<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999
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.)
One Valero Place
San Antonio, Texas
(Address of principal executive offices)
78212
(Zip Code)
(210) 370-2000
(Registrant's telephone number, including area code)
----------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
----------
Indicated below is the number of shares outstanding of the registrant's
only class of common stock, as of May 1, 1999.
<TABLE>
<CAPTION>
Number of
Shares
Title of Class Outstanding
-------------- -----------
<S> <C>
Common Stock, $.01 Par Value 56,145,483
</TABLE>
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<PAGE> 2
VALERO ENERGY CORPORATION AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets - March 31, 1999 and December 31, 1998.................... 3
Consolidated Statements of Income - For the Three Months Ended
March 31, 1999 and 1998............................................................. 4
Consolidated Statements of Cash Flows - For the Three Months Ended
March 31, 1999 and 1998............................................................. 5
Notes to Consolidated Financial Statements............................................ 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................................. 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk....................... 20
PART II. OTHER INFORMATION................................................................. 23
Item 6. Exhibits and Reports on Form 8-K................................................. 23
SIGNATURE................................................................................... 24
</TABLE>
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
VALERO ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
March 31,
1999 December 31,
(Unaudited) 1998
----------- ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and temporary cash investments ................................. $ 13,343 $ 11,199
Receivables, less allowance for doubtful accounts of
$1,375 (1999) and $1,150 (1998) ................................... 296,925 283,456
Inventories ......................................................... 299,472 316,405
Current deferred income tax assets .................................. 58,052 4,851
Prepaid expenses and other .......................................... 25,342 23,799
----------- -----------
693,134 639,710
----------- -----------
PROPERTY, PLANT AND EQUIPMENT - including
construction in progress of $164,533 (1999)
and $179,136 (1998), at cost ........................................ 2,608,488 2,572,190
Less: Accumulated depreciation ................................... 633,725 612,847
----------- -----------
1,974,763 1,959,343
----------- -----------
DEFERRED CHARGES AND OTHER ASSETS ..................................... 146,501 126,611
----------- -----------
$ 2,814,398 $ 2,725,664
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term debt ..................................................... $ 63,000 $ 160,000
Accounts payable .................................................... 405,144 283,183
Accrued expenses .................................................... 45,527 54,561
----------- -----------
513,671 497,744
----------- -----------
LONG-TERM DEBT ........................................................ 846,421 822,335
----------- -----------
DEFERRED INCOME TAXES ................................................. 262,290 210,389
----------- -----------
DEFERRED CREDITS AND OTHER LIABILITIES ................................ 111,437 109,909
----------- -----------
COMMON STOCKHOLDERS' EQUITY:
Common stock, $.01 par value - 150,000,000 shares authorized;
issued 56,314,798 (1999 and 1998) shares .......................... 563 563
Additional paid-in capital .......................................... 1,105,615 1,112,726
Accumulated deficit ................................................. (20,334) (17,618)
Treasury stock, 198,444 (1999) and 378,130 (1998) shares, at cost ... (5,265) (10,384)
----------- -----------
1,080,579 1,085,287
----------- -----------
$ 2,814,398 $ 2,725,664
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
3
<PAGE> 4
VALERO ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
----------------------------
1999 1998
----------- -----------
<S> <C> <C>
OPERATING REVENUES .......................................... $ 1,337,103 $ 1,362,359
----------- -----------
COSTS AND EXPENSES:
Cost of sales and operating expenses ...................... 1,287,347 1,292,269
Write-down of inventories to market value ................. -- 37,673
Selling and administrative expenses ....................... 18,188 17,330
Depreciation expense ...................................... 23,048 17,504
----------- -----------
Total ................................................... 1,328,583 1,364,776
----------- -----------
OPERATING INCOME (LOSS) ..................................... 8,520 (2,417)
OTHER EXPENSE, NET .......................................... (79) (45)
INTEREST AND DEBT EXPENSE:
Incurred .................................................. (14,288) (7,576)
Capitalized ............................................... 1,831 754
----------- -----------
LOSS BEFORE INCOME TAX BENEFIT .............................. (4,016) (9,284)
INCOME TAX BENEFIT .......................................... (1,300) (3,400)
----------- -----------
NET LOSS .................................................... $ (2,716) $ (5,884)
=========== ===========
LOSS PER SHARE OF COMMON STOCK (basic and diluted) .......... $ (.05) $ (.11)
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING (in thousands) ... 56,057 56,149
DIVIDENDS PER SHARE OF COMMON STOCK ......................... $ .08 $ .08
</TABLE>
See Notes to Consolidated Financial Statements.
4
<PAGE> 5
VALERO ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(THOUSANDS OF DOLLARS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------------
1999 1998
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ................................................ $ (2,716) $ (5,884)
Adjustments to reconcile net loss
to net cash provided by operating activities:
Depreciation expense ................................ 23,048 17,504
Amortization of deferred charges and other, net ..... 13,827 8,108
Write-down of inventories to market value ........... -- 37,673
Changes in current assets and current liabilities ... 113,981 (1,320)
Deferred income tax benefit ......................... (1,300) (7,700)
Changes in deferred items and other, net ............ 1,579 (1,039)
--------- ---------
Net cash provided by operating activities ......... 148,419 47,342
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures .................................... (38,871) (33,158)
Deferred turnaround and catalyst costs .................. (30,053) (32,140)
Other, net .............................................. (150) 484
--------- ---------
Net cash used in investing activities ................. (69,074) (64,814)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in short-term debt, net ............. (97,000) 53,000
Long-term borrowings .................................... 448,323 93,500
Long-term debt reduction ................................ (426,000) (125,000)
Common stock dividends .................................. (4,486) (4,491)
Issuance of common stock ................................ 2,586 526
Purchase of treasury stock .............................. (624) (190)
--------- ---------
Net cash provided by (used in) financing activities ... (77,201) 17,345
--------- ---------
NET INCREASE (DECREASE) IN CASH AND TEMPORARY
CASH INVESTMENTS ........................................ 2,144 (127)
CASH AND TEMPORARY CASH INVESTMENTS AT
BEGINNING OF PERIOD ..................................... 11,199 9,935
--------- ---------
CASH AND TEMPORARY CASH INVESTMENTS AT
END OF PERIOD ........................................... $ 13,343 $ 9,808
========= =========
</TABLE>
See Notes to Consolidated Financial Statements.
