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SCHEDULE 14A
(RULE 14A-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement [ ] Confidential, for Use of the
Commission Only (as permitted by
Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to sec. 240.14a-11(c) or sec. 240.14a-12
Valero Energy Corporation
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(Name of Registrant as Specified in its Charter)
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(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(l) and
0-11.
(1) Title of each class of securities to which transaction applies:
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(2) Aggregate number of securities to which transaction applies:
- --------------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the filing fee
is calculated and state how it was determined):
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(4) Proposed maximum aggregate value of transaction:
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(5) Total fee paid:
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[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or
the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
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(2) Form, Schedule or Registration Statement No.:
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(3) Filing Party:
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(4) Date Filed:
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THE PROMPT RETURN OF PROXY CARDS WILL SAVE THE EXPENSE OF
FURTHER REQUESTS FOR PROXIES IN ORDER TO ASSURE A QUORUM.
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[VALERO ENERGY CORPORATION GRAPHIC]
VALERO
ENERGY CORPORATION
NOTICE OF 1999 ANNUAL MEETING OF STOCKHOLDERS
The Board of Directors has determined that the 1999 Annual Meeting of
Stockholders of Valero Energy Corporation ("Valero") will be held on Thursday,
April 29, 1999 at 10:00 a.m., Central Time, at Valero's corporate headquarters
in San Antonio, Texas, One Valero Place, for the following purposes:
(1) To elect three Class II directors as members of the Board of
Directors to serve until the 2002 Annual Meeting, or until their successors are
elected and have qualified;
(2) To ratify the appointment of Arthur Andersen LLP as independent
public accountants to examine Valero's accounts for the year 1999; and
(3) To transact any other business properly brought before the meeting.
By order of the Board of Directors,
Jay D. Browning
Corporate Secretary
San Antonio, Texas
March 25, 1999
<PAGE> 3
[VALERO ENERGY CORPORATION GRAPHIC]
VALERO
ENERGY CORPORATION
PROXY STATEMENT
---------------------------
ANNUAL MEETING OF STOCKHOLDERS
---------------------------
GENERAL INFORMATION
This Proxy Statement is being mailed to stockholders beginning on or about March
25, 1999 in connection with the solicitation of proxies by the Board of
Directors of Valero Energy Corporation ("Valero" or the "Company") to be voted
at the 1999 Annual Meeting of Stockholders of Valero (the "Annual Meeting") on
April 29, 1999. The accompanying notice describes the time, place and purposes
of the Annual Meeting. Holders of record of Valero's Common Stock, $0.01 par
value ("Common Stock"), at the close of business on March 1, 1999 are entitled
to vote on the matters presented at the Annual Meeting. On the record date,
56,090,860 shares of Common Stock were issued and outstanding, and entitled to
one vote per share. Action may be taken at the Annual Meeting on April 29, 1999
or on any date or dates to which the meeting may be adjourned. A majority of
such shares, present in person or represented by properly executed proxy, shall
constitute a quorum. If instructions to the contrary are not given, shares will
be voted as indicated on the proxy card. A stockholder may revoke a proxy at any
time before it is voted by submitting a written revocation to Valero, returning
a subsequently dated proxy to Valero or by voting in person at the Annual
Meeting.
Brokers holding shares must vote according to specific instructions they receive
from the beneficial owners. If specific instructions are not received, brokers
may generally vote these shares in their discretion. However, the New York Stock
Exchange (the "Exchange") precludes brokers from exercising voting discretion on
certain proposals without specific instructions from the beneficial owner. This
results in a "broker non-vote" on such a proposal. A broker non-vote is treated
as "present" for purposes of determining the existence of a quorum, has the
effect of a negative vote when a majority of the shares issued and outstanding
is required for approval of a particular proposal and has no effect when a
majority of the shares present and entitled to vote or a majority of the votes
cast is required for approval. Pursuant to the rules of the Exchange, brokers
will have discretion to vote on the two items scheduled to be presented at the
Annual Meeting.
Valero pays for the cost of soliciting proxies and the Annual Meeting. In
addition to the solicitation of proxies by mail, proxies may be solicited by
personal interview, telephone and similar means by directors, officers or
employees of the Company, none of whom will be specially compensated for such
activities. Valero also intends to request that brokers, banks and other
nominees solicit proxies from their principals and will pay such brokers, banks
and other nominees certain expenses incurred by them for such activities. The
Company has retained Kissel-Blake, Inc., a proxy soliciting firm, to assist in
the solicitation of proxies, for an estimated fee of $11,000, plus reimbursement
of certain out-of-pocket expenses.
PARTICIPANTS IN THE VALERO THRIFT PLAN PLEASE NOTE:
In the case of participants in the Valero Thrift Plan, the proxy card will
represent (in addition to any shares held individually of record) the number of
shares allocated to the participant's account under the plan. For those shares
held under the plan, the proxy card will constitute an instruction to the
Trustee under the plan
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as to how such shares are to be voted. Shares for which instructions are not
received may be voted by the Trustee in accordance with the plan.
RESTRUCTURING
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. Prior
to July 31, 1997, Valero was a wholly owned subsidiary of Valero Energy
Corporation ("Old Valero"). Old Valero was engaged in both the refining and
marketing business and the natural gas related services business. On July 31,
1997, Old Valero spun off Valero to Old Valero's stockholders by distributing
all of the Common Stock of Valero (the "Distribution"). Immediately after the
Distribution, Old Valero, with its remaining natural gas related services
business, merged (the "Merger") with a wholly owned subsidiary of PG&E
Corporation. The Distribution and the Merger are collectively referred to as the
"Restructuring." 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."
INFORMATION REGARDING THE BOARD OF DIRECTORS
The business of Valero is managed by or under the direction of the Board of
Directors (the "Board"). The Board conducts its business through meetings of the
Board and its committees. During 1998, the Board held 9 meetings and the
committees held 10 meetings in the aggregate. No member of the Board attended
less than 75% of the meetings of the Board of Directors and committees of which
he or she was a member.
Valero's Restated Certificate of Incorporation requires the Board to be divided
into Class I, Class II and Class III directors, with each class serving a
staggered three-year term. The size of the Board is currently set at eight
members.
The Board has standing Audit, Compensation and Executive Committees. When deemed
necessary or advisable, the Board will form from its members a Nominating
Committee to consider and recommend candidates for election to the Board. The
standing committees of the Board and the number of meetings held by each
committee in 1998 are described below.
AUDIT COMMITTEE
The Audit Committee reviews and reports to the Board on various auditing and
accounting matters, including the quality, objectivity and performance of the
Company's internal and external accountants and auditors, the adequacy of its
financial controls and the reliability of financial information reported to the
public. The Audit Committee also monitors the Company's efforts to comply with
environmental laws and regulations. Current members of the Audit Committee are
James L. Johnson (Chairman), Ruben M. Escobedo and Susan Kaufman Purcell. The
Audit Committee met four times in 1998.
COMPENSATION COMMITTEE
The Compensation Committee reviews and reports to the Board on matters related
to compensation strategies, policies and programs, including certain personnel
policies and policy controls, management development, management succession and
benefit programs. The Compensation Committee also approves and administers the
Company's stock option, restricted stock, incentive bonus and other stock plans.
See "Report of the Compensation Committee of the Board of Directors on Executive
Compensation." Current members of the Compensation Committee are Lowell H.
Lebermann (Chairman), Robert G. Dettmer and
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James L. Johnson, none of whom are current or former employees or officers of
the Company. The Compensation Committee met four times in 1998.
There are no compensation committee interlocks. For the previous three fiscal
years, except for compensation arrangements disclosed in this Proxy Statement,
the Company has not participated in any contracts, loans, fees, awards or
financial interests, direct or indirect, with any committee member, nor is the
Company aware of any means, directly or indirectly, by which a committee member
could receive a material benefit from the Company.
EXECUTIVE COMMITTEE
The Executive Committee exercises the power and authority of the Board during
intervals between meetings of the Board. Actions taken by the Executive
Committee do not require Board ratification. Unless a separate Nominating
Committee is created, the Executive Committee may also review possible director
candidates for nomination as a director. Current members of the Executive
Committee are Robert G. Dettmer (Chairman), Ronald K. Calgaard, William E.
Greehey and Lowell H. Lebermann. The Executive Committee met one time in 1998.
