,000, respectively, of
compensation expense. Compensation expense was based on the VESOP debt
principal payments for the portion of the VESOP established in 1989 and on
the cost of the shares allocated to participants for the portion of the
VESOP established in 1991. Dividends on VESOP shares of common stock were
recorded as a reduction of retained earnings. Dividends on allocated shares
of common stock were paid to participants. Dividends paid on unallocated
shares were used to reduce the Company's contributions to the VESOP during
1997, 1996 and 1995 by $13,000, $225,000 and $426,000, respectively.
VESOP shares of common stock were considered outstanding for earnings per
share computations. As of December 31, 1996 and 1995, the number of
allocated shares was 1,052,454 and 940,470, respectively, the number of
committed-to-be-released shares was 62,918 for both years, and the number
of suspense shares was 583,301 and 772,055, respectively.
Stock Compensation Plans
Prior to the Restructuring, Energy maintained various stock
compensation plans. In connection with the Restructuring, all stock
options held by Energy employees under any of such stock compensation plans
that were granted prior to January 1, 1997 became 100% vested and immediately
exercisable upon the approval of the Restructuring by Energy's stockholders
on June 18, 1997. For all options still outstanding at the time of the
Distribution, pursuant to the Employee Benefits Agreement, each option
to purchase Energy Common Stock held by a current or former employee of
the Company was converted into an option to acquire shares of Company Common
Stock, and each option held by a current or former employee of Energy's
natural gas related services business was converted into an option to
acquire shares of PG&E common stock. In each case, the number of options
and related exercise prices were converted in such a manner so that the
aggregate option value for each holder immediately after the Restructuring
was equal to the aggregate option value immediately prior to the
Restructuring. The other terms and conditions of any such converted
option remained essentially unchanged. All restricted stock issued
pursuant to Energy's stock compensation plans became fully vested either
upon the approval of the Restructuring by Energy's stockholders on
June 18, 1997 or upon the completion of the Restructuring on July 31, 1997.
As of December 31, 1997, the Company had various fixed and
performance-based stock compensation plans. The Company's Executive
Stock Incentive Plan (the "ESIP"), which was maintained by Energy prior
to the Restructuring, authorizes the grant of various stock and
stock-related awards to executive officers and other key employees.
Awards available under the ESIP include options to purchase shares
of Common Stock, restricted stock which vests over a period determined
by the Company's compensation committee, and performance shares which
vest upon the achievement of an objective performance goal. A total of
2,500,000 shares of Company Common Stock may be issued under the ESIP, of
which no more than 1,000,000 shares may be issued as restricted stock.
Under the ESIP, 6,250 shares of restricted stock were granted during the
period August 1, 1997 through December 31, 1997 at a weighted average
grant-date fair value of $31.78 per share and 24,563 performance shares
were granted during the period January 1, 1997 through July 31, 1997 at
a weighted average grant-date fair value of $34.58 per share. The Company
also has a non-qualified stock option plan (the "Stock Option Plan") which,
at the date of the Restructuring, replaced three non-qualified stock option
plans previously maintained by Energy. Awards under the Stock Option Plan
are granted to key officers, employees and prospective employees of the
Company. A total of 2,000,000 shares of Company Common Stock may be
issued under the Stock Option Plan. The Company also maintains an
Executive Incentive Bonus Plan, under which 200,000 shares of Company
Common Stock may be issued, that provides bonus compensation to key
employees of the Company based on individual contributions to Company
profitability. Bonuses are payable either in cash or in whole or in
part in Company Common Stock. No grants of Common Stock were made under
this plan in 1997. The Company also has a non-employee director stock
option plan, under which 200,000 shares of Company Common Stock may be
issued, and a non-employee director restricted stock plan, under
which 100,000 shares of Company Common Stock may be issued. During the
period August 1, 1997 through December 31, 1997, 9,336 shares were granted
under the non-employee director restricted stock plan at a weighted average
grant-date fair value of $28.94 per share.
Under the terms of the ESIP, the Stock Option Plan and the non-employee
director stock option plan, the exercise price of the options granted will
not be less than the fair market value of Common Stock at the date of grant.
Stock options become exercisable pursuant to the individual written agreements
between the Company and the participants, generally in three equal annual
installments beginning one year after the date of grant, with unexercised
options expiring ten years from the date of grant. A summary of the status
of the Company's stock option plans, including options granted under the
ESIP, the Stock Option Plan, the non-employee director stock option plan
and Energy's previously existing stock compensation plans, as of
December 31, 1997, 1996, and 1995, and changes during the years then ended
is presented in the table below. (Note: Shares outstanding at July 31, 1997
prior to the Restructuring differs from shares outstanding at August 1, 1997
after the Restructuring because the August 1 amount: (i) excludes options
held by current or former employees of Energy's natural gas related services
business which were converted to PG&E options and (ii) reflects the
conversion of Energy options held by current or former employees of the
Company to an equivalent number of Company options.)
<TABLE>
<CAPTION>
1997 1996 1995
August 1-December 31 January 1-July 31
Weighted- Weighted- Weighted- Weighted-
Average Average Average Average
Exercise Exercise Exercise Exercise
Shares Price Shares Price Shares Price Shares Price
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of
period 3,802,584 $19.05 4,229,092 $22.02 3,928,267 $20.69 2,575,902 $21.51
Granted 36,550 29.35 1,365,875 33.71 757,920 27.44 1,599,463 18.99
Exercised (44,144) 17.21 (2,925,687) 21.81 (418,117) 19.28 (171,604) 17.08
Forfeited (14,572) 23.07 (17,028) 25.84 (38,978) 22.17 (74,428) 21.12
Expired - - - - - - (1,066) 18.36
Outstanding at
end of period 3,780,418 19.15 2,652,252 28.25 4,229,092 22.02 3,928,267 20.69
Exercisable
at end of
period 1,758,479 15.08 1,288,977 22.47 2,525,957 21.71 1,531,718 22.30
Weighted-average
fair value of
options granted $ 6.86 $ 8.09 $ 6.25 $ 4.50
</TABLE>
The following table summarizes information about stock options
outstanding under the ESIP, the Stock Option Plan and the non-employee
director stock option plan as of December 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
Range Number Weighted-Avg. Number
of Outstanding Remaining Weighted-Avg. Exercisable Weighted-Avg.
Exercise Prices at 12/31/97 Contractual Life Exercise Price at 12/31/97 Exercise Price
<C> <C> <C> <C> <C> <C>
$11.47-$16.95 1,246,320 6.4 years $13.42 1,245,691 $13.43
$18.45-$33.81 2,534,098 8.9 21.97 512,788 19.11
$11.47-$33.81 3,780,418 8.1 19.15 1,758,479 15.08
</TABLE>
The fair value of each option grant was estimated on the date of
grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions used for grants in 1997, 1996 and 1995,
respectively: risk-free interest rates of 6.3 percent, 6.4 percent and
6.7 percent; expected dividend yields of 1.5 percent, 1.9 percent and 2.8
percent; expected lives of 3.2 years, 3.1 years and 3.2 years; and expected
volatility of 26.2 percent, 25.5 percent and 29.5 percent.
For each share of stock that can be purchased thereunder pursuant to a
stock option, the Stock Option Plan provides, and the predecessor stock
option plans of Energy provided, that a SAR may also be granted. A SAR is
a right to receive a cash payment equal to the difference between the fair
market value of Common Stock on the exercise date and the option price of
the stock to which the SAR is related. SARs are exercisable only upon the
exercise of the related stock options. At the end of each reporting
period within the exercise period, the Company recorded an adjustment to
compensation expense based on the difference between the fair market value
of Common Stock at the end of each reporting period and the option price
of the stock to which the SAR was related. During the January 1, 1997
through July 31, 1997 period prior to the Restructuring, 88,087 SARs
were exercised at a weighted-average exercise price of $14.52 per share,
and no SARs related to Company Common Stock remained outstanding as of
July 31, 1997. During the August 1, 1997 through December 31, 1997
period subsequent to the Restructuring, no SARs were granted.
The Company applies APB Opinion No. 25 and related Interpretations
in accounting for its plans. Accordingly, no compensation cost has been
recognized for its fixed stock option plans. The after-tax compensation
cost reflected in net income for stock-based compensation plans was
$4.6 million, $2.6 million and $1.7 million for 1997, 1996 and 1995,
respectively. Of these amounts, $2.1 million, $1.4 million and
$.9 million related to the discontinued natural gas related services
business. Had compensation cost for the Company's stock-based
compensation plans been determined based on the fair value at the grant
dates for 1997, 1996 and 1995 awards under those plans consistent with
the method of SFAS No. 123, the Company's net income and earnings per
share for the years ended December 31, 1997, 1996 and 1995 would have
been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1996 1995
<S> <C> <C> <C>
Net Income As Reported $96,096 $72,701 $59,838
Pro Forma $92,304 $70,427 $58,373
Earnings per share As Reported $ 1.77 $ 1.40 $ 1.10
Pro Forma $ 1.70 $ 1.35 $ 1.07
Earnings per share - assuming dilution As Reported $ 1.74 $ 1.42 $ 1.17
Pro Forma $ 1.67 $ 1.38 $ 1.14
</TABLE>
Because the SFAS No. 123 method of accounting has not been applied to
awards granted prior to January 1, 1995, the resulting pro forma compensation
cost may not be representative of that to be expected in future years.
14. LEASE AND OTHER COMMITMENTS
The Company has long-term operating lease commitments in connection
with land, office facilities and equipment, and various facilities and
equipment used in the storage, transportation and production of refinery
feedstocks and/or refined products. Long-term leases for land have
remaining primary terms of up to 26.7 years, while long-term leases for
office facilities have remaining primary terms of up to 4.5 years. The
Company's long-term leases for production equipment, feedstock and refined
product storage facilities and transportation assets have remaining primary
terms of up to 14.1 years and in certain cases provide for various
contingent payments based on, among other things, throughput volumes in
excess of a base amount.
Future minimum lease payments and minimum rentals to be received under
subleases as of December 31, 1997 for operating leases having initial or
remaining noncancelable lease terms in excess of one year are as follows
(in thousands):
<TABLE>
<S> <C>
1998 $23,779
1999 22,654
2000 16,492
2001 11,924
2002 4,438
Remainder 18,843
98,130
Less future minimum rentals to be received
under subleases 1,354
$96,776
</TABLE>
Consolidated rental expense under operating leases for continuing
operations amounted to approximately $39,805,000, $26,739,000, and
$24,177,000 for 1997, 1996 and 1995, respectively. Such amounts are
included in the accompanying Consolidated Statements of Income in cost of
sales and operating expenses and in selling and administrative expenses
and include various month-to-month and other short-term rentals in
addition to rents paid and accrued under long-term lease commitments.
The Company has a product supply arrangement which requires the
payment of a reservation fee of approximately $10.4 million annually
through August 2002.
15. 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. As discussed in
Note 4, the Company and Salomon reached an agreement in December 1997
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 previously acquired
Teco and now ultimately owns both Teco and Energy after the Restructuring,
PG&E's Teco acquisition agreement purports to assign the benefit or
detriment of this lawsuit to the former shareholders of Teco. Pursuant
to the Distribution Agreement by which the Company was spun off to Energy's
stockholders in connection with the Restructuring, the Company has agreed to
indemnify and hold harmless Energy with respect to this lawsuit to the
extent of 50% of the amount of any final judgment or settlement amount
not in excess of $30 million, and 100% of that part of any final judgment
or settlement amount in excess of $30 million.
General
The Company is also a party to additional claims and legal proceedings
arising in the ordinary course of business. The Company believes it is
unlikely that the final outcome of any of the claims or proceedings to
which the Company is a party 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.
16. QUARTERLY RESULTS OF OPERATIONS (Unaudited)
The results of operations by quarter for the years ended
December 31, 1997 and 1996 were as follows (in thousands of dollars,
except per share amounts):
<TABLE>
<CAPTION>
1997 - Quarter Ended (a)
March 31 June 30 (b) September 30(b) December 31 (b) Total
<S> <C> <C> <C> <C> <C>
Operating revenues $821,802 $1,362,624 $1,975,665 $1,596,129 $5,756,220
Operating income 38,413 55,800 94,107 22,714 211,034
Income from continuing operations 19,811 27,598 51,993 12,366 111,768
Income (loss) from discontinued
operations (4,371) (10,869) (432) - (15,672)
Net income 15,440 16,729 51,561 12,366 96,096
Earnings (loss) per common share:
Continuing operations .45 .55 .93 .22 2.16
Discontinued operations (.16) (.26) (.01) - (.39)
Total .29 .29 .92 .22 1.77
Earnings (loss) per common share -
assuming dilution:
Continuing operations .38 .50 .91 .22 2.03
Discontinued operations (.08) (.20) (.01) - (.29)
Total .30 .30 .90 .22 1.74
</TABLE>
<TABLE>
<CAPTION>
1996 - Quarter Ended (a)
March 31 June 30 September 30 December 31 Total
<S> <C> <C> <C> <C> <C>
Operating revenues $574,522 $675,009 $678,059 $830,263 $2,757,853
Operating income 10,105 36,534 23,060 20,049 89,748
Income from continuing operations 2,963 18,164 6,630 (5,285) 22,472
Income (loss) from discontinued
operations 16,951 2,677 6,516 24,085 50,229
Net income 19,914 20,841 13,146 18,800 72,701
Earnings (loss) per common share:
Continuing operations .07 .41 .15 (.12) .51
Discontinued operations .32 - .08 .49 .89
Total .39 .41 .23 .37 1.40
Earnings (loss) per common share -
assuming dilution:
Continuing operations .06 .36 .13 (.12) .44
Discontinued operations .33 .05 .13 .49 .98
Total .39 .41 .26 .37 1.42
<FN>
(a) Amounts reflect Energy's natural gas related services business as discontinued operations pursuant to the Restructuring.
(b) Includes the operations of the Texas City, Houston and Krotz Springs refineries commencing May 1, 1997.
</TABLE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information on directors required by Items 401 and 405 of Regulation
S-K is incorporated herein by reference to the Company's definitive Proxy
Statement which will be filed with the Commission by April 30, 1998.
Information concerning the Company's executive officers appears in Part I
of this Annual Report on Form 10-K.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) 1. Financial Statements. The following Consolidated Financial
Statements of Valero Energy Corporation and its subsidiaries are included
in Part II, Item 8 of this Form 10-K:
Page
Report of independent public accountants
Consolidated balance sheets as of December 31, 1997 and 1996
Consolidated statements of income for the years ended
December 31, 1997, 1996 and 1995
Consolidated statements of common stock and other stockholders'
equity for the years ended December 31, 1997, 1996 and 1995
Consolidated statements of cash flows for the years ended
December 31, 1997, 1996 and 1995
Notes to consolidated financial statements
2. Financial Statement Schedules and Other Financial Information.
No financial statement schedules are submitted because either they are
inapplicable or because the required information is included in the
Consolidated Financial Statements or notes thereto.
3. Exhibits. Filed as part of this Form 10-K are the following
exhibits:
2.1 -- Agreement and Plan of Merger, dated as of January 31, 1997, as
amended, by and among Valero Energy Corporation, PG&E
Corporation, and PG&E Acquisition Corporation--incorporated
by reference from Exhibit 2.1 to the Company's Registration
Statement on Form S-1 (File No. 333-27013, filed May 13, 1997).
2.2 -- Form of Agreement and Plan of Distribution between Valero Energy
Corporation and Valero Refining and Marketing Company--
incorporated by reference from Exhibit 2.2 to the Company's
Registration Statement on Form S-1 (File No. 333-27013, filed
May 13, 1997).
2.3 -- Form of Tax Sharing Agreement among Valero Energy Corporation,
Valero Refining and Marketing Company and PG&E Corporation--
incorporated by reference from Exhibit 2.3 to the Company's
Registration Statement on Form S-1 (File No. 333-27013, filed
May 13, 1997).
2.4 -- Form of Employee Benefits Agreement between Valero Energy
Corporation and Valero Refining and Marketing Company--
incorporated by reference from Exhibit 2.4 to the Company's
Registration Statement on Form S-1 (File No. 333-27013, filed
May 13, 1997).
2.5 -- Form of Interim Services Agreement between Valero Energy
Corporation and Valero Refining and Marketing Company--
incorporated by reference from Exhibit 2.5 to the Company's
Registration Statement on Form S-1 (File No. 333-27013, filed
May 13, 1997).
2.6 -- Stock Purchase Agreement dated as of April 22, 1997, among
Valero Energy Corporation, Valero Refining and Marketing
Company, Salomon Inc and Basis Petroleum, Inc.--incorporated
by reference from Exhibit 2.1 to the Company's Current Report
on Form 8-K.
3.1 -- Amended and Restated Certificate of Incorporation of Valero
Energy Corporation (formerly known as Valero Refining and
Marketing Company)--incorporated by reference from Exhibit
3.1 to the Company's Registration Statement on Form S-1 (File
No. 333-27013, filed May 13, 1997).
3.2 -- By-Laws of Valero Energy Corporation (formerly known as Valero
Refining and Marketing Company)--incorporated by reference
from Exhibit 3.2 to the Company's Registration Statement on
Form S-1 (File No. 333-27013, filed May 13, 1997).
4.1 -- Rights Agreement between Valero Refining and Marketing
Company and Harris Trust and Savings Bank, as Rights
Agent--incorporated by reference from Exhibit 4.1 to the
Company's Registration Statement on Form S-8 (File No. 333-31709,
filed July 21, 1997).
*4.2 -- Amended and Restated Credit Agreement dated as of November 28,
1997, among Valero Energy Corporation, the Banks listed therein,
Morgan Guaranty Trust Company of New York, as Administrative
Agent, and Bank of Montreal, as Syndicating Agent and Issuing
Bank.
+10.1 -- Valero Energy Corporation Executive Incentive Bonus Plan, as
amended, dated as of April 23, 1997--incorporated by reference
from Exhibit 10.1 to the Company's Registration Statement on
Form S-1 (File No. 333-27013, filed May 13, 1997).
+10.2 -- Valero Energy Corporation Executive Stock Incentive Plan, as
amended, dated as of April 23, 1997--incorporated by reference
from Exhibit 10.2 to the Company's Registration Statement on
Form S-1 (File No. 333-27013, filed May 13, 1997).
+10.3 -- Valero Energy Corporation Stock Option Plan, as amended, dated
as of April 23, 1997--incorporated by reference from Exhibit 10.3
to the Company's Registration Statement on Form S-1
(File No. 333-27013, filed May 13, 1997).
+10.4 -- Valero Energy Corporation Restricted Stock Plan for Non-Employee
Directors, as amended, dated as of April 23, 1997--incorporated
by reference from Exhibit 10.4 to the Company's Registration
Statement on Form S-1 (File No. 333-27013, filed May 13, 1997).
+10.5 -- Valero Energy Corporation Non-Employee Director Stock Option
Plan, as amended, dated as of April 23, 1997--incorporated by
reference from Exhibit 10.5 to the Company's Registration
Statement on Form S-1 (File No. 333-27013, filed May 13, 1997).
+10.6 -- Executive Severance Agreement between Valero Energy Corporation
and William E. Greehey, dated as of December 15, 1982, as
adopted and ratified by Valero Refining and Marketing
Company--incorporated by reference from Exhibit 10.6 to the
Company's Registration Statement on Form S-1 (File No. 333-27013,
filed May 13, 1997).
+10.7 -- Schedule of Executive Severance Agreements--incorporated by
reference from Exhibit 10.7 to the Company's Registration
Statement on Form S-1 (File No. 333-27013, filed May 13, 1997).
+10.8 -- Form of Indemnity Agreement between Valero Refining and
Marketing Company and William E. Greehey--incorporated by
reference from Exhibit 10.8 to the Company's Registration
Statement on Form S-1 (File No. 333-27013, filed May 13, 1997).
+10.9 -- Schedule of Indemnity Agreements--incorporated by reference
from Exhibit 10.9 to the Company's Registration Statement on
Form S-1 (File No. 333-27013, filed May 13, 1997).
+10.10 -- Form of Incentive Bonus Agreement between Valero Refining and
Marketing Company and Gregory C. King--incorporated by
reference from Exhibit 10.10 to the Company's Registration
Statement on Form S-1 (File No. 333-27013, filed May 13, 1997).
+10.11 -- Schedule of Incentive Bonus Agreements--incorporated by
reference from Exhibit 10.11 to the Company's Registration
Statement on Form S-1 (File No. 333-27013, filed May 13, 1997).
*+10.12 -- Employment Agreement between Valero Refining and Marketing
Company and William E. Greehey, dated as of June 18, 1997.
*+10.13 -- Employment Agreement between Valero Refining and Marketing
Company and Edward C. Benninger, dated as of June 18, 1997.
*+10.14 -- Form of Management Stability Agreement between Valero Energy
Corporation and Gregory C. King.
*+10.15 -- Schedule of Management Stability Agreements.
*11.1 -- Computation of Earnings Per Share.
*21.1 -- Valero Energy Corporation subsidiaries, including state or other
jurisdiction of incorporation or organization.
*23.1 -- Consent of Arthur Andersen LLP, dated February 26, 1998.
*24.1 -- Power of Attorney, dated February 26, 1998 (set forth on the
signatures page of this Form 10-K).
**27.1 -- Financial Data Schedule (reporting financial information as of
and for the year ended December 31, 1997).
**27.2 -- Restated Financial Data Schedule (reporting financial information
as of and for the year ended December 31, 1996).
**27.3 -- Restated Financial Data Schedule (reporting financial information
as of and for the year ended December 31, 1995).
______________
* Filed herewith
+ Identifies management contracts or compensatory plans or arrangements
required to be filed as an exhibit hereto pursuant to Item 14(c)
of Form 10-K.
** 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-K in accordance with Item 601(c) of Regulation S-K and
Section 401 of Regulation S-T.
Copies of exhibits filed as a part of this Form 10-K may be obtained by
stockholders of record at a charge of $.15 per page, minimum $5.00 each
request. Direct inquiries to Jay D. Browning, Corporate Secretary,
Valero Energy Corporation, P.O. Box 500, San Antonio, Texas 78292.
Pursuant to paragraph 601(b)(4)(iii)(A) of Regulation S-K, the
registrant has omitted from the foregoing listing of exhibits, and hereby
agrees to furnish to the Commission upon its request, copies of certain
instruments, each relating to long-term debt not exceeding 10% of the total
assets of the registrant and its subsidiaries on a consolidated basis.
(b) Reports on Form 8-K. The Company did not file any Current Reports
on Form 8-K during the quarter ended December 31, 1997.
For the purposes of complying with the rules governing Form S-8 under
the Securities Act of 1933, the undersigned registrant hereby undertakes
as follows, which undertaking shall be incorporated by reference into
registrant's Registration Statements on Form S-8 No. 333-31709
(filed July 21, 1997), No. 333-31721 (filed July 21, 1997), No. 333-31723
(filed July 21, 1997) and No. 333-31727 (filed July 21, 1997):
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing provisions,
or otherwise, the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act of 1933 and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in
the successful defense of any action, suit or proceeding) is asserted by
such director, officer or controlling person in connection with the
securities being registered, the registrant will, unless in the opinion
of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question of whether
such indemnification by it is against public policy as expressed in the
Act and will be governed by the final adjudication of such issue.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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/ William E. Greehey
(William E. Greehey)
Chairman of the Board and
Chief Executive Officer
Date: February 26, 1998
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below hereby constitutes and appoints William E. Greehey, Edward
C. Benninger and Jay D. Browning, or any of them, each with power to act
without the other, his true and lawful attorney-in-fact and agent, with
full power of substitution and resubstitution, for him and in his name,
place and stead, in any and all capacities, to sign any or all subsequent
amendments and supplements to this Annual Report on Form 10-K, and to
file the same, or cause to be filed the same, with all exhibits thereto,
and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto each said attorney-in-fact and agent
full power to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully to all intents
and purposes as he might or could do in person, hereby qualifying and
confirming all that said attorney-in-fact and agent or his substitute
or substitutes may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates indicated.
Signature Title Date
Director, Chairman of the
Board and Chief Executive
Officer (Principal
/s/ William E. Greehey Executive Officer) February 26, 1998
(William E. Greehey)
Chief Financial Officer
(Principal Financial and
/s/ John D. Gibbons Accounting Officer) February 26, 1998
(John D. Gibbons)
/s/ Edward C. Benninger Director and President February 26, 1998
(Edward C. Benninger)
/s/ Ronald K. Calgaard Director February 26, 1998
(Ronald K. Calgaard)
/s/ Robert G. Dettmer Director February 26, 1998
(Robert G. Dettmer)
/s/ Ruben M. Escobedo Director February 26, 1998
(Ruben M. Escobedo)
/s/ James L. Johnson Director February 26, 1998
(James L. Johnson)
/s/ Lowell H. Lebermann Director February 26, 1998
(Lowell H. Lebermann)
/s/ Susan Kaufman Purcell Director February 26, 1998
(Susan Kaufman Purcell)
CONFORMED COPY
$835,000,000
AMENDED AND RESTATED
CREDIT AGREEMENT
dated as of
November 28, 1997
among
Valero Energy Corporation,
The Banks Listed Herein,
Morgan Guaranty Trust Company of New York,
as Administrative Agent,
and
Bank of Montreal,
as Syndication Agent and Issuing Bank
<PAGE>
TABLE OF CONTENTS
Page
ARTICLE 1
Definitions
Section 1.01. Definitions . . . . . . . . . . . . . . . . . . .1
Section 1.02. Accounting Terms and Determinations . . . . . . 15
Section 1.03. Types of Borrowings . . . . . . . . . . . . . . 15
Section 1.04. Other Definitional Provisions . . . . . . . . . 16
Section 2.01. Commitments to Lend . . . . . . . . . . . . . . 16
Section 2.02. Notice of Committed Borrowing . . . . . . . . . 17
Section 2.03. Money Market Borrowings . . . . . . . . . . . . 17
Section 2.04. Notice to Banks; Funding of Loans . . . . . . . 21
Section 2.05. Notes . . . . . . . . . . . . . . . . . . . . . 22
Section 2.06. Maturity of Loans . . . . . . . . . . . . . . . 23
Section 2.07. Interest Rates. . . . . . . . . . . . . . . . . 23
Section 2.09. Optional Termination or Reduction of
Commitments . . . . . . . . . . . . . . . . . 26
Section 2.10. Scheduled Termination of Commitments. . . . . . 26
Section 2.11. Optional Prepayments. . . . . . . . . . . . . . 26
Section 2.14. Computation of Interest and Fees. . . . . . . . 28
ARTICLE 3
Letters of Credit
Section 3.01. Letter of Credit Commitment . . . . . . . . . . 28
Section 3.02. Letter of Credit Requests . . . . . . . . . . . 29
Section 3.04. Agreement to Repay Letter of Credit Drawings. . 30
Section 3.05. Indemnity . . . . . . . . . . . . . . . . . . . 32
ARTICLE 4
Conditions
Section 4.01. Effectiveness . . . . . . . . . . . . . . . . . 32
Section 4.02. Borrowings. . . . . . . . . . . . . . . . . . . 34
ARTICLE 5
Representations and Warranties
Section 5.02. Corporate and Governmental Authorization;
No Contravention . . . . . . . . . . . . . . 35
Section 5.03. Binding Effect. . . . . . . . . . . . . . . . . 35
Section 5.04. Financial Information . . . . . . . . . . . . . 35
Section 5.05. Litigation. . . . . . . . . . . . . . . . . . . 36
Section 5.06. Compliance with ERISA . . . . . . . . . . . . . 36
Section 5.07. Environmental Matters . . . . . . . . . . . . . 37
Section 5.08. Taxes . . . . . . . . . . . . . . . . . . . . . 37
Section 5.09. Subsidiaries. . . . . . . . . . . . . . . . . . 37
Section 5.10. Not an Investment Company . . . . . . . . . . . 38
Section 5.11. Full Disclosure . . . . . . . . . . . . . . . . 38
Section 5.12. Representations in Subsidiary Guarantee
Agreement . . . . . . . . . . . . . . . . . . 38
ARTICLE 6
Covenants
Section 6.01. Information . . . . . . . . . . . . . . . . . . 38
Section 6.02. Payment of Obligations. . . . . . . . . . . . . 40
Section 6.03. Maintenance of Property; Insurance. . . . . . . 40
Section 6.04. Conduct of Business and Maintenance of
Existence . . . . . . . . . . . . . . . . . . 41
Section 6.05. Compliance with Laws. . . . . . . . . . . . . . 41
Section 6.06. Inspection of Property, Books and Records . . . 41
Section 6.07. Fixed Charge Coverage . . . . . . . . . . . . . 41
Section 6.08. Debt. . . . . . . . . . . . . . . . . . . . . . 42
Section 6.09. Minimum Consolidated Net Worth. . . . . . . . . 42
Section 6.10. Negative Pledge-Liens . . . . . . . . . . . . . 43
Section 6.11. Subsidiary Debt . . . . . . . . . . . . . . . . 45
Section 6.12. Guarantors. . . . . . . . . . . . . . . . . . . 45
Section 6.13. Consolidations, Mergers and Transfers of Assets 46
Section 6.14. Use of Proceeds . . . . . . . . . . . . . . . . 47
Section 6.15. Restriction on Other Agreements . . . . . . . . 47
ARTICLE 7
Defaults
Section 7.01. Events of Default . . . . . . . . . . . . . . . 47
Section 7.02. Cash Cover. . . . . . . . . . . . . . . . . . . 49
Section 7.03. Notice of Default . . . . . . . . . . . . . . . 50
ARTICLE 8
The Administrative Agent
Section 8.01. Appointment and Authorization . . . . . . . . . 50
Section 8.02. Administrative Agent and Agent. . . . . . . . . 50
Section 8.03. Action by Administrative Agent. . . . . . . . . 50
Section 8.04. Consultation with Experts . . . . . . . . . . . 50
Section 8.05. Liability of Administrative Agent . . . . . . . 51
Section 8.06. Indemnification . . . . . . . . . . . . . . . . 51
Section 8.07. Credit Decision . . . . . . . . . . . . . . . . 51
Section 8.08. Successor Administrative Agent. . . . . . . . . 52
Section 8.09. Administrative Agent's Fee. . . . . . . . . . . 52
Section 8.10. Syndication Agent . . . . . . . . . . . . . . . 52
ARTICLE 9
Change in Circumstances
Section 9.01. Basis for Determining Interest Rate
Inadequate or Unfair. . . . . . . . . . . . . 52
Section 9.02. Illegality. . . . . . . . . . . . . . . . . . . 53
Section 9.03. Increased Cost and Reduced Return . . . . . . . 54
Section 9.04. Taxes . . . . . . . . . . . . . . . . . . . . . 55
Section 9.05. Base Rate Loans Substituted for Affected
Fixed Rate Loans. . . . . . . . . . . . . . . 57
Section 9.06. Borrower's Right to Replace Banks . . . . . . . 58
ARTICLE 10
Miscellaneous
Section 10.01. Notices. . . . . . . . . . . . . . . . . . . . 58
Section 10.02. No Waivers . . . . . . . . . . . . . . . . . . 59
Section 10.03. Expenses; Indemnification. . . . . . . . . . . 59
Section 10.04. Sharing of Set-Offs. . . . . . . . . . . . . . 60
Section 10.05. Amendments and Waivers . . . . . . . . . . . . 60
Section 10.06. Successors and Assigns . . . . . . . . . . . . 61
Section 10.07. Collateral . . . . . . . . . . . . . . . . . . 62
Section 10.08. Governing Law; Submission to Jurisdiction. . . 62
Section 10.09. Counterparts; Integration. . . . . . . . . . . 63
Section 10.10. WAIVER OF JURY TRIAL . . . . . . . . . . . . . 63
Schedule I - Pricing Schedule
Schedule II - Commitment Schedule
Exhibit A - Note
Exhibit B - Money Market Quote Request
Exhibit C - Invitation for Money Market Quotes
Exhibit D - Money Market Quote
Exhibit E - Opinion of Counsel for the Borrower
Exhibit F - Opinion of Special Counsel for the Administrative Agent
Exhibit G - Assignment and Assumption Agreement
Exhibit H - Notice of Borrowing
Exhibit I - Subsidiary Guarantee Agreement
Exhibit J - Form of Guarantor Counsel Opinion
<PAGE>
AMENDED AND RESTATED CREDIT AGREEMENT
AGREEMENT dated as of November 28, 1997, among VALERO ENERGY
CORPORATION, the BANKS listed on the signature pages hereof, MORGAN
GUARANTY TRUST COMPANY OF NEW YORK, as Administrative Agent, and BANK
OF MONTREAL, as Syndication Agent and Issuing Bank.