5
<PAGE> 6
VALERO ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The consolidated financial statements included herein have been
prepared by Valero Energy Corporation ("Valero") and subsidiaries (collectively
referred to as the "Company"), without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission ("SEC"). However, all
adjustments have been made to the accompanying financial statements which are,
in the opinion of the Company's management, necessary for a fair presentation of
the Company's results of operations for the periods covered. Certain information
and footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations, although the Company believes
that the disclosures are adequate to make the information presented herein not
misleading. Certain prior period amounts have been reclassified for comparative
purposes.
2. ACQUISITION OF PAULSBORO REFINERY
On September 16, 1998, the Company and Mobil Oil Corporation ("Mobil")
entered into an asset sale and purchase agreement for the acquisition by the
Company of substantially all of the assets and the assumption of certain
liabilities related to Mobil's 155,000 barrel-per-day ("BPD") refinery in
Paulsboro, New Jersey ("Paulsboro Refinery"). The acquisition was accounted for
using the purchase method of accounting and the purchase price was allocated to
the assets acquired and liabilities assumed based on estimated fair values,
pending the completion of an independent appraisal. Pursuant to the purchase
method of accounting, the accompanying Consolidated Statement of Income for the
three months ended March 31, 1998 does not include the results of operations of
the Paulsboro Refinery.
Pursuant to the asset sale and purchase agreement, Mobil is entitled to
receive payments in any of the five years following the acquisition if certain
average refining margins during any of such years exceed a specified level. Any
payments under this earn-out arrangement, which will be determined in September
of each year beginning in 1999, are limited to $20 million in any year and $50
million in the aggregate.
In connection with the acquisition of the Paulsboro Refinery, Mobil
agreed to indemnify the Company for certain environmental matters and conditions
existing on or prior to the acquisition and the Company agreed to assume Mobil's
environmental liabilities, with certain limited exceptions (including
"superfund" liability for off-site waste disposal). Mobil's indemnities and the
periods of indemnification include (i) third party environmental claims for a
period of five years, (ii) governmental fines and/or penalties for a period of
five years, (iii) required remediation of known environmental conditions for a
period of five years, subject to a cumulative deductible, (iv) required
remediation of unknown environmental conditions for a period of seven years,
subject to a sharing arrangement with a cap on the Company's obligation and
subject to a cumulative deductible, and (v) certain capital expenditures
required by a governmental entity for a three-year period, to the extent
required to cure a breach of certain representations of Mobil concerning
compliance with environmental laws, subject to a specified deductible. The
Company's assumed liabilities include remediation obligations to the New Jersey
Department of Environmental Protection. These remediation obligations relate
primarily to clean-up costs associated with groundwater contamination, landfill
closure and post-closure monitoring costs, and tank farm spill prevention costs.
As of March 31, 1999, the
6
<PAGE> 7
VALERO ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Company has recorded approximately $20 million in Accrued Expenses and Deferred
Credits and Other Liabilities representing its best estimate of costs to be
borne by the Company related to these remediation obligations. The majority of
such costs are expected to be incurred in relatively level amounts over the next
20 years.
The following unaudited pro forma financial information of the Company
for the three months ended March 31, 1998 assumes that the acquisition of the
Paulsboro Refinery occurred at the beginning of such period. Such pro forma
information is not necessarily indicative of the results of future operations.
(Dollars in thousands, except per share amounts.)
<TABLE>
<S> <C>
Operating revenues.................................... $1,640,118
Operating income...................................... 7,182
Net loss.............................................. (3,282)
Loss per common share (basic and diluted)............. (.06)
</TABLE>
3. 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 under the last-in, first-out
("LIFO") method of inventory pricing, and the cost of feedstocks and products
purchased for resale determined under the weighted average cost method. During
the first quarter of 1999, LIFO inventory quantities were reduced causing prior
year LIFO costs, which were lower than current year replacement costs, to be
charged to cost of sales. This LIFO liquidation resulted in a decrease in cost
of sales of $10.5 million and a decrease in the net loss of $6.8 million, or
$.12 per share. At March 31, 1999, the replacement cost of the Company's LIFO
inventories exceeded their LIFO carrying values by approximately $74 million.
Materials and supplies are carried principally at weighted average cost not in
excess of market. Inventories as of March 31, 1999 and December 31, 1998 were as
follows (in thousands):
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
--------- ------------
<S> <C> <C>
Refinery feedstocks ................ $ 77,555 $ 80,036
Refined products and blendstocks ... 160,984 174,125
Materials and supplies ............. 60,933 62,244
-------- --------
$299,472 $316,405
======== ========
</TABLE>
7
<PAGE> 8
VALERO ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
4. STATEMENTS OF CASH FLOWS
In order to determine net cash provided by operating activities, the
net loss has been adjusted by, among other things, changes in current assets and
current liabilities. The changes in the Company's current assets and current
liabilities are shown in the following table as an (increase)/decrease in
current assets and an increase/(decrease) in current liabilities (in thousands).
These amounts exclude, among other things, a $37.7 million noncash write-down of
inventory to market value in the first quarter of 1998 and changes in cash and
temporary cash investments, current deferred income tax assets and short-term
debt.
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------------
1999 1998
--------- ---------
<S> <C> <C>
Receivables, net ............. $ (13,463) $ 94,763
Inventories .................. 16,060 (16,403)
Prepaid expenses and other ... (1,543) (8,247)
Accounts payable ............. 121,961 (61,127)
Accrued expenses ............. (9,034) (10,306)
--------- ---------
Total ..................... $ 113,981 $ (1,320)
========= =========
</TABLE>
Cash flows related to interest and income taxes were as follows (in
thousands):
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------
1999 1998
------ ------
<S> <C> <C>
Interest paid (net of amount capitalized) ... $6,989 $4,699
Income tax refunds received ................. 7,212 9,000
Income taxes paid ........................... 5 3,504
</TABLE>
5. LONG-TERM DEBT
In March 1999, the Company refinanced $25 million of its Series 1998
taxable, variable rate Waste Disposal Revenue Bonds with tax-exempt bonds. These
Series 1999 tax-exempt bonds have a fixed interest rate of 5.7% and mature on
April 1, 2032.
