<PAGE> 1
Filed Pursuant to Rule 424(b)(5)
Registration Nos. 333-33846
333-33846-01
The information in this preliminary prospectus supplement is not complete
and may be changed. This preliminary prospectus supplement and accompanying
prospectus are not an offer to sell these securities and they are not
soliciting an offer to buy these securities in any jurisdiction where the
offer or sale is not permitted.
PROSPECTUS SUPPLEMENT (Subject to Completion) Issued June 7, 2000
(To Prospectus dated May 30, 2000)
6,000,000 Units
[Logo]
VALERO ENERGY CORPORATION
VEC Trust I
% PEPS(SM) Units
(Premium Equity Participating Security Units -- PEPS(SM) Units)
------------------------
Each PEPS Unit consists of a purchase contract issued by us and a trust
preferred security due 2005 issued by VEC Trust I.
- The purchase contract will obligate you to purchase from us, no later than
August 18, 2003 for a price of $25, the following number of shares of Valero
Energy Corporation common stock:
- if the average closing price of our common stock over the 20-trading day
period ending on the third trading day prior to August 18, 2003 equals or
exceeds $ , shares;
- if the average closing price of our common stock over the same period is
less than $ but greater than $ , a number of shares having a value,
based on the 20-trading day average closing price, equal to $25; and
- if the average closing price of our common stock over the same period is
less than or equal to $ , shares.
- Each trust preferred security will have a stated liquidation amount of $25 and
will represent an undivided beneficial interest in the assets of the Trust.
The trust preferred security will be pledged to secure your obligation to
purchase our common stock under the related purchase contract. You may use the
proceeds from the remarketing of your trust preferred security to satisfy your
payment obligations under the purchase contract.
- The trust preferred security will pay a cash distribution at a rate of % of
the stated liquidation amount per year, or $ , prior to August 18, 2003,
and at a reset rate that may be less than, equal to or greater than % per
year after that date. These payments will be made on February 18, May 18,
August 18 and November 18 of each year, beginning August 18, 2000. We will
guarantee the payments of the distributions on the trust preferred securities
to the extent set forth in this prospectus supplement and the accompanying
prospectus.
- The assets of the Trust will consist solely of our senior deferrable notes
maturing on August 18, 2005. We may defer interest payments on the senior
deferrable notes. Any deferred interest payments will bear additional interest
at % until August 18, 2003 and at the reset rate thereafter. If we defer
interest payments on the senior deferrable notes, the Trust will not have
funds to make distribution payments on the trust preferred securities.
------------------------
APPLICATION HAS BEEN MADE TO LIST THE PEPS UNITS ON THE NEW YORK STOCK EXCHANGE
UNDER THE SYMBOL "VLO PRU".
------------------------
INVESTING IN THE PEPS UNITS INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON PAGE
S-24 OF THIS PROSPECTUS SUPPLEMENT.
------------------------
<TABLE>
<CAPTION>
UNDERWRITING
DISCOUNTS AND
PRICE TO PUBLIC COMMISSIONS NET PROCEEDS
--------------- ------------- ------------
<S> <C> <C> <C>
Per PEPS Unit............................................... $25 See below $25
Total....................................................... $ 150,000,000 See below $ 150,000,000
</TABLE>
The Trust will not pay any underwriting commissions. We will pay underwriting
commission of $ per PEPS Unit sold ($ for all PEPS Units and $ if the
over-allotment option referred to below is executed in full).
Any accumulated distributions on the trust preferred securities that are a part
of the PEPS Units from , 2000 will be added to the price to public.
The Securities and Exchange Commission and state securities regulators have not
approved or disapproved of these securities or determined if this prospectus
supplement or the prospectus is truthful or complete. Any representation to the
contrary is a criminal offense.
We and the Trust have granted the underwriters a 30-day option to purchase up to
900,000 additional PEPS Units on the same terms and conditions set forth above
solely to cover over-allotments, if any. Morgan Stanley & Co. Incorporated
expects to deliver the PEPS Units to purchasers on or about June , 2000.
------------------------
MORGAN STANLEY DEAN WITTER
CREDIT SUISSE FIRST BOSTON
J.P. MORGAN & CO.
BMO NESBITT BURNS CORP.
, 2000
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PROSPECTUS SUPPLEMENT PAGE
--------------------- -----
<S> <C>
Index of Selected Terms for Prospectus
Supplement.......................... S-3
Summary............................... S-5
Risk Factors.......................... S-24
Forward-Looking Information........... S-33
The Benicia Acquisition and Related
Financings.......................... S-35
Use of Proceeds....................... S-38
Capitalization........................ S-39
Price Range of Common Stock and
Dividend Policy..................... S-40
Unaudited Pro Forma Combined Financial
Statements.......................... S-41
Selected Financial Data............... S-47
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... S-48
Business.............................. S-66
Management............................ S-78
Accounting Treatment.................. S-80
Description of PEPS Units............. S-80
Description of the Purchase
Contracts........................... S-83
Certain Provisions of the Purchase
Contracts, the Purchase Contract
Agreement and the Pledge Agreement... S-91
Description of the Trust Preferred
Securities.......................... S-94
Description of the Senior Deferrable
Notes............................... S-99
Description of the Guarantee.......... S-104
Book Entry Systems.................... S-106
United States Federal Income Tax
Consequences........................ S-108
ERISA Considerations.................. S-116
Underwriting.......................... S-117
Legal Matters......................... S-118
Experts............................... S-119
Information We Incorporate by
Reference........................... S-119
Index to Financial Statements......... F-1
</TABLE>
<TABLE>
<CAPTION>
PROSPECTUS PAGE
---------- ----
<S> <C>
About This Prospectus................. 3
Summary Information--Q&A.............. 4
About Valero Energy Corporation....... 6
Forward-Looking Information........... 7
Use of Proceeds....................... 8
Accounting Treatment Relating to Trust
Securities.......................... 9
Ratio of Earnings to Fixed Charges.... 9
The Trusts............................ 9
Description of Trust Preferred
Securities.......................... 11
Description of Trust Preferred
Securities Guarantee................ 23
Description of Debt Securities........ 26
Relationship Among the Trust Preferred
Securities, the Debt Securities and
the Guarantee....................... 34
Description of Stock Purchase
Contracts and Stock Purchase
Units............................... 36
Description of Capital Stock.......... 36
Plan of Distribution.................. 40
Legal Matters......................... 41
Experts............................... 41
Where You Can Find More Information... 41
Information We Incorporate by
Reference........................... 42
</TABLE>
------------------------
You should rely only on the information contained in or incorporated into
this document. We have not authorized anyone to provide you with information
that is different from that contained in this document. This document is not an
offer to sell the PEPS Units and is not soliciting an offer to buy PEPS Units in
any state where the offer or sale is not permitted. The information contained in
this document is accurate only as of the date hereof, regardless of the time of
delivery of this document or of any sale of the PEPS Units.
As used in this prospectus supplement, the terms "Valero" and "we" or "us"
may, depending upon the context, refer to Valero Energy Corporation, to one or
more of its consolidated subsidiaries or to all of them taken as a whole.
S-2
<PAGE> 3
INDEX OF SELECTED TERMS FOR
PROSPECTUS SUPPLEMENT
<TABLE>
<CAPTION>
TERM PAGE
---- -----
<S> <C>
applicable market value..................................... S-84
applicable ownership interest............................... S-81
applicable ownership interest of the treasury portfolio..... S-81
applicable principal amount................................. S-102
applicable spread........................................... S-96
Benicia acquisition......................................... S-5
business day................................................ S-82
closing price............................................... S-85
collateral agent............................................ S-9
current market price........................................ S-89
Distribution Assets......................................... S-35
early settlement............................................ S-88
extension period............................................ S-100
failed remarketing.......................................... S-87
guarantee payments.......................................... S-104
indenture trustee........................................... S-99
interest payment date....................................... S-100
original issue discount..................................... S-113
PEPS Units.................................................. S-8
pledge agreement............................................ S-90
pledged securities.......................................... S-90
prevailing rating........................................... S-96
purchase contract........................................... S-8
purchase contract agent..................................... S-92
purchase contract agreement................................. S-8
purchase contract settlement date........................... S-8
quotation agent............................................. S-102
redemption amount........................................... S-102
reference price............................................. S-84
remarketed.................................................. S-10
remarketing agent........................................... S-10
remarketing agreement....................................... S-86
remarketing date............................................ S-94
reset rate.................................................. S-10
securities intermediary..................................... S-93
Service Station Assets...................................... S-35
settlement rate............................................. S-84
tax event................................................... S-102
tax event redemption........................................ S-101
tax event redemption date................................... S-101
threshold appreciation price................................ S-84
trading day................................................. S-85
Treasury PEPS Units......................................... S-12
treasury portfolio.......................................... S-102
treasury portfolio purchase price........................... S-102
</TABLE>
S-3
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<TABLE>
<CAPTION>
TERM PAGE
---- -----
<S> <C>
treasury security........................................... S-12
trust preferred securities.................................. S-94
trust securities............................................ S-14
two-year benchmark treasury rate............................ S-96
</TABLE>
S-4
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SUMMARY
This summary contains basic information about us and our PEPS Units. It
does not contain all the information that is important to you. You should read
the following summary together with the more detailed information and financial
statements and notes to the financial statements contained elsewhere or
incorporated by reference into this prospectus supplement or the accompanying
prospectus. To fully understand this offering, you should read all of these
documents.
Unless otherwise noted, the information included in this prospectus
supplement does not give effect to the Benicia acquisition.
VALERO ENERGY CORPORATION
Valero Energy Corporation is one of the largest and most geographically
diverse independent petroleum refining and marketing companies in the United
States. As of March 31, 2000, we owned five refineries in Texas, Louisiana and
New Jersey, providing us with core operations on both the Gulf Coast and the
East Coast. These refineries are located in Corpus Christi, Houston, and Texas
City in Texas, Krotz Springs, Louisiana and Paulsboro, New Jersey. In addition,
on March 2, 2000, we entered into an agreement to purchase Exxon Mobil
Corporation's Benicia, California refinery and Exxon-branded California retail
assets, which consist of approximately 80 service station facilities and branded
supplier relationships with approximately 260 Exxon-branded service stations,
thereby establishing a significant presence on the West Coast and extending our
geographic reach from coast to coast. We refer to this acquisition as the
Benicia acquisition. The acquisition of the Benicia refinery and the branded
supplier relationships closed on May 15, 2000, and the acquisition of the
service station facilities is expected to close on or about June 15, 2000. On a
pro forma basis, after giving effect to the Benicia acquisition and our
financing plan, including this offering, discussed below in "The Benicia
Acquisition and Related Financings," we had revenue of $3.4 billion and $9.3
billion and net income of $45.9 million and $68.2 million for the three-month
period ended March 31, 2000 and the year ended December 31, 1999, respectively.
Valero produces premium, environmentally clean products such as
reformulated gasoline, low-sulfur diesel and oxygenates and is able to produce
gasoline meeting the specifications of the California Air Resources Board, or
CARB gasoline. We also produce a substantial slate of middle distillates, jet
fuel and petrochemicals. With the Benicia acquisition, our products are marketed
in 35 states as well as to selected export markets.
We were incorporated in Delaware in 1981 as Valero Refining and Marketing
Company, a wholly owned subsidiary of our predecessor company. On July 31, 1997,
our stock was distributed, or spun off, by our predecessor company to its
shareholders, and we changed our name to Valero Energy Corporation. At the time
of the spin-off, Valero had approximately 530,000 barrels per day of refining
throughput capacity.
Since that time, we have continued to grow and enhance our competitive
position to become a premier, independent refining and marketing company. We are
focused on using innovative means of upgrading our facilities in order to
efficiently refine lower-cost feedstocks into higher value-added premium
products. Including the capacity of the Benicia refinery, we have increased our
refining capacity by approximately 79% since the spin-off.
Our strategic objectives include the following:
-- Accretive Growth through Acquisitions. We regularly search for
acquisition opportunities that we believe will be accretive to earnings
and cash flow and provide acceptable rates of return. To be consistent
with our operating philosophy, we typically look at opportunities that
offer refining capacity in excess of 100,000 barrels per day with
expansion or upgrading potential and that are located near a coastal area
or a major pipeline connection in order to provide greater flexibility in
accessing suppliers and customers.
-- Upgrading Refineries in a Cost-Effective Manner. We continually evaluate
ways to maximize the value of our refineries through cost-effective
upgrades and expansions. We believe refineries that are more flexible with
regard to feedstocks or that are able to produce higher value-added
premium products such as
S-5
<PAGE> 6
reformulated gasoline and low-sulfur diesel are better positioned to
exploit increases in refining margins and mitigate the effects of
decreases in refining margins than refineries that produce more
conventional forms of gasoline and distillates.
-- Pursuit of Additional Cost Savings Initiatives. We continually attempt to
identify and implement cost savings initiatives at our refineries,
including improved maintenance practices, as well as reliability and
operational improvements.
-- Increased Earnings Diversification. We continue to evaluate opportunities
to diversify earnings, including retail petroleum marketing, petrochemical
ventures, and other ancillary businesses.
-- Dedication to Safety and Environmental Concerns. We continue to focus on
and devote significant time and resources to safety training and
accountability programs throughout our operations. We seek to be
environmentally proactive and will continue to actively monitor
developments with the Environmental Protection Agency's proposed air
emissions reduction rules and other regulatory changes.
THE BENICIA ACQUISITION AND RELATED FINANCINGS
On March 2, 2000, we executed a sale and purchase agreement for the
purchase of ExxonMobil's Benicia refinery and the related branded supplier
relationships and service station facilities for a purchase price of $895
million plus the value of refinery inventories acquired in the transaction. The
acquisition of the Benicia refinery and the branded supplier relationships
closed on May 15, 2000, at which time the value of inventories was estimated to
be approximately $123 million, and the acquisition of the service station
facilities is expected to close on or about June 15, 2000.
The Benicia refinery is located on the Carquinez Straits of the San
Francisco Bay. It is a highly complex refinery and has a throughput capacity of
approximately 160,000 barrels per day. The Benicia refinery produces a high
percentage of light products, with limited production of natural gas liquids and
other products. Approximately 95% of the gasoline produced by the Benicia
refinery meets the California Air Resources Board specifications for gasoline
sold in California. The Benicia refinery includes significant feedstock and
product storage facilities, deepwater docking facilities, a 20-inch pipeline and
truck rack facilities. Concurrently with the closing of the acquisition of the
Benicia refinery, we entered into a contract providing for ExxonMobil to supply
and for us to purchase up to 100,000 barrels per day of Alaska North Slope crude
oil from ExxonMobil at market-related prices.
The service station facilities include 10 company-operated sites and 70
lessee-dealer sites, 75 of which are in the San Francisco Bay area. Under
consent decrees related to the merger between Exxon Corporation and Mobil
Corporation, the Federal Trade Commission and the State of California ordered
that ExxonMobil withdraw the "Exxon" brand name from this area. As a result,
ExxonMobil has notified its dealers in this market area that their franchise
right to market "Exxon" branded products is being terminated effective June 15,
2000. We plan to introduce our own brand of retail petroleum products in the San
Francisco Bay area and have offered to the dealers at these locations a
franchise right to market products under the new Valero brand. The branded
supplier relationships are with up to 260 independently-owned and operated
distributor service stations that are located outside of the San Francisco Bay
area. These independently-owned and operated distributor gas station sites will
retain the right to use the Exxon brand, continue to accept the Exxon
proprietary credit card and receive Exxon brand support, while we will receive
the exclusive rights to offer the Exxon brand throughout the state of California
(except for the San Francisco Bay area) for a ten-year period. Many of the
independently-owned and operated distributor gas station sites and the service
station facilities also contain convenience stores.
The acquisition of the Benicia refinery and the branded supplier
relationships was initially funded through interim financing consisting of (i)
borrowings of $600 million under a bank bridge facility, (ii) borrowings of
$298.5 million under our existing bank credit facilities and (iii) an
approximate $30 million interim lease arrangement to accommodate the acquisition
of the Benicia refinery's docking facility. In connection with the acquisition
of the service station facilities, we will (i) enter into a structured lease
arrangement with a commitment of up to $135 million, substantially all of which
will be used to acquire the service station
S-6
<PAGE> 7
facilities and replace the interim lease arrangement for the acquisition of the
Benicia refinery's docking facility, and (ii) borrow an additional $8.5 million
under our existing credit facilities which will be used to pay certain
transaction costs. It is expected that the $600 million of borrowings under the
bridge facility and $186.3 million of borrowings under our existing bank credit
facilities will be repaid with the proceeds of this offering and two other
concurrent offerings consisting of (i) approximately $500 million aggregate
principal amount of senior notes and (ii) approximately $150 million of common
stock. We also expect to continue to borrow under our existing credit facilities
amounts sufficient to fund the working capital needs of the Benicia assets.
S-7
<PAGE> 8
THE OFFERING
Each PEPS Unit consists of
a purchase contract and a
trust preferred security... We are offering 6,000,000 % Premium Equity
Participating Security Units--PEPS(SM) Units. The
stated amount and issue price of each PEPS Unit is
$25.
Each PEPS Unit consists of two parts:
-- a purchase contract for shares of our common
stock; and
-- a trust preferred security issued by VEC
Trust I.
The trust preferred security will be pledged to
secure the PEPS Unit holder's obligation to us
under the purchase contract to purchase shares of
our common stock.
You will receive from each PEPS Unit:
-- cash distributions on the trust preferred
security at the rate of % per year, or
$ per year, paid quarterly; and
-- on August 18, 2003, between and
shares of our common stock, depending on the
average closing price of our common stock
over the 20-trading day period ending on the
third trading day prior to August 18, 2003.
You will be required under
the purchase contract to
purchase our common stock
on or prior to August 18,
2003....................... We will enter into a purchase contract agreement
with The Bank of New York, which will act as agent
for all of the holders of the PEPS Units (as well
as the holders of the Treasury PEPS Units discussed
below). For each PEPS Unit that you purchase a
contract will be issued under the purchase contract
agreement, which creates a contractual arrangement
between you and us for the purchase of shares of
our common stock. We refer to this contract as a
"purchase contract." Under each purchase contract,
you will be obligated to purchase, at an aggregate
purchase price of $25 for each of your PEPS Units,
a variable number of shares of our common stock.
You will not be obligated to pay the purchase price
until August 18, 2003, which has been set as the
"purchase contract settlement date" and you will
not receive shares of our common stock until you
have settled your purchase contract. You will have
the option of settling your purchase contract by
settling early, by settling with cash or by
applying the proceeds from the remarketing of your
trust preferred security, as more fully described
later under "Description of the Purchase Contracts"
in this prospectus supplement.
The number of shares of our common stock that you
will be entitled to receive on the purchase
contract settlement date will depend on the average
closing price of a share of our common stock over a
20-trading day period ending on the third trading
day prior to the purchase contract settlement date.
Until you actually purchase the shares of our
common stock, your obligation to pay the $25
purchase price will be secured by the trust
preferred security that is part of your PEPS Unit,
which will be pledged to our collateral agent as
collateral. You may substitute as
S-8
<PAGE> 9
collateral a U.S. treasury security for the trust
preferred security. See "Description of the PEPS
Units--Creating Treasury PEPS Units by Substituting
a Treasury Security for Trust Preferred Securities"
in this prospectus supplement.
The trust preferred
security will mature on
August 18, 2005............ In addition to the purchase contract, each PEPS
Unit also will include a trust preferred security
that represents an undivided beneficial interest in
the assets of the Trust. The Trust will pay you
cash distributions of $
each quarter (which is equal to % per year of the
$25 stated liquidation amount) on your trust
preferred security, provided that the first
distribution will cover a period of less than three
months and will therefore be proportionately less
than the regular quarterly distribution.
Distributions will accumulate from the date the
PEPS Units are issued and will continue until
August 18, 2005. If you continue to own your trust
preferred security after the purchase contract
settlement date, the Trust will pay you
distributions on your trust preferred security from
August 18, 2003 until August 18, 2005, at a reset
rate that is described in more detail later in this
prospectus supplement. The Trust will pay
distributions only when it has funds available for
payment. The Trust's sole source of funds for
distributions are the payments of interest we make
on the senior deferrable notes that the Trust will
hold. We have the right to defer interest on the
senior deferrable notes, in which case
distributions on the trust preferred securities
will also be deferred. Distributions not paid on
the scheduled payment date will accumulate and
compound quarterly at the rate of % per year
through and including August 18, 2003, and at the
reset rate thereafter.
The Guarantee.............. We will guarantee the payment of distributions on
the trust preferred securities and the payment of
the redemption price of the trust preferred
securities, to the extent that the Trust has funds
available for payment. Taken together with our
obligations under the senior deferrable notes and
the related indenture, this guarantee effectively
provides a full, irrevocable and unconditional
guarantee of the trust preferred securities. You
can find more information about this guarantee
arrangement under the heading "Description of the
Guarantee" in this prospectus supplement.
The trust preferred
security will be pledged as
collateral under the pledge
arrangement................ When you purchase a PEPS Unit, the trust preferred
security that is part of that PEPS Unit will be
pledged as collateral to secure your obligation to
purchase our common stock on or prior to August 18,
2003 under the related purchase contract. We will
enter into a pledge agreement under which Bank One
Trust Company, N.A. will act as collateral agent
and hold your trust preferred security until the
$25 purchase price under the purchase contract has
been paid. Even though your trust preferred
security will be pledged as collateral, you will be
the beneficial owner of it.
You may settle the purchase
contract by paying cash or
using the proceeds from the
remarketing of the trust
preferred securities....... Under the purchase contract that is part of each
PEPS Unit, you will be obligated to pay, on or
prior to August 18, 2003, $25 to purchase shares
S-9
<PAGE> 10
of our common stock. To satisfy this obligation and
at the same time release your related trust
preferred security from the pledge, you may deliver
at any time until the seventh business day
preceding August 18, 2003 a cash payment of $25 for
every purchase contract you wish to settle and
receive shares of our common stock on the purchase
contract settlement date at the applicable
settlement rate. If you do not pay cash, your trust
preferred securities held as collateral under the
pledge arrangement will be sold or "remarketed" to
the public for a price equal to $25.0625. Morgan
Stanley & Co. Incorporated will act as the
remarketing agent. If you are a Treasury PEPS Unit
holder you must settle your purchase contracts with
cash in groups of 40 purchase contracts.
If you pay cash to settle
your purchase contract,
your trust preferred
security will be released
from the pledge
arrangement................ If you choose not to participate in the remarketing
and instead pay cash for your shares of our common
stock, then:
-- you must pay $25 in cash to us under each
purchase contract;
-- we will deliver to you the number of shares
of our common stock determined based on the
applicable settlement rate on the purchase
contract settlement date; and
-- your trust preferred security will be
released from the pledge arrangement and
delivered to you. Starting on August 18,
2003, the settlement date of the remarketing,
and continuing until August 18, 2005,
distributions on the trust preferred security
will be payable at the reset rate that will
be determined by the remarketing agent in the
remarketing.
If you do not pay cash
under your purchase
contract, your trust
preferred security will be
remarketed................. On the third business day prior to the purchase
contract settlement date, the remarketing agent
will remarket the trust preferred securities of
those holders of PEPS Units who have not delivered
cash payments for the shares of our common stock by
the seventh business day preceding August 18, 2003.
If you hold a trust
preferred security that is
not part of a PEPS Unit,
you may choose to have it
remarketed................. If you hold a trust preferred security that is not
part of a PEPS Unit, you may choose to have your
trust preferred security remarketed in the
remarketing. PEPS Unit holders who have created
Treasury PEPS Units or who have settled their
purchase contracts early may make such an election,
as more fully described in this prospectus
supplement.
The reset rate will be
determined by the
remarketing agent.......... After the trust preferred securities have been
remarketed, the distribution rate on the trust
preferred securities will be the rate determined by
the remarketing agent in the remarketing, the
"reset rate."
S-10
<PAGE> 11
If the remarketing
succeeds, the remarketed
trust preferred securities
will be sold and, if you
are a PEPS Unit holder, you
will receive our common
stock...................... If you do not notify the purchase contract agent
that you will pay cash for the shares of our common
stock by 5:00 p.m., New York City time, on the
seventh business day prior to the purchase contract
settlement date, or if you notify the purchase
contract agent that you will pay cash but you do
not deliver the cash by 11:00 a.m., New York City
time, on the fifth business day preceding the
purchase contract settlement date, your trust
preferred securities will be remarketed.
-- On the third trading day prior to the
purchase contract settlement date, the
remarketing agent will use reasonable efforts
to sell your trust preferred security,
together with all other trust preferred
securities being remarketed. If the market
value of the trust preferred securities
immediately prior to the remarketing is
greater than or less than $25.0625 per trust
preferred security, then the remarketing
agent will adjust the distribution rate on
the trust preferred securities so that the
market value will be equal to $25.0625 per
trust preferred security at the time of the
remarketing.
-- If the remarketing is successful, then your
trust preferred security will be sold. Of the
proceeds:
-- $25 will be delivered to us as payment for
the shares of our common stock;
-- $.0625 will be paid as a remarketing fee
to the remarketing agent; and
-- if you are a PEPS Unit holder, you will
receive shares of our common stock.
If the remarketing fails
and you are a PEPS Unit
holder, we may take
possession of your trust
preferred security......... If the remarketing agent is unable to remarket the
trust preferred securities we will exercise our
rights as a secured party, and we may take
possession of your trust preferred security. Your
obligation to purchase shares of our common stock
would then be fully satisfied, and you will receive
the shares of our common stock.
Upon settlement, you will
receive a number of shares
of our common stock equal
to the settlement rate..... Unless you elect to settle your purchase contract
early, the number of shares of our common stock you
will receive under your purchase contract will
depend on the average of the closing price per
share of our common stock as reported on the New
York Stock Exchange for the 20-trading day period
ending on the third trading day prior to the
purchase contract settlement date.
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<PAGE> 12
The number of shares of our common stock you will
receive for each purchase contract will be
determined as follows:
-- if the average closing price during the
20-trading day period equals or exceeds
$ , you will receive shares of our
common stock;
-- if the average closing price during the
20-trading day period is less than $ but
greater than $ , you will receive a
number of shares of our common stock having a
value, based on the average closing price
during that period, equal to $25; and
-- if the average closing price during the
20-trading day period is less than or equal
to $ , you will receive shares of
our common stock.
During the term of the PEPS Units, we will adjust
the settlement rate to reflect the occurrence of
certain stock dividends, stock splits and other
corporate events that could affect the market price
of our common stock. See "Description of the
Purchase Contracts--Anti-Dilution Adjustments."
You can create Treasury
PEPS Units by substituting
a treasury security for
trust preferred
securities.................
For every 40 PEPS Units you own, you may create 40
Treasury PEPS Units by substituting U.S. treasury
securities for the trust preferred securities that
are a part of the PEPS Units.
A Treasury PEPS Unit will consist of:
-- a purchase contract for shares of our common
stock that is identical to the purchase
contract that is a part of the PEPS Unit; and
-- a 1/40 undivided beneficial ownership
interest in a zero-coupon U.S. treasury
security (CUSIP No. 912820BG1), the "treasury
security", that has a principal amount at
maturity of $1,000, and matures on August 15,
2003, the business day prior to the purchase
contract settlement date.
To create Treasury PEPS Units, you must:
-- for each group of 40 Treasury PEPS Units you
wish to create, transfer the treasury
security to Bank One Trust Company, N.A.,
which is acting as the securities
intermediary under the pledge agreement. The
treasury security will become the collateral
supporting your obligation to purchase shares
of our common stock, and the collateral agent
will release the 40 trust preferred
securities from the pledge. Those trust
preferred securities then will be separately
tradable and will no longer be a part of a
PEPS Unit or a Treasury PEPS Unit; and
-- pay to the collateral agent any fees or
expenses incurred in connection with the
substitution.
You may substitute a treasury security for trust
preferred securities at any time prior to or on the
seventh business day preceding August 18, 2003.
Distributions will continue to be made on the trust
preferred security. Because each treasury security
has a principal amount at maturity of $1,000, you
may substitute Treasury PEPS Units for PEPS Units
only in multiples of 40. For each group of 40 PEPS
Units you own, after substitution of the U.S.
treasury securities for the trust
S-12
<PAGE> 13
preferred securities that are part of the 40 PEPS
Units, you will receive 40 Treasury PEPS Units.
A Treasury PEPS Unit holder
will be required to accrue
original issue discount on
the Treasury PEPS Unit and
will not receive any cash
payments on the Treasury
PEPS Unit.................. If you own Treasury PEPS Units, because the
treasury security included in the Treasury PEPS
Units is a zero-coupon security, you generally will
be required for U.S. federal income tax purposes to
include in gross income each year your allocable
share of original issue discount or acquisition
discount on the treasury security that accrues in
such year. You, however, will not receive any
payments on the Treasury PEPS Units. See "United
States Federal Income Tax Consequences" in this
prospectus supplement.
So long as you continue to own any trust preferred
securities, whether as part of a PEPS Unit or as a
separate security, you will receive distributions
on them, separately from the Treasury PEPS Units.
You can recreate PEPS
Units...................... If you own 40 Treasury PEPS Units, you may recreate
40 PEPS Units at any time prior to or on the
seventh business day preceding August 18, 2003.
Because the treasury security has a principal
amount at maturity of $1,000, you must recreate
PEPS Units from Treasury PEPS Units in multiples of
40. For each group of 40 Treasury PEPS Units you
submit, you will receive 40 PEPS Units.
To recreate PEPS Units, you must:
-- for each group of 40 PEPS Units you wish to
recreate, transfer 40 trust preferred
securities to the securities intermediary.
The securities intermediary then will deposit
the trust preferred securities in the
collateral account maintained under the
pledge arrangement. The 40 trust preferred
securities will become the collateral
supporting your obligation to purchase the
shares of our common stock, and the
collateral agent will release the treasury
security from the pledge. That treasury
security then will be separately tradable and
will not be part of any PEPS Unit; and
-- pay to the collateral agent any fees or
expenses incurred in connection with the
substitution.
You may settle the purchase
contracts of Treasury PEPS
Units by paying cash or
having the proceeds of the
pledged treasury security
applied.................... Unless you notify the purchase contract agent that
you will pay cash for the shares of our common
stock, upon settlement of the purchase contracts
related to the Treasury PEPS Units, we will receive
the proceeds of the treasury security being held as
collateral under the pledge arrangement. This will
satisfy your obligation to deliver the purchase
price for the shares of our common stock, and you
will receive the shares of our common stock.
S-13
<PAGE> 14
You may settle the purchase
contract early............. You may satisfy your obligation to purchase shares
of our common stock under your purchase contract at
any time prior to 5:00 p.m., New York City Time, on
the seventh business day preceding the purchase
contract settlement date.
If you choose to settle early:
-- You must deliver to the purchase contract
agent a notice indicating your election to
"settle early".
-- You must deliver to the purchase contract
agent a cash payment of $25 for each purchase
contract being settled prior to 5:00 p.m.,
New York City Time, on the seventh business
day preceding the purchase contract
settlement date.
-- You will receive, for each PEPS Unit or
Treasury PEPS Unit you surrender, both:
-- shares of our common stock,
regardless of the market price of the
shares of our common stock on the date of
early settlement and, subject to
anti-dilution adjustments; and
-- your trust preferred security (if you are
settling a PEPS Unit) or a 1/40 undivided
beneficial interest in a treasury security
(if you are settling a Treasury PEPS
Unit).
-- You will retain the right to have your trust
preferred securities remarketed.
You may settle Treasury PEPS Units early only in
multiples of 40 Treasury PEPS Units.
If you elect to have your
trust preferred securities
that are not part of PEPS
Units remarketed and the
remarketing fails, you will
retain possession of your
trust preferred securities
and the reset rate will be
determined pursuant to a
formula.................... If the remarketing agent cannot remarket the trust
preferred securities by three business days prior
to the purchase contract settlement date, you will
retain possession of your trust preferred
securities and the reset rate will be determined
pursuant to a formula described under "Description
of the Trust Preferred Securities--Failed
Remarketing" in this prospectus supplement.
Interest payments on the
senior deferrable notes.... The Trust will use all the proceeds from the sale
of its common securities and the trust preferred
securities, collectively, the "trust securities",
to purchase the senior deferrable notes from us.
The senior deferrable notes will be the sole assets
of the Trust. We will pay interest at a rate of %
on the senior deferrable notes to the Trust on a
quarterly basis. The Trust will use those interest
payments to pay distributions on the trust
preferred securities. We have the right to defer
interest payments on the senior deferrable notes in
which case the Trust will not have any funds to pay
distributions on the trust preferred securities and
the trustee and the Trust will therefore defer
payments on the trust preferred securities. We
S-14
<PAGE> 15
will pay to the Trust additional interest on any
deferred interest payments at the current rate
(compounded quarterly). After a successful
remarketing of the trust preferred securities, the
interest rate on the senior deferrable notes will
reset to equal the reset rate on the trust
preferred securities.
Substitution of treasury
portfolio upon tax event... If the tax laws change or are interpreted in a way
that adversely affects the tax treatment of the
Trust or the senior deferrable notes, then we, as
issuer of the senior deferrable notes, may elect to
redeem the senior deferrable notes held by the
Trust. If the senior deferrable notes are redeemed
before August 15, 2003, the money received from the
redemption will be used to purchase a treasury
portfolio of zero-coupon U.S. treasury securities
that mature on or prior to August 15, 2003, and the
Trust will be dissolved. The treasury portfolio
will replace the trust preferred securities as the
collateral securing your obligations to purchase
our common stock under the purchase contracts. If
the senior deferrable notes are redeemed, then each
PEPS Unit will consist of a purchase contract for
our common stock and an ownership interest in the
treasury portfolio.
Distribution of the senior
deferrable notes........... We may dissolve the Trust at any time if certain
conditions are met. If the Trust is dissolved after
the purchase contract settlement date (other than
as a result of the redemption of the senior
deferrable notes) and you continue to hold trust
preferred securities, you will receive your pro
rata share of the senior deferrable notes held by
the Trust (after any creditors of the Trust have
been paid). If the Trust is dissolved prior to the
purchase contract settlement date, then these
senior deferrable notes will be substituted for the
trust preferred securities and will be pledged as
collateral to secure your obligation to purchase
our common stock under your purchase contracts.
Investing in the PEPS Units
is not the equivalent of
investing in our common
stock...................... The distributions on the trust preferred securities
will be paid at a rate per year that is greater
than the current dividend yield on our common
stock. In addition, because the number of shares of
our common stock that you will receive upon
settlement of the purchase contracts may decline by
approximately % as the applicable market value
increases, the PEPS Units give you less opportunity
for equity appreciation than you would have if you
invested directly in our common stock.
The purchase contracts will
terminate upon our
bankruptcy................. The purchase contracts will terminate automatically
if certain bankruptcy, insolvency or reorganization
events occur with respect to us. If the purchase
contracts terminate upon one of these events, then
your rights and obligations under your purchase
contract also will terminate, including your
obligation to pay for, and your right to receive,
shares of our common stock. Upon termination, you
will receive your trust preferred security or your
treasury security, as the case may be, free of our
security interest.
S-15
<PAGE> 16
Application has been made
to list the PEPS Units on
the New York Stock
Exchange................... Application has been made to list the PEPS Units on
the New York Stock Exchange under the symbol "VLO
PrU".