NOMINATING COMMITTEE
At its October 22, 1998 meeting, the Board created a special Nominating
Committee to review possible director candidates for the Annual Meeting. The
Nominating Committee met on January 20, 1999. At that meeting, the Nominating
Committee reviewed and recommended director candidates for election at the
Annual Meeting, and also reviewed and recommended assignments for the Committees
of the Board following the Annual Meeting. The full Board reviewed and approved
the recommendations of the Nominating Committee on January 21, 1999. No other
meetings of the Nominating Committee were held since the Company's 1998 Annual
Meeting.
COMPENSATION OF DIRECTORS
Non-employee directors receive a retainer fee of $18,000 per year, plus $1,250
for each Board and committee meeting attended. Directors who serve as
chairperson of a committee receive an additional $2,000 annually. Each director
is also reimbursed for expenses of meeting attendance. Directors who are
employees of the Company receive no compensation (other than reimbursement of
expenses) for serving as directors.
Valero maintains the Restricted Stock Plan for Non-Employee Directors ("Director
Stock Plan") and the Non-Employee Director Stock Option Plan ("Director Option
Plan") to supplement the compensation paid to non-employee directors and
increase their identification with the interests of Valero's stockholders
through ownership of Common Stock. Under the Director Stock Plan, non-employee
directors receive grants of Common Stock that vest (become nonforfeitable) in
equal annual installments over a three-year period ("Director Stock"). Upon
election to the Board, each non-employee director receives a grant consisting of
Director Stock valued at $45,000. Annual installments usually vest on or about
the date of the Annual Meeting. When all of the Director Stock previously
granted to a director under the Director Stock Plan is fully vested and the
director is continuing in office after such Director Stock is fully vested,
another similar grant is made.
The Director Option Plan provides non-employee directors of Valero automatic
annual grants of stock options for Valero's Common Stock. To the extent
necessary, the plan is administered by the Compensation Committee of the Board.
The plan provides that each new non-employee director elected to the Valero
Board automatically receives an initial grant of 5,000 options. On the date of
each subsequent annual
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meeting of stockholders of Valero, each non-employee director (who is not a new
non-employee director) automatically receives a grant of 1,000 additional
options. Stock options awarded under the Director Option Plan have an exercise
price equal to the market price of the Common Stock on the date of grant. The
initial grant of options to each non-employee director vests in three equal
annual installments on each anniversary date of the grant. The subsequent annual
grants of 1,000 options vest fully six months following the date of grant. All
options expire ten years following the date of grant. Options vest and remain
exercisable in accordance with their original terms in the case of a director
retiring from the Board. Options previously granted by Old Valero pursuant to a
corresponding plan were converted pursuant to the Distribution into options to
acquire shares of Valero Common Stock.
In the event of a "Change of Control" as defined in the Director Stock Plan and
Director Option Plan, all shares of Director Stock and options previously
granted under the plans immediately become vested or exercisable. The Director
Option Plan also contains anti-dilution provisions providing for an adjustment
in the number of options granted to prevent dilution of benefits or potential
benefits in the event any change in the capital structure of the Company affects
the Common Stock.
Under the Retirement Plan for Non-Employee Directors ("Retirement Plan"),
non-employee directors become entitled to a retirement benefit upon completion
of five years of service. The annual benefit at retirement is equal to 10% of
the highest annual cash retainer paid to the director during his or her service
on the Board, multiplied by the number of full and partial years of service (not
to exceed 10 years). Such benefit is then paid for up to 10 years or the
director's lifetime, whichever is shorter. Service on the Board of Directors of
Old Valero is counted for purposes of computing benefits under the Retirement
Plan. The Retirement Plan provides no survivor benefits and is an unfunded plan
paid from the general assets of the Company.
PROPOSAL NO. 1. ELECTION OF DIRECTORS
The Company's Board is divided into three classes for purposes of election.
Three Class II directors will be elected at the Annual Meeting to serve until
the 2002 Annual Meeting of Stockholders or until replaced by their respective
successors. Ronald K. Calgaard, William E. Greehey and Susan Kaufman Purcell
have been nominated for election as Class II directors. The persons named in the
enclosed proxy card intend to vote for the election of each of the three
nominees, unless you indicate on the proxy card that your vote should be
withheld from any or all of such nominees.
THE BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE "FOR" THE ELECTION OF
EACH SUCH NOMINEE.
Directors are elected by a plurality of the shares of Common Stock represented
at the Annual Meeting and entitled to vote. Votes "withheld" from a nominee will
not count against the election of the nominee, and the three nominees for Class
II director receiving the greatest number of votes, whether or not such votes
represent a majority of the shares present and voting at the Annual Meeting,
will be elected as Class II directors. If any nominee is unavailable as a
candidate at the time of the Annual Meeting, either the number of directors
constituting the full Board will be reduced to eliminate the vacancy, or the
persons named as proxies will use their best judgment in voting for any
available nominee. The Board has no reason to believe that any current nominee
will be unable to serve.
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INFORMATION CONCERNING NOMINEES AND OTHER DIRECTORS
The following table sets forth information concerning each nominee for election
as a director and the current directors whose terms expire in 2000 and 2001. The
information provided regarding directors of Valero is based partly on data
furnished by the directors and partly on the Company's records. There is no
family relationship among any of the executive officers, directors or nominees
for director of Valero.
<TABLE>
<CAPTION>
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EXECUTIVE
OFFICER AGE AS OF PRESENT CURRENT
POSITION(S) HELD OR DIRECTOR DECEMBER 31, TERM DIRECTOR
NAME WITH VALERO SINCE(1) 1998 EXPIRES CLASS
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<S> <C> <C> <C> <C> <C>
NOMINEES
Ronald K. Calgaard Director 1996 61 1999 II
William E. Greehey Director, Chairman 1979 62 1999 II
of the Board, President
and Chief Executive
Officer
Susan Kaufman Purcell Director 1994 56 1999 II
OTHER CURRENT DIRECTORS
Edward C. Benninger Director 1979 56 2000 III
Robert G. Dettmer Director 1991 67 2000 III
James L. Johnson Director 1991 71 2000 III
Ruben M. Escobedo Director 1994 61 2001 I
Lowell H. Lebermann Director 1986 59 2001 I
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</TABLE>
(1) Dates reported include service with Old Valero prior to the
Distribution. All directors were elected to the Board of Valero in 1997
in connection with the Distribution.
NOMINEES
DR. CALGAARD has served as President of Trinity University, San Antonio, Texas,
since 1979. Dr. Calgaard currently serves as a director of Luby's Cafeteria,
Inc., Plymouth Commercial Mortgage Fund and The Trust Company. He also served as
a director of Valero Natural Gas Company from 1987 until 1994.
MR. GREEHEY is Chief Executive Officer and Chairman of the Board of Valero. He
served as Chief Executive Officer and a director of Old Valero from 1979, and as
Chairman of the Board of Old Valero from 1983. He retired from his position as
Chief Executive Officer of Old Valero in June 1996 but, upon request of the
Board of Directors, resumed this position in November 1996. Mr. Greehey also
served as Chairman of the Board and Chief Executive Officer of Valero prior to
the Distribution when Valero was a wholly owned subsidiary of Old Valero. Mr.
Greehey is also a director of Santa Fe Energy Resources, Inc.
DR. PURCELL has served as Vice President of the Americas Society in New York,
New York since 1989 and is also Vice President of the Council of the Americas.
She is a consultant for several international and national firms and serves on
the boards of The Argentina Fund and Scudder Global High Income Fund.
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OTHER CURRENT DIRECTORS
MR. ESCOBEDO has been with his own public accounting firm, Ruben Escobedo &
Company, CPAs, in San Antonio, Texas since its formation in 1977. Mr. Escobedo
also serves as a director of Cullen/Frost Bankers, Inc. and previously served as
a director of Valero Natural Gas Company from 1989 to 1994.
MR. LEBERMANN has been President of Centex Beverage, Inc., a wholesale beverage
distributor in Austin, Texas, since 1981. Mr. Lebermann is also a director of
Station Casinos, Inc.
MR. BENNINGER retired as President of Valero on December 31, 1998. In addition
to serving as President of Valero since 1997 and as President and Chief
Financial Officer of Old Valero from 1996 until the Distribution, he served in
various other capacities with Old Valero, and its subsidiaries since 1979,
including Executive Vice President and Treasurer.