W I T N E S S E T H:
WHEREAS, the Borrower, the banks referred to therein, Morgan Guaranty
Trust Company of New York, as administrative agent for such banks and Bank
of Montreal as syndication agent and issuing bank, are parties to a Credit
Agreement dated as of May 1, 1997 (the "Existing Credit Agreement");
WHEREAS, the parties thereto desire to amend and restate the Existing
Credit Agreement as provided in this Agreement and, upon satisfaction of
the conditions specified in Section 4.01, said Credit Agreement will be so
amended and restated;
NOW, THEREFORE, the parties hereto hereby agree as follows:
ARTICLE I
Definitions
Section 1.01. Definitions. The following terms, as used herein,
have the following meanings:
"Absolute Rate Auction" means a solicitation of Money Market Quotes
setting forth Money Market Absolute Rates pursuant to Section 2.03.
"Additional IDB" means up to $25,000,000 aggregate principal amount of
industrial development bonds to be issued for the account of the Borrower or a
Subsidiary and supported by a Letter of Credit to be issued under this
Agreement.
"Adjusted London Interbank Offered Rate" has the meaning set forth in
Section 2.07(b).
"Administrative Agent" means Morgan Guaranty in its capacity as
administrative agent and documentation agent for the Banks under the Financing
Documents, and its successors in such capacity.
"Administrative Questionnaire" means, with respect to each Bank, an
administrative questionnaire in the form prepared by the Administrative Agent
and submitted to the Administrative Agent (with a copy to the Borrower) duly
completed by such Bank.
"Agreement" means the Existing Credit Agreement as amended and restated
by this Amended Agreement and as the same may be further amended or restated
from time to time in accordance with the terms hereof.
"Amended Agreement" means this Amended and Restated Credit Agreement
dated as of November 28, 1997 among the Borrower, the Banks, the
Administrative Agent and BMO as Syndication Agent and Issuing Bank.
"Applicable Lending Office" means, with respect to any Bank, (i) in the
case of its Base Rate Loans, its Domestic Lending Office, (ii) in the case of
its Euro-Dollar Loans, its Euro-Dollar Lending Office and (iii) in the case of
its Money Market Loans, its Money Market Lending Office.
"Assignee" has the meaning set forth in Section 10.06(c).
"Bank" means each bank listed on the signature pages hereof, each
Assignee which becomes a Bank pursuant to Section 10.06(c), and their
respective successors.
"Base Rate" means, for any day, a rate per annum equal to the higher of
(i) the Prime Rate for such day and (ii) the sum of 1/2 of 1% plus the Federal
Funds Rate for such day.
"Base Rate Loan" means a Committed Loan to be made by a Bank as a Base
Rate Loan in accordance with the applicable Notice of Borrowing or pursuant to
Article 9.
"Benefit Arrangement" means at any time an employee benefit plan within
the meaning of Section 3(3) of ERISA which is not a Plan or a Multi-employer
Plan and which is maintained or otherwise contributed to by any member of the
ERISA Group.
"BMO" means Bank of Montreal.
"Bond Letters of Credit" means (i) the letter of credit issued by BMO and
outstanding under the Existing Credit Agreement supporting payment of up to
$98,500,000 principal amount of Industrial Development Corporation of Port of
Corpus Christi Revenue Refunding Bonds (Valero Refining and Marketing Company
Project) and specified amounts of accrued interest thereon and (ii) the letter
of credit issued by BMO and outstanding under the Existing Credit Agreement
supporting payment of up to $25,000,000 principal amount of Gulf Coast
Industrial Development Authority Waste Disposal Revenue Bonds (Valero Refining
and Marketing Company Project) and specified amounts of accrued interest
thereon. The amount available under each Bond Letter of Credit shall include,
for all purposes of this Agreement, any amounts not currently available
thereunder but subject to reinstatement in accordance with the terms thereof.
"Borrower" means Valero Energy Corporation, a Delaware corporation.
"Borrowing" has the meaning set forth in Section 1.03.
"Commitment" means, with respect to each Bank, the amount set forth
opposite the name of such Bank on the Commitment Schedule, as such amount may
be reduced from time to time pursuant to Section 2.09 or 2.10 or increased or
reduced from time to time pursuant to Section 10.06(c), or the obligation of
such Bank to make Committed Loans and to participate in Letters of Credit
hereunder in an aggregate amount at any time outstanding not to exceed such
amount, as the context may require.
"Commitment Schedule" means the Schedule attached hereto and identified
as such.
"Committed Borrowings" has the meaning given such term in Section 1.03.
"Committed Loan" means a loan made by a Bank pursuant to Section 2.01.
"Consolidated Debt" means for any Person at any date the Debt of such
Person and its Consolidated Subsidiaries as of such date, determined on a
consolidated basis in accordance with generally accepted accounting
principles.
"Consolidated Net Income" means, for any Person for any period, the net
income of such Person and its Consolidated Subsidiaries for such period
determined on a consolidated basis in accordance with generally accepted
accounting principles.
"Consolidated Net Income Applicable to Common Stock" means, for any
Person for any period, the net income to common shareholders of such Person
and its Consolidated Subsidiaries for such period determined on a consolidated
basis in accordance with generally accepted accounting principles.
"Consolidated Net Worth" means for any Person at any date the Net Worth
of such Person and its Consolidated Subsidiaries as of such date determined on
a consolidated basis in accordance with generally accepted accounting
principles.
"Consolidated Subsidiary" means for any Person at any date any Subsidiary
or other entity the accounts of which would be consolidated with those of such
Person in its consolidated financial statements if such statements were
prepared as of such date.
"Consolidated Total Assets" means for any Person at any date the total
assets of such Person and its Consolidated Subsidiaries, determined on a
consolidated basis as of such date in accordance with generally accepted
accounting principles.
"Debt" of any Person means at any date, without duplication, (i) all
items of indebtedness or liability which, in accordance with generally
accepted accounting principles, would be included in determining total
liabilities as shown on the liability side of a balance sheet at the date as
of which indebtedness is to be determined, but excluding Net Worth, preferred
stock, deferred credits, deferred taxes, accounts payable (not more than 120
days past due), accrued expenses and taxes payable, (ii) all obligations under
leases which, in accordance with generally accepted accounting principles,
would at such time (and assuming that the Person was not a regulated
enterprise) be required to be capitalized on a balance sheet of such Person,
(iii) all non-contingent obligations (and, solely for purposes of Sections
6.10 and the definitions of Material Debt and Material Financial Obligations,
all contingent obligations) of such Person to reimburse any bank or other
Person in respect of amounts paid under a letter of credit or similar
instrument, (iv) all indebtedness, liabilities or obligations of others of the
type described in clause (i), (ii) or (iii) that are Guaranteed by such Person
and (v) all indebtedness, liabilities or obligations of others of the type
described in clause (i), (ii), (iii) or (iv) that are secured by any Lien upon
the properties or assets of such Person, provided that the amount of any Debt
of such Person which constitutes Debt of such Person solely by reason of this
clause (v) shall not for purposes of this Agreement exceed the greater of the
book value or the fair market value of the properties or assets subject to
such Lien.
"Default" means any condition or event which constitutes an Event of
Default or which with the giving of notice or lapse of time or both would,
unless cured or waived, become an Event of Default.
"Deferred Turnaround and Catalyst Cost" means, for any period, the amount
of capital expenditures of the Borrower and its Consolidated Subsidiaries
during such period in respect of scheduled or periodic maintenance of
refineries where such scheduled or periodic maintenance requires the shutdown
of a refinery for a period in excess of 14 days; provided that Deferred
Turnaround and Catalyst Cost shall not for purposes of calculations of
compliance under Section 6.07 exceed $40,000,000 for any period of four
consecutive fiscal quarters.
"Derivatives Obligations" of any Person means all obligations of such
Person in respect of any rate swap transaction, basis swap, forward rate
transaction, commodity swap, commodity option, equity or equity index swap,
equity or equity index option, bond option, interest rate option, foreign
exchange transaction, cap transaction, floor transaction, collar transaction,
currency swap transaction, cross-currency rate swap transaction, currency
option or any other similar transaction (including any option with respect to
any of the foregoing transactions) or any combination of the foregoing
transactions.
"Domestic Business Day" means any day except a Saturday, Sunday or other
day on which commercial banks in New York City are authorized by law to close.
"Domestic Lending Office" means, as to each Bank, its office located at
its address set forth in its Administrative Questionnaire (or identified in
its Administrative Questionnaire as its Domestic Lending Office) or such other
office as such Bank may hereafter designate as its Domestic Lending Office by
notice to the Borrower and the Administrative Agent.
"Effective Date" means the date this Amended Agreement becomes effective
in accordance with Section 4.01.
"Environmental Laws" means any and all federal, state, local and foreign
statutes, laws, judicial decisions, regulations, ordinances, rules, judgments,
orders, decrees, plans, injunctions, permits, concessions, grants, franchises,
licenses, agreements and other governmental restrictions relating to the
environment, the effect of the environment on human health or to emissions,
discharges or releases of pollutants, contaminants, Hazardous Substances or
wastes into the environment including, without limitation, ambient air,
surface water, ground water, or land, or otherwise relating to the
manufacture, processing, distribution, use, treatment, storage, disposal,
transport or handling of pollutants, contaminants, Hazardous Substances or
wastes or the clean-up or other remediation thereof.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended, or any successor statute.
"ERISA Group" means the Borrower, any Subsidiary and all members of a
controlled group of corporations and all trades or businesses (whether or not
incorporated) under common control which, together with the Borrower or any
Subsidiary, are treated as a single employer under Section 414 of the Internal
Revenue Code.
"Euro-Dollar Business Day" means any Domestic Business Day on which
commercial banks are open for international business (including dealings in
dollar deposits) in London.
"Euro-Dollar Lending Office" means, as to each Bank, its office, branch
or affiliate located at its address set forth in its Administrative
Questionnaire (or identified in its Administrative Questionnaire as its
Euro-Dollar Lending Office) or such other office, branch or affiliate of such
Bank as it may hereafter designate as its Euro-Dollar Lending Office by notice
to the Borrower and the Administrative Agent.
"Euro-Dollar Loan" means a Committed Loan to be made by a Bank as a
Euro-Dollar Loan in accordance with the applicable Notice of Committed
Borrowing.
"Euro-Dollar Margin" has the meaning set forth in Section 2.07(c).
"Euro-Dollar Reserve Percentage" has the meaning set forth in Section
2.07(c).
"Event of Default" has the meaning set forth in Section 7.01.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Existing Credit Agreement" has the meaning set forth in the recitals
hereto.
"Existing Letter of Credit" means each Letter of Credit outstanding under
the Existing Credit Agreement on the Effective Date, including the Bond
Letters of Credit.
"Federal Funds Rate" means, for any day, the rate per annum (rounded
upward, if necessary, to the nearest 1/100th of 1%) equal to the weighted
average of the rates on overnight Federal funds transactions with members of
the Federal Reserve System arranged by Federal funds brokers on such day, as
published by the Federal Reserve Bank of New York on the Domestic Business Day
next succeeding such day, provided that (i) if such day is not a Domestic
Business Day, the Federal Funds Rate for such day shall be such rate on such
transactions on the next preceding Domestic Business Day as so published on
the next succeeding Domestic Business Day, and (ii) if no such rate is so
published on such next succeeding Domestic Business Day, the Federal Funds
Rate for such day shall be the average rate quoted to Morgan Guaranty on such
day on such transactions as determined by the Administrative Agent.
"Fee Letters" means the letter agreements entered into from time to time
by the Borrower and Morgan Guaranty and/or BMO establishing fees payable by
the Borrower.
"Financial Letter of Credit" means the Bond Letters of Credit and any
other Letter of Credit which is not a Performance Letter of Credit.
"Financial Officer" means the chief financial officer, vice
president-finance or other financial vice president, controller, treasurer or
assistant treasurer of the Borrower.
"Financing Documents" means this Agreement, the Notes and each Subsidiary
Guarantee Agreement.
"Fixed Rate Borrowing" has the meaning set forth in Section 1.03.
"Fixed Rate Loans" means Euro-Dollar Loans or Money Market Loans
(excluding Money Market LIBOR Loans bearing interest at the Base Rate pursuant
to Section 9.01) or any combination of the foregoing.
"Guarantee" by any Person means any obligation, contingent or otherwise,
of such Person directly or indirectly guaranteeing any Debt of any other
Person and, without limiting the generality of the foregoing, any obligation,
direct or indirect, contingent or otherwise, of such Person (i) to purchase or
pay (or advance or supply funds for the purchase or payment of) such Debt
(whether arising by virtue of partnership arrangements, by agreement to
keep-well, to purchase assets, goods, securities or services, to take-or-pay,
or to maintain financial statement conditions or otherwise) or (ii) entered
into for the purpose of assuring in any other manner the holder of such Debt
of the payment thereof or to protect such holder against loss in respect
thereof (in whole or in part), provided that the term Guarantee shall not
include endorsements for collection or deposit in the ordinary course of
business. The term "Guarantee" used as a verb has a corresponding meaning.
"Guarantor" means, at any time, a Subsidiary which at or prior to such
time shall have delivered to the Administrative Agent (i) a Subsidiary
Guarantee Agreement in substantially the form of Exhibit I, duly executed by
such Subsidiary, which Subsidiary Guarantee Agreement has not been terminated
in accordance with its terms, (ii) an opinion of counsel for such Subsidiary
(which counsel may be an employee of the Borrower or such Subsidiary)
reasonably satisfactory to the Administrative Agent with respect to such
Subsidiary Guarantee Agreement, substantially in the form of Exhibit J hereto
and covering such additional matters relating to such Subsidiary Guarantee
Agreement as the Required Banks may reasonably request and (iii) all documents
the Administrative Agent may reasonably request relating to the existence of
such Subsidiary, the corporate authority for and the validity of such
Subsidiary Guarantee Agreement, and any other matters reasonably determined by
the Administrative Agent to be relevant thereto, all in form and substance
reasonably satisfactory to the Administrative Agent.
"Hazardous Substances" means any toxic, radioactive, caustic or otherwise
hazardous substance, including petroleum, its derivatives, by-products and
other hydrocarbons, or any substance having any constituent elements
displaying any of the foregoing characteristics.
"Indemnitee" has the meaning set forth in Section 10.03(b).
"Interest Period" means: (1) with respect to each Euro-Dollar Borrowing,
the period commencing on the date of such Borrowing and ending one, two, three
or six months thereafter, as the Borrower may elect in the applicable Notice
of Borrowing; provided that:
(a) any Interest Period which would otherwise end on a day which is
not a Euro-Dollar Business Day shall, subject to clause (c) below, be extended
to the next succeeding Euro-Dollar Business Day unless such Euro-Dollar
Business Day falls in another calendar month, in which case such Interest
Period shall end on the next preceding Euro-Dollar Business Day;
(b) any Interest Period which begins on the last Euro-Dollar
Business Day of a calendar month (or on a day for which there is no
numerically corresponding day in the calendar month at the end of such
Interest Period) shall, subject to clause (c) below, end on the last
Euro-Dollar Business Day of a calendar month; and
(c) any interest Period which would otherwise end after the
Termination Date shall end on the Termination Date.
(2) with respect to each Base Rate Borrowing, the period commencing on
the date of such Borrowing and ending on the Termination Date;
(3) with respect to each Money Market LIBOR Borrowing, the period
commencing on the date of such Borrowing and ending such whole number of
months thereafter as the Borrower may elect in accordance with Section 2.03;
provided that:
(a) any Interest Period which would otherwise end on a day which is
not a Euro-Dollar Business Day shall, subject to clause (c) below, be extended
to the next succeeding Euro-Dollar Business Day unless such Euro-Dollar
Business Day falls in another calendar month, in which case such Interest
Period shall end on the next preceding Euro-Dollar Business Day;
(b) any Interest Period which begins on the last Euro-Dollar
Business Day of a calendar month (or on a day for which there is no
numerically corresponding day in the calendar month at the end of such
Interest Period) shall, subject to clause (c) below, end on the last
Euro-Dollar Business Day of a calendar month; and
(c) any interest Period which would otherwise end after the
Termination Date shall end on the Termination Date.
(4) with respect to each Money Market Absolute Rate Borrowing, the
period commencing on the date of such Borrowing and ending such number of days
thereafter (but not less than 7 days) as the Borrower may elect in accordance
with Section 2.03; provided that:
(a) any Interest Period which would otherwise end on a day which is
not a Euro-Dollar Business Day shall, subject to clause (b) below, be extended
to the next succeeding Euro-Dollar Business Day; and
(b) any interest Period which would otherwise end after the
Termination Date shall end on the Termination Date.
"Internal Revenue Code" means the Internal Revenue Code of 1986, as
amended, or any successor statute.
"Investment Grade Rating" means a rating of senior long-term unsecured
debt securities of the Borrower without any third-party credit enhancement of
(i) BBB- or higher by S&P or (ii) Baa3 or higher by Moody's.
"Issuing Bank" means BMO.
"Letters of Credit" has the meaning set forth in Section 3.01.
"Letter of Credit Outstandings" means, at any time, the sum (without
duplication) of the aggregate Stated Amount of all outstanding Letters of
Credit and the aggregate amount of all Unpaid Drawings in respect of Letters
of Credit.
"Letter of Credit Termination Date" means the date falling ten days prior
to the Termination Date.
"LIBOR Auction" means a solicitation of Money Market Quotes setting forth
Money Market Margins based on the London Interbank Offered Rate pursuant to
Section 2.03.
"Lien" means, with respect to any asset, any mortgage, lien, pledge,
charge, security interest or encumbrance of any kind, or any other type of
preferential arrangement that has the practical effect of creating a security
interest, in respect of such asset. For the purposes of this Agreement, the
Borrower or any Subsidiary shall be deemed to own subject to a Lien any asset
which it has acquired or holds subject to the interest of a vendor or lessor
under any conditional sale agreement, capital lease or other title retention
agreement relating to such asset.
"Loan" means a Base Rate Loan or a Euro-Dollar Loan or a Money Market
Loan and "Loans" means Base Rate Loans or Euro-Dollar Loans or Money Market
Loans or any combination of the foregoing.
"London Interbank Offered Rate" has the meaning set forth in Section
2.07(c).
"Material Debt" means Debt (other than the Notes) of the Borrower and/or
one or more of its Subsidiaries, arising in one or more related or unrelated
transactions, in an aggregate principal or face amount exceeding $25,000,000.
"Material Financial Obligations" means a principal or face amount of Debt
and/or payment obligations in respect of Derivatives Obligations of the
Borrower and/or one or more of its Subsidiaries, arising in one or more
related or unrelated transactions, exceeding in the aggregate $25,000,000.
"Material Plan" means at any time a Plan or Plans having aggregate
Unfunded Liabilities in excess of $25,000,000.
"Material Subsidiary" means Valero Refining Company, Valero Marketing and
Supply Company, Valero Refining Company-Texas and Valero Refining
Company-Louisiana and (ii) each other Subsidiary of the Borrower that would be
a "significant subsidiary" as such term is defined in Regulation S-X
promulgated pursuant to the Securities Exchange Act of 1934, as amended to the
date hereof, and their respective successors.
"Moody's" means Moody's Investors Service, Inc.
"Money Market Absolute Rate" has the meaning set forth in Section
2.03(d).
"Money Market Absolute Rate Loan" means a loan to be made by a Bank
pursuant to an Absolute Rate Auction.
"Money Market Lending Office" means, as to each Bank, its Domestic
Lending Office or such other office, branch or affiliate of such Bank as it
may hereafter designate as its Money Market Lending Office by notice to the
Borrower and the Administrative Agent; provided that any Bank may from time to
time by notice to the Borrower and the Administrative Agent designate separate
Money Market Lending Offices for its Money Market LIBOR Loans, on the one
hand, and its Money Market Absolute Rate Loans, on the other hand, in which
case all references herein to the Money Market Lending Office of such Bank
shall be deemed to refer to either or both of such offices, as the context may
require.
"Money Market LIBOR Loan" means a loan to be made by a Bank pursuant to a
LIBOR Auction (including such a loan bearing interest at the Base Rate
pursuant to Section 9.01).
"Money Market Loan" means a Money Market LIBOR Loan or a Money Market
Absolute Rate Loan.
"Money Market Margin" has the meaning set forth in Section 2.03(d).
"Money Market Quote" means an offer by a Bank to make a Money Market Loan
in accordance with Section 2.03.
"Morgan Guaranty" means Morgan Guaranty Trust Company of New York.
"Multiemployer Plan" means at any time an employee pension benefit plan
within the meaning of Section 4001(a)(3) of ERISA to which any member of the
ERISA Group is then making or accruing an obligation to make contributions or
has within the preceding five plan years made contributions, including for
these purposes any Person which ceased to be a member of the ERISA Group
during such five year period.
"Net Worth" of a Person means at any time the sum of its capital stock,
additional paid in capital, retained earnings, and any other account which, in
accordance with generally accepted accounting principles, constitutes
stockholders' equity, less treasury stock; provided that "Net Worth" shall not
include the liquidation value of any preferred stock classified as redeemable
preferred stock in accordance with generally accepted accounting principles.
"Notes" means promissory notes of the Borrower, substantially in the form
of Exhibit A hereto, evidencing the obligation of the Borrower to repay the
Loans, and "Note" means any one of such promissory notes issued hereunder.
"Notice of Borrowing" means a notice of borrowing in substantially the
form of Exhibit H.
"Parent" means, with respect to any Bank, any Person controlling such
Bank.
"Participant" has the meaning set forth in Section 10.06(b).
"PBGC" means the Pension Benefit Guaranty Corporation or any entity
succeeding to any or all of its functions under ERISA.
"Percentage Participation" means, for each Bank, the percentage obtained
by dividing the amount of such Bank's Commitment by the aggregate amount of
the Commitments.
"Performance Letter of Credit" means a Letter of Credit to back
performance of non-financial or commercial contracts or undertakings of the
Borrower and its Subsidiaries of the type which qualifies for a 50% conversion
factor for purposes of risk-based capital adequacy regulations applicable to
the Banks.
"Person" means an individual, a corporation, a partnership, an
association, a trust or any other entity or organization, including a
government or political subdivision or an agency or instrumentality thereof.
"Plan" means at any time an employee pension benefit plan (other than a
Multi-employer Plan) which is covered by Title IV of ERISA or subject to the
minimum funding standards under Section 412 of the Internal Revenue Code and
either (i) is maintained, or contributed to, by any member of the ERISA Group
for employees of any member of the ERISA Group or (ii) has at any time within
the preceding five years been maintained, or contributed to, by any Person
which was at such time a member of the ERISA Group for employees of any Person
which was at such time a member of the ERISA Group.
"Pricing Schedule" means the Schedule attached hereto identified as such.
"Prime Rate" means the rate of interest publicly announced by Morgan
Guaranty in New York City from time to time as its Prime Rate.
"Reference Banks" means the principal London offices of BMO and Morgan
Guaranty.
"Refunding Borrowing" means a Committed Borrowing which, after
application of the proceeds thereof, results in no net increase in the
outstanding principal amount of Committed Loans made by any Bank.
"Regulation G" means Regulation G of the Board of Governors of the
Federal Reserve System, as in effect from time to time.
"Regulation U" means Regulation U of the Board of Governors of the
Federal Reserve System, as in effect from time to time.
"Required Banks" means at any time Banks having at least 51% of the
aggregate amount of the Commitments or, if the Commitments shall have been
terminated, holding at least 51% of the sum of the aggregate unpaid principal
amount of the Loans and the Letter of Credit Outstandings.
"Revolving Credit Period" means the period from and including the
Effective Date to but excluding the Termination Date.
"S&P" shall mean Standard & Poor's Ratings Services.
"Stated Amount" means, as to any Letter of Credit at any time, the
maximum amount then available to be drawn thereunder (without regard to
whether any conditions to drawing could then be met).
"Subsidiary" means, as to any Person, (i) any corporation more than 50%
of whose stock of any class or classes having by the terms thereof ordinary
voting power to elect a majority of the directors of such corporation
(irrespective of whether or not at the time stock of any class or classes of
such corporation shall have or might have voting power by reason of the
happening of any contingency) is at the time owned by such Person directly or
indirectly through one or more other Subsidiaries and (ii) any partnership,
association, joint venture or other entity in which such Person, directly or
indirectly through one or more other Subsidiaries, has a greater than 50%
equity interest at the time.
"Subsidiary Guarantee Agreement" means a Guarantee which may be entered
into by a Subsidiary substantially in the form of Exhibit I hereto.
"Syndication Agent" means BMO in its capacity as syndication agent
hereunder.
"Termination Date" means November 28, 2002, or, if such day is not a
Euro-Dollar Business Day, the next preceding Euro-Dollar Business Day.
"Unfunded Liabilities" means, with respect to any Plan at any time, the
amount (if any) by which (i) the value of all benefit liabilities under such
Plan, determined on a plan termination basis using the assumptions prescribed
by the PBGC for purposes of Section 4044 of ERISA, exceeds (ii) the fair
market value of all Plan assets allocable to such liabilities under Title IV
of ERISA (excluding any accrued but unpaid contributions), all determined as
of the then most recent valuation date for such Plan, but only to the extent
that such excess represents a potential liability of a member of the ERISA
Group to the PBGC or any other Person under Title IV of ERISA.
"United States" means the United States of America, including the States
and the District of Columbia, but excluding its territories and possessions.
"Unpaid Drawing" has the meaning set forth in Section 3.04(a).
"Valero S-1" means the Registration Statement on Form S-1 filed by the
Borrower with the Securities and Exchange Commission on May 13, 1997 pursuant
to the Securities Act of 1933, as amended.
"Valero 10-Q" means the Borrower's quarterly report on Form 10-Q for the
fiscal period ended September 30, 1997, as filed with the Securities and
Exchange Commission pursuant to the Exchange Act.
"Wholly-Owned Consolidated Subsidiary" means, as to any Person, any
Consolidated Subsidiary all of the shares of capital stock or other ownership
interests of which (except directors' qualifying shares) are at the time
directly or indirectly owned by such Person.
Section 1.02. Accounting Terms and Determinations. Unless otherwise
specified herein, all accounting terms used herein shall be interpreted, all
accounting determinations hereunder shall be made, and all financial
statements required to be delivered hereunder shall be prepared in accordance
with generally accepted accounting principles as in effect from time to time,
applied on a basis consistent (except for changes concurred in by the
Borrower's independent public accountants) with the most recent audited
consolidated financial statements of the Borrower and its Consolidated
Subsidiaries delivered to the Banks; provided that, if the Borrower notifies
the Administrative Agent that the Borrower wishes to amend any covenant in
Article 6 to eliminate the effect of any change in generally accepted
accounting principles on the operation of such covenant (or if the
Administrative Agent notifies the Borrower that the Required Banks wish to
amend Article 6 for such purpose), then the Borrower's compliance with such
covenant shall be determined on the basis of generally accepted accounting
principles in effect immediately before the relevant change in generally
accepted accounting principles became effective, until either such notice is
withdrawn or such covenant is amended in a manner satisfactory to the Borrower
and the Required Banks.
Section 1.03. Types of Borrowings. The term "Borrowing" denotes the
aggregation of Loans of one or more Banks to be made to the Borrower pursuant
to Article 2 on a single date and for a single Interest Period. Borrowings
are classified for purposes of this Agreement either by reference to the
pricing of Loans comprising such Borrowing (e.g., a "Euro-Dollar Borrowing" is
a Borrowing comprised of Euro-Dollar Loans and a "Fixed Rate Borrowing" is a
Borrowing comprised of Fixed Rate Loans) or by reference to the provisions of
Article 2 under which participation therein is determined (i.e., a "Committed
Borrowing" is a Borrowing under Section 2.01 in which all Banks participate in
proportion to their Commitments, while a "Money Market Borrowing" is a
Borrowing under Section 2.03 in which the Bank participants are determined on
the basis of their bids in accordance therewith).