If Treasury PEPS Units are created and then traded
at a volume that satisfies applicable exchange
listing requirements, we will try to list them on
the national securities exchanges or associations
on which the PEPS Units are then listed or quoted.
We, however, have no obligation to do so.
The symbol for our common
stock on the New York Stock
Exchange................... VLO
United States federal
income tax consequences.... Because a PEPS Unit will consist of a purchase
contract and a trust preferred security, the
purchase price of each PEPS Unit will be allocated
between the purchase contract and the related trust
preferred security in proportion to their relative
fair market values at the time of purchase. We
expect that, at the date of issuance of the PEPS
Units, the fair market value of each purchase
contract will be $ and the fair market value of
each trust preferred security will be $ .
If you own a PEPS Unit, you will normally include
in gross income your proportionate share of income
on the trust preferred securities when such income
is paid or accrued in accordance with your regular
method of tax accounting. You will also be required
to include in gross income your allocable share of
the original issue discount on the senior
deferrable notes as it accrues, over the first
three years of the term of the senior deferrable
notes. The amount of original issue discount
attributable to each trust preferred security will
be $ , which is equal to the excess of the
remarketed price of the trust preferred security of
$25.0625 over the amount of the purchase price
allocated to the trust preferred security.
If you own a Treasury PEPS Unit, you will be
required to include in gross income each year your
allocable share of any original issue discount or
acquisition discount on the treasury security that
accrues in such year.
Because there is no statutory, judicial or
administrative authority directly addressing the
tax treatment of the PEPS Units or instruments
similar to the PEPS Units, you are urged to consult
your own tax advisor concerning the tax
consequences of an investment in the PEPS Units.
For additional information, see "United States
Federal Income Tax Consequences" in this prospectus
supplement.
Use of proceeds............ The Trust will use all of the proceeds received
from the sale of the PEPS Units to purchase the
senior deferrable notes from us. We estimate that
we will receive net proceeds from the sale of the
senior deferrable notes to the Trust of $145.1,
which we intend to use, together with the net
proceeds from the concurrent offerings of senior
notes and common stock, to repay outstanding
indebtedness incurred under our bank bridge
facility and our existing credit facilities in
connection with the Benicia acquisition.
Concurrent offerings....... We are concurrently offering to the public
approximately $150 million of common stock and up
to $500 million aggregate principal amount of our
senior notes. This offering and the offering of
common stock are not
S-16
<PAGE> 17
contingent on any other offering. However, the
closing of the offering of our senior notes is
contingent on the prior closing of both this
offering and the offering of common stock. You
should not assume that we will complete either the
offering of the common stock or the offering of our
senior notes.
Unless we state otherwise, the information in this prospectus supplement
does not include 900,000 PEPS Units that may be issued to the underwriters
pursuant to their over-allotment option. If the underwriters exercise their
over-allotment option in full, the total number of PEPS Units offered will be
6,900,000.
HYPOTHETICAL ILLUSTRATION OF PEPS UNIT WITH ASSUMED TERMS AND FEATURES
The following illustrates some of the key terms and features of the PEPS
Units. THE YIELD, REFERENCE PRICE, THRESHOLD APPRECIATION PRICE AND PERCENTAGES
USED BELOW ARE ONLY FOR ILLUSTRATIVE PURPOSES AND MAY OR MAY NOT BE THE ACTUAL
VALUES APPLICABLE TO A PURCHASER OF THE PEPS UNITS.
Components of each PEPS
Unit: -- A contract to purchase shares of our common
stock on or prior to August 18, 2003
-- A trust preferred security of the Trust due
August 18, 2005
Issue price of each PEPS
Unit: $25
Assumed yield on each PEPS
Unit: 7.5%, consisting of distributions on the trust
preferred security at a rate of 7.5% per year, paid
quarterly, until August 18, 2003. On August 18,
2003, following a remarketing of the trust
preferred securities, the distribution rate will be
reset.
Assumed reference price (or
price of common stock at
time of issuance of PEPS
Units): $30 (On May 31, 2000, the last sale price of our
common stock on the NYSE was 29 1/4 per share.)
Assumed threshold
appreciation price: $36 (a 20% premium to the assumed reference price)
A PEPS Unit consists of two components, a purchase contract and a trust
preferred security. The return to an investor on a PEPS Unit will depend upon
the return provided by each of these components. For an investor that holds the
PEPS Unit until remarketing and uses the proceeds from the remarketing to settle
the purchase contract, the return will be comprised of the following:
<TABLE>
<S> <C> <C>
Value of shares of common Distributions on the trust
stock delivered at maturity of preferred securities at an
the purchase contract on + assumed 7.5% of the stated
August 18, 2003 liquidation amount per year
until August 18, 2003
</TABLE>
PURCHASE CONTRACT
The purchase contract obligates you to purchase, and us to sell, our common
stock. You can satisfy this obligation by settling early in cash or by electing
to pay cash before seven business days prior to August 18, 2003 or by
participating in the remarketing. Based on the assumptions above, if you settle
early you will receive for each PEPS Unit 0.694 shares of our common stock,
regardless of the market price of our common stock on the date of early
settlement.
Otherwise the number of shares delivered to you will depend on the average
closing price of our common stock for the 20-trading day period ending on the
third trading day prior to August 18, 2003.
S-17
<PAGE> 18
-- If the average closing price equals or exceeds $36, the assumed
threshold appreciation price, you would receive 0.694 shares. This is
calculated by dividing the PEPS Unit issue price by the assumed
threshold appreciation price ($25/$36 = 0.694).
-- If the average closing price for the period is greater than $30, the
assumed reference price, but less than $36, the assumed threshold
appreciation price, you would receive a number of shares that
produces a value of $25.
-- If the average closing price for the period is less than or equal to
$30, the assumed reference price, the investor would receive 0.833
shares. This is calculated by dividing the PEPS Unit issue price by
the assumed reference price ($25/$30 = 0.833).
The following graphs show the hypothetical number of shares of our common
stock that would be delivered for each purchase contract on August 18, 2003 and
the value of the shares that would be delivered on August 18, 2003, depending
upon our common stock share price performance and assuming the threshold
appreciation price and reference price set out above.
FRACTION OF A SHARE DELIVERABLE PER PURCHASE CONTRACT ON AUGUST 18, 2003
[GRAPH]
Average Closing Price of Valero Common Stock During 20 Trading Day Period Ending
August 13, 2003
VALUE OF FRACTION OF A SHARE DELIVERABLE PER PURCHASE CONTRACT ON AUGUST 18,
2003
[GRAPH]
Average Closing Price of Valero Common Stock During 20 Trading Day Period Ending
August 13, 2003
Such graphs, however, are for illustrative purposes only and may not be
indicative of the actual terms of the securities.
S-18
<PAGE> 19
TRUST PREFERRED SECURITY
The Trust will pay quarterly cash distributions on each trust preferred
security described above at a rate per annum of 7.5% of its $25 stated
liquidation amount until August 18, 2003. After that date, the distribution rate
may be reset in connection with the remarketing of the trust preferred
securities. The trust preferred securities will mature on August 18, 2005.
The trust preferred security will serve as collateral for your purchase
contract obligation. If you do not substitute a treasury security for the trust
preferred security or elect to settle the purchase contract for cash or to
settle the purchase contract early, the trust preferred security will be
remarketed and the proceeds from the remarketing will be used to settle the
purchase contract.
S-19
<PAGE> 20
COMPARISON OF HYPOTHETICAL INVESTMENT RETURNS FOR A PEPS UNIT AND OUR COMMON
STOCK
The following table compares the hypothetical return you would realize by
investing at the same time $25 in a PEPS Unit (the stated amount and purchase
price of each unit) compared to investing $25 in our common stock (or .833
shares, assuming a common stock price of $30 per share). If you buy a PEPS Unit,
your investment would be substantially similar to the risks and rewards of an
investment in our common stock. However, you would not benefit from the first
20% appreciation in the market value of the common stock underlying the PEPS
Unit. In addition, after the first 20% appreciation in the market value of our
common stock, you would receive only 83.3% of any additional appreciation in the
market value of the common stock underlying the PEPS Unit. Finally, until you
settle your purchase contract, you would not receive any dividends on our common
stock. Instead, you would receive payments on your PEPS Unit at a rate of 7.5%
per year (representing distributions on the trust preferred security included in
your PEPS Unit) until August 18, 2003. You should note that this analysis also
assumes that we continue to pay quarterly dividends on our common stock totaling
$0.32 per share per year.
<TABLE>
<CAPTION>
HYPOTHETICAL
HYPOTHETICAL MARKET VALUE VALUE OF PRETAX
VALERO OF .833 SHARES COMMON ANNUALIZED PRETAX
CHANGE IN VALERO COMMON STOCK OF VALERO STOCK RATE OF RETURN ANNUALIZED
COMMON STOCK PRICE (PER COMMON STOCK DELIVERED PER ON VALERO RATE OF
PRICE FROM SHARE) AT AT SETTLEMENT PURCHASE COMMON RETURN ON
REFERENCE PRICE SETTLEMENT DATE DATE CONTRACT STOCK PEPS UNITS
---------------- --------------- --------------- ------------- -------------- ----------
<S> <C> <C> <C> <C> <C>
(40)% $18.00 $15.00 $15.00 (15.31)% (7.21)%
(30)% $21.00 $17.50 $17.50 (10.45)% (2.91)%
(20)% $24.00 $20.00 $20.00 (6.19)% 0.92%
(10)% $27.00 $22.50 $22.50 (2.38)% 4.36%
(5)% $28.50 $23.75 $23.75 (0.61)% 5.97%
0% $30.00 $25.00 $25.00 1.07% 7.5%
5% $31.50 $26.25 $25.00 2.67% 7.5%
10% $33.00 $27.50 $25.00 4.21% 7.5%
20% $36.00 $30.00 $25.00 7.11% 7.5%
30% $39.00 $32.50 $27.07 9.79% 9.92%
40% $42.00 $35.00 $29.16 12.29% 12.19%
</TABLE>
The above diagrams and tables do not represent all potential outcomes from
an investment in PEPS Units. For example, prior to seven business days preceding
August 18, 2003, an investor may substitute a treasury security for the trust
preferred security as collateral. By substituting a zero-coupon treasury
security for 40 trust preferred securities, an investor may achieve higher or
lower rates of return than shown above. The actual returns will vary depending
upon a number of factors, including:
-- the price of the zero-coupon treasury security;
-- the potential trading price of the trust preferred securities; and
-- the costs and expenses associated with creating a Treasury PEPS Unit.
An investor that creates a Treasury PEPS Unit, or an investor that settles
the purchase contract early or for cash, and continues to hold the trust
preferred security will continue to receive cash distributions on the trust
preferred security until August 18, 2003. The distribution rate on the trust
preferred securities will be reset on August 18, 2003 to the rate determined by
the remarketing agent in the remarketing of the trust preferred securities.
S-20
<PAGE> 21
SUMMARY CONSOLIDATED HISTORICAL AND
PRO FORMA FINANCIAL INFORMATION
The following tables set forth summary consolidated historical financial
data for each of the periods indicated and certain adjusted pro forma
information. Our historical financial information should be read in conjunction
with our consolidated financial statements and related notes. The pro forma as
adjusted statement of income data for the three months ended March 31, 2000 and
the year ended December 31, 1999 give effect to the Benicia acquisition and the
related interim financings as if such events occurred on January 1, 1999 and are
further adjusted to give effect to this offering, the common stock offering and
the senior notes offering. The pro forma balance sheet data gives effect to the
Benicia acquisition and the related interim financings as if such events
occurred on March 31, 2000 and is further adjusted to give effect to this
offering, the common stock offering and the senior notes offering. The unaudited
pro forma information set forth below is not necessarily indicative of the
results that actually would have been achieved had the Benicia acquisition been
consummated on the relevant dates noted above, or that may be achieved in the
future. The pro forma information should be read in conjunction with the pro
forma financial statements and the related notes included herein.
<TABLE>
<CAPTION>
PRO FORMA COMBINED
AS ADJUSTED
FOR THE OFFERINGS HISTORICAL
--------------------------- --------------------------------------------------------------
THREE MONTHS THREE MONTHS
ENDED YEAR ENDED ENDED MARCH 31, YEAR ENDED DECEMBER 31,
MARCH 31, DECEMBER 31, ----------------------- ------------------------------------
2000 1999 2000 1999 1999 1998(1)(2) 1997(3)
------------ ------------ ---------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Operating revenues.......... $3,423,416 $9,312,743 $2,928,617 $1,337,103 $7,961,168 $5,539,346 $5,756,220
Operating income (loss)..... 98,302 222,054 57,052 8,520 69,141 (51,198) 211,034
Income (loss) from
continuing operations..... 45,929 68,216 30,739 (2,716) 14,287 (47,291) 111,768
Income (loss) from
discontinued operations,
net of income taxes(4).... -- -- -- -- -- -- (15,672)
Net income (loss)........... 45,929 68,216 30,739 (2,716) 14,287 (47,291) 96,096
Less: preferred stock
dividend
requirements and
redemption
premium............. -- -- -- -- -- -- 4,592
Net income (loss) applicable
to common stock........... 45,929 68,216 30,739 (2,716) 14,287 (47,291) 91,504
Earnings (loss) per share of
common stock -- assuming
dilution:
Continuing operations..... $ .74 $ 1.10 $ .54 $ (.05) $ .25 $ (.84) $ 2.03
Discontinued operations... -- -- -- -- -- -- (.29)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total............... $ .74 $ 1.10 $ .54 $ (.05) $ .25 $ (.84) $ 1.74
========== ========== ========== ========== ========== ========== ==========
Dividends per share of
common stock.............. $ .08 $ .32 $ .08 $ .08 $ .32 $ .32 $ .42
CASH FLOW DATA:
Cash flow from continuing
operating activities...... $ 67,562 $ 563,402 $ 11,177 $ 148,419 $ 435,111 $ 165,825 $ 196,645
Cash flow used in continuing
investing activities...... (48,167) (242,326) (41,966) (69,074) (172,168) (566,268) (434,046)
Cash flow provided by (used
in) financing
activities................ (70,878) (272,430) (20,789) (77,201) (214,055) 401,707 275,548
OTHER FINANCIAL DATA:
EBITDA(5)................... $ 146,639 $ 408,421 $ 95,950 $ 45,111 $ 219,657 $ 244,523 $ 313,025
</TABLE>
(footnotes
on next page)
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<PAGE> 22
<TABLE>
<CAPTION>
MARCH 31, 2000
----------------------------------------------
PRO FORMA
PRO FORMA COMBINED
COMBINED AS ADJUSTED
FOR THE BENICIA FOR THE
HISTORICAL ACQUISITION(6) OFFERINGS(7)
---------- ---------------- --------------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (excluding short-term debt and current
maturities on long-term debt)............................. $ 131,557 $ 285,443 $ 285,443
Property, plant and equipment, net.......................... 1,985,184 2,700,804 2,700,804
Total assets................................................ 3,121,174 4,034,488 4,037,022
Total debt.................................................. 771,655 1,678,669 1,392,359
Valero-obligated mandatorily redeemable preferred capital
trust securities of a subsidiary trust holding solely
Valero senior notes....................................... -- -- 150,000
Total equity................................................ 1,108,704 1,108,704 1,247,548
</TABLE>
------------
(1) Includes the operations of the Paulsboro, New Jersey refinery beginning
September 17, 1998.
(2) The 1998 operating loss includes a $170.9 million write-down of inventories
to market value, which resulted in a $111.1 million reduction in net income,
or $1.98 per share.
(3) Includes the operations of the Texas City and Houston, Texas refineries and
the Krotz Springs, Louisiana refinery beginning May 1, 1997.
(4) Reflects the results of our former parent's natural gas related services
business for periods prior to the July 31, 1997 spin-off of our stock.
(5) Earnings before interest, taxes, depreciation and amortization ("EBITDA") is
presented as a measure of our ability to service our debt and to make
capital expenditures. It is not a measure of operating results and is not
presented in our consolidated financial statements.
(6) Gives effect to the Benicia acquisition, including (i) borrowings of $600
million under our bank bridge facility and (ii) borrowings of $307 million
under our existing credit facilities. Funding for the Benicia acquisition
also includes an assumed amount of approximately $130 million of structured
lease financing.
(7) The pro forma as adjusted balance sheet column gives effect to (i) the
offering of approximately $150 million aggregate stated amount of PEPS Units
pursuant to this offering, (ii) a concurrent offering of approximately $500
million aggregate principal amount of senior notes and (iii) a concurrent
offering of 5 million shares of common stock at an assumed offering price of
$30 per share as well as the application of the net proceeds from such
offerings to repay all amounts outstanding under our bank bridge facility
and reduce borrowings under our existing credit facilities. On May 31, 2000,
the reported last sale price of the common stock on the NYSE was $29 1/4 per
share.
S-22
<PAGE> 23
SUMMARY REFINING OPERATING DATA
The following table sets forth certain operating results for the three
months ended March 31, 2000 and the year ended December 31, 1999 for Valero and
the Benicia refinery on a separate and combined basis. However, no changes in
the operations of the Benicia assets have been assumed and, therefore, the
combined data is not necessarily indicative of future performance. Volumes are
stated in thousand barrels per day or MBPD. Average throughput margin per barrel
is computed by subtracting total direct product cost of sales from product sales
revenues and dividing the result by throughput volumes. Refinery charges and
yields by component are expressed as percentages of total charges and yields,
respectively.
<TABLE>
<CAPTION>
THREE MONTHS ENDED YEAR ENDED
MARCH 31, 2000 DECEMBER 31, 1999
--------------------------- ---------------------------
VALERO BENICIA COMBINED VALERO BENICIA COMBINED
------ ------- -------- ------ ------- --------
<S> <C> <C> <C> <C> <C> <C>
Sales volumes (MBPD).................... 1,002 155 1,157 1,033 144 1,177
Throughput volumes (MBPD)............... 744 158 902 712 137 849
Average throughput margin per barrel.... $3.62 $6.80 $ 4.17 $2.93 $7.77 $ 3.71
Operating costs per barrel(1):
Cash (fixed and variable)............. $1.95 $2.92 $ 2.10 $1.85 $4.37 $ 2.09
Depreciation and amortization......... .51 .41 .51 .53 .46 .54
------ ----- ------ ------ ----- ------
Total operating costs per
barrel...................... $2.46 $3.33 $ 2.61 $2.38 $4.83 $ 2.63
====== ===== ====== ====== ===== ======
Charges:
Crude oils:
Sour............................... 52% 81% 57% 48% 83% 54%
Heavy sweet........................ 9 -- 8 12 -- 10
Light sweet........................ 9 -- 7 9 -- 8
------ ----- ------ ------ ----- ------
Total crude oils.............. 70 81 72 69 83 72
High-sulfur resid..................... 4 5 5 3 4 3
Low-sulfur resid...................... 4 -- 3 6 -- 5
Other feedstocks and blendstocks...... 22 14 20 22 13 20
------ ----- ------ ------ ----- ------
Total charges................. 100% 100% 100% 100% 100% 100%
====== ===== ====== ====== ===== ======
Yields:
Gasolines and blendstocks............. 50% 72% 54% 51% 68% 54%
Distillates........................... 30 11 27 29 15 27
Petrochemicals........................ 5 -- 4 5 -- 4
Lubes and asphalts.................... 3 -- 2 3 -- 2
Other products........................ 12 17 13 12 17 13
------ ----- ------ ------ ----- ------
Total yields.................. 100% 100% 100% 100% 100% 100%
====== ===== ====== ====== ===== ======
</TABLE>
---------------
(1) The combined information reflects the adjustments made in the pro forma
statements of income.
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<PAGE> 24
RISK FACTORS
In considering whether to purchase our PEPS Units, you should carefully
consider all the information we have included or incorporated by reference in
this prospectus supplement and the accompanying prospectus. In particular, you
should carefully consider the risk factors described below. In addition, please
read "Forward-Looking Information" on page S-33 of this prospectus supplement
and on page 7 of the accompanying prospectus, where we describe additional
uncertainties associated with our business and the forward-looking statements in
this prospectus supplement and the accompanying prospectus.
Because a PEPS Unit consists of a purchase contract to acquire shares of
our common stock and a trust preferred security issued by the Trust, you are
making an investment decision with regard to our common stock and the trust
preferred securities, as well as the PEPS Units.
RISK FACTORS RELATING TO THE PEPS UNITS
YOU WILL BEAR THE ENTIRE RISK OF A DECLINE IN THE PRICE OF OUR COMMON
STOCK.
The value of the shares of our common stock that you will receive upon the
settlement of the purchase contract is not fixed, but rather will depend on the
market value of our common stock near the time of settlement. Because the price
of our common stock fluctuates, the aggregate market value of the shares of our
common stock receivable upon settlement of the purchase contract may be more or
less than the stated amount of $25 per PEPS Unit. If the market value of our
common stock near the time of settlement is less than $ , the aggregate
market value of the shares issuable upon settlement generally will be less than
the stated amount of the purchase contract, and your investment in a PEPS Unit
may result in a loss. Therefore, you will bear the full risk of a decline in the
market value of our common stock prior to settlement of the purchase contract.
YOU WILL RECEIVE ONLY A PORTION OF ANY APPRECIATION IN THE MARKET PRICE OF
OUR COMMON STOCK.
The aggregate market value of the shares of our common stock receivable
upon settlement of the purchase contract generally will exceed the stated amount
of $25 only if the average closing price of our common stock over the 20-trading
day period ending on the third trading day before August 18, 2003 equals or
exceeds the threshold appreciation price of $ (which represents an
appreciation of % over the reference price of $ ). Therefore, during the
period prior to settlement, an investment in a PEPS Unit affords less
opportunity for equity appreciation than a direct investment in shares of our
common stock. If the applicable average closing price exceeds the reference
price of $ but is less than the threshold appreciation price of $ , you
will realize no equity appreciation on our common stock for the period during
which you own the purchase contract. Furthermore, if the applicable average
closing price equals or exceeds the threshold appreciation price, you will
realize only % of the equity appreciation for that period above the threshold
appreciation price. See "Description of the Purchase Contracts--General" in this
prospectus supplement for an illustration of the number of shares of our common
stock that you would receive at various average market prices.
THE MARKET PRICE OF OUR COMMON STOCK IS UNPREDICTABLE.
It is impossible to predict whether the market price of our common stock
will rise or fall. Many factors influence the trading price of our common stock,
including those described below under "--Risk Factors Relating to Valero" and
"Forward-Looking Information."
The market for our common stock likely will influence, and be influenced
by, any market that develops for the PEPS Units. For example, investors'
anticipation of the distribution into the market of the additional shares of our
common stock issuable upon settlement of the purchase contracts could depress
the price of our common stock and increase its volatility. If the underwriters'
over-allotment option is exercised in full, the largest number of shares of our
common stock issuable upon settlement of the purchase contracts would constitute
approximately % of our common stock outstanding as of March 31, 2000. The
price of our common stock also could be affected by possible sales of our common
stock by investors who view the PEPS
S-24
<PAGE> 25
Units as a more attractive means of equity participation in us and by hedging or
arbitrage trading activity that may develop involving the PEPS Units and our
common stock.
THE PEPS UNITS AND TREASURY PEPS UNITS PROVIDE LIMITED SETTLEMENT RATE
ADJUSTMENTS.
The number of shares of our common stock issuable upon settlement of each
purchase contract is subject to adjustment only for stock splits and
combinations, stock dividends and certain other specified transactions. The
number of shares of our common stock issuable upon settlement of each purchase
contract is not subject to adjustment for other events, such as employee stock
option grants, offerings of our common stock for cash or in connection with
certain acquisitions or other transactions, which may adversely affect the price
of our common stock. The terms of the PEPS Units do not restrict our ability to
offer our common stock in the future or to engage in other transactions that
could dilute our common stock. We have no obligation to consider the interests
of the holders of the PEPS Units for any reason.
YOU HAVE NO SHAREHOLDER RIGHTS WITH RESPECT TO OUR COMMON STOCK.
Until you acquire shares of our common stock upon settlement of your
purchase contract, you will have no rights with respect to the shares of our
common stock, including voting rights, rights to respond to tender offers and
rights to receive any dividends or other distributions (including rights under
our shareholders' rights plan) on our common stock. Upon settlement of your
purchase contract, you will be entitled to exercise the rights of a holder of
shares of our common stock only as to actions for which the applicable record
date occurs after the settlement date.
HOLDERS OF TRUST PREFERRED SECURITIES WILL HAVE LIMITED VOTING RIGHTS.
You will not be entitled to vote to appoint, remove, replace or change the
number of the trustees of the Trust, and generally will have no voting rights,
except in the limited circumstances described under "Description of the Trust
Preferred Securities--Voting Rights" in the accompanying prospectus.
WE MAY REDEEM THE SENIOR DEFERRABLE NOTES UPON OCCURRENCE OF A TAX EVENT.
We may redeem the senior deferrable notes (and thereby cause the redemption
of the trust securities) in whole at any time upon the occurrence and
continuation of a tax event. See "Description of the Senior Deferrable
Notes--Tax Event Redemption" in this prospectus supplement. A tax event
redemption is likely to constitute a taxable event to the beneficial owners of
the trust preferred securities. If a tax event redemption occurs prior to
settlement under the purchase contracts, the Trust will distribute the
applicable redemption price to the securities intermediary, in liquidation of
the PEPS Unit holders' interests in the Trust. The securities intermediary will
use the redemption amount to purchase the treasury portfolio as substitute
collateral on behalf of the holders of the PEPS Units. It is impossible to
predict the impact that the substitution of the treasury portfolio as collateral
for the redeemed trust preferred securities will have on the market price of the
PEPS Units.
WE WILL HAVE THE OPTION TO DEFER INTEREST PAYMENTS ON THE SENIOR DEFERRABLE
NOTES HELD BY THE TRUST.
If we exercise our right to defer interest payments on the senior
deferrable notes, the Trust will not have enough funds to make the distributions
on the trust preferred securities. In this case, even though you would not be
receiving distributions on your trust preferred securities, you would be
required to include the stated distribution amount on the trust preferred
securities in gross income, as original issue discount, on a daily economic
accrual basis, regardless of your method of accounting. As a result, you would
recognize income for United States federal income tax purposes in advance of the
receipt of cash attributable to such income, and would not receive cash
distributions on your trust preferred securities until we make an interest
payment on the senior deferrable notes. See "United States Federal Income Tax
Consequences--United States Holders--Trust Preferred Securities--Interest Income
and Original Issue Discount" in this prospectus supplement.
S-25
<PAGE> 26
If we exercise our right to defer payments of interest on the senior
deferrable notes, the market price of the PEPS Units is likely to decrease. In
addition, the mere existence of the right to defer interest payments may cause
the market price of the PEPS Units to be more volatile than the market price of
other securities that are not subject to such deferrals.
THE GUARANTEE ONLY COVERS PAYMENTS ON THE TRUST PREFERRED SECURITIES TO THE
EXTENT WE HAVE MADE CORRESPONDING PAYMENTS ON THE SENIOR DEFERRABLE NOTES.
Under the guarantee to be executed by us for the benefit of the holders of
the trust preferred securities, we will irrevocably guarantee the payment of
various amounts payable with respect to the trust preferred securities,
including accumulated distributions, the redemption price and amounts payable
upon dissolution of the Trust, but only to the extent that the Trust has funds
available for those payments. The Trust depends on us for its source of funds to
make distributions on the trust preferred securities when due. If we were to
default on our obligations to pay principal of or interest on the senior
deferrable notes, the Trust would not have sufficient funds to pay distributions
or other amounts on the trust preferred securities, and you would not be able to
rely upon the guarantee for payment of these amounts. Instead, you would have to
(1) rely on the property trustee enforcing its rights as the registered holder
of the senior deferrable notes or (2) enforce the rights of the property trustee
or assert your own right to bring an action directly against us to enforce
payments on the senior deferrable notes. The declaration of trust provides that,
by acceptance of the trust preferred securities, you agree to the provisions of
the guarantee and the indenture under which the senior deferrable notes will be
issued.
YOUR PLEDGED TRUST PREFERRED SECURITY WILL BE ENCUMBERED BY OUR SECURITY
INTEREST.
Although you will be the beneficial owner of the underlying pledged trust
preferred security, that pledged trust preferred security will be pledged with
the collateral agent to secure your obligation under the purchase contract.
Therefore, for so long as the purchase contract remains in effect, you will not
be allowed to withdraw your pledged trust preferred security from this pledge
arrangement, except to create Treasury PEPS Units or if you settle the purchase
contract early or settle the purchase contracts for cash on the purchase
contract settlement date as described in this prospectus supplement.
SECONDARY TRADING IN THE PEPS UNITS, TREASURY PEPS UNITS AND THE TRUST
PREFERRED SECURITIES MAY BE LIMITED.
It is impossible to predict how the PEPS Units, the Treasury PEPS Units and
the trust preferred securities will trade in the secondary market or whether the
market for any of these securities will be liquid or illiquid. There currently
is no secondary market for any of these securities, and we cannot assure you as
to the liquidity of any trading market that may develop, the ability of holders
to sell their securities in that market or whether any such market will
continue.
Application has been made to list the PEPS Units on the New York Stock
Exchange under the symbol "VLO PrU". However, listing on the New York Stock
Exchange does not guarantee the depth or liquidity of the market for the PEPS
Units. If holders of the PEPS Units create Treasury PEPS Units, the liquidity of
the PEPS Units could be adversely affected. Moreover, if the number of the PEPS
Units falls below the New York Stock Exchange's requirement for continued
listing (whether as a result of the creation of Treasury PEPS Units or
otherwise), the PEPS Units could be delisted from the New York Stock Exchange,
or trading in the PEPS Units could be suspended.
If Treasury PEPS Units are traded to a sufficient extent to meet applicable
exchange listing requirements, we will try to list those securities on the same
national securities exchanges or associations as the PEPS Units. However, we do
not presently plan to list the Treasury PEPS Units or the trust preferred
securities on any securities exchange and have no obligation to do so in the
future. The underwriters have advised us that they presently intend to make a
market for the PEPS Units, the Treasury PEPS Units and the trust preferred
securities. However, they are not obligated to do so and they may discontinue
any market making at any time.
S-26
<PAGE> 27
THE PURCHASE CONTRACT AGREEMENT IS NOT QUALIFIED UNDER THE TRUST INDENTURE
ACT AND THEREFORE THE OBLIGATIONS OF THE PURCHASE CONTRACT AGENT ARE
LIMITED.
The purchase contract agreement is not an indenture under the Trust
Indenture Act. Therefore, the purchase contract agent will not qualify as a
trustee under the Trust Indenture Act, and you will not benefit from the
protections of that law, such as disqualification of an indenture trustee for
"conflicting interests", provisions preventing an indenture trustee from
improving its own position at the expense of the security holders and the
requirement that an indenture trustee deliver reports at least annually with
respect to the indenture trustee and the securities. Under the terms of the
purchase contract agreement, the purchase contract agent will have only limited
obligations to you as a holder of the PEPS Unit.
THE DELIVERY OF SECURITIES IS SUBJECT TO POTENTIAL DELAY.
The purchase contracts will terminate automatically if certain bankruptcy,
insolvency or reorganization events occur with respect to us. If the purchase
contracts terminate upon one of these events, your rights and obligations under
your purchase contract also will terminate, including your obligation to pay
for, and your right to receive, shares of our common stock. Upon termination,
you will receive your trust preferred security or your treasury security.
Notwithstanding the automatic termination of the purchase contracts, imposition
of an automatic stay under Section 362 of the Bankruptcy Code may delay the
delivery to you of your securities being held as collateral under the pledge
arrangement.
RISK FACTORS RELATING TO VALERO
REFINING MARGINS ARE VOLATILE.
Our financial results are primarily affected by the relationship, or
margin, between refined product prices and the prices for crude oil and other
feedstocks. The cost to acquire our feedstocks and the price at which we can
ultimately sell refined products depend upon numerous factors beyond our
control. Historically, refining margins have been volatile, and they are likely
to continue to be volatile in the future. In 1998, significant declines in
feedstock and refined product prices resulted in a non-cash inventory write-down
of $171 million which decreased earnings by $111 million. Until recently, there
was a substantial excess supply of refined products which led to low product
prices and weak refining margins. Recently there has been an improvement in
refining fundamentals and refining margins; however, we cannot assure you that
these improvements will continue or be sustainable.
Specific factors which may affect our refining margins include:
-- the domestic and foreign supplies of refined products such as
gasoline, diesel, heating oil and petrochemicals;
-- the domestic and foreign supplies of crude oil and other feedstocks;
-- the ability of the members of the Organization of Petroleum Exporting
Countries to agree to and maintain oil price and production controls;
-- the level of consumer demand, including seasonal fluctuations;
-- refinery overcapacity or undercapacity;
-- the actions taken by competitors, including both pricing and the
expansion and retirement of refining capacity in response to market
conditions;
-- environmental and other regulations at both the state and federal
levels and in foreign countries;
-- political conditions in oil producing regions, including the Middle
East;
-- the level of foreign imports;
-- accidents or other unscheduled shutdowns affecting our plants,
machinery, pipelines or equipment, or those of our suppliers or
customers;
S-27
<PAGE> 28
-- changes in the cost or availability of transportation for feedstocks
and refined products;
-- write-downs of inventories caused by a material decline in petroleum
prices;
-- the price, availability and acceptance of alternative fuels;
-- cancellation of or failure to implement planned capital projects and
realize the various assumptions and benefits projected for such
projects;
-- irregular weather, which can unforeseeably affect the price or
availability of feedstocks and refined products;
-- rulings, judgments, or settlements in litigation or other legal
matters, including unexpected environmental remediation costs in
excess of any reserves and claims of product liability;
-- the introduction or enactment of federal or state legislation which
may adversely affect our business or operations; and
-- overall economic conditions.
The interplay of these factors has historically resulted in a high level of
volatility in the energy markets, which makes it impossible to predict with any
certainty future refining margins.
OUR INTEGRATION OF THE OPERATIONS OF THE BENICIA REFINERY MAY NOT BE
SUCCESSFUL.
As discussed more fully in "The Benicia Acquisition and Related
Financings," we acquired Exxon Mobil Corporation's Benicia refinery and branded
supplier relationships on May 15, 2000 and expect to acquire its service station
facilities on June 15, 2000. While our refining and marketing business has been
profitable, there is no assurance that, following the Benicia acquisition:
-- the combined entities will be profitable,
-- the combined entities will be able to achieve the level of
performance we anticipate, and
-- the projected demand for and prices of refinery feedstocks and
refined products will be realized.
The success of the Benicia acquisition will depend on the ability of our
management to integrate the operations of the Benicia refinery with our existing
operations and to integrate various departments, systems and procedures. The
inability to integrate the operations of the Benicia refinery in a timely and
efficient manner could adversely affect our ability to realize our projected
financial results. Additionally, although we have conducted a due diligence
investigation of the Benicia refinery, the scope of that investigation,
particularly in light of the volume of environmental, litigation and other
matters, has necessarily been limited. Pursuant to the purchase agreement, we
are indemnified by ExxonMobil for any litigation pending at the time of the
Benicia acquisition and, subject to certain terms, conditions and limitations,
with respect to other matters. However, we cannot assure you that other material
matters will not subsequently be identified or that the matters now identified
will not later prove to be more significant or expose us to greater liabilities
than currently expected.