MR. DETTMER retired from PepsiCo, Inc. in 1996 after serving as Executive Vice
President and Chief Financial Officer since 1986.
MR. JOHNSON served as Chairman and Chief Executive Officer of GTE Corporation
from 1988 to 1992, and since 1992 has served as Chairman Emeritus. Mr. Johnson
also serves as a director of CellStar Corporation, FINOVA Group, Inc.,
Harte-Hanks Communications, Inc., The MONY Group (formerly The Mutual Life
Insurance Company of New York) and Walter Industries, Inc.
For detailed information regarding the nominees' holdings of Common Stock,
compensation and other arrangements, see "Information Regarding the Board of
Directors," "Beneficial Ownership of Valero Securities," "Executive
Compensation," "Arrangements with Certain Officers and Directors" and
"Transactions with Management and Others."
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BENEFICIAL OWNERSHIP OF VALERO SECURITIES
The following table sets forth information as of December 31, 1998, with respect
to each entity known to Valero to be the beneficial owner of more than 5% of its
Common Stock, based solely upon a statement on Schedule 13G filed by such entity
with the Securities and Exchange Commission ("SEC"):
<TABLE>
<CAPTION>
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SHARES
NAME AND ADDRESS BENEFICIALLY PERCENT
TITLE OF CLASS OF BENEFICIAL OWNER OWNED OF CLASS
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<S> <C> <C> <C>
Common Stock Franklin Resources, Inc.(1) 8,307,128 14.82%
777 Mariners Island Blvd.
San Mateo, CA 94404
Common Stock Wellington Management Company, LLP(2) 6,138,700 10.95%
75 State Street
Boston, MA 02109
Common Stock Capital Research and 4,569,000 8.15%
Management Company(3)
333 South Hope Street
Los Angeles, CA 90071
Common Stock MacKay-Shields Financial Corporation(4) 3,158,400 5.63%
9 West 57th Street
37th Floor
New York, NY 10019
Common Stock J.P. Morgan & Co. Incorporated(5) 2,967,882 5.2%
60 Wall Street
New York, NY 10260
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</TABLE>
(1) Franklin Resources, Inc. has reported that it and certain of its
shareholders and subsidiaries beneficially own 8,307,128 shares. One such
subsidiary, Templeton Global Advisors Limited has also reported that it
has sole voting power with respect to 7,978,170 shares and sole
dispositive power with respect to 7,982,370 shares.
(2) Wellington Management Company, LLP ("Wellington") and Vanguard/Windsor
Funds, Inc. ("Vanguard") have filed with the SEC separate Schedules 13G,
reporting their beneficial ownership with respect to 6,138,700 shares. As
disclosed in the Schedules 13G, Wellington has shared dispositive power
with respect to 6,138,700 shares and shared voting power with respect to
525,400 shares, while Vanguard has shared dispositive power and sole
voting power with respect to 5,113,300 shares.
(3) Capital Research and Management Company ("Capital") and American Variable
Insurance Series Growth -Income Fund ("American") have jointly filed a
Schedule 13G with the SEC, reporting their beneficial ownership with
respect to 4,569,000 shares. As disclosed in the Schedule 13G, Capital has
sole dispositive power with respect to 4,569,000 shares, while American
has sole voting power with respect to 2,809,000.
(4) MacKay-Shields Financial Corporation has reported that it has shared
dispositive power and shared voting power with respect to the 3,158,400
shares it beneficially owns.
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(5) J.P. Morgan & Co. Incorporated has reported that it and certain of its
subsidiaries have sole voting power with respect to 2,199,900 shares,
shared voting power with respect to 600 shares, sole dispositive power
with respect to 3,013,400 shares and shared dispositive power with respect
to 600 shares.
Except as otherwise indicated, the following table sets forth information as of
February 1, 1999 regarding Common Stock beneficially owned (or deemed to be
owned) by each nominee for director, each current director, each executive
officer named in the Summary Compensation Table and all current directors and
executive officers of Valero as a group. The persons listed below have furnished
this information to Valero and accordingly this information cannot be
independently verified by Valero.
<TABLE>
<CAPTION>
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COMMON STOCK
-----------------------------------
PERCENT
SHARES SHARES UNDER OF CLASS
NAME OF BENEFICIALLY EXERCISABLE (COMMON
BENEFICIAL OWNER (1) OWNED(2)(3) OPTIONS(4) STOCK)(2)
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Edward C. Benninger 127,321 333,808 *
Ronald K. Calgaard 2,850 7,468 *
Robert G. Dettmer(5) 9,433 10,456 *
Ruben M. Escobedo(6) 5,834 10,456 *
John D. Gibbons 32,635 23,210 *
William E. Greehey(7) 485,050 983,523 2.6%
John F. Hohnholt 18,121 47,631 *
James L. Johnson 15,864 0 *
Gregory C. King 16,020 40,760 *
Lowell H. Lebermann 1,556 1,494 *
Susan Kaufman Purcell 3,845 10,456 *
All executive officers and
directors as a group, including
the persons named above
(13 persons)(8) 751,236 1,513,371 3.9%
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</TABLE>
* Indicates that the percentage of beneficial ownership does not exceed 1%
of the class.
(1) The business address for all beneficial owners listed above is One
Valero Place, San Antonio, Texas 78212.
(2) No executive officer, director or nominee for director of Valero owns any
class of equity securities of Valero other than Common Stock. The
calculation for Percent of Class includes shares listed under the
captions "Shares Beneficially Owned" and "Shares Under Exercisable
Options."
(3) Includes shares allocated pursuant to the Valero Thrift Plan (the "Thrift
Plan") through December 31, 1998, as well as shares of restricted stock
granted under Valero's Executive Stock Incentive Plan ("ESIP") and the
Director Stock Plan. Except as otherwise noted, each person named in the
table, and each other executive officer, has sole power to vote or direct
the vote of all such shares beneficially owned by him or her. Except as
otherwise noted, each person named in the table, and each other executive
officer, has sole power to dispose or direct the disposition of shares
beneficially owned by him or her. Common Stock granted under the ESIP and
the Director Stock Plan may not be disposed of until
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vested. Does not include shares that could be acquired under options,
which information is set forth in the second column.
(4) Includes shares subject to options that are exercisable within 60 days
from February 1, 1999. Such shares may not be voted unless the options
are exercised. Options that may become exercisable within such 60 day
period only in the event of a change of control of Valero are excluded.
None of the current executive officers, directors or nominees for
director of Valero hold any rights to acquire Common Stock within 60
days, except through exercise of stock options.
(5) Includes 1,500 shares held by spouse.
(6) Includes 673 shares held by spouse and 916 shares held in a trust.
(7) Includes 58,500 shares awarded under the ESIP as performance shares and
27,678 shares awarded under the ESIP as restricted stock which Mr.
Greehey has elected to defer the issuance and delivery of until January
of the year following his retirement.
(8) Certain officers of Valero not designated as executive officers by the
Board do not perform the duties of executive officers and are not
classified as "executive officers" for purposes of this Proxy Statement.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended ("Exchange
Act"), requires Valero's executive officers, directors and greater than 10%
stockholders to file with the SEC certain reports of ownership and changes in
ownership. Based on a review of the copies of such forms received and written
representations from certain reporting persons, Valero believes that, during the
year ended December 31, 1998, its executive officers, directors and greater than
10% stockholders were in compliance with applicable requirements of Section
16(a), with the following exceptions. Based on information provided to the
Company, a report filed by Mr. Escobedo in 1997 inadvertently omitted 200 shares
owned indirectly. In July 1998, Mr. Greehey failed to timely report an open
market purchase of 20,000 shares of the Company's Common Stock. These omissions
were corrected by amended filings with the SEC.
Notwithstanding anything to the contrary set forth in any of Valero's previous
filings under the Securities Act of 1933, as amended, or in the Exchange Act
that might incorporate future filings by reference, including this Proxy
Statement, in whole or in part, the following Performance Graph and Report of
the Compensation Committee of the Board of Directors on Executive Compensation
shall not be incorporated by reference into any such filings. The following
Performance Graph and Report of the Compensation Committee of the Board of
Directors on Executive Compensation shall not be deemed to be "soliciting
material" or to be "filed" with the SEC or subject to Regulations 14A or 14C
under the Exchange Act, or to the liabilities of Section 18 of the Exchange Act.