Section 1.04. Other Definitional Provisions. References in this
Agreement to "Articles", "Sections", "Schedules" or "Exhibits" shall be to
Articles, Sections, Schedules or Exhibits of or to this Agreement unless
otherwise specifically provided. Any of the terms defined in Section 1.01
may, unless the context otherwise requires, be used in the singular or plural
depending on the reference. "Include" or "includes" and "including" shall be
deemed to be followed by "without limitation" whether or not they are in fact
followed by such words or words of like import. "Writing", "written" and
comparable terms refer to printing, typing and other means of reproducing
words in a visible form. References to any agreement or contract are to such
agreement or contract as amended, modified or supplemented from time to time
in accordance with the terms hereof and thereof. Reference to any Person
include the successors and permitted assigns of such Person. References
"from" or "through" any date mean, unless otherwise specified, "from and
including" or "through and including", respectively.
ARTICLE 2
The Credits
Section 2.01. Commitments to Lend. During the Revolving Credit Period
each Bank severally agrees, on the terms and conditions set forth in this
Agreement, to make loans to the Borrower pursuant to this Section from time to
time in amounts requested by the Borrower, provided that the sum of the
aggregate principal amount of Committed Loans by such Bank at any one time
outstanding and such Bank's ratable share of the Letter of Credit Outstandings
at such time shall not exceed the amount of its Commitment. Each Borrowing
under this Section shall be in an aggregate principal amount of $1,000,000 or
any larger multiple of $1,000,000 (except that any such Borrowing may be in
the aggregate amount available in accordance with Section 4.02(b)) and shall
be made from the several Banks ratably in proportion to their respective
Commitments. Within the foregoing limits, the Borrower may borrow under this
Section, repay, or to the extent permitted by Section 2.11, prepay Loans, and
re-borrow at any time during the Revolving Credit Period under this Section.
Section 2.02. Notice of Committed Borrowing. The Borrower shall give
the Administrative Agent a Notice of Borrowing not later than 12:30 P.M. (New
York City time) on (x) the date of each Base Rate Borrowing and (y) the third
Euro-Dollar Business Day before each Euro-Dollar Borrowing, specifying:
(a) the date of such Borrowing, which shall be a Domestic Business Day
in the case of a Base Rate Borrowing or a Euro-Dollar Business Day in the case
of a Euro-Dollar Borrowing;
(b) the aggregate amount of such Borrowing;
(c) whether the Loans comprising such Borrowing are to be Base Rate
Loans or Euro-Dollar Loans; and
(d) in the case of a Fixed Rate Borrowing, the duration of the Interest
Period applicable thereto, subject to the provisions of the definition of
Interest Period.
Section 2.03. Money Market Borrowings.
(a) The Money Market Option. In addition to Committed Borrowings
pursuant to Section 2.01, the Borrower may, as set forth in this Section,
request the Banks during the Revolving Credit Period to make offers to make
Money Market Loans to the Borrower. The Banks may, but shall have no
obligation to, make such offers and the Borrower may, but shall have no
obligation to, accept any such offers in the manner set forth in this Section.
(b) Money Market Quote Request. When the Borrower wishes to request
offers to make Money Market Loans under this Section, it shall transmit to the
Administrative Agent by telex or facsimile transmission a Money Market Quote
Request substantially in the form of Exhibit B hereto so as to be received no
later than 12:30 P.M. (New York City time) on (x) the fifth Euro-Dollar
Business Day prior to the date of Money Market Borrowing proposed therein, in
the case of a LIBOR Auction or (y) the Domestic Business Day next preceding
the date of Borrowing proposed therein, in the case of an Absolute Rate
Auction (or, in either case, such other time or date as the Borrower and the
Administrative Agent shall have mutually agreed and shall have notified to the
Banks not later than the date of the Money Market Quote Request for the first
LIBOR Auction or Absolute Rate Auction for which such change is to be
effective) specifying:
(i) the proposed date of Borrowing, which shall be a Euro-Dollar
Business Day in the case of a LIBOR Auction or a Domestic Business Day in the
case of an Absolute Rate Auction,
(ii) the aggregate amount of such Borrowing, which shall be
$1,000,000 or a larger multiple of $1,000,000,
(iii) the duration of the Interest Period applicable thereto,
subject to the provisions of the definition of Interest Period, and
(iv) whether the Money Market Quotes requested are to set forth a
Money Market Margin or a Money Market Absolute Rate.
The Borrower may request offers to make Money Market Loans for more than one
Interest Period in a single Money Market Quote Request.
(c) Invitation for Money Market Quotes. Promptly upon receipt of a
Money Market Quote Request, the Administrative Agent shall send to the Banks
by telex or facsimile transmission an Invitation for Money Market Quotes
substantially in the form of Exhibit C hereto, which shall constitute an
invitation by the Borrower to each Bank to submit Money Market Quotes offering
to make the Money Market Loans to which such Money Market Quote Request
relates in accordance with this Section.
(d) Submission and Contents of Money Market Quotes. (i) Each Bank may
submit a Money Market Quote containing an offer or offers to make Money Market
Loans in response to any Invitation for Money Market Quotes. Each Money
Market Quote must comply with the requirements of this subsection (d) and must
be submitted to the Administrative Agent by telex or facsimile transmission at
its offices specified in or pursuant to Section 9.01 not later than (x) 2:00
P.M. (New York City time) on the fourth Euro-Dollar Business Day prior to the
proposed date of Borrowing, in the case of a LIBOR Auction or (y) 11:30 A.M.
(New York City time) on the proposed date of Borrowing, in the case of an
Absolute Rate Auction (or, in either case, such other time or date as the
Borrower and the Administrative Agent shall have mutually agreed and shall
have notified to the Banks not later than the date of the Money Market Quote
Request for the first LIBOR Auction or Absolute Rate Auction for which such
change is to be effective); provided that Money Market Quotes submitted by the
Administrative Agent (or any affiliate of the Administrative Agent) in the
capacity of a Bank may be submitted, and may only be submitted, if the
Administrative Agent or such affiliate notifies the Borrower of the terms of
the offer or offers contained therein not later than (x) one hour prior to the
deadline for the other Banks, in the case of a LIBOR Auction or (y) 15 minutes
prior to the deadline for the other Banks, in the case of an Absolute Rate
Auction. Subject to Articles 4 and 7, any Money Market Quote so made shall be
irrevocable except with the written consent of the Administrative Agent given
on the instructions of the Borrower.
(ii) Each Money Market Quote shall be in substantially the form of
Exhibit D hereto and shall in any case specify:
(A) the proposed date of Borrowing;
(B) the principal amount of the Money Market Loan for which
each such offer is being made, which principal amount (w) may be greater than
or less than the Commitment of the quoting Bank, (x) must be $1,000,000 or a
larger multiple of $1,000,000, (y) may not exceed the principal amount of
Money Market Loans for which offers were requested and (z) may be subject to
an aggregate limitation as to the principal amount of Money Market Loans for
which offers being made by such quoting Bank may be accepted;
(C) in the case of a LIBOR Auction, the margin above or below
the applicable London Interbank Offered Rate (the "Money Market Margin")
offered for each such Money Market Loan, expressed as a percentage (specified
to the nearest 1/10,000th of 1%) to be added to or subtracted from such base
rate;
(D) in the case of an Absolute Rate Auction, the rate of
interest per annum (specified to the nearest 1/10,000th of 1%) (the "Money
Market Absolute Rate") offered for each such Money Market Loan; and
(E) the identity of the quoting Bank.
A Money Market Quote may set forth up to five separate offers by the quoting
Bank with respect to each Interest Period specified in the related Invitation
for Money Market Quotes.
(iii) Any Money Market Quote shall be disregarded if it:
(A) is not substantially in conformity with Exhibit D hereto
or does not specify all of the information required by subsection (d)(ii);
(B) contains qualifying, conditional or similar language;
(C) proposes terms other than or in addition to those set
forth in the applicable Invitation for Money Market Quotes; or
D) arrives after the time set forth in subsection (d)(i).
(e) Notice to Borrower.
(i) The Administrative Agent shall promptly notify the Borrower of
(A) the terms of any Money Market Quote submitted by a Bank that is in
accordance with subsection (d) and (B) of any Money Market Quote that amends,
modifies or is otherwise inconsistent with a previous Money Market Quote
submitted by such Bank with respect to the same Money Market Quote Request.
Any such subsequent Money Market Quote shall be disregarded by the
Administrative Agent unless such subsequent Money Market Quote is submitted
solely to correct a manifest error in such former Money Market Quote.
(ii) The Administrative Agent's notice to the Borrower shall specify
(A) the aggregate principal amount of Money Market Loans for which offers have
been received for each Interest Period specified in the related Money Market
Quote Request, (B) the respective principal amounts and Money Market Margins
or Money Market Absolute Rates, as the case may be, so offered and (C) if
applicable, limitations on the aggregate principal amount of Money Market
Loans for which offers in any single Money Market Quote may be accepted.
(f) Acceptance and Notice by Borrower. Not later than 12:30 P.M. (New
York City time) on (x) the third Euro-Dollar Business Day prior to the
proposed date of Borrowing, in the case of a LIBOR Auction or (y) the proposed
date of Borrowing, in the case of an Absolute Rate Auction (or, in either
case, such other time or date as the Borrower and the Administrative Agent
shall have mutually agreed and shall have notified to the Banks not later than
the date of the Money Market Quote Request for the first LIBOR Auction or
Absolute Rate Auction for which such change is to be effective), the Borrower
shall notify the Administrative Agent of its acceptance or non-acceptance of
the offers so notified to it pursuant to subsection (e). In the case of
acceptance, such notice shall be a Notice of Borrowing which shall specify the
aggregate principal amount of offers for each Interest Period that are
accepted. The Borrower may accept any Money Market Quote in whole or in part;
provided that:
(i) the aggregate principal amount of each Money Market Borrowing
may not exceed the applicable amount set forth in the related Money Market
Quote Request;
(ii) the principal amount of each Money Market Borrowing must be
$1,000,000 or a larger multiple of $1,000,000;
(iii) acceptance of offers may only be made on the basis of
ascending Money Market Margins or Money Market Absolute Rates, as the case may
be; and
(iv) the Borrower may not accept any offer that is described in
subsection (d)(iii) or that otherwise fails to comply with the requirements of
this Agreement.
(g) Allocation by Administrative Agent. If offers are made by two or
more Banks with the same Money Market Margins or Money Market Absolute Rates,
as the case may be, for a greater aggregate principal amount than the amount
in respect of which such offers are accepted for the related Interest Period,
the principal amount of Money Market Loans in respect of which such offers are
accepted shall be allocated by the Administrative Agent among such Banks as
nearly as possible (in multiples of $1,000,000, as the Administrative Agent
may deem appropriate) in proportion to the aggregate principal amounts of such
offers. Determinations by the Administrative Agent of the amounts of Money
Market Loans shall be conclusive in the absence of manifest error.
Section 2.04. Notice to Banks; Funding of Loans.
(a) Upon receipt of a Notice of Borrowing, the Administrative Agent
shall promptly notify each Bank of the contents thereof and of such Bank's
share (if any) of such Borrowing and such Notice of Borrowing shall not
thereafter be revocable by the Borrower.
(b) Not later than 2:00 P.M. (New York City time) on the date of each
Borrowing, each Bank participating therein shall (except as provided in
subsection (c) of this Section) make available its share of such Borrowing, in
Federal or other funds immediately available in New York City, to the
Administrative Agent at its address referred to in Section 10.01. Unless the
Administrative Agent determines that any applicable condition specified in
Article 4 has not been satisfied, the Administrative Agent will make the funds
so received from the Banks available tothe Borrower at the Administrative
Agent's aforesaid address.
(c) If any Bank makes a new Loan hereunder on a day on which the
Borrower is to repay all or any part of an outstanding Loan from such Bank,
such Bank shall apply the proceeds of its new Loan to make such repayment and
only an amount equal to the difference (if any) between the amount being
borrowed and the amount being repaid shall be made available by such Bank to
the Administrative Agent as provided in subsection (b), or remitted by the
Borrower to the Administrative Agent as provided in Section 2.12, as the case
may be.
(d) Unless the Administrative Agent shall have received notice from a
Bank prior to the date of any Borrowing that such Bank will not make available
to the Administrative Agent such Bank's share of such Borrowing, the
Administrative Agent may assume that such Bank has made such share available
to the Administrative Agent on the date of such Borrowing in accordance with
subsections (b) and (c) of this Section and the Administrative Agent may, in
reliance upon such assumption, make available to the Borrower on such date a
corresponding amount. If and to the extent that such Bank shall not have so
made such share available to the Administrative Agent, such Bank and the
Borrower severally agree to repay to the Administrative Agent forthwith on
demand such corresponding amount together with interest thereon, for each day
from the date such amount is made available to the Borrower until the date
such amount is repaid to the Administrative Agent, at the Federal Funds Rate.
If such Bank shall repay to the Administrative Agent such corresponding
amount, such amount so repaid shall constitute such Bank's Loan included in
such Borrowing for purposes of this Agreement.
(e) Nothing in subsection (d) shall be deemed to relieve any Bank from
its obligation to make Loans or to prejudice any right which the Borrower may
have against any Bank if such Bank defaults in the performance of its
obligations under this Agreement.
Section 2.05. Notes. (a) The Loans of each Bank shall be evidenced by a
single Note payable to the order of such Bank for the account of its
Applicable Lending Office in an amount equal to the aggregate unpaid principal
amount of such Bank's Loans.
(b) Each Bank may, by notice to the Borrower and the Administrative
Agent, request that its Loans of a particular type be evidenced by a separate
Note in an amount equal to the aggregate unpaid principal amount of such
Loans. Each such Note shall be in substantially the form of Exhibit A hereto
with appropriate modifications to reflect the fact that it evidences solely
Loans of the relevant type. Each reference in this Agreement to the "Note" of
such Bank shall be deemed to refer to and include any or all of such Notes, as
the context may require.
(c) Upon receipt of each Bank's Note pursuant to Section 4.01(b), the
Administrative Agent shall forward such Note to such Bank. Each Bank shall
record the date, amount, type and maturity of each Loan made by it and the
date and amount of each payment of principal made by the Borrower with respect
thereto, and may, if such Bank so elects in connection with any transfer or
enforcement of its Note, endorse on the schedule forming a part thereof
appropriate notations to evidence the foregoing information with respect to
each such Loan then outstanding; provided that the failure of any Bank to make
any such recordation or endorsement shall not affect the obligations of the
Borrower hereunder or under the Notes. Each Bank is hereby irrevocably
authorized by the Borrower so to endorse its Note and to attach to and make a
part of its Note a continuation of any such schedule as and when required.
Section 2.06. Maturity of Loans. Each Loan included in any Borrowing
shall mature, and the principal amount thereof shall be due and payable, on
the last day of the Interest Period applicable to such Borrowing.
Section 2.07. Interest Rates. (a) Each Base Rate Loan shall bear
interest on the outstanding principal amount thereof, for each day from the
date such Loan is made until it becomes due, at a rate per annum equal to the
Base Rate for such day. Such interest shall be payable in arrears on the
third Domestic Business Day following the end of each calendar quarter and on
the third Domestic Business Day following the Termination Date (or earlier
date of termination of the Commitments in their entirety) for the period to
and including the last day of such calendar quarter or the Termination Date
(or such earlier date of termination of the Commitments in their entirety).
Any overdue principal of or interest on any Base Rate Loan shall bear
interest, payable on demand, for each day until paid at a rate per annum equal
to the sum of 2% plus the rate otherwise applicable to Base Rate Loans for
such day.
(b) Each Euro-Dollar Loan shall bear interest on the outstanding
principal amount thereof, for each day during the Interest Period applicable
thereto, at a rate per annum equal to the sum of the Euro-Dollar Margin for
such day plus the Adjusted London Interbank Offered Rate applicable to such
Interest Period. Such interest shall be payable for each Interest Period on
the last day thereof and, if such Interest Period is longer than three months,
at intervals of three months after the first day thereof.
"Euro-Dollar Margin" means a rate per annum determined in accordance with
the Pricing Schedule.
The "Adjusted London Interbank Offered Rate" applicable to any Interest
Period means a rate per annum equal to the quotient obtained (rounded upward,
if necessary, to the next higher 1/100 of 1%) by dividing (i) the applicable
London Interbank Offered Rate by (ii) 1.00 minus the Euro-Dollar Reserve
Percentage.
The "London Interbank Offered Rate" applicable to any Interest Period
means the average (rounded upward, if necessary, to the next higher 1/16 of
1%) of the respective rates per annum at which deposits in dollars are offered
to each of the Reference Banks in the London interbank market at approximately
11:00 A.M. (London time) two Euro-Dollar Business Days before the first day of
such Interest Period in an amount approximately equal to the principal amount
of the Euro-Dollar Loan of such Reference Bank to which such Interest Period
is to apply and for a period of time comparable to such Interest Period.
"Euro-Dollar Reserve Percentage" means for any day that percentage
(expressed as a decimal) which is in effect on such day, as prescribed by the
Board of Governors of the Federal Reserve System (or any successor) for
determining the maximum reserve requirement for a member bank of the Federal
Reserve System in New York City with deposits exceeding five billion dollars
in respect of "Eurocurrency liabilities" (or in respect of any other category
of liabilities which includes deposits by reference to which the interest rate
on Euro-Dollar Loans is determined or any category of extensions of credit or
other assets which includes loans by a non-United States office of any Bank to
United States residents). The Adjusted London Interbank Offered Rate shall be
adjusted automatically on and as of the effective date of any change in the
Euro-Dollar Reserve Percentage.
(c) Any overdue principal of or interest on any Euro-Dollar Loan shall
bear interest, payable on demand, for each day until paid at a rate per annum
equal to the higher of (i) the sum of 2% plus the Euro-Dollar Margin for such
day plus the Adjusted London Interbank Offered Rate applicable to the Interest
Period for such Loan and (ii) the sum of 2% plus the Euro-Dollar Margin for
such day plus the quotient obtained (rounded upward, if necessary, to the next
higher 1/100 of 1%) by dividing (x) the average (rounded upward, if necessary,
to the next higher 1/16 of 1%) of the respective rates per annum at which one
day (or, if such amount due remains unpaid more than three Euro-Dollar
Business Days, then for such other period of time not longer than six months
as the Administrative Agent may select) deposits in dollars in an amount
approximately equal to such overdue payment due to each of the Reference Banks
are offered to such Reference Bank in the London interbank market for the
applicable period determined as provided above by (y) 1.00 minus the
Euro-Dollar Reserve Percentage (or, if the circumstances described in clause
(a) or (b) of Section 9.01 shall exist, at a rate per annum equal to the sum
of 2% plus the rate applicable to Base Rate Loans for such day).
(d) Subject to Section 9.01(a), each Money Market LIBOR Loan shall bear
interest on the outstanding principal amount thereof, for the Interest Period
applicable thereto, at a rate per annum equal to the sum of the London
Interbank Offered Rate for such Interest Period (determined in accordance with
Section 2.07(c) as if the related Money Market LIBOR Borrowing were a
Committed Euro-Dollar Borrowing) plus (or minus) the Money Market Margin
quoted by the Bank making such Loan in accordance with Section 2.03. Each
Money Market Absolute Rate Loan shall bear interest on the outstanding
principal amount thereof, for the Interest Period applicable thereto, at a
rate per annum equal to the Money Market Absolute Rate quoted by the Bank
making such Loan in accordance with Section 2.03. Such interest shall be
payable for each Interest Period on the last day thereof and, if such Interest
Period is longer than three months, at intervals of three months after the
first day thereof. Any overdue principal of or interest on any Money Market
Loan shall bear interest, payable on demand, for each day until paid at a rate
per annum equal to the sum of 2% plus the Base Rate for such day. (e) The
Administrative Agent shall determine each interest rate applicable to the
Loans hereunder. The Administrative Agent shall give prompt notice to the
Borrower and the participating Banks of each rate of interest so determined,
and its determination thereof shall be conclusive in the absence of manifest
error.
(f) Each Reference Bank agrees to use its best efforts to furnish
quotations to the Administrative Agent as contemplated by this Section. If
any Reference Bank does not furnish a timely quotation, the Administrative
Agent shall determine the relevant interest rate on the basis of the quotation
or quotations furnished by the remaining Reference Bank or Banks or, if none
of such quotations is available on a timely basis, the provisions of Section
9.01 shall apply.
Section 2.08. Facility Fee. The Borrower shall pay to the
Administrative Agent for the account of the Banks ratably a facility fee at
the Facility Fee Rate (determined daily in accordance with the Pricing
Schedule). Such facility fee shall accrue (i) from and including the
Effective Date to but excluding the Termination Date (or such earlier date of
termination of the Commitments in their entirety), on the daily aggregate
amount of the Commitments (whether used or unused) and (ii) from and including
the Termination Date or such earlier date of termination to but excluding the
date the Loans shall be repaid in their entirety, on the daily sum of the
aggregate outstanding principal amount of the Loans and the Letter of Credit
Outstandings. Any facility fee payable under this Section shall be payable in
arrears on the third Domestic Business Day following the end of each calendar
quarter and on the third Domestic Business Day following the Termination Date
(or earlier date of termination of the Commitments in their entirety) for the
period to and including the last day of such calendar quarter or the
Termination Date (or such earlier date of termination of the Commitments in
their entirety).
Section 2.09. Optional Termination or Reduction of Commitments. During
the Revolving Credit Period, the Borrower may, upon at least three Domestic
Business Days' notice to the Administrative Agent, (i) terminate the
Commitments at any time, if no Loans are outstanding at such time and there
are no Letter of Credit Outstandings at such time or (ii) ratably reduce from
time to time by an aggregate amount of $5,000,000 or any larger multiple
thereof, the aggregate amount of the Commitments in excess of the sum of the
aggregate outstanding principal amount of the Loans and the Letter of Credit
Outstandings.
Section 2.10. Scheduled Termination of Commitments. The Commitments
shall terminate on the Termination Date, and any Loans then outstanding
(together with accrued interest thereon) shall be due and payable on such
date.
Section 2.11. Optional Prepayments. (a) Subject in the case of any
Euro-Dollar Borrowing to Section 2.13, the Borrower may, upon notifying the
Administrative Agent no later than 12:30 p.m. (New York City time) on any
Domestic Business Day, prepay any Base Rate Borrowing (or any Money Market
Borrowing bearing interest at the Base Rate pursuant to Section 9.01(a)) or
upon at least three Euro-Dollar Business Days' notice to the Administrative
Agent, prepay any Euro-Dollar Borrowing, in each case in whole at any time, or
from time to time in part in amounts aggregating $1,000,000 or any larger
multiple of $1,000,000, (i) with respect to any Base Rate Borrowing, by paying
the principal amount to be prepaid and (ii) with respect to any Euro-Dollar
Borrowing or Money Market Borrowing bearing interest at the Base Rate, by
paying the principal amount to be prepaid together with accrued interest
thereon to the date of prepayment. Each such optional prepayment shall be
applied to prepay ratably the Loans of the several Banks included in such
Borrowing.
(b) Except as provided in Section 2.11(a), the Borrower may not prepay
all or any portion of the principal amount of any Money Market Loan prior to
the maturity thereof.
(c) Upon receipt of a notice of prepayment pursuant to this Section, the
Administrative Agent shall promptly notify each Bank of the contents thereof
and of such Bank's ratable share (if any) of such prepayment and such notice
shall not thereafter be revocable by the Borrower.
Section 2.12. General Provisions as to Payments. (a) The Borrower shall
make each payment of principal of, and interest on, the Loans and fees
hereunder, not later than 2:00 P.M. (New York City time) on the date when due,
in Federal or other funds immediately available in New York City, to the
Administrative Agent at its address referred to in Section 10.01. The
Administrative Agent will promptly distribute to each Bank its ratable share
of each such payment received by the Administrative Agent for the account of
the Banks. Whenever any payment of principal of, or interest on, the Base
Rate Loans or of fees shall be due on a day which is not a Domestic Business
Day, the date for payment thereof shall be extended to the next succeeding
Domestic Business Day. Whenever any payment of principal of, or interest on,
the Euro-Dollar Loans shall be due on a day which is not a Euro-Dollar
Business Day, the date for payment thereof shall be extended to the next
succeeding Euro-Dollar Business Day unless such Euro-Dollar Business Day falls
in another calendar month, in which case the date for payment thereof shall be
the next preceding Euro-Dollar Business Day. Whenever any payment of
principal of, or interest on, the Money Market Loans shall be due on a day
which is not a Euro-Dollar Business Day, the date for payment thereof shall be
extended to the next succeeding Euro-Dollar Business Day. If the date for any
payment of principal is extended by operation of law or otherwise, interest
thereon shall be payable for such extended time.
(b) Unless the Administrative Agent shall have received notice from the
Borrower prior to the date on which any payment is due to the Banks hereunder
that the Borrower will not make such payment in full, the Administrative Agent
may assume that the Borrower has made such payment in full to the
Administrative Agent on such date and the Administrative Agent may, in
reliance upon such assumption, cause to be distributed to each Bank on such
due date an amount equal to the amount then due such Bank. If and to the
extent that the Borrower shall not have so made such payment, each Bank shall
repay to the Administrative Agent forthwith on demand such amount distributed
to such Bank together with interest thereon, for each day from the date such
amount is distributed to such Bank until the date such Bank repays such amount
to the Administrative Agent, at the Federal Funds Rate.
Section 2.13. Funding Losses. If the Borrower makes any payment of
principal with respect to any Fixed Rate Loan (pursuant to Article 2, 7 or 9
or otherwise) on any day other than the last day of the Interest Period
applicable thereto, or the last day of an applicable period fixed pursuant to
Section 2.07(d), or if the Borrower fails to borrow or prepay any Fixed Rate
Loans after notice has been given to any Bank in accordance with Section
2.04(a) or 2.11(c), the Borrower shall reimburse each Bank within 15 days
after demand for any resulting loss or expense incurred by it (or by an
existing or prospective Participant in the related Loan), including (without
limitation) any loss incurred in obtaining, liquidating or employing deposits
from third parties, but excluding loss of margin for the period after any such
payment or failure to borrow or prepay, provided that such Bank shall have
delivered to the Borrower a certificate as to the amount of and basis for
determining such loss or expense, which certificate shall be conclusive in the
absence of manifest error.
Section 2.14. Computation of Interest and Fees. Interest based on the
Prime Rate hereunder shall be computed on the basis of a year of 365 days (or
366 days in a leap year) and paid for the actual number of days elapsed
(including the first day but excluding the last day). All other interest and
all fees shall be computed on the basis of a year of 360 days and paid for the
actual number of days elapsed (including the first day but excluding the last
day).
ARTICLE 3
Letters of Credit
Section 3.01. Letter of Credit Commitment. (a) Subject to and upon the
terms and conditions herein set forth, the Borrower may request the Issuing
Bank to issue, and the Issuing Bank agrees to issue, at any time and from time
to time on or after the Effective Date and prior to the Letter of Credit
Termination Date, one or more irrevocable letters of credit ("Letters of
Credit") for the account of the Borrower, and for the benefit of any obligee
of payment obligations of the Borrower or any of its Subsidiaries, in amounts
such that the sum of the aggregate outstanding principal amount of the Loans
and the Letter of Credit Outstandings shall at no time exceed the aggregate
amount of the Commitments.
(b) Each Letter of Credit shall be in a form customarily used by the
Issuing Bank on the Effective Date or otherwise in such form as may be
approved by the Issuing Bank. Each Letter of Credit shall be subject to the
Uniform Customs and Practice for Documentary Credits (1994 Revision),
International Chamber of Commerce Publication No. 500, (and any subsequent
revisions thereof approved by a Congress of the International Chamber of
Commerce and adhered to by the Issuing Bank), and shall also be subject to
Section 5-114 of the New York Uniform Commercial Code.
(c) Each Letter of Credit issued hereunder shall (i) be denominated in
United States dollars and provide for the payment of sight drafts and/or
documents when presented for honor thereunder in accordance with the terms
thereof and accompanied by the documents described therein, and (ii) have an
expiry date occurring not later than (1) the earliest of one year after the
date of issuance or (2) the Letter of Credit Termination Date.
Notwithstanding anything to the contrary contained in clause (ii) of the
preceding sentence, if requested prior to the Letter of Credit Termination
Date, but not earlier than 45 days prior to the expiry date of any Letter of
Credit, the expiry date of such Letter of Credit may be extended for a period
of up to one year from the expiry date in effect before giving effect to such
extension (but in no event later than the Letter of Credit Termination Date)
so long as such Letter of Credit could otherwise be issued at such time
pursuant to this Agreement.
(d) Upon the issuance of any Letter of Credit (or upon the Effective
Date with respect to any Existing Letter of Credit), the Issuing Bank shall be
deemed to have sold and each Bank shall be deemed to have acquired, an
undivided participation in each Letter of Credit issued by the Issuing Bank in
accordance with the terms hereof and in each drawing made thereunder in a
percentage equal to the Percentage Participation of such Bank.
Section 3.02. Letter of Credit Requests. Whenever the Borrower desires
that a Letter of Credit be issued for its account, the Borrower shall give the
Issuing Bank and the Administrative Agent notice no later than 12:30 p.m.
(Chicago time) on any Domestic Business Day, including instructions in such
notice, and such letter of credit applications or other documents that the
Issuing Bank customarily requires in connection therewith. In the event any
provision of any letter of credit application is inconsistent with, or in
conflict with, any provision of this Agreement, the provisions of this
Agreement shall control.
Section 3.03. Letter of Credit Fees. (a) The Borrower agrees to pay to
the Administrative Agent for the account of the Banks, a letter of credit fee
at a rate per annum equal to the applicable Letter of Credit Rate (determined
daily in accordance with the Pricing Schedule) for such day on the aggregate
daily amount available for drawing under all Letters of Credit issued
hereunder, such fee to be payable for the account of the Banks ratably in
proportion to their participation therein.
(b) The Borrower agrees to pay the Issuing Bank, for its own account, a
fronting fee in respect of each Letter of Credit issued hereunder in
accordance with BMO's Fee Letter.
(c) Fees payable pursuant to subsections (a) and (b) shall be calculated
to the end of each calendar quarter and to the Letter of Credit Termination
Date, and shall be due and payable on the third Domestic Business Day
following the end of each calendar quarter during the term hereof and on the
third Domestic Business Day following the Letter of Credit Termination Date.