OUR LEVERAGE MAY LIMIT OUR FINANCIAL FLEXIBILITY.
As of March 31, 2000, we had approximately $771.7 million in total
indebtedness. We incurred substantial additional indebtedness in connection with
the Benicia acquisition. After giving effect to the Benicia acquisition and the
related financings, including this offering and the concurrent offerings of
common stock and senior notes, as of March 31, 2000, we would have had total
debt of $1.4 billion, trust preferred securities issued as part of the PEPS
Units in an aggregate liquidation amount of $150 million, and stockholders'
equity of $1.2 billion, resulting in a total debt to total capital ratio of
51.0% (80% of the aggregate liquidation amount of trust preferred securities
included in the PEPS Units is deemed to be equity for purposes of this
computation). In addition, depending on prevailing financial, economic and
market conditions, we may be unable to consummate the concurrent offerings as
described herein. If we are not able
S-28
<PAGE> 29
to complete the offerings as contemplated, our credit rating may be downgraded
which may result in even higher borrowing costs. The interest rate and fees
under our $835 million revolving bank credit and letter of credit facility are
subject to adjustment based upon the credit ratings assigned to our long-term
debt. Accordingly, the amount of outstanding indebtedness and interest expense
may be greater than contemplated and stockholders' equity may be lower than
contemplated. We may also incur additional indebtedness in the future, including
in connection with other acquisitions, although our ability to do so will be
restricted by our existing $835 million bank credit facility. The level of our
indebtedness will have several important effects on our future operations,
including, among others:
-- a significant portion of our cash flow from operations will be
dedicated to the payment of principal and interest on our
indebtedness and will not be available for other purposes;
-- covenants contained in our existing debt arrangements require us to
meet certain financial tests, which may affect our flexibility in
planning for, and reacting to, changes in our business, including
possible acquisition opportunities;
-- our ability to obtain additional financing for working capital,
capital expenditures, acquisitions, general corporate and other
purposes may be limited;
-- we may be at a competitive disadvantage to our competitors that are
less leveraged; and
-- our vulnerability to adverse economic and industry conditions may
increase.
Our ability to meet our debt service obligations and to reduce our total
indebtedness will be dependent upon our future performance, which will be
subject to general economic conditions, industry cycles and financial, business
and other factors affecting our operations, many of which are beyond our
control. We cannot assure you that our business will continue to generate
sufficient cash flow from operations to service our indebtedness. If we are
unable to generate sufficient cash flow from operations, we may be required to
sell assets, to refinance all or a portion of our indebtedness or to obtain
additional financings. We cannot assure you that any such refinancing will be
possible or that additional financing will be available on commercially
acceptable terms or at all.
Our $835 million bank credit facility imposes financial and other
restrictions on Valero. Covenants contained in the credit facility and relating
to certain other indebtedness of Valero limit, among other things, the
incurrence of funded indebtedness by Valero and its subsidiaries and require
maintenance of a minimum net worth and fixed-charge coverage ratio and a maximum
debt-to-capitalization ratio. There can be no assurance that the requirements of
our credit facility or such other indebtedness will be met in the future.
Failure to comply with such covenants may result in a default with respect to
the related debt under the credit facility or such other indebtedness and could
lead to acceleration of such debt or any instruments evidencing indebtedness
that contain cross-acceleration or cross-default provisions. In such a case,
there can be no assurance that Valero would be able to refinance or otherwise
repay such indebtedness.
COMPLIANCE WITH AND CHANGES IN ENVIRONMENTAL LAWS COULD ADVERSELY AFFECT
OUR PERFORMANCE.
We are subject to extensive federal, state and local environmental laws and
regulations, including those relating to the discharge of materials into the
environment, waste management, pollution prevention measures and characteristics
and composition of gasoline and diesel fuels. If we violate or fail to comply
with these laws and regulations, we could be fined or otherwise sanctioned.
Although our environmental policies and practices are designed to ensure
compliance with these laws and regulations, future developments and increasingly
stringent and complex regulations could require us to make additional unforeseen
expenditures relating to environmental matters. In 1999, we spent approximately
$7 million for capital expenditures to comply with environmental regulations,
and we currently estimate spending an additional $7 million and $22 million in
2000 and 2001, respectively. These estimates do not include any expenditures for
the installation of a flue gas scrubber at the Texas City refinery in connection
with our voluntary participation in the Governor's City Air Responsibility
Enterprise Program (estimated to be approximately $35 million over a two-year
period beginning in 2000 and which is being funded via a structured lease
financing arrangement), any expenditures
S-29
<PAGE> 30
for the installation of a flue gas scrubber at the Paulsboro refinery in
connection with a consent order issued by the New Jersey Department of
Environmental Protection (expected to be incurred primarily in 2003) or
estimated capital expenditures for the Benicia refinery and the service station
facilities. We currently estimate these Benicia-related capital expenditures to
be approximately $7 million in each of 2000 and 2001 based on the amount of due
diligence that we have been able to conduct to date. However, because
environmental laws and regulations are increasingly becoming more stringent and
new environmental laws and regulations are continuously being enacted or
proposed, such as those relating to methyl tertiary butyl ether (MTBE), CARB
gasoline and the Tier II gasoline standard and the Maximum Available Control
Technology rule (MACT II rule) under the Clean Air Act, we cannot predict with
certainty the level of future expenditures that will be required for
environmental matters. In addition, because some of our air emissions are
grandfathered under certain environmental laws, including those of the Benicia
refinery, any major upgrades in any of our refineries could require material
additional expenditures to comply with environmental laws and regulations. These
expenditures could have a material adverse effect on our financial position,
results of operations and liquidity.
In connection with the Benicia acquisition and our acquisitions of the
Paulsboro refinery and Basis Petroleum, Inc., we have been indemnified on a
limited basis for certain environmental matters, including those relating to
remediation and superfund liabilities. There can be no assurance that the
indemnifying parties will indemnify us or continue to indemnify us. In the event
that the indemnifying parties fail to do so, we could be liable for the costs of
these environmental matters, which could be material. See
"Business--Environmental Matters."
On May 17, 2000, the Environmental Protection Agency ("EPA") proposed
regulations to reduce the sulfur content for diesel fuel sold to highway
consumers by 97%, from 500 parts per million to 15 parts per million, beginning
June 1, 2006. In its release, the EPA estimated that the overall cost to fuel
producers of the reduction in sulfur content would be approximately 4 cents per
gallon. The American Petroleum Institute has released a statement supporting
sharp reductions in diesel fuel sulfur content, but strongly opposing the EPA's
"unrealistic" proposal. We are unable to predict whether the proposed
regulations will be adopted or the effect of the proposal on our business.
DISRUPTION OF OUR ABILITY TO OBTAIN CRUDE OIL COULD ADVERSELY AFFECT OUR
OPERATIONS.
Over 70% of Valero's total crude oil feedstock requirements are purchased
through term crude oil feedstock contracts totaling approximately 380,000 BPD.
The remainder of our crude oil feedstock requirements are purchased on the spot
market. The term agreements include contracts to purchase feedstocks from
various foreign national oil companies and various domestic integrated oil
companies. In particular, a significant portion of our feedstock requirements
are served through suppliers located in the Middle East, and we are, therefore,
subject to the political, geographic and economic risks attendant to doing
business with suppliers located in that area. In the event one or more of our
term contracts were terminated, we believe we would be able to find alternative
sources of supply. However, we cannot assure you that this situation will
continue. If we are unable to obtain adequate crude oil volumes or are only able
to obtain such volumes at unfavorable prices, our results of operations could be
materially adversely affected.
COMPETITORS WHO PRODUCE THEIR OWN SUPPLY OF FEEDSTOCKS, WHO HAVE EXTENSIVE
RETAIL OUTLETS OR WHO HAVE GREATER FINANCIAL RESOURCES MAY HAVE A
COMPETITIVE ADVANTAGE.
The refining and marketing industry is highly competitive with respect to
both feedstock supply and refined product markets. We compete with numerous
other companies for available supplies of crude oil and other feedstocks and for
outlets for our refined products. We do not produce any of our crude oil
feedstocks and, following the Benicia acquisition, will control only limited
retail outlets for our refined products. Many of our competitors, however,
obtain a significant portion of their feedstocks from company-owned production
and have extensive retail outlets. Competitors that have their own production or
extensive retail outlets (and brand-name recognition) are at times able to
offset losses from refining operations with profits from producing or retailing
operations, and may be better positioned to withstand periods of depressed
refining margins or feedstock shortages.
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<PAGE> 31
A number of our competitors also have materially greater financial and
other resources than we possess. Such competitors have a greater ability to bear
the economic risks inherent in all phases of the industry. In addition, we
compete with other industries that provide alternative means to satisfy the
energy and fuel requirements of our industrial, commercial and individual
consumers. If we are unable to compete effectively with our competitors, both
within and outside of our industry, our financial condition and results of
operations could be materially adversely affected.
As a result of the Benicia acquisition, we are entering the California
refining and marketing market at a time when competition in the industry is
increasing and new technology is making refining more efficient. The addition of
new refining and marketing companies to the California market, as well as the
addition of new retail product providers, may increase the supply of refined
products available for sale in that state or increase competitive pressure, or
both, either of which could lead to lower prices and reduced margins. A
reduction in our anticipated margins in California could adversely affect our
prospective financial position, liquidity and results of operations.
THE OUTCOME OF THE UNOCAL PATENT DISPUTE MAY ADVERSELY AFFECT OUR BUSINESS.
In April 1995, six major oil refiners filed a lawsuit against Unocal
Corporation concerning the validity of Unocal's claimed patent on certain
gasoline compositions required by the CARB Phase II regulations in California.
In 1997, a federal court jury upheld the validity of Unocal's patent and awarded
Unocal royalty damages based on infringement of the patent. The decision was
appealed, and in March 2000, a panel of the Court of Appeals for the Federal
Circuit affirmed the lower court decision and a subsequent petition for
reconsideration and for rehearing by the full court was denied. The ultimate
outcome of the litigation is uncertain. Unocal also has four other gasoline
composition patents not involved in the litigation. We were not a party to this
lawsuit, but if we were required to pay a royalty on the compositions claimed by
Unocal's patents, such payments could affect our operating results and alter the
blending economics for compositions not covered by the patents. All liabilities
related to any claim Unocal may have against ExxonMobil are being retained by
ExxonMobil. However, we will be responsible for any infringement liabilities
relating to gasoline produced from any of our other refineries and from the
Benicia refinery after the date of our acquisition of the Benicia refinery.
A SIGNIFICANT INTERRUPTION IN ONE OR MORE OF OUR REFINERIES COULD ADVERSELY
AFFECT OUR BUSINESS.
With the acquisition of the Benicia refinery, our refining activities are
conducted at six major refineries in Texas, Louisiana, New Jersey and
California. The refineries are our principal operating assets. As a result, our
operations could be subject to significant interruption if one or more of the
refineries were to experience a major accident, be damaged by severe weather or
other natural disaster, or otherwise be forced to shut down. Although we
maintain business interruption insurance against some types of risks in amounts
which we believe to be economically prudent, if any refinery were to experience
an interruption in operations, earnings therefrom could be materially adversely
affected.
A significant percentage of our operations take place along the Texas and
Louisiana Gulf Coast. At December 31, 1999, four of our five refineries were in
the Gulf Coast area, with three situated in Texas and one in Louisiana. As a
result, a variety of adverse conditions or events in that region, including
natural disasters, transportation problems, or state government regulation or
political developments could have a material adverse effect on our operations.
WE DO NOT HAVE AN OPERATING HISTORY IN THE RETAIL BUSINESS.
We do not have an operating history in the retail business, and our senior
management has limited experience in the retail business. Until we gain further
experience in this area, we will be reliant to a significant degree on the
expertise of the retail marketing and operations personnel hired from ExxonMobil
in connection with the acquisition of the retail assets. Our success in the
retail business will be, in large part, dependent upon market recognition of our
brands. We anticipate that we will need to incur certain costs to obtain or
maintain such recognition. Accordingly, the retail business may divert some of
our financial resources from our refining
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and marketing business. We cannot assure you that our retail business will be
successful. Our inability to achieve success in our retail business could have a
material adverse effect on our overall financial position, results of operations
and liquidity.
We will be permitted to use Exxon's service marks and other trade indicia
to sell retail products at specified service stations outside the San Francisco
Bay area. We do not have control over the Exxon brand name, and a decrease in
the strength, visibility or reputation of the Exxon brand name could adversely
affect our ability to conduct a successful retail business, which in turn could
have a material adverse effect on our overall financial position, liquidity and
results of operations. We cannot give you assurance that the acquisition of the
service station facilities will be consummated on or about June 15, 2000 or any
time thereafter.
OUR OPERATIONS EXPOSE US TO MANY OPERATING RISKS, NOT ALL OF WHICH ARE
INSURED.
Our refining and marketing operations are subject to various hazards common
to the industry, including explosions, fires, toxic emissions, maritime hazards,
and uncontrollable flows of oil and gas. They are also subject to the additional
hazards of loss from severe weather conditions. As protection against operating
hazards, we maintain insurance coverage against some, but not all, such
potential losses. Although we believe that our insurance is adequate and
customary for companies of a similar size engaged in operations similar to ours,
losses could occur for uninsurable or uninsured risks or in amounts in excess of
our existing insurance coverage. The occurrence of an event that is not fully
covered by our insurance could have an adverse impact on our financial condition
and results of operations.
THE BANNING OF THE USE OF MTBE COULD ADVERSELY AFFECT US.
The presence of MTBE in some water supplies in California and other states
due to gasoline leakage from underground and aboveground storage tanks,
automobile and tanker truck accidents, pipelines and certain other sources has
led to public concern that MTBE has contaminated drinking water supplies, and
thereby resulted in a possible health risk.
In March 1999, the Governor of California ordered the ban of the use of
MTBE as a gasoline component by the end of 2002. The California Air Resources
Board has also finalized the specifications for CARB Phase III gasoline, which
specifications become effective at the end of 2002. Valero estimates that the
cost for permitting and modification of the Benicia refinery in order to comply
with CARB Phase III specifications and eliminate MTBE as a gasoline component is
approximately $20 million. On May 24, 2000, Valero was served with a class
action complaint filed in the Southern District of New York. The complaint
attempts to certify a class action claim alleging that numerous gasoline
suppliers, including Valero, contaminated groundwater in the State of New York
with MTBE. In addition, numerous oil companies have been ordered by the
Environmental Protection Agency to help replace contaminated water supplies in
California. Although the Benicia refinery has not been involved in such order,
there can be no assurances that it will not be involved in such order or that it
or our other refineries will not be involved in other future litigation or other
proceedings involving the environmental effects of MTBE, or that such litigation
or proceedings will not have a material adverse effect on our overall financial
condition, results of operations or liquidity. Heightened public awareness has
also resulted in other states and the EPA either passing or proposing
restrictions on, or banning the use of, MTBE. If MTBE were to be restricted or
banned throughout the U.S., we believe that our MTBE-producing facilities, other
than the Benicia refinery discussed above, could be modified to produce other
gasoline blendstocks or other petrochemicals for a capital investment of
approximately $22 million. Because the volume of alternative products that could
be produced would be less than the current production of MTBE and the price of
such alternative products is currently lower than the price of MTBE, our results
of operations could potentially be materially adversely affected.
OUR ACQUISITION STRATEGY MAY NOT BE SUCCESSFUL AND MAY REQUIRE US TO INCUR
ADDITIONAL FINANCING.
A substantial portion of our growth over the last several years has been
attributed to acquisitions. A principal component of our strategy going forward
is to continue to acquire assets or businesses that are logical extensions of
our existing assets or businesses in order to increase cash flow and earnings.
Our ability to achieve this goal will be dependent upon a number of factors,
including our ability to (i) identify acceptable acquisition candidates, (ii)
consummate acquisitions on favorable terms, (iii) successfully integrate
acquired businesses and (iv) obtain financing to support our growth. We cannot
assure you that we will be successful in implementing our acquisition strategy
or that such strategy will improve operating results. In addition, the
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financing of future acquisitions may require us to incur additional
indebtedness, which could limit our financial flexibility, or to issue
additional equity, which could result in further dilution of the ownership
interest of existing shareholders.
PROVISIONS IN OUR CORPORATE DOCUMENTS AND DELAWARE LAW COULD DELAY OR
PREVENT A CHANGE IN OUR CONTROL.
The existence of some provisions in our corporate documents and Delaware
law could delay or prevent a change in control of Valero, even if that change
might be beneficial to our stockholders. In addition, we have adopted a
stockholder rights plan that would cause extreme dilution to any person or group
who attempts to acquire a significant interest in Valero without advance
approval of our board of directors. Delaware law imposes additional restrictions
on mergers and other business combinations between us and any holder of 15% or
more of our outstanding common stock.
FORWARD-LOOKING INFORMATION
This prospectus supplement, including the information we incorporate by
reference, contains certain estimates, predictions, projections and other
"forward-looking statements" (as defined in 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 our
current judgment regarding the direction of our business, actual results will
almost always vary, sometimes materially, from any estimates, predictions,
projections, assumptions, or other future performance suggested herein. These
forward-looking statements can generally be identified by the words
"anticipate," "believe," "expect," "plan," "intend," "estimate," "project,"
"budget," "forecast," "will," "could," "should," "may" and similar expressions.
These forward-looking statements include, among other things, statements
regarding:
-- the Benicia acquisition and our results of operations following the
Benicia acquisition;
-- future refining margins, including gasoline and heating oil margins;
-- the expected cost of feedstocks, including crude oil discounts, and
refining products;
-- anticipated levels of crude oil and refined product inventories;
-- our anticipated level of capital investments, including deferred
turnaround and catalyst costs and capital expenditures for regulatory
compliance and other purposes, and the effect of these capital
investments on our results of operations;
-- refinery utilization rates;
-- anticipated trends in the supply and demand for crude oil feedstocks
and refined products in the United States and elsewhere;
-- expectations regarding environmental and other regulatory
initiatives; and
-- the effect of general economic and other conditions on refining
industry fundamentals.
We have based our forward-looking statements on our beliefs and assumptions
derived from information available to us at the time the statements are made.
Differences between actual results and any future performance suggested in our
forward-looking statements or projections could result from a variety of
factors, including the following:
-- the domestic and foreign supplies of refined products such as
gasoline, diesel, heating oil and petrochemicals;
-- the domestic and foreign supplies of crude oil and other feedstocks;
-- the ability of the members of the Organization of Petroleum Exporting
Countries to agree to and maintain oil price and production controls;
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-- the level of consumer demand, including seasonal fluctuations;
-- refinery overcapacity or undercapacity;
-- the actions taken by competitors, including both pricing and the
expansion and retirement of refining capacity in response to market
conditions;
-- environmental and other regulations at both the state and federal
levels and in foreign countries;
-- political conditions in oil producing regions, including the Middle
East;
-- the level of foreign imports;
-- accidents or other unscheduled shutdowns affecting our plants,
machinery, pipelines or equipment, or those of our suppliers or
customers;
-- changes in the cost or availability of transportation for feedstocks
and refined products;
-- write-downs of inventories caused by a material decline in petroleum
prices;
-- the price, availability and acceptance of alternative fuels;
-- cancellation of or failure to implement planned capital projects and
realize the various assumptions and benefits projected for such
projects;
-- irregular weather, which can unforeseeably affect the price or
availability of feedstocks and refined products;
-- rulings, judgments, or settlements in litigation or other legal
matters, including unexpected environmental remediation costs in
excess of any reserves and claims of product liability;
-- the introduction or enactment of federal or state legislation which
may adversely affect our business or operations;
-- changes in the credit ratings assigned to our debt securities and
trade credit; and
-- overall economic conditions.
We caution you that any one of these factors or other factors described
under the heading "Risk Factors," or a combination of these factors, could
materially affect our future results of operations and whether our
forward-looking statements ultimately prove to be accurate. These
forward-looking statements are not guarantees of our future performance, and our
actual results and future performance may differ materially from those suggested
in our forward-looking statements. When considering these forward-looking
statements, you should keep in mind the factors described under the heading
"Risk Factors" and other cautionary statements in this prospectus supplement,
the accompanying prospectus and the documents we have incorporated by reference.
We do not intend to update these statements unless the securities laws require
us to do so.
All subsequent written and oral forward-looking statements attributable to
us or persons acting on our behalf are expressly qualified in their entirety by
the foregoing. We undertake 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 of this report or to reflect the
occurrence of unanticipated events.
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<PAGE> 35
THE BENICIA ACQUISITION AND RELATED FINANCINGS
THE ACQUISITION
On March 2, 2000, Valero and Exxon Mobil Corporation executed a sale and
purchase agreement pursuant to which Valero agreed to acquire ExxonMobil's
Benicia, California refinery and Exxon-branded California retail assets, which
consist of approximately 80 service station facilities (the "Service Station
Assets") and branded supplier relationships with approximately 260 Exxon-branded
service stations (the "Distribution Assets"), for a purchase price of $895
million plus an amount for refinery inventories acquired in the transaction
based on market-related prices at the time of closing. ExxonMobil agreed to sell
these assets as a result of consent decrees issued by the Federal Trade
Commission and the State of California providing that certain assets be divested
by ExxonMobil to satisfy anticompetitive issues in connection with the recent
merger of Exxon Corporation and Mobil Corporation. The consummation of the
Benicia acquisition has been approved by the Federal Trade Commission and the
Office of the Attorney General of the State of California. The purchase
agreement was amended on May 14, 2000 to provide, among other things, that the
closing of the purchase of the Benicia refinery and the Distribution Assets
would occur on May 15, 2000. The amendment also covered an environmental issue
relating to a request for information by the EPA under the Clean Air Act arising
subsequent to the original signing, certain employee matters and more specific
inventory determination procedures. The acquisition of the Benicia refinery and
the Distribution Assets closed on May 15, 2000, and the acquisition of the
Service Station Assets is expected to close on or about June 15, 2000. The
Benicia acquisition will be accounted for under the purchase method.
The purchase agreement, as amended, contains representations and warranties
of each of Valero and ExxonMobil, which survive the closing for one year, as
well as customary covenants. In addition, Valero will assume the environmental
liabilities of ExxonMobil with certain exceptions. ExxonMobil retained liability
for (i) pending penalties assessed for violations relating to the Benicia
refinery, (ii) pending lawsuits, (iii) all costs associated with compliance with
a variance issued in connection with control of nitrogen oxides, (iv) claims in
connection with offsite transportation and disposal of wastes prior to closing
asserted within three years of closing or asserted with respect to abandoned
disposal sites, (v) the capital costs incurred within five years of closing for
specified corrective action of groundwater and soil contamination, (vi) all
covered contamination at the Service Station Assets caused by ExxonMobil or its
lessees that is reflected in baseline reports prepared prior to closing, (vii)
the repair or replacement of any underground storage tanks at the Service
Station Assets found to be leaking prior to closing and (viii) fines and
penalties imposed within five years of closing arising out of a request for
information from the EPA relating to certain provisions of the Clean Air Act
that are attributable to actions taken prior to closing or untimely or
unresponsive responses to the request. ExxonMobil has agreed to indemnify Valero
for all losses related to these retained liabilities, provided that ExxonMobil
will indemnify Valero for losses related to covered contamination at the Service
Station Assets for a period of five years from the date of closing. In addition,
ExxonMobil will indemnify Valero for breaches of its representations and
warranties to the extent that the aggregate amount of Valero's losses resulting
from such breaches exceeds $1 million and ExxonMobil receives notice of such
losses within one year after the closing date.
The Benicia refinery is located on the Carquinez Straits of the San
Francisco Bay. It is considered a highly complex refinery and has a total
throughput capacity of approximately 160,000 barrels per day or "BPD." The
Benicia refinery produces a high percentage of light products, with limited
production of other products. It can produce approximately 110,000 BPD of
gasoline, 14,000 BPD of jet fuel, 11,000 BPD of diesel and 8,000 BPD of natural
gas liquids. Approximately 95% of the gasoline produced by the Benicia refinery
meets the California Air Resources Board ("CARB") II specifications for gasoline
sold in California. The refinery has significant liquid storage capacity,
including storage for crude oil and other feedstocks. Also included with the
refinery assets are a deepwater dock located offsite on the Carquinez Straits
that is capable of berthing large crude carriers, petroleum coke storage silos
located on an adjacent dock, a 20-inch crude pipeline connecting the refinery to
a southern California crude delivery system, and an adjacent truck terminal for
regional truck rack sales. Under the consent decrees, ExxonMobil was required to
offer the buyer of the divested assets a crude oil supply contract. As a
consequence, in connection with the closing of the acquisition of the Benicia
refinery and the Distribution Assets, Valero entered into a ten-year term
contract providing for
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ExxonMobil to supply and for Valero to purchase 100,000 BPD of Alaska North
Slope ("ANS") crude oil at market-related prices, to be reduced to 65,000 BPD on
January 1, 2001. Prior to January 1, 2001, Valero will have an option to reduce
the volume of ANS crude to 65,000 BPD with 90 days' prior notice. After January
1, 2001, Valero will have an option to reduce the required volumes by an
additional 20,000 BPD once per year.
The Service Station Assets include 10 company-operated service stations and
70 lessee-dealer service stations, 75 of which are in the San Francisco Bay
area. Under the consent decrees related to the merger between Exxon Corporation
and Mobil Corporation, the Federal Trade Commission and the State of California
ordered that ExxonMobil withdraw the "Exxon" brand name from the San Francisco
area. As a result, ExxonMobil has notified the dealers in this market area that
their franchise right to market "Exxon" branded products is being terminated
effective June 15, 2000. Valero plans to introduce its own brand of retail
petroleum products in the San Francisco Bay area and has offered to the dealers
at these locations a franchise right to market products under the new Valero
brand. Due to the timing requirements of ExxonMobil's franchise termination
notice to various dealers as described above, ExxonMobil cannot close the
acquisition of the Service Station Assets until (i) all of the dealers agree to
terminate their franchise agreements or (ii) June 15, 2000, whichever comes
first. Subsequent to the anticipated June 15, 2000 closing date, Valero plans to
offer those dealers who accept Valero's franchise offering an option to purchase
the stations that they are currently leasing. As part of the purchase option,
the dealers must enter into a fuels purchase agreement with Valero for a term of
15 years. The dealers will have 90 days to exercise or reject their purchase
option.
The Distribution Assets include up to 260 independently-owned and operated
distributor facilities which are located outside of the San Francisco Bay area.
The distributor locations will retain the right to use the Exxon brand, continue
to accept the Exxon proprietary credit card and receive Exxon brand support,
while Valero will receive the exclusive rights to offer the Exxon brand
throughout the state of California (except for the San Francisco Bay area) for a
ten-year period. In connection with the Benicia acquisition, ExxonMobil assigned
to Valero all of the existing Exxon California distributor contracts under which
the distributors will purchase Exxon branded products from Valero after the
acquisition.
THE FINANCING
Valero established with a group of banks a $600 million bridge loan
facility (the "Bridge Facility") to provide interim financing in connection with
the Benicia acquisition. The Bridge Facility has a term of one year, and Valero
has an option to extend for an additional two years. The Bridge Facility has
covenants similar to those contained in Valero's $835 million bank credit and
letter of credit facility (the "Credit Facility"). Any amounts borrowed under
the Bridge Facility bear interest at LIBOR plus an applicable margin. The Credit
Facility bears interest at either LIBOR plus a margin, a base rate or a money
market rate. The interest rate and fees under the Credit Facility are subject to
adjustment based upon the credit ratings assigned to Valero's long-term debt.
The Credit Facility includes certain restrictive covenants including a
fixed-charge coverage ratio, a debt-to-capitalization ratio, and a minimum net
worth test. Valero has amended its existing bank credit facilities to provide
for, among other things, the higher debt-to-capitalization limits necessary to
complete the Benicia acquisition. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital Resources."
The acquisition of the Benicia refinery and the Distribution Assets was
initially funded through interim financing consisting of (i) borrowings of $600
million under the Bridge Facility, (ii) borrowings of $298.5 million under our
existing bank credit facilities, and (iii) an approximate $30 million interim
lease arrangement to accommodate the acquisition of the Benicia refinery's
docking facility. In connection with the acquisition of the Service Station
Assets, Valero will (i) enter into a structured lease arrangement with a
commitment of up to $135 million (the "Structured Lease Financing"),
substantially all of which will be used to acquire the Service Station Assets
and replace the interim lease arrangement for the acquisition of the Benicia
refinery's docking facility, and (ii) borrow an additional $8.5 million under
the Credit Facility which will be used to pay certain transaction costs. It is
expected that $600 million of borrowings under the Bridge Facility and $186.3
million of borrowings under the Credit Facility will be repaid with the proceeds
of this offering and two other concurrent offerings consisting of (i)
approximately $500 million aggregate principal amount of senior notes (the "Debt
Offering") and (ii) approximately $150 million of common stock (the
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"Equity Offering"). Valero also expects to continue to borrow under its existing
credit facilities to fund the working capital needs of the Benicia assets. This
offering, the Debt Offering and the Equity Offering are collectively referred to
herein as the "Offerings".
At the closing of the Benicia acquisition, the financing is expected to be
provided as follows:
<TABLE>
<CAPTION>
AMOUNT
-------------
(IN MILLIONS)
<S> <C>
SOURCES OF FUNDS:
Borrowings under Bridge Facility................... $ 600.0
Borrowings under Credit Facility................... 307.0
Structured Lease Financing......................... 130.0
--------
Total sources of funds..................... $1,037.0
========
USES OF FUNDS:
Cash consideration to ExxonMobil................... $1,018.0
Estimated transaction costs........................ 19.0
--------
Total uses of funds........................ $1,037.0
========
</TABLE>
Valero intends to repay indebtedness incurred to finance the Benicia
acquisition with the proceeds of the Offerings as follows:
<TABLE>
<CAPTION>
AMOUNT
-------------
(IN MILLIONS)
<S> <C>
SOURCES OF FUNDS:
Proceeds from this offering........................ $150.0
Proceeds from the Debt Offering.................... 500.0
Proceeds from the Equity Offering.................. 150.0
------
Total sources of funds..................... $800.0
======
USES OF FUNDS:
Repayment of borrowings under Bridge Facility...... $600.0
Repayment of borrowings under Credit Facility...... 186.3
Estimated expenses of Offerings.................... 13.7
------
Total uses of funds........................ $800.0
======
</TABLE>
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USE OF PROCEEDS
The net proceeds from the sale of 6,000,000 PEPS Units, after deducting
underwriting discounts and commissions and estimated fees and expenses, are
expected to be approximately $145.1 million ($166.9 million if the underwriters'
over-allotment option is exercised in full). Concurrently with this offering of
PEPS Units, we are also offering to sell approximately $150 million of common
stock and $500 million aggregate principal amount of our senior notes in
separate offerings registered with the SEC. The Equity Offering and this
offering are not contingent on any other offering. The closing of the Debt
Offering is contingent on the prior closing of both this offering and the Equity
Offering. As a result, you should not assume that we will complete either the
Equity Offering or the Debt Offering.
Upon completion of the Benicia acquisition, we will have borrowed
approximately $600 million under our Bridge Facility, which currently bears
interest at a rate of LIBOR plus 1.50% and matures on May 15, 2001 unless Valero
exercises its option to extend the maturity, and approximately $307 million
under our Credit Facility, which bears interest at a rate of LIBOR plus 1.125%
and matures on November 27, 2002. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital Resources"
for more information on our Bridge Facility and Credit Facility.
The Trust will use all of the proceeds received from the sale of the PEPS
Units to purchase the senior deferrable notes from us. We anticipate using the
net proceeds of the sale of the senior deferrable notes, together with the
additional funds acquired from the concurrent offerings, to repay the Bridge
Facility and $186.3 million under our Credit Facility.
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CAPITALIZATION
The following table sets forth our capitalization (which includes our
consolidated subsidiaries) as of March 31, 2000 (i) on an historical basis, (ii)
as adjusted to give effect to the Benicia acquisition, including the incurrence
of borrowings of $600 million under the Bridge Facility and $307 million under
the Credit Facility in connection therewith, and (iii) as further adjusted to
reflect this offering, the sale by us of 5 million shares of common stock at an
assumed public offering price of $30 per share in the Equity Offering and the
Debt Offering and the application of the net proceeds from these Offerings as
described under "Use of Proceeds" and "The Benicia Acquisition and Related
Financings." On May 31, 2000, the reported last sale price of our common stock
on the NYSE was $29 1/4 per share. The adjustments made for the implementation
of Valero's financing plan assume the ability to complete the Offerings under
the terms and pricing as described above, which Valero believes to be reasonable
in light of its knowledge of current market conditions and its expected credit
profile at the anticipated dates of the Offerings. There can be no assurance
that Valero will be able to complete any or all of the Offerings, or that the
proceeds from the Offerings will be in an amount as currently contemplated. The
closing of the Debt Offering is contingent upon the prior closing of both this
offering and the Equity Offering. This offering and the Equity Offering are not
contingent on the other Offerings. This table should be read in conjunction with
the consolidated financial statements of Valero and the "Unaudited Pro Forma
Combined Financial Statements" and the notes thereto included elsewhere herein.
<TABLE>
<CAPTION>
MARCH 31, 2000
--------------------------------------------
PRO FORMA
PRO FORMA COMBINED
COMBINED FOR AS ADJUSTED
BENICIA FOR THE
HISTORICAL ACQUISITION(1) OFFERINGS
---------- -------------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Short-term debt............................................. $ 126,500 $ 126,500 $ 126,500
---------- ---------- ----------
Long-term debt:
Industrial revenue bonds.................................. 192,000 192,000 192,000
7.375% notes, due March 15, 2006.......................... 300,000 300,000 300,000
6.75% notes, due December 15, 2032........................ 150,000 150,000 150,000
Notes issued in the Debt Offering......................... -- -- 500,000
Credit Facility........................................... -- 307,014 120,704
Bridge Facility........................................... -- 600,000 --
Net unamortized premium and discount...................... 3,155 3,155 3,155
---------- ---------- ----------
Total long-term debt............................... 645,155 1,552,169 1,265,859
---------- ---------- ----------
Valero-obligated mandatorily redeemable preferred capital
trust securities of subsidiary trust holding solely Valero
senior notes(2)........................................... -- -- 150,000
---------- ---------- ----------
Stockholders' equity:
Common stock, par value $0.01, 150,000,000 shares
authorized; 56,331,166 shares issued; 61,331,166 shares
assumed issued as adjusted for the Equity Offering...... 563 563 613
Additional paid-in capital................................ 1,088,829 1,088,829 1,227,623(3)
Retained earnings......................................... 27,408 27,408 27,408
Treasury stock--398,632 shares, at cost................... (8,096) (8,096) (8,096)
---------- ---------- ----------
Total stockholders' equity......................... 1,108,704 1,108,704 1,247,548
---------- ---------- ----------
Total capitalization............................... $1,880,359 $2,787,373 $2,789,907
========== ========== ==========
</TABLE>
------------
(1) Funding for the Benicia acquisition also includes approximately $130 million
of assumed financing under a structured lease arrangement.