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PERFORMANCE GRAPH
Set forth below is a line graph which compares the Cumulative Total Return
(defined in the footnote below) on an investment in Old Valero common stock,
$1.00 par value ("Old Valero Common Stock"), against the cumulative total return
of the S&P 500 Composite Index, the peer group used by Valero in its 1998 Proxy
Statement (the "Old Peer Group") and an index of three new peer companies (the
"New Peer Group") selected by Valero for the period of five fiscal years
commencing December 31, 1993 and ending December 31, 1998. In 1998, Valero
changed its peer group to exclude Ashland Oil Company, which contributed its
refining and marketing assets to a joint venture with Marathon Oil Company. The
New Peer Group selected by Valero consists of three companies engaged in the
domestic petroleum refining industry with business operations, risks and markets
comparable to Valero's. The New Peer Group consists of Sun Company, Inc., Tosco
Corporation and Ultramar Diamond Shamrock Corporation.
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
AMONG VALERO ENERGY CORPORATION, THE S&P 500 INDEX,
A NEW PEER GROUP AND AN OLD PEER GROUP
[GRAPH]
<TABLE>
<CAPTION>
12/1993 12/1994 12/1995 12/1996 12/1997 12/1998
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Valero Common Stock.................................... 100 82 122 146 240 168
New Peer Group......................................... 100 105 112 151 211 161
Old Peer Group......................................... 100 105 111 148 201 162
S&P 500................................................ 100 101 139 171 229 294
</TABLE>
The foregoing Performance Graph and related textual information are based on
historical data and are not necessarily indicative of future performance.
- ---------------------
* Assumes an investment in Old Valero common stock (Valero's former parent)
and each index was $100 on December 31, 1993. "Cumulative Total Return" is
based on share price appreciation plus reinvestment of dividends on Old
Valero common stock from December 31, 1993 through the date of the
Restructuring (July 31, 1997) and on Valero Common Stock from the date of
the Restructuring through December 31, 1998 (including reinvestment of the
value of the PG&E Corporation shares received as a result of the Merger
(see Restructuring on page 2)).
10
<PAGE> 13
REPORT OF THE COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS ON EXECUTIVE
COMPENSATION
The Company's executive compensation programs are administered by the
Compensation Committee (the "Committee") of Valero's Board. The Committee is
composed of three independent outside directors ineligible to participate in the
Company's executive compensation programs. The Committee's policies are
implemented by the Company's compensation and benefits staff under the direction
of the Director, Human Resources. The Company's executive compensation programs
are intended to provide strong incentives for high performance, enabling the
Company to recruit, retain and motivate the executive talent necessary to be
successful.
COMPENSATION POLICIES
The Company's philosophy for compensating executive officers is based on the
belief that a significant portion of executive compensation should be incentive
based and determined by both the Company's and the executive's performance. The
executive compensation program includes base salary, an annual incentive bonus
opportunity and long-term, stock-based incentives. The CEO and other executive
officers also participate in benefit plans generally available to employees of
the Company. The Committee believes that the market in which the Company
competes for executive talent is broader than the market defined by the
companies included in the Peer Group presented above in the Comparison of Five
Year Cumulative Total Return. Accordingly, to assist with determining executive
compensation levels, the Company utilizes a subgroup of companies from a
nationally recognized compensation database compiled by Hewitt Associates,
L.L.C. ("Hewitt"), an independent compensation consultant. This subgroup
consists of 10 companies (the "Compensation Peer Group") with significant
participation in the domestic oil refining and marketing industry, which
includes certain of the Peer Group companies for which compensation data is
available. Hewitt's Compensation Peer Group recommendation reflects
consideration of each company's relative revenue, asset base, employee
population and capitalization, along with the scope of managerial responsibility
and reporting relationships. Base salary, bonuses and other compensation
recommendations are developed by the Company's compensation and benefits staff,
reviewed by Hewitt and submitted to the Committee for consideration. Other
nationally recognized compensation surveys are utilized to validate the
information provided by Hewitt. In establishing and implementing executive
compensation arrangements, the Committee reviews and discusses the staff
recommendations directly with representatives of Hewitt.
Annual incentive bonuses, when awarded, are related both to measures of Company
financial performance and to individual performance. Long-term incentives,
consisting of performance shares, restricted stock and stock option grants, as
well as the noncash portion of annual incentive bonus awards, are intended to
balance executive management focus between short and long-term goals and provide
capital accumulation linked directly to the performance of Valero's Common
Stock. Base salary levels are targeted at approximately the 50th percentile of
the Compensation Peer Group, while annual and long-term incentive compensation,
when awarded, are targeted at the 65th percentile. While no specific percentile
target is set for overall compensation, the Committee intends that each
executive's total compensation package favor longer-term and variable
compensation over fixed compensation.
BASE SALARIES
Base salaries for each executive position are set based upon the Compensation
Peer Group data for positions having similar duties and levels of
responsibility. Base salaries are reviewed annually and may be adjusted to
reflect promotions, the assignment of additional responsibilities, individual
performance or the performance of the Company. Salaries are also periodically
adjusted to remain competitive with the Compensation Peer Group. Base salaries
for the named executive officers (other than Mr. Greehey and Mr. Benninger) were
increased in mid-1998 by an average of approximately 21%, principally as part of
the Company's effort to bring their base salary levels more closely in line with
those of similarly situated executives in the Compensation Peer Group.
11
<PAGE> 14
ANNUAL INCENTIVE BONUS
Executive officers have the opportunity to earn an annual incentive bonus based
on the following three factors:
o the position of the executive officer, which is used to
determine a targeted percentage of annual base salary that may
be awarded as incentive bonus, with the targets ranging from a
low of approximately 40% of base salary to approximately 65%
of base salary (for the CEO);
o realization by the Company of quantitative financial
performance goals approved by the Committee; and
o a qualitative evaluation of the individual's performance.
For each executive, the target percentage of base salary is adjusted upward or
downward based upon Company achievement of certain financial performance goals.
The Committee retains discretion to further adjust individual bonus targets
upward or downward by not more than 25%, based upon such factors as it deems to
be appropriate, and ultimately to determine whether to award a bonus to any
individual. In establishing incentive bonuses for 1998, the Company utilized the
following quantitative measures of Company financial performance:
o return on equity ("ROE") compared with the average ROE for a
group of six companies in the domestic oil refining and
marketing business (the "Target Group") for the 12-month
period ended September 30, 1998 (the "Target Period");
o return on investment ("ROI") for the Target Period compared
with that of the Target Group;
o earnings per share of Common Stock in 1998 (based on estimates
available at the time of computation) compared with 1997; and
o the daily average closing price of a share of Common Stock
during November 1998 compared with the daily average closing
price during the corresponding period in the prior year.
For the ROE and ROI financial performance measures, the target percentage of
base salary is subject to adjustment, upward or downward, depending upon whether
the Company's ROE and ROI exceeds, or falls short of, the average ROE and ROI
for the Target Group. For the earnings per share and stock price performance
measures, the target percentage of base salary is subject to adjustment if the
Company's performance exceeds or falls short of the prior year's measures. The
four performance factors are given approximately equal weight in determining
potential adjustments to the target percentages of base salary for 1998. ROE and
ROI are measured against the Target Group, rather than the Compensation Peer
Group, because (i) certain entities for which compensation survey information is
either not available or not comparable are nonetheless included in the Target
Group because their operations are most comparable to Valero's; and (ii) certain
entities with whom Valero competes for executive talent, and who are therefore
included in the Compensation Peer Group, have operations sufficiently different
in size or scope from Valero's such that financial comparisons are less
meaningful.
For 1998, the Company's performance was above the Target Group average for ROE,
slightly below the Target Group average for ROI, and significantly below the
1997 earnings per share and stock price performance. Based on these financial
results, the Committee (and, in the case of the CEO and the President, the
Board) determined to adjust the bonus target amounts downward. The named
executives received cash bonus awards at an average of approximately 40% of the
original target bonus amounts. In addition, to
12
<PAGE> 15
further emphasize the Company's goal of increasing stock ownership as a
component of both short and long-term compensation, and to enhance the Company's
ability to retain key executives, the named executives, with the exception of
Mr. Benninger who retired on December 31, 19998, received restricted Common
Stock ("Restricted Stock") bonus awards equal in value to 50% of their cash
bonus award, with the entire award of Restricted Stock vesting (becoming
non-forfeitable) on the second anniversary of the date of grant.