Also in March 1999, the Company completed a public offering of $300
million principal amount of 7 3/8% notes which are due on March 15, 2006. The
notes were issued under the Company's $600 million universal shelf registration
statement which was previously declared effective by the SEC on June 30, 1998.
Net proceeds from the financing of approximately $297.5 million were used to pay
down borrowings under the Company's revolving bank credit facility.
8
<PAGE> 9
VALERO ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
6. EARNINGS PER SHARE
The computation of basic and diluted per-share amounts, as required by
the Financial Accounting Standards Board's ("FASB") Statement of Financial
Accounting Standards ("SFAS") No. 128, is as follows (dollars and shares in
thousands, except per share amounts):
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------------------------------------------------
1999 1998
-------------------------------- --------------------------------
Per- Per-
Net Share Net Share
Loss Shares Amt. Loss Shares Amt.
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Net loss, shares, and basic and diluted
earnings per share ................... $(2,716) 56,057 $ (.05) $(5,884) 56,149 $ (.11)
======= ======= ======= ======= ======= =======
</TABLE>
Because the Company reported a net loss for the three months ended
March 31, 1999 and 1998, various stock options and performance awards which were
granted to employees in connection with the Company's stock compensation plans
and were outstanding during such periods were not included in the computation of
diluted earnings per share because the effect would have been antidilutive. At
March 31, 1999 and 1998, options to purchase approximately 6.4 million and 4.4
million common shares, respectively, and performance awards totaling
approximately 317,000 and 121,000 common shares, respectively, were outstanding.
7. NEW ACCOUNTING PRONOUNCEMENTS
In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") No. 98-1, "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use." This SOP
provides guidance for determining when to capitalize or expense costs incurred
to develop or obtain internal-use software. This statement became effective for
the Company's financial statements beginning January 1, 1999, with its
requirements applied to costs incurred on or after such date. The adoption of
this SOP did not have a material effect on the Company's consolidated financial
statements.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards requiring that every derivative instrument (including
certain derivative instruments embedded in other contracts) be recorded in the
balance sheet as either an asset or liability measured at its fair value. The
statement requires that changes in a derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met. Special
accounting for qualifying hedges allows a derivative's gains and losses to
offset related results on the hedged item in the income statement, and requires
that a company must formally document, designate, and assess the effectiveness
of transactions that receive hedge accounting. This statement becomes effective
for the Company's financial statements beginning January 1, 2000 and is not
allowed to be applied retroactively to financial statements of prior periods. At
such effective date, SFAS No. 133 must be applied to (i) all freestanding
derivative instruments and (ii) certain derivative instruments embedded in
hybrid contracts that exist at such date and were issued, acquired, or
substantially modified after December 31, 1997 (and, at the Company's election,
that were issued or acquired before January 1, 1998 and not substantively
modified thereafter). The Company is currently evaluating the impact on its
financial statements of adopting this
9
<PAGE> 10
VALERO ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
statement. Adoption of this statement could result in increased volatility in
the Company's earnings and other comprehensive income.
8. LITIGATION AND CONTINGENCIES
Prior to July 31, 1997, Valero was a wholly owned subsidiary of Valero
Energy Corporation ("Energy"). Energy was engaged in both the refining and
marketing business and the natural gas related services business. On July 31,
1997, Energy spun off Valero to Energy's stockholders and merged its remaining
natural gas related services business with a wholly owned subsidiary of PG&E
Corporation ("PG&E") (the "Restructuring"). 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 owns both
Teco and Energy, PG&E's Teco acquisition agreement purports to assign the
benefit or detriment of this lawsuit to the former shareholders of Teco.
Pursuant to the agreement by which the Company was spun off to Energy's
stockholders in connection with the Restructuring, the Company has agreed to
indemnify Energy with respect to this lawsuit to the extent of 50% of the amount
of any final judgment or settlement amount not in excess of $30 million, and
100% of that part of any final judgment or settlement amount in excess of $30
million.
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.
9. SUBSEQUENT EVENTS
On April 29, 1999, the Company's Board of Directors declared a regular
quarterly cash dividend of $.08 per common share payable June 8, 1999, to
holders of record at the close of business on May 11, 1999.
10
<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
FIRST QUARTER 1999 COMPARED TO FIRST QUARTER 1998
FINANCIAL HIGHLIGHTS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Three Months Ended March 31,
-----------------------------------------------------------------
Change
----------------------------
1999 1998 (1) Amount %
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Operating revenues ............................... $ 1,337,103 $ 1,362,359 $ (25,256) (2)%
Cost of sales .................................... (1,154,960) (1,187,776) 32,816 3
Operating costs:
Cash (fixed and variable) .................... (119,442) (96,764) (22,678) (23)
Depreciation and amortization ................ (35,127) (24,939) (10,188) (41)
Selling and administrative expenses (including
related depreciation expense) ................ (19,054) (17,624) (1,430) (8)
----------- ----------- -----------
Operating income, before inventory write-down .... 8,520 35,256 (26,736) (76)
Write-down of inventories to market value ........ -- (37,673) 37,673 100
----------- ----------- -----------
Total operating income (loss) ................ $ 8,520 $ (2,417) $ 10,937 453
=========== =========== ===========
Other expense, net ............................... $ (79) $ (45) $ (34) (76)
Interest and debt expense, net ................... $ (12,457) $ (6,822) $ (5,635) (83)
Income tax benefit ............................... $ 1,300 $ 3,400 $ (2,100) (62)
Net loss ......................................... $ (2,716) $ (5,884) $ 3,168 54
Loss per share of common stock ................... $ (.05) $ (.11) $ .06 55
Earnings before interest, taxes, depreciation
and amortization ("EBITDA") .................. $ 45,111 $ 60,758(2) $ (15,647) (26)
Ratio of EBITDA to interest incurred ............. 3.2x 8.0x (4.8)x (60)
</TABLE>
- ----------
(1) Excludes the operations of the Paulsboro Refinery which commenced
September 17, 1998.