(2) The sole assets of the trust are senior notes of Valero. Upon prepayment of
such senior notes, the related capital trust securities are mandatorily
redeemable.
(3) Adjustments related to the Offerings include the following: (i) an increase
of $143.7 million representing the estimated proceeds of the Equity Offering
net of issuance costs and (ii) a reduction representing estimated
transaction fees and expenses and underwriters' discount on this offering of
$4.9 million.
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PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
Our common stock has been trading on the New York Stock Exchange since
August 1, 1997 under the symbol VLO. The following table sets forth the
quarterly high and low sales prices for our common stock as reported by the NYSE
for the periods indicated and the amount of per-share dividends for the periods
indicated.
<TABLE>
<CAPTION>
STOCK PRICES
------------ DIVIDENDS PER
HIGH LOW COMMON SHARE
---- ---- -------------
<S> <C> <C> <C>
FISCAL YEAR 1998
First Quarter.................................. $36 1/2 $27 9/16 $.08
Second Quarter................................. 36 31 5/16 .08
Third Quarter.................................. 33 13/16 17 5/8 .08
Fourth Quarter................................. 26 1/16 17 3/4 .08
FISCAL YEAR 1999
First Quarter.................................. $24 7/8 $16 3/4 $.08
Second Quarter................................. 25 19 .08
Third Quarter.................................. 23 13/16 19 1/4 .08
Fourth Quarter................................. 23 1/8 17 3/8 .08
FISCAL YEAR 2000
First Quarter.................................. $31 15/16 $18 15/16 $.08
Second Quarter (through May 31, 2000).......... 32 5/8 27 7/16 .08
</TABLE>
Dividends are considered quarterly by our board of directors and may be
paid only when approved by our board. Our credit facilities restrict our ability
to pay dividends to our stockholders under provisions that we do not currently
believe will limit our ability to continue to pay dividends at the current rate.
On May 4, 2000, our board of directors declared a regular quarterly cash
dividend payable June 14, 2000 in the amount of $.08 per share to stockholders
of record at the close of business on May 30, 2000.
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UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
The following unaudited pro forma combined financial statements give effect
to the Benicia acquisition and to the related interim financings and are further
adjusted to give effect to the Offerings. The unaudited pro forma combined
balance sheet as of March 31, 2000 is presented as if the Benicia acquisition
and the related interim financings had occurred on that date and is further
adjusted to give effect to the Offerings. The unaudited pro forma combined
statements of income for the three months ended March 31, 2000 and the year
ended December 31, 1999 assume that the Benicia acquisition and the related
interim financings occurred on January 1, 1999 and are further adjusted to give
effect to the Offerings. The Benicia acquisition is being accounted for using
the purchase method of accounting, with the purchase price allocated to the
assets acquired and liabilities assumed based on estimated fair values, pending
the completion of an independent appraisal. The unaudited pro forma combined
balance sheet does not give effect to the issuance of any shares of common stock
issuable upon settlement of the purchase contracts issued as part of the PEPS
Units.
The unaudited pro forma combined financial statements should be read in
conjunction with (i) the historical consolidated financial statements of Valero
and the Benicia refinery and related branded supplier relationships and service
station facilities which are included in this prospectus supplement beginning on
page F-2, and (ii) "Management's Discussion and Analysis of Financial Condition
and Results of Operations" of Valero included in this prospectus supplement
beginning on page S-48. The unaudited pro forma combined financial statements
are not necessarily indicative of the financial position that would have been
obtained or the financial results that would have occurred if the Benicia
acquisition and the related interim financings had been consummated on the dates
indicated, nor are they necessarily indicative of the financial position or
financial results which may be attained in the future. The pro forma
adjustments, as described in the Notes to Pro Forma Combined Financial
Statements, are based upon available information and upon certain assumptions
that Valero's management believes are reasonable.
S-41
<PAGE> 42
VALERO ENERGY CORPORATION
PRO FORMA COMBINED BALANCE SHEETS
MARCH 31, 2000
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
COMBINED COMBINED
FOR THE AS ADJUSTED
VALERO BENICIA PRO FORMA BENICIA OFFERINGS FOR THE
HISTORICAL HISTORICAL ADJUSTMENTS ACQUISITION ADJUSTMENTS OFFERINGS
---------- ---------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Current assets:
Cash and temporary cash investments...... $ 8,509 $ 99 $ (99)(a) $ 8,509 $ -- $ 8,509
Receivables, net......................... 403,557 44,998 (44,998)(a) 403,557 -- 403,557
Inventories.............................. 436,197 30,345 (30,345)(a) 591,083 -- 591,083
154,886(b)
Current deferred income tax assets....... 89,477 -- -- 89,477 -- 89,477
Prepaid expenses and other............... 22,591 3,224 (3,224)(a) 22,591 -- 22,591
---------- -------- --------- ---------- --------- ----------
960,331 78,666 76,220 1,115,217 -- 1,115,217
---------- -------- --------- ---------- --------- ----------
Property, plant and equipment.............. 2,711,907 901,641 (901,641)(a) 3,427,527 -- 3,427,527
715,620(b)
Less: Accumulated depreciation........... 726,723 426,191 (426,191)(a) 726,723 -- 726,723
---------- -------- --------- ---------- --------- ----------
1,985,184 475,450 240,170 2,700,804 -- 2,700,804
---------- -------- --------- ---------- --------- ----------
Deferred charges and other assets.......... 175,659 18,109 (18,109)(a) 218,467 2,534(A) 221,001
42,808(b)
---------- -------- --------- ---------- --------- ----------
$3,121,174 $572,225 $ 341,089 $4,034,488 $ 2,534 $4,037,022
========== ======== ========= ========== ========= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Short-term debt.......................... $ 126,500 $ -- $ -- $ 126,500 $ -- $ 126,500
Accounts payable......................... 732,561 37,768 (37,768)(a) 732,561 -- 732,561
Accrued expenses......................... 96,213 24,512 (24,512)(a) 97,213 -- 97,213
1,000(b)
---------- -------- --------- ---------- --------- ----------
955,274 62,280 (61,280) 956,274 -- 956,274
---------- -------- --------- ---------- --------- ----------
Long-term debt............................. 645,155 -- 907,014(b) 1,552,169 500,000(A) 1,265,859
(786,310)(A)
---------- -------- --------- ---------- --------- ----------
Deferred income taxes...................... 296,628 88,560 (88,560)(a) 296,628 -- 296,628
---------- -------- --------- ---------- --------- ----------
Deferred credits and other liabilities..... 115,413 11,503 (11,503)(a) 120,713 -- 120,713
5,300(b)
---------- -------- --------- ---------- --------- ----------
Valero-obligated mandatorily redeemable
preferred capital trust securities of
subsidiary trust holding solely Valero
senior notes............................. -- -- -- -- 150,000(A) 150,000
---------- -------- --------- ---------- --------- ----------
Common stockholders' equity:
Common stock............................. 563 -- -- 563 50(A) 613
Additional paid-in capital............... 1,088,829 -- -- 1,088,829 149,950(A) 1,227,623
(11,156)(A)
Retained earnings........................ 27,408 -- -- 27,408 -- 27,408
Treasury stock........................... (8,096) -- -- (8,096) -- (8,096)
ExxonMobil net investment................ -- 409,882 (409,882)(a) -- -- --
---------- -------- --------- ---------- --------- ----------
1,108,704 409,882 (409,882) 1,108,704 138,844 1,247,548
---------- -------- --------- ---------- --------- ----------
$3,121,174 $572,225 $ 341,089 $4,034,488 $ 2,534 $4,037,022
========== ======== ========= ========== ========= ==========
</TABLE>
See Notes to Pro Forma Combined Financial Statements.
S-42
<PAGE> 43
VALERO ENERGY CORPORATION
PRO FORMA COMBINED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 2000
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
COMBINED COMBINED
FOR THE AS ADJUSTED
VALERO BENICIA PRO FORMA BENICIA OFFERINGS FOR THE
HISTORICAL HISTORICAL ADJUSTMENTS ACQUISITION ADJUSTMENTS OFFERINGS
---------- ---------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Operating revenues.................. $2,928,617 $623,337 $(128,538)(c) $3,423,416 $ -- $3,423,416
---------- -------- --------- ---------- --------- ----------
Costs and expenses:
Cost of sales and operating
expenses........................ 2,827,341 567,535 (128,538)(c) 3,266,475 -- 3,266,475
612(d)
(670)(g)
2,096(g)
(2,000)(h)
369(h)
(2,700)(i)
2,430(i)
Selling and administrative
expenses........................ 19,669 7,501 2,020(d) 27,616 -- 27,616
875(e)
(3,000)(h)
561(h)
(100)(i)
90(i)
Depreciation expense.............. 24,555 6,723 (6,723)(f) 31,023 -- 31,023
6,468(f)
---------- -------- --------- ---------- --------- ----------
Total...................... 2,871,565 581,759 (128,210) 3,325,114 -- 3,325,114
---------- -------- --------- ---------- --------- ----------
Operating income.................... 57,052 41,578 (328) 98,302 -- 98,302
Other income (expense), net......... 2,647 (45) -- 2,602 -- 2,602
Interest and debt expense:
Incurred.......................... (14,147) -- (18,775)(j) (32,922) 15,749(C) (28,249)
(11,076)(C)
Capitalized....................... 1,387 -- -- 1,387 -- 1,387
Distributions on preferred
securities of subsidiary trust.... -- -- -- -- (2,813)(B) (2,813)
---------- -------- --------- ---------- --------- ----------
Income (loss) before income taxes... 46,939 41,533 (19,103) 69,369 1,860 71,229
Income tax expense (benefit)........ 16,200 16,923 (8,323)(k) 24,800 500(D) 25,300
---------- -------- --------- ---------- --------- ----------
Net income (loss)................... $ 30,739 $ 24,610 $ (10,780) $ 44,569 $ 1,360 $ 45,929
========== ======== ========= ========== ========= ==========
Earnings per share of common
stock............................. $ .55 $ .80 $ .75
Weighted average common shares
outstanding (in thousands)...... 55,874 55,874 60,874
Earnings per share of common
stock -- assuming dilution........ $ .54 $ .78 $ .74(E)
Weighted average common shares
outstanding (in thousands)...... 57,234 57,234 62,234(E)
</TABLE>
See Notes to Pro Forma Combined Financial Statements.
S-43
<PAGE> 44
VALERO ENERGY CORPORATION
PRO FORMA COMBINED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1999
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
COMBINED COMBINED
FOR THE AS ADJUSTED
VALERO BENICIA PRO FORMA BENICIA OFFERINGS FOR THE
HISTORICAL HISTORICAL ADJUSTMENTS ACQUISITION ADJUSTMENTS OFFERINGS
---------- ---------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Operating revenues................. $7,961,168 $1,826,081 $(474,506)(c) $9,312,743 $ -- $9,312,743
---------- ---------- --------- ---------- -------- ----------
Costs and expenses:
Cost of sales and operating
expenses....................... 7,731,151 1,661,750 (474,506)(c) 8,873,531 -- 8,873,531
2,448(d)
(45,100)(g)
6,481(g)
(12,000)(h)
1,474(h)
(8,476)(i)
10,309(i)
Selling and administrative
expenses....................... 68,463 25,478 8,080(d) 98,875 -- 98,875
3,500(e)
(9,000)(h)
2,244(h)
(510)(i)
620(i)
Depreciation expense............. 92,413 26,474 25,870(f) 118,283 -- 118,283
(26,474)(f)
---------- ---------- --------- ---------- -------- ----------
Total..................... 7,892,027 1,713,702 (515,040) 9,090,689 -- 9,090,689
---------- ---------- --------- ---------- -------- ----------
Operating income................... 69,141 112,379 40,534 222,054 -- 222,054
Other income (expense), net........ 6,475 (825) -- 5,650 -- 5,650
Interest and debt expense:
Incurred......................... (61,182) -- (75,098)(j) (136,280) 62,993(C) (117,591)
(44,304)(C)
Capitalized...................... 5,753 -- -- 5,753 -- 5,753
Distributions on preferred
securities of subsidiary trust... -- -- -- -- (11,250)(B) (11,250)
---------- ---------- --------- ---------- -------- ----------
Income (loss) before income
taxes............................ 20,187 111,554 (34,564) 97,177 7,439 104,616
Income tax expense (benefit)....... 5,900 46,023 (18,123)(k) 33,800 2,600(D) 36,400
---------- ---------- --------- ---------- -------- ----------
Net income (loss).................. $ 14,287 $ 65,531 $ (16,441) $ 63,377 $ 4,839 $ 68,216
========== ========== ========= ========== ======== ==========
Earnings per share of common
stock............................ $ .25 $ 1.13 $ 1.12
Weighted average common shares
outstanding (in thousands)..... 56,086 56,086 61,086
Earnings per share of common
stock -- assuming dilution....... $ .25 $ 1.12 $ 1.10(E)
Weighted average common shares
outstanding (in thousands)..... 56,758 56,758 61,758(E)
</TABLE>
See Notes to Pro Forma Combined Financial Statements.
S-44
<PAGE> 45
VALERO ENERGY CORPORATION
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
PRO FORMA ADJUSTMENTS RELATED TO THE BENICIA ACQUISITION
(a) To reverse the historical cost of the assets acquired and liabilities
assumed.
(b) To reflect the allocation of the purchase price, including transaction costs
incurred in the acquisition, to the assets acquired and liabilities assumed
based on their estimated fair values as follows (in thousands):
<TABLE>
<S> <C>
Inventories.............................................. $154,886
Property, plant and equipment............................ 715,620
Deferred charges and other assets........................ 42,808
Accrued expenses......................................... (1,000)
Deferred credits and other liabilities................... (5,300)
--------
$907,014
========
</TABLE>
The above also reflects borrowings of $600 million under the Bridge Facility
and $307 million under the Credit Facility, including related debt issuance
costs of $7.8 million, required to fund the Benicia acquisition.
(c) To exclude excise taxes collected on behalf of governmental agencies
associated with the operations acquired in the Benicia acquisition from
Operating Revenues and Cost of Sales to conform to Valero's accounting
policies.
(d) To reflect rent expense related to a structured lease financing arrangement
used to finance the acquisition of the Benicia refinery's dock facility,
which is included in Operating Expenses, and the Service Station Assets,
which is included in Selling and Administrative Expenses.
(e) To reflect amortization expense on $35 million of value assigned to Valero's
receipt of the exclusive right to offer the Exxon brand throughout
California (except for the San Francisco Bay area) for a ten-year period in
connection with Valero's acquisition of the Distribution Assets.
(f) To reverse historical depreciation expense and record depreciation expense
over an estimated life of 25 years based on the portion of the acquisition
cost allocated to property, plant and equipment.
(g) To conform the accounting for turnaround costs at the Benicia refinery from
the "expense as incurred" method followed by ExxonMobil to the "defer and
amortize" method followed by Valero.
(h) To reverse historical charges for various corporate and divisional
administrative expenses allocated to the acquired assets by ExxonMobil from
both Operating Expenses and Selling and Administrative Expenses and record
incremental corporate administrative expenses that would have been incurred
by Valero.
(i) To reverse historical expense related to various employee benefit programs
from both Operating Expenses and Selling and Administrative Expenses and
record expense that would have been incurred by Valero under its employee
benefit programs.
(j) To reflect interest expense on borrowings under the Bridge Facility of $12.2
million and $48.6 million for the three months ended March 31, 2000 and the
year ended December 31, 1999, respectively, and interest expense on
borrowings under the Credit Facility of $5.9 million and $23.7 million for
the three months ended March 31, 2000 and the year ended December 31, 1999,
respectively, required to fund the Benicia acquisition, as well as the
amortization of deferred debt issuance costs in the amount of $.7 million
and $2.8 million for the three months ended March 31, 2000 and the year
ended December 31, 1999, respectively.
S-45
<PAGE> 46
VALERO ENERGY CORPORATION
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(k) To reflect the tax effect of the pro forma pre-tax income adjustments
related to the Benicia acquisition and adjust the effective tax rate to the
rate that would have been incurred by Valero with respect to the assets
acquired.
ADJUSTMENTS RELATED TO THE OFFERINGS
(A) To reflect the issuance of $500 million aggregate principal amount of senior
notes, 5 million shares of common stock at an assumed offering price of $30
per share and $150 million aggregate stated amount of PEPS Units, including
the incurrence of $2.5 million of issuance costs related to the Debt
Offering, $4.9 million of issuance costs related to this offering and $6.3
million of issuance costs related to the Equity Offering, the net proceeds
from which are used to repay all amounts outstanding under the Bridge
Facility and reduce borrowings under the Credit Facility by $186.3 million.
On May 31, 2000, the reported last sale price of the common stock on the
NYSE was $29 1/4.
(B) To reflect distributions on the $150 million aggregate liquidation amount of
trust preferred securities issued as part of the PEPS units.
(C) To reflect the effect on interest expense of repaying all amounts
outstanding under the Bridge Facility ($12.2 million and $48.6 million for
the three months ended March 31, 2000 and the year ended December 31, 1999,
respectively) and reducing borrowings by $186.3 million under the Credit
Facility ($3.6 million and $14.4 million for the three months ended March
31, 2000 and the year ended December 31, 1999, respectively) with proceeds
from the Offerings ($11.1 million and $44.3 million for the three months
ended March 31, 2000 and the year ended December 31, 1999, respectively,
related to the Debt Offering based on an assumed rate of 8.8%). A 1/8%
change in the interest rate associated with borrowings incurred under the
Debt Offering would have a $.2 million and $.6 million effect on interest
expense for the three months ended March 31, 2000 and the year ended
December 31, 1999, respectively, and a 1/8% change in the interest rate
associated with remaining borrowings under the Credit Facility would have a
$.2 million effect on annual interest expense.
(D) To reflect the tax effect of the pre-tax income adjustments related to the
Offerings based on Valero's effective tax rate.
(E) Under the treasury stock method, the calculation of earnings per share does
not include any dilutive effect from any shares of common stock that may be
issued pursuant to the stock purchase contracts issued as part of the PEPS
Units.
S-46
<PAGE> 47
SELECTED FINANCIAL DATA
The following table sets forth selected financial data for each of the
periods indicated. This information should be read in conjunction with the
consolidated financial statements and related notes for the years ended December
31, 1999, 1998 and 1997 and the three months ended March 31, 2000 and 1999
included herein, as well as the unaudited pro forma financial information and
related notes included herein. The selected consolidated financial data for the
five years ended December 31, 1999 are derived from our consolidated financial
statements, which have been audited by Arthur Andersen LLP, independent public
accountants. The financial data for the three months ended March 31, 2000 and
1999 are derived from unaudited consolidated financial statements. The unaudited
consolidated financial statements include all adjustments, consisting of normal
recurring accruals, that we consider necessary for a fair presentation of the
financial position and results of operations for these periods. Operating
results for the three months ended March 31, 2000 are not necessarily indicative
of the results that investors in our common stock should expect for the entire
fiscal year ending December 31, 2000. Some previously reported amounts have been
reclassified to conform with the current period presentation.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
----------------------- --------------------------------------------------------------
2000 1999 1999 1998(1)(2) 1997(3) 1996 1995
---------- ---------- ---------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Operating revenues.................... $2,928,617 $1,337,103 $7,961,168 $5,539,346 $5,756,220 $2,757,853 $1,772,638
Operating income (loss)............... 57,052 8,520 69,141 (51,198) 211,034 89,748 123,755
Income (loss) from continuing
operations.......................... 30,739 (2,716) 14,287 (47,291) 111,768 22,472 58,242
Income (loss) from discontinued
operations, net of income
taxes(4)............................ -- -- -- -- (15,672) 50,229 1,596
Net income (loss)..................... 30,739 (2,716) 14,287 (47,291) 96,096 72,701 59,838
Less: preferred stock dividend
requirements and redemption
premium....................... -- -- -- -- 4,592 11,327 11,818
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income (loss) applicable to common
stock............................... $ 30,739 $ (2,716) $ 14,287 $ (47,291) $ 91,504 $ 61,374 $ 48,020
========== ========== ========== ========== ========== ========== ==========
Earnings (loss) per share of common
stock:
Continuing operations............... $ .55 $ (.05) $ .25 $ (.84) $ 2.16 $ .51 $ 1.33
Discontinued operations............. -- -- -- -- (.39) .89 (.23)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total......................... $ .55 $ (.05) $ .25 $ (.84) $ 1.77 $ 1.40 $ 1.10
========== ========== ========== ========== ========== ========== ==========
Earnings (loss) per share of common
stock--assuming dilution:
Continuing operations............... $ .54 $ (.05) $ .25 $ (.84) $ 2.03 $ .44 $ 1.16
Discontinued operations............. -- -- -- -- (.29) .98 .01
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total......................... $ .54 $ (.05) $ .25 $ (.84) $ 1.74 $ 1.42 $ 1.17
========== ========== ========== ========== ========== ========== ==========
Dividends per share of common stock... $ .08 $ .08 $ .32 $ .32 $ .42 $ .52 $ .52
CASH FLOW DATA:
Cash flow from continuing operating
activities.......................... $ 11,177 $ 148,419 $ 435,111 $ 165,825 $ 196,645 $ 120,454 $ 165,931
Cash flow used in continuing investing
activities.......................... (41,966) (69,074) (172,168) (566,268) (434,046) (93,123) (128,180)
Cash flow provided by (used in)
financing activities................ (20,789) (77,201) (214,055) 401,707 275,548 (84,347) (8,341)
OTHER FINANCIAL DATA:
EBITDA(5)............................. $ 95,950 $ 45,111 $ 219,657 $ 244,523 $ 313,025 $ 164,958 $ 214,318
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
----------------------- --------------------------------------------------------------
2000 1999 1999 1998(1)(2) 1997(3) 1996 1995
---------- ---------- ---------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (excluding short-term
debt and current maturities on
long-term debt)..................... $ 131,557 $ 242,463 $ 109,876 $ 301,966 $ 313,741 $ 135,030 $ 135,257
Property, plant and equipment, net.... 1,985,184 1,974,763 1,984,514 1,959,343 1,592,533 1,232,210 1,229,627
Total assets.......................... 3,121,174 2,814,398 2,979,272 2,725,664 2,493,043 1,985,631 1,904,655
Total debt............................ 771,655 909,421 785,472 982,335 552,183 437,072 490,027
Total equity.......................... 1,108,704 1,080,579 1,084,769 1,085,287 1,158,841 1,075,825 1,024,213
</TABLE>
------------
(1) Includes the operations of the Paulsboro refinery beginning September 17,
1998.
(2) The 1998 operating loss includes a $170.9 million write-down of inventories
to market value, which resulted in a $111.1 million reduction in net income,
or $1.98 per share.
(3) Includes the operations of the Texas City, Houston and Krotz Springs
refineries beginning May 1, 1997.
(4) Reflects the results of our former parent's natural gas related services
business for periods prior to the July 31, 1997 spin-off of our common
stock.
(5) Earnings before interest, taxes, depreciation and amortization ("EBITDA") is
presented as a measure of our ability to service our debt and to make
capital expenditures. It is not a measure of operating results and is not
presented in our consolidated financial statements.
S-47
<PAGE> 48
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
Valero is one of the largest and most geographically diverse independent
petroleum refining and marketing companies in the United States. As of March 31,
2000, Valero owned five refineries in Texas, Louisiana and New Jersey, providing
it with core operations on both the Gulf Coast and the East Coast. These
refineries are located in Corpus Christi, Houston, and Texas City in Texas,
Krotz Springs, Louisiana and Paulsboro, New Jersey. In addition, on March 2,
2000, Valero entered into an agreement to purchase ExxonMobil's Benicia
refinery, the Service Station Assets and the Distribution Assets, thereby
establishing a significant presence on the West Coast and extending its
geographic reach from coast to coast. The acquisition of the Benicia refinery
and the Distribution Assets closed on May 15, 2000 and the acquisition of the
Service Station Assets is expected to close on or about June 15, 2000. The
acquisition of the Benicia refinery increased Valero's throughput capacity from
approximately 790,000 BPD to approximately 950,000 BPD.
Valero produces premium, environmentally clean products such as
reformulated gasoline, low-sulfur diesel and oxygenates and is able to produce
CARB gasoline. Valero also produces a substantial slate of middle distillates,
jet fuel and petrochemicals. Valero has distinguished itself among independent
refiners by cost effectively upgrading its refineries to not only increase
output but also increase overall refining complexity and flexibility, enhancing
Valero's ability to process lower cost feedstocks into higher value-added
premium products. Valero processes a wide slate of feedstocks including medium
sour crude oils, heavy sweet crudes and residual fuel oils, or resid, which can
typically be purchased at a discount to West Texas Intermediate, a benchmark
crude oil. Between 45% and 50% of Valero's total gasoline production is
typically reformulated gasoline ("RFG"), which sells at a premium over
conventional grades of gasoline. The Benicia refinery produces approximately
110,000 BPD of gasoline, approximately 95% of which is CARB gasoline. Valero
also produces over 75% of its distillate slate as low-sulfur diesel and jet
fuel, which sell at a premium over high-sulfur heating oil. In addition to its
feedstock and product advantages, Valero has synergies among its Gulf Coast
refineries which allow Valero to transfer intermediate feedstocks such as
deasphalted oil, or DAO, and atmospheric tower bottoms, or ATBs, among the Texas
City, Houston and Corpus Christi refineries. With the Benicia acquisition,
Valero's products are marketed in 35 states as well as to selected export
markets.
FACTORS AFFECTING OPERATING RESULTS
Valero's earnings and cash flow from operations are primarily affected by
the relationship between refined product prices and the prices for crude oil and
other feedstocks. The cost to acquire feedstocks and the price for which refined
products are ultimately sold depends on numerous factors beyond Valero's
control, including the global, national and regional supply and demand for crude
oil, gasoline, diesel, heating oil and other feedstocks and refined products,
which in turn are dependent upon, among other things, weather, the availability
of imports, the economies and production levels of foreign suppliers, the
marketing of competitive fuels, political affairs and the extent of governmental
regulation.
Feedstock and refined product prices are also affected by other factors,
such as product pipeline capacity, local market conditions and the operating
levels of competing refineries. Crude oil costs and the price of refined
products have historically been subject to wide fluctuation. Expansion of
existing facilities and installation of additional refinery crude distillation
and upgrading facilities, price volatility, international political and economic
developments and other factors beyond Valero's control are likely to continue to
play an important role in refining industry economics. These factors can impact,
among other things, the level of inventories in the market resulting in price
volatility and a reduction in product margins. Moreover, the industry typically
experiences seasonal fluctuations in demand for refined products, such as for
gasoline during the summer driving season and for home heating oil during the
winter in the Northeast. For example, three consecutive unseasonably warm
winters in the Northeast resulted in reduced demand, unusually high inventories
and considerably lower prices for heating oil during 1999.
S-48
<PAGE> 49
A large portion of Valero's feedstock supplies are secured under term
contracts. There is no assurance, however, of renewal of these contracts upon
their expiration or that economically equivalent substitute supply contracts can
be secured. Feedstock supplies from international producers are loaded aboard
chartered vessels and are subject to the usual maritime hazards. If foreign
sources of crude oil or access to the marine system for delivering crude oil
were curtailed, Valero's operations could be adversely affected. In addition,
the loss of, or an adverse change in the terms of, certain of its feedstock
supply agreements or the loss of sources or means of delivery of its feedstock
supplies, could adversely affect its operating results. The volatility of prices
and quantities of feedstocks that may be purchased on the spot market or
pursuant to term contracts could also have a material adverse effect on
operating results.
Because Valero manufactures a significant portion of its gasoline as RFG
and can produce approximately 28,000 BPD of oxygenates, certain federal and
state clean-fuel programs significantly affect its operations and the markets in
which Valero sells refined products. In the future, Valero cannot control or
with certainty predict the effect these clean-fuel programs may have on the cost
to manufacture, demand for or supply of refined products. Presently, the EPA's
oxygenated fuel program under the Clean Air Act requires that areas designated
"nonattainment" for carbon monoxide use gasoline that contains a prescribed
amount of clean burning oxygenates during certain winter months. Additionally,
the EPA's RFG program under the Clean Air Act requires year-round usage of RFG
in areas designated "extreme" or "severe" nonattainment for ozone. In addition
to these nonattainment areas, approximately 44 of the 87 areas that were
designated as "serious," "moderate" or "marginal" nonattainment for ozone also
"opted in" to the RFG program to decrease their emissions of hydrocarbons and
toxic pollutants. Phase II of the federal RFG program became effective January
2000, further restricting the acceptable levels of nitrous oxides, volatile
organic compounds and toxics in gasoline. In order to meet the new restrictions,
refiners, including Valero, will necessarily need to reduce the sulfur, benzene
and vapor pressure of gasoline, which could effectively reduce the production
capacity of U.S. refiners.
Because Valero's refineries are generally more complex than many
conventional refineries and are designed to process heavy and sour crude oils,
including resid, its operating costs per barrel are generally higher than those
of most conventional refiners. But because Valero's primary feedstocks usually
sell at discounts to benchmark crude oil, Valero has generally been able to
recover its higher operating costs by generating higher margins than many
conventional refiners that use lighter and sweeter crudes as their principal
feedstocks. Moreover, through recent acquisitions, improvements in technology
and modifications to its operating units, Valero has improved its flexibility to
process different types of feedstocks, including heavy crude oils. Valero
expects its primary feedstocks will continue to sell at a discount to benchmark
crude oil, but is unable to predict future relationships between the supply of
and demand for its feedstocks.
After the acquisition of the retail assets from ExxonMobil, Valero's
earnings and cash flow from operations will also be affected by the costs
necessary to achieve brand recognition and loyalty in the retail gasoline
business and the costs necessary to accept credit cards from consumers. See
"Risk Factors -- We do not have an operating history in the retail business."
OUTLOOK
During the last half of 1998 and throughout most of 1999, Valero operated
in an environment characterized by very weak refining industry fundamentals.
These weak industry fundamentals caused a significant increase in refined
product inventories and put downward pressure on refined product prices. OPEC's
decision in March 1999 to curtail crude oil production resulted in a reduced
supply of the heavier crude oils which are Valero's primary feedstocks, thus
resulting in higher feedstock costs and lower discounts. These conditions
combined to create an exceptionally difficult period for refiners, including
Valero.
Beginning in late 1999, however, the weak refining industry fundamentals
that had prevailed during the latter half of 1998 and most of 1999 began to show
signs of improvement. In March 2000, OPEC met and agreed to increase crude oil
production. In addition, during the last several months of 1999 and into 2000,
S-49
<PAGE> 50
refined product inventories fell dramatically. According to reports of the
Department of Energy and other industry publications, the decline in finished
product inventory levels was attributable to the following factors:
-- Lower crude oil supplies resulting primarily from OPEC's decision in
March 1999 to curtail production.
-- Reduced refinery utilization rates in the U.S., to rates below 90%
compared to rates that were above 95% in early 1999.
-- Colder weather in the Northeastern U.S. in early 2000.
-- Strong economic growth in the U.S. and abroad.
Valero anticipates that refining industry margins for 2000 will benefit
from improved industry fundamentals. This expectation is based on several
assumptions, including the following:
-- According to the International Energy Agency (April 2000 report),
worldwide crude oil demand for 2000 is projected to grow about 1.6
million barrels per day, up from 1.2 million barrels per day growth
in 1999. Valero expects that increased production resulting from
OPEC's decision to increase crude oil production should more than
offset this increased demand resulting in improved feedstock
discounts.
-- The Department of Energy projects a growth in gasoline demand for
2000 of over 1% as well as increased demand for low-sulfur diesel and
jet fuel.
-- The International Energy Agency and the Department of Energy project
a stronger demand for light products in Europe and Asia, which in
turn is expected to result in reduced available volumes for imports
into the U.S.
-- More stringent fuel specifications in the U.S. and Europe became
effective at the beginning of 2000 and Valero expects that this
should result in a reduction in refinery light product yields.
-- The Oil and Gas Journal (December 20, 1999 survey) projected a
slowdown in increases to industry refining capacity.
-- Petrochemical margins have improved significantly in 2000 as a result
of the improving worldwide economy and increased demand for
petrochemical feedstocks, which are used in both the petrochemical
industry and as gasoline blendstocks.
Thus far in the second quarter of 2000, refining industry margins have
improved from the already strong conditions that existed during the first
quarter of 2000. Gasoline margins on average have increased from first quarter
levels, and are significantly in excess of second quarter 1999 margins, due to
low inventory levels and continued strong demand. Heating oil margins on average
have also dramatically improved from the negative margins experienced in the
second quarter of 1999 due to low inventories and cooler weather in the
Northeast. In addition, OPEC's agreement in March 2000 to increase crude oil
production has resulted in improved feedstock discounts and contributed, along
with improving supply and demand fundamentals, to higher petrochemical and lube
oil margins and other refined product margins.
During the second quarter of 2000, Valero incurred downtime in connection
with a scheduled maintenance turnaround of the fluid catalytic cracking unit at
its Paulsboro refinery (approximately 51 days) and certain unscheduled
maintenance of the heavy oil cracker at its Corpus Christi refinery
(approximately 11 days). Although this downtime will somewhat offset the
improvement in margins during the second quarter discussed above, Valero
believes that capacity expansions and operational improvements implemented
during this downtime will benefit its future operations. As refining margins
merit, Valero expects to continue making capital improvements at its refinery
facilities to increase, among other things, throughput capacity, conversion
capability, operational efficiency and feedstock flexibility. The majority of
these capital improvements are expected to be performed during scheduled
maintenance turnarounds.
S-50
<PAGE> 51
Valero expects demand, both domestically and worldwide, for clean-burning
fuels such as RFG to continue to increase as a result of the worldwide movement
to reduce lead and certain other pollutants and contaminants in gasoline. Valero
expects this increasing demand for clean-burning fuels to sustain increased
demand for oxygenates such as MTBE. However, public concern that MTBE has
contaminated water supplies has resulted in certain states and the EPA passing
or proposing restrictions on or banning the use of MTBE. If MTBE were to be
restricted or banned throughout the U.S., Valero believes that its
MTBE-producing facilities, other than the Benicia refinery discussed below,
could be modified to produce other gasoline blendstocks or other petrochemicals
for a capital investment of approximately $22 million. (Valero estimates that
the cost for permitting and modification of the Benicia refinery in order to
comply with CARB Phase III specifications and eliminate MTBE as a gasoline
component is approximately $20 million.) Since the volume of alternative
products that could be produced would be less than the current production of
MTBE and the price of such alternative products is currently lower than the
price of MTBE, Valero's results of operations could potentially be materially
adversely affected. Valero anticipates, however, that if MTBE were to be
restricted or banned, the resulting industry-wide shortage in octane-enhancing
components would cause a significant change in the economics related to Valero's
various alternative products, and as a result, such an action would not be
expected to have a material adverse effect on Valero. See "Risk Factors -- The
banning of the use of MTBE could adversely affect us."
Valero expects that various industry consolidations through mergers and
acquisitions will continue, making for a more competitive business environment
while providing Valero with potential opportunities to expand its operations.
The financial results of the assets purchased in the Benicia acquisition for
1998, 1999 and the quarter ended March 31, 2000 are set forth in the financial
statements included herein. Valero currently expects that the outlook for the
Benicia refinery will be consistent with the industry trends discussed above.