LONG-TERM INCENTIVE AWARDS
To provide stock-based longer-term compensation for executives, the Company
maintains the Executive Stock Incentive Plan ("ESIP"). The plan authorizes
awards of performance shares ("Performance Shares") which vest (become
nonforfeitable) upon the achievement of an objective performance goal, as well
as grants of Restricted Stock which vest over a period determined by the
Committee. For each eligible executive, a targeted number of Performance Shares
is set with an aggregate hypothetical market value at the date of grant targeted
at the 65th percentile of the Compensation Peer Group. Such targeted award can
then be adjusted based upon an individual subjective performance evaluation,
which (for executives other than the CEO) is based upon the recommendation of
the CEO, and such other factors as the Committee deems appropriate. As with the
annual incentive bonus, discretion is retained by the Committee ultimately to
determine whether an award should be made. The total number of shares awarded is
a function of the Common Stock price at the time of grant and the number of
shares required to achieve a percentage of compensation target. The Committee
anticipates awards of Performance Shares will generally be made annually.
Performance Shares are earned only upon the achievement of an objective
performance measure. Total shareholder return ("TSR") is the performance measure
utilized for determining what portion of Performance Share awards may vest. Each
award is subject to vesting in three increments, based upon the Company's TSR
during rolling three-year periods that end on December 31 of each year following
the date of grant. At the end of each performance period, the Company's TSR is
compared to the Target Group (excluding one company for 1998 for which
information required to calculate TSR was not available) and ranked by quartile.
Participants then earn 0%, 50%, 100% or 150% of the initial grant amount
depending upon whether the Company's TSR is in the last, 3rd, 2nd or 1st
quartile; 200% would be earned if the Company ranks highest in the group.
Amounts not earned in a given performance period can be carried forward for one
additional performance period and up to 100% of the carried amount can still be
earned, depending upon the quartile achieved for such subsequent period. For the
performance period ended December 31, 1998, the Company's performance ranked in
the first quartile, resulting in a vesting of 150% of the initial grant amounts
for such period. The Committee believes this type of incentive award strengthens
the tie between the named executive's pay and the Company's financial
performance. Because Performance Share awards are intended to provide an
incentive for future performance, determination of individual awards are not
based upon past Company performance. Additionally, in determining an individual
award, the Committee does not consider Performance Shares or Restricted Stock
previously awarded or currently held, because such considerations are not
reflected in the compensation survey information upon which awards are based,
and because the Company does not wish to encourage executives to sell stock in
order to qualify for additional awards.
STOCK OPTIONS
Under the ESIP, the Committee may grant stock options to executive officers.
Procedures for determining the number of options to be granted are in all
material respects the same as for Performance Share awards. The option awards
made by the Committee in 1998 vest over a period of three years in equal
installments and expire ten years from the date of grant. The Committee expects
generally to continue this practice. The award and vesting of stock options are
not contingent on achievement of any specified performance targets, but the
options will provide a benefit to the executive only to the extent that there is
appreciation in the market price of the Common Stock during the option period.
13
<PAGE> 16
DETERMINATION OF THE CEO'S COMPENSATION
The CEO's compensation is recommended by the Committee and established by the
Board of Directors.
In 1997, the Committee approved a new employment agreement between the Company
and Mr. Greehey as CEO. Under that agreement, Mr. Greehey's base salary was set
at $900,000 based on the Committee's evaluation of the most recently available
Compensation Peer Group data. In determining the CEO's annual incentive bonus
for 1998, the Committee considered the four financial performance measures
discussed above and his individual performance. Based upon these factors, the
Committee recommended, and on January 21, 1999 the Board of Directors approved,
a cash bonus award equal to 40% of his original target bonus amount, or
$234,000, and a Restricted Stock bonus award equal in value to 50% of the cash
bonus award, or $117,000, with the entire award of Restricted Stock vesting on
the second anniversary of the date of grant.
TAX POLICY
Under Section 162(m) of the Internal Revenue Code (the "Code"), with certain
exceptions, publicly held corporations, including the Company, may take a tax
deduction for compensation in excess of $1 million paid to the CEO or the other
four most highly compensated executive officers named in the Summary
Compensation Table only if such compensation is "performance based" as defined
by the Code. Section 162(m) will not apply to limit the deductibility of
performance-based compensation exceeding $1 million if such compensation is paid
(i) solely upon attainment of one or more performance goals, (ii) pursuant to a
qualifying performance-based compensation plan adopted by the Committee, and
(iii) the material terms, including the performance goals, of such plan are
approved by the stockholders before payment of the compensation. The Company
believes that options granted under its stock option plans (including stock
option awards under the ESIP) qualify as performance-based compensation and are
not subject to any deductibility limitations under Section 162(m). However, the
ESIP does not require satisfaction of quantifiable performance goals for awards
of Restricted Stock, and the performance goals adopted for the Performance
Shares described above have not been specifically approved by the stockholders.
Accordingly, Restricted Stock and Performance Share grants which have been made
under the ESIP are ineligible for the performance-based compensation exception
of Section 162(m), notwithstanding that no Performance Shares are issued by the
Committee unless the established performance criteria established by the
Committee has been met. The Committee considers deductibility under Section
162(m) with respect to compensation arrangements with executive officers.
However, the Committee and the Board believe that it is in the best interest of
the Company that the Committee retain its flexibility and discretion to make
compensation awards to foster achievement of performance goals established by
the Committee (which may include performance goals defined in the Code) and
other corporate goals the Committee deems important to the Company's success,
such as encouraging employee retention, rewarding achievement of nonquantifiable
goals and achieving progress with specific projects.
MEMBERS OF THE COMPENSATION COMMITTEE:
Lowell H. Lebermann, Chairman
Robert G. Dettmer
James L. Johnson
14
<PAGE> 17
EXECUTIVE COMPENSATION
The following table provides a summary of compensation paid for the last
three-years to Valero's CEO, and to its four other most highly compensated
executive officers. The table shows amounts earned by such persons for services
rendered to the Company in all capacities in which they served, including
compensation paid or accrued by Old Valero or by subsidiaries of Old Valero
(including Valero and subsidiaries of Valero) prior to the effective date of the
Restructuring (see page 2 of this Proxy Statement for a discussion of the
Restructuring). Benefits under health care, disability, term life insurance,
vacation and other plans available to employees generally are not included in
the table.
SUMMARY COMPENSATION TABLE (1996-1998)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
LONG-TERM COMPENSATION
----------------------
ANNUAL COMPENSATION RESTRICTED SECURITIES
------------------- STOCK UNDERLYING ALL OTHER
NAME AND BONUS AWARDS OPTIONS LTIP COMPENSATION
POSITION(S) YEAR SALARY($) ($)(1) ($)(2) (#)(3) PAYOUTS($)(4) ($)(5)
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
William E. Greehey 1998 $900,000 $ 234,000 $ 117,000 400,000 $ 683,394 $ 78,956
Director, Chairman 1997 900,000 1,085,000 675,000 493,000 718,750 93,996
of the Board and 1996 497,337 670,739 1,545,362 5,000 325,000 928,949
Chief Executive
Officer
Edward C. Benninger(6) 1998 $400,008 $ 150,000 $ 0 0 $ 246,901 $ 93,442
Director and 1997 400,008 470,000 337,500 185,000 260,188 49,298
President 1996 357,180 335,370 497,500 25,000 93,698 28,541
John D. Gibbons(7) 1998 $240,000 $ 40,000 $ 125,750 27,500 $ 28,875 $ 18,935
Chief Financial Officer 1997 181,887 340,006 81,000 19,125 0 13,450
and Vice President,
Finance
Gregory C. King(7) 1998 $226,002 $ 38,000 $ 19,019 27,500 $ 51,975 $ 16,134
Vice President and 1997 191,095 356,500 84,375 26,250 37,500 8,755
General Counsel
John F. Hohnholt(8) 1998 $212,502 $ 40,000 $ 65,000 27,500 $ 28,875 $ 14,243
Vice President
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) For 1996, executives received bonuses payable 25% in cash and 75% in Common
Stock. For 1997, bonus amounts include the cash portion of the regular
annual bonus under the Executive Incentive Bonus Plan, as well as a special
cash bonus paid upon completion of the Restructuring. In 1997, executives
were provided the opportunity to receive their annual incentive bonuses 80%
in cash and 20% in Common Stock or 50% in Restricted Stock vesting 50%
annually over a two-year period and 50% in cash. Executives choosing the
50/50 option received additional Restricted Stock equal in value to 17.5%
of their total incentive award. Each of the executives listed selected the
50/50 option. For 1998, executives received a cash bonus and a bonus
payable in Restricted Stock equal to 50% of the cash award. For further
information, see "Report of the Compensation Committee of the Board of
Directors on Executive Compensation" above.