(2) Excludes the $37.7 million pre-tax write-down of inventories to market
value.
11
<PAGE> 12
OPERATING HIGHLIGHTS
<TABLE>
<CAPTION>
Three Months Ended March 31,
-------------------------------------------
Change
-----------------
1999 1998 (1) Amount %
----- -------- ------ -----
<S> <C> <C> <C> <C>
Sales volumes (Mbbls per day) ..................... 1,050 817 233 29%
Throughput volumes (Mbbls per day) ................ 698(2) 527 171 32
Average throughput margin per barrel .............. $2.90 $3.68(3) $(.78) (21)
Operating costs per barrel:
Cash (fixed and variable) ..................... $1.90 $2.04 $(.14) (7)
Depreciation and amortization ................. .56 .53 .03 6
----- ----- -----
Total operating costs per barrel .......... $2.46 $2.57 $(.11) (4)
===== ===== =====
Charges:
Crude oils:
Sour ...................................... 51% 34% 17% 50%
Heavy sweet ............................... 11 16 (5) (31)
Light sweet ............................... 10 13 (3) (23)
----- ----- -----
Total crude oils ...................... 72 63 9 14
High-sulfur residual fuel oil ("resid") ....... 3 12 (9) (75)
Low-sulfur resid .............................. 4 4 -- --
Other feedstocks and blendstocks .............. 21 21 -- --
----- ----- -----
Total charges ............................. 100% 100% --% --
===== ===== =====
Yields:
Finished gasolines and gasoline blendstocks ... 51% 53% (2)% (4)
Distillates ................................... 31 27 4 15
Petrochemicals ................................ 4 5 (1) (20)
Lubes and asphalts ............................ 2 -- 2 --
Other products ................................ 12 15 (3) (20)
----- ----- -----
Total yields .............................. 100% 100% --% --
===== ===== =====
</TABLE>
AVERAGE MARKET REFERENCE PRICES AND DIFFERENTIALS
(U.S. GULF COAST) (DOLLARS PER BARREL)
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------------------
Change
-----------------
1999 1998 Amount %
------ ------ ------ ----
<S> <C> <C> <C> <C>
Feedstocks:
West Texas Intermediate ("WTI") crude oil ................... $13.05 $15.95 $(2.90) (18)%
WTI less sour crude oil (Arab medium) (4) ................... $ 3.05 $ 3.25 $ (.20) (6)
WTI less heavy sweet crude oil (Cabinda plus freight) (4) ... $ .97 $ 1.64 $ (.67) (41)
WTI less high-sulfur resid (Singapore plus freight) (4) ..... $ 1.00 $ 3.85 $(2.85) (74)
Products:
Conventional 87 gasoline less WTI ........................... $ 1.67 $ 2.82 $(1.15) (41)
No. 2 fuel oil less WTI ..................................... $ .31 $ 1.78 $(1.47) (83)
Propylene less WTI .......................................... $ (.30) $ 3.89 $(4.19) (108)
</TABLE>
- ----------
(1) Excludes the operations of the Paulsboro Refinery which commenced
September 17, 1998.
(2) Includes 174 Mbbls per day related to the Paulsboro Refinery.
(3) Excludes an $.80 per barrel reduction resulting from the effect of the
$37.7 million pre-tax write-down of inventories to market value.
(4) Excludes $.25 to $.50 per barrel for other delivery-related costs.
12
<PAGE> 13
The Company reported a net loss for the first quarter of 1999 of $2.7
million, or $.05 per share, compared to a net loss of $5.9 million, or $.11 per
share, for the first quarter of 1998. The first quarter 1998 results were
reduced by a $37.7 million ($23.9 million after-tax, or $.43 per share)
write-down in the carrying amount of the Company's refinery inventories
resulting from a significant decline in feedstock and refined product prices
during the quarter. Excluding the effect of the 1998 inventory write-down, first
quarter 1999 results were below first quarter 1998 levels due to a carryover
from 1998 into January and February 1999 of extremely weak refining industry
fundamentals, the effect of significant downtime at the Company's Corpus Christi
refinery in early 1999 due to a major maintenance turnaround and expansion of
the heavy oil cracker and related units, and increased interest expense.
Partially offsetting the decreases in income resulting from these factors were
significant improvements in industry conditions in March 1999, increased
benefits from the Company's price risk management activities, and a benefit to
income related to a permanent reduction in LIFO inventories during the first
quarter of 1999 (see Note 3 of Notes to Consolidated Financial Statements).
Operating revenues decreased $25.3 million, or 2%, to $1.34 billion
during the first quarter of 1999 compared to the same period in 1998 due to a
$4.36, or 24%, decrease in the average sales price per barrel partially offset
by a 29% increase in average daily sales volumes. The decrease in sales prices
was due to a continuation from 1998 of excess crude oil and refined product
inventories which resulted in depressed refined product prices, particularly in
January and February of 1999. Sales prices increased dramatically in March 1999,
however, as a result of several factors, including a decision by OPEC to
significantly reduce crude oil production, and a reduction in refined product
inventories due to, among other things, lower refinery run rates resulting
primarily from numerous refinery outages on the West Coast. The increase in
sales volumes was due primarily to additional volumes attributable to the
September 1998 acquisition of the Paulsboro Refinery and, to a lesser extent, to
the reduction in inventories in the first quarter of 1999 noted above.
Excluding the effect of the $37.7 million inventory write-down in the
first quarter of 1998 described above, operating income decreased $26.7 million
to $8.5 million during the first quarter of 1999 compared to the first quarter
of 1998. This decrease in operating income was due primarily to an approximate
$33 million increase in operating costs (including related depreciation expense)
primarily because of the acquisition of the Paulsboro Refinery as discussed
further below, partially offset by a $7.6 million increase in total throughput
margins.