RESTRUCTURING
Valero was incorporated in Delaware in 1981 under the name Valero Refining
and Marketing Company as a wholly owned subsidiary of Valero Energy Corporation,
referred to as 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. Immediately after this distribution, Old
Valero, with its remaining natural gas related services business, merged with a
wholly owned subsidiary of PG&E Corporation. The distribution of Valero common
stock to Old Valero's stockholders and the merger of Old Valero with the
subsidiary of PG&E Corporation 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." As a result of the Restructuring, Valero became a "successor
registrant" to Old Valero for financial reporting purposes under the federal
securities laws. Accordingly, for periods before the Restructuring, the
following Management's Discussion and Analysis of Financial Condition and
Results of Operations, and the consolidated financial statements included
elsewhere in this prospectus supplement, reflect Old Valero's natural gas
related services business as discontinued operations of Valero.
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<PAGE> 52
RESULTS OF OPERATIONS
FIRST QUARTER 2000 COMPARED TO FIRST QUARTER 1999
Financial Highlights
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
--------------------------------------------------
CHANGE
--------------------
2000 1999 AMOUNT %
------------ ------------ ------------ -----
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Operating revenues......................... $ 2,928,617 $ 1,337,103 $ 1,591,514 119%
Cost of sales.............................. (2,683,680) (1,154,960) (1,528,720) (132)
Operating costs:
Cash (fixed and variable)................ (132,371) (119,442) (12,929) (11)
Depreciation and amortization............ (34,477) (35,127) 650 2
Selling and administrative expenses
(including related depreciation
expense)................................. (21,037) (19,054) (1,983) (10)
----------- ----------- -----------
Total operating income........... $ 57,052 $ 8,520 $ 48,532 570
=========== =========== ===========
Other income (expense), net................ $ 2,647 $ (79) $ 2,726 --(1)
Interest and debt expense, net............. $ (12,760) $ (12,457) $ (303) (2)
Income tax (expense) benefit............... $ (16,200) $ 1,300 $ (17,500) --(1)
Net income (loss).......................... $ 30,739 $ (2,716) $ 33,455 --(1)
Earnings (loss) per share of common stock-
assuming dilution........................ $ .54 $ (.05) $ .59 --(1)
Earnings before interest, taxes,
depreciation and amortization
("EBITDA")............................... $ 95,950 $ 45,111 $ 50,839 113
Ratio of EBITDA to interest incurred....... 6.8x 3.2x 3.6x 113
</TABLE>
------------
(1) Percentage variance is not meaningful.
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<PAGE> 53
Operating Highlights
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
------------------------------
CHANGE
------------
2000 1999 AMOUNT %
------ ------ ------ ---
<S> <C> <C> <C> <C>
Sales volumes (Mbbls per day)............................... 1,002 1,050 (48) (5)%
Throughput volumes (Mbbls per day).......................... 744 698 46 7
Average throughput margin per barrel........................ $ 3.62 $ 2.90 $ .72 25
Operating costs per barrel:
Cash (fixed and variable)................................. $ 1.95 $ 1.90 $ .05 3
Depreciation and amortization............................. .51 .56 (.05) (9)
------ ------ -----
Total operating costs per barrel.................. $ 2.46 $ 2.46 $ -- --
====== ====== =====
Charges:
Crude oils:
Sour................................................... 52% 51% 1% 2
Heavy sweet............................................ 9 11 (2) (18)
Light sweet............................................ 9 10 (1) (10)
------ ------ -----
Total crude oils.................................. 70 72 (2) (3)
High-sulfur residual fuel oil, or "resid"................. 4 3 1 33
Low-sulfur resid.......................................... 4 4 -- --
Other feedstocks and blendstocks.......................... 22 21 1 5
------ ------ -----
Total charges..................................... 100% 100% --% --
====== ====== =====
Yields:
Gasolines and blendstocks................................. 50% 51% (1)% (2)
Distillates............................................... 30 31 (1) (3)
Petrochemicals............................................ 5 4 1 25
Lubes and asphalts........................................ 3 2 1 50
Other products............................................ 12 12 -- --
------ ------ -----
Total yields...................................... 100% 100% --% --
====== ====== =====
</TABLE>
Average Market Reference Prices and Differentials
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
------------------------------
CHANGE
------------
2000 1999 AMOUNT %
------ ------ ------ ---
(DOLLARS PER BARREL)
<S> <C> <C> <C> <C>
Feedstocks:
West Texas Intermediate, or "WTI," crude oil.............. $28.90 $13.05 $15.85 121%
WTI less sour crude oil(1)................................ $ 2.38 $ 2.45 $(.07) (3)
WTI less sweet crude oil(2)............................... $ .45 $ .90 $(.45) (50)
Products (U.S. Gulf Coast):
Conventional 87 gasoline less WTI......................... $ 4.27 $ 1.67 $2.60 156
No. 2 fuel oil less WTI................................... $ 1.84 $ .31 $1.53 494
Propylene less WTI........................................ $ 2.32 $ (.30) $2.62 873
</TABLE>
------------
(1) The market reference differential for sour crude oil is based on U.S. Gulf
Coast posted prices for 50% Arab medium and 50% Arab light.
(2) The market reference differential for sweet crude oil is based on Platt's
posted prices for 50% light Louisiana sweet, or "LLS," and 50% Cusiana.
S-53
<PAGE> 54
General. Valero reported net income for the first quarter of 2000 of $30.7
million, or $.54 per share, compared to a net loss of $2.7 million, or $.05 per
share, for the first quarter of 1999. The increase in first quarter results was
due primarily to dramatically improved refining industry fundamentals which
resulted in a significant increase in refined product margins. Also contributing
to higher first quarter results was a 46,000 barrel-per-day increase in
throughput volumes. This was due in large part to the effect of a major
maintenance turnaround of the heavy oil cracker and related units at Valero's
Corpus Christi refinery in the first quarter of 1999, as well as certain unit
expansions implemented during that downtime. Partially offsetting the increases
in income resulting from these factors were higher cash operating costs, lower
income from trading activities, the nonrecurrence in 2000 of a benefit to income
in 1999 related to a permanent reduction in LIFO inventories and an increase in
income tax expense.
Operating Revenues. Operating revenues increased $1.6 billion, or 119%, to
$2.9 billion during the first quarter of 2000 compared to the same period in
1999 due to a $17.97, or 127%, increase in the average sales price per barrel,
partially offset by a 5% decrease in average daily sales volumes. The increase
in sales prices was due to significantly higher refined product prices resulting
from reduced refined product inventories which reached historically low levels
in the first quarter of 2000. This decline in inventory levels was attributable
primarily to lower crude oil supplies resulting from OPEC's decision in March
1999 to significantly reduce production, and to lower refinery utilization
rates. During most of the first quarter of 1999, sales prices were extremely
depressed due to excess refined product inventories prior to the OPEC decision
to curtail crude oil production.
Operating Income. Operating income increased $48.5 million to $57.1 million
during the first quarter of 2000 compared to the first quarter of 1999 due
primarily to an approximate $63 million increase in total throughput margins
(discussed below), partially offset by an approximate $13 million increase in
cash operating costs and an approximate $2 million increase in selling and
administrative expenses (including related depreciation expense). Cash operating
costs were higher due primarily to increased catalyst costs associated with
processing more lower-cost feedstocks, and higher fuel costs attributable mainly
to an increase in natural gas prices. Selling and administrative expenses
(including related depreciation expense) increased primarily as a result of an
increase in employee-related costs.
Total throughput margins (operating revenues less cost of sales) increased
due to (i) significantly higher gasoline and distillate margins resulting
primarily from the improved industry conditions noted above, (ii) the increase
in throughput volumes discussed above, and (iii) higher petrochemical margins
resulting from improving worldwide demand, most particularly in Asia. Partially
offsetting the increases in total throughput margins resulting from these
factors were (i) a decrease in feedstock discounts relative to WTI, (ii) lower
lube, fuel oil and other margins resulting mainly from higher crude oil prices,
(iii) a decrease in gains from trading activities from $12.8 million in the
first quarter of 1999 to $1.8 million in the first quarter of 2000, and (iv) the
nonrecurrence in 2000 of a $10.5 million benefit in the first quarter of 1999
resulting from the liquidation of LIFO inventories. The 1999 trading profits and
LIFO benefit were attributable to a steep increase in prices at the end of the
1999 first quarter.
Other Income. Other income (expense), net, increased by $2.7 million during
the first quarter of 2000 compared to the same period in 1999 due primarily to
improved results from Valero's 20% equity interest in the Javelina off-gas
processing plant in Corpus Christi attributable primarily to higher ethylene and
other product prices, partially offset by higher natural gas feedstock costs.
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<PAGE> 55
Income Tax Expense. Income taxes increased from an income tax benefit of
$1.3 million in the first quarter of 1999 to income tax expense of $16.2 million
in the first quarter of 2000 due primarily to a significant increase in pre-tax
income.
1999 COMPARED TO 1998
Financial Highlights
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------
CHANGE
------------------
1999 1998(1) AMOUNT %
----------- ----------- ----------- ----
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Operating revenues......................... $ 7,961,168 $ 5,539,346 $ 2,421,822 44%
Cost of sales.............................. (7,200,584) (4,792,665) (2,407,919) (50)
Operating costs:
Cash (fixed and variable)................ (480,106) (435,542) (44,564) (10)
Depreciation and amortization............ (138,625) (119,524) (19,101) (16)
Selling and administrative expenses
(including related depreciation
expense)................................. (72,712) (71,884) (828) (1)
----------- ----------- -----------
Operating income, before inventory
write-down............................... 69,141 119,731 (50,590) (42)
Write-down of inventories to market
value.................................... -- (170,929) 170,929 --(2)
----------- ----------- -----------
Total operating income (loss).... $ 69,141 $ (51,198) $ 120,339 235
=========== =========== ===========
Other income, net.......................... $ 6,475 $ 586 $ 5,889 --(2)
Interest and debt expense, net............. $ (55,429) $ (32,479) $ (22,950) (71)
Income tax (expense) benefit............... $ (5,900) $ 35,800 $ (41,700) (116)
Net income (loss).......................... $ 14,287 $ (47,291)(3) $ 61,578 130
Earnings (loss) per share of common
stock--assuming dilution................. $ .25 $ (.84)(3) $ 1.09 130
Earnings before interest, taxes,
depreciation and amortization
("EBITDA")............................... $ 219,657 $ 244,523(4) $ (24,866) (10)
Ratio of EBITDA to interest incurred....... 3.6x 6.5x (2.9)x (45)
</TABLE>
------------
(1) Includes the operations of the Paulsboro refinery beginning September 17,
1998.
(2) Percentage variance is not meaningful.
(3) Includes a $111.1 million, or $1.98 per share, effect resulting from the
$170.9 million pre-tax write-down of inventories to market value.
(4) Excludes the $170.9 million pre-tax write-down of inventories to market
value.
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<PAGE> 56
Operating Highlights
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
CHANGE
------------
1999 1998(1) AMOUNT %
------ ------- ------ ---
<S> <C> <C> <C> <C>
Sales volumes (MBPD)...................................... 1,033 894 139 16%
Throughput volumes (MBPD)(2).............................. 712 579 133 23
Average throughput margin per barrel...................... $ 2.93 $3.53(3) $(.60) (17)
Operating costs per barrel:
Cash (fixed and variable)............................... $ 1.85 $2.06 $(.21) (10)
Depreciation and amortization........................... .53 .57 (.04) (7)
------ ----- -----
Total operating costs per barrel................ $ 2.38 $2.63 $(.25) (10)
====== ===== =====
Charges:
Crude oils:
Sour................................................. 48% 37% 11% 30
Heavy sweet.......................................... 12 20 (8) (40)
Light sweet.......................................... 9 11 (2) (18)
------ ----- -----
Total crude oils................................ 69 68 1 1
High-sulfur residual fuel oil, or "resid"............... 3 9 (6) (67)
Low-sulfur resid........................................ 6 3 3 100
Other feedstocks and blendstocks........................ 22 20 2 10
------ ----- -----
Total charges................................... 100% 100% --% --
====== ===== =====
Yields:
Gasolines and blendstocks............................... 51% 53% (2)% (4)
Distillates............................................. 29 28 1 4
Petrochemicals.......................................... 5 4 1 25
Lubes and asphalts...................................... 3 1 2 200
Other products.......................................... 12 14 (2) (14)
------ ----- -----
Total yields.................................... 100% 100% --% --
====== ===== =====
</TABLE>
Average Market Reference Prices and Differentials
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
CHANGE
------------
1999 1998 AMOUNT %
------ ------- ------ ---
(DOLLARS PER BARREL)
<S> <C> <C> <C> <C>
Feedstocks:
West Texas Intermediate, or "WTI," crude oil............ $19.28 $14.41 $4.87 34%
WTI less sour crude oil(4)(6)........................... $ 2.40 $ 2.74 $(.34) (12)
WTI less sweet crude oil(5)(6).......................... $ .57 $ .66 $(.09) (14)
WTI less high-sulfur resid (Singapore).................. $ 1.63 $ 1.57 $ .06 4
Products (U.S. Gulf Coast):
Conventional 87 gasoline less WTI....................... $ 2.53 $ 2.98 $(.45) (15)
No. 2 fuel oil less WTI................................. $ .33 $ 1.45 $(1.12) (77)
Propylene less WTI...................................... $ .93 $ 2.23 $(1.30) (58)
</TABLE>
------------
(1) Includes the operations of the Paulsboro refinery beginning September 17,
1998.
(2) Includes 173 MBPD and 46 MBPD for 1999 and 1998, respectively, related to
the Paulsboro refinery.
(3) Excludes an $.81 per barrel reduction resulting from the $170.9 million
pre-tax write-down of inventories to market value.
(4) The market reference differential for sour crude oil is based on U.S. Gulf
Coast posted prices for 50% Arab medium and 50% Arab light.
(5) The market reference differential for sweet crude oil is based on Platt's
posted prices for 50% light Louisiana sweet, or "LLS," and 50% Cusiana.
(6) The market reference differentials for 1999 and 1998 have been restated from
amounts reported in the 1999 Form 10-K to conform to market reference prices
used in 2000.
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<PAGE> 57
General. Valero reported net income of $14.3 million, or $.25 per share,
for the year ended December 31, 1999 compared to a net loss of $47.3 million, or
$.84 per share, for the year ended December 31, 1998. Non-cash inventory
write-downs resulting from significant declines in feedstock and refined product
prices reduced the total year 1998 results by $170.9 million. Before the effect
of the inventory write-downs, net income for 1998 was $63.8 million, or $1.14
per share.
The 1999 results were well below 1998 levels, before the effects of the
1998 inventory write-downs, due to historically weak refining industry
fundamentals during the first half of 1999, the effect of significant downtime
at Valero'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 these decreases in income were
improvements in industry conditions in the second half of 1999, a significant
reduction in cash operating costs (excluding the effect of the Paulsboro
refinery) resulting from Valero's comprehensive cost reduction efforts, and
benefits to income related to reductions in LIFO inventories during the first
and fourth quarters of 1999.
Operating Revenues. Operating revenues increased $2.4 billion, or 44%, to
$8.0 billion during 1999 compared to 1998 due to a $4.14, or 24%, increase in
the average sales price per barrel and a 16% increase in average daily sales
volumes. The increase in sales volumes was due primarily to the September 1998
acquisition of the Paulsboro refinery, while the increase in sales prices was
due primarily to higher crude oil prices attributable to OPEC production cuts
announced in March 1999 and lower refined product inventories in the second half
of the year.
Operating Income (Loss). Operating income increased $120.3 million, from a
$51.2 million operating loss in 1998 to operating income of $69.1 million in
1999, due in large part to the 1998 inventory write-downs of $170.9 million
noted above. Excluding the effect of these write-downs, operating income
decreased $50.6 million, or 42%, during 1999 compared to 1998. This decrease was
due primarily to an approximate $98 million increase in operating costs
attributable to a full year of operations in 1999 for the Paulsboro refinery,
and an approximate $9 million increase in depreciation expense and amortization
of deferred turnaround and catalyst costs for all refineries exclusive of the
Paulsboro refinery. Partially offsetting these decreases was an approximate $43
million reduction in cash operating costs for all refineries exclusive of the
Paulsboro refinery, primarily due to lower maintenance expense, energy savings
and improved energy efficiencies, and reduced catalyst and chemical costs, all
resulting from Valero's cost savings initiatives implemented in early 1999. Also
partially offsetting the above-noted decreases in operating income was an
increase in total throughput margins of approximately $14 million.
Total throughput margins (operating revenues less cost of sales) increased
in 1999 compared to 1998 due primarily to (i) the contribution from the
Paulsboro refinery resulting from a full year of operations in 1999, (ii)
benefits from higher sales volumes (excluding higher volumes resulting from the
full-year effect of Paulsboro refinery operations), including benefits resulting
from the liquidation of LIFO inventories in the first and fourth quarters of
1999 of $10.5 million and $9.3 million, respectively, and (iii) benefits from
trading activities of approximately $17 million in 1999 compared to $1 million
in 1998. The positive effect on throughput margins resulting from these factors
was offset to a large extent by extremely depressed refining industry
fundamentals in the first half of 1999. Distillate and gasoline margins were
significantly below 1998 levels during this period (average distillate margins
were negative in the first half of 1999) as above-average refined product
inventory levels resulted in depressed refined product prices, while crude oil
prices increased due to the OPEC production cuts announced in March 1999.
Furthermore, petrochemical margins were lower during the first half of 1999
resulting from depressed demand for petrochemical feedstocks due to the Asian
economic crisis. Although industry conditions improved in the second half of
1999 as refined product inventories declined due to both an increase in demand
and reduced refinery utilization rates, increasingly higher crude oil prices
resulting from a continuation of reduced OPEC production limited the improvement
in product margins during this period. Total throughput margins were also
negatively affected in 1999 compared to 1998 by a decrease in crude oil
feedstock discounts relative to WTI and reduced income from hedging activities
under Valero's price risk management program. In 1999, Valero's hedging
activities resulted in a reduction of total throughput margins of approximately
$10 million compared to a benefit of approximately $17 million in 1998. See
"--Quantitative and Qualitative Disclosures About Market Risk," Note 1 of Notes
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<PAGE> 58
to Consolidated Financial Statements for the year ended December 31, 1999 under
"Price Risk Management Activities," and Note 7 of Notes to Consolidated
Financial Statements for the year ended December 31, 1999 for additional
information regarding Valero's hedging and trading activities.
Other Income. Other income, net, increased by $5.9 million to $6.5 million
during 1999 compared to 1998 due primarily to improved results from Valero's 20%
equity interest in the Javelina off-gas processing plant in Corpus Christi (see
Note 1 of Notes to Consolidated Financial Statements for the year ended December
31, 1999 under "Deferred Charges and Other Assets") attributable primarily to
higher ethylene and other product prices, partially offset by higher natural gas
feedstock costs.
Net Interest and Debt Expense. Net interest and debt expense increased
$22.9 million, or 71%, to $55.4 million during 1999 compared to 1998 primarily
due to the full-year effect of higher borrowings resulting from the acquisition
of the Paulsboro refinery in September 1998, and to a lesser extent, to an
increase in average interest rates.
Income Tax Expense (Benefit). Income taxes increased from a $35.8 million
benefit in 1998 to a $5.9 million expense in 1999 due primarily to the
significant increase in pre-tax income and, to a lesser extent, to the
recognition in 1998 of $5.8 million related to a research and experimentation
tax credit. See Note 12 of Notes to Consolidated Financial Statements for the
year ended December 31, 1999.
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<PAGE> 59
1998 COMPARED TO 1997
Financial Highlights
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
CHANGE
-------------------
1998(1) 1997(2) AMOUNT %
----------- ----------- --------- ----
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Operating revenues..................... $ 5,539,346 $ 5,756,220 $(216,874) (4)%
Cost of sales.......................... (4,792,665) (5,092,150) 299,485 6
Operating costs:
Cash (fixed and variable)............ (435,542) (304,683) (130,859) (43)
Depreciation and amortization........ (119,524) (92,317) (27,207) (29)
Selling and administrative expenses
(including related depreciation
expense)............................. (71,884) (56,036) (15,848) (28)
----------- ----------- ---------
Operating income, before inventory
write-down........................... 119,731 211,034 (91,303) (43)
Write-down of inventories to market
value................................ (170,929) -- (170,929) --
----------- ----------- ---------
Total operating income
(loss)..................... $ (51,198) $ 211,034 $(262,232) (124)
=========== =========== =========
Other income, net...................... $ 586 $ 6,978 $ (6,392) (92)
Interest and debt expense, net......... $ (32,479) $ (42,455) $ 9,976 23
Income tax (expense) benefit........... $ 35,800 $ (63,789) $ 99,589 156
Income (loss) from continuing
operations........................... $ (47,291)(3) $ 111,768 $(159,059) (142)
Loss from discontinued operations, net
of income tax benefit(4)............. $ -- $ (15,672) $ 15,672 100
Net income (loss)...................... $ (47,291)(3) $ 96,096 $(143,387) (149)
Net income (loss) applicable to common
stock................................ $ (47,291)(3) $ 91,504 $(138,795) (152)
Earnings (loss) per share of common
stock--assuming dilution:
Continuing operations................ $ (.84)(3) $ 2.03 $ (2.87) (141)
Discontinued operations.............. -- (.29) .29 100
----------- ----------- ---------
Total........................ $ (.84) $ 1.74 $ (2.58) (148)
=========== =========== =========
Earnings before interest, taxes,
depreciation and amortization
("EBITDA")........................... $ 244,523(5) $ 313,025 $ (68,502) (22)
Ratio of EBITDA to interest
incurred(6).......................... 6.5x 7.1x (.6)x (8)
</TABLE>
------------
(1) Includes the operations of the Paulsboro refinery beginning September 17,
1998.
(2) Includes the operations of the Texas City, Houston and Krotz Springs
refineries beginning May 1, 1997.
(3) Includes a $111.1 million, or $1.98 per share, effect resulting from the
$170.9 million pre-tax write-down of inventories to market value.
(4) Reflects the results of Old Valero's natural gas related services business
for periods prior to the July 31, 1997 Restructuring.
(5) Excludes the $170.9 million pre-tax write-down of inventories to market
value.
(6) Interest incurred for 1997 includes $18,164 of interest on corporate debt
that was allocated to continuing operations (see Note 4 of Notes to
Consolidated Financial Statements for the year ended December 31, 1999).
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Operating Highlights
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
CHANGE
------------
1998(1) 1997(2) AMOUNT %
------- ------- ------ ---
<S> <C> <C> <C> <C>
Sales volumes (MBPD)........................................ 894 630 264 42%
Throughput volumes (MBPD)................................... 579(3) 417(4) 162 39
Average throughput margin per barrel........................ $3.53(5) $4.35 $(.82) (19)
Operating costs per barrel:
Cash (fixed and variable)................................. $2.06 $2.00 $ 06 3
Depreciation and amortization............................. .57 .61 (.04) (7)
----- ----- -----
Total operating costs per barrel................... $2.63 $2.61 $ .02 1
===== ===== =====
Charges:
Crude oils:
Sour.................................................... 37% 26% 11% 42
Heavy sweet............................................. 20 21 (1) (5)
Light sweet............................................. 11 10 1 10
----- ----- -----
Total crude oils................................... 68 57 11 19
High-sulfur resid......................................... 9 17 (8) (47)
Low-sulfur resid.......................................... 3 3 -- --
Other feedstocks and blendstocks.......................... 20 23 (3) (13)
----- ----- -----
Total charges...................................... 100% 100% --% --
===== ===== =====
Yields:
Gasolines and blendstocks................................. 53% 53% --% --
Distillates............................................... 28 25 3 12
Petrochemicals............................................ 4 6 (2) (33)
Lubes and asphalts........................................ 1 -- 1 --
Other products............................................ 14 16 (2) (13)
----- ----- -----
Total yields....................................... 100% 100% --% --
===== ===== =====
</TABLE>
Average Market Reference Prices and Differentials
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
CHANGE
------------
1998 1997 AMOUNT %
------ ------ ------ ---
(DOLLARS PER BARREL)
<S> <C> <C> <C> <C>
Feedstocks:
WTI crude oil............................................. $14.41 $20.61 $(6.20) (30)%
WTI less sour crude oil(6)(8)............................. $ 2.74 $ 2.56 $ .18 7
WTI less sweet crude oil(7)(8)............................ $ .66 $ .36 $ .30 83
WTI less high-sulfur resid (Singapore).................... $ 1.57 $ 2.61 $(1.04) (40)
Products (U.S. Gulf Coast):
Conventional 87 gasoline less WTI......................... $ 2.98 $ 3.97 $(.99) (25)
No. 2 fuel oil less WTI................................... $ 1.45 $ 1.96 $(.51) (26)
Propylene less WTI........................................ $ 2.23 $ 8.14 $(5.91) (73)
</TABLE>
------------
(1) Includes the operations of the Paulsboro refinery beginning September 17,
1998.
(2) Includes the operations of the Texas City, Houston and Krotz Springs
refineries beginning May 1, 1997.
(3) Includes 46 MBPD related to the Paulsboro refinery.
(4) Includes 238 MBPD related to the Texas City, Houston and Krotz Springs
refineries.
(5) Excludes an $.81 per barrel reduction resulting from the $170.9 million
pre-tax write-down of inventories to market value.
(6) The market reference differential for sour crude oil is based on U.S. Gulf
Coast posted prices for 50% Arab medium and 50% Arab light.
(7) The market reference differential for sweet crude oil is based on Platt's
posted prices for 50% light Louisiana sweet, or "LLS," and 50% Cusiana.
(8) The market reference differentials for 1998 and 1997 have been restated from
amounts reported in the 1999 Form 10-K to conform to market reference prices
used in 2000.
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General. Valero reported a net loss of $47.3 million, or $.84 per share,
for the year ended December 31, 1998 compared to income from continuing
operations of $111.8 million, or $2.03 per share, for the year ended December
31, 1997. The 1998 results were reduced by non-cash inventory write-downs
totaling $170.9 million.
Excluding the effects of the inventory write-downs, total year 1998 net
income ($63.8 million, or $1.14 per share) was still well below 1997 levels due
to extremely weak refining industry fundamentals in the latter half of 1998.
Partially offsetting the effects of such depressed industry conditions were
full-year contributions in 1998 from the operations related to the Texas City,
Houston and Krotz Springs refineries acquired on May 1, 1997 and the
contribution from the Paulsboro refinery beginning September 17, 1998. Results
from discontinued operations in 1997 were a loss of $15.7 million, or $.29 per
share, for the seven months prior to the Restructuring on July 31, 1997. In
determining earnings per share for the year ended December 31, 1997, dividends
on Old Valero's preferred stock were deducted from income from discontinued
operations as such preferred stock was issued in connection with Old Valero's
natural gas related services business.
Operating Revenues. Operating revenues decreased $216.9 million, or 4%, to
$5.5 billion during 1998 compared to 1997 due to a 32% decrease in the average
sales price per barrel partially offset by a 42% increase in average daily sales
volumes. The significant decrease in sales prices was attributable to an
oversupply of crude oil due to lower worldwide energy demand, particularly in
Asia. These excess crude oil supplies, combined with high refinery utilization
rates and below average demand for heating oil due to mild winter weather,
resulted in a build-up of refined product inventories, particularly distillates,
and severely depressed refined product prices. The increase in sales volumes was
due primarily to the acquisitions of the Texas City, Houston, Krotz Springs and
Paulsboro refineries, and an increase in related marketing activities.
Operating Income (Loss). Operating income decreased $262.2 million during
1998 compared to 1997 due in large part to the $170.9 million in inventory
write-downs noted above. Excluding the effect of the inventory write-downs,
operating income decreased $91.3 million, or 43%, to $119.7 million during 1998
compared to 1997. This decrease was due to an approximate $158 million increase
in operating costs and higher selling and administrative expenses of
approximately $16 million (both including related depreciation expense),
partially offset by an approximate $83 million increase in total throughput
margins.
Total throughput margins increased due primarily to four additional months
of operations in 1998 versus 1997 related to the Texas City, Houston and Krotz
Springs refineries, and the inclusion of the Paulsboro refinery beginning with
its acquisition. Although total throughput margins increased, the average
throughput margin per barrel declined $.82, or 19%, due in large part to the
fact that the Texas City, Houston, Krotz Springs and Paulsboro refineries
normally realize a lower per-barrel margin (but also lower per-barrel operating
costs) than that realized by the Corpus Christi refinery. Also contributing to
an increase in total throughput margins was a significant improvement in
feedstock discounts relative to WTI due to improved sweet and sour crude
differentials and enhanced feedstock processing flexibility, particularly at the
Corpus Christi refinery, partially offset by lower discounts on resid. However,
this feedstock benefit was more than offset by (i) lower gasoline and distillate
margins resulting primarily from the factors noted above under "Operating
Revenues," and (ii) significantly lower petrochemical margins and other factors
as discussed below. The net negative effect on throughput margins resulting from
the changes in gasoline and distillate margins and feedstock discounts was
somewhat offset by a benefit from hedging activities related to such products
and feedstocks under Valero's price risk management program. In 1998, Valero's
hedging activities resulted in a benefit to total throughput margins of
approximately $17 million, while in 1997, the effect of hedging activities was
slightly negative. The decline in petrochemical margins noted above which
substantially reduced total throughput margins resulted from depressed demand
for petrochemical feedstocks due to the Asian economic crisis.
With regard to operating costs, approximately $38 million ($33 million cash
cost and $5 million depreciation and amortization), or 24%, of the total
operating cost increase was attributable to the Paulsboro refinery acquired in
September 1998, while $92 million, or 58%, of the increase was attributable to
the four additional months of operations during the 1998 period for the Texas
City, Houston and Krotz Springs refineries. The remainder of the increase in
operating costs was attributable to an increase in amortization of
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deferred turnaround and catalyst costs for the Texas City, Houston and Corpus
Christi refineries resulting from various turnarounds and catalyst change-outs,
an increase in cash costs for injected catalyst at those same refineries
resulting from the use of lower-cost/reduced-quality feedstocks, higher catalyst
costs at the Corpus Christi refinery resulting primarily from shorter than
expected catalyst life, and higher salary costs. Selling and administrative
expenses increased due primarily to the three and one-half months of operations
for the Paulsboro refinery and to the four additional months of operations for
the Texas City, Houston and Krotz Springs refineries during 1998.
Other Income. Other income, net, decreased by $6.4 million to $.6 million
during 1998 compared to 1997 due primarily to lower results from Valero's 20%
equity interest in the Javelina off-gas processing plant due primarily to lower
petrochemical and other product prices, partially offset by lower natural gas
feedstock costs.
Net Interest and Debt Expense. Net interest and debt expense decreased $10
million, or 23%, to $32.5 million during 1998 compared to 1997 due primarily to
the inclusion in the 1997 period of allocated interest expense related to
corporate debt that was subsequently assumed by PG&E in connection with the
Restructuring, and to a reduction in average interest rates. The decrease in net
interest and debt expense resulting from these factors was partially offset by
an increase in bank borrowings due primarily to the acquisition of the Paulsboro
refinery.
Income Tax Expense (Benefit). Income taxes decreased from a $63.8 million
expense in 1997 to a $35.8 million benefit in 1998 due primarily to the
significant decrease in pre-tax results from continuing operations and, to a
lesser extent, to the recognition in 1998 of $5.8 million related to a research
and experimentation tax credit.
Discontinued Operations. The loss from discontinued operations in 1997 of
$15.7 million (net of an income tax benefit of $8.9 million), or $.29 per share,
reflected the net loss of Old Valero's natural gas related services business for
the seven months ended July 31, 1997, prior to the Restructuring. See Note 4 of
Notes to Consolidated Financial Statements for the year ended December 31, 1999.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities decreased $137.2 million during
the first quarter of 2000 compared to the same period in 1999 due primarily to a
$177.1 million increase in the amount of cash utilized for working capital
purposes, as detailed in Note 4 of Notes to Consolidated Financial Statements
for the three months ended March 31, 2000, partially offset by the increase in
earnings discussed above under "Results of Operations." In the first quarter of
2000, amounts needed by Valero to finance feedstock and refined product
inventories increased significantly due to higher inventory levels as well as an
increase in commodity prices from December 31, 1999 to March 31, 2000. Although
this increase in inventories was somewhat offset by an increase in accounts
payable resulting from the higher volume of inventory purchases, Valero incurred
a net increase in cash utilized for working capital purposes in the 2000 period
of approximately $63 million. Included in the changes in current assets and
current liabilities for the 1999 period was an increase in both accounts
receivable and accounts payable due primarily to a significant increase in
commodity prices during that quarter. However, concerted efforts by Valero to
collect accounts receivable and reduce inventory levels resulted in a net
decrease in cash utilized for working capital purposes of approximately $114
million in the first quarter of 1999. During the first quarter of 2000, cash
provided by operating activities of $11.2 million, existing cash balances of
$51.6 million and issuances of common stock related to Valero's benefit plans of
$5.9 million were utilized to reduce bank borrowings by $13.5 million, fund
capital expenditures and deferred turnaround and catalyst costs of $42 million,
repurchase $8.7 million of shares of Valero's common stock and pay $4.5 million
of common stock dividends.
Net cash provided by operating activities increased $269.3 million to
$435.1 million during 1999 compared to 1998, primarily as a result of proactive
efforts by Valero to reduce working capital levels. During 1999, both accounts
receivable and accounts payable increased significantly as crude oil, gasoline,
and heating oil prices more than doubled from December 31, 1998 to December 31,
1999. However, concerted efforts by Valero to collect accounts receivable, and
the sale of receivables in September 1999 as described in Note 2 of Notes to
Consolidated Financial Statements for the year ended December 31, 1999, helped
reduce the
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increase in receivables resulting from higher commodity prices. In addition, a
significant reduction in inventory levels helped to offset the effect of higher
commodity prices on the carrying amount of Valero's inventories. All of these
factors combined to reduce cash utilized for working capital purposes by $296.3
million during 1999. During 1998, cash utilized for working capital purposes
increased $46.2 million, as a substantial decrease in accounts payable was
offset to a large extent by a decrease in accounts receivable, both of which
resulted from a significant decrease in commodity prices from December 31, 1997
to December 31, 1998. During 1999, cash provided by (i) operating activities,
including the sale of accounts receivable discussed above, (ii) proceeds from
the issuance of 7 3/8% notes (approximately $297.5 million) and Series 1999
tax-exempt Waste Disposal Revenue Bonds ($25 million), and (iii) issuances of
common stock related to Valero's benefit plans were utilized to reduce bank
borrowings, redeem $25 million of Series 1998 taxable Waste Disposal Revenue
Bonds, fund capital expenditures and deferred turnaround and catalyst costs, pay
common stock dividends, purchase treasury stock and add to existing cash
balances.
Valero 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 the Credit Facility bear interest at either LIBOR plus
a margin, a base rate or a money market rate. Valero 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
Valero's long-term debt. The Credit Facility includes certain restrictive
covenants including a fixed-charge coverage ratio, a debt-to-capitalization
ratio, and a minimum net worth test. In connection with the Benicia acquisition,
in April 2000, the Credit Facility was amended to, among other things, increase
the total debt-to-capitalization limit from 50% to 65%. This ratio will decrease
to 60% at the earlier of March 31, 2001 or upon the issuance of $300 million of
equity or equity linked securities, and will further decrease to 55% on
September 30, 2001. These amendments to the credit facility became effective
upon closing of the acquisition of the Benicia refinery and the Distribution
Assets. Valero also currently has various uncommitted short-term bank credit
facilities, along with various uncommitted bank letter of credit facilities.