(2) On January 21, 1999, each named executive received a grant of Restricted
Stock as a part of his annual incentive bonus for 1998, vesting on the
second anniversary of the grant date. The value of such stock is included
in the Summary Compensation Table. Dividends are paid on the Restricted
Stock at the same rate as on Valero's unrestricted Common Stock. Amounts
for Mr. Gibbons include 3,000 shares of Restricted Stock which vest in
one-third increments beginning on the first anniversary of the grant date.
Amounts for Mr. Hohnholt include 1,312 shares of Restricted Stock which
vest on the second anniversary of the grant date. Amounts reported may
include awards the executive has elected to defer. The aggregate number of
shares of Restricted Stock held at December 31, 1998, and the market value
of such shares on that date (calculated according to SEC regulation without
regard to restrictions on such shares) were: Mr. Greehey, 21,600 shares,
$459,000; Mr. Benninger, 10,800 shares, $229,500; Mr. Gibbons, 5,592
shares, $118,830; Mr. King, 2,700 shares, $57,375; and Mr. Hohnholt, 5,512
shares, $117,130.
(3) The number of options granted in 1996 and 1997 consists of options granted
by Old Valero. Such options were subsequently converted at the time of the
Restructuring into options to purchase shares of Valero's Common Stock.
(4) LTIP payouts are the number of performance share awards vested during the
year multiplied by the market price per share of Valero Common Stock on the
vesting date. Amounts reported may include awards the executive has elected
to defer. For further information, see the notes following the table
entitled "Long Term Incentive Plans-Awards in Last Fiscal Year."
(5) Amounts include Company contributions pursuant to the Thrift Plan and
Valero's Excess Thrift Plan, unused portions of amounts provided by the
Company under the Company's Flexible Benefits Plan and that portion of
interest accrued under the Executive Deferred Compensation Plan which is
deemed to be at "above-market" rates under applicable SEC rules. Messrs.
Greehey,
15
<PAGE> 18
Benninger, Gibbons, King and Hohnholt, were allocated $54,931, $27,041,
$14,724, $13,597 and $12,766, respectively, as a result of Company
contributions to the Thrift Plan and Valero's Excess Thrift Plan for 1998,
$6,535, $3,523, $3,420, $1,746 and $1,261, respectively, as a result of
reimbursement of certain membership dues and $4,507, $14,107, $0, $0 and
$64, respectively, as a result of "above-market" allocations to the
Executive Deferred Compensation Plan for 1998. Messrs. King and Gibbons do
not participate in the Executive Deferred Compensation Plan. Amounts for
Mr. Greehey also include executive insurance policy premiums with respect
to cash value life insurance (not split-dollar life insurance) in the
amount of $7,583 for 1996, $12,212 for 1997 and $12,212 for 1998. Amounts
for Mr. Benninger also include $48,000 for reimbursement of certain federal
income taxes in connection with his retirement.
(6) Mr. Benninger retired as President of the Company on December 31, 1998.
(7) Messrs. Gibbons and King were not executive officers of Valero or Old
Valero for any part of 1996. Bonus amounts for 1997 include $80,000 and
$84,000, respectively, of previously unreported bonus compensation earned
in 1997 but deferred until 1998.
(8) Mr. Hohnholt was not an executive officer of Valero or Old Valero for any
part of 1996 or 1997.
STOCK OPTION GRANTS AND RELATED INFORMATION
The following table provides further information regarding the grants of stock
options to the named executive officers reflected in the Summary Compensation
Table.
OPTION GRANTS IN THE LAST FISCAL YEAR (1)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
NUMBER OF PERCENT OF
SECURITIES TOTAL OPTIONS MARKET
UNDERLYING GRANTED PRICE AT GRANT DATE
OPTIONS TO EMPLOYEES EXERCISE PRICE GRANT DATE EXPIRATION PRESENT VALUE
NAME GRANTED (#) IN FISCAL YEAR ($/SH) (1) ($/SH) DATE ($) (2)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
William E. Greehey 400,000 20% $20.6563 $20.6563 08/27/08 $1,840,800
Edward C. Benninger 0
John D. Gibbons 12,500 1% $31.2500 $31.2500 01/28/08 $ 102,100
15,000 $20.6563 $20.6563 08/27/08 $ 69,030
Gregory C. King 12,500 1% $31.2500 $31.2500 01/28/08 $ 102,100
15,000 $20.6563 $20.6563 08/27/08 $ 69,030
John F. Hohnholt 12,500 1% $31.2500 $31.2500 01/28/08 $ 102,100
15,000 $20.6563 $20.6563 08/27/08 $ 69,030
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) All options reported vest in equal increments over a three-year period from
the date of grant. In the event of a change of control of Valero, such
options would become immediately exercisable pursuant to provisions of the
plan under which such options were granted or of an executive severance
agreement. Under the terms of the plan, the exercise price and tax
withholding obligations related to exercise may be paid by delivery of
already owned shares or by offset of the underlying shares, subject to
certain conditions.
(2) A variation of the Black-Scholes option pricing model was used to determine
grant date present value. This model is designed to value publicly traded
options. Options issued under the Company's option plans are not freely
traded, and the exercise of such options is subject to substantial
restrictions. Moreover, the Black-Scholes model does not give effect to
either risk of forfeiture or lack of transferability. The estimated values
under the Black-Scholes model are based on assumptions as to variables such
as interest rates, stock price volatility and future dividend yield. The
estimated grant date present values presented in this table were calculated
using an expected average option term of 3.32 years, risk-free rates of
return of 5.50% (for the January 28, 1998 grants) and 5.04% (for the August
27, 1998 grants), average volatility rates for the 3.32 years preceding
such grants of 29.10% (for the January 28, 1998 grants) and 28.12% (for the
August 27, 1998 grants), and dividend yields of 1.01% (for the January 28,
1998 grants) and 1.58% (for the August 27, 1998 grants), which are the
annualized quarterly dividend rates in effect at the date of grant,
expressed as a percentage of the market value of the Common Stock at the
date of grant. The actual value of stock options could be zero; realization
of any positive value depends upon the actual future performance of the
Common Stock, the continued employment of the option holder throughout the
vesting period and the timing of the exercise of the option. Accordingly,
the values set forth in this table may not be achieved.
16
<PAGE> 19
LONG TERM INCENTIVE PLANS - AWARDS IN LAST FISCAL YEAR(1)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
ESTIMATED FUTURE PAYOUTS
PERFORMANCE UNDER NON-STOCK PRICE-BASED PLANS
NUMBER OF OR OTHER PERIOD ----------------------------------------
SHARES, UNITS UNTIL MATURATION THRESHOLD TARGET MAXIMUM
NAME OR OTHER RIGHTS OR PAYOUT (# SHARES) (# SHARES) (# SHARES)
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
William E. Greehey 8,334 12/31/98 0 8,334 16,668
8,333 12/31/99 0 8,333 16,666
8,333 12/31/00 0 8,333 16,666
Edward C. Benninger 3,000 12/31/98 0 3,000 6,000
3,000 12/31/99 0 3,000 6,000
3,000 12/31/00 0 3,000 6,000
John D. Gibbons 1,000 12/31/98 0 1,000 2,000
1,000 12/31/99 0 1,000 2,000
1,000 12/31/00 0 1,000 2,000
Gregory C. King 1,000 12/31/98 0 1,000 2,000
1,000 12/31/99 0 1,000 2,000
1,000 12/31/00 0 1,000 2,000
John F. Hohnholt 1,000 12/31/98 0 1,000 2,000
1,000 12/31/99 0 1,000 2,000
1,000 12/31/00 0 1,000 2,000
- -------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Long-term incentive awards are grants of performance shares ("Performance
Shares") made under the Executive Stock Incentive Plan. Total shareholder
return ("TSR") during a specified "performance period" was established as
the performance measure for determining what portion of the 1998
Performance Share awards may vest. For purposes of the Performance Share
awards, TSR is measured by dividing the sum of (a) the net change in the
price of a share of Valero's Common Stock between the beginning of the
performance period and the end of the performance period, and (b) the total
dividends paid on the Common Stock during the performance period, by (c)
the price of a share of Valero's Common Stock at the beginning of the
performance period. Each 1998 Performance Share award is subject to vesting
in three equal increments, based upon the Company's TSR during three
overlapping periods, with all such periods beginning on the date of the
Distribution and ending on December 31, 1998, 1999 and 2000, respectively.