Total throughput margins increased due in large part to the
contribution from the Paulsboro Refinery. However, throughput margins were
negatively affected, both in total and on a per-barrel basis, by (i)
significantly lower gasoline and distillate margins resulting primarily from the
depressed industry conditions noted above in the discussion of operating
revenues, (ii) a decrease in feedstock discounts relative to WTI primarily due
to an 18% decrease in the price of WTI resulting from the excess crude oil
inventories noted above, (iii) lower petrochemical margins resulting from
continuing depressed demand for petrochemical feedstocks due to the Asian
economic crisis, and (iv) lower contributions from the Company's interest in the
Clear Lake Methanol Plant. The negative effect on throughput margins resulting
from the changes in gasoline and distillate margins and feedstock discounts was
partially offset by an approximate $34 million increase in benefits from the
Company's price risk management program, including an approximate $13 million
increase in gains from trading activities, and a $10.5 million benefit resulting
from the liquidation of LIFO inventories in the first quarter of 1999.
The increase in operating costs was attributable to the Paulsboro
Refinery acquired in September 1998. Excluding the effect of the Paulsboro
Refinery, total operating costs decreased
13
<PAGE> 14
approximately $3 million due to a $9 million reduction in cash operating
expenses resulting mainly from lower maintenance and fuel costs, partially
offset by a $6 million increase in depreciation expense and amortization of
deferred turnaround and catalyst costs.
Net interest and debt expense increased $5.6 million, or 83%, to $12.5
million during the first quarter of 1999 compared to the same period in 1998 due
primarily to an increase in borrowings resulting from the acquisition of the
Paulsboro Refinery in September 1998.
The income tax benefit during the first quarter of 1999 decreased $2.1
million compared to the income tax benefit during the first quarter of 1998 due
primarily to a decrease in the pre-tax loss.
OUTLOOK
Although gasoline margins thus far in the second quarter of 1999 have
improved from average first quarter levels, they are well below average
historical levels and below the second quarter of 1998 as well. In addition,
heating oil margins have been negative thus far in the second quarter of 1999
and are below both historical averages for this time of year and first quarter
1999's depressed level. If these trends continue, earnings for the second
quarter of 1999 will be significantly lower than earnings reported for the
second quarter of 1998.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities increased $101.1 million
during the first quarter of 1999 compared to the same period in 1998 due
primarily to a $115.3 million decrease in the amount of cash utilized for
working capital purposes, as detailed in Note 4 of Notes to Consolidated
Financial Statements, partially offset by the decrease in earnings, excluding
the effects of non-cash items, discussed above under "Results of Operations." In
the first quarter of 1999, both accounts receivable and accounts payable
increased due to a significant increase in commodity prices from December 31,
1998 to March 31, 1999. Combined with concerted efforts by the Company during
such quarter to (i) collect accounts receivable, which helped reduce the
increase in receivables resulting from higher commodity prices, and (ii) reduce
inventory levels, the Company realized a net decrease in cash utilized for
working capital purposes in the 1999 period of approximately $114 million.
Included in the changes in current assets and current liabilities for the 1998
period was a substantial decrease in both accounts receivable and accounts
payable due primarily to a reduction in commodity prices during that quarter.
During the first quarter of 1999, cash provided by operating activities
(approximately $148 million) and proceeds from the issuance of the 7 3/8% notes
described in Note 5 of Notes to Consolidated Financial Statements (approximately
$298 million) were utilized to reduce bank borrowings, fund capital expenditures
and deferred turnaround and catalyst costs, and pay common stock dividends.
The Company currently maintains an unsecured $835 million revolving
bank credit and letter of credit facility that matures in November 2002 and is
available for general corporate purposes including working capital needs and
letters of credit. Borrowings under this facility bear interest at either LIBOR
plus a margin, a base rate or a money market rate. The Company is also charged
various fees and expenses in connection with this facility, including a facility
fee and various letter of credit fees. The interest rate and fees under the
credit facility are subject to adjustment based upon the credit ratings assigned
to the Company's long-term debt. The credit facility includes certain
restrictive covenants including a coverage ratio, a capitalization ratio, and a
minimum net worth test. As of March 31, 1999, outstanding borrowings and letters
of credit under this committed bank credit and letter of credit facility totaled
14
<PAGE> 15
approximately $225 million. The Company also has numerous uncommitted short-term
bank credit facilities under which amounts up to $145 million may be borrowed,
along with several uncommitted bank letter of credit facilities totaling $285
million. As of March 31, 1999, $63 million was outstanding under the short-term
bank credit facilities, and letters of credit totaling approximately $1 million
were outstanding under the uncommitted letter of credit facilities.
During the first quarter of 1999, the Company reduced its exposure to
increases in interest rates and increased its financial flexibility by (i)
refinancing $25 million of its taxable, variable rate industrial revenue bonds
with tax-exempt 5.7% fixed rate bonds and (ii) issuing $300 million of
seven-year 7 3/8% notes under its $600 million shelf registration statement. Net
proceeds from the issuance of the notes were used to reduce variable rate bank
borrowings. See Note 5 of Notes to Consolidated Financial Statements.
As of March 31, 1999, the Company's debt to capitalization ratio
decreased to 45.7% from 47.5% as of December 31, 1998 due to the items noted
above. The Company was in compliance with all covenants contained in its various
debt facilities as of March 31, 1999.
During the first quarter of 1999, the Company expended approximately
$69 million for capital investments, including (i) capital expenditures of $39
million and (ii) deferred turnaround and catalyst costs of $30 million related
primarily to a major maintenance turnaround of the heavy oil cracker and related
units at the Corpus Christi refinery. For total year 1999, the Company currently
expects to incur approximately $150 million for capital investments, including
approximately $85 million for capital expenditures and approximately $65 million
for deferred turnaround and catalyst costs. The capital expenditure estimate
includes approximately $20 million for computer system projects and
approximately $10 million for projects related to environmental control and
protection.
Dividends on the Company's Common Stock are considered quarterly by the
Company's Board of Directors, are determined by the Board on the basis of
earnings and cash flows, and may be paid only when approved by the Board. On
April 29, 1999, the Company's Board of Directors declared a regular quarterly
cash dividend of $.08 per common share payable June 8, 1999, to holders of
record at the close of business on May 11, 1999.