Section 3.04. Agreement to Repay Letter of Credit Drawings. (a) The
Borrower hereby agrees to reimburse the Issuing Bank for any payment or
disbursement made by the Issuing Bank under any Letter of Credit (each such
amount so paid or disbursed until reimbursed, an "Unpaid Drawing") within one
Business Day after the date of such payment or disbursement, with interest on
the amount so paid or disbursed by the Issuing Bank, if and to the extent not
reimbursed prior to 2:00 P.M., Chicago time, on the date of such payment or
disbursement, from and including the date paid or disbursed to but excluding
the date the Issuing Bank was reimbursed therefor at a rate per annum which
shall be the rate of interest that would be applicable to Base Rate Loans
during such period.
(b) The Borrower's obligations under this Section 3.04 to reimburse the
Issuing Bank with respect to Unpaid Drawings in respect of Letters of Credit
(including, in each case, interest thereon) shall be absolute and
unconditional under any and all circumstances and irrespective of any set off,
counterclaim or defense to payment which the Borrower may have or have had
against any Bank (including the Issuing Bank in its capacity as issuer of the
Letter of Credit or as a Bank), including, without limitation, any defense
based upon the failure of any drawing under a Letter of Credit (each a
"Drawing") to conform to the terms of the Letter of Credit or any
non-application or misapplication by the beneficiary of the proceeds of such
Drawing. The Borrower assumes all risks as a result of the acts or omissions
of the user of any Letter of Credit and all risks of the misuse of any Letter
of Credit. The Issuing Bank in its capacity as issuer of any Letter of Credit
shall not be liable:
(i) for the form, validity, sufficiency, accuracy, genuineness or
legal effect of any document reasonably believed to be genuine by the Person
examining such document in connection with any Letter of Credit, even if it
should prove to be in any respect invalid, insufficient, inaccurate,
fraudulent or forged,
(ii) for the validity or insufficiency of any instrument
transferring or assigning or purporting to assign any Letter of Credit or the
rights and benefits thereunder or the proceeds thereof,
(iii) for clerical, administrative or other ministerial errors,
such as failure of any draft to bear any reference or adequate reference to
any applicable Letter of Credit, or failure of any Person to note the amount
of any draft on any applicable Letter of Credit or to surrender or take up any
applicable Letter of Credit or to send forward any such document apart from
drafts as required by the terms of any Letter of Credit, each of which
provisions, if contained in any Letter of Credit, may be waived by the Issuing
Bank,
(iv) for errors, omissions, interruptions or delays in transmissions
or delivery of any message, by mail, telegraph, telex or otherwise,
(v) for any error, neglect, default, suspension or insolvency of
any correspondent,
(vi) for errors in translation or for errors in interpretation of
technical terms, (vii) for any loss or delay in the transmission or
otherwise of any Letter of Credit or any document or draft in connection
therewith or the proceeds thereof,
(viii) for any consequence arising from causes beyond the control
of the Issuing Bank, or
(ix) for any other act or omission to act or delay of any kind by
any Bank (including the Issuing Bank), the Administrative Agent or any other
Person which might, but for the provisions of this subsection (vii),
constitute a legal or equitable discharge of or defense to the Borrower's
obligations hereunder. Nothing in this subsection (b) is intended to limit
the right of the Borrower to make a claim against the Issuing Bank for damages
as contemplated by the proviso to the first sentence of Section 3.05.
(c) Promptly upon the occurrence of any Unpaid Drawing, the Issuing Bank
shall notify the Borrower and the Banks thereof. Failure to give such notice,
however, shall not affect the obligations of the Borrower or the Banks in
respect of such Unpaid Drawing.
(d) Promptly after receiving notice of any Unpaid Drawing, each Bank
shall pay to the Issuing Bank the amount of such Bank's Percentage
Participation in such Unpaid Drawing by transferring the same to the Issuing
Bank in immediately available funds at the office specified by it in such
notice. To the extent any Bank does not effect such payment on the date of
any Unpaid Drawing, such Bank agrees to pay interest to the Issuing Bank on
such amount until such payment is made at the overnight Federal Funds Rate.
If a Bank shall have made all payments to the Issuing Bank required by this
Section, the Issuing Bank shall pay such Bank its proportionate share of all
payments received by the Issuing Bank from the Borrower in respect of Unpaid
Drawings, all as, and, to the extent possible, when received by the Issuing
Bank.
Section 3.05. Indemnity. The Borrower hereby indemnifies and holds
harmless the Administrative Agent and each Bank from and against any and all
claims, damages, losses, liabilities, costs or expenses which it may incur,
and none of the Banks (including any Issuing Bank) nor the Administrative
Agent nor any of their officers, directors, employees or agents shall be
liable or responsible, by reason of or in connection with the execution and
delivery or transfer of or payment or failure to pay under any Letter of
Credit, including without limitation (i) any error, omission, interruption or
delay in transmission or delivery of any messages, by mail, cable, telegraph,
telex or otherwise, (ii) any error in interpretation of technical terms, (iii)
any loss or delay in the transmission of any document required in order to
make a drawing under a Letter of Credit, (iv) any consequences arising from
causes beyond the control of the Issuing Bank, including without limitation
any government acts, or any other circumstances whatsoever (including without
limitation the circumstances enumerated in Section 3.04(b) above) in making or
failing to make payment under such Letter of Credit; provided that the
Borrower shall have a claim against the Issuing Bank for direct (but not
consequential) damage suffered by it, to the extent caused by (x) the willful
misconduct or gross negligence of the Issuing Bank in determining whether a
request presented under any Letter of Credit complied with the terms of such
Letter of Credit or (y) the Issuing Bank's failure to pay under any Letter of
Credit after the presentation to it of a request that strictly complies with
the terms and conditions of such Letter of Credit. Nothing in this Section is
intended to limit the obligations of the Borrower under any other provision of
this Agreement.
ARTICLE 4
Conditions
Section 4.01. Effectiveness. This Amended Agreement shall become
effective on the date (the "Effective Date") that each of the following
conditions shall have been satisfied (or waived in accordance with Section
10.05):
(a) receipt by the Administrative Agent of counterparts hereof
signed by each of the parties hereto (or, in the case of any party as to which
an executed counterpart shall not have been received, receipt by the
Administrative Agent in form satisfactory to it of telegraphic, telex or other
written confirmation from such party of execution of a counterpart hereof by
such party);
(b) receipt by the Administrative Agent of a duly executed Note for
the account of each Bank dated on or before the Effective Date complying with
the provisions of Section 2.05;
(c) receipt by the Administrative Agent of an opinion of the
General Counsel of the Borrower, substantially in the form of Exhibit E hereto
and covering such additional matters relating to the transactions contemplated
hereby as the Required Banks may reasonably request;
(d) receipt by the Administrative Agent of an opinion of Davis Polk
& Wardwell, special counsel for the Administrative Agent, substantially in the
form of Exhibit F hereto and covering such additional matters relating to the
transactions contemplated hereby as the Required Banks may reasonably request;
(e) receipt by the Administrative Agent of evidence satisfactory to
it of the payment of all principal of and interest on any loans outstanding
under, and of all other amounts payable under, the Existing Credit Agreement
up to but excluding the Effective Date; and]
(f) receipt by the Administrative Agent of all documents it may
reasonably request relating to the existence of the Borrower, the corporate
authority for and the validity of this Amended Agreement and the Notes, and
any other matters relevant hereto, all in form and substance satisfactory to
the Administrative Agent.
On the Effective Date the Existing Credit Agreement will be automatically
amended and restated in its entirety to read as set forth herein. On and
after the Effective Date the rights and obligations of the parties hereto
shall be governed by this Amended Agreement; provided the rights and
obligations of the parties hereto that are parties to the Existing Credit
Agreement shall continue to be governed by the provisions of the Existing
Credit Agreement with respect to the period prior to the Effective Date. On
the Effective Date, any Bank whose Commitment is changed to zero shall cease
to be a Bank party to this Agreement and all accrued fees and other amounts
payable under this Agreement for the account of such Bank shall be due and
payable on such date; provided that the provisions of Sections 9.03, 9.04 and
10.03 of this Agreement shall continue to inure to the benefit of each such
Bank. The Notes delivered to each Bank under the Existing Credit Agreement
shall be canceled and Notes under this Amended Agreement shall be given in
substitution therefor. Each Bank shall promptly after the Effective Date
deliver to the Borrower for cancellation the Note delivered to such Bank under
the Existing Credit Agreement. The parties hereto acknowledge that on and as
of the Effective Date, the Subsidiary Guaranty Agreement delivered to the
Administrative Agent pursuant to Section 4.03(c) of the Existing Credit
Agreement shall be automatically terminated without further action of the
parties thereto or hereto and the obligations of the guarantors thereunder
shall be released. The Administrative Agent shall promptly notify the
Borrower and each Bank of the effectiveness of this Amended Agreement, and
such notice shall be conclusive and binding on all parties hereto.
Section 4.02. Borrowings. The obligation of any Bank to make a Loan on
the occasion of any Borrowing or of the Issuing Bank to issue or extend any
Letter of Credit is subject to the satisfaction of the following conditions:
(a) receipt by the Administrative Agent of a Notice of Borrowing as
required by Section 2.02 or 2.03, or by the Issuing Bank and the
Administrative Agent of a notice as required by Section 3.02, as may be
applicable;
(b) the fact that, immediately after such Borrowing or the issuance
of such Letter of Credit, as the case may be, (i) the sum of the aggregate
outstanding principal amount of the Loans and the Letter of Credit
Outstandings will not exceed the aggregate amount of the Commitments and (ii)
the aggregate amount of the Letter of Credit Outstandings in respect of
Financial Letters of Credit shall not exceed $400,000,000;
(c) the fact that, immediately before and after such Borrowing, no
Default shall have occurred and be continuing; and
(d) the fact that the representations and warranties of the
Borrower contained in this Agreement (except, in the case of a Refunding
Borrowing, the representations and warranties set forth in Sections 5.04(c)
and 5.05 as to any matter which has theretofore been disclosed in writing by
the Borrower to the Banks) shall be true on and as of the date of such
Borrowing.
Each Borrowing hereunder shall be deemed to be a representation and warranty
by the Borrower on the date of such Borrowing as to the facts specified in
clauses (b), (c) and (d) of this Section.
ARTICLE 5
Representations and Warranties
The Borrower represents and warrants that:
Section 5.01. Corporate Existence and Power. The Borrower and each
Guarantor is a corporation duly incorporated, validly existing and in good
standing under the laws of its jurisdiction of incorporation, and has all
corporate powers and all material governmental licenses, authorizations,
consents and approvals required to carry on its business as now conducted.
Section 5.02. Corporate and Governmental Authorization; No
Contravention. The execution, delivery and performance by the Borrower and
each Guarantor of each Financing Document to which it is a party are within
its corporate powers, have been duly authorized by all necessary corporate
action, require no action by or in respect of, or filing with, any
governmental body, agency or official (except for any reports required to be
filed by the Borrower with or to the Securities and Exchange Commission (or
any successor thereto) pursuant to the Exchange Act) and do not contravene, or
constitute a default under, any provision of applicable law or regulation or
of its certificate of incorporation or by-laws or of any agreement, judgment,
injunction, order, decree or other instrument binding upon the Borrower or any
of its Subsidiaries or result in the creation or imposition of any Lien on any
asset of the Borrower or any of its Subsidiaries.
Section 5.03. Binding Effect. This Agreement constitutes a valid and
binding agreement of the Borrower, and each other Financing Document, when
executed and delivered in accordance with this Agreement, will constitute a
valid and binding obligation of the Borrower and each Guarantor party thereto,
in each case enforceable in accordance with its terms.
Section 5.04. Financial Information.
(a) The unaudited pro forma consolidated balance sheet of the
Borrower as of December 31, 1996 and the related unaudited pro forma
consolidated statement of income for the year ended December 31, 1996 set
forth in the Valero S-1, are complete and correct in all material respects and
have been prepared on the basis described therein and otherwise in conformity
with generally accepted accounting principles applied on a basis consistent
with the financial statements referred to in subsection (b) of this Section
and show the consolidated financial position and results of operations of the
Borrower as if the Transactions (as defined in the Existing Credit Agreement)
had occurred, in the case of the consolidated balance sheet, on December 31,
1996 and in the case of the consolidated statement of earnings, as of January
1, 1996.
(b) The consolidated balance sheet of the Borrower and its
Consolidated Subsidiaries as of September 30, 1997 and the related
consolidated statements of income and cash flows for the fiscal period then
ended, set forth in the Valero Form 10-Q, a copy of which has been delivered
to each of the Banks, fairly present, in conformity with generally accepted
accounting principles, the consolidated financial position of the Borrower and
its Consolidated Subsidiaries as of such date and their consolidated results
of operations and cash flows for such fiscal period.
(c) Since September 30, 1997, there has been no material adverse
change in the business, financial position, results of operations or prospects
of the Borrower and its Consolidated Subsidiaries, considered as a whole.
Section 5.05. Litigation. Except as disclosed in the Valero Form 10-Q
or otherwise disclosed in writing to the Banks prior to the execution and
delivery of this Amended Agreement, there is no action, suit or proceeding
pending against, or to the knowledge of the Borrower threatened against or
affecting, the Borrower or any of its Subsidiaries before any court or
arbitrator or any governmental body, agency or official in which there is a
reasonable possibility of an adverse decision which could reasonably be
expected to materially adversely affect the business, consolidated financial
position or consolidated results of operations of the Borrower and its
Consolidated Subsidiaries, considered as a whole, or which in any manner draws
into question the validity of any Financing Document.
Section 5.06. Compliance with ERISA. Each member of the ERISA Group has
fulfilled its obligations under the minimum funding standards of ERISA and the
Internal Revenue Code with respect to each Plan and is in compliance in all
material respects with the presently applicable provisions of ERISA and the
Internal Revenue Code with respect to each Plan. No member of the ERISA Group
has (i) sought a waiver of the minimum funding standard under Section 412 of
the Internal Revenue Code in respect of any Plan, (ii) failed to make any
contribution or payment to any Plan or Multi-employer Plan or in respect of
any Benefit Arrangement, or made any amendment to any Plan or Benefit
Arrangement, which has resulted or could reasonably be expected to result in
the imposition of a Lien or the posting of a bond or other security under
ERISA or the Internal Revenue Code or (iii) incurred any liability under Title
IV of ERISA other than a liability to the PBGC for premiums under Section 4007
of ERISA.
Section 5.07. Environmental Matters. In the ordinary course of its
business, the Borrower conducts or causes to be conducted an ongoing review of
the effect of Environmental Laws on the business, operations and properties of
the Borrower and its Subsidiaries, in the course of which it identifies and
evaluates associated liabilities and costs (including, without limitation, any
capital or operating expenditures required for clean-up or closure of
properties presently or previously owned, any capital or operating
expenditures required to achieve or maintain compliance with environmental
protection standards imposed by law or as a condition of any license, permit
or contract, any related constraints on operating activities, including any
periodic or permanent shutdown of any facility or reduction in the level of or
change in the nature of operations conducted thereat, any costs or liabilities
in connection with off-site disposal of wastes or Hazardous Substances, and
any actual or potential liabilities to third parties, including employees, and
any related costs and expenses). On the basis of this review, the Borrower
has reasonably concluded that such associated liabilities and costs, including
the costs of compliance with Environmental Laws, are unlikely to have a
material adverse effect on the business, financial condition, results of
operations or prospects of the Borrower and its Consolidated Subsidiaries,
considered as a whole.
Section 5.08. Taxes. The Borrower and its Subsidiaries have filed all
United States Federal income tax returns and all other material tax returns
which are required to be filed by them and have paid all taxes due pursuant to
such returns or pursuant to any assessment received by the Borrower or any
Subsidiary. The charges, accruals and reserves on the books of the Borrower
and its Subsidiaries in respect of taxes or other governmental charges are, in
the opinion of the Borrower, adequate.
Section 5.09. SubsidiariesEach of the Borrower's Subsidiaries is a
corporation, partnership or other legal entity duly organized, validly
existing and is in good standing in each jurisdiction in which the ownership
of its properties or the conduct of its business requires such qualification
and where the failure to so qualify could reasonably be expected to have a
material adverse effect on the business, financial position or results of
operations of the Borrower and its Subsidiaries, taken as a whole. Each of
the Borrower's Subsidiaries has all legal power and all governmental licenses,
authorizations, consents and approvals required to own its assets and to carry
on its business as now conducted and where the failure to have any such
corporate or partnership power, licenses, authorizations, consents or
approvals could reasonably be expected to have a material adverse effect on
the business, financial position, results of operation of the Borrower and its
Subsidiaries, taken as a whole.
Section 5.10. Not an Investment Company. The Borrower is not an
"investment company" within the meaning of the Investment Company Act of 1940,
as amended.
Section 5.11. Full Disclosure. All information heretofore furnished by
the Borrower to the Administrative Agent or any Bank for purposes of or in
connection with this Agreement or any transaction contemplated hereby is, and
all such information hereafter furnished by the Borrower to the Administrative
Agent or any Bank will be, true and accurate in all material respects on the
date as of which such information is stated or certified. The Borrower has
disclosed to the Banks in writing any and all facts which materially and
adversely affect or could reasonably be expected to materially and adversely
affect (to the extent the Borrower can now reasonably foresee), the business,
operations or financial condition of the Borrower and its Consolidated
Subsidiaries, taken as a whole, or the ability of the Borrower to perform its
obligations under the Financing Documents.
Section 5.12. Representations in Subsidiary Guarantee Agreement. Each
representation and warranty of each Guarantor set forth in its Subsidiary
Guarantee Agreement (if any) is true and correct.
ARTICLE 6
Covenants
The Borrower agrees that, so long as any Bank has any Commitment
hereunder or any Letter of Credit Outstanding hereunder or any amount payable
under any Note remains unpaid:
Section 6.01. Information. The Borrower will deliver to each of the
Banks:
(a) as soon as available and in any event within 105 days after the end
of each fiscal year of the Borrower, a Form 10-K of the Borrower and its
Consolidated Subsidiaries for such fiscal year as filed with the Securities
and Exchange Commission;
(b) as soon as available and in any event within 60 days after the end
of each of the first three quarters of each fiscal year of the Borrower, a
Form 10-Q of the Borrower and its Consolidated Subsidiaries for such quarter
as filed with the Securities and Exchange Commission;
(c) simultaneously with the delivery of each set of financial statements
referred to in clauses (a) and (b) above, a certificate of a Financial Officer
of the Borrower (i) setting forth whether the Borrower was in compliance with
the requirements of Sections 6.07 to 6.13, inclusive, on the date of such
financial statements, (ii) with respect to Sections 6.07 to 6.09, inclusive,
and Sections 6.11 and 6.13, setting forth the calculations in reasonable
detail required to establish whether the Borrower was in compliance with the
requirements of such Sections and (iii) stating whether any Default exists on
the date of such certificate and, if any Default then exists, setting forth
the details thereof and the action which the Borrower is taking or proposes to
take with respect thereto;
(d) simultaneously with the delivery of each set of financial statements
referred to in clause (a) above, a statement of the firm of independent public
accountants which reported on such statements whether anything has come to
their attention to cause them to believe that any Default existed on the date
of such statements.
(e) within five days after any Financial Officer of the Borrower obtains
knowledge of any Default, if such Default is then continuing, a certificate of
a Financial Officer of the Borrower setting forth the details thereof and the
action which the Borrower is taking or proposes to take with respect thereto;
(f) promptly upon the mailing thereof to the shareholders of the
Borrower generally, copies of all financial statements, reports and proxy
statements so mailed;
(g) promptly upon the filing thereof, copies of all registration
statements (other than the exhibits thereto and any registration statements on
Form S-8 or its equivalent) and reports on Forms 10-K, 10-Q and 8-K (or their
equivalents) which the Borrower shall have filed with the Securities and
Exchange Commission;
(h) if and when any member of the ERISA Group (i) gives or is required
to give notice to the PBGC of any "reportable event" (as defined in Section
4043 of ERISA) with respect to any Plan which could reasonably be expected to
constitute grounds for a termination of such Plan under Title IV of ERISA, or
knows that the plan administrator of any Plan has given or is required to give
notice of any such reportable event, a copy of the notice of such reportable
event given or required to be given to the PBGC; (ii) receives notice of
complete or partial withdrawal liability under Title IV of ERISA or notice
that any Multi-employer Plan is in reorganization, is insolvent or has been
terminated, a copy of such notice; (iii) receives notice from the PBGC under
Title IV of ERISA of an intent to terminate, impose liability (other than for
premiums under Section 4007 of ERISA) in respect of, or appoint a trustee to
administer any Plan, a copy of such notice; (iv) applies for a waiver of the
minimum funding standard under Section 412 of the Internal Revenue Code, a
copy of such application; (v) gives notice of intent to terminate any Plan
under Section 4041(c) of ERISA, a copy of such notice and other information
filed with the PBGC; (vi) gives notice of withdrawal from any Plan pursuant to
Section 4063 of ERISA, a copy of such notice; or (vii) fails to make any
payment or contribution to any Plan or Multi-employer Plan or in respect of
any Benefit Arrangement or makes any amendment to any Plan or Benefit
Arrangement which has resulted or could reasonably be expected to result in
the imposition of a Lien or the posting of a bond or other security, a
certificate of a Financial Officer of the Borrower setting forth details as to
such occurrence and action, if any, which the Borrower or applicable member of
the ERISA Group is required or proposes to take; and
(i) from time to time such additional information regarding the
financial position or business of the Borrower and its Subsidiaries as the
Administrative Agent, at the request of any Bank, may reasonably request.
Section 6.02. Payment of Obligations. The Borrower will pay and
discharge, and will cause each of its Subsidiaries to pay and discharge, at or
before maturity, all their respective material obligations and liabilities,
including, without limitation, tax liabilities, except where the same may be
contested in good faith by appropriate proceedings, and will maintain, and
will cause each of its Subsidiaries to maintain, in accordance with generally
accepted accounting principles, appropriate reserves for the accrual of any of
the same.
Section 6.03. Maintenance of Property; Insurance.
(a) The Borrower will keep, and will cause each of its Subsidiaries to
keep, all of its property useful and necessary in its business in good working
order and condition, ordinary wear and tear excepted, as would a prudent owner
and operator of similar properties.
(b) The Borrower shall, and shall cause each of its Subsidiaries to,
maintain or cause to be maintained, with financially sound and reputable
insurers, insurance with respect to its properties and business and the
properties and business of its Subsidiaries against loss or damage of the
kinds customarily insured against by corporations of established reputation
engaged in the same or similar businesses and similarly situated, of such type
and in such amounts and with such levels of deductibles, as are customarily
carried under similar circumstances by such other corporations.
Sectin 6.04. Conduct of Business and Maintenance of Existence. The
Borrower will continue, and will cause each of its Subsidiaries to continue,
to engage in business of the same general type as now conducted by the
Borrower and its Subsidiaries, and will preserve, renew and keep in full force
and effect, and will cause each of its Subsidiaries to preserve, renew and
keep in full force and effect their respective legal existence and their
respective rights, privileges and franchises necessary or desirable in the
normal conduct of business; provided that nothing in this Section shall
prohibit (i) the merger of a Subsidiary into the Borrower or the merger or
consolidation of a Subsidiary with or into another Person if the entity
surviving such consolidation or merger is a Subsidiary and if, in each case,
after giving effect thereto, no Default shall have occurred and be continuing
or (ii) the termination of the business or legal existence of any Subsidiary
if the Borrower in good faith determines that such termination is in the best
interest of the Borrower and is not materially disadvantageous to the Banks.
Section 6.05. Compliance with Laws. The Borrower will comply, and cause
each of its Subsidiaries to comply, in all material respects with all
applicable laws, ordinances, rules, regulations, and requirements of
governmental authorities (including, without limitation, Environmental Laws
and ERISA and the rules and regulations thereunder) except where the necessity
of compliance therewith is contested in good faith by appropriate proceedings.
Section 6.06. Inspection of Property, Books and Records. The Borrower
will keep, and will cause each of its Subsidiaries to keep, proper books of
record and account in which complete and accurate entries shall be made of all
financial and business transactions of the Borrower and its Subsidiaries; and
will permit, and will cause each of its Subsidiaries to permit,
representatives of any Bank at such Bank's expense to visit and inspect any of
their respective properties, to examine and make abstracts from any of their
respective books and records and to discuss their respective affairs, finances
and accounts with their respective officers, employees and independent public
accountants, all at such reasonable times and as often as may reasonably be
desired.
Section 6.07. Fixed Charge Coverage. After the Effective Date, the
Borrower will not permit the ratio of:
(a) the sum (without duplication) of (i) Consolidated Net Income
(excluding extraordinary items) of the Borrower for the applicable period,
plus (ii) interest expense for the Borrower and its Subsidiaries on a
consolidated basis for such period, plus (iii) deferred federal and state
income taxes deducted in determining such Consolidated Net Income for such
period, plus (iv) depreciation and amortization expense deducted in
determining such Consolidated Net Income for such period, plus (v) other
noncash charges deducted in determining such Consolidated Net Income for such
period, minus (vi) other noncash credits added in determining such
Consolidated Net Income for such period, plus (vii) Deferred Turnaround and
Catalyst Cost for such period, to
(b) the sum (without duplication) of (i) interest incurred by the
Borrower and its Subsidiaries on a consolidated basis for such period (whether
expensed or capitalized), plus (ii) cash dividends paid by the Borrower on its
preferred stock during such period (other than dividends paid on preferred
stock held by the Borrower or a Subsidiary of the Borrower), plus (iii) cash
dividends paid by the Borrower on its common stock during such period (other
than dividends reinvested in newly issued or treasury shares of common stock
of the Borrower pursuant to any dividend reinvestment plan maintained by the
Borrower for holders of its common stock), plus (iv) the amount of mandatory
redemptions of preferred stock made by the Borrower during such period
(excluding redemptions of shares of such preferred stock held by the Borrower
or Subsidiaries of the Borrower), plus (v) Deferred Turnaround and Catalyst
Cost for such period,
to be less than 1.8 to 1.0 (i) until such time as four full fiscal quarters
shall have commenced and ended subsequent to July 31, 1997, for the period
consisting of such number of consecutive full fiscal quarters as at the time
shall have commenced and ended subsequent to July 31, 1997 and (ii)
thereafter, for any period of four consecutive fiscal quarters (taken as one
accounting period).
Section 6.08. Debt. Consolidated Debt of the Borrower will at no time
exceed 45% of the sum of Consolidated Debt of the Borrower plus the
Consolidated Net Worth of the Borrower plus the involuntary liquidation value
of outstanding shares of redeemable preferred stock of the Borrower.
Section 6.09. Minimum Consolidated Net Worth. Consolidated Net Worth of
the Borrower will at no time at or after the Effective Date be less than the
sum of (i) $850,000,000 plus (ii) an amount equal to 50% of Consolidated Net
Income Applicable to Common Stock for each fiscal quarter of the Borrower
ending after September 30, 1997 but prior to the date of determination for
which fiscal quarter Consolidated Net Income Applicable to Common Stock is
positive (but with no deduction on account of negative Consolidated Net Income
Applicable to Common Stock for any fiscal period of the Borrower) plus (iii)
75% of the aggregate increase in Consolidated Net Worth attributable to the
issuance and sale after September 30, 1997 of any capital stock of the
Borrower (other than the proceeds of any issuance and sale of any capital
stock (x) to a Subsidiary of the Borrower or (y) which is required to be
redeemed, or is redeemable at the option of the holder, if certain events or
conditions occur or exist or otherwise) or in connection with the conversion
or exchange of any Debt of the Borrower into capital stock after September 30,
1997.
Section 6.10. Negative Pledge-Liens. Neither the Borrower nor any
Subsidiary will create, assume or suffer to exist any Lien on any asset now
owned or hereafter acquired by it, except for:
(a) Liens existing on the date of the Existing Credit Agreement securing
Debt outstanding on the date of the Existing Credit Agreement in an aggregate
principal or face amount not exceeding $5,000,000;
(b) any Lien existing on any asset of any Person at the time such Person
becomes a Subsidiary;
(c) any Lien on any asset securing Debt incurred or assumed for the
purpose of financing all or any part of the cost of acquiring such asset,
provided that such Lien attaches to such asset concurrently with or within 90
days after the acquisition thereof;
(d) any Lien on any asset of any Person existing at the time such Person
is merged or consolidated with or into the Borrower or a Subsidiary;
(e) any Lien existing on any asset prior to the acquisition thereof by
the Borrower or a Subsidiary;
(f) any Lien arising out of refinancing, extending, renewing or
refunding (or successively refinancing, extending, renewing or refunding) any
Debt secured by any Lien permitted by any of the foregoing clauses of this
Section, provided that the principal amount of such Debt is not increased and
such Debt is not secured by any additional assets;
(g) any Lien on property constituting substitutions or replacements for,
or additions or accessions to, property of the Borrower or a Subsidiary and
created pursuant to after-acquired property provisions of any Lien otherwise
permitted by any of the foregoing clauses;
(h) Liens for or in connection with taxes or assessments, governmental
charges and similar charges not delinquent or being contested in good faith by
appropriate proceedings, including deposits as security in connection
therewith;
(i) Liens reserved in or arising under leases constituting "Debt" as
described in clause (ii) of the definition thereof, or reserved in or arising
under licenses, permits or operating leases for rent or other charges or to
secure the performance of obligations thereunder;
(j) Liens granted or arising in favor of an operator on assets subject
to joint operations to secure payments or other obligations due such operator
in connection with the operation of such assets;
(k) Liens granted or arising on joint venture and partnership interests
in favor of such joint ventures or partnerships or the other partners or
owners thereof on the Borrower's or its Subsidiaries' interests therein, or on
the assets of such partnerships or joint ventures, to secure payments or other
obligations due to such partnerships or joint ventures or the other partners
or owners thereof with respect to the business of such partnerships or joint
ventures;
(l) Mechanics' and materialmens' liens or any lien or charge in
connection with workmens' compensation, unemployment insurance or other social
security or old age pension obligations or deposits in connection therewith,
including obligations under ERISA; good faith deposits in connection with
tenders or leases of real estate, bids or contracts; deposits to secure public
or statutory obligations or to secure or in lieu of surety bonds;
(m) Liens securing judgments or orders for the payment of money, or
surety or appeal bonds with respect to any such judgments or order, in an
aggregate amount not exceeding $25,000,000, so long as no Event of Default
exists with respect thereto under Section 7.01(j);
(n) Liens on property of a Subsidiary to secure obligations of such
Subsidiary to the Borrower or to another Subsidiary; provided however, that
the obligations so secured may not be assigned, sold or otherwise transferred
to a Person other than the Borrower or another Subsidiary unless such Liens
are otherwise permitted hereunder;
(o) Rights reserved to or vested in, or obligations or duties owed to,
any governmental or public authority or railroad or utility by the terms of
any right, power, franchise, grant, license, permit or provision of law; and
any easement, right-of-way, mineral lease or other agreement relating to the
exploration, development, production or other exploitation of mining, oil,
gas, timber or other natural resources, exception or reservation in any
property of the Borrower or any Subsidiary granted or reserved in any property
of the Borrower or any Subsidiary which do not materially impair the use of
the property of the Borrower and its Subsidiaries, taken as a whole, for the
purposes for which it is held in the operation of the business of the Borrower
and its Subsidiaries;
(p) Liens and encumbrances (other than those securing Debt or Derivative
Obligations) existing upon property or rights in or relating thereto,
including rights of tenants in common or other common owners; zoning,
planning, environmental laws and ordinances and governmental regulations; and
minor defects or irregularities in or encumbrances on the titles to properties
which in the aggregate do not materially impair the use of the property of the
Borrower and its Subsidiaries, taken as a whole, for the purposes for which it
is held in the operation of the business of the Borrower and its Subsidiaries;
(q) Liens on cash, cash equivalents, options or futures positions and
other account holdings securing Derivatives Obligations or otherwise incurred
in connection with margin accounts with brokerage or commodities firms;
provided that the aggregate amount of assets subject to such Liens shall at no
time exceed $60,000,000;
(r) Liens arising in connection with statutory or contractual set-off
provisions granted or arising in the ordinary course of business in favor of
banks, brokers or other creditors;
(s) Liens arising in the ordinary course of its business which (i) do
not secure Debt or Derivatives Obligations, (ii) do not secure any obligation
in an amount exceeding $25,000,000 and (iii) do not in the aggregate
materially detract from the value of its assets or materially impair the use
thereof in the operation of its business; and
(t) Liens not otherwise permitted by the foregoing clauses of this
Section securing Debt in an aggregate principal or face amount at any date not
to exceed 5% of Consolidated Net Worth.