In connection with the funding of the Benicia acquisition, Valero entered
into a $600 million bridge loan facility. The Bridge Facility has a term of one
year with an option to extend for an additional two years, and has covenants
similar to the Credit Facility. Borrowings under the Bridge Facility bear
interest at LIBOR plus an applicable margin. Borrowings under the Bridge
Facility, along with borrowings under Valero's existing credit facilities and an
interim lease arrangement, were used to finance the acquisition of the Benicia
refinery and the Distribution Assets. In connection with the acquisition of the
Service Station Assets, Valero will enter into a structured lease arrangement
with a commitment of up to $135 million, substantially all of which will be used
to acquire the Service Station Assets and replace the interim lease arrangement
for the acquisition of the Benicia refinery's docking facility. Valero intends
to use the proceeds from this offering, the Debt Offering and the Equity
Offering to pay down all amounts outstanding under the Bridge Facility and use
the remaining proceeds to reduce borrowings under the Credit Facility.
As of March 31, 2000, $126.5 million was outstanding under Valero's various
bank credit facilities and letters of credit totaling approximately $234 million
were outstanding under its various letter of credit facilities. As of May 15,
2000, $486 million was outstanding under Valero's various bank credit
facilities, $600 million was outstanding under the Bridge Facility and letters
of credit totaling approximately $160 million were outstanding under its various
letter of credit facilities. After giving effect to the Benicia acquisition and
the related financings, including the Offerings, as of March 31, 2000, Valero
would have had total debt of $1.4 billion, $150 million aggregate liquidation
amount of trust preferred securities issued as part of the PEPS Units, and
stockholders' equity of $1.2 billion.
As of March 31, 2000, Valero's debt to capitalization ratio was 41%, a
decrease from 42% as of December 31, 1999. After giving effect to the Benicia
acquisition and the related financings, including the Offerings, Valero's debt
to capitalization ratio would have been 51% at March 31, 2000 (with 80% of the
aggregate liquidation amount of trust preferred securities issued as part of the
PEPS Units deemed to be equity for purposes of this computation).
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During 1999, Valero reduced its exposure to increases in interest rates and
increased its financial flexibility by (i) issuing $300 million of seven-year
7 3/8% notes under its $600 million universal shelf registration statement and
using the net proceeds to reduce variable rate bank borrowings and (ii)
refinancing $25 million of its taxable, variable-rate industrial revenue bonds
with tax-exempt 5.7% fixed-rate bonds. See Note 6 of Notes to Consolidated
Financial Statements for the year ended December 31, 1999.
As described in Note 3 of Notes to Consolidated Financial Statements for
the year ended December 31, 1999, Salomon Smith Barney Inc. is entitled to
receive payments from Valero in any of the ten years following the May 1997
acquisition of Basis and Mobil is entitled to receive payments in any of the
five years following the September 1998 acquisition of the Paulsboro refinery,
if certain average refining margins during any of these years exceed a specified
level. Due to depressed refining margins during the years ended May 1999 and
September 1999, no earn-out payments were due to Salomon or Mobil during 1999.
Based on actual margins since May and September of 1999, and estimated margin
levels through September of 2000, Valero currently expects that no earn-out
payments will be due to Salomon or Mobil during 2000.
During the first quarter of 2000, Valero expended approximately $42 million
for capital investments, including capital expenditures of $25 million and
deferred turnaround and catalyst costs of $17 million. For total year 2000,
Valero currently expects to incur approximately $240 million for capital
investments, including approximately $160 million for capital expenditures and
approximately $80 million for deferred turnaround and catalyst costs. The
capital expenditure estimate includes approximately $15 million for computer
system projects and approximately $7 million for projects related to
environmental control and protection. The capital expenditure estimate does not
include estimated expenditures related to the installation of a scrubber at the
Texas City refinery, which will be financed through a lease arrangement, and the
installation of a scrubber at the Paulsboro refinery, which Valero expects will
be incurred primarily in 2003. See "Risk Factors -- Compliance with and changes
in environmental laws could adversely affect our performance." In addition to
the above, Valero expects to incur approximately $40 million for the year 2000
for capital expenditures and deferred turnaround and catalyst costs related to
the Benicia refinery and the Service Station Assets. Any major upgrades in any
of Valero's refineries could require additional expenditures to comply with
environmental laws and regulations. However, because environmental laws and
regulations are increasingly becoming more stringent and new environmental laws
and regulations are continuously being enacted or proposed, Valero cannot
predict with certainty the level of future expenditures that will be required
for environmental matters.
During 1999, Valero expended approximately $173 million for capital
investments, including capital expenditures of $100 million and deferred
turnaround and catalyst costs of $73 million. Capital expenditures included
approximately $12 million for computer system projects and approximately $7
million for projects related to environmental control and protection. The
deferred turnaround and catalyst costs related primarily to (i) a major
maintenance turnaround of the heavy oil cracker and related units at the Corpus
Christi refinery in the first quarter, (ii) a catalyst change for the Corpus
Christi hydrodesulfurization unit in the second quarter, (iii) a turnaround and
catalyst change of the Texas City residfiner also in the second quarter, and
(iv) a turnaround of the reformer at the Paulsboro refinery in the fourth
quarter.
Valero's Board of Directors approved in the third quarter of 1998 a common
stock repurchase program allowing repurchase of up to $100 million of its common
stock. Through December 31, 1998, Valero had repurchased common shares at a cost
of approximately $15 million, and during the fourth quarter of 1999 and the
first quarter of 2000, Valero repurchased additional shares of its common stock
at a cost of approximately $13 million and $7 million, respectively. The shares
repurchased will be used primarily to meet requirements under Valero's employee
benefit plans.
Dividends on Valero's common stock are considered quarterly by Valero'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. Valero has declared
a dividend of $.08 per common share for each quarter since the Restructuring.
Valero 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. Valero expects that, to the extent
necessary, it can raise additional funds from time to time through equity or
debt financings.
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However, there can be no assurances regarding the availability of any future
financings or whether such financings will be available on terms acceptable to
Valero.
Valero's refining and marketing operations have a concentration of
customers in the oil refining industry and petroleum products markets. These
concentrations of customers may impact Valero's overall exposure to credit risk,
either positively or negatively, in that these customers may be similarly
affected by changes in economic or other conditions. However, Valero believes
that its portfolio of accounts receivable is sufficiently diversified to the
extent necessary to minimize potential credit risk. Historically, Valero has not
had any significant problems collecting its accounts receivable. Valero's
accounts receivable are not collateralized. See Note 2 of Notes to Consolidated
Financial Statements for the year ended December 31, 1999 for information
regarding a program entered into by Valero in September 1999 to sell up to $100
million of an undivided percentage ownership interest in a designated pool of
accounts receivable.
NEW ACCOUNTING PRONOUNCEMENTS
As discussed in Note 6 of Notes to Consolidated Financial Statements for
the three months ended March 31, 2000, certain new financial accounting
pronouncements have been issued by the FASB which will become effective for
Valero's financial statements beginning in either July 2000 or January 2001.
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 pronouncements is not expected to have a material effect on Valero's
consolidated financial statements.
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BUSINESS
Valero is one of the largest and most geographically diverse independent
petroleum refining and marketing companies in the United States. As of March 31,
2000, Valero owned five refineries in Texas, Louisiana and New Jersey, providing
it with core operations on both the Gulf Coast and the East Coast. These
refineries are located in Corpus Christi, Houston, and Texas City in Texas,
Krotz Springs, Louisiana and Paulsboro, New Jersey. In addition, on March 2,
2000, Valero entered into an agreement to purchase ExxonMobil's Benicia
refinery, the Service Station Assets and the Distribution Assets, thereby
establishing a significant presence on the West Coast and extending its
geographic reach from coast to coast. The acquisition of the Benicia refinery
and the Distribution Assets closed on May 15, 2000 and the acquisition of the
Service Station Assets is expected to close on or about June 15, 2000. The
acquisition of the Benicia refinery increased Valero's throughput capacity from
approximately 790,000 BPD to approximately 950,000 BPD.
Valero produces premium, environmentally clean products such as
reformulated gasoline, low-sulfur diesel and oxygenates and is able to produce
CARB gasoline. Valero also produces a substantial slate of middle distillates,
jet fuel and petrochemicals. Valero has distinguished itself among independent
refiners by cost effectively upgrading its refineries to not only increase
output but also increase overall refining complexity and flexibility, enhancing
Valero's ability to process lower cost feedstocks into higher value-added
premium products. Valero processes a wide slate of feedstocks including medium
sour crude oils, heavy sweet crudes and residual fuel oils, or resid, which can
typically be purchased at a discount to West Texas Intermediate, a benchmark
crude oil. Between 45% and 50% of Valero's total gasoline production is
typically RFG, which sells at a premium over conventional grades of gasoline.
The Benicia refinery produces approximately 110,000 BPD of gasoline,
approximately 95% of which is CARB gasoline. Valero also produces over 75% of
its distillate slate as low-sulfur diesel and jet fuel, which sell at a premium
over high-sulfur heating oil. In addition to its feedstock and product
advantages, Valero has synergies among its Gulf Coast refineries which allow
Valero to transfer intermediate feedstocks such as deasphalted oil, or DAO, and
atmospheric tower bottoms, or ATBs, among the Texas City, Houston and Corpus
Christi refineries. With the Benicia acquisition, Valero's products are marketed
in 35 states as well as to selected export markets.
VALERO'S STRATEGIC DIRECTION
Valero intends to remain a premier, independent refining and marketing
company that focuses on innovative, efficient upgrading of its facilities to
refine lower-cost feedstocks into higher value-added premium products. Valero's
strategic objectives include the following:
-- Accretive Growth through Acquisitions. Valero intends to continue to
selectively pursue acquisitions in order to increase growth and
diversification. As part of this strategy, Valero regularly searches
for acquisition opportunities that it believes will be accretive to
earnings and cash flow and provide acceptable rates of return. To be
consistent with its operating philosophy, Valero typically looks at
opportunities that offer refining capacity in excess of 100,000
barrels per day with expansion or upgrading potential and that are
located near a coastal area or a major pipeline connection in order
to provide greater flexibility in accessing suppliers and customers.
Valero believes the Benicia acquisition will be immediately accretive
to earnings and cash flow and provide geographic diversification and
important access to the West Coast.
-- Upgrading Refineries in a Cost Effective Manner. Valero continually
evaluates ways to maximize the value of its refineries through
cost-effective upgrades and expansions. Valero believes refineries
that are more flexible with regard to feedstocks or that are able to
produce higher value-added premium products such as reformulated
gasoline and low-sulfur diesel are better positioned to exploit
increases in refining margins and mitigate the effects of decreases
in refining margins than refineries that produce more conventional
forms of gasoline and distillates. During 2000, Valero plans to
expand the capacity of two of the Texas City refinery's three crude
units by approximately 37,000 BPD and its diesel hydrotreater by
approximately 14,000 BPD. Additionally, Valero plans to expand the
Paulsboro refinery's fluid catalytic cracking unit by 6,500 BPD and
its crude unit by approximately 2,000 BPD.
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-- Pursuit of Additional Cost Savings Initiatives. Valero continually
attempts to identify and implement cost saving initiatives. The
components of Valero's cost savings program include: (i) improving
mechanical availability, (ii) reducing maintenance costs, (iii)
improving energy efficiency, (iv) replicating best operating
practices at all refineries, (v) improving purchasing efficiencies
through multi-refinery contracts, (vi) reducing warehouse inventory
and (vii) reducing the use of outside professional services. In 1999,
Valero implemented cost savings initiatives which resulted in
operating expense savings of over $40 million at its Gulf Coast
refineries, and expects to attain further operating cost reductions
at all of its refineries in 2000.
-- Increased Earnings Diversification. Valero continues to evaluate
several strategies that offer opportunities to diversify earnings,
including retail petroleum marketing, petrochemical ventures, and
other ancillary businesses. The Benicia acquisition has facilitated
Valero's entry into the retail business.
-- Dedication to Safety and Environmental Concerns. Valero continues to
focus on and devote significant time and resources to safety training
and accountability programs throughout its operations. Valero seeks
to be environmentally proactive and will continue to actively monitor
developments with the EPA's proposed air emissions reduction rules
and other regulatory changes. During 2000, Valero is installing a
flue gas scrubber on the FCC Unit at the Texas City refinery in
connection with its voluntary participation in the Governor's City
Air Responsibility Enterprise Program.
REFINING, MARKETING AND FEEDSTOCK SUPPLY
REFINING
Valero's six refineries have a combined total throughput capacity of
approximately 950,000 BPD. The following table lists the location of each of its
refineries and their respective feedstock throughput capacities.
<TABLE>
<CAPTION>
FEEDSTOCK THROUGHPUT
REFINERY LOCATION CAPACITY IN BPD
----------------- --------------------
<S> <C> <C>
Corpus Christi Refinery...................... Corpus Christi, Texas 215,000
Texas City Refinery.......................... Texas City, Texas 200,000
Paulsboro Refinery........................... Paulsboro, New Jersey 170,000
Houston Refinery............................. Houston, Texas 120,000
Krotz Springs Refinery....................... Krotz Springs, 85,000
Louisiana
Benicia Refinery............................. Benicia, California 160,000
-------
Total.............................. 950,000(1)
=======
</TABLE>
------------
(1) Crude unit capacity = 663,000 BPD
The Texas City, Houston and Krotz Springs refineries were acquired with the
acquisition of Basis Petroleum, Inc., a wholly owned subsidiary of Salomon Inc.,
on May 1, 1997. On September 16, 1998, the Paulsboro refinery was acquired from
Mobil Oil Corporation. On May 15, 2000, the Benicia refinery was acquired from
Exxon Mobil Corporation.
Corpus Christi Refinery. The Corpus Christi refinery is situated on 254
acres along the Corpus Christi Ship Channel. The Corpus Christi refinery
specializes in processing primarily lower-cost heavy crude oil and resid into
premium products, such as RFG and CARB gasoline. The Corpus Christi refinery can
produce approximately 125,000 BPD of gasoline and gasoline-related products,
35,000 BPD of low-sulfur diesel and 35,000 BPD of other products such as
petrochemicals, including propylene and xylene. The Corpus Christi refinery can
produce most of its gasoline as RFG and all of its diesel fuel as low-sulfur
diesel. The Corpus Christi refinery has substantial flexibility to vary its mix
of gasoline products to meet changing market conditions.
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The Corpus Christi refinery's primary operating units include an 87,000 BPD
heavy oil cracker, or HOC, an 82,000 BPD hydrodesulfurization unit, or HDS unit,
a 36,000 BPD hydrocracker and a 37,000 BPD reformer complex. It also operates
certain units which produce oxygenate(1) such as MTBE (methyl tertiary butyl
ether) and TAME (tertiary amyl methyl ether). The Corpus Christi refinery can
produce approximately 24,000 BPD of oxygenates, which are blended into Valero's
gasoline production and also sold separately. Substantially all of the methanol
feedstocks required for the production of oxygenates at the Corpus Christi
refinery can normally be provided by a methanol plant in Clear Lake, Texas owned
by a joint venture between a Valero subsidiary and Hoechst Celanese Chemical
Group, Inc. In January 1997, a mixed xylene fractionation facility, which
recovers the mixed xylene stream from the Corpus Christi refinery's reformate
stream, was placed into service at the refinery. The fractionated xylene is sold
into the petrochemical feedstock market for use in the production of paraxylene
when market conditions are favorable. These units and related facilities
diversify the Corpus Christi refinery's operations, giving this refinery the
flexibility to pursue potentially higher-margin product markets.
A scheduled turnaround of certain of the Corpus Christi refinery's major
refining units was completed in the first quarter of 1999. Modifications made to
the HOC during the 1999 turnaround increased throughput capacity by
approximately 10,000 BPD. During the HOC turnaround, the HDS unit was further
modified, increasing its capacity to process high-sulfur crude oil from
approximately 50,000 BPD to 60,000 BPD, thereby increasing the refinery's
feedstock flexibility. During the third quarter of 1999, this refinery
experienced unplanned downtime as a precaution against the effects of Hurricane
Bret. Turnarounds of the hydrocracker and reformer complexes were completed in
January 2000, and turnarounds of the HDS and MTBE units are planned for the
fourth quarter of 2000.
Texas City Refinery. The Texas City refinery is capable of refining
lower-cost medium sour crudes into a slate of gasolines and distillates,
including home heating oil, low-sulfur diesel, kerosene and jet fuel. The Texas
City refinery can produce approximately 70,000 BPD of gasoline and 65,000 BPD of
distillates. Other products include chemical grade propylene and propane. The
Texas City refinery can also provide approximately 35,000 BPD of intermediate
feedstocks such as DAO and ATBs to the Corpus Christi refinery and/or the
Houston refinery. The refinery typically receives and delivers its feedstocks
and products by tanker and barge via deep water docking facilities along the
Texas City Ship Channel, and also has access to the Colonial, Explorer and
TEPPCO pipelines for distribution of its products.
The Texas City refinery's primary operating units include a 168,000 BPD
crude distillation complex and a 52,000 BPD fluid catalytic cracking unit, or
FCC Unit. During the latter part of 1996, an 85,000 BPD Residfiner (which
reduces the sulfur content and improves the cracking characteristics of the
feedstocks for the FCC Unit), and a 40,000 BPD Residual Oil Supercritical
Extraction unit, or ROSE unit (which recovers DAO from the vacuum tower bottoms
for feed to the FCC Unit), were placed in service at the Texas City refinery.
These units significantly enhanced this refinery's feedstock flexibility and
product diversity.
During 1999, the Texas City refinery entered into long-term hydrogen supply
arrangements with Air Liquide and Praxair, respectively, in order to mitigate
certain hydrogen supply problems encountered in previous years. A scheduled
turnaround was completed on the Residfiner and the ROSE unit in April 1999 and
one of the crude units in October 1999. In 2000, Valero intends to expand two of
the refinery's crude units by an aggregate of 37,000 BPD and the diesel
hydrotreating unit by 14,000 BPD. Additionally, the annual catalyst replacement
for the Residfiner is planned for the second quarter of 2000.
Paulsboro Refinery. On September 16, 1998, Valero Refining Company-New
Jersey, a wholly owned subsidiary of Valero, purchased substantially all of the
assets related to Mobil Oil Corporation's 155,000 BPD refinery in Paulsboro, New
Jersey and assumed certain of its liabilities. The purchase price was $228
million plus approximately $107 million representing the value of inventories
and certain other items acquired in the transaction.
---------------
(1) "Oxygenates" are liquid hydrocarbon compounds containing oxygen. Gasoline
that contains oxygenates usually has lower carbon monoxide emissions than
conventional gasoline. MTBE is an oxygen-rich, high-octane gasoline
blendstock produced by reacting methanol and isobutylene, and is used to
manufacture oxygenated and reformulated gasolines. TAME, like MTBE, is an
oxygen- rich, high-octane gasoline blendstock.
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As part of the acquisition, Valero and Mobil signed long-term agreements
for the Paulsboro refinery to supply Mobil's adjacent lube oil blending and
packaging facility with fuels and lubricant basestocks. In addition, Valero and
Mobil signed long-term agreements for the Paulsboro refinery to supply portions
of Mobil's marketing operations with light products at market-related prices.
The acquisition of the Paulsboro refinery increased Valero's total
throughput capacity by approximately 25%, improved its geographic diversity by
providing better access to Northeast markets and diversified its product mix
through the Paulsboro refinery's production of lubricant basestocks and asphalt.
The Paulsboro refinery processes primarily medium sour and heavy sour
crudes into a wide slate of gasoline and distillates, lubricant basestocks and
asphalt. The Paulsboro refinery can produce approximately 70,000 BPD of
gasoline, 60,000 BPD of distillates, 15,000 BPD of asphalt and 12,000 BPD of
lubricant basestocks. Major units at the Paulsboro refinery include a 105,000
BPD lubricants crude unit, a 50,000 BPD fuels crude unit, a 48,000 BPD FCC Unit,
a 25,000 BPD delayed coking unit, a 15,000 BPD asphalt unit and a 12,000 BPD
lubricants plant. Feedstocks and refined products are typically transported via
refinery-owned dock facilities along the Delaware River, Mobil's product
distribution system or the refinery's access to the Colonial pipeline, which
allows products to be sold into the New York Harbor market.
During 1999, scheduled turnarounds were completed on the distillate
hydrotreater and reformer units. The Paulsboro refinery experienced unscheduled
processing rate reductions and unit downtime during 1999, primarily associated
with its FCC Unit. A scheduled turnaround and 6,500 BPD expansion of the FCC
Unit and 2,000 BPD expansion of one of the crude units are planned for the
second quarter of 2000 in conjunction with scheduled turnarounds. A turnaround
of the naphtha hydrotreater and regeneration of the naphtha reformer catalyst
are also planned for the fourth quarter of 2000.
Houston Refinery. The Houston refinery is capable of processing both heavy
sweet and medium sour crude oils and can produce approximately 60,000 BPD of
gasoline and 30,000 BPD of distillates. The refinery also produces chemical
grade propylene. It operates an 85,000 BPD crude distillation complex and a
61,000 BPD FCC Unit. The refinery typically receives its feedstocks via tanker
at deep water docking facilities along the Houston Ship Channel. This facility
also has access to major product pipelines, including the Colonial, Explorer and
TEPPCO pipelines.
During the second quarter of 1999, the Houston refinery's naphtha reformer
was refurbished, which increased yields from the unit by 5,000 BPD and increased
its flexibility to produce a higher percentage of RFG and premium gasoline. The
Houston refinery experienced one unplanned outage of its FCC Unit during the
fourth quarter of 1999. No major turnarounds are currently planned for 2000.
Krotz Springs Refinery. The Krotz Springs refinery processes primarily
local, light Louisiana sweet crude oil and can produce approximately 40,000 BPD
of gasoline and 45,000 BPD of distillates. The refinery is geographically
located to benefit from access to upriver markets on the Mississippi River and
it has docking facilities along the Atchafalaya River sufficiently deep to allow
barge and light ship access. The facility is also connected to the Colonial
pipeline for product transportation to the Southeast and Northeast. Built during
the 1979-1982 time period, the refinery is a relatively new facility compared to
other U.S. refineries. Primary units include an 80,000 BPD crude distillation
complex, a 31,000 BPD FCC Unit and a 12,000 BPD reformer complex.
No significant turnarounds were undertaken by the Krotz Springs refinery in
1999. A turnaround of the reformer complex was completed in January 2000.
Benicia Refinery. The Benicia refinery is located on the Carquinez Straits
of the San Francisco Bay. It is considered a highly complex refinery and has a
total throughput capacity of 160,000 BPD. The Benicia refinery produces a high
percentage of light products, with limited production of other products. It can
produce approximately 110,000 BPD of gasoline, 14,000 BPD of jet fuel, 11,000
BPD of diesel and 8,000 BPD of natural gas liquids. Approximately 95% of the
gasoline produced by the Benicia refinery meets the CARB II specifications for
gasoline sold in California.
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The Benicia refinery's operating units include a 135,000 BPD crude
distillation complex, a 72,000 BPD vacuum distillation unit, a 73,000 BPD FCC, a
28,000 BPD fluidized coking unit, a 35,000 BPD hydrocracking unit, a 35,000 BPD
reforming unit and a 15,000 BPD alkylation unit. The Benicia refinery also has a
39,000 BPD FCC feed hydrotreater and a 45,000 BPD FCC gasoline hydrotreater. It
has significant liquid storage capacity including storage for crude oil and
other feedstocks. Also included with the refinery assets are a deepwater dock
located offsite on the Carquinez Straits which is capable of berthing large
crude carriers, petroleum coke storage silos located on an adjacent dock, a
20-inch crude pipeline connecting the refinery to a southern California crude
delivery system, and an adjacent truck terminal for regional truck rack sales.
In addition, the sale and purchase agreement related to the acquisition of the
Benicia refinery provides for a ten-year term contract for ExxonMobil to supply
and for Valero to purchase 100,000 BPD of ANS crude oil at market-related
prices, to be reduced to 65,000 BPD on January 1, 2001. Prior to January 1,
2001, Valero will have an option to reduce the volume of ANS crude to 65,000 BPD
with 90 days prior notice. After January 1, 2001, Valero will have an option to
reduce the required volumes by an additional 20,000 BPD once per year.
Selected Refinery Operating Results. The following tables set forth
certain consolidated operating results for the Corpus Christi, Texas City,
Paulsboro, Houston and Krotz Springs refineries for the last three fiscal years,
for the Benicia refinery for 1999 and on a combined basis including Benicia for
1999 (volumes are stated in thousand barrels per day or MBPD). Amounts for 1998
include the results of operations of the Paulsboro refinery after September 16,
1998. Amounts for 1997 include the results of operations of the Texas City,
Houston and Krotz Springs refineries from May 1, 1997. Average throughput margin
per barrel is computed by subtracting total direct product cost of sales from
product sales revenues and dividing the result by throughput volumes. Aggregate
refinery charges and yields are expressed as percentages of total charges and
yields, respectively.
<TABLE>
<CAPTION>
PRO FORMA
VALERO BENICIA COMBINED
YEAR ENDED DECEMBER 31, YEAR ENDED YEAR ENDED
------------------------ DECEMBER 31, DECEMBER 31,
1997 1998 1999 1999 1999
----- ----- ------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Refinery Throughput Volumes............ 417(1) 579(2) 712 137 849
Sales Volumes.......................... 630(1) 894(2) 1,033 144 1,177
Average Throughput Margin per Barrel... $4.35 $3.53 $ 2.93 $ 7.77 $ 3.71
Average Operating Cost per Barrel(3):
Cash (Fixed and Variable)............ $2.00 $2.06 $ 1.85 $ 4.37 $ 2.09
Depreciation and Amortization........ .61 .57 .53 .46 .54
----- ----- ------ ------ ------
Total Operating Cost per
Barrel..................... $2.61 $2.63 $ 2.38 $ 4.83 $ 2.63
===== ===== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
PRO FORMA
VALERO BENICIA COMBINED
YEAR ENDED DECEMBER 31, YEAR ENDED YEAR ENDED
------------------------ DECEMBER 31, DECEMBER 31,
1997 1998 1999 1999 1999
----- ----- ------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Charges:
Crude oils:
Sour.............................. 26% 37% 48% 83% 54%
Heavy sweet....................... 21 20 12 -- 10
Light sweet....................... 10 11 9 -- 8
----- ----- ------ ------ ------
Total crude oils............. 57 68 69 83 72
High-sulphur residual fuel oil....... 17 9 3 4 3
Low-sulphur residual fuel oil........ 3 3 6 -- 5
Other feedstocks and blendstocks..... 23 20 22 13 20
----- ----- ------ ------ ------
Total charges................ 100% 100% 100% 100% 100%
===== ===== ====== ====== ======
</TABLE>
(footnotes on next page)
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<TABLE>
<CAPTION>
PRO FORMA
VALERO BENICIA COMBINED
YEAR ENDED DECEMBER 31, YEAR ENDED YEAR ENDED
------------------------ DECEMBER 31, DECEMBER 31,
1997 1998 1999 1999 1999
----- ----- ------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Yields:
Gasolines and blendstocks............ 53% 53% 51% 68% 54%
Distillates.......................... 25 28 29 15 27
Petrochemicals....................... 6 4 5 -- 4
Lubes and asphalts................... -- 1 3 -- 2
Other products....................... 16 14 12 17 13
----- ----- ------ ------ ------
Total yields................. 100% 100% 100% 100% 100%
===== ===== ====== ====== ======
</TABLE>
------------
(1) For the eight months following the acquisition of Basis Petroleum, Inc.,
refinery throughput volumes and sales volumes were 543 MBPD and 740 MBPD,
respectively.
(2) For the fourth quarter of 1998 following the acquisition of the Paulsboro
Refiner, refinery throughput volumes and sales volumes were 640 MBPD and 949
MBPD, respectively.
(3) The combined information reflects the adjustments made in the pro forma
statements of income. No changes in the operations of the Benicia assets
have been assumed and, therefore, the combined data is not necessarily
indicative of future performance.
For additional information regarding Valero's operating results for the
three years ended December 31, 1999, see "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
MARKETING
Including the Benicia acquisition, over 85% of Valero's product slate is
comprised of premium products such as gasoline and related components,
distillates, lubricant basestocks and petrochemicals, and Valero sells refined
products under spot and term contracts to bulk and truck rack customers at over
200 locations in 35 states throughout the United States and selected export
markets in Latin America. Currently, Valero markets over 200,000 BPD of gasoline
and distillates through truck rack facilities. The principal purchasers of its
products from truck racks are wholesalers and distributors in the Northeast,
Southeast, Midwest, West Coast and Gulf Coast. Other sales are made to large oil
companies and gasoline distributors and transported by pipeline, barges and
tankers. With its access to the Gulf of Mexico, the Pacific Ocean and the
Atlantic Ocean, Valero's refineries are able to ship refined products throughout
the world. Interconnects with common-carrier pipelines give Valero the
flexibility to sell products in most major geographic regions of the United
States.
During 1999, approximately one-third of Valero's refined products were sold
pursuant to term contracts, and total product sales volumes averaged
approximately 1,033,000 BPD. Sales volumes included amounts produced at Valero's
refineries and amounts purchased from third parties and resold in connection
with its marketing activities. Substantially all of the light products from the
Paulsboro refinery are sold to Mobil at market-related prices pursuant to
long-term agreements. In 1999, 13% of Valero's consolidated operating revenues
were derived from Mobil. Other than sales to Mobil, no single purchaser of
Valero's products accounted for more than 10% of total sales during 1999.
Approximately 70,000 BPD of Valero's RFG production is under contract at
market-related prices to gasoline marketers in Texas and the Northeast. Valero
also sells RFG into the spot market. When market conditions are favorable,
Valero can supply CARB gasoline to West Coast markets from its Corpus Christi
refinery. During 1999, approximately 2.7 million barrels of gasoline, including
1.6 million barrels of CARB Phase II gasoline, were delivered to California
purchasers.
For further discussion, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Factors Affecting Operating
Results" and "--Outlook."
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FEEDSTOCK SUPPLY
Refinery acquisitions and capital improvements since 1997 have expanded and
diversified the slate of feedstocks Valero can process. Prior to these
investments, Valero's primary feedstock was resid processed at the Corpus
Christi refinery, representing 50-70% of total feedstocks. Approximately 60% of
Valero's feedstock slate is comprised of medium sour crude oil and heavy sweet
crude oil, while high-sulfur resid purchases comprise less than 5% of total
feedstocks. The remaining feedstocks are primarily low-sulfur crude oil and
intermediates, such as low-sulfur resid and coker gas oil, methanol and butane.
In 1999, approximately 80% of Valero's total crude oil feedstock
requirements were purchased through term feedstock contracts totaling
approximately 425,000 BPD. The remainder of its crude oil feedstock requirements
were purchased on the spot market. The term agreements include contracts to
purchase feedstocks from various foreign national oil companies, including
certain Middle Eastern suppliers, and various domestic integrated oil companies.
In the event one or more of its term contracts were terminated, Valero believes
it would be able to find alternative sources of supply without material adverse
effect on its business.
In connection with the Restructuring in 1997, Valero entered into several
contracts with its former affiliates, including a 10-year term contract under
which a former affiliate is to supply approximately 50% of the butane required
as feedstock for the MTBE facilities at Corpus Christi and natural gasoline for
blending. Approximately 80% of the total methanol requirements for Valero's
refineries are obtained through a 50% joint venture interest in the methanol
plant in Clear Lake, Texas with Hoechst Celanese Chemical Group, Inc.
In connection with the Benicia acquisition, Valero entered into a ten-year
contract for ExxonMobil to supply 100,000 BPD of ANS crude oil at market-related
prices, to be reduced to 65,000 BPD on January 1, 2001, to the Benicia refinery.
Prior to January 1, 2001, Valero will have an option to reduce the volume of ANS
crude to 65,000 BPD with 90 days prior notice. After January 1, 2001, Valero
will have an option to reduce the required volumes by an additional 20,000 BPD
once per year.
Valero owns feedstock and refined product storage facilities and leases
feedstock and refined product storage facilities in various locations. Valero
believes its storage facilities are generally adequate for its refining and
marketing operations.
COMPETITION
Many of Valero's competitors in the petroleum industry are fully integrated
companies engaged on a national or international basis in many segments of the
petroleum business, including exploration, production, transportation, refining
and marketing, on scales much larger than Valero's. Such competitors may have
greater flexibility in responding to or absorbing market changes occurring in
one or more of such segments. All of Valero's crude oil and feedstock supplies
are purchased from third party sources, while some competitors have proprietary
sources of crude oil available for their own refineries.
The refining industry is highly competitive with respect to both feedstock
supply and marketing. Valero competes with numerous other companies for
available supplies of feedstocks and for outlets for its refined products.
Valero does not produce any of its crude oil feedstocks and, following the
Benicia acquisition, will control only limited retail outlets for its refined
products. Many of its competitors, however, obtain a significant portion of
their feedstocks from company-owned production and have extensive retail
outlets. Competitors that have their own production or extensive retail outlets
(and brand-name recognition) are at times able to offset losses from refining
operations with profits from producing or retailing operations, and may be
better positioned to withstand periods of depressed refining margins or
feedstock shortages.
Valero expects a continuation of the trend of industry restructuring and
consolidation through mergers, acquisitions, divestitures, joint ventures and
similar transactions, making for a more competitive business environment while
providing opportunities to expand its operations. As refining margins merit,
Valero expects to continue making capital improvements to increase the
throughput capacity of its refinery facilities and increase their operational
flexibility.
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ENVIRONMENTAL MATTERS
Valero's operations are subject to environmental regulation by federal,
state and local authorities, including but not limited to, the Environmental
Protection Agency ("EPA"), the Texas Natural Resource Conservation Commission,
the New Jersey Department of Environmental Protection, the Louisiana Department
of Environmental Quality and, following the Benicia acquisition, the California
Environmental Protection Agency. The regulatory requirements relate primarily to
discharge of materials into the environment, waste management and pollution
prevention measures. Several of the more significant federal laws applicable to
Valero's operations include the Clean Air Act, the Clean Water Act, the
Comprehensive Environmental Response, Compensation and Liability Act, or CERCLA,
and the Solid Waste Disposal Act, as amended by the Resource Conservation and
Recovery Act, or RCRA. The Clean Air Act establishes stringent criteria for
regulating conventional air pollutants as well as toxic pollutants at operating
facilities in addition to requiring refiners to market cleaner-burning gasoline
in specific regions of the country to reduce ozone forming pollutants and toxic
emissions.
In May 2000, the EPA proposed regulations to reduce the sulfur content for
diesel fuel sold to highway consumers by 97%, from 500 parts per million to 15
parts per million, beginning June 1, 2006. In its release, the EPA estimated
that the overall cost to fuel producers of the reduction in sulfur content would
be approximately 4 cents per gallon. The American Petroleum Institute has
released a statement supporting sharp reductions in diesel fuel sulfur content,
but strongly opposing the EPA's "unrealistic" proposal. Valero is unable to
predict whether the proposed regulations will be adopted or the effect that the
proposal would have on its business or results of operations.