The Company believes it has sufficient funds from operations, and to
the extent necessary, from the public and private capital markets and bank
markets, to fund its ongoing operating requirements. The Company expects that,
to the extent necessary, it can raise additional funds from time to time through
equity or debt financings; however, except for borrowings under bank credit
agreements or offerings under its universal shelf registration statement that
may occur from time to time, the Company has no other specific financing plans.
NEW ACCOUNTING PRONOUNCEMENTS
As discussed in Note 7 of Notes to Consolidated Financial Statements,
various new financial accounting pronouncements have been issued by the AICPA
and FASB which either became effective for the Company's financial statements
beginning in 1999 or become effective in 2000. Except for SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," for which the
impact has not yet been determined, the adoption of these statements has not had
a material effect on the Company's consolidated financial statements.
15
<PAGE> 16
YEAR 2000 READINESS DISCLOSURE
BACKGROUND
The transition to January 1, 2000 poses problems for almost all users
of information technology ("IT"). These potential problems result from the fact
that many computer programs created in the past were programmed to identify
calendar dates with only the last two digits of the year. As a result, such
programs are unable to distinguish between the year 1900 and the year 2000,
potentially resulting in miscalculations, malfunctions or failures of such
programs. In addition to its potential effect on computer systems, the century
date change may also result in malfunctions or failures of non-IT equipment
which contain embedded systems with date-sensitive functions. These potential
consequences are generally referred to as the "Year 2000" problem.
STATE OF READINESS
In 1996, in order to improve business processes, reduce costs,
integrate business information, improve access to such information, and provide
flexibility for ongoing business changes, the Company began the implementation
of new client/server based systems which will run substantially all of the
Company's principal business software applications. These new systems have been
represented as Year 2000 compliant by their respective manufacturers and were
substantially implemented by the end of 1998.
In order to verify the Year 2000 compliance of the above noted systems,
and address the Year 2000 problem with respect to other IT systems and non-IT
embedded systems, the Company has developed a compliance plan with respect to
those systems and services that are deemed to be critical to the Company's
operations and safety of its employees. This plan is divided into the following
sections, which represent major business areas that are potentially affected by
the Year 2000 problem: Business Systems (includes IT hardware, software and
network systems serving the Company's corporate, refining, marketing and supply
areas); Plant Facilities (includes non-IT embedded systems such as process
control systems and the physical equipment and facilities at the Company's
refineries); and Office Facilities/Aviation (includes telephone, security and
environmental systems and office equipment at the Company's office facilities
and aviation-related equipment and software). Implementation of the Company's
Year 2000 compliance plan is led by a Management Oversight Committee, which
includes members of executive management, and Year 2000 coordinators for each of
the business areas described above. The compliance plan is monitored weekly by
the business area coordinators and progress reported monthly to the Management
Oversight Committee. The compliance plan includes the following phases and
scheduled completion dates:
<TABLE>
<CAPTION>
Scheduled
Compliance Plan Phase Completion Date
--------------------- ---------------
<S> <C> <C>
o Form internal Year 2000 organizations, both at the corporate and refinery level,
to pursue relevant action plans. Completed
o Inventory affected systems and services for all business areas and prioritize
the importance of each particular system to the Company and its operations
as either high, medium, or low priority. Completed*
o Assess the compliance of inventoried items by contacting the vendor or
manufacturer to determine whether the system is Year 2000 compliant. Completed*
o Develop action plans to remediate (fix, replace, or discard) each of the
non-compliant high and medium priority items (those items believed by
the Company to have a risk involving the safety of individuals,
significant damage to equipment, the environment, or communications,
or a significant loss of revenues). Completed*
o Remediate the non-compliant high and medium priority items by implementing
the plans developed above. 8/31/99
o Validate Year 2000 compliance by testing, wherever possible, all high and
medium priority items. 8/31/99
o Develop contingency plans for (i) the most critical high-priority items, even if
validated as compliant, and (ii) all high and medium priority items that cannot
be tested. 9/30/99
</TABLE>
- ----------
* Although the Company-wide inventory, assessment and planning phases have been
completed, other non-compliant items may be discovered during the remediation
and testing phases.
16
<PAGE> 17
The Company currently anticipates that completion of its Year 2000
compliance plan will be performed primarily by Company personnel. However, in
certain cases, outside contractors or consultants have been engaged to assist in
the Company's Year 2000 efforts and may be required in the future. Presently, no
significant IT projects have been delayed due to the implementation of the
Company's Year 2000 compliance plan. The following table indicates, as of May 7,
1999, the status of the Company's progress in completing its compliance plan.
The percentages reported below represent the estimated percentage of total
inventoried items (high, medium and low priority items for Business Systems and
Office Facilities/Aviation, and high and medium priority items for Plant
Facilities) that are now remediated or tested, as the case may be.
<TABLE>
<CAPTION>
Remediated Tested
---------- ------
<S> <C> <C>
Business Systems ............. 92% 73%
Office Facilities/Aviation ... 96 96
Plant Facilities ............. 99 28
</TABLE>
The percent remediated for Business Systems shown in the table above
declined from 94% as disclosed in the Company's Form 10-K for the year ended
December 31, 1998 due primarily to the inclusion of low priority items in the
above amount which were excluded from the prior disclosure.
In addition to the major business areas described above, the Company's
External Service Providers (third-party relationships material to the Company's
operations, including (i) service providers for the Company's Business Systems,
Plant Facilities and Office Facilities/Aviation described above, (ii) "supply"
relationships such as major suppliers of refinery feedstocks, (iii) "marketing"
relationships such as major customers and pricing services, and (iv) "logistics"
relationships such as pipelines, terminals, ships, barges and storage
facilities) could equally be affected by the Year 2000 problem, which in turn
could have an impact on the Company's business. For that reason, Year 2000
compliance of the External Service Providers which the Company believes to be
critical is also being assessed as part of the Company's Year 2000 compliance
plan. Over 650 Year 2000 questionnaires have been sent to high, medium and
low-priority External Service Providers. An additional 100 questionnaires have
been sent to External Service Providers deemed to be critical. As of May 7,
1999, responses have been received for approximately 64% of the total
questionnaires sent (83% of critical service providers). A risk assessment of
the responses is expected to be completed by August 31, 1999 and contingency
plans are expected to be developed for all critical External Service Providers
by September 30, 1999. Contingency plans may also be developed for certain
External Service Providers not deemed to be critical depending upon their
priority and level of risk.