Section 6.11. Subsidiary Debt. The total Debt of all Consolidated
Subsidiaries (excluding (i) Debt secured by a Lien permitted by clauses (a)
through (r) of Section 6.10, (ii) Debt of a Person existing at the time such
Person becomes a Subsidiary and not created in contemplation of such event,
(iii) the Additional IDB, (iv) Debt of the Borrower owing to any Subsidiary or
Debt of a Subsidiary owing to the Borrower or to any other Subsidiary and (v)
refinancings, extensions, renewals or refundings of any Debt permitted by the
foregoing clauses of this Section, provided that the principal amount of such
Debt referred to in clauses (i), (ii) and (iii) is not increased) will at no
time exceed $5,000,000 in aggregate outstanding principal amount.
Sectin 6.12. Guarantors. At such time (if any) hereafter as the
Borrower ceases to have an Investment Grade Rating, the Borrower agrees (i) to
cause each Material Subsidiary to become a Guarantor hereunder within 10 days
of such event and (ii) thereafter within 10 days after any Person becomes a
Material Subsidiary, to cause such Person to become a Guarantor hereunder.
Section 6.13. Consolidations, Mergers and Transfers of Assets. (a) The
Borrower will not consolidate or merge with or into any other Person; provided
that the Borrower may merge with another Person if:
(i) the Borrower or a Wholly-Owned Consolidated Subsidiary is the
corporation surviving such merger;
(ii) the Person (if other than the Borrower) formed by such
consolidation or into which the Borrower is merged (any such Person, the
"Successor"), shall be organized and existing under the laws of the United
States, any state thereof or the District of Columbia and shall expressly
assume, in a writing executed and delivered to the Administrative Agent for
delivery to each of the Banks, in form reasonably satisfactory to the
Administrative Agent, the due and punctual payment of the principal of and
interest on the Notes and the performance of the other obligations under this
Agreement and the Notes on the part of the Borrower to be performed or
observed, as fully as if such Successor were originally named as the Borrower
in this Agreement;
(iii) after giving effect to such merger, no Default shall have
occurred and be continuing; and
(iv) the Borrower has delivered to the Administrative Agent a
certificate on behalf of the Borrower signed by a Financial Officer and an
opinion of counsel (which counsel may be an employee of the Borrower), each
stating that all conditions provided in this Section 6.13 relating to such
transaction have been satisfied.
(b) The Borrower and its Subsidiaries will not, sell, lease, transfer or
otherwise dispose of (each, a "Transfer") all or part of the assets of the
Borrower and its Subsidiaries taken as a whole (other than (w) Transfers of
inventory or of abandoned, obsolete or worn-out machinery, fixtures, equipment
and materials in the ordinary course of business; (x) Transfers of inventory
pursuant to inventory monetization arrangements which provide for financing
not in excess of $150,000,000, (y) Transfers of cash or short-term investments
and (z) (i) if the Borrower has an Investment Grade Rating, Transfers of
assets by the Borrower to any Subsidiary or by any Subsidiary to the Borrower
or any other Subsidiary and (ii) otherwise, Transfers of assets by the
Borrower to any Guarantor or by any Guarantor to the Borrower or any other
Guarantor), to any Person, which assets have a fair market value (as
determined in good faith by the Borrower's Board of Directors) which, when
aggregated with the proceeds of the other assets of the Borrower and its
Subsidiaries taken as a whole Transferred subsequent to the date hereof
(exclusive of Transfers permitted by the foregoing clauses (w), (x), (y) and
(z)) are in an amount in excess of 25% of Consolidated Total Assets as of the
end of the immediately preceding fiscal year.
Section 6.14. Use of Proceeds. The proceeds of the Loans made under
this Amended Agreement will be used by the Borrower to fund working capital,
letters of credit and for general corporate purposes. None of such proceeds
will be used, directly or indirectly, for the purpose, whether immediate,
incidental or ultimate, of buying or carrying any "margin stock" within the
meaning of Regulation U and Regulation G.
Section 6.15. Restriction on Other Agreements. The Borrower will not,
and will not permit any of its Subsidiaries to, enter into any agreement
prohibiting or having the effect of restricting the ability of any Subsidiary
of the Borrower to pay dividends or make any distribution, loans or advances
to the Borrower or any Subsidiary of the Borrower owning any capital stock of
or other equity interest in such Subsidiary (other than this Agreement).
ARTICLE 7
Defaults
Section 7.01. Events of Default. If one or more of the following events
("Events of Default") shall have occurred and be continuing:
(a) the Borrower shall fail to pay when due any principal of any Loan or
any Unpaid Drawing, or shall fail to pay within five days of the due date any
interest, any fees or any other amount payable hereunder;
(b) the Borrower shall fail to observe or perform any covenant contained
in Sections 6.07 to 6.15, inclusive;
(c) the Borrower or any Guarantor shall fail to observe or perform any
covenant or agreement contained in the Financing Documents (other than those
covered by clause (a) or (b) above) for 30 days after notice thereof has been
given to the Borrower by the Administrative Agent at the request of any Bank;
(d) any representation, warranty, certification or statement made by the
Borrower or any Guarantor in the Financing Documents or in any certificate,
financial statement or other document delivered pursuant to the Financing
Documents shall prove to have been incorrect in any material respect when made
(or deemed made);
(e) the Borrower or any Subsidiary of the Borrower shall fail to make
any payment in respect of any Material Financial Obligations when due or
within any applicable grace period;
(f) any event or condition shall occur which results in the acceleration
of the maturity of any Material Debt or enables (or, with the giving of notice
or lapse of time or both, would enable) the holder of such Debt or any Person
acting on such holder's behalf to accelerate the maturity thereof;
(g) the Borrower or any Material Subsidiary of the Borrower shall
commence a voluntary case or other proceeding seeking liquidation,
reorganization or other relief with respect to itself or its debts under any
bankruptcy, insolvency or other similar law now or hereafter in effect or
seeking the appointment of a trustee, receiver, liquidator, custodian or other
similar official of it or any substantial part of its property, or shall
consent to any such relief or to the appointment of or taking possession by
any such official in an involuntary case or other proceeding commenced against
it, or shall make a general assignment for the benefit of creditors, or shall
fail generally to pay its debts as they become due, or shall take any
corporate action to authorize any of the foregoing;
(h) an involuntary case or other proceeding shall be commenced against
the Borrower or any Material Subsidiary of the Borrower seeking liquidation,
reorganization or other relief with respect to it or its debts under any
bankruptcy, insolvency or other similar law now or hereafter in effect or
seeking the appointment of a trustee, receiver, liquidator, custodian or other
similar official of it or any substantial part of its property, and such
involuntary case or other proceeding shall remain undismissed and unstayed for
a period of 60 days; or an order for relief shall be entered against the
Borrower or any Material Subsidiary of the Borrower under the federal
bankruptcy laws as now or hereafter in effect;
(i) any member of the ERISA Group shall fail to pay when due an amount
or amounts aggregating in excess of $25,000,000 which it shall have become
liable to pay under Title IV of ERISA; or notice of intent to terminate a
Material Plan shall be filed under Title IV of ERISA by any member of the
ERISA Group, any plan administrator or any combination of the foregoing; or
the PBGC shall institute proceedings under Title IV of ERISA to terminate, to
impose liability (other than for premiums under Section 4007 of ERISA) in
respect of, or to cause a trustee to be appointed to administer any Material
Plan; or a condition shall exist by reason of which the PBGC would be entitled
to obtain a decree adjudicating that any Material Plan must be terminated; or
there shall occur a complete or partial withdrawal from, or a default, within
the meaning of Section 4219(c)(5) of ERISA, with respect to, one or more
Multi-employer Plans which could cause one or more members of the ERISA Group
to incur a current payment obligation in excess of $25,000,000;
(j) judgments or orders for the payment of money in excess of
$25,000,000 in the aggregate shall be rendered against the Borrower or any
Subsidiary of the Borrower and such judgments or orders shall continue
unsatisfied and unstayed for a period of 60 days;
(k) any person or group of persons (within the meaning of Section 13 or
14 of the Securities Exchange Act of 1934, as amended) shall have acquired
beneficial ownership (within the meaning of Rule 13d-3 promulgated by the
Securities and Exchange Commission under said Act) of 20% or more of the
outstanding shares of common stock of the Borrower (excluding, however, any
such Person or group entitled to report such ownership on Schedule 13G in
accordance with Rule 13d-1(b)(1) or (2)); or, during any period of 24
consecutive calendar months, individuals who were directors of the Borrower on
the first day of such period shall cease to constitute a majority of the board
of directors of the Borrower (unless the election, or the nomination for
election, by the shareholders of the Borrower, or the appointment by the Board
of Directors, of each new director during such 24-month period was approved by
the vote at a meeting or the written consent of at least two-thirds of the
directors then still in office who were directors at the beginning of such
period);
then, and in every such event, the Administrative Agent shall (i) if requested
by Banks having more than 66 2/3% in aggregate amount of the Commitments, by
notice to the Borrower terminate the Commitments and they shall thereupon
terminate, and (ii) if requested by Banks holding Notes evidencing more than
66 2/3% in aggregate principal amount of the Loans, by notice to the Borrower
declare the Notes (together with accrued interest thereon) to be, and the
Notes shall thereupon become, immediately due and payable without presentment,
demand, protest or other notice of any kind, all of which are hereby waived by
the Borrower; provided that in the case of any of the Events of Default
specified in clause (g) or (h) above with respect to the Borrower, without any
notice to the Borrower or any other act by the Administrative Agent or the
Banks, the Commitments shall thereupon terminate and the Notes (together with
accrued interest thereon) shall become immediately due and payable without
presentment, demand, protest or other notice of any kind, all of which are
hereby waived by the Borrower.
Section 7.02. Cash Cover. The Borrower agrees, in addition to the
provisions of Section 7.01 hereof, that upon the occurrence and during the
continuance of any Event of Default, it shall, if requested by the
Administrative Agent upon the instruction of the Required Banks, pay to the
Administrative Agent an amount in immediately available funds (which funds
shall be held as collateral for the Letter of Credit Outstandings) equal to
the aggregate amount available for drawing under all Letters of Credit then
outstanding at such time, provided that, upon the occurrence of any Event of
Default specified in Section 7.01(g) or 7.01(h) with respect to the Borrower,
the Borrower shall pay such amount forthwith without any notice or demand or
any other act by the Administrative Agent or the Banks.
Section 7.03. Notice of Default. The Administrative Agent shall give
notice to the Borrower under Section 7.01(c) promptly upon being requested to
do so by any Bank and shall thereupon notify all the Banks thereof.
ARTICLE 8
The Administrative Agent
Section 8.01. Appointment and Authorization. Each Bank irrevocably
appoints and authorizes the Administrative Agent to take such action as
Administrative Agent on its behalf and to exercise such powers under the
Financing Documents and the Notes as are delegated to the Administrative Agent
by the terms thereof, together with all such powers as are reasonably
incidental thereto.
Section 8.02. Administrative Agent and Agent. Morgan Guaranty shall
have the same rights and powers under the Financing Documents as any other
Bank and may exercise or refrain from exercising the same as though it were
not the Administrative Agent, and Morgan Guaranty and its affiliates may
accept deposits from, lend money to, and generally engage in any kind of
business with the Borrower or any Subsidiary or affiliate of the Borrower as
if it were not an Administrative Agent hereunder.
Section 8.03. Action by Administrative Agent. The obligations of the
Administrative Agent under the Financing Documents are only those expressly
set forth therein. Without limiting the generality of the foregoing, the
Administrative Agent shall not be required to take any action with respect to
any Default, except as expressly provided in Article 7.
Section 8.04. Consultation with Experts. Each of the Administrative
Agent and the Issuing Bank may consult with legal counsel (who may be counsel
for the Borrower), independent public accountants and other experts selected
by it and shall not be liable for any action taken or omitted to be taken by
it in good faith in accordance with the advice of such counsel, accountants or
experts.
Section 8.05. Liability of Administrative Agent. Neither the
Administrative Agent nor the Issuing Bank nor any of their affiliates nor any
of their respective directors, officers, agents or employees shall be liable
for any action taken or not taken by it in connection with the Financing
Documents (i) with the consent or at the request of the Required Banks or (ii)
in the absence of its own gross negligence or willful misconduct. Neither the
Administrative Agent nor the Issuing Bank nor any of their affiliates nor any
of their respective directors, officers, agents or employees shall be
responsible for or have any duty to ascertain, inquire into or verify (i) any
statement, warranty or representation made in connection with the Financing
Documents or any borrowing hereunder; (ii) the performance or observance of
any of the covenants or agreements of the Borrower; (iii) the satisfaction of
any condition specified in Article 4, except receipt of items required to be
delivered to the Administrative Agent or the Issuing Bank; or (iv) the
validity, effectiveness or genuineness of the Financing Documents or any other
instrument or writing furnished in connection therewith. Neither the
Administrative Agent nor the Issuing Bank shall incur any liability by acting
in reliance upon any notice, consent, certificate, statement, or other writing
(which may be a bank wire, telex, facsimile transmission or similar writing)
believed by it to be genuine or to be signed by the proper party or parties.
Section 8.06. Indemnification. Each Bank shall, ratably in accordance
with its Commitment, indemnify the Administrative Agent and the Issuing Bank,
its affiliates and their respective directors, officers, agents and employees
(to the extent not reimbursed by the Borrower) against any cost, expense
(including counsel fees and disbursements), claim, demand, action, loss or
liability (except such as result from such indemnitees' gross negligence or
willful misconduct) that such indemnitees may suffer or incur in connection
with the Financing Documents or any action taken or omitted by such
indemnitees thereunder.
Section 8.07. Credit Decision. Each Bank acknowledges that it has,
independently and without reliance upon the Administrative Agent, the
Syndication Agent or any other Bank, and based on such documents and
information as it has deemed appropriate, made its own credit analysis and
decision to enter into this Agreement. Each Bank also acknowledges that it
will, independently and without reliance upon the Administrative Agent, the
Syndication Agent or any other Bank, and based on such documents and
information as it shall deem appropriate at the time, continue to make its own
credit decisions in taking or not taking any action under this Agreement.
Section 8.08. Successor Administrative Agent. The Administrative Agent
may resign at any time by giving notice thereof to the Banks and the Borrower.
Upon any such resignation, the Required Banks shall have the right to appoint
a successor Administrative Agent. If no successor Administrative Agent shall
have been so appointed by the Required Banks, and shall have accepted such
appointment, within 30 days after the retiring Administrative Agent gives
notice of resignation, then the retiring Administrative Agent may, on behalf
of the Banks, appoint a successor Administrative Agent, which shall be a
commercial bank organized or licensed under the laws of the United States of
America or of any State thereof and having a combined capital and surplus of
at least $50,000,000. Upon the acceptance of its appointment as
Administrative Agent hereunder by a successor Administrative Agent, such
successor Administrative Agent shall thereupon succeed to and become vested
with all the rights and duties of the retiring Administrative Agent, and the
retiring Administrative Agent shall be discharged from its duties and
obligations under the Financing Documents. After any retiring Administrative
Agent's resignation hereunder as Administrative Agent, the provisions of this
Article shall inure to its benefit as to any actions taken or omitted to be
taken by it while it was Administrative Agent.
Section 8.09. Administrative Agent's Fee. The Borrower shall pay to
each of the Administrative Agent, the Syndication Agent and the Issuing Bank,
for its own account fees in the amounts and at the times specified in the Fee
Letters.
Section 8.10. Syndication Agent. Nothing in this Agreement shall impose
upon the Syndication Agent, in such capacity, any obligation or liability
whatsoever.
ARTICLE 9
Change in Circumstances
Section 9.01. Basis for Determining Interest Rate Inadequate or Unfair.
If on or prior to the first day of any Interest Period for any Fixed Rate
Borrowing:
(a) the Administrative Agent is advised by the Reference Banks that
deposits in dollars (in the applicable amounts) are not being offered to the
Reference Banks in the London interbank market for such Interest Period, or
(b) in the case of a Committed Borrowing, Banks having 50% or more of
the aggregate amount of the Commitments advise the Administrative Agent that
the Adjusted London Interbank Offered Rate, as the case may be, as determined
by the Administrative Agent will not adequately and fairly reflect the cost to
such Banks of funding their Euro-Dollar Loans for such Interest Period,
the Administrative Agent shall forthwith give notice thereof to the Borrower
and the Banks, whereupon until the Administrative Agent notifies the Borrower
that the circumstances giving rise to such suspension no longer exist, the
obligations of the Banks to make Euro-Dollar Loans shall be suspended. Unless
the Borrower notifies the Administrative Agent at least two Domestic Business
Days before the date of any Fixed Rate Borrowing for which a Notice of
Borrowing has previously been given that it elects not to borrow on such date,
(i) if such Fixed Rate Borrowing is a Committed Borrowing, such Borrowing
shall instead be made as a Base Rate Borrowing and (ii) if such Fixed Rate
Borrowing is a Money Market LIBOR Borrowing, the Money Market LIBOR Loans
comprising such Borrowing shall bear interest for each day from and including
the first day to but excluding the last day of the Interest Period applicable
thereto at the Base Rate for such day.
Section 9.02. Illegality. If, on or after the date of this Amended
Agreement, the adoption of any applicable law, rule or regulation, or any
change in any applicable law, rule or regulation, or any change in the
interpretation or administration thereof by any governmental authority,
central bank or comparable agency charged with the interpretation or
administration thereof, or compliance by any Bank (or its Euro-Dollar Lending
Office) with any request or directive (whether or not having the force of law)
of any such authority, central bank or comparable agency shall make it
unlawful or impossible for any Bank (or its Euro-Dollar Lending Office) to
make, maintain or fund its Euro-Dollar Loans and such Bank shall so notify the
Administrative Agent, the Administrative Agent shall forthwith give notice
thereof to the other Banks and the Borrower, whereupon until such Bank
notifies the Borrower and the Administrative Agent that the circumstances
giving rise to such suspension no longer exist, the obligation of such Bank to
make Euro-Dollar Loans shall be suspended. Before giving any notice to the
Administrative Agent pursuant to this Section, such Bank shall designate a
different Euro-Dollar Lending Office if such designation will avoid the need
for giving such notice and will not, in the judgment of such Bank, be
otherwise disadvantageous to such Bank. If such Bank shall determine that it
may not lawfully continue to maintain and fund any of its outstanding
Euro-Dollar Loans to maturity and shall so specify in such notice, the
Borrower shall immediately prepay in full the then outstanding principal
amount of each such Euro-Dollar Loan, together with accrued interest thereon.
Concurrently with prepaying each such Euro-Dollar Loan, the Borrower shall
borrow a Base Rate Loan in an equal principal amount from such Bank (on which
interest and principal shall be payable contemporaneously with the related
Euro-Dollar Loans of the other Banks), and such Bank shall make such a Base
Rate Loan.
Section 9.03. Increased Cost and Reduced Return. (a) If on or after (x)
the date of this Amended Agreement, in the case of any Committed Loan or any
obligation to make Committed Loans or (y) the date of the related Money Market
Quote, in the case of any Money Market Loan, the adoption of any applicable
law, rule or regulation, or any change in any applicable law, rule or
regulation, or any change in the interpretation or administration thereof by
any governmental authority, central bank or comparable agency charged with the
interpretation or administration thereof, or compliance by any Bank (or its
Applicable Lending Office) with any request or directive (whether or not
having the force of law) of any such authority, central bank or comparable
agency shall impose, modify or deem applicable any reserve (including, without
limitation, any such requirement imposed by the Board of Governors of the
Federal Reserve System, but excluding with respect to any Euro-Dollar Loan any
such requirement included in an applicable Euro-Dollar Reserve Percentage),
special deposit, insurance assessment or similar requirement against assets
of, deposits with or for the account of, or credit extended by, any Bank (or
its Applicable Lending Office) or shall impose on any Bank (or its Applicable
Lending Office) or on the United States market for certificates of deposit or
the London interbank market any other condition affecting its Fixed Rate
Loans, its Note or its obligation to make Fixed Rate Loans or its obligations
hereunder in respect of Letters of Credit and the result of any of the
foregoing is to increase the cost to such Bank (or its Applicable Lending
Office) of making or maintaining any Fixed Rate Loan or of issuing or
participating in any Letter of Credit, or to reduce the amount of any sum
received or receivable by such Bank (or its Applicable Lending Office) under
this Agreement or under its Note with respect thereto, by an amount deemed by
such Bank to be material, then, within 15 days after demand by such Bank (with
a copy to the Administrative Agent), the Borrower shall pay to such Bank such
additional amount or amounts as will compensate such Bank for such increased
cost or reduction.
(b) If any Bank shall have determined that, after the date of this
Amended Agreement, the adoption of any applicable law, rule or regulation
regarding capital adequacy, or any change in any such law, rule or regulation,
or any change in the interpretation or administration thereof by any
governmental authority, central bank or comparable agency charged with the
interpretation or administration thereof, or any request or directive
regarding capital adequacy (whether or not having the force of law) of any
such authority, central bank or comparable agency, has or would have the
effect of reducing the rate of return on capital of such Bank (or its Parent)
as a consequence of such Bank's obligations hereunder to a level below that
which such Bank (or its Parent) could have achieved but for such adoption,
change, request or directive (taking into consideration its policies with
respect to capital adequacy) by an amount deemed by such Bank to be material,
then from time to time, within 15 days after demand by such Bank (with a copy
to the Administrative Agent), the Borrower shall pay to such Bank such
additional amount or amounts as will compensate such Bank (or its Parent) for
such reduction.
(c) Each Bank will promptly notify the Borrower and the Administrative
Agent of any event of which it has knowledge, occurring after the date hereof,
which will entitle such Bank to compensation pursuant to this Section and will
designate a different Applicable Lending Office if such designation will avoid
the need for, or reduce the amount of, such compensation and will not, in the
judgment of such Bank, be otherwise disadvantageous to such Bank. A
certificate of any Bank claiming compensation under this Section and setting
forth the additional amount or amounts to be paid to it hereunder, together
with the basis for determining such additional amounts, shall be conclusive in
the absence of manifest error. In determining such amount, such Bank agrees
to act in good faith and to use reasonable averaging and attribution methods.
(d) In the event any Bank shall seek compensation pursuant to this
Section, the Borrower may give notice to such Bank (with copy to the
Administrative Agent) that it wishes to seek one or more financial
institutions (which may be one or more of the Banks) to assume the Commitment
of such Bank and to purchase its outstanding Loans and Note and its interest
in any outstanding Letters of Credit. Each Bank requesting compensation
pursuant to this Section agrees to sell its Commitment, Loans, Note and
interest in this Agreement and any other credit documents to any such
financial institution pursuant to, and subject to the conditions contained in
Section 9.06.
Section 9.04. Taxes. (a) For purposes of this Section, the following
terms have the following meanings:
"Taxes" means any and all present or future taxes, duties, levies,
imposts, deductions, charges or withholdings with respect to any payment by
the Borrower pursuant to this Agreement or under any Note, and all liabilities
with respect thereto, excluding (i) in the case of each Bank and the
Administrative Agent, taxes imposed on or measured by its income and/or net
worth, and franchise or similar taxes imposed on it by a jurisdiction under
the laws of which such Bank or the Administrative Agent (as the case may be)
is organized or in which its principal executive office is located or, in the
case of each Bank, in which its Applicable Lending Office or other permanent
establishment for the conduct of business is located, and (ii) in the case of
each Bank, any United States withholding tax imposed on such payments but only
to the extent that such Bank is subject to United States withholding tax at
the time such Bank first becomes a party to this Agreement.
"Other Taxes" means any present or future stamp or documentary taxes and
any other excise or property taxes, or similar charges or levies, which arise
from any payment made pursuant to this Agreement or under any Letter of Credit
or any Note or from the execution or delivery of, or otherwise with respect
to, this Agreement or any Letter of Credit or any Note.
(b) Any and all payments by the Borrower to or for the account of any
Bank or the Administrative Agent hereunder or under any Note shall be made
without deduction for any Taxes or Other Taxes; provided that, if the Borrower
shall be required by law to deduct any Taxes or Other Taxes from any such
payments, (i) the sum payable shall be increased as necessary so that after
making all required deductions (including deductions applicable to additional
sums payable under this Section such Bank or the Administrative Agent (as the
case may be) receives an amount equal to the sum it would have received had no
such deductions been made, (ii) the Borrower shall make such deductions, (iii)
the Borrower shall pay the full amount deducted to the relevant taxation
authority or other authority in accordance with applicable law and (iv) the
Borrower shall furnish to the Administrative Agent, at its address referred to
in Section 10.01, the original or a certified copy of a receipt evidencing
payment thereof.
(c) The Borrower agrees to indemnify each Bank and the Administrative
Agent for the full amount of Taxes or Other Taxes (including, without
limitation, any Taxes or Other Taxes imposed or asserted by any jurisdiction
on amounts payable under this Section paid by such Bank or the Administrative
Agent (as the case may be) and any liability (including penalties, interest
and expenses) arising therefrom or with respect thereto. This indemnification
shall be paid within 15 days after such Bank or the Administrative Agent (as
the case may be) makes demand therefor.
(d) Each Bank organized under the laws of a jurisdiction outside the
United States, on or prior to the date of its execution and delivery of this
Agreement in the case of each Bank listed on the signature pages hereof and on
or prior to the date on which it becomes a Bank in the case of each other
Bank, and from time to time thereafter if requested in writing by the Borrower
(but only so long as such Bank remains lawfully able to do so), shall provide
the Borrower with Internal Revenue Service form 1001 or 4224, as appropriate,
or any successor form prescribed by the Internal Revenue Service, certifying
that such Bank is entitled to benefits under an income tax treaty to which the
United States is a party which exempts the Bank from United States withholding
tax or reduces the rate of withholding tax on payments of interest for the
account of such Bank or certifying that the income receivable pursuant to this
Agreement is effectively connected with the conduct of a trade or business in
the United States.
(e) For any period with respect to which a Bank has failed to provide
the Borrower with the appropriate form pursuant to Section 9.04(d) (unless
such failure is due to a change in treaty, law or regulation occurring
subsequent to the date on which such form originally was required to be
provided), such Bank shall not be entitled to indemnification under Section
9.04(b) or (c) with respect to Taxes imposed by the United States; provided
that if a Bank, which is otherwise exempt from or subject to a reduced rate of
withholding tax, becomes subject to Taxes because of its failure to deliver a
form required hereunder, the Borrower shall take such steps as such Bank shall
reasonably request to assist such Bank to recover such Taxes.
(f) Each Bank will promptly notify the Borrower and the Administrative
Agent of any event of which it has knowledge, occurring after the date hereof,
which would require the Borrower to pay additional amounts to or for the
account of such Bank pursuant to this Section 9.04, and such Bank will change
the jurisdiction of its Applicable Lending Office if, in the judgment of such
Bank, such change (i) will eliminate or reduce any such additional payment
which may thereafter accrue and (ii) is not otherwise disadvantageous to such
Bank. A certificate of any Bank claiming compensation under this Section, and
setting forth the additional amount or amounts to be paid to it hereunder,
together with the basis for determining such additional amounts, shall be
conclusive in the absence of manifest error. In determining such amount, such
Bank agrees to act in good faith and to use reasonable averaging and
attribution methods.
Section 9.05. Base Rate Loans Substituted for Affected Fixed Rate Loans.
If (i) the obligation of any Bank to make Euro-Dollar Loans has been suspended
pursuant to Section 9.02 or (ii) any Bank has demanded compensation under
Section 9.03 or 9.04 with respect to its Euro-Dollar Loans and the Borrower
shall, by at least five Euro-Dollar Business Days' prior notice to such Bank
through the Administrative Agent, have elected that the provisions of this
Section shall apply to such Bank, then, unless and until such Bank notifies
the Borrower that the circumstances giving rise to such suspension or demand
for compensation no longer exist:
(a) all Loans which would otherwise be made by such Bank as Euro-Dollar
Loans shall be made instead as Base Rate Loans (on which interest and
principal shall be payable contemporaneously with the related Euro-Dollar
Loans of the other Banks); and
(b) after each of its Euro-Dollar Loans has been repaid, all payments of
principal which would otherwise be applied to repay such Euro-Dollar Loans
shall be applied to repay its Base Rate Loans instead.