In February 2000, the Tier II gasoline standard was published by the EPA
pursuant to the Clean Air Act in final form. The standard will ultimately
require the sulfur content in gasoline to be reduced to 30 parts per million and
the regulation will be phased in beginning in 2004. Valero has determined that
modifications will be required at all of its refineries as a result of the Tier
II standard. Valero currently plans to begin implementing those modifications in
2001 and expects all modifications to be complete by 2006. Valero believes that
the costs of such modifications should not have a material adverse effect on its
financial position, results of operations or liquidity.
EPA has proposed a Maximum Available Control Technology rule, or MACT II
rule, under the Clean Air Act that is to become final in late 2000. The MACT II
rule, as proposed, contains a three-year compliance schedule for refiners to
install any pollution control technology that may be required in order to meet
emissions limitations of the rule applicable to FCC units, sulfur recovery units
and reformers. Once the MACT II rule is finalized and published, Valero will
determine what capital improvements will be required. Based on information
currently available, Valero does not anticipate that material capital
expenditures will be required to comply with the MACT II rule.
As a result of heightened public concern that MTBE has contaminated
drinking water supplies, initiatives have been passed in California seeking to
ban the use of MTBE as a gasoline component by the end of 2002, or earlier, if
feasible, in California. In addition, other states and the EPA have either
passed or proposed or are considering proposals to restrict or ban the use of
MTBE. If MTBE were to be restricted or banned throughout the United States,
Valero's operations could potentially be materially adversely affected.
Furthermore, there can be no assurance that Valero will not be named in any
future proceeding or litigation relating to the environmental effects of MTBE or
that such proceeding or litigation will not have a material adverse effect on
Valero's overall financial condition, results of operations or liquidity. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Outlook."
CERCLA and RCRA, and related state law, subject Valero to the potential
obligation to remove or mitigate the environmental impact of the disposal or
release of certain pollutants from Valero's facilities and at formerly owned or
operated sites or third party waste disposal sites. Under CERCLA, Valero is
subject to potential joint and several liability for the costs of remediation at
"superfund" sites at which it has been identified as a "potentially responsible
party." Pursuant to the terms of the Basis Petroleum, Inc. acquisition, Salomon
agreed to indemnify Valero from third party claims, including "superfund"
liability associated with any pre-closing activities with respect to the
refineries acquired as part of the acquisition, subject to certain
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terms, conditions and limitations. See Note 3 of Notes to Consolidated Financial
Statements for the year ended December 31, 1999 for information regarding the
settlement of certain contingent environmental obligations for which Salomon was
responsible in connection with Valero's acquisition of Basis. As described below
under "Legal Proceedings," Valero has received notice of a claim under CERCLA
for alleged contamination of the plaintiffs' marine loading and tankering
facilities. Based on the information available to Valero, Valero believes that
some or all of any Valero liability would be covered by the Salomon indemnity.
Valero has not otherwise received any claims under CERCLA for any sites or costs
not covered by Salomon's indemnity of Valero.
In connection with the acquisition of the Paulsboro refinery, Mobil agreed
to indemnify Valero for certain environmental matters and conditions existing on
or prior to the acquisition and Valero 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 from the closing date, (ii) governmental fines and/or penalties for a
period of five years from the closing date, (iii) required remediation of known
environmental conditions for a period of five years from the closing date,
subject to a cumulative deductible, (iv) required remediation of unknown
environmental conditions for a period of seven years from the closing date,
subject to a sharing arrangement with a cap on Valero's obligation and subject
to a cumulative deductible, and (v) certain capital expenditures required by a
governmental entity for a three-year period from the closing date, to the extent
required to cure a breach of certain representations of Mobil concerning
compliance with environmental laws, subject to a specified deductible. Valero'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
December 31, 1999, Valero has accrued approximately $20 million representing its
best estimate of costs to be borne by Valero related to these remediation
obligations. The majority of such costs are expected to be incurred in
relatively level amounts over the next 19 years. See Note 3 of Notes to
Consolidated Financial Statements for the year ended December 31, 1999.
In connection with the Benicia acquisition, Valero will assume the
environmental liabilities of ExxonMobil with certain exceptions. ExxonMobil
retained liability for (i) pending penalties assessed for violations relating to
the Benicia refinery, (ii) pending lawsuits, (iii) all costs associated with
compliance with a variance issued in connection with control of nitrogen oxides,
(iv) claims in connection with offsite transportation and disposal of wastes
prior to closing asserted within three years of closing or asserted with respect
to abandoned disposal sites, (v) the capital costs incurred within five years of
closing for specified corrective action of groundwater and soil contamination,
(vi) all covered contamination at the Service Station Assets caused by
ExxonMobil or its lessees that is reflected in baseline reports prepared prior
to closing, (vii) the repair or replacement of any underground storage tanks at
the Service Station Assets found to be leaking prior to closing and (viii) fines
and penalties imposed within five years of closing arising out of a request for
information from the EPA relating to certain provisions of the Clean Air Act
that are attributable to actions taken prior to closing or untimely or
unresponsive responses to the request. ExxonMobil has agreed to indemnify Valero
for all losses related to these retained liabilities, provided that ExxonMobil
will indemnify Valero for losses related to covered contamination at the Service
Station Assets for a period of five years from the date of closing. In addition,
ExxonMobil will indemnify Valero for breaches of its representations and
warranties to the extent that the aggregate amount of Valero's losses resulting
from such breaches exceeds $1 million and ExxonMobil receives notice of such
losses within one year after the closing date.
There can be no assurance that these indemnifying parties will indemnify or
continue to indemnify Valero pursuant to the terms of these acquisitions. In the
event that these indemnifying parties fail to do so, Valero could be liable for
the costs of the environmental matters covered under these indemnities, the
costs of which could be material.
Valero is leading an industry initiative in the State of Texas to
voluntarily permit its "grandfathered" emissions sources by participating in the
Governor's Clean Air Responsibility Enterprise program at the Houston refinery
and by utilizing a flexible permitting process for the Texas City refinery. The
flexible permit is a permitting process in Texas that allows companies that have
committed to install advanced pollution
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control technology greater operational flexibility, including increased
throughput capacities, as long as a facility-wide emissions cap is not exceeded.
As part of Valero's efforts to permit all of its "grandfathered" emissions
sources and achieve operational flexibility and increased production capability,
a flue gas scrubber is being installed on the FCC Unit at the Texas City
refinery in connection with Valero's voluntary participation in the Governor's
City Air Responsibility Enterprise Program and additional emission control
devices are planned for the Houston refinery. Installation of the flue gas
scrubber will cost approximately $35 million over a two-year period, beginning
in 2000, and is being funded through a structured lease financing arrangement.
The Corpus Christi refinery was issued a flexible operating permit by the Texas
Natural Resources Conservation Commission on March 1, 1999, and the Commission
approved a flexible operating permit for the Texas City refinery on February 9,
2000.
In 1999, capital expenditures for Valero attributable to compliance with
environmental regulations were approximately $7 million and are currently
estimated to be $7 million for 2000 and $22 million for 2001. The foregoing
estimates for 2000 and 2001 do not include expenditures for the installation of
the flue gas scrubber at the Texas City refinery discussed above, expenditures
for the installation of the flue gas scrubber at the Paulsboro refinery
discussed in "-- Legal Proceedings" below (expected to be incurred primarily in
2003), any amounts related to constructed facilities for which the portion of
expenditures relating to compliance with environmental regulations is not
determinable or any capital expenditures for the Benicia refinery and the
Service Station Assets. Valero currently estimates these Benicia-related capital
expenditures to be approximately $7 million in each of 2000 and 2001 based on
the amount of due diligence that it has been able to conduct to date.
Governmental regulations are complex, subject to different interpretations
and becoming increasingly more stringent. Therefore, future action and
regulatory initiatives could result in changes to expected operating permits,
additional remedial actions or increased capital expenditures and operating
costs that cannot be assessed with certainty at this time. In addition, because
certain air emissions at the refineries, including those at the Benicia
refinery, have been grandfathered under particular environmental laws, any major
upgrades in any of Valero's refineries could require potentially material
additional expenditures to comply with environmental laws and regulations.
EMPLOYEES
As of April 30, 2000, Valero had 2,528 employees. Valero believes its
relationship with its employees is good.
PROPERTIES
Valero's properties include its six refineries described above and related
facilities located in the States of Texas, Louisiana, New Jersey and California.
See "--Refining, Marketing and Feedstock Supply" for additional information
regarding properties of Valero. Valero believes that its facilities are
generally adequate for their respective operations and that its facilities are
maintained in a good state of repair. Valero is the lessee under a number of
cancelable and non-cancelable leases for certain real properties, including
office facilities and various facilities and equipment used to store, transport
and produce refinery feedstocks and/or refined products. See Note 14 of Notes to
Consolidated Financial Statements for the year ended December 31, 1999.
LEGAL PROCEEDINGS
In connection with the acquisition of the Paulsboro refinery from Mobil,
Valero Refining Company-New Jersey, a wholly owned subsidiary of Valero, assumed
certain environmental liabilities associated with the refinery, including
obligations under the New Jersey Department of Environmental Protection
("NJDEP") Administrative Consent Orders dated September 10, 1979, September 29,
1980, May 10, 1991, and August 27, 1998, related to ongoing site remediation.
Additionally, Valero has received two New Jersey Department of Environmental
Protection Administrative Orders and Notices of Civil Administrative Penalty
Assessment related to particulate tests of the Paulsboro refinery's FCC Unit.
Although these orders and
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assessments related to emissions from the FCC Unit that occurred after Valero's
acquisition of the refinery, they related to conditions existing prior to the
acquisition. On May 5, 2000, Valero entered into a comprehensive administrative
consent order with the NJDEP to resolve all pending enforcement actions and
related but unasserted claims regarding particulate emissions from the refinery.
The order authorizes an expansion of the refinery allowing for production of
RFG, provides for interim emissions limits, and requires a penalty payment of
$600,000 on the particulate emissions issues. Under the order, Valero also
agreed to install a wet-gas scrubber on the refinery's FCC Unit by December 31,
2003. Valero believes that the terms of the foregoing settlement will not have a
material adverse effect on its operations, financial position or liquidity.
On June 11, 1999, the Texas Natural Resources Conservation Commission
notified Valero of its commencement of proceedings against Valero's Texas City
refinery concerning certain record keeping deficiencies and alleged emissions
exceedances, most of which occurred prior to Valero's acquisition of the
refinery. Corrective action was immediately taken and all contested matters have
been resolved pursuant to an agreed order dated December 20, 1999, under which
Valero paid an agreed penalty of $174,455.
In 1986, Valero filed suit against M.W. Kellogg Company for damages arising
from certain alleged design and construction defects in connection with a major
construction project at the Corpus Christi refinery. Ingersoll-Rand Company was
added as a defendant in 1989. In 1991, the trial court granted summary judgment
against Valero based in part on certain exculpatory provisions in various
agreements connected with the project. In 1993, the court of appeals affirmed
the summary judgment and the Texas Supreme Court denied review. Subsequent to
the summary judgment, Kellogg and Ingersoll-Rand brought indemnity claims
against Valero for attorney's fees and expenses incurred in defending the
original action. In 1996, the trial court rendered summary judgment against
Kellogg and Ingersoll-Rand based on procedural grounds, and the court of appeals
affirmed that ruling in 1997. However, in 1999, the Texas Supreme Court reversed
the court of appeals and remanded Kellogg's and Ingersoll-Rand's claims for
attorney's fees and expenses to the 117th State District Court, Nueces County,
Texas.
Valero has received notice of, but has not been served with, a complaint
filed April 28, 2000 in the U.S. District Court for the Southern District of
Texas, Galveston Division (Texas City Terminal Railway Co. v. Marathon Ashland
Petroleum, LLC, et al.). The complaint alleges that several companies, including
Valero, are liable under CERCLA, other environmental laws and tort law theories
for alleged contamination of the plaintiffs' marine loading and tankering
facilities. Based on the information available to Valero, Valero believes that
some or all of any Valero liability would be covered by an indemnity from
Salomon Inc. provided in connection with Valero's acquisition from Salomon of
Basis Petroleum, Inc.
On May 24, 2000, Valero was served with a class action complaint filed in
the U.S. District Court for the Southern District of New York. The complaint
attempts to certify a class action claim alleging that numerous gasoline
suppliers, including Valero, contaminated groundwater in the State of New York
with MTBE.
LITIGATION RELATING TO DISCONTINUED OPERATIONS
Old Valero and certain of its natural gas related subsidiaries, and Valero,
have been sued by Teco Pipeline Company in the 215th State District Court,
Harris County, Texas regarding the operation of the 340-mile West Texas Pipeline
in which a subsidiary of Old Valero holds a 50% undivided interest. The case was
filed April 24, 1996. In 1985, a subsidiary of Old Valero sold a 50% undivided
interest in the pipeline and entered into a joint venture through an ownership
agreement and an operating agreement, with the purchaser of the interest. In
1988, Teco succeeded to that purchaser's 50% interest. A subsidiary of Old
Valero has at all times been the operator of the pipeline. Despite the written
ownership and operating agreements, the plaintiff contends that a separate,
unwritten partnership agreement exists, and that the defendants have exercised
improper control over this alleged partnership's affairs. The plaintiff also
contends that the defendants acted in bad faith and negatively affected the
economics of the joint venture in order to provide financial advantages to
facilities or entities owned by the defendants, and by allegedly taking 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. Old Valero's
motion to require arbitration of the case as required in
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the written agreements was denied by the trial court, but Old Valero appealed,
and in August 1999, the court of appeals ruled in Old Valero's favor and ordered
arbitration of the entire dispute. Teco has since waived efforts to further
appeal this ruling, and an arbitration panel has been selected. Valero has been
formally added to this proceeding. The arbitration panel has scheduled the
arbitration hearing for October 2000. Although PG&E previously acquired Teco and
now owns both Teco and Old Valero, PG&E's Teco acquisition agreement purports to
assign the benefit or detriment of this lawsuit to the former shareholders of
Teco. In connection with the Restructuring, Valero has agreed to indemnify Old
Valero with respect to this lawsuit for 50% of any final judgment or settlement
amount up to $30 million, and 100% of that part of any final judgment or
settlement amount over $30 million.
GENERAL
Valero is also a party to additional claims and legal proceedings arising
in the ordinary course of business. Valero believes it is unlikely that the
final outcome of any of the claims or proceedings to which it is a party would
have a material adverse effect on its 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 Valero's results of operations, financial position or
liquidity. See also "Risk Factors -- The outcome of the Unocal patent dispute
may adversely affect our business" for an additional discussion of litigation
related matters.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
<TABLE>
<CAPTION>
NAME AGE POSITIONS HELD WITH VALERO
---- --- --------------------------
<S> <C> <C>
William E. Greehey........................ 63 Chairman of the Board, President and Chief
Executive Officer
Gregory C. King........................... 39 Senior Vice President and Chief Operating
Officer
John D. Gibbons........................... 46 Vice President and Chief Financial Officer
Keith D. Booke............................ 41 Vice President and Chief Administrative
Officer
S. Eugene Edwards......................... 43 Vice President
John F. Hohnholt.......................... 47 Vice President
Dr. Donald M. Carlton..................... 62 Director
Jerry D. Choate........................... 61 Director
Robert G. Dettmer......................... 68 Director
Ruben M. Escobedo......................... 62 Director
Lowell H. Lebermann....................... 60 Director
Dr. Ronald K. Calgaard.................... 62 Director
Dr. Susan Kaufman Purcell................. 57 Director
</TABLE>
MR. GREEHEY 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 in June 1996 but, upon request of the
Board of Old Valero, resumed this position in November 1996. Mr. Greehey has
served as Valero's Chairman of the Board and Chief Executive Officer since the
Restructuring, positions he also held with Valero prior to the Restructuring
when Valero was a wholly owned subsidiary of Old Valero, and was elected
President of Valero upon the retirement of Edward C. Benninger at the end of
1998. Mr. Greehey also serves as a director of Santa Fe Snyder Corp.
MR. KING was elected Senior Vice President and Chief Operating Officer of
Valero in 1999. Prior to that time he had served as Vice President and General
Counsel since 1997. He joined Old Valero in 1993 as Associate General Counsel
and prior to that was a partner in the Houston law firm of Bracewell and
Patterson.
MR. GIBBONS was elected Chief Financial Officer of Valero in 1998.
Previously, he was elected Vice President--Finance and Treasurer of Valero in
1997, and was elected Treasurer of Old Valero in 1992. He joined Old Valero in
1981 and held various other positions with Old Valero prior to the
Restructuring.
MR. BOOKE was elected Vice President and Chief Administrative Officer in
1999. Until that time he had served as Vice President--Administration and Human
Resources since 1998. Prior to that he served as Vice President--Administration
of Valero since 1997 and Vice President-Investor Relations of Old Valero since
1994. He joined Old Valero in 1983 and held various other positions with Old
Valero prior to the Restructuring.
MR. EDWARDS was elected Vice President of Valero in January 1998 and
functions as head of the Supply, Marketing and Transportation Division. Mr.
Edwards joined Old Valero in 1982 and held various positions within Old Valero's
refining operations, planning and economics, business development and marketing
departments prior to the Restructuring.
MR. HOHNHOLT was elected Vice President of Valero in January 1998 and
functions as the head of the Refining Operations Division. Prior to that he was
General Manager of the Corpus Christi refinery. Mr. Hohnholt joined Old Valero
in 1982 and held various positions within Old Valero's refining operations and
engineering departments prior to the Restructuring.
DR. CARLTON was elected as a director of Valero in 1999. Until his
retirement on December 31, 1998, Dr. Carlton served as President and Chief
Executive Officer of Radian International LLC, an Austin, Texas based
engineering and technology firm that is a part of the Dames and Moore Group. Dr.
Carlton also serves
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as a director of Central and Southwest Corp., National Instruments Corp. and
Salomon Smith Barney Concert Investment Series.
MR. CHOATE was elected as a director of Valero in 1999. Mr. Choate retired
from Allstate Corporation at the end of 1998 where he had served as Chairman of
the Board and Chief Executive Officer since January 1, 1995. Mr. Choate also
serves as a director of Amgen, Inc. and Van Kampen Mutual Funds.
MR. DETTMER was elected as a director of Valero in 1991. He retired from
PepsiCo, Inc. in 1996 after serving as Executive Vice President and Chief
Financial Officer since 1986. Mr. Dettmer also serves as a director of Allied
Worldwide, Inc.
MR. ESCOBEDO was elected as a director of Valero in 1994. He 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, an affiliate of Old Valero, from 1989 to 1994.
MR. LEBERMANN was elected as a director of Valero in 1986. He 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.
DR. CALGAARD was elected as a director of Valero in 1996. He served as
President of Trinity University, San Antonio, Texas, from 1979 until his
retirement in 1999. Dr. Calgaard currently serves as Chief Operating Officer of
Austin Calvert & Flavin Inc. in San Antonio, and is 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, an affiliate of Old
Valero, from 1987 until 1994.
DR. PURCELL was elected as a director of Valero in 1994. She 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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ACCOUNTING TREATMENT
The financial statements of the Trust will be reflected in our consolidated
financial statements, with the trust preferred securities shown on our balance
sheet as Valero-obligated mandatorily redeemable preferred capital trust
securities of a subsidiary trust holding solely Valero senior notes. The
footnotes to our consolidated financial statements will reflect that the sole
asset of the Trust will be the senior deferrable notes. Distributions on the
trust preferred securities will be reflected as a charge to our consolidated
income, identified as "Distributions on Preferred Securities of a Subsidiary
Trust," whether paid or accumulated.
The purchase contracts are forward transactions in our common stock. Upon
settlement of a purchase contract, we will receive the stated amount of $25 on
the purchase contract and will issue the requisite number of shares of our
common stock. The stated amount received will be credited to shareholders'
equity.
Prior to the issuance of shares of our common stock upon settlement of the
purchase contracts, the PEPS Units will be reflected in our earnings per share
calculations using the treasury stock method. Under this method, the number of
shares of our common stock used in calculating earnings per share is deemed to
be increased by the excess, if any, of the number of shares issuable upon
settlement of the purchase contracts over the number of shares that could be
purchased by us in the market (at the average market price during the period)
using the proceeds receivable upon settlement. Consequently, we expect there
will be no dilutive effect on our earnings per share except during periods when
the average market price of a share of our common stock is above the threshold
appreciation price.
DESCRIPTION OF PEPS UNITS
The following is a summary of some of the terms of the PEPS Units. This
summary together with the summary of some of the terms of the purchase
contracts, the purchase contract agreement, the pledge agreement and the trust
preferred securities set forth under the captions "Description of the Purchase
Contracts," "Certain Provisions of the Purchase Contracts, the Purchase Contract
Agreement and the Pledge Agreement" and "Description of the Trust Preferred
Securities" in this prospectus supplement contain a description of all of the
material terms of the PEPS Units but is not complete. We refer you to the forms
of the purchase contract agreement, the pledge agreement and the trust preferred
securities that have been filed or incorporated by reference as exhibits to the
registration statement of which this prospectus supplement and the accompanying
prospectus form a part. This summary supplements the description of the stock
purchase units in the accompanying prospectus, and, to the extent it is
inconsistent, replaces the description in the prospectus.
PEPS UNITS
Each PEPS Unit offered will initially consist of:
-- a purchase contract under which the holder will purchase from us on
the purchase contract settlement date, or upon early settlement, for
$25, a number of shares of our common stock equal to the applicable
settlement rate described under "Description of the Purchase
Contracts--General" or "Description of the Purchase Contracts--Early
Settlement" in this prospectus supplement, as the case may be; and
-- a trust preferred security, having a stated liquidation amount of
$25, representing an undivided beneficial ownership interest in the
assets of the Trust, which assets will consist solely of the senior
deferrable notes, under which we will pay cash distributions at the
rate of % per year, or $ per year, paid quarterly.
The trust preferred security will be pledged under the pledge agreement to
secure your obligation to purchase our common stock under the purchase contract.
We will have the right at any time to dissolve the Trust and, after
satisfaction of liabilities to creditors of the Trust, if any, to cause the
senior deferrable notes to be distributed to the holders of the trust
securities.
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Prior to the distribution of the senior deferrable notes, we will be required to
obtain an opinion of counsel that the distribution of the senior deferrable
notes will not be taxable to the holders of the trust preferred securities for
United States federal income tax purposes. References in this prospectus
supplement to trust preferred securities, unless the context otherwise requires,
include the senior deferrable notes that would be delivered to the holders of
the trust preferred securities upon dissolution of the Trust.
In addition, if a tax event occurs prior to the purchase contract
settlement date, we may cause the senior deferrable notes (and, thus, the trust
preferred securities) to be redeemed. Upon such a "tax event redemption," the
securities intermediary will use the proceeds from the redemption of the senior
deferrable notes to purchase a portfolio of zero-coupon U.S. treasury securities
that mature one business day prior to the purchase contract settlement date and
on the various dates upon which payments would have been due on the senior
deferrable notes. We refer to this portfolio of treasury securities as the
"treasury portfolio." The treasury portfolio will be substituted for the
redeemed trust preferred securities as the collateral securing the holders'
obligations under the related purchase contracts and the Trust will be
dissolved.
If the Trust is dissolved at a time when the trust preferred securities are
part of the PEPS Unit, each PEPS Unit thereafter will consist of a purchase
contract plus either a senior deferrable note having a principal amount of $25
or the applicable ownership interest of the treasury portfolio, as applicable,
instead of a trust preferred security. If the Trust is dissolved at a time when
the trust preferred securities are no longer a part of the PEPS Unit, the holder
of the trust preferred securities will receive either a senior deferrable note
or cash in an amount equal to the redemption price of the senior deferrable
note, as applicable.
An "applicable ownership interest" means, with respect to a PEPS Unit and
the treasury portfolio, (1) a 1/40, or 2.5%, undivided beneficial ownership
interest in a $1,000 face amount of a principal or interest strip in a U.S.
treasury security included in the treasury portfolio that matures on or prior to
August 18, 2003 and (2) for each scheduled interest payment date on the senior
deferrable notes that occurs after the date upon which the senior deferrable
notes are redeemed due to a tax event, a 1/40, or 2.5%, undivided beneficial
ownership interest in a $1,000 face amount of a principal or interest strip in a
U.S. treasury security included in the treasury portfolio that matures on or
prior to such date. Unless otherwise specified, references in this prospectus
supplement to the "applicable ownership interest of the treasury portfolio" have
the meaning specified in clause (1) of this definition.
The purchase price of each PEPS Unit will be allocated between the purchase
contract and the trust preferred security in proportion to their respective fair
market values at the time of purchase. We expect that, at the time of issuance,
the fair market value of each purchase contract will be $ and the fair
market value of each trust preferred security will be $ . This position
generally will be binding on each beneficial owner of a PEPS Unit (but not on
the IRS).
So long as the units are in the form of PEPS Units, either the related
trust preferred securities or the applicable ownership interest of the treasury
portfolio, as applicable, will be pledged to the collateral agent to secure the
holders' obligations to purchase our common stock under the related purchase
contracts.
CREATING TREASURY PEPS UNITS BY SUBSTITUTING A TREASURY SECURITY FOR TRUST
PREFERRED SECURITIES
Each holder of 40 PEPS Units may create 40 Treasury PEPS Units by
substituting for the trust preferred securities that are a part of the PEPS
Units a treasury security having an aggregate principal amount at maturity equal
to $1,000.
Each Treasury PEPS Unit will consist of:
-- a purchase contract under which the holder will purchase from us on
the purchase contract settlement date, or upon early settlement, for
$25, a number of shares of our common stock equal to the applicable
settlement rate; and
-- a 1/40 undivided beneficial ownership interest in a zero-coupon U.S.
treasury security (CUSIP No. 912820BG1) with a principal amount at
maturity equal to $1,000 and maturing on August 15, 2003, the
business day preceding the purchase contract settlement date.
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The term "business day" means any day other than a Saturday or a Sunday or
a day on which banking institutions in New York City or San Antonio, Texas are
authorized or required by law or executive order to remain closed or a day on
which The Bank of New York, a New York banking corporation, acting as indenture
trustee with respect to the senior deferrable notes and property trustee under
the declaration of trust, is closed for business.
The Treasury PEPS Unit holder's beneficial ownership in the treasury
security will be pledged under the pledge agreement to secure the holder's
obligation to purchase shares of our common stock under the purchase contract.
Holders of PEPS Units may create Treasury PEPS Units at any time on or
prior to the seventh business day preceding August 18, 2003. Because the
treasury security is issued in integral multiples of $1,000, holders of PEPS
Units may create Treasury PEPS Units only in integral multiples of 40.
To create 40 Treasury PEPS Units, a holder is required to:
-- deposit with the securities intermediary a zero-coupon U.S. treasury
security (CUSIP No. 912820BG1) with a principal amount at maturity
equal to $1,000 and maturing on August 15, 2003; and
-- transfer to the purchase contract agent 40 PEPS Units, accompanied by
a notice stating that the holder of the PEPS Units has deposited a
treasury security with the securities intermediary and requesting
that the purchase contract agent instruct the collateral agent to
release the related 40 trust preferred securities.
Upon receiving instructions from the purchase contract agent and
confirmation of receipt of the treasury security by the securities intermediary,
the collateral agent will cause the securities intermediary to release the
related 40 trust preferred securities from the pledge and deliver them to the
purchase contract agent, free and clear of our security interest. The purchase
contract agent then will:
-- cancel the 40 PEPS Units;
-- transfer the related 40 trust preferred securities to the holder; and
-- deliver 40 Treasury PEPS Units to the holder.
The treasury security will be substituted for the trust preferred
securities and will be pledged to the collateral agent to secure the holder's
obligation to purchase shares of our common stock under the related purchase
contracts. These trust preferred securities thereafter will trade separately
from the Treasury PEPS Units.
Holders who create Treasury PEPS Units or recreate PEPS Units (as discussed
below) will be responsible for any fees or expenses payable to the collateral
agent in connection with substitutions of collateral. See "Certain Provisions of
the Purchase Contracts, the Purchase Contract Agreement and the Pledge
Agreement--Miscellaneous" in this prospectus supplement.
RECREATING PEPS UNITS
Each holder of 40 Treasury PEPS Units may recreate 40 PEPS Units by:
-- depositing with the securities intermediary 40 trust preferred
securities; and
-- transferring to the purchase contract agent 40 Treasury PEPS Units,
accompanied by a notice stating that such holder has deposited 40
trust preferred securities with the securities intermediary and
requesting that the purchase contract agent instruct the collateral
agent to release the related treasury security.
Upon receiving instructions from the purchase contract agent and
confirmation of receipt of the trust preferred securities by the securities
intermediary, the collateral agent will cause the securities intermediary to
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release the related treasury security from the pledge and deliver it to the
purchase contract agent, on behalf of the holder, free and clear of our security
interest. The purchase contract agent then will:
-- cancel the 40 Treasury PEPS Units;
-- transfer the related treasury security to the holder; and
-- deliver 40 PEPS Units to the holder.
Holders of Treasury PEPS Units may recreate PEPS Units at any time on or
prior to the seventh business day preceding August 18, 2003.
CURRENT PAYMENTS
The payments on the PEPS Units will consist of cash distributions payable
on the trust preferred securities by the Trust or the senior deferrable notes or
amounts payable in respect of the treasury portfolio, as applicable, payable at
the rate of % of the stated liquidation or principal amount per year, payable
quarterly in arrears, on February 18, May 18, August 18, and November 18,
starting August 18, 2000. We may defer interest payments on the senior
deferrable notes which will effectively be a deferral of the cash distribution
on the trust preferred securities since the Trust's only source of funds is the
interest payments we make on the senior deferrable notes.
If a holder of PEPS Units creates Treasury PEPS Units by substituting a
treasury security for the trust preferred securities, such holder will not
receive any payments with respect to the Treasury PEPS Units. If a Treasury PEPS
Unit holder continues to hold the trust preferred security that has been
separated from the PEPS Unit, it will continue to receive distributions on such
trust preferred security.
LISTING OF THE PEPS UNITS AND THE TREASURY PEPS UNITS
We have applied to list the PEPS Units on the New York Stock Exchange under
the symbol "VLO PrU" If Treasury PEPS Units are created and then traded to a
sufficient extent that applicable exchange listing requirements are met, we will
try to list them on the national securities exchanges or associations on which
the PEPS Units are then listed or quoted, but we have no obligation to do so. We
do not intend to list the trust preferred securities on any securities exchange.
REPURCHASE OF THE PEPS UNITS
We may purchase from time to time any of the PEPS Units offered by this
prospectus supplement and the accompanying prospectus that are then outstanding
by tender, in the open market, by private agreement or otherwise.
DESCRIPTION OF THE PURCHASE CONTRACTS
GENERAL
The following description is a summary of some of the terms of the purchase
contracts. It supplements the description of the stock purchase contracts in the
accompanying prospectus and, to the extent it is inconsistent, replaces the
description in the prospectus. The purchase contracts will be issued pursuant to
the purchase contract agreement between us and The Bank of New York, as purchase
contract agent. The description of the purchase contracts and the purchase
contract agreement in this prospectus supplement and the accompanying prospectus
contain a summary of their material terms but do not purport to be complete, and
reference is hereby made to the form of the purchase contract agreement that is
filed as an exhibit or incorporated by reference to the registration statement.
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A holder of a PEPS Unit or a Treasury PEPS Unit can satisfy his or her
obligation under the purchase contract to purchase our common stock on or prior
to the purchase contract settlement date in one of three ways. Such holder can
settle his or her purchase contract obligation by:
-- settling on the purchase contract settlement date through the
remarketing procedures described under "--Settlement through
Remarketing";
-- settling on the purchase contract settlement date by paying cash as
described under "--Notice to Settle with Cash"; or
-- settling early at any time on or prior to the seventh business day
preceding August 18, 2003 by paying cash as described under "--Early
Settlement."
Each of the three settlement methods requires you to make a decision about
how you wish to satisfy your purchase contract obligation to purchase our common
stock and take the appropriate steps no later than seven business days prior to
August 18, 2003. If you are a PEPS Unit holder and you fail to make an effective
election on your trust preferred securities, your purchase contract obligation
will be settled on the purchase contract settlement date through the remarketing
procedures and if you are a Treasury PEPS Unit holder and you fail to elect to
settle in cash on the purchase contract settlement date the principal amount of
the related treasury security will be applied to satisfy your obligation under
your purchase contracts, in each case as more fully described under
"--Settlement through Remarketing."
Each purchase contract that is a part of a PEPS Unit or a Treasury PEPS
Unit will obligate its holder to purchase, and us to sell, on the purchase
contract settlement date (unless the purchase contract terminates prior to that
date or is settled early at the holder's option), a number of shares of our
common stock equal to the settlement rate, for $25 in cash. The number of shares
of our common stock issuable upon settlement of each purchase contract on the
purchase contract settlement date (which we refer to as the "settlement rate")
will be determined as follows, (subject to adjustment as described under
"--Anti-Dilution Adjustments" below):
-- If the average of the closing prices of our common stock on the 20
trading days ending on the third trading day prior to the contract
settlement date, is equal to or greater than $ , the threshold
appreciation price, then each purchase contract will be settled for
shares.
-- If the average of the closing prices of our common stock on the 20
trading days ending on the third trading day prior to the contract
settlement date, is less than $ but greater than the closing
price of our common stock on the date of this prospectus supplement,
the "reference price," then each purchase contract will be settled
for a number of shares having a value, based on such 20-trading day
average, equal to $25.
-- If the average of the closing prices of our common stock on the 20
trading days ending on the third trading day prior to the contract
settlement date, is less than or equal to the reference price, then
each purchase contract will be settled for shares of our common
stock.
Except under the limited circumstances described under "-- Anti-Dilution
Adjustments," if you elect to settle your purchase contract early, the number of
shares of our common stock issuable upon settlement of such purchase contract
will be .