17
<PAGE> 18
COSTS
Total external costs incurred to date in connection with the completion
of the Company's Year 2000 compliance plan are approximately $800,000. The
estimated total external costs to complete the Company's Year 2000 compliance
plan are currently estimated to be approximately $4 million. The Company does
not separately track internal costs, principally consisting of payroll and
related costs for its information systems group and certain other employees,
incurred in connection with its Year 2000 compliance efforts. The above amounts
do not include costs associated with the implementation of the new client/server
based systems described under "State of Readiness."
RISKS
The scheduled completion dates and costs of compliance noted above are
the current best estimates of the Company's management and are believed to be
reasonably accurate. In the event unanticipated problems are encountered which
cause the compliance plan to fall behind schedule, the Company may need to
devote more resources to completing the plan and additional costs may be
incurred. If the Company were not able to satisfactorily complete its Year 2000
compliance plan, including identifying and resolving problems encountered by the
Company's External Service Providers, potential consequences could include,
among other things, unit downtime at or damage to the Company's refineries,
delays in transporting refinery feedstocks and refined products, impairment of
relationships with significant suppliers or customers, loss of accounting data
or delays in processing such data, and loss of or delays in internal and
external communications. The occurrence of any or all of the above could result
in a material adverse effect on the Company's results of operations, liquidity
or financial condition. Although the Company currently believes that it will
satisfactorily complete its Year 2000 compliance plan as described above prior
to January 1, 2000, there can be no assurance that the plan will be completed by
such time or that the Year 2000 problem will not adversely affect the Company
and its business.
CONTINGENCY PLANS
As discussed above under "State of Readiness," the Company currently
anticipates developing its contingency plans by September 30, 1999 based on the
results of the testing phase of its compliance plan for the Business Systems,
Plant Facilities and Office Facilities/Aviation business areas and the results
of its communications with critical External Service Providers.
YEAR 2000 INFORMATION AND READINESS DISCLOSURE ACT
To the maximum extent permitted by applicable law, the above
information is being designated as a "Year 2000 Readiness Disclosure" pursuant
to the "Year 2000 Information and Readiness Disclosure Act" which was signed
into law on October 19, 1998.
18
<PAGE> 19
FORWARD-LOOKING STATEMENTS
The foregoing discussion contains certain estimates, predictions,
projections and other "forward-looking statements" (within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934) that involve various risks and uncertainties. While these
forward-looking statements, and any assumptions upon which they are based, are
made in good faith and reflect the Company's current judgment regarding the
direction of its business, actual results will almost always vary, sometimes
materially, from any estimates, predictions, projections, assumptions, or other
future performance suggested herein. Some important factors (but not necessarily
all factors) that could affect the Company's sales volumes, growth strategies,
future profitability and operating results, or that otherwise could cause actual
results to differ materially from those expressed in any forward-looking
statement include the following: renewal or satisfactory replacement of the
Company's feedstock arrangements as well as market, political or other forces
generally affecting the pricing and availability of refinery feedstocks and
refined products; accidents or other unscheduled shutdowns affecting the
Company's, its suppliers' or its customers' pipelines, plants, machinery or
equipment; excess industry capacity; competition from products and services
offered by other energy enterprises; changes in the cost or availability of
third-party vessels, pipelines and other means of transporting feedstocks and
products; cancellation of or failure to implement planned capital projects and
realize the various assumptions and benefits projected for such projects; the
failure to avoid or correct a material Year 2000 problem, including internal
problems or problems encountered by third parties; state and federal
environmental, economic, safety and other policies and regulations, any changes
therein, and any legal or regulatory delays or other factors beyond the
Company's control; weather conditions affecting the Company's operations or the
areas in which the Company's products are marketed; rulings, judgments, or
settlements in litigation or other legal matters, including unexpected
environmental remediation costs in excess of any reserves; the introduction or
enactment of federal or state legislation which may adversely affect the
Company's business or operations; and changes in the credit ratings assigned to
the Company's debt securities and trade credit. All subsequent written and oral
forward-looking statements attributable to the Company or persons acting on its
behalf are expressly qualified in their entirety by the foregoing. 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.
19
<PAGE> 20
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
COMMODITY PRICE RISK
The Company is exposed to market risks related to the volatility of
crude oil and refined product prices, as well as volatility in the price of
natural gas used in the Company's refining operations. In order to reduce the
risks of these price fluctuations, the Company uses derivative commodity
instruments to hedge refinery feedstock and refined product inventories to
reduce the impact of adverse price changes on these inventories before the
conversion of the feedstock to finished products and ultimate sale. The Company
also uses derivative commodity instruments to hedge the price risk of
anticipated transactions. Such transactions include anticipated feedstock,
product and natural gas purchases, and product sales. These instruments are used
to lock in purchase or sales prices or components of refining operating margins,
including feedstock discounts, crack spreads (i.e., the difference between the
price of crude oil and conventional gasoline or heating oil) and premium product
differentials. In addition, the Company uses derivative commodity instruments
for trading purposes using its fundamental and technical analysis of market
conditions to earn additional revenues. The types of instruments used in the
Company's hedging and trading activities described above include price swaps,
options, and futures contracts. The Company's positions in derivative commodity
instruments are monitored and managed on a daily basis by a risk control group
to ensure compliance with the Company's stated risk management policy which has
been approved by the Company's Board of Directors.
The following table provides information about the Company's derivative
commodity instruments, which mature in 1999, held to hedge refining inventories
as of March 31, 1999 (dollars in thousands, except per barrel amounts).
<TABLE>
<CAPTION>
Fixed Price
------------------------
Payor Receiver
-------- --------
<S> <C> <C>
Futures:
Volumes (Mbbls) .................... 8,091 8,126
Weighted average price (per bbl) ... $ 15.59 $ 15.49
Contract amount .................... $126,156 $125,844
Fair value ......................... $136,730 $141,125
</TABLE>
20
<PAGE> 21
The following table provides information about the Company's derivative
commodity instruments held to hedge anticipated feedstock, product and natural
gas fuel purchases, product sales and refining margins as of March 31, 1999 and
which mature in 1999 or 2000 (dollars in thousands, except amounts per barrel or
per million British thermal units ("MMBtu")). Volumes shown for swaps represent
notional volumes which are used to calculate amounts due under the agreements.