Section 9.06. Borrower's Right to Replace Banks. If at any time any
Bank shall be in receivership or shall seek compensation or recompense
pursuant to any provision of this Article 9, the Borrower shall have the right
to replace such Bank with another financial institution; provided, that such
new financial institution shall be acceptable to the Issuing Bank and the
Administrative Agent (unless the Bank to be replaced is the Administrative
Agent, in which case such new financial institution shall be acceptable to the
Issuing Bank). Each Bank agrees to its replacement at the option of the
Borrower pursuant to this Section, provided, that the successor financial
institution shall purchase without recourse the Commitment of such Bank and
all obligations of the Borrower to such Bank hereunder and under the Notes for
cash in an aggregate amount equal to the aggregate unpaid principal thereof,
all unpaid interest accrued thereon, all unpaid fees and letter of credit fees
accrued for the account of such Bank, and all other amounts (if any) then
owing to such Bank hereunder and otherwise in accordance with this Agreement
(including such amounts, if any, as would be payable by the Borrower pursuant
to Section 2.13 if the Loans of such Bank were prepaid in full on such date).
Nothing contained in this Section shall alter or modify the Borrower's
obligation to pay any amount payable to or for the account of the replaced
Bank pursuant to any other Section of this Article 9 accruing prior to the
replacement of such Bank. Notwithstanding anything to the contrary contained
in this Section 9.06, the Issuing Bank may not be replaced hereunder at any
time while it has Letters of Credit outstanding hereunder unless arrangements
satisfactory to the such bank (including, the furnishing of a standby letter
of credit in form and substance, and issued by an issuer, satisfactory to such
bank or the furnishing of cash collateral in amounts and pursuant to
arrangements satisfactory to such bank) have been made with respect to such
outstanding Letters of Credit.
ARTICLE 10
Miscellaneous
Section 10.01. Notices. All notices, requests and other communications
to any party hereunder shall be in writing (including bank wire, telex,
facsimile transmission or similar writing) and shall be given to such party:
(w) in the case of the Borrower or the Administrative Agent, at its address,
facsimile number or telex number set forth on the signature pages hereof, (x)
in the case of any Guarantor, to it care of the Borrower, (y) in the case of
any Bank, at its address, facsimile number or telex number set forth in its
Questionnaire or (z) in the case of any party, such other address, facsimile
number or telex number as such party may hereafter specify for the purpose by
notice to the Administrative Agent and the Borrower. Each such notice,
request or other communication shall be effective (i) if given by telex, when
such telex is transmitted to the telex number specified in this Section and
the appropriate answerback is received, (ii) if given by facsimile
transmission, when transmitted to the facsimile number specified in this
Section and confirmation of receipt is received, (iii) if given by mail, 72
hours after such communication is deposited in the mails with first class
postage prepaid, addressed as aforesaid or (iv) if given by any other means,
when delivered at the address specified in this Section; provided that notices
to the Administrative Agent under Article 2 or Article 10 shall not be
effective until received.
Section 10.02. No Waivers. No failure or delay by the Administrative
Agent or any Bank in exercising any right, power or privilege or under any
Financing Document shall operate as a waiver thereof nor shall any single or
partial exercise thereof preclude any other or further exercise thereof or the
exercise of any other right, power or privilege. The rights and remedies
provided in the Financing Documents shall be cumulative and not exclusive of
any rights or remedies provided by law.
Section 10.03. Expenses; Indemnification. (a) The Borrower shall pay (i)
all reasonable out-of-pocket expenses of the Administrative Agent and the
Issuing Bank, including fees and disbursements of special counsel for the
Administrative Agent, in connection with the preparation of the Financing
Documents, any waiver or consent thereunder or any amendment thereof or any
Default or alleged Default hereunder and (ii) if an Event of Default occurs,
all out-of-pocket expenses incurred by the Administrative Agent, the Issuing
Bank and each Bank, including (without duplication) the reasonable fees and
disbursements of outside counsel and the allocated cost of inside counsel, in
connection with such Event of Default and collection, bankruptcy, insolvency
and other enforcement proceedings resulting therefrom.
(b) The Borrower agrees to indemnify the Administrative Agent, the
Issuing Bank and each Bank, their respective affiliates and the respective
directors, officers, agents and employees of the foregoing (each an
"Indemnitee") and hold each Indemnitee harmless from and against any and all
liabilities, losses, damages, costs and expenses of any kind, including,
without limitation, the reasonable fees and disbursements of counsel, which
may be incurred by such Indemnitee in connection with any investigative,
administrative or judicial proceeding (whether or not such Indemnitee shall be
designated a party thereto) brought or threatened relating to or arising out
of the Financing Documents or any actual or proposed use of proceeds of Loans
hereunder; provided that no Indemnitee shall have the right to be indemnified
hereunder for such Indemnitee's own gross negligence or willful misconduct as
determined by a court of competent jurisdiction.
Section 10.04. Sharing of Set-Offs. Each Bank agrees that if it shall,
by exercising any right of set-off or counterclaim or otherwise, receive
payment of a proportion of the aggregate amount of principal and interest due
with respect to any Note held by it which is greater than the proportion
received by any other Bank in respect of the aggregate amount of principal and
interest due with respect to any Note held by such other Bank, the Bank
receiving such proportionately greater payment shall purchase such
participations in the Notes held by the other Banks, and such other
adjustments shall be made, as may be required so that all such payments of
principal and interest with respect to the Notes held by the Banks shall be
shared by the Banks pro rata; provided that nothing in this Section shall
impair the right of any Bank to exercise any right of set-off or counterclaim
it may have and to apply the amount subject to such exercise to the payment of
indebtedness of the Borrower other than its indebtedness hereunder. Each of
the Borrower and the Guarantors agrees, to the fullest extent it may
effectively do so under applicable law, that any holder of a participation in
a Note, whether or not acquired pursuant to the foregoing arrangements, may
exercise rights of set-off or counterclaim and other rights with respect to
such participation as fully as if such holder of a participation were a direct
creditor of the Borrower or such Guarantor, as the case may be, in the amount
of such participation.
Section 10.05. Amendments and Waivers. Any provision of this Agreement
or the Notes may be amended or waived if, but only if, such amendment or
waiver is in writing and is signed by the Borrower and the Required Banks
(and, if the rights or duties of the Administrative Agent, the Syndication
Agent or the Issuing Bank are affected thereby, by it); provided that no such
amendment or waiver shall, unless signed by all the Banks, (i) increase or
decrease the Commitment of any Bank (except for a ratable decrease in the
Commitments of all Banks) or subject any Bank to any additional obligation,
(ii) reduce the principal of or rate of interest on any Loan or any Unpaid
Drawing or any fees hereunder, (iii) postpone the date fixed for any payment
of principal of or interest on any Loan or any Unpaid Drawing or any fees
hereunder or for termination of any Commitment, (iv) extend the Letter of
Credit Termination Date or (except as expressly contemplated by Section 3.02)
the expiry date of any Letter of Credit or (v) change this Section 10.05 or
the percentage of the Commitments or of the aggregate unpaid principal amount
of the Notes, or the number of Banks, which shall be required for the Banks or
any of them to take any action under this Section or any other provision of
this Agreement.
Section 10.06. Successors and Assigns. (a) The provisions of this
Agreement shall be binding upon and inure to the benefit of the parties hereto
and their respective successors and assigns, provided that, the Borrower may
not assign or otherwise transfer any of its rights under this Agreement
without the prior written consent of all Banks.
(b) Any Bank may at any time grant to one or more banks or other
institutions (each a "Participant") participating interests in its Commitment
or any or all of its Loans. In the event of any such grant by a Bank of a
participating interest to a Participant, whether or not upon notice to the
Borrower and the Administrative Agent, such Bank shall remain responsible for
the performance of its obligations hereunder, and the Borrower and the
Administrative Agent shall continue to deal solely and directly with such Bank
in connection with such Bank's rights and obligations under this Agreement.
Any agreement pursuant to which any Bank may grant such a participating
interest shall provide that such Bank shall retain the sole right and
responsibility to enforce the obligations of the Borrower hereunder including,
without limitation, the right to approve any amendment, modification or waiver
of any provision of this Agreement; provided that such participation agreement
may provide that such Bank will not agree to any modification, amendment or
waiver of this Agreement described in clause (i), (ii), (iii) or (iv) of
Section 10.05 without the consent of the Participant. The Borrower agrees
that each Participant shall, to the extent provided in its participation
agreement, be entitled to the benefits of Article 9 with respect to its
participating interest. An assignment or other transfer which is not
permitted by subsection (c) or (d) below shall be given effect for purposes of
this Agreement only to the extent of a participating interest granted in
accordance with this subsection (b).
(c) Any Bank may at any time assign to one or more banks or other
institutions (each an "Assignee") all, or a proportionate part (equivalent to
an initial Commitment of not less than $5,000,000 or such lesser amount as may
be acceptable to the Borrower and the Administrative Agent), of all, of its
rights and obligations under this Agreement and the Notes, and such Assignee
shall assume such rights and obligations, pursuant to an Assignment and
Assumption Agreement in substantially the form of Exhibit G hereto executed by
such Assignee and such transferor Bank, with (and subject to) the subscribed
consent of the Borrower, which shall not be unreasonably withheld, the Issuing
Bank and the Administrative Agent; provided that if an Assignee is an
affiliate of such transferor Bank, no such consent shall be required; and
provided further that such assignment may, but need not, include rights of the
transferor Bank in respect of outstanding Money Market Loans. Upon execution
and delivery of such instrument and payment by such Assignee to such
transferor Bank of an amount equal to the purchase price agreed between such
transferor Bank and such Assignee, such Assignee shall be a Bank party to this
Agreement and shall have all the rights and obligations of a Bank with a
Commitment as set forth in such instrument of assumption, and the transferor
Bank shall be released from its obligations hereunder to a corresponding
extent, and no further consent or action by any party shall be required. Upon
the consummation of any assignment pursuant to this subsection (c), the
transferor Bank, the Administrative Agent and the Borrower shall make
appropriate arrangements so that, if required, a new Note is issued to the
Assignee. In connection with any such assignment, the transferor Bank shall
pay to the Administrative Agent an administrative fee for processing such
assignment in the amount of $2,500. If the Assignee is not incorporated under
the laws of the United States of America or a state thereof, it shall deliver
to the Borrower and the Administrative Agent certification as to exemption
from deduction or withholding of any United States federal income taxes in
accordance with Section 9.04.
(d) Any Bank may at any time assign all or any portion of its rights
under this Agreement and its Note to a Federal Reserve Bank. No such
assignment shall release the transferor Bank from its obligations hereunder.
(e) No Assignee, Participant or other transferee of any Bank's rights
shall be entitled to receive any greater payment under Section 9.03 or 9.04
than such Bank would have been entitled to receive with respect to the rights
transferred, unless such transfer is made with the Borrower's prior written
consent or by reason of the provisions of Section 9.02, 9.03 or 9.04 requiring
such Bank to designate a different Applicable Lending Office under certain
circumstances or at a time when the circumstances giving rise to such greater
payment did not exist.
Section 10.07. Collateral. Each of the Banks represents to the
Administrative Agent, the Syndication Agent and each of the other Banks that
it in good faith is not relying upon any "margin stock" (as defined in
Regulation U and Regulation G) as collateral in the extension or maintenance
of the credit provided for in this Agreement.
Section 10.08. Governing Law; Submission to Jurisdiction. This
Agreement and each Note shall be governed by and construed in accordance with
the laws of the State of New York. The parties hereto hereby (i) submit to
the nonexclusive jurisdiction of the United States District Court for the
Southern District of New York and of any New York State court sitting in New
York City for purposes of all legal proceedings arising out of or relating to
this Agreement or the transactions contemplated hereby and (ii) irrevocably
waive, to the fullest extent permitted by law, any objection which they may
now or hereafter have to the laying of the venue of any such proceeding
brought in such a court and any claim that any such proceeding brought in such
a court has been brought in an inconvenient forum; provided, however, that
nothing in this Section is intended to waive the right of any party to remove
any such action or proceeding commenced in any such New York State court to an
appropriate New York Federal court to the extent the basis for such removal
exists under applicable law.
Section 10.09. Counterparts; Integration. This Agreement may be signed
in any number of counterparts, each of which shall be an original, with the
same effect as if the signatures thereto and hereto were upon the same
instrument. This Agreement constitutes the entire agreement and understanding
among the parties hereto and supersedes any and all prior agreements and
understandings, oral or written, relating to the subject matter hereof.
Section 10.10. WAIVER OF JURY TRIAL. EACH OF THE BORROWER, THE
ADMINISTRATIVE AGENT AND THE BANKS HEREBY IRREVOCABLY WAIVES ANY AND ALL RIGHT
TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THIS
AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed by their respective authorized officers as of the day and year
first above written.
VALERO ENERGY CORPORATION
By /s/ John D. Gibbons
Title: Vice President, Finance & Treasurer
Facsimile number: 210-370-2988
MORGAN GUARANTY TRUST COMPANY OF NEW YORK
By /s/ James S. Finch
Title: Vice President
BANK OF MONTREAL
By /s/ Donald G. Skipper
Title: Director
BANK OF TOKYO-MITSUBISHI, LTD.
By /s/ T. Yokokawa
Title: Deputy General Manager
BANKBOSTON, N.A.
By /s/ Terrence Ronan
Title: Vice President
BANQUE NATIONALE DE PARIS, HOUSTON AGENCY
By /s/ Henry F. Setina
Title: Vice President
BHF-BANK AKTIENGESELLSCHAFT
By /s/ Paul Travers
Title:Vice President
By /s/ John Sykes
Title: Assistant Vice President
CIBC INC.
By /s/ Aleksandra K. Dymanus
Title: Director
CREDIT LYONNAIS NEW YORK BRANCH
By /s/ Pascal Poupelle
Title: Executive Vice President
THE FIRST NATIONAL BANK OF CHICAGO
By /s/ Dixon P. Schultz
Title: Vice President
THE FUJI BANK, LIMITED
By /s/ Jacques M. Azagury
Title: Vice President & Manager
ROYAL BANK OF CANADA
By /s/ Gil J. Benard
Title: Senior Manager
SOCIETE GENERALE
By /s/ Richard A. Gould
Title: Vice President
TORONTO DOMINION (TEXAS), INC.
By /s/ Frederic Hawley
Title: Vice President
BARCLAYS BANK PLC
By /s/ Nicholas A. Bell
Title: Director, Portfolio Management
CHRISTIANIA BANK, NEW YORK BRANCH
By /s/ William S. Phillips
Title: Vice President
By /s/ Peter M. Dodge
Title: First Vice President
DEN NORSKE BANK ASA
By /s/ Byron L. Cooley
Title: Senior Vice President
By /s/ J. Morten Kreutz
Title: Vice President
GUARANTY FEDERAL BANK, F.S.B.
By /s/ Jim R. Hamilton
Title: Vice President
THE INDUSTRIAL BANK OF JAPAN, LIMITED,
NEW YORK BRANCH
By /s/ Kazutoshi Kuwahara
Title: Executive Vice President,
Houston Office
THE SUMITOMO BANK, LIMITED
By /s/ Reiji Sato
Title: Joint General Manager
THE BANK OF NOVA SCOTIA
By /s/ F.C.H. Ashby
Title: Senior Manger, Loan Operations
CREDIT AGRICOLE INDOSUEZ
By /s/ Katharine L. Abbott
Title: First Vice President
By /s/ Dean Balice
Title: Senior Vice President Branch Manager
THE DAI-ICHI KANGYO BANK, LTD.
By /s/ Seiji Imai
Title: Vice President
THE FROST NATIONAL BANK
By /s/ Jim Crosby
Title: Senior Vice President
MELLON BANK, N.A.
By /s/ Roger E. Howard
Title: Vice President
THE MITSUI TRUST AND BANKING COMPANY,
LIMITED
By /s/ Margaret Holloway
Title: Vice President & Manager
THE SANWA BANK, LIMITED,
DALLAS AGENCY
By /s/ Matthew G. Patrick
Title: Vice President
UNION BANK OF SWITZERLAND, HOUSTON AGENCY
By /s/ Dan O. Boyle
Title: Managing Director
By /s/ W. Benson Vance
Title: Assistant Vice President
MORGAN GUARANTY TRUST COMPANY OF
NEW YORK,as Administrative Agent
By /s/ James S. Finch
Title: Vice President
60 Wall Street
New York, New York 10260-0060
Fax: 212-648-5023
BANK OF MONTREAL, as Syndication
Agent and Issuing Bank
By /s/ Donald G. Skipper
Title: Director
700 Louisiana Avenue, Suite 4400
Houston, Texas 77002
Fax: 713-223-4007
<PAGE>
Pricing Schedule
The "Euro-Dollar Margin", "Facility Fee Rate" and "Letter of Credit Rate"
for any day are the respective percentages set forth below in the
applicable row under the column corresponding to the Status that
exists on such day:
Status Level I Level II Level III Level IV Level V
Euro-Dollar Margin 0.2100% 0.2150% 0.3000% 0.500% 0.875%
Facility Fee Rate 0.0900% 0.110% 0.150% 0.250% 0.375%
Letter of Credit Rate
Performance 0.1050% 0.1075% 0.1500% 0.2500% 0.4375%
Financial 0.2100% 0.2150% 0.3000% 0.5000% 0.8750%
For purposes of this Schedule, the following terms have the following
meanings (subject to the last paragraph of this Schedule):
"Level I Status" exists at any date if, at such date, the Borrower's
long-term debt is rated at least BBB+ by S&P or at least Baa1 by Moody's.
"Level II Status" exists at any date if, at such date, (i) the Borrower's
long-term debt is rated at least BBB by S&P or at least Baa2 by Moody's
and (ii) Level I Status does not exist.
"Level III Status" exists at any date if, at such date, (i) the Borrower's
long-term debt is rated at least BBB- by S&P or at least Baa3 by Moody's
and (ii) neither Level I Status nor Level II Status exists.
"Level IV Status" exists at any date if, at such date, (i) the Borrower's
long-term debt is rated at least BB+ by S&P and least Ba1 by Moody's and
(ii) none of Level I Status, Level II Status and Level III Status exists.
"Level V Status" exists at any date if, at such date, no other Status
exists.
"Status" refers to the determination of which of Level I Status,
Level II Status, Level III Status, Level IV Status or Level V
Status exists at any date.
The credit ratings to be utilized for purposes of this Schedule are
those assigned to the senior unsecured long-term debt securities of the
Borrower without third-party credit enhancement, and any rating assigned
to any other debt security of the Borrower shall be disregarded. The
rating in effect at any date is that in effect at the close of business
on such date.
So long as the Borrower is rated at least BB- by S&P and at least Ba3 by
Moody's, if Borrower is split-rated and the ratings differential is one
level, the higher of the two ratings will apply (e.g., BBB/Baa3 results in
Level II Status). If the Borrower is split-rated and the ratings
differential is more than one level, the average of the two ratings (or
the higher of two intermediate ratings) shall be used (e.g., BBB-/Ba1
results in Level III Status, as does BBB/Ba2).
<PAGE>
Commitment Schedule
Bank Commitment
Morgan Guaranty Trust Company of New York $ 47,750,000
Bank of Montreal 47,750,000
Bank of Tokyo-Mitsubishi, Ltd. 39,500,000
BankBoston, N.A. 39,500,000
Banque Nationale De Paris, Houston Agency 39,500,000
Barclays Bank PLC 39,500,000
CIBC Inc. 39,500,000
Credit Lyonnais New York Branch 39,500,000
The First National Bank of Chicago 39,500,000
The Fuji Bank, Limited 39,500,000
Royal Bank of Canada 39,500,000
Societe Generale 39,500,000
Toronto Dominion (Texas), Inc. 39,500,000
Union Bank of Switzerland, Houston Agency 39,500,000
Den Norske Bank ASA 35,000,000
Christiania Bank, New York Branch 30,000,000
The Industrial Bank of Japan, Limited, New York Branch 30,000,000
Guaranty Federal Bank, F.S.B. 28,000,000
The Bank of Nova Scotia 22,500,000
Mellon Bank, N.A. 22,500,000
The Sanwa Bank, Limited, Dallas Agency 22,500,000
Credit Agricole Indosuez 20,000,000
The Dai-Ichi Kangyo Bank, Ltd. 20,000,000
The Frost National Bank 20,000,000
BHF-Bank Aktiengesellschaft 15,000,000
The Sumitomo Bank, Limited 0
The Mitsui Trust and Banking Company, Limited 0
Total $835,000,000
Exhibit 10.12
EMPLOYMENT AGREEMENT
This Employment Agreement ("Agreement") is between Valero Refining and
Marketing Company, a Delaware corporation ("Valero"), and William E. Greehey,
a resident of San Antonio, Texas, ("Greehey"). This Agreement is effective on
the day that all of the capital stock of Valero is distributed by Valero
Energy Corporation ("VEC") to its stockholders ("Effective Date"). Valero and
Greehey are sometimes referred to herein individually as a "Party", and
collectively as the "Parties". The Parties hereby agree as follows:
1. Employment. Valero hereby employs Greehey, and Greehey hereby
accepts employment with Valero, subject to the terms and conditions set forth
in this Agreement.
2. Term. Subject to the provisions for termination of employment as
provided in Section 9(a), this Agreement shall be in effect for a period of
two years beginning on the Effective Date and ending on the second anniversary
of the Effective Date ("Initial Period"). If Greehey notifies Valero at least
ninety (90) days prior to the end of the Initial Period of his intention to
extend this Agreement, then this Agreement shall be extended on a
month-to-month basis ("Extension Period"). Greehey may terminate this
Agreement within the Extension Period by giving Valero ninety (90) calendar
days written notice of termination.
3. Compensation. Greehey's compensation during his employment under
the terms of this Agreement and prior to his retirement shall be as follows:
(a) Base Salary. Valero shall pay to Greehey a base salary (the
"Base Salary") of Nine Hundred Thousand Dollars ($900,000) per year. In
addition, the Board of Directors of Valero shall in good faith consider
granting annual increases to the Base Salary based upon such factors as
Greehey's performance and the growth and profitability of Valero, but it shall
have no obligation to grant any such increases in compensation. Any such
increase to the Base Salary shall be deemed thereafter to be the Base Salary;
provided, however, based upon the same such factors, the Board of Directors of
Valero may thereafter reduce the Base Salary to an amount that is not below
the amount first set forth above in this Paragraph 3(a). The Base Salary
shall be payable in equal, semi-monthly installments on the 15th day and last
day of each month or at such other times and in such installments as may be
agreed between Valero and Greehey. All payments shall be subject to the
deduction of payroll taxes, income tax withholdings, and similar deductions
and withholdings as required by law.
(b) Bonus. In addition to the Base Salary, Greehey shall be
eligible to receive bonus compensation in such amounts and at such times as
the Board of Directors of Valero shall from time to time determine. In the
year of his retirement, Greehey shall receive a pro-rata share of bonus
compensation in such amount as the Board of Directors of Valero shall
determine at the customary time annual bonuses are determined and paid to
executive officers of Valero.
(c) Stock Option Grant. Greehey shall receive a nonqualified stock
option grant to purchase 290,000 shares of Valero Energy Corporation common
stock, granted on the fifth (5th) business day following approval of said
grant by the Board of Directors of Valero Energy Corporation ("Grant Date")
with an exercise price per share equal to the fair market value of Valero
Energy Corporation common stock on the Grant Date. These options shall vest
at the rate of 50% on the first anniversary of the Grant Date and the
remaining 50% on the second anniversary of the Grant Date, and shall have a
total term of ten years from the Grant Date. These vesting periods shall not
be modified by the accelerated vesting provisions set forth in Paragraph 7(f).
4. Expenses and Benefits. During his employment, Greehey is authorized
to incur reasonable expenses in connection with the business of Valero,
including expenses for entertainment, travel and similar matters. Valero will
reimburse Greehey for such expenses upon presentation by Greehey of such
accounts and records as Valero may from time to time reasonably require.
Valero also agrees to provide Greehey with the following benefits during
employment:
(a) Insurance. Permanent life insurance in addition to any life
insurance under Valero's normal benefit plans in accordance with Paragraph
7(g).
(b) Employee Benefit Plans. Participation in any employee benefit
plans now existing or hereafter adopted by Valero for its executives or other
officers and employees.
(c) Club Memberships. Valero shall reimburse Greehey for all
monthly dues and fees for Greehey's present country club memberships and for
any expenses incurred by Greehey in connection with such club memberships in
representing Valero's interests.
(d) Vacations. Greehey shall be entitled (in addition to the usual
Valero holidays) to a paid vacation for a period in each calendar year not
exceeding five weeks.
(e) Working Facilities. Greehey shall be furnished by Valero with
an office, secretarial help and other facilities and services, including but
not limited to full use of Valero's mail and communication facilities and
services reasonably suitable to his position and reasonably necessary for the
performance of his duties under this Agreement.
(f) Tax Planning. Greehey will be furnished tax planning services
by an independent certified public accounting firm of the type furnished to
executive officers of Valero.
(g) Other. Such other items as Valero shall from time to time
consider necessary or appropriate to assist Greehey in or to provide
incentives or compensation for the performance of his duties under this
Agreement.
5. Positions and Duties. Greehey is employed as Chief Executive
Officer of Valero and for no additional compensation shall, subject to his
being elected or re-elected as a director by Valero's stockholders, serve at
the discretion of the Board as its Chairman of the Board. In addition, if
requested to do so, Greehey shall serve as the chief executive officer or as a
member of the Board of Directors, or both, of any subsidiary or affiliate of
Valero. Such duties shall be performed at Valero's principal place of
business in San Antonio, Texas.
6. Extent of Service. Greehey shall, during his employment under the
terms of this Agreement, devote substantially all of his working time,
attention, energies and business efforts to his duties as an employee of
Valero and to the business of Valero generally, and shall not, during the term
of this Agreement, engage in any other business activity whatsoever, whether
or not such business activity is pursued for gain, profit or other pecuniary
advantage; however, this Paragraph 6 shall not be construed to prevent Greehey
from serving as a member of the board of directors of other companies, or from
investing his personal, private assets as a passive investor in such form or
manner as will not require any active services on the part of Greehey in the
management or operation of the affairs of the companies, partnerships, or
other business entities in which any such passive investments are made.
7. Retirement. Notwithstanding the term and notice provisions of
Paragraph 2, Greehey may retire at any time as Chief Executive Officer of
Valero under the terms of this Agreement by giving Valero written notice of
his intention to retire 90 days in advance of the designated retirement date.
Upon retirement, and provided that Valero has not terminated Greehey for cause
pursuant to Paragraph 9(a), Greehey shall no longer be employed by Valero, but
he shall have the following rights and obligations:
(a) Continuation as Chairman. Greehey agrees to continue serving
at the discretion of the Board as Chairman of the Board of Valero for two
years following his effective date of retirement;
(b) Duties. As Chairman of the Board of Valero, Greehey shall
perform such duties as are reasonably required by a person holding such
position. However, it is agreed and understood that Greehey shall not be
obligated to devote any particular amount of time to the affairs of Valero
over and above that which he determines is necessary to perform his duties as
a director, and will be free to pursue other business interests provided the
pursuit thereof does not violate any fiduciary duty owed to Valero in
Greehey's capacity as Chairman of the Board or violate the provisions of
Paragraphs 11 or 12;
(c) Compensation. Greehey shall be paid compensation for serving
as Chairman of the Board equal to one half of the Base Salary being paid to
Greehey at the time of his retirement. This payment shall continue for the
two year period Greehey serves as Chairman of the Board (other than as a
result of Greehey's refusal to serve as Chairman of the Board) and shall be
payable in semi-monthly installments;
(d) Working Facilities. Valero shall provide Greehey with off-site
office facilities and secretarial and other office services reasonably
commensurate with Greehey's position as retired Chief Executive Officer of
Valero. The office facilities and secretarial and other services to be
provided to Greehey following his retirement shall continue until December 31,
2005.
(e) Annual Physical Examination. Valero shall pay for an annual
physical examination for Greehey for the remainder of his life.
(f) Vesting and Option Exercise Periods. Upon retirement,
Greehey's stock options, stock appreciation rights, restricted stock grants,
performance share awards, and any other similar stock or long-term incentive
rights or benefits previously granted to Greehey, which have not fully vested,
shall immediately fully vest, except for any unvested stock options granted to
Greehey pursuant to Paragraph 3(c). Greehey shall have the right to exercise
any vested stock options, stock appreciation rights, restricted stock grants,
performance share awards, and other similar stock or long-term incentive
rights or benefits for the full remaining term thereof. Any outstanding
performance share award shall be deemed to have been earned at the target
level for the full term.
(g) Retirement Benefits and Supplemental Retirement Benefits.
Greehey shall be entitled to all retirement benefits provided under the Valero
Energy Corporation Pension Plan ("Pension Plan") and Supplemental Executive
Retirement Plan (SERP), with the following supplemental benefits:
(i) retiree medical coverage consistent with coverage amount
and/or deductibles and costs as provided to Valero retirees;
(ii) paid up permanent life insurance, in addition to life
insurance included in Valero's normal retirement benefit plans, with cash
value of at least $300,000;
(iii) a total of eight "points" under the SERP to be added
to his years of credited service, or his age, or divided between both in such
proportion that total eight, as he elects at time of retirement. The amount
per month equal to the difference between Greehey's normal monthly retirement
benefit under the Pension Plan and the SERP with the eight added points shall
constitute a supplemental monthly retirement payment, payable at the time each
payment is made under the Pension Plan. For purposes of calculating Greehey's
monthly retirement benefits, service shall be deemed continuous from August
19, 1963 through the date of retirement pursuant to this Agreement.
Greehey shall not be entitled to participate in nor receive the
benefits of any special "window" retirement or early retirement program, if
any, that may be offered to other employees of Valero or subsidiaries at or
about the time of Greehey's giving notice of retirement or actual retirement;
and
(iv) payments under any other employee benefit plan(s), which
are due as a result of separation of service.