FOR ILLUSTRATIVE PURPOSES ONLY, THE FOLLOWING TABLE SHOWS THE NUMBER OF
SHARES OF OUR COMMON STOCK ISSUABLE UPON SETTLEMENT OF EACH PURCHASE CONTRACT AT
VARIOUS ASSUMED VALUES FOR THE AVERAGE OF THE CLOSING PRICES OF OUR COMMON STOCK
ON THE 20 TRADING DAYS ENDING ON THE THIRD TRADING DAY PRIOR TO THE PURCHASE
CONTRACT SETTLEMENT DATE, THE "APPLICABLE MARKET VALUE," AND ASSUMING A
REFERENCE PRICE OF $30 AND A THRESHOLD APPRECIATION PRICE OF $36. The assumed
threshold appreciation price represents an appreciation of 20% above the
reference price of $30. The table assumes that there will be no adjustments to
the settlement rate described under "--Anti-Dilution Adjustments" below. We
cannot assure you that the actual applicable market value will be within the
range set forth below, and there can be no assurance that the assumed
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reference price or the assumed threshold appreciation price will be indicative
of the actual terms of the securities. Based on these assumptions, a holder of a
PEPS Unit or a Treasury PEPS Unit would receive on the purchase contract
settlement date, in settlement of each purchase contract, the following
fractions of a share of our common stock at the following assumed applicable
market values:
<TABLE>
<CAPTION>
FRACTION OF A
ASSUMED APPLICABLE SHARE OF OUR
MARKET VALUE COMMON STOCK
------------------ -------------
<S> <C>
$24 .833
$26 .833
$28 .833
$30 .833
$32 .781
$34 .735
$36 .694
$38 .694
$40 .694
$42 .694
</TABLE>
As the above hypothetical table illustrates, if, on the purchase contract
settlement date, the applicable market value is greater than or equal to the
assumed threshold appreciation price of $36, we would be obligated to deliver
.694 shares of our common stock for each purchase contract. As a result, the
holder would receive 83.3% of the appreciation in the market value of the shares
of our common stock underlying each purchase contract above $36. If, on the
purchase contract settlement date, the applicable market value is less than the
assumed threshold appreciation price of $36 but greater than the assumed
reference price of $30 we would be obligated to deliver a number of shares of
our common stock having a value, based on the applicable market value, equal to
$25 and we would retain all appreciation in the market value of the shares of
our common stock underlying each purchase contract for that period. If, on the
purchase contract settlement date, the applicable market value is less than or
equal to the assumed reference price of $30, we would be obligated to deliver in
settlement of the purchase contract .833 shares of our common stock for each
purchase contract, regardless of the market price of the shares of our common
stock. As a result, the holder would realize the entire loss on the decline in
market value of the shares of our common stock underlying each purchase contract
for that period.
The term "closing price" of shares of our common stock means, on any date
of determination (1) the closing sale price (or, if no closing sale price is
reported, the last reported sale price) of shares of our common stock on the New
York Stock Exchange on such date or, if shares of our common stock are not
listed for trading on the New York Stock Exchange on any such date, as reported
in the composite transactions for the principal United States securities
exchange on which the shares of our common stock are so listed, or if shares of
our common stock are not so listed on a United States national or regional
securities exchange, as reported by the Nasdaq National Market or (2) if shares
of our common stock are not so reported, the last quoted bid price for the
shares of our common stock in the over-the-counter market as reported by the
National Quotation Bureau or a similar organization, or, if such bid price is
not available, the average of the mid-point of the last bid and ask prices of
shares of our common stock on such date from at least three nationally
recognized independent investment banking firms retained for this purpose by us.
The term "trading day" means a day on which the shares of our common stock
(1) are not suspended from trading on any national or regional securities
exchange or association or over-the-counter market at the close of business and
(2) has traded at least once on the national or regional securities exchange or
association or over-the-counter market that is the primary market for the
trading of the shares of our common stock.
We will not issue any fractional shares of our common stock upon settlement
of a purchase contract. Instead of a fractional share, the holder will receive
an amount of cash equal to such fraction multiplied by the applicable market
value. If, however, a holder surrenders for settlement at one time more than one
purchase
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contract, then the number of shares of our common stock issuable pursuant to
such purchase contracts will be computed based upon the aggregate number of
purchase contracts surrendered.
Prior to the settlement of a purchase contract, the shares of our common
stock underlying each purchase contract will not be outstanding, and the holder
of the purchase contract will not have any voting rights, rights to dividends or
other distributions or other rights (including under our shareholder rights
plan) of a holder of our common stock by virtue of holding such purchase
contract.
By purchasing a PEPS Unit or a Treasury PEPS Unit, a holder will be deemed
to have, among other things:
-- irrevocably authorized the purchase contract agent as its
attorney-in-fact to enter into and perform that holder's obligations
under the related purchase contract and pledge agreement on behalf of
such holder;
-- agreed to be bound by the terms and provisions of the related
purchase contract; and
-- agreed to be bound by the pledge arrangement contained in the related
pledge agreement.
In addition, each holder will be deemed to have agreed to treat itself as
the owner of the related trust preferred security, treasury security or
applicable ownership interest of the treasury portfolio, as the case may be, and
to treat the senior deferrable notes as our indebtedness for United States
federal, state and local income and franchise tax purposes.
SETTLEMENT THROUGH REMARKETING
PEPS Unit holders:
-- who fail to notify the purchase contract agent, prior to 5:00 p.m.,
New York City time, on the seventh business day prior to August 18,
2003, of their intention to effect settlement of the related purchase
contracts with cash in the manner described under "--Notice to Settle
with Cash," or
-- who so notify the purchase contract agent but fail to deliver such
cash prior to 11:00 a.m., New York City time, on the fifth business
day prior to August 18, 2003, or
-- who do not settle early the related purchase contract prior to 5:00
p.m., New York City time, on the seventh business day prior to August
18, 2003 in the manner described under "--Early Settlement'
will have their trust preferred securities remarketed three business days prior
to August 18, 2003, the remarketing date. These PEPS Unit holders will join the
holders of trust preferred securities who have elected to have their trust
preferred securities remarketed.
Pursuant to the remarketing agreement among the remarketing agent, the
Trust and us, the remarketing agent will use its reasonable efforts to remarket
the trust preferred securities on the remarketing date at a price equal to
$25.0625. If the remarketing agent determines that it will be able to remarket
all the trust preferred securities tendered or deemed tendered for a purchase
price in excess of $25.0625 per trust preferred security immediately prior to
the remarketing, then the remarketing agent will decrease the distribution rate
on the trust preferred securities so that the market value will be equal to
$25.0625 per trust preferred security at the time of the remarketing. If the
remarketing agent determines that it will not be able to remarket all the trust
preferred securities tendered or deemed tendered for a purchase price of
$25.0625 per trust preferred security immediately prior to remarketing, then the
remarketing agent will increase the distribution rate on the trust preferred
securities so that the market value will be equal to $25.0625 per trust
preferred security at the time of the remarketing. Of the proceeds from the
remarketing of the trust preferred securities that are a part of the PEPS Units,
$25 will automatically be applied to satisfy in full your obligation to purchase
shares of our common stock under the related purchase contracts and $.0625 will
automatically be applied to pay the remarketing agent for its services in
connection with the remarketing. See "Description of the Trust Preferred
Securities--Distribution Rate Reset" in this prospectus supplement.
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If the remarketing agent is unable to remarket the trust preferred
securities, a "failed remarketing" will be deemed to have occurred. If you are a
PEPS Unit holder who did not settle your purchase contract early, we will be
entitled to exercise our rights as a secured party and, subject to applicable
law, retain your trust preferred security pledged as collateral under the pledge
agreement or sell it in one or more private sales. In either case, your
obligations under the related purchase contracts would be satisfied in full. If
we exercise our rights as a secured creditor, we will pay any accrued and unpaid
distributions on such trust preferred security in cash to the purchase contract
agent for payment to the holders of the PEPS Units of which such senior
deferrable notes are a part. We will cause a notice of such failed remarketing
to be published on August 14, 2003, the second business day prior to the
purchase contract settlement date in a daily newspaper in the English language
of general circulation in New York City, which is expected to be The Wall Street
Journal, and on Bloomberg News.
In the event of a failed remarketing, if you are a holder of a trust
preferred security that is not a part of a PEPS Unit, such as a PEPS Unit holder
who settled the purchase contract early or a Treasury PEPS Unit holder, the
distribution rate on your trust preferred security will be set at the rate
determined by a formula, set forth under "Description of the Trust Preferred
Securities--Failed Remarketing" in this prospectus supplement.
As long as the PEPS Units, Treasury PEPS Units or the trust preferred
securities are evidenced by one or more global security certificates deposited
with The Depository Trust Company, we will request, not later than 15 nor more
than 30 calendar days prior to the remarketing date, that DTC notify its
participants holding PEPS Units, Treasury PEPS Units or trust preferred
securities of such remarketing and of the procedures to be followed for
settlement with cash. We have agreed that, if required under the U.S. federal
securities laws, we will try to have in effect a registration statement covering
the trust preferred securities to be remarketed in a form that the remarketing
agent may use in connection with the remarketing process.
NOTICE TO SETTLE WITH CASH
A holder of a PEPS Unit wishing to settle the related purchase contract
with cash must notify the purchase contract agent by delivering a "Notice to
Settle with Cash" prior to 5:00 p.m., New York City time, on the seventh
business day preceding August 18, 2003 if a tax event redemption has not
occurred. If you hold a Treasury PEPS Unit or a tax event redemption has
occurred you have until 5:00 p.m., New York City time, on the second business
day preceding August 18, 2003 to deliver your "Notice to Settle with Cash." A
Treasury PEPS Unit holder may only settle their purchase contracts in integral
multiples of 40 purchase contracts.
Such holder must deliver to the securities intermediary a cash payment in
the form of a certified or cashier's check or by wire transfer, in each case in
immediately available funds payable to or upon the order of the securities
intermediary. Such payment must be delivered prior to 11:00 a.m., New York City
time, on the fifth business day prior to August 18, 2003, if a tax exempt
redemption has not occurred. If you hold a Treasury PEPS Unit or a tax event
redemption has occurred, you have until 11:00 a.m., New York City time on the
business day prior to August 18, 2003 to deliver your cash payment.
Upon receipt of such cash payment, the related trust preferred security,
treasury security or applicable ownership interest in the treasury portfolio, as
the case may be, will be released from the pledge arrangement and transferred to
the purchase contract agent for distribution to the holder of the related PEPS
Unit. The holder of the PEPS Unit will then receive the applicable number of
shares of our common stock on the purchase contract settlement date.
If the cash payment is not delivered by you by the applicable time and date
specified above, the related trust preferred security will be remarketed and we
will use the proceeds to satisfy in full your purchase contract obligation or we
will receive at maturity the principal amount of the related treasury security
in full satisfaction of your purchase contract to buy our common stock on the
purchase contract settlement date.
Any cash received by the securities intermediary upon cash settlement will
be invested promptly in permitted investments and paid to us on the purchase
contract settlement date. Any funds received by the
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securities intermediary in excess of the funds necessary to settle the purchase
contracts in respect of the investment earnings from such investments will be
distributed to the purchase contract agent for payment to the holders who
settled with cash.
EARLY SETTLEMENT
A holder of a PEPS Unit or Treasury PEPS Unit may settle the related
purchase contract prior to the remarketing date by delivering to the purchase
contract agent (1) a completed "Election to Settle Early" form and (2) a cash
payment in the form of a certified or cashier's check or by wire transfer, in
each case in immediately available funds payable to, or upon the order of,
Valero Energy Corporation in an amount equal to $25 multiplied by the number of
purchase contracts being settled. A holder of a PEPS Unit or a Treasury PEPS
Unit may settle early the related purchase contract at any time prior to 5:00
p.m., New York City time, on the seventh business day preceding August 18, 2003.
If you are a Treasury PEPS Unit holder you may settle your purchase contracts
early only in integral multiples of 40 purchase contracts.
Upon early settlement, we will sell, and the holder will be entitled to
buy, shares of our common stock for each purchase contract being settled
(regardless of the market price of one share of our common stock on the date of
early settlement), subject to adjustment under the circumstances described under
"--Anti-Dilution Adjustments" below. We will cause (1) the shares of our common
stock to be delivered and (2) the related trust preferred security, treasury
security or applicable ownership interest in the treasury portfolio, as the case
may be, securing such purchase contract to be released from the pledge under the
pledge agreement, and, within three business days following the settlement date,
each will be transferred to the purchase contract agent for delivery to the
holder.
If the purchase contract agent receives a completed "Election to Settle
Early" and payment of $25 for each purchase contract being settled earlier than
5:00 p.m., New York City time, on any business day, then that day will be
considered the settlement date. If the purchase contract agent receives the
foregoing on or after 5:00 p.m., New York City time, on any business day or at
any time on a day that is not a business day, then the next business day will be
considered the settlement date. As long as the PEPS Units or Treasury PEPS Units
, as applicable, are evidenced by one or more global PEPS Unit or a Treasury
PEPS Unit certificates deposited with DTC, procedures for early settlement also
will be governed by standing arrangements between DTC and the purchase contract
agent.
ANTI-DILUTION ADJUSTMENTS
The formula for determining the settlement rate will be adjusted if certain
events occur, including:
-- the payment of dividends (and other distributions) on our common
stock made in our common stock;
-- the issuance to all holders of our common stock of rights, warrants
or options entitling them, for a period of up to 45 days, to
subscribe for or purchase our common stock at less than the "current
market price," as defined below, of our common stock;
-- subdivisions, splits or combinations of our common stock;
-- distributions to all holders of our common stock of evidences of our
indebtedness, shares of capital stock, securities, cash or property
(excluding any dividend or distribution covered by the first and
second bullets above and any dividend or distribution paid
exclusively in cash);
-- distributions consisting exclusively of cash to all holders of our
common stock, excluding any quarterly cash dividend on our common
stock to the extent that the aggregate cash dividend per share of our
common stock in any fiscal quarter does not exceed $.08, and
excluding any dividend or distribution in connection with our
liquidation, dissolution or termination (if an adjustment is required
to be made as set forth in this clause as a result of a distribution
(i) that is a quarterly dividend, such an adjustment would be based
on the amount by which such dividend exceeds $.08 or (ii) that is not
a quarterly dividend, such an adjustment would be based on the full
amount of such distribution); and
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-- the successful completion of a tender or exchange offer made by us or
any of our subsidiaries for our common stock that involves an
aggregate consideration having a fair market value that, when
combined with (a) any cash and the fair market value of other
consideration payable in respect of any tender or exchange offer by
us or any of our subsidiaries for our common stock concluded within
the preceding 12 months and (b) the aggregate amount of any all-cash
distributions to all holders of our common stock made within the
preceding 12 months, exceeds 15% of our aggregate market
capitalization on the expiration of such tender or exchange offer.
The term "current market price" per share of our common stock on any day
means the average of the daily closing prices for the five consecutive trading
days selected by us commencing not more than 30 trading days before, and ending
not later than, the earlier of the day in question and the day before the "ex
date" with respect to the issuance or distribution requiring such computation.
For purposes of this paragraph, the term "ex date", when used with respect to
any issuance or distribution, will mean the first date on which the shares of
our common stock trade on the applicable exchange or in the applicable market
without the right to receive such issuance or distribution.
In the case of certain reclassifications, consolidations, mergers, sales or
transfers of assets or other transactions pursuant to which our common stock is
converted into the right to receive other securities, cash or property, each
purchase contract then outstanding would become, without the consent of the
holder of the related PEPS Unit or Treasury PEPS Unit, as the case may be, a
contract to purchase only the kind and amount of securities, cash and other
property receivable upon consummation of the transaction by a holder of the
number of shares that would have been received by the holder of the related PEPS
Unit or Treasury PEPS Unit if the purchase contract settlement date had occurred
immediately prior to the date of consummation of such transaction.
In the case of our consolidation with or merger into any other person, any
merger of another person into us (other than a merger that does not result in
any reclassification, conversion, exchange or cancellation of outstanding shares
of common stock) in which 30% or more of the total consideration paid to our
shareholders consists of cash or cash equivalents, you may settle your purchase
contract with cash during the one-week period beginning on the twenty-third
trading day following the closing date of the merger at the applicable
settlement rate. For this purpose, the twenty-third trading date after the
closing date of the merger will be deemed to be the "purchase contract
settlement date" for the purpose of determining the "applicable market value".
If at any time we make a distribution of property to holders of our common
stock that would be taxable to such shareholders as a dividend for United States
federal income tax purposes (i.e., distributions of evidences of our
indebtedness or assets, but generally not stock dividends or rights to subscribe
to capital stock) and, pursuant to the settlement rate adjustment provisions of
the purchase contract agreement, the settlement rate is increased, such increase
may give rise to a taxable dividend to holders of the PEPS Units and Treasury
PEPS Units. See "United States Federal Income Tax Consequences--PEPS
Units--Purchase Contracts--Adjustment to Settlement Rate" in this prospectus
supplement.
In addition, we may make such increases in the settlement rate as we deem
advisable in order to avoid or diminish any income tax to holders of our common
stock resulting from any dividend or distribution of our common stock (or rights
to acquire our common stock) or from any event treated as such for income tax
purposes or for any other reason.
Adjustments to the settlement rate will be calculated to the nearest
1/10,000th of a share. No adjustment in the settlement rate will be required
unless such adjustment would require an increase or decrease of at least 1% in
the settlement rate; provided that any adjustments not made by reason of the
foregoing will be carried forward and taken into account in any subsequent
adjustment.
Whenever the settlement rate is adjusted, we must deliver to the purchase
contract agent a certificate setting forth the settlement rate, detailing the
calculation of the settlement rate and describing the facts upon which the
adjustment is based. In addition, we must notify the holders of the PEPS Units
and Treasury
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PEPS Units of the adjustment within ten business days of any event requiring
such adjustment and describe in reasonable detail the method by which the
settlement rate was adjusted.
Each adjustment to the settlement rate will result in a corresponding
adjustment to the number of shares of our common stock issuable upon early
settlement of a purchase contract.
If an adjustment is made to the settlement rate, an adjustment also will be
made to the applicable market value solely to determine which settlement rate
will be applicable on the purchase contract settlement date.
TERMINATION
The purchase contracts and the obligations and rights of us and of the
holders of the PEPS Units and Treasury PEPS Units thereunder (including the
holders' obligation and right to purchase and receive shares of our common
stock) will terminate automatically upon the occurrence of certain events of
bankruptcy, insolvency or reorganization with respect to us. Upon such
termination, the collateral agent will release the related trust preferred
securities, applicable ownership interests of the treasury portfolio or treasury
securities, as the case may be, from the pledge arrangement and cause the
securities intermediary to transfer such trust preferred securities, applicable
ownership interests of the treasury portfolio or treasury securities to the
purchase contract agent for distribution to the holders of the PEPS Units and
Treasury PEPS Units subject, in the case of the applicable ownership interest of
the treasury portfolio, to the purchase contract agent's disposition of the
subject securities for cash and the payment of such cash to the holders to the
extent that the holders otherwise would have been entitled to receive less than
$1,000 of any such security. Upon such termination, however, such release and
distribution may be subject to a delay. In the event that we become the subject
of a case under the Bankruptcy Code, such delay may occur as a result of the
automatic stay under the Bankruptcy Code and continue until such automatic stay
has been lifted.
PLEDGED SECURITIES AND PLEDGE
The trust preferred securities that are a part of the PEPS Units (or the
applicable ownership interests of the treasury portfolio that are a part of the
PEPS Units, if a tax event redemption has occurred) or, if substituted, the
treasury securities that are a part of the Treasury PEPS Units collectively, the
"pledged securities", will be pledged to the collateral agent for our benefit
pursuant to the pledge agreement to secure your obligation to purchase shares of
our common stock under the related purchase contracts. The rights of the holders
of the PEPS Units and Treasury PEPS Units with respect to such pledged
securities will be subject to our security interest therein. No holder of PEPS
Units or Treasury PEPS Units will be permitted to withdraw the pledged
securities related to such PEPS Units or Treasury PEPS Units from the pledge
arrangement except:
-- in the case of a PEPS Unit, to substitute a treasury security for the
related trust preferred security;
-- in the case of a Treasury PEPS Unit, to substitute trust preferred
securities for the related treasury security (for this bullet point
and the one above, as provided for under "Description of the PEPS
Units--Creating Treasury PEPS Units by Substituting a Treasury
Security for Trust Preferred Securities" and "--Recreating PEPS
Units" in this prospectus supplement); and
-- upon early settlement, settlement for cash or termination of the
related purchase contracts.
Subject to our security interest and the terms of the purchase contract
agreement and the pledge agreement, each holder of PEPS Units (unless a tax
event redemption has occurred) will be entitled, through the purchase contract
agent and the collateral agent, to all of the proportional rights and
preferences of the related trust preferred securities (including distribution,
voting, redemption, repayment and liquidation rights), and each holder of
Treasury PEPS Units or PEPS Units (if a tax event redemption has occurred) will
retain beneficial ownership of the related treasury securities or applicable
ownership interest of the treasury portfolio, as applicable, pledged in respect
of the related purchase contracts. We will have no interest in the pledged
securities other than our security interest.
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Upon receipt of distributions on the pledged securities, the securities
intermediary will distribute such payments to the purchase contract agent, which
in turn will distribute those payments to the holders in whose names the PEPS
Units are registered at the close of business on the record date preceding the
date of such distribution.
CERTAIN PROVISIONS OF THE PURCHASE CONTRACTS, THE
PURCHASE CONTRACT AGREEMENT AND THE PLEDGE AGREEMENT
GENERAL
Payments on the PEPS Units and Treasury PEPS Units will be payable, the
purchase contracts will be settled and transfers of the PEPS Units and Treasury
PEPS Units will be registrable at the office of the purchase contract agent in
the Borough of Manhattan, New York City. In addition, if the PEPS Units or
Treasury PEPS Units do not remain in book-entry form, we have the option to make
payments on the PEPS Units and Treasury PEPS Units by check mailed to the
address of the person entitled thereto as shown on the security register.
No service charge will be made for any registration of transfer or exchange
of the PEPS Units or Treasury PEPS Units, except for any tax or other
governmental charge that may be imposed in connection therewith.
MODIFICATION
Subject to certain limited exceptions, we and the purchase contract agent
may not modify the terms of the purchase contracts or the purchase contract
agreement without the consent of the holders of not less than a majority of the
outstanding purchase contracts, except that no such modification may, without
the consent of the holder of each outstanding purchase contract affected
thereby:
-- change any payment date;
-- change the amount or type of collateral required to be pledged to
secure a holder's obligations under the purchase contract, impair the
right of the holder of any purchase contract to receive distributions
on such collateral, or otherwise adversely affect the holder's rights
in or to such collateral;
-- change the place or currency of payment;
-- impair the right to institute suit for the enforcement of a purchase
contract;
-- reduce the number of shares of our common stock purchasable under a
purchase contract, increase the purchase price of the shares of our
common stock on settlement of any purchase contract, change the
purchase contract settlement date or otherwise adversely affect the
holder's rights under a purchase contract; or
-- reduce the above-stated percentage of outstanding purchase contracts
whose holders' consent is required for the modification or amendment
of the provisions of the purchase contracts, the purchase contract
agreement or the pledge agreement;
provided that if any amendment or proposal would adversely affect only the PEPS
Units or only the Treasury PEPS Units, then only the affected voting group of
holders will be entitled to vote on such amendment or proposal, and such
amendment or proposal will not be effective except with the consent of the
holders of not less than a majority of such voting group or, if referred to in
the first through sixth bullets above, all of the holders of such voting group.
Subject to certain limited exceptions, we, the collateral agent, the
securities intermediary and the purchase contract agent may not modify the terms
of the pledge agreement without the consent of the holders
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of not less than a majority of the outstanding purchase contracts, except that
no such modification may, without the consent of the holder of each outstanding
purchase contract affected thereby:
-- change the amount or type of collateral required to be pledged to
secure a holder's obligations under the purchase contract, impair the
right of the holder of any purchase contract to receive interest
payments on such collateral or otherwise adversely affect the
holder's rights in or to such collateral;
-- otherwise effect any action that under the purchase contract
agreement would require the consent of the holders of each
outstanding purchase contract affected thereby; or
-- reduce the above-stated percentage of outstanding purchase contracts
whose holders' consent is required for the modification or amendment;
provided that if any amendment or proposal would adversely affect only the PEPS
Units or only the Treasury PEPS Units, then only the affected voting group of
holders will be entitled to vote on such amendment or proposal, and such
amendment or proposal will not be effective except with the consent of the
holders of not less than a majority of such voting group or, if referred to in
the first through third bullets above, all of the holders of such voting group.
NO CONSENT TO ASSUMPTION
Each holder of a PEPS Unit or a Treasury PEPS Unit will be deemed under the
terms of the purchase contract agreement, by the purchase of such PEPS Unit or
Treasury PEPS Unit, to have expressly withheld any consent to the assumption
(i.e., affirmance) of the related purchase contracts by us, our receiver,
liquidator or trustee in the event that we become the subject of a case under
the Bankruptcy Code or other similar state or federal law providing for
reorganization or liquidation.
MERGER, SALE OR LEASE
We will covenant in the purchase contract agreement that we will not merge
or consolidate with any other entity or sell, assign, transfer, lease or convey
all or substantially all of our properties and assets to any other entity or
group of affiliated entities unless:
-- either we are the continuing corporation or the successor corporation
is a corporation organized under the laws of the United States of
America, a state thereof or the District of Columbia and such
corporation expressly assumes all of our obligations under the
purchase contracts, the purchase contract agreement and the pledge
agreement by one or more supplemental agreements in form reasonably
satisfactory to the purchase contract agent and the collateral agent;
and
-- we are, or such successor corporation is, not, immediately after such
merger, consolidation, sale, assignment, transfer, lease or
conveyance, in default in the performance of any of our or its
obligations thereunder.
GOVERNING LAW
The purchase contracts, the purchase contract agreement and the pledge
agreement will be governed by, and construed in accordance with, the laws of the
State of New York.
INFORMATION CONCERNING THE PURCHASE CONTRACT AGENT
The Bank of New York will be the purchase contract agent. The purchase
contract agent will act as the agent for the holders of the PEPS Units and
Treasury PEPS Units. The purchase contract agent will not be obligated to take
any discretionary action in connection with a default under the terms of the
PEPS Units, the Treasury PEPS Units or the purchase contract agreement.
The purchase contract agreement will contain provisions limiting the
liability of the purchase contract agent. The purchase contract agreement also
will contain provisions under which the purchase contract agent
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may resign or be replaced. Such resignation or replacement will be effective
upon the appointment of a successor.
INFORMATION CONCERNING THE COLLATERAL AGENT
Bank One Trust Company, N.A. will be the collateral agent. The collateral
agent will act solely as our agent and will not assume any obligation or
relationship of agency or trust for or with any of the holders of the PEPS Units
and the Treasury PEPS Units except for the obligations owed by a pledgee of
property to the owner thereof under the pledge agreement and applicable law.
The pledge agreement will contain provisions limiting the liability of the
collateral agent. The pledge agreement also will contain provisions under which
the collateral agent may resign or be replaced. Such resignation or replacement
will be effective upon the appointment of a successor.
INFORMATION CONCERNING THE SECURITIES INTERMEDIARY
Bank One Trust Company, N.A. will be the securities intermediary. All
property delivered to the securities intermediary pursuant to the purchase
contract agreement or the pledge agreement will be credited to a collateral
account established by the securities intermediary for the collateral agent. The
securities intermediary will treat the purchase contract agent as entitled to
exercise all rights relating to any financial asset credited to such collateral
account, subject to the provisions of the pledge agreement.
MISCELLANEOUS
The purchase contract agreement will provide that we will pay all fees and
expenses related to (1) the retention of the collateral agent and the securities
intermediary and (2) the enforcement by the purchase contract agent of the
rights of the holders of the PEPS Units and Treasury PEPS Units. Holders who
elect to substitute the related pledged securities, thereby creating Treasury
PEPS Units or recreating PEPS Units, however, will be responsible for any fees
or expenses payable in connection with such substitution, as well as for any
commissions, fees or other expenses incurred in acquiring the pledged securities
to be substituted. We will not be responsible for any such fees or expenses.
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DESCRIPTION OF THE TRUST PREFERRED SECURITIES
The following description is a summary of the terms of the trust preferred
securities. It supplements the description of the trust preferred securities in
the accompanying prospectus and, to the extent it is inconsistent with the
accompanying prospectus, replaces the description in the accompanying
prospectus. The trust preferred securities, which initially form a part of the
PEPS Units and which, under certain circumstances, will trade separately from
the purchase contracts also forming a part of the PEPS Units, will be issued
pursuant to the terms of the declaration of trust. The terms of the trust
preferred securities will include those stated in the declaration of trust and
those made part of the declaration of trust by the Trust Indenture Act. The
following description of certain terms of the trust preferred securities and
certain provisions of the declaration of trust in this prospectus supplement and
their description in the accompanying prospectus contain a description of
certain of their terms but do not purport to be complete, and reference is
hereby made to the copy of the declaration of trust (including the definitions
of certain terms used therein) that is filed as an exhibit or incorporated by
reference to the registration statement, the Delaware Business Trust Act and the
Trust Indenture Act.
SECURITIES ISSUABLE BY THE TRUST
The declaration of trust authorizes the Trust to issue the trust preferred
securities and the trust common securities. The trust preferred securities and
the trust common securities represent undivided beneficial interests in the
assets of the Trust. We will own all of the trust common securities. We may
transfer the trust common securities only to an affiliate that is a U.S. person
for U.S. federal income tax purposes. The trust preferred securities and the
trust common securities will generally have equivalent terms, except that:
-- if an event of default under the declaration of trust occurs and is
continuing, the holders of the trust preferred securities will have
the right to receive periodic distributions and liquidation,
redemption and other payments before the holder of the trust common
securities receives any payments and
-- the holder of trust common securities will have the exclusive right
to dissolve the Trust or to appoint, remove or replace the trustees
and to increase or decrease the number of trustees.
DISTRIBUTIONS
Distributions on each trust preferred security will accumulate and be
payable at a rate per year of % of the stated liquidation amount of $25 per
trust preferred security until August 18, 2003, and at the reset rate
thereafter. Distributions not paid on the scheduled payment date will accumulate
and compound quarterly at the rate of % per year through and including
August 18, 2003, and at the reset rate thereafter. The term "distribution", as
used herein, includes any such distributions payable unless otherwise stated.
The amount of distributions payable for any period will be computed (1) for any
full quarterly distribution period, on the basis of a 360-day year of twelve
30-day months, and (2) for any period shorter than a full quarterly distribution
period, on the basis of a 30-day month and, for any period of less than one
month, on the basis of the actual number of days elapsed per 30-day month.
Distributions on the trust preferred securities will be cumulative, will
accumulate from the first date of issuance of the trust preferred securities and
will be payable quarterly, in arrears, on February 18, May 18, August 18 and
November 18 of each year, commencing August 18, 2000.
Distributions are payable only to the extent that payments are made to the
Trust in respect of the senior deferrable notes held by the property trustee and
to the extent the Trust has funds available for the payment of such
distributions. We have the right to defer interest on the senior deferrable
notes, in which case distributions on the trust preferred securities will also
be deferred.
DISTRIBUTION RATE RESET
The reset rate on the trust preferred securities will be determined on the
third business day prior to the purchase contract settlement date, the
"remarketing date" and actually reset on August 18, 2003. The reset rate, which
may be less than, equal to or greater than % per year, will be the rate per
year that results
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from the remarketing of (1) the trust preferred securities that are a part of
PEPS Units as to which the holders have not given notice of their election to
settle the related purchase contracts with cash, or have given such notice but
failed to deliver cash, and (2) the trust preferred securities that are not a
part of PEPS Units (that is, the trust preferred securities that are owned by
Treasury PEPS Unit holders, by PEPS Unit holders who elected to settle for cash
or to settle early or by holders who purchased trust preferred securities in a
secondary trading transaction), as to which the holders have requested
remarketing.
On the remarketing date, the remarketing agent will use reasonable efforts
to remarket these trust preferred securities. If the remarketing agent
determines that it can remarket the trust preferred securities at $25.0625 per
trust preferred security without an increase in the rate, then the reset rate
will equal %. If the remarketing agent determines that it will be able to
remarket all the trust preferred securities tendered or deemed tendered for a
purchase price in excess of $25.0625 per trust preferred security prior to 4:00
p.m., New York City time, on the remarketing date, the remarketing agent will
decrease the distribution rate on the trust preferred securities so that the
market value will be equal to $25.0625 per trust preferred security at that
time, and then the reset rate will equal that decreased rate. If the remarketing
agent determines that it will not be able to remarket all the trust preferred
securities tendered or deemed tendered for a purchase at a price of $25.0625 per
trust preferred security prior to 4:00 p.m., New York City time, on the
remarketing date, the remarketing agent will increase the distribution rate on
the trust preferred securities so that the market value will be equal to
$25.0625 per trust preferred security at that time, and then the reset rate will
equal that increased rate.
REMARKETING PROCEDURES
Set forth below is a summary of the procedures to be followed in connection
with a remarketing of the trust preferred securities (or, if the senior
deferrable notes have been distributed to holders of the trust preferred
securities in liquidation of the Trust, a remarketing of the senior deferrable
notes):
As long as the PEPS Units or the trust preferred securities are evidenced
by one or more global security certificates deposited with DTC, we will request,
not later than 15 nor more than 30 calendar days prior to the remarketing date,
that DTC notify its participants holding trust preferred securities or PEPS
Units of the remarketing.
Not later than 5:00 p.m., New York City time, on the seventh business day
preceding August 18, 2003, any holder of trust preferred securities that are a
part of the PEPS Units may elect to have its trust preferred securities
remarketed. Holders of PEPS Units that do not settle their related purchase
contract early or that do not give notice prior to such time of their intention
to settle their related purchase contract early or to settle their related
purchase contract for cash, and holders who give such notice but fail to deliver
such cash prior to 11:00 a.m., New York City time, on the fifth business day
prior to August 18, 2003, will be deemed to have consented to the disposition of
the trust preferred securities that are a part of their PEPS Units in the
remarketing. Holders of trust preferred securities that are not a part of a PEPS
Unit who wish to have their trust preferred securities remarketed must give
notice of their election to the property trustee prior to 11:00 a.m., New York
City time, on the fifth business day prior to August 18, 2003. Any such notice
will be irrevocable and may not be conditioned upon the level at which the reset
rate is established in the remarketing.
If none of the holders elects to have their trust preferred securities
remarketed in the remarketing, the reset rate will be the rate determined by the
remarketing agent, in its sole, reasonable discretion, as the rate that would
have been established had a remarketing been held on the remarketing date.
FAILED REMARKETING
If, by 4:00 p.m., New York City time, on the remarketing date, the
remarketing agent is unable to remarket all the trust preferred securities
tendered or deemed tendered for purchase, a "failed remarketing" will be deemed
to have occurred, and the remarketing agent will so advise DTC, the property
trustee, the Trust and us.
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If a failed remarketing occurs and you are a PEPS Unit holder who has not
settled your purchase contract early or has not settled its purchase contract
with cash or has given notice of your election to settle your purchase contract
with cash but failed to do so, we may exercise our rights as a secured party and
take possession of your trust preferred securities. Your obligation to purchase
the shares of our common stock then will be fully satisfied, and you will
receive the appropriate number of shares of our common stock.
If a failed remarketing occurs and you are a holder of trust preferred
securities that are not part of a PEPS Unit, you will retain possession of your
trust preferred securities and the reset rate will be equal to (1) the two-year
benchmark treasury rate, as defined below, plus (2) the applicable spread, as
defined below.
The term "two-year benchmark treasury rate" means the bid side rate
displayed at 10:00 a.m., New York City time, on the third business day prior to
the purchase contract settlement date for direct obligations of the United
States having a maturity comparable to the remaining term to maturity of the
senior deferrable notes, as agreed upon by us and the remarketing agent. This
rate will be as displayed in the Telerate system or, if the Telerate system is
no longer available or, in the opinion of the remarketing agent (after
consultation with us), no longer an appropriate system from which to obtain such
rate, such other nationally recognized quotation system as, in the opinion of
the remarketing agent (after consultation with us) is appropriate. If this rate
is not so displayed, the two-year benchmark treasury rate will be calculated by
the remarketing agent as the yield to maturity of the trust