At the end of each performance period, the Company's TSR is compared to the
TSR for a target group of comparable companies. Valero and the companies in
the target group are then ranked by quartile. At the end of each
performance period, participants earn 0%, 50%, 100% or 150% of the initial
grant amount for such period depending upon whether the Company's TSR is in
the last, 3rd, 2nd or 1st quartile of the target group; 200% will be earned
if the Company ranks highest in the group. Amounts not earned in a given
performance period can be carried forward for one additional performance
period and up to 100% of the carried amount can still be earned, depending
upon the quartile achieved for such subsequent period.
17
<PAGE> 20
The following table provides information regarding securities underlying options
exercisable at December 31, 1998, and options exercised during 1998, for the
executive officers named in the Summary Compensation Table:
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION VALUES
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
VALUE OF UNEXERCISED
NUMBER OF SECURITIES IN-THE-MONEY
SHARES UNDERLYING UNEXERCISED OPTIONS AT
ACQUIRED VALUE OPTIONS AT FY-END(#) FY-END ($)(1)
ON EXERCISE REALIZED -------------------------- --------------------------
NAME (#) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
William E. Greehey - - 882,460 818,689 $4,273,449 $236,000
Edward C. Benninger - - 176,986 156,822 131,366 0
John D. Gibbons - - 9,522 46,542 0 8,850
Gregory C. King - - 23,524 53,637 29,274 8,850
John F. Hohnholt - - 35,996 42,436 183,762 8,850
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Represents the dollar value obtained by multiplying the number of
unexercised options by the difference between the stated exercise price per
share of the options and the average market price per share of Valero's
Common Stock on December 31, 1998.
RETIREMENT BENEFITS
The following table shows the estimated annual gross benefits payable under
Valero's Pension Plan ("Pension Plan"), Excess Pension Plan and Supplemental
Executive Retirement Plan ("SERP") upon retirement at age 65, based upon the
assumed compensation levels and years of service indicated and assuming an
election to have payments continue for the life of the participant only.
ESTIMATED ANNUAL PENSION BENEFITS AT AGE 65
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
YEARS OF SERVICE
COVERED ------------------------------------------------------------------------------------
COMPENSATION 15 20 25 30 35
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 200,000 $ 55,000 $ 73,000 $ 91,000 $109,000 $128,000
250,000 69,000 92,000 116,000 139,000 162,000
300,000 84,000 112,000 140,000 168,000 196,000
400,000 113,000 151,000 189,000 226,000 264,000
500,000 142,000 190,000 237,000 285,000 332,000
600,000 172,000 229,000 288,000 343,000 401,000
700,000 201,000 268,000 335,000 402,000 469,000
800,000 230,000 307,000 384,000 460,000 537,000
900,000 259,000 346,000 432,000 519,000 605,000
1,000,000 289,000 385,000 481,000 577,000 674,000
1,100,000 318,000 424,000 530,000 636,000 742,000
1,200,000 347,000 463,000 579,000 694,000 810,000
1,300,000 376,000 502,000 627,000 753,000 878,000
1,400,000 406,000 541,000 676,000 811,000 947,000
- --------------------------------------------------------------------------------------------------------------
</TABLE>
Valero maintains a noncontributory defined benefit Pension Plan in which
virtually all employees are eligible to participate and under which
contributions for individual participants are not determinable. Valero also
maintains a noncontributory, non-qualified Excess Pension Plan and a
non-qualified SERP, which provide supplemental pension benefits to certain
highly compensated employees. The Pension Plan (supplemented, as necessary, by
the Excess Pension Plan) provides a monthly pension at normal retirement equal
to 1.6%
18
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of the participant's average monthly compensation (based upon the participant's
base earnings during the 60 consecutive months of the participant's credited
service, including service with Old Valero, affording the highest such average)
times the participant's years of credited service, plus .35% times the product
of the participant's years of credited service (maximum 35 years) multiplied by
the excess of the participant's average monthly compensation over the lesser of
1.25 times the monthly average (without indexing) of the social security wage
bases for the 35-year period ending with the year the participant attains social
security retirement age, or the monthly average of the social security wage base
in effect for the year that the participant retires.
Compensation for purposes of the Pension Plan and Excess Pension Plan includes
only salary as reported in the Summary Compensation Table and excludes bonuses.
For purposes of the SERP, the participant's most highly compensated consecutive
36 months of service during the participant's last 10 years of employment
(rather than 60 months), including employment with Old Valero and its
subsidiaries, are considered, and bonuses are included. Accordingly, the amounts
reported in the Summary Compensation Table under the headings "Salary" and
"Bonus" constitute covered compensation for purposes of the SERP. Pension
benefits are not subject to any deduction for social security or other offset
amounts.
Credited years of service for the period ended December 31, 1998 for the
executive officers named in the Summary Compensation Table are as follows: Mr.
Greehey -- 35 years; Mr. Benninger -- 24 years; Mr. Gibbons -- 18 years; Mr.
King -- 5 years; and Mr. Hohnholt - 17 years.
ARRANGEMENTS WITH CERTAIN OFFICERS AND DIRECTORS
Old Valero entered into agreements (the "Severance Agreements") with Messrs.
Greehey and Benninger, which provide certain payments and other benefits in the
event of their termination of employment under certain circumstances. Mr.
Benninger's Severance Agreement was terminated in connection with his retirement
from employment with the Company on December 31, 1998. Mr. Greehey's Severance
Agreement provides that if he leaves the Company for any reason (other than
death, disability or normal retirement) within two years after a "change of
control," he will receive a lump-sum cash payment equal to three times his
highest compensation during any consecutive 12-month period in the prior three
years. He will also be entitled to accelerated vesting of all previously granted
stock options, SARs and restricted stock. The agreement also provides for
special retirement benefits if he would have qualified for benefits under the
Pension Plan had he remained with the Company for the three-year period
following such termination, continuance of life and health insurance coverages,
relocation assistance and other fringe benefits for such three-year period. In
connection with the Merger, Mr. Greehey executed a waiver providing that the
consummation of the transactions contemplated by the Merger would not constitute
a "change of control" for purposes of his Severance Agreement, and Valero
assumed the obligations of Old Valero under the Severance Agreement after the
Merger.
In connection with Mr. Benninger's retirement as President of the Company on
December 31, 1998, the Company entered into a retirement agreement (the
"Agreement") and a consulting agreement (the "Consulting Agreement") with Mr.
Benninger. The Agreement terminated the Company's obligations under his existing
employment agreement with the Company and provided for the immediate vesting of
previously granted stock options, restricted stock and performance shares;
crediting of eight supplemental retirement "points" to be added, at his
election, to his credited years of service or his age under the Pension Plan;
office and secretarial support for a two-year period; transfer of a club
membership; and certain retiree medical benefits. Under the Consulting
Agreement, Mr. Benninger will provide certain consulting services to the Company
through December 31, 1999. For his services, Mr. Benninger will receive a
consulting fee of $175,000, reimbursement of certain membership dues and certain
tax planning services.
Valero has entered into Management Stability Agreements ("Stability Agreements")
with various key executives, including Messrs. King and Gibbons. These
agreements are intended to assure the continued availability of these executives
in the event of certain transactions culminating in a "change of control" of
Valero. Under the Stability Agreements, in the event Mr. King or Mr. Gibbons is
terminated within two years
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after a change of control or divestiture transaction has occurred, and
termination is not voluntary or the result of death, permanent disability,
retirement or certain other defined circumstances, the executive would be
entitled to receive (i) a lump sum cash payment equal to two times the highest
annual compensation paid to such executive during the prior three-year period,
and (ii) the continuation of life, disability and health insurance coverages for
two years. The executives would also be entitled to accelerated vesting of all
previously granted stock options, SARs and restricted stock.