8. Death and Disability.
(a) Death. If during the term of Greehey's employment under this
Agreement and prior to the date of retirement Greehey dies, then in addition
to all other employee benefits to which Greehey's estate, spouse or other
beneficiaries may be entitled, Valero shall pay in equal semi-monthly
installments to the beneficiary designated by Greehey, or his estate if no
such beneficiary has been designated in writing to Valero, the Base Salary
which Greehey would have received if he had remained employed to the end of
the Initial Period or if his employment has been extended pursuant to
Paragraph 2, to the end of the Extension Period.
(b) Disability.
(i) If during the term of Greehey's employment under this
Agreement Greehey becomes unable to perform his duties as Chief Executive
Officer as a result of illness or physical injury as defined in Valero's Long
Term Disability Plan, Greehey shall be deemed to have retired and be entitled
to the benefits described in Paragraph 7(d), (e), (f) and (g).
(ii) If following his retirement as Chief Executive Officer,
Greehey becomes unable to perform his duties as Chairman of the Board, as
determined by a majority of the other Directors, Greehey's benefits under
Paragraph 7(a) and (b) shall cease; however, Greehey shall be entitled to the
balance of the remaining two years' compensation for serving as Chairman of
the Board, as defined in Paragraph 7 (c), payable in semi-monthly
installments.
9. Termination by Valero. Valero shall have the right to terminate
Greehey's employment as hereinafter provided.
(a) Termination for Cause. Valero shall have the right to
terminate Greehey's employment under this Agreement for cause. As used
herein, "cause" shall mean and be strictly limited to:
(i) Greehey's conviction of a crime constituting a felony
under federal or state law or involving moral turpitude;
(ii) an illegal act or acts that were intended to and did
defraud Valero; or
(iii) the willful refusal by Greehey to fulfill
responsibilities under this Agreement after written notice of such willful
refusal from the Board and the failure to correct such refusal within 30 days
from the date such notice is given. If Valero terminates this Agreement
pursuant to the provisions of this Paragraph 9(a): (i) all compensation or
other benefits due Greehey pursuant to Paragraphs 3 and 4 hereto shall be paid
by Valero to Greehey to the date of such termination; and (ii) all
supplemental and additional benefits and rights granted to Greehey at
retirement by Paragraph 7 are revoked and become null and void; and, upon such
payment by Valero, all obligations of Valero to Greehey hereunder shall be
totally and completely satisfied, and Valero shall have no further obligations
of any type to Greehey pursuant to this Agreement.
(b) Termination other than for Cause. Valero shall have the right
to terminate Greehey's employment as Chief Executive Officer under this
Agreement without cause, and Greehey's employment under this Agreement shall
be deemed terminated upon the giving of 90 days written notice to such effect
by Valero to Greehey. A termination of employment other than as a result of
death, retirement, disability, or in accordance with Paragraph 9(a) shall be
deemed a termination without cause. In the event of termination without
cause:
(i) Valero shall pay Greehey in cash a lump sum amount equal
to the product of Greehey's semi-monthly Base Salary being paid to Greehey at
the date of such termination multiplied by the number of semi-monthly pay
periods remaining to the end of the Initial Period (or successive period if
employment has been extended pursuant to Paragraph 2), plus an amount equal to
the highest annual bonus paid to Greehey during the five years preceding the
time of such termination. Such amount shall be paid within five days of
termination;
(ii) Greehey shall receive all the payments and benefits to
which he is entitled pursuant to Paragraph 7(f) and (g); but shall not be
entitled to receive any further payments or benefits under Paragraph 7 after
the date of such termination, including any payment under 7 (c).
(c) Termination as Chairman of the Board. If for any reason
Greehey is removed by a majority of the other Directors as Chairman of the
Board after his retirement as Chief Executive Officer, other than as a result
of death or disability, he shall receive the balance of the remaining two
years' compensation for serving as Chairman of the Board as defined in
Paragraph 7(c), payable in semi-monthly installments.
10. Executive Severance Agreement. In the event Greehey receives any
cash payments under that certain Executive Severance Agreement dated December
15, 1982 between Valero and Greehey, Valero shall be entitled to credit any
cash payments that are made to Greehey pursuant to his Executive Severance
Agreement against any cash payments that it is obligated to make under this
Agreement. Valero agrees that if remuneration or benefits of any form paid to
Greehey by Valero during or after his employment with Valero are excess
parachute payments as defined in Section 280G of the Internal Revenue Code of
1986, as amended ("Code"), and are subject to the 20% excise tax imposed by
Section 4999 of the Code, Valero shall pay Greehey a bonus no later than seven
days prior to the earliest of the due date for the excise tax return or
initial estimated payment, in an amount equal to the excise tax payable as a
result of the excess parachute payment and any additional federal income taxes
(including any additional excise taxes) payable by him as a result of the
bonus, assuming that he will be subject to federal income taxes at the highest
individual marginal rate. It is the intention of the Parties that the bonus
be "grossed up" so that the bonus contains sufficient funds to pay the excise
and all additional federal income taxes due as a result of the bonus payment
so that Greehey will suffer no detriment from the excise tax payable as a
result of the excess golden parachute payments.
11. Disclosure of Confidential Information. Except to the extent
absolutely required in the performance of his duties and obligations to Valero
as expressly authorized herein, or by prior written consent of a duly
authorized officer or director of Valero, Greehey will not, directly or
indirectly, at any time during his employment with Valero, or at any time
subsequent to the termination thereof, for any reason whatsoever, with or
without cause, breach the confidence reposed in him by Valero by using,
disseminating, disclosing, divulging or in any manner whatsoever disclosing or
permitting to be divulged or disclosed in any manner to any person, firm,
corporation, association or other business entity, trade secrets, secret
methods or "Confidential Information" of Valero, nor will Greehey lecture on
or publish articles concerning any trade secrets, secret methods or
"Confidential Information" of Valero. As used herein, the term "Confidential
Information" means any and all information concerning Valero's products,
processes, sources of supply, and services, including information relating to
research, development, inventions, manufacture, purchasing, accounting,
engineering, marketing, merchandising, or the selling of any product or
products to any customers of Valero, disclosed to Greehey or known by Greehey
as a consequence of or through his employment by Valero (or any parent,
subsidiary or affiliated corporations of Valero) including, but not
necessarily limited to, any person, firm, corporation, association or other
business entity with which Valero has any type of agency agreement, or any
shareholders, directors, or officers of any such person, firm, corporation,
association or other business entity, if such information is not generally
known in any industry in which Valero is or may become engaged during the term
of this Agreement. On termination of employment with Valero, all documents,
records, notebooks, or similar repositories of or containing Confidential
Information, including all copies of any documents, records, notebooks, or
similar repositories of or containing Confidential Information, then in
Greehey's possession or in the possession of any third party under the control
of Greehey or pursuant to any agreement with Greehey, whether prepared by
Greehey or any other person, firm, corporation, association or other business
entity, will be delivered to Valero by Greehey.
12. Noncompetition. Greehey recognizes and understands that in
performing the responsibilities of his employment, he will occupy a position
of fiduciary trust and confidence, pursuant to which he will develop and
acquire experience and knowledge with respect to Valero's business. It is the
expressed intent and agreement of Greehey and Valero that such knowledge and
experience shall be used exclusively in the furtherance of the interests of
Valero and not in any manner which would be detrimental to Valero's interests.
Greehey further understands and agrees that Valero conducts its business
within a specialized market segment throughout the United States, and that it
would be detrimental to the interests of Valero if Greehey used the knowledge
and experience which he currently possesses or which he acquires pursuant to
his employment hereunder for the purpose of directly or indirectly competing
with Valero or for the purpose of aiding other persons or entities in so
competing with Valero. In consideration for the benefits herein, Greehey
therefore agrees that so long as he is employed by Valero and for a period of
the greater of (i) two years after termination of Greehey's employment, or
(ii) as long as he is receiving any payments under paragraph 7(c), unless he
first secures the written consent of Valero, Greehey will not directly or
indirectly invest, engage or participate in any entity in direct or indirect
competition with Valero's business or contract to do so, other than
investments in amounts aggregating less than 1% in any securities of any
company that is obligated under the 1934 Act to file periodic reports pursuant
to Section 13 thereunder. In the event that the provisions of this Paragraph
12 should ever be deemed to exceed the time or geographic limitations
permitted by applicable laws, then such provisions shall be reformed to the
maximum time or geographic limitations permitted by applicable law.
13. Insurance. Valero may, in its sole and absolute discretion, at any
time after the Effective Date, apply for and procure, as owner and for its own
benefit, insurance on the life of Greehey, in such amounts and in such forms
as Valero may choose. Unless otherwise agreed by Valero, Greehey shall have
no interest whatsoever in any such policy or policies, but Greehey shall, at
Valero's request, submit to such medical examinations, supply such
information, and execute and deliver such documents as may be required by the
insurance company or companies to which Valero has applied for such insurance.
14. Acknowledgment of Greehey. Greehey hereby acknowledges that his
execution of this Agreement is given in consideration of the following, any of
which Greehey acknowledges is adequate consideration:
(i) Valero's employment of Greehey under the terms and conditions
contained herein; and
(ii) The termination by Valero of any previous employment agreement
between Valero and Greehey.
15. Notice. Any notice, request, reply, instruction, or other
communication provided or permitted in this Agreement must be given in writing
and may be served by depositing same in the United States mail in certified or
registered form, postage prepaid, addressed to the Party to be notified with
return receipt requested, or by delivering the notice in person to such Party.
Unless actual receipt is required by any provision of this Agreement, notice
deposited in the United States mail in the manner herein prescribed shall be
effective on dispatch. For purposes of notice, the address of Greehey, his
spouse, any purported donee or transferee or any administrator, executor or
legal representative of Greehey or his estate, as the case may be, shall be as
follows:
Mr. William E. Greehey
307 Grandview
San Antonio, Texas 78209
The address of Valero shall be:
Valero Refining and Marketing Company
Post Office Box 500
San Antonio, Texas 78292
Attention: General Counsel
Valero and Greehey shall have the right from time to time and at any time to
change their respective addresses and shall have the right to specify as their
respective addresses any other address by giving at least ten days written
notice to the other Party as provided hereby.
16. Termination of other Employment Agreements. On the Effective Date,
all other prior employment agreements between the Parties in effect on the
Effective Date shall terminate and forever be from the date null, void and of
no further force or effect whatsoever, and any and all such agreements shall
be superseded in their entirety by this Agreement.
17. Litigation. In the event litigation shall be brought by either
Party to enforce or interpret any provision contained in this Agreement the
following provisions shall apply:
(a) if Greehey brings such an action, and it is not established by
clear and convincing evidence that Greehey has no meritorious bases for such
action, Valero shall pay all of Greehey's and Valero's legal fees incurred in
connection with such litigation;
(b) in the event Valero brings such an action, and it is not
established by clear and convincing evidence that Greehey has no meritorious
defenses to such action, Valero shall pay all of Greehey's and Valero's legal
fees incurred in connection with such litigation; and
(c) any claim by Valero of a right to terminate this Agreement
pursuant to Paragraph 9(a) which is subjected to litigation must be
established by Valero by clear and convincing evidence.
18. Controlling Law. The execution, validity, interpretation, and
performance of this Agreement shall be determined and governed by the laws of
the State of Texas.
19. Additional Instruments. Valero and Greehey shall execute and
deliver any and all additional instruments and agreements which may be
necessary or proper to carry out this Agreement.
20. Entire Agreement. This Agreement contains the entire agreement of
the Parties. This Agreement may not be changed orally but only by an
agreement in writing signed by the Party against whom enforcement of any
waiver, change, modification, extension or discharge is sought.
21. Separability. If any provision of the Agreement is rendered or
declared illegal or unenforceable by reason of any existing or subsequently
enacted legislation or by decree of a court of last resort, Valero and Greehey
shall promptly meet and negotiate substitute provisions for those rendered and
declared illegal or unenforceable, and all the remaining provisions of this
Agreement shall remain in full force and effect.
22. Effect of Agreement. This Agreement shall be binding upon Greehey
and his heirs, executors, legal representatives, successors and assigns, and
Valero and its legal representatives, successors and assigns.
23. Execution. This Agreement may be executed in multiple counterparts
each of which shall be deemed an original and all of which shall constitute
one instrument.
24. Waiver of Breach. The waiver by Valero of a breach of any provision
of the Agreement by Greehey shall not operate or be construed as a waiver by
Valero of any subsequent breach by Greehey. The waiver by Greehey of a breach
of any provision of the Agreement by Valero shall not operate or be construed
as a waiver by Greehey of any subsequent breach by Valero.
IN WITNESS WHEREOF, the Parties have executed this Agreement as of the
date below written.
____________________________________
William E. Greehey
Valero Refining and Marketing Company
By:___________________________________
Edward C. Benninger
President
Date: June 18, 1997
Exhibit 10.13
EMPLOYMENT AGREEMENT
This Employment Agreement ("Agreement") is between Valero Refining and
Marketing Company, a Delaware corporation ("Valero"), and Edward C. Benninger,
a resident of San Antonio, Texas, ("Benninger"). This Agreement is effective
on the day that all of the capital stock of Valero is distributed by Valero
Energy Corporation ("VEC") to its stockholders ("Effective Date"). Valero and
Benninger are sometimes referred to herein individually as a "Party", and
collectively as the "Parties". The Parties hereby agree as follows:
1. Employment. Valero hereby employs Benninger as President and
Benninger hereby accepts employment with Valero, subject to the terms and
conditions set forth in this Agreement.
2. Term. Subject to the provisions for termination of employment as
provided in Section 9(a), this Agreement shall be in effect for a period of
two years beginning on the Effective Date and ending on the second anniversary
of the Effective Date ("Initial Period"). If Benninger notifies Valero at
least ninety (90) days prior to the end of the Initial Period of his intention
to extend this Agreement, then this Agreement shall be extended on a
month-to-month basis ("Extension Period"). Benninger may terminate this
Agreement within the Extension Period by giving Valero ninety (90) calendar
days written notice of termination.
3. Compensation. Benninger's compensation during his employment under
the terms of this Agreement and prior to his retirement shall be as follows:
(a) Base Salary. Valero shall pay to Benninger a base salary (the
"Base Salary") of Four Hundred Thousand Dollars ($400,000) per year. In
addition, the Board of Directors of Valero shall in good faith consider
granting annual increases to the Base Salary based upon such factors as
Benninger's performance and the growth and profitability of Valero, but it
shall have no obligation to grant any such increases in compensation. Any
such increase to the Base Salary shall be deemed thereafter to be the Base
Salary; provided, however, based upon the same such factors, the Board of
Directors of Valero may thereafter reduce the Base Salary to an amount that is
not below the amount first set forth above in this Paragraph 3(a). The Base
Salary shall be payable in equal, semi-monthly installments on the 15th day
and last day of each month or at such other times and in such installments as
may be agreed between Valero and Benninger. All payments shall be subject to
the deduction of payroll taxes, income tax withholdings, and similar
deductions and withholdings as required by law.
(b) Bonus. In addition to the Base Salary, Benninger shall be
eligible to receive bonus compensation in such amounts and at such times as
the Board of Directors of Valero shall from time to time determine. In the
year of his retirement, Benninger shall receive a pro-rata share of bonus
compensation in such amount as the Board of Directors of Valero shall
determine at the customary time annual bonuses are determined and paid to
executive officers of Valero.
(c) Stock Option Grant. Benninger shall receive a nonqualified
stock option grant to purchase 110,000 shares of Valero Energy Corporation
common stock, granted on the fifth (5th) business day following approval of
said grant by the Board of Directors of Valero Energy Corporation ("Grant
Date") with an exercise price per share equal to the fair market value of
Valero Energy Corporation common stock on the Grant Date. These options shall
vest at the rate of 50% on the first anniversary of the Grant Date and the
remaining 50% on the second anniversary of the Grant Date, and shall have a
total term of ten years from the Grant Date. These vesting periods shall not
be modified by the accelerated vesting provisions set forth in Paragraph 7(c).
4. Expenses and Benefits. During his employment, Benninger is
authorized to incur reasonable expenses in connection with the business of
Valero, including expenses for entertainment, travel and similar matters.
Valero will reimburse Benninger for such expenses upon presentation by
Benninger of such accounts and records as Valero may from time to time
reasonably require. Valero also agrees to provide Benninger with the
following benefits during employment:
(a) Employee Benefit Plans. Participation in any employee benefit
plans now existing or hereafter adopted by Valero for its executives or other
officers and employees.
(b) Club Memberships. Valero shall reimburse Benninger for all
monthly dues and fees for Benninger's present country club memberships and for
any expenses incurred by Benninger in connection with such club memberships in
representing Valero's interests.
(c) Vacations. Benninger shall be entitled (in addition to the
usual Valero holidays) to a paid vacation for a period in each calendar year
not exceeding five weeks.
(d) Working Facilities. Benninger shall be furnished by Valero
with an office, secretarial help and other facilities and services, including
but not limited to full use of Valero's mail and communication facilities and
services reasonably suitable to his position and reasonably necessary for the
performance of his duties under this Agreement.
(e) Tax Planning. Benninger will be furnished tax planning
services by an independent certified public accounting firm of the type
furnished to executive officers of Valero.
(f) Other. Such other items as Valero shall from time to time
consider necessary or appropriate to assist Benninger in or to provide
incentives or compensation for the performance of his duties under this
Agreement.
5. Positions and Duties. Benninger is employed as President of Valero.
In addition, if requested to do so, Benninger shall serve as President of any
subsidiary or affiliate of Valero. Such duties shall be performed at Valero's
principal place of business in San Antonio, Texas.
6. Extent of Service. Benninger shall, during his employment under the
terms of this Agreement, devote substantially all of his working time,
attention, energies and business efforts to his duties as an employee of
Valero and to the business of Valero generally, and shall not, during the term
of this Agreement, engage in any other business activity whatsoever, whether
or not such business activity is pursued for gain, profit or other pecuniary
advantage; however, this Paragraph 6 shall not be construed to prevent
Benninger from serving as a member of the board of directors of other
companies, or from investing his personal, private assets as a passive
investor in such form or manner as will not require any active services on the
part of Benninger in the management or operation of the affairs of the
companies, partnerships, or other business entities in which any such passive
investments are made.
7. Retirement. Notwithstanding the term and notice provisions of
Paragraph 2, Benninger may retire at any time as President of Valero under the
terms of this Agreement by giving Valero written notice of his intention to
retire 90 days in advance of the designated retirement date. Upon retirement,
and provided that Valero has not terminated Benninger for cause pursuant to
Paragraph 9(a), Benninger shall no longer be employed by Valero, but he shall
have the following rights and obligations:
(a) Working Facilities. Valero shall provide Benninger with
off-site office facilities and secretarial and other office services
reasonably commensurate with Benninger's position as retired President of
Valero. The office facilities and secretarial and other services to be
provided to Benninger following his retirement shall continue for two years
from his retirement date.
(b) Dominion Country Club Membership. Valero will transfer to
Benninger the corporate Dominion Country Club membership currently assigned to
him, with Valero paying or reimbursing any membership transfer fee, and with
Benninger being responsible for all membership dues and fees.
(c) Vesting and Option Exercise Periods. Upon retirement,
Benninger's stock options, stock appreciation rights, restricted stock grants,
performance share awards, and any other similar stock or long-term incentive
rights or benefits previously granted to Benninger, which have not fully
vested, shall immediately fully vest, except for any unvested stock options
granted to Benninger pursuant to Paragraph 3(c). Benninger shall have the
right to exercise any vested stock options, stock appreciation rights,
restricted stock grants, performance share awards, and other similar stock or
long-term incentive rights or benefits for the full remaining term thereof.
Any outstanding performance share award shall be deemed to have been earned at
the target level for the full term.
(d) Retirement Benefits and Supplemental Retirement Benefits.
Benninger shall be entitled to all retirement benefits provided under the
Valero Energy Corporation Pension Plan ("Pension Plan") and Supplemental
Executive Retirement Plan (SERP), with the following supplemental benefits:
(i) retiree medical coverage consistent with coverage amount
and/or deductibles and costs as provided to Valero retirees;
(ii) a total of eight "points" under the SERP to be added to
his years of credited service, or his age, or divided between both in such
proportion that total eight, as he elects at time of retirement. The amount
per month equal to the difference between Benninger's normal monthly
retirement benefit under the Pension Plan and the SERP with the eight added
points shall constitute a supplemental monthly retirement payment, payable at
the time each payment is made under the Pension Plan. The eight "points" will
also be applied to other age or service related benefits.
Benninger shall not be entitled to participate in nor receive the
benefits of any special "window" retirement or early retirement program, if
any, that may be offered to other employees of Valero or subsidiaries at or
about the time of Benninger's giving notice of retirement or actual
retirement; and
(iii) payments under any other employee benefit plan(s),
which are due as a result of separation of service.
8. Death and Disability.
(a) Death. If during the term of Benninger's employment under this
Agreement and prior to the date of retirement Benninger dies, then in addition
to all other employee benefits to which Benninger's estate, spouse or other
beneficiaries may be entitled, Valero shall pay in equal semi-monthly
installments to the beneficiary designated by Benninger, or his estate if no
such beneficiary has been designated in writing to Valero, the Base Salary
which Benninger would have received if he had remained employed to the end of
the Initial Period or if his employment has been extended pursuant to
Paragraph 2, to the end of the Extension Period.
(b) Disability. If during the term of Benninger's employment under
this Agreement Benninger becomes unable to perform his duties as President as
a result of illness or physical injury as defined in Valero's Long Term
Disability Plan, Benninger shall be deemed to have retired and be entitled to
the benefits described in Paragraph 7(b), (c), and (d).
9. Termination by Valero. Valero shall have the right to terminate
Benninger's employment as hereinafter provided.
(a) Termination for Cause. Valero shall have the right to
terminate Benninger's employment under this Agreement for cause. As used
herein, "cause" shall mean and be strictly limited to:
(i) Benninger's conviction of a crime constituting a felony
under federal or state law or involving moral turpitude;
(ii) an illegal act or acts that were intended to and did
defraud Valero; or
(iii) the willful refusal by Benninger to fulfill
responsibilities under this Agreement after written notice of such willful
refusal from the Board and the failure to correct such refusal within 30 days
from the date such notice is given.
If Valero terminates this Agreement pursuant to the provisions of this
Paragraph 9(a): (i) all compensation or other benefits due Benninger pursuant
to Paragraphs 3 and 4 hereto shall be paid by Valero to Benninger to the date
of such termination; and (ii) all supplemental and additional benefits and
rights granted to Benninger at retirement by Paragraph 7 are revoked and
become null and void; and, upon such payment by Valero, all obligations of
Valero to Benninger hereunder shall be totally and completely satisfied, and
Valero shall have no further obligations of any type to Benninger pursuant to
this Agreement.
(b) Termination other than for Cause. Valero shall have the right
to terminate Benninger's employment as President under this Agreement without
cause, and Benninger's employment under this Agreement shall be deemed
terminated upon the giving of 90 days written notice to such effect by Valero
to Benninger. A termination of employment other than as a result of death,
retirement, disability, or in accordance with Paragraph 9(a) shall be deemed a
termination without cause. In the event of termination without cause:
(i) Valero shall pay Benninger in cash a lump sum amount equal
to the product of Benninger's semi-monthly Base Salary being paid to Benninger
at the date of such termination multiplied by the number of semi-monthly pay
periods remaining to the end of the Initial Period (or successive period if
employment has been extended pursuant to Paragraph 2), plus an amount equal to
the highest annual bonus paid to Benninger during the five years preceding the
time of such termination. Such amount shall be paid within five days of
termination;
(ii) Benninger shall receive all the payments and benefits to
which he is entitled pursuant to Paragraph 7(b), (c), and (d).
10. Executive Severance Agreement. In the event Benninger receives any
cash payments under that certain Executive Severance Agreement dated December
15, 1982 between Valero and Benninger, Valero shall be entitled to credit any
cash payments that are made to Benninger pursuant to his Executive Severance
Agreement against any cash payments that it is obligated to make under this
Agreement. Valero agrees that if remuneration or benefits of any form paid to
Benninger by Valero during or after his employment with Valero are excess
parachute payments as defined in Section 280G of the Internal Revenue Code of
1986, as amended ("Code"), and are subject to the 20% excise tax imposed by
Section 4999 of the Code, Valero shall pay Benninger a bonus no later than
seven days prior to the earliest of the due date for the excise tax return or
initial estimated payment, in an amount equal to the excise tax payable as a
result of the excess parachute payment and any additional federal income taxes
(including any additional excise taxes) payable by him as a result of the
bonus, assuming that he will be subject to federal income taxes at the highest
individual marginal rate. It is the intention of the Parties that the bonus
be "grossed up" so that the bonus contains sufficient funds to pay the excise
and all additional federal income taxes due as a result of the bonus payment
so that Benninger will suffer no detriment from the excise tax payable as a
result of the excess golden parachute payments.
11. Disclosure of Confidential Information. Except to the extent
absolutely required in the performance of his duties and obligations to Valero
as expressly authorized herein, or by prior written consent of a duly
authorized officer or director of Valero, Benninger will not, directly or
indirectly, at any time during his employment with Valero, or at any time
subsequent to the termination thereof, for any reason whatsoever, with or
without cause, breach the confidence reposed in him by Valero by using,
disseminating, disclosing, divulging or in any manner whatsoever disclosing or
permitting to be divulged or disclosed in any manner to any person, firm,
corporation, association or other business entity, trade secrets, secret
methods or "Confidential Information" of Valero, nor will Benninger lecture on
or publish articles concerning any trade secrets, secret methods or
"Confidential Information" of Valero. As used herein, the term "Confidential
Information" means any and all information concerning Valero's products,
processes, sources of supply, and services, including information relating to
research, development, inventions, manufacture, purchasing, accounting,
engineering, marketing, merchandising, or the selling of any product or
products to any customers of Valero, disclosed to Benninger or known by
Benninger as a consequence of or through his employment by Valero (or any
parent, subsidiary or affiliated corporations of Valero) including, but not
necessarily limited to, any person, firm, corporation, association or other
business entity with which Valero has any type of agency agreement, or any
shareholders, directors, or officers of any such person, firm, corporation,
association or other business entity, if such information is not generally
known in any industry in which Valero is or may become engaged during the term
of this Agreement. On termination of employment with Valero, all documents,
records, notebooks, or similar repositories of or containing Confidential
Information, including all copies of any documents, records, notebooks, or
similar repositories of or containing Confidential Information, then in
Benninger's possession or in the possession of any third party under the
control of Benninger or pursuant to any agreement with Benninger, whether
prepared by Benninger or any other person, firm, corporation, association or
other business entity, will be delivered to Valero by Benninger.
12. Noncompetition. Benninger recognizes and understands that in
performing the responsibilities of his employment, he will occupy a position
of fiduciary trust and confidence, pursuant to which he will develop and
acquire experience and knowledge with respect to Valero's business. It is the
expressed intent and agreement of Benninger and Valero that such knowledge and
experience shall be used exclusively in the furtherance of the interests of
Valero and not in any manner which would be detrimental to Valero's interests.
Benninger further understands and agrees that Valero conducts its business
within a specialized market segment throughout the United States, and that it
would be detrimental to the interests of Valero if Benninger used the
knowledge and experience which he currently possesses or which he acquires
pursuant to his employment hereunder for the purpose of directly or indirectly
competing with Valero or for the purpose of aiding other persons or entities
in so competing with Valero. In consideration for the benefits herein,
Benninger therefore agrees that so long as he is employed by Valero and for a
period of two years after termination of Benninger's employment, unless he
first secures the written consent of Valero, Benninger will not directly or
indirectly invest, engage or participate in any entity in direct or indirect
competition with Valero's business or contract to do so, other than
investments in amounts aggregating less than 1% in any securities of any
company that is obligated under the 1934 Act to file periodic reports pursuant
to Section 13 thereunder. In the event that the provisions of this Paragraph
12 should ever be deemed to exceed the time or geographic limitations
permitted by applicable laws, then such provisions shall be reformed to the
maximum time or geographic limitations permitted by applicable law.
13. Insurance. Valero may, in its sole and absolute discretion, at any
time after the Effective Date, apply for and procure, as owner and for its own
benefit, insurance on the life of Benninger, in such amounts and in such forms
as Valero may choose. Unless otherwise agreed by Valero, Benninger shall have
no interest whatsoever in any such policy or policies, but Benninger shall, at
Valero's request, submit to such medical examinations, supply such
information, and execute and deliver such documents as may be required by the
insurance company or companies to which Valero has applied for such insurance.
14. Acknowledgment of Benninger. Benninger hereby acknowledges that his
execution of this Agreement is given in consideration of the following, any of
which Benninger acknowledges is adequate consideration:
(i) Valero's employment of Benninger under the terms and conditions
contained herein; and
(ii) The termination by Valero of any previous employment agreement
between Valero and Benninger.
15. Notice. Any notice, request, reply, instruction, or other
communication provided or permitted in this Agreement must be given in writing
and may be served by depositing same in the United States mail in certified or
registered form, postage prepaid, addressed to the Party to be notified with
return receipt requested, or by delivering the notice in person to such Party.
Unless actual receipt is required by any provision of this Agreement, notice
deposited in the United States mail in the manner herein prescribed shall be
effective on dispatch. For purposes of notice, the address of Benninger, his
spouse, any purported donee or transferee or any administrator, executor or
legal representative of Benninger or his estate, as the case may be, shall be
as follows:
Mr. Edward C. Benninger
21 Devon Wood
San Antonio, Texas 78257
The address of Valero shall be:
Valero Refining and Marketing Company
Post Office Box 500
San Antonio, Texas 78292
Attention: General Counsel
Valero and Benninger shall have the right from time to time and at any time to
change their respective addresses and shall have the right to specify as their
respective addresses any other address by giving at least ten days written
notice to the other Party as provided hereby.
16. Termination of other Employment Agreements. On the Effective Date,
all other prior employment agreements between the Parties in effect on the
Effective Date shall terminate and forever be from the date null, void and of
no further force or effect whatsoever, and any and all such agreements shall
be superseded in their entirety by this Agreement.