<TABLE>
<CAPTION>
Mature in 1999 Mature in 2000
--------------------------- --------------------------
Fixed Price Fixed Price
--------------------------- --------------------------
Payor Receiver Payor Receiver
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Swaps:
Notional volumes (Mbbls) ..................... 1,800 4,550 -- 2,100
Weighted average pay price (per bbl) ......... $ .63 $ .47 -- $ 2.20
Weighted average receive price (per bbl) ..... $ .65 $ .45 -- $ 2.19
Fair value ................................... $ 33 $ (75) -- $ (13)
Notional volumes (MMBtus) .................... 1,530 1,530 -- --
Weighted average pay price (per MMBtu) ....... $ 2.13 $ 2.01 -- --
Weighted average receive price (per MMBtu) ... $ 2.01 $ 2.32 -- --
Fair value ................................... $ (178) $ 469 -- --
Futures:
Volumes (Mbbls) .............................. 5,254 1,425 -- --
Weighted average price (per bbl) ............. $ 18.63 $ 18.26 -- --
Contract amount .............................. $ 97,869 $ 26,023 -- --
Fair value ................................... $ 101,239 $ 27,702 -- --
</TABLE>
In addition to the above, as of March 31, 1999, the Company was the
fixed price payor under certain swap contracts held to hedge anticipated
purchases of refinery feedstocks and refined products that mature in 2002 with
notional volumes totaling approximately 7.5 million barrels, a weighted average
pay price of $20.11 per barrel, a weighted average receive price of $16.26 per
barrel, and a net unrecognized negative fair value of approximately $6 million.
The following table provides information about the Company's derivative
commodity instruments held or issued for trading purposes as of March 31, 1999
and which mature in 1999 or 2000 (dollars in thousands, except per barrel
amounts). Volumes shown for swaps represent notional volumes which are used to
calculate amounts due under the agreements.
<TABLE>
<CAPTION>
Mature in 1999 Mature in 2000
-------------------------- --------------------------
Fixed Price Fixed Price
-------------------------- --------------------------
Payor Receiver Payor Receiver
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Swaps:
Notional volumes (Mbbls) ................... 23,025 18,150 2,850 5,250
Weighted average pay price (per bbl) ....... $ 4.30 $ 4.57 $ 1.92 $ 2.21
Weighted average receive price (per bbl) ... $ 5.14 $ 4.15 $ 2.21 $ 2.11
Fair value ................................. $ 19,418 $ (7,687) $ 824 $ (476)
Options:
Volumes (Mbbls) ............................ 100 100 -- --
Weighted average strike price (per bbl) .... $ 16.06 $ 16.06 -- --
Contract amount ............................ $ 99 $ 518 -- --
Fair value ................................. $ 1,489 $ 1,912 -- --
Futures:
Volumes (Mbbls) ............................ 22,575 21,739 4,075 4,950
Weighted average price (per bbl) ........... $ 15.18 $ 14.90 $ 14.52 $ 14.44
Contract amount ............................ $ 342,668 $ 323,996 $ 59,175 $ 71,476
Fair value ................................. $ 404,074 $ 379,346 $ 64,559 $ 78,404
</TABLE>
21
<PAGE> 22
INTEREST RATE RISK
The Company's primary market risk exposure for changes in interest
rates relates to the Company's long-term debt obligations. The Company manages
its exposure to changing interest rates principally through the use of a
combination of fixed and floating rate debt and currently does not use
derivative financial instruments to manage such risk. See Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources for a discussion of various initiatives
undertaken by the Company in the first quarter of 1999 to reduce its exposure to
increases in interest rates and increase its financial flexibility.
22
<PAGE> 23
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
27.1* Financial Data Schedule (reporting financial information as of
and for the three months ended March 31, 1999).
- ----------
* The 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 is
included as an exhibit only to the electronic filing of this
Form 10-Q in accordance with Item 601(c) of Regulation S-K and
Section 401 of Regulation S-T.
(b) Reports on Form 8-K. A Current Report on Form 8-K was filed by the
Company on February 4, 1999 reporting the Company's earnings for the fourth
quarter and year ended December 31, 1998.
23
<PAGE> 24
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
VALERO ENERGY CORPORATION
(Registrant)
By: /s/ John D. Gibbons
-----------------------------------------------
John D. Gibbons
Chief Financial Officer, Vice President -
Finance
(Duly Authorized Officer and Principal
Financial and Accounting Officer)
Date: May 14, 1999
24
<PAGE> 25
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
27.1* Financial Data Schedule (reporting financial information as of
and for the three months ended March 31, 1999).
- ----------
* The 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 is
included as an exhibit only to the electronic filing of this
Form 10-Q in accordance with Item 601(c) of Regulation S-K and
Section 401 of Regulation S-T.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AS OF MARCH 31, 1999 AND THE CONSOLIDATED STATEMENT
OF INCOME FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 13,343
<SECURITIES> 0
<RECEIVABLES> 298,300
<ALLOWANCES> 1,375
<INVENTORY> 299,472
<CURRENT-ASSETS> 693,134
<PP&E> 2,608,488
<DEPRECIATION> 633,725
<TOTAL-ASSETS> 2,814,398
<CURRENT-LIABILITIES> 513,671
<BONDS> 846,421
0
0
<COMMON> 563
<OTHER-SE> 1,080,016
<TOTAL-LIABILITY-AND-EQUITY> 2,814,398
<SALES> 1,337,103
<TOTAL-REVENUES> 1,337,103
<CGS> 1,328,583
<TOTAL-COSTS> 1,328,583
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 12,457
<INCOME-PRETAX> (4,016)
<INCOME-TAX> (1,300)
<INCOME-CONTINUING> (2,716)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,716)
<EPS-PRIMARY> (.05)
<EPS-DILUTED> (.05)
</TABLE>