Valero has entered into an Employment Agreement with Mr. Greehey. The agreement
became effective July 31, 1997 and has an initial term of two years, which may
be extended on a month-to-month basis thereafter. Under the agreement, Mr.
Greehey agrees to serve as Chief Executive Officer of Valero and receives a base
salary of $900,000 per annum, subject to possible increase adjustments by the
Valero Board. The agreement also provides for Mr. Greehey to receive an annual
bonus in an amount to be determined by the Board. During his employment, Mr.
Greehey would also receive reimbursement for certain club membership dues and
fees, tax planning services and a permanent life insurance benefit. In the event
Mr. Greehey dies during employment, his base salary shall be paid to his
beneficiaries or estate for the remainder of the agreement period.
The agreement provides that Mr. Greehey may retire at any time upon 90 days
prior notice. Upon his retirement from employment, Mr. Greehey has agreed to
continue to serve at the discretion of the Board as Chairman of the Board for
two additional years at a rate of compensation equal to one-half of his base
salary at the time of his retirement. Upon his retirement, in addition to
retiree medical and other benefits payable to retirees generally, Mr. Greehey
would also receive credit for eight additional years of service for purposes of
calculating his supplemental pension benefits under the SERP, vesting of
outstanding derivative securities, office and secretarial facilities and
$300,000 of permanent life insurance.
The Company may terminate Mr. Greehey's employment as Chief Executive Officer at
any time upon 90 days notice. Unless such termination is for cause, Mr. Greehey
would be entitled to receive a pro rata, lump sum cash settlement equal to the
sum of (i) Mr. Greehey's base salary for the remaining term of the agreement,
plus (ii) an amount equal to the highest annual bonus paid to Mr. Greehey during
the preceding five years. If Mr. Greehey's employment is terminated by the
Company, he would not be entitled to serve as Chairman or to receive the
compensation specified for such service. However, if Mr. Greehey retires and
commences service as Chairman of the Board, and is then removed from such
position by a majority of the remaining Board members, he would be entitled to
receive the balance of the two years compensation for serving as Chairman of the
Board. The Employment Agreement provides that if Mr. Greehey receives a cash
payment thereunder, and such payment is determined to be subject to the excise
tax required for certain "excess parachute payments," then he shall receive a
cash bonus to cover the amount of any such excise tax payable, plus any taxes on
such bonus amount. In addition, amounts which he may receive under his Severance
Agreement shall be credited against amounts payable under his Employment
Agreement.
TRANSACTIONS WITH MANAGEMENT AND OTHERS
See "Executive Compensation" and "Arrangements with Certain Officers and
Directors" for a discussion of compensation paid to certain officers and
directors.
Except as referenced above, no executive officer, director or nominee for
director of Valero has been indebted to the Company, or has acquired a material
interest in any transaction to which the Company is a party, during the last
fiscal year.
PROPOSAL NO. 2. RATIFICATION OF INDEPENDENT PUBLIC ACCOUNTANTS
The Board requests stockholder approval of the following resolution adopted at
the Board meeting held on February 25, 1999, appointing Arthur Andersen LLP, 70
N.E. Loop 410, San Antonio, Texas 78216, as independent public accountants for
the Company for the year 1999. Arthur Andersen LLP has served continuously in
such capacity for Old Valero and the Company since 1979.
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RESOLVED, that the appointment of the firm of Arthur Andersen LLP,
Certified Public Accountants, as the independent auditors for the
Company for the purpose of conducting an examination and audit of the
financial statements of Valero and its subsidiaries for the fiscal year
ending December 31, 1999, is hereby approved and ratified.
THE BOARD RECOMMENDS THAT THE STOCKHOLDERS VOTE "FOR" THE PROPOSAL TO RATIFY THE
APPOINTMENT OF INDEPENDENT PUBLIC ACCOUNTANTS.
Passage of the proposal requires approval of a majority of the shares
represented and entitled to vote at the Annual Meeting. If the appointment is
not approved, the adverse vote will be considered as an indication to the Board
that it should select other independent public accountants for the following
year. Because of the difficulty and expense of making any substitution of
accountants so long after the beginning of the current year, it is contemplated
that the appointment for the year 1999 will be permitted to stand unless the
Board finds other good reason for making a change.
A representative of Arthur Andersen LLP is expected to be present at the Annual
Meeting to respond to appropriate questions raised at the Annual Meeting or
submitted to them in writing prior to the Annual Meeting. The representative may
also make a statement if he or she desires to do so.
PROPOSAL NO. 3. OTHER BUSINESS
If any matters not referred to in this Proxy Statement properly come before the
Annual Meeting, a majority of the persons named in the proxy (or, if one such
person acts, then that one) may vote the shares represented by proxy in
accordance with their best judgment. The Board was not aware at a reasonable
time before solicitation of proxies began of any other matters that would be
presented for action at the meeting.
STOCKHOLDER PROPOSALS
Under Valero's By-Laws, stockholders intending to bring any business before an
Annual Meeting of Stockholders, including nominations of persons for election as
directors, must give prior written notice to the Corporate Secretary regarding
the business to be presented or persons to be nominated. The notice must be
received at the principal executive office of Valero within the specified period
and must be accompanied by the information and documents specified in the
By-Laws. A copy of the By-Laws may be obtained by writing to the Corporate
Secretary of Valero.
The foregoing provisions of the By-Laws do not affect any stockholder's right to
request inclusion of proposals in the Proxy Statement pursuant to Rule 14a-8
under the Exchange Act. Rule 14a-8 of the federal proxy rules specify what
constitutes timely submission for a stockholder proposal to be included in the
Company's proxy statement. If a stockholder desires to bring business before the
meeting which is not the subject of a proposal timely submitted for inclusion in
the proxy statement, the stockholder must follow procedures outlined in the
Company's By-Laws. A copy of these procedures is available upon request from the
Corporate Secretary of the Company, P.O. Box 500, San Antonio, Texas, 78292-500.
One of the procedural requirements in the Company's By-Laws is timely notice in
writing of the business the stockholder proposes to bring before the meeting.
Notice must be received not less than 60 days nor more than 90 days prior to the
first anniversary of the preceding year's annual meeting. It should be noted
that those By-Law procedures govern proper submission of business to be put
before a stockholder vote and do not preclude discussion by any stockholder of
any business properly brought before the annual meeting. Under the SEC's proxy
solicitation rules, to be considered for inclusion in the proxy materials for
the 2000 Annual Meeting of Stockholders, stockholder proposals must be received
by the Corporate Secretary at Valero's principal executive office by November
25, 1999.
Valero will consider recommendations by stockholders for directors to be
nominated at the 2000 Annual Meeting of Stockholders. Recommendations must be in
writing and include sufficient biographical and other relevant information such
that an informed judgment as to the proposed nominee's qualifications can be
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made. Recommendations must be accompanied by a notarized statement executed by
the proposed nominee consenting to be named in the Proxy Statement, if
nominated, and to serve as a director, if elected. Recommendations received in
proper order by the Corporate Secretary at Valero's principal executive office
at least six months prior to the 2000 Annual Meeting of Stockholders will be
referred to, and considered by, the Executive Committee or, if appointed, a
Nominating Committee.
Stockholders are urged to review all applicable rules and, if questions arise,
to consult their own legal counsel before submitting a nomination or proposal to
Valero. No stockholder recommendations or proposals were received within the
required period before the Annual Meeting.
MISCELLANEOUS
Consolidated financial statements and related information for Valero, including
audited financial statements for the fiscal year ended December 31, 1998, are
contained in the Company's Annual Report on Form 10-K which is included with
this Proxy Statement.
Valero's Annual Report to Stockholders for the fiscal year ended December 31,
1998, has simultaneously been mailed to stockholders entitled to vote at the
Annual Meeting. The Annual Report is not to be treated as a part of the proxy
materials.
Harris Trust and Savings Bank, Chicago, Illinois, serves as transfer agent,
registrar and dividend paying agent for Valero's Common Stock. Correspondence
relating to any stock accounts, dividends or transfers of stock certificates
should be addressed to:
Harris Trust and Savings Bank
Communications Team
P.O. Box A3504
Chicago, Illinois 60690-3504
(312) 360-5261
By order of the Board of Directors,
Jay D. Browning
Corporate Secretary
San Antonio, Texas
March 25, 1999
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