17. Litigation. In the event litigation shall be brought by either
Party to enforce or interpret any provision contained in this Agreement the
following provisions shall apply:
(a) if Benninger brings such an action, and it is not established
by clear and convincing evidence that Benninger has no meritorious bases for
such action, Valero shall pay all of Benninger's and Valero's legal fees
incurred in connection with such litigation;
(b) in the event Valero brings such an action, and it is not
established by clear and convincing evidence that Benninger has no meritorious
defenses to such action, Valero shall pay all of Benninger's and Valero's
legal fees incurred in connection with such litigation; and
(c) any claim by Valero of a right to terminate this Agreement
pursuant to Paragraph 9(a) which is subjected to litigation must be
established by Valero by clear and convincing evidence.
18. Controlling Law. The execution, validity, interpretation, and
performance of this Agreement shall be determined and governed by the laws of
the State of Texas.
19. Additional Instruments. Valero and Benninger shall execute and
deliver any and all additional instruments and agreements which may be
necessary or proper to carry out this Agreement.
20. Entire Agreement. This Agreement contains the entire agreement of
the Parties. This Agreement may not be changed orally but only by an
agreement in writing signed by the Party against whom enforcement of any
waiver, change, modification, extension or discharge is sought.
21. Separability. If any provision of the Agreement is rendered or
declared illegal or unenforceable by reason of any existing or subsequently
enacted legislation or by decree of a court of last resort, Valero and
Benninger shall promptly meet and negotiate substitute provisions for those
rendered and declared illegal or unenforceable, and all the remaining
provisions of this Agreement shall remain in full force and effect.
22. Effect of Agreement. This Agreement shall be binding upon Benninger
and his heirs, executors, legal representatives, successors and assigns, and
Valero and its legal representatives, successors and assigns.
23. Execution. This Agreement may be executed in multiple counterparts
each of which shall be deemed an original and all of which shall constitute
one instrument.
24. Waiver of Breach. The waiver by Valero of a breach of any provision
of the Agreement by Benninger shall not operate or be construed as a waiver by
Valero of any subsequent breach by Benninger. The waiver by Benninger of a
breach of any provision of the Agreement by Valero shall not operate or be
construed as a waiver by Benninger of any subsequent breach by Valero.
IN WITNESS WHEREOF, the Parties have executed this Agreement as of the
date below written.
____________________________________
Edward C. Benninger
Valero Refining and Marketing Company
By:___________________________________
William E. Greehey
Chief Executive Officer
Date: June 18, 1997
MANAGEMENT STABILITY AGREEMENT
AGREEMENT dated effective August 1, 1997 ("Agreement") between Valero
Energy Corporation (formerly Valero Refining and Marketing Company), a
Delaware corporation (the "Corporation"), and Gregory C. King (the
"Executive"),
WITNESSETH:
WHEREAS, Executive and Valero Energy Corporation ("VEC"), (now, by change
of name, PG&E Gas Transmission Texas Co.) entered into that certain Management
Stability Agreement dated November 1, 1996 (the "Prior Agreement"); and
WHEREAS, the Prior Agreement specifies that, in the event of a
Divestiture (as defined in the Prior Agreement), the Corporation shall execute
and deliver this Agreement to Executive; and
WHEREAS, at a meeting of the Board of Directors of the Corporation held
on April 23, 1997, the Board of Directors approved the execution, delivery and
performance by the Corporation of management retention agreements,
substantially in the form of this Agreement, between the Corporation and
certain officers and other key executives of the Corporation and its
subsidiaries, including the Executive;
WHEREAS, should the Corporation become involved in any Change of Control
situation, in addition to Executive's regular duties, Executive may be called
upon to assist in the assessment of any third-party or internal proposals,
advise management and the Board as to whether such proposals would be in the
best interests of the Corporation and its shareholders, participate in
successfully completing such transactions and to take such other actions as
the Board might determine appropriate;
NOW, THEREFORE, to assure that the Corporation will have the continued
dedication of the Executive, and the availability of Executive's advice and
counsel as to the best interests of the Corporation and its stockholders,
notwithstanding the possibility, threat, or occurrence of a Change of Control,
and to induce the Executive to remain in the employ of the Corporation and/or
its designated subsidiaries, and for other good and valuable consideration,
Corporation and Executive agree as follows:
1. Certain Definitions. The following terms, as used herein, have the
following meanings:
"Applicable Period" shall mean the two-year period following the
Termination Date.
"Annual Rate of Compensation" shall mean the aggregate regular base
salary paid or payable to Executive by the Corporation and/or VEC with respect
to any period of 12 consecutive months.
"Cause" shall mean (i) Executive's conviction of a crime under federal or
state law (excluding a misdemeanor offense not involving moral turpitude), or
(ii) Executive's gross and deliberate disregard of Executive's duties and
responsibilities, as reasonably determined by the Board of Directors of the
Corporation after written notice of such failure and the failure or refusal by
Executive to correct such failure within 10 days from the date notice is
given, or (iii) the continued material impairment of Executive's ability to
fulfill his responsibilities as a result of alcoholism or drug dependency
after written notice of such material impairment and the failure to correct
such impairment within 45 days from the date notice is given or such longer
period as may be required under applicable law.
"Change of Control" shall mean:
(i) The acquisition by any Person of beneficial ownership (within
the meaning of Rule 13d-3 promulgated under the Securities Exchange Act of
1934, as amended) of 15% or more of either (a) the then outstanding shares of
common stock of the Corporation (the "Outstanding Corporation Common Stock")
or (b) the combined voting power of the then outstanding voting securities of
the Corporation entitled to vote generally in the election of directors (the
"Outstanding Corporation Voting Securities"); provided, however, that for
purposes of this subparagraph (i), the following acquisitions shall not
constitute a Change of Control: (a) any acquisition directly from the
Corporation, (b) any acquisition by the Corporation, (c) any acquisition by
any employee benefit plan (or related trust) sponsored or maintained by the
Corporation or any corporation or other entity controlled by the Corporation
or (d) any acquisition by any corporation or other entity pursuant to a
transaction which complies with clauses (a), (b) and (c) of subparagraph (iii)
of this definition;
(ii) Individuals who, as of the date hereof, constitute the Board of
Directors of the Corporation (the "Incumbent Board") cease for any reason to
constitute at least a majority of the Board; provided, however, that any
individual becoming a director subsequent to the date hereof whose election,
or nomination for election by the Corporation's shareholders, was approved by
a vote of at least a majority of the directors then comprising the Incumbent
Board shall be considered as though such individual were a member of the
Incumbent Board, but excluding, for this purpose, any such individual whose
initial assumption of office occurs as a result of an actual or threatened
election contest with respect to the election or removal of directors or other
actual or threatened solicitation of proxies or consents by or on behalf of a
Person other than the Board; or
(iii) Consummation of a reorganization, merger or consolidation, or
sale, transfer, or other disposition of all or substantially all of the assets
of the Corporation (a "Business Combination"), in each case, unless, following
such Business Combination, (a) all or substantially all of the individuals and
entities who were the beneficial owners, respectively, of the Outstanding
Corporation Common Stock and Outstanding Corporation Voting Securities
immediately prior to such Business Combination beneficially own, directly or
indirectly, more than 50% of, respectively, the then outstanding shares of
common stock and the combined voting power of the then outstanding voting
securities entitled to vote generally in the election of directors, as the
case may be, of the corporation or other entity surviving or resulting from
such Business Combination (including, without limitation, a corporation or
other entity which as a result of such transaction owns the Corporation or all
or substantially all of the Corporation's assets either directly or through
one or more subsidiaries) in substantially the same proportions as their
ownership immediately prior to such Business Combination of the Outstanding
Corporation Common Stock and Outstanding Corporation Voting Securities, as the
case may be, (b) no Person (excluding any corporation or other entity
surviving or resulting from such Business Combination or any employee benefit
plan (or related trust) of the Corporation or such corporation or other entity
surviving or resulting from such Business Combination) beneficially owns,
directly or indirectly, 15% or more of, respectively, the then outstanding
shares of common stock of the corporation or other entity surviving or
resulting from such Business Combination or the combined voting power of the
then outstanding voting securities of such corporation or other entity except
to the extent that such ownership existed prior to the Business Combination
and (c) at least a majority of the members of the board of directors or other
governing body of the corporation or other entity surviving or resulting from
such Business Combination were members of the Incumbent Board at the time of
the execution of the initial agreement or of the action of the Board,
providing for such Business Combination; or
(iv) Approval by the shareholders of the Corporation of a complete
liquidation or dissolution of the Corporation; or
(v) any other event determined by the Board of Directors or the
Committee to constitute a "Change of Control" hereunder. "Good Reason" shall
mean (i) the occurrence of any event or circumstance which, if occurring
following a Change in Control, would render Executive's termination of
employment "involuntary" (as defined in Paragraph 3.D), or (ii) a breach
(other than an insubstantial failure which is remedied by the Corporation
promptly after receipt of notice thereof from the Executive) by the
Corporation of any provision of this Agreement
"Person" shall mean any individual, entity or group (within the meaning
of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as
amended).
"Termination Date" shall mean the Executive's last day of employment with
the Corporation or any of its subsidiaries.
2. Services During Certain Events.
A. In the event any Person (i) begins a tender or exchange offer
for equity securities of the Corporation, (ii) or publicly announces an
intention to take or consider taking any actions which, if consummated, would
constitute a Change of Control, (iii) circulates a stockholder consent or
solicits a proxy for the election of directors, (iv) enters into an agreement
with the Corporation, the consummation of which would result in a Change of
Control, (v) becomes an "Acquiring Person" under the Rights Agreement dated
July 17, 1997 between the Corporation and Harris Trust and Savings Bank, as
Rights Agent, or (vi) publicly takes other steps which, if consummated, would
constitute a Change of Control, Executive agrees not to voluntarily leave the
employ of the Corporation or its subsidiaries, and will render the services
contemplated in the recitals to this Agreement and in any employment agreement
between the Corporation and Executive, until the earlier of (x) such date as
such Person has abandoned or terminated efforts to effect a Change of Control,
(y) sixty days following the date on which a Change of Control has occurred or
(z) thirty days following written notice to the Corporation that Executive
intends to terminate employment with the Corporation.
B. The provisions of Paragraph 2.A notwithstanding, Executive may
terminate employment for any reason prior to the occurrence of an event
specified in Paragraph 2.A(i)-(vi), and, following the occurrence of any such
event may terminate employment through retirement, total and permanent
disability, or for Good Reason.
3. Termination After Change of Control. In the event that, within two
years following the occurrence of a Change of Control of the Corporation,
Executive's employment is terminated so that Executive is no longer employed
with the Corporation or any of its subsidiaries, then, except as is otherwise
provided in Paragraph 3.C below, Executive shall be entitled to receive the
following payments and other benefits:
A. Lump Sum Cash Payment. On or before Executive's Termination
Date, the Corporation will pay to Executive (in addition to any base salary,
bonuses, incentive compensation, expenses, vacation, benefits, benefit plan
distributions and other amounts which would otherwise normally be payable to
Executive, to the extent not theretofore paid), as compensation for services
rendered to the Corporation, a lump sum cash amount (subject to any applicable
payroll or other taxes required to be withheld) equal to two (2) times the
Executive's highest Annual Rate of Compensation in effect with the Corporation
or VEC at any time during the 36-month period ending on the Termination
Date.In the event there are fewer than 24 months remaining from the
Termination Date to Executive's normal retirement date at age 65, the amount
otherwise payable hereunder shall be reduced as follows: the amount otherwise
calculated under this Paragraph 3.A will be multiplied by a fraction, the
numerator of which is the number of days remaining to Executive's normal
retirement date and the denominator of which is 720, and the resulting product
shall be the amount payable to Executive under this Paragraph 3.A.
B. Other Benefits.
(i) Insurance or Other Special Benefits. For the Applicable
Period, or such longer period as may be provided by the terms of the
appropriate plan, program, practice or policy, the Corporation shall continue
benefits to Executive and/or Executive's family at least equal to those which
would have been provided to them under the welfare benefit plans, practices,
policies and programs provided by the Corporation (including, without
limitation, medical, prescription, dental, disability, employee life, group
life, accidental death and travel accident insurance plans and programs)
immediately prior to such termination if the Executive's employment had not
been terminated; provided, however, that in no event shall the continued
benefits provided hereunder be less favorable, in the aggregate, than those
provided under the most favorable of such plans, practices, policies and
programs in effect for Executive at any time during the 120-day period
immediately preceding the Termination Date or, if more favorable to Executive,
those provided generally at any time after the Termination Date to other peer
executives of the Corporation, its affiliated companies or their successors.
To the extent that, during the Applicable Period, or any portion thereof, the
benefits required to be provided under this Paragraph 3.B are also required to
be provided by the Corporation under applicable provisions of the Consolidated
Omnibus Budget Reconciliation Act of 1985 ("COBRA"), the Corporation may
discharge such portion of its obligation hereunder by providing such
COBRA-mandated benefits, but at the Corporation's sole cost and expense. If
Executive is reemployed by another employer and is eligible to receive medical
or other welfare benefits under another employer-provided plan, the medical
and other welfare benefits described herein shall be secondary to those
provided under such other plan during the Applicable Period.
(ii) Thrift and Other Plans. The Executive's participation in
the Corporation's Thrift Plan, retirement plan for employees generally
("Pension Plan"), Supplemental Executive Retirement Plan ("SERP") or other
applicable plans of the Corporation shall not continue after the Termination
Date. Any terminating distributions and/or vested rights under such plans
shall be governed by the terms of the respective plans.
C. The foregoing provisions of this Paragraph 3 notwithstanding,
Executive shall not be entitled to receive, and the Corporation shall not be
obligated to make, the payments and other benefits specified in Paragraphs
3.A and 3.B above if Executive's termination employment occurs under any
one of more of the following circumstances:
(i) Executive's termination of employment is "voluntary";
(ii) Executive is terminated by his employer company for Cause;
(iii) Executive's termination is a consequence of death or total and
permanent disability; or
(iv) Executive retires under the Corporation's Pension Plan.
D. "Voluntary"/involuntary". In the event that Executive ceases
to be an employee of the Corporation or its subsidiaries after (i) Executive's
base salary is reduced to an amount below the base salary pertaining
immediately prior to the Change of Control, or (ii) Executive's benefits (to
include, without limitation, medical, prescription, dental, disability,
employee life, group life, accidental death and travel accident insurance
plans and programs, vacation benefits, retirement benefits, participation in
stock option, restricted stock and other employee stock plans, and
participation in executive incentive bonus programs) are reduced so as not to
be at least substantially comparable with the benefits to which Executive was
entitled prior to the Change of Control, or (iii) Executive is required to
relocate to a new principal place of employment under circumstances in which
Executive would not be reimbursed for all expenses reasonably incurred in such
relocation (including taxes payable on such reimbursement; costs of packing,
shipping and unpacking household goods; reasonable expenses of travel, meals
and lodging in moving to the new location; reasonable costs of temporary
living expenses at the new location; and a home sale allowance or other
assistance in selling Executive's home commensurate with the assistance
customarily provided by the Corporation to transferred executives prior to the
Change of Control, then such termination of employment shall be deemed for all
purposes of this Agreement to be "involuntary" and Executive shall be entitled
to the benefits specified in Paragraphs 3.A and 3.B. If the Executive's
termination of employment is not "involuntary," as defined above, and does not
arise from one or more of the circumstances itemized in Paragraph 3.C(ii)
through (iv), then such termination of employment is deemed to be "voluntary"
for purposes of this Agreement.
4. Acceleration of Options and Rights in Certain Events. Stock options
("options") and stock appreciation or similar rights ("rights"), if any,
granted to Executive by the Corporation under the Corporation's Stock Option
Plan and Executive Stock Incentive Plan (collectively the "Plans") (or any
other stock option or stock appreciation rights plan adopted by the
Corporation) and not previously exercised, canceled or otherwise terminated
will be exercisable in full for a period of 90 days, or if longer, such period
as is specified in such plan, commencing on the earlier of (a) the date of the
Change of Control of the Corporation or (b) the date of approval by the
Corporation's shareholders of a transaction constituting a Change of Control;
provided however, that no such option or right shall be exercisable after the
expiration date of such option or right.
5. Removal of Restrictions on Stock Grants. Stock previously granted
to Executive by the Corporation as restricted stock or performance shares
under the Corporation's Executive Stock Incentive Plan (or any other similar
stock plan adopted by the Corporation) will have all restrictions removed on
the earlier of (a) the date of the Change of Control of the Corporation, or
(b) on the date of approval by the Corporation's shareholders of a transaction
constituting a Change of Control; provided, that, in the case of stock
previously granted to Executive as performance shares under the Corporation's
Executive Stock Incentive Plan (or any other similar stock plan adopted by the
Corporation), the performance period shall be deemed to have terminated on the
earlier of the dates specified in clauses (a) or (b) above, and the number of
shares to which the Executive is then entitled shall be determined in
accordance with such plan.
6. Excess Amounts.
A. Excise Taxes. Anything in this Agreement to the contrary
notwithstanding, in the event any payment or distribution by the Corporation
to or for the benefit of Executive (whether paid or payable or distributed or
distributable pursuant to the terms of this Agreement or otherwise) (a
"Payment") would be subject to the excise tax imposed by Section 4999 of the
Internal Revenue Code of 1986, as amended (the "Code") (such excise tax,
including any interest or penalties incurred with respect thereto, being
referred to herein as the "Excise Tax"), then the lump-sum amount payable to
the Executive pursuant to Paragraph 3.A hereof shall be reduced to such amount
(the "Reduced Payment") but not below zero, such that the receipt of the
Executive of the Reduced Payment and all other payments and distributions
pursuant to this Agreement would not give rise to any Excise Tax.
B. No Duplication. Subject to the terms and conditions hereof, if
Executive has received either (i) the lump-sum payment specified in
Section 3.A of the Prior Agreement, or (ii) the lump-sum payment and other
benefits specified in Paragraph 3 of this Agreement for one Change of Control
event under this Agreement, Executive shall not be entitled to receive a
lump-sum payment or other such benefits under this Agreement from the
Corporation for any Change of Control event occurring subsequent to the event
resulting in such payment. In addition, if Executive receives a lump-sum
payment under this Agreement, then, except as may be expressly provided in a
separate agreement between Executive and the Corporation, Executive shall not
be entitled to participate in and receive a severance benefit under any other
severance plan maintained by the Corporation for executive officers or
employees generally. The foregoing limitations shall not be construed to
prevent Executive from receiving a payment from the Corporation under any
separate agreement, contract or arrangement.
C. Overpayments and Underpayments. All determinations required to
be made under Paragraph 6.A shall be made by the Corporation which shall
provide detailed supporting calculations to the Executive no later than the
Termination Date. As a result of uncertainty in the application of Section
280G of the Code at the time of the initial determination hereunder, it is
possible that payments will have been made by the Corporation which should not
have been made ("Overpayment") or that additional payments, which will not
have been made by the Corporation could have been made ("Underpayment"), in
each case, consistent with the calculations required to be made hereunder. In
the event that an Overpayment has been made, any such Overpayment shall be
treated for all purposes as a loan to the Executive which the Executive shall
repay to the Corporation together with interest at the applicable Federal rate
provided for in Section 7872(f)(2) of the Code; provided, however, that no
amount shall be payable by the Executive to the Corporation (or if paid by the
Executive to the Corporation shall be returned to the Executive) if and to the
extent such payment would not reduce the amount which is subject to taxation
under Section 4999 of the Code. In the event that an Underpayment has
occurred, any such Underpayment shall be promptly paid by the Corporation to
or for the benefit of the Executive together with interest at the applicable
Federal rate provided for in Section 7872(f)(2) of the Code.
7. General.
A. Indemnification. If litigation is initiated to enforce or
interpret any provision contained herein, the Corporation hereby agrees to
indemnify Executive for reasonable attorneys' fees and disbursements incurred
by Executive in such litigation (including any appellate proceedings, and
regardless of whether or not such litigation is ultimately resolved in favor
of Executive), and hereby agrees to pay pre-judgement interest on any money
judgement obtained by Executive, calculated at the "prime rate" of interest
announced by Morgan Guaranty Trust Company of New York, New York as being in
effect from time to time, from the date that payment(s) to Executive should
have been made in accordance with the provisions of this Agreement.
B. Payment Obligations Absolute. The Corporation's obligation to
pay Executive the compensation and other amounts specified herein and to make
the arrangements provided herein shall be absolute and unconditional and shall
not be affected by any circumstances, including, without limitation, any
set-off, counterclaim, recoupment, defense or other right which the
Corporation may have against Executive or anyone else, or the completion of
any Change of Control . All amounts payable by the Corporation hereunder
shall be paid without notice or demand. Each and every payment made hereunder
by the Corporation shall be final and the Corporation will not seek to recover
all or any part of such payment from Executive or from whoever may be entitled
thereto, for any reason whatsoever, excluding manifest error. Executive shall
not be required to mitigate the amount of any payment provided for in this
Agreement by seeking other employment or otherwise, nor shall the amount of
any payment provided for in this Agreement be reduced by any compensation
earned by Executive as a result of employment by another employer, by
retirement benefits, by offset against any amount claimed to be owing by
Executive to the Corporation, or otherwise.
C. Successors. This Agreement shall be binding upon and inure to
the benefit of Executive and Executive's estate, and the Corporation and any
successor of the Corporation, but neither this Agreement nor any rights
arising hereunder may be assigned or pledged by Executive.
D. Severability. Any provision in this Agreement which is
prohibited or unenforceable in any jurisdiction shall, as to such
jurisdiction, be ineffective only to the extent of such prohibition or
unenforceability without invalidating or affecting the remaining provisions
hereof, and any such prohibition or unenforceability in any jurisdiction shall
not invalidate or render unenforceable such provision in any other
jurisdiction.
E. Controlling Law and Interpretation. This Agreement shall in
all respects be governed by, and construed in accordance with, the laws of the
State of Texas. In the event that the interpretation or application of any
provision of this Agreement is determined in any proceeding to be ambiguous or
uncertain, the parties expressly intend and agree that such ambiguity or
uncertainty shall be resolved in favor of Executive.
F. Assumption of Obligations under Prior Agreement. The parties
recognize that, under the Prior Agreement, VEC has agreed to provide a lump
sum cash payment and certain other benefits to Executive if Executive's
employment with the Corporation is terminated within the period and under the
circumstances specified therein, and that the Prior Agreement requires the
Corporation to jointly and severally assume such obligation. Accordingly, the
Corporation further agrees to, and does hereby, assume, jointly and severally
with VEC, all obligations and liabilities of VEC to Executive under the Prior
Agreement, and agrees that any claim, demand, or cause of action which
Executive may have or claim to have under the Prior Agreement may be brought
directly against the Corporation with the same force and effect as if the
Corporation were an original party to the Prior Agreement; provided, however,
that this assumption of obligations is not intended and shall not be construed
to (i) release VEC from any obligation or liability to Executive under the
Prior Agreement, or (ii) in any way enlarge or otherwise alter the obligations
of VEC under the Prior Agreement, or extend the effectiveness of such Prior
Agreement.
IN WITNESS WHEREOF, the parties have executed this Agreement effective as
of the date set forth above.
Gregory C. King
VALERO ENERGY CORPORATION (formerly
Valero Refining and Marketing Company)
By:
Edward C. Benninger
President
Exhibit 10.15
Schedule of Management Stability Agreements
Employee Date of Agreement
Keith D. Booke August 1, 1997
Jay D. Browning August 1, 1997
Michael S. Ciskowski August 1, 1997
John D. Gibbons August 1, 1997
James A. Greenwood August 1, 1997
Gregory C. King August 1, 1997
John H. Krueger August 1, 1997
William N. Latham August 1, 1997
Robert R. Taylor August 1, 1997
T. Wyatt Stripling August 1, 1997
<TABLE>
<CAPTION> EXHIBIT 11.1
VALERO ENERGY CORPORATION AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE
(Thousands of Dollars, Except Per Share Amounts)
Year Ended December 31,
1997 1996 1995
<S> <C> <C> <C>
COMPUTATION OF BASIC EARNINGS PER SHARE:
Income from continuing operations . . . . . . . $ 111,768 $ 22,472 $ 58,242
Income (loss) from discontinued operations,
net of income taxes. . . . . . . . . . . . . $ (15,672) $ 50,229 $ 1,596
Less: Preferred stock dividend requirements
and redemption premium . . . . . . . . . . . (4,592) (11,327) (11,818)
Income (loss) from discontinued operations
applicable to common stock . . . . . . . . . $ (20,264) $ 38,902 $ (10,222)
Weighted average number of shares of
common stock outstanding . . . . . . . . . . 51,662,449 43,926,026 43,651,914
Earnings (loss) per share:
Continuing operations. . . . . . . . . . . . $ 2.16 $ .51 $ 1.33
Discontinued operations. . . . . . . . . . . (.39) .89 (.23)
Total . . . . . . . . . . . . . . . . . . $ 1.77 $ 1.40 $ 1.10
COMPUTATION OF EARNINGS PER SHARE
ASSUMING DILUTION:
Income from continuing operations assuming dilution . . . . . . $ 111,768 $ 22,472 $ 58,242
Income (loss) from discontinued operations, net of
income taxes . . . . . . . . . . . . . . . . $ (15,672) $ 50,229 $ 1,596
Less: Preferred stock dividend requirements
and redemption premium . . . . . . . . . . . (4,592) (11,327) (11,818)
Add: Reduction of preferred stock dividends applicable
to the assumed conversion of Convertible Preferred Stock
at the beginning of the period . . . . . . . 4,522 10,781 10,781
Income (loss) from discontinued operations applicable
to common stock assuming dilution . . . . . . . . $ (15,742) $ 49,683 $ 559
Weighted average number of shares of
common stock outstanding . . . . . . . . . . 51,662,449 43,926,026 43,651,914
Effect of dilutive securities:
Stock options. . . . . . . . . . . . . . . . 880,864 424,986 209,045
Performance awards . . . . . . . . . . . . . 91,151 44,050 -
Convertible preferred stock. . . . . . . . . 2,494,905 6,381,798 6,381,798
Weighted average number of shares of
common stock outstanding assuming dilution. . . . . . 55,129,369 50,776,860 50,242,757
Earnings (loss) per share - assuming dilution:
Continuing operations. . . . . . . . . . . . $ 2.03 $ .44 $ 1.16
Discontinued operations. . . . . . . . . . . (.29) .98 .01
Total . . . . . . . . . . . . . $ 1.74 $ 1.42 $ 1.17
</TABLE>
Exhibit 21.1
Valero Energy Corporation
Schedule of Subsidiaries
Name of Subsidiary State of Organization
Valero Energy Corporation Delaware
Valero Corporate Services Company Delaware
Valero Coal Company Delaware
Valero Producing Company Delaware
VMGA Company Delaware
Valero Refining and Marketing Company Delaware
Valero Marketing and Supply Company Delaware
Valero Refining Company-Louisiana Delaware
Valero Refining Company-Texas Texas
Valero Javelina Company Delaware
Valero Mediterranean Company Delaware
Valero Mexico Company Delaware
Valero MTBE Investments Company Delaware
Valero MTBE Operating Company Delaware
Valero Technical Services Company Delaware
Exhibit 23.1
Consent of Independent Public Accountants
As independent public accountants, we hereby consent to the incorporation
of our report included in this Form 10-K into the Company's previously filed
Registration Statements on Form S-8 (File Nos. 333-31709, 333-31721,
333-31723 and 333-31727).
ARTHUR ANDERSEN LLP
/s/ Arthur Andersen LLP
San Antonio, Texas
February 26, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1997 AND THE CONSOLIDATED
STATEMENT OF INCOME FOR THE YEAR ENDED DECEMBER 31, 1997 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 9,935
<SECURITIES> 0
<RECEIVABLES> 367,590
<ALLOWANCES> 1,275
<INVENTORY> 369,355
<CURRENT-ASSETS> 789,025
<PP&E> 2,132,489
<DEPRECIATION> 539,956
<TOTAL-ASSETS> 2,493,043
<CURRENT-LIABILITIES> 597,284
<BONDS> 430,183
0
0
<COMMON> 561
<OTHER-SE> 1,158,280
<TOTAL-LIABILITY-AND-EQUITY> 2,493,043
<SALES> 5,756,220
<TOTAL-REVENUES> 5,756,220
<CGS> 5,545,186
<TOTAL-COSTS> 5,545,186
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 42,455
<INCOME-PRETAX> 175,557
<INCOME-TAX> 63,789
<INCOME-CONTINUING> 111,768
<DISCONTINUED> (15,672)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 96,096
<EPS-PRIMARY> 1.77
<EPS-DILUTED> 1.74
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 10
<SECURITIES> 0
<RECEIVABLES> 163,432
<ALLOWANCES> 975
<INVENTORY> 159,871
<CURRENT-ASSETS> 351,849
<PP&E> 1,712,334
<DEPRECIATION> 480,124
<TOTAL-ASSETS> 1,985,631
<CURRENT-LIABILITIES> 300,584
<BONDS> 353,307
1,150
3,450
<COMMON> 44,186
<OTHER-SE> 1,028,189
<TOTAL-LIABILITY-AND-EQUITY> 1,985,631
<SALES> 2,757,853
<TOTAL-REVENUES> 2,757,853
<CGS> 2,668,105
<TOTAL-COSTS> 2,668,105
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 38,534
<INCOME-PRETAX> 39,083
<INCOME-TAX> 16,611
<INCOME-CONTINUING> 22,472
<DISCONTINUED> 50,229
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 72,701
<EPS-PRIMARY> 1.40
<EPS-DILUTED> 1.42
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<CASH> 13
<SECURITIES> 0
<RECEIVABLES> 129,479
<ALLOWANCES> 675
<INVENTORY> 101,782
<CURRENT-ASSETS> 268,373
<PP&E> 1,653,064
<DEPRECIATION> 423,437
<TOTAL-ASSETS> 1,904,655
<CURRENT-LIABILITIES> 168,522
<BONDS> 454,621
6,900
3,450
<COMMON> 43,739
<OTHER-SE> 977,024
<TOTAL-LIABILITY-AND-EQUITY> 1,904,655
<SALES> 1,772,638
<TOTAL-REVENUES> 1,772,638
<CGS> 1,648,883
<TOTAL-COSTS> 1,648,883
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 40,935
<INCOME-PRETAX> 88,696
<INCOME-TAX> 30,454
<INCOME-CONTINUING> 58,242
<DISCONTINUED> 1,596
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 59,838
<EPS-PRIMARY> 1.10
<EPS-DILUTED> 1.17
</TABLE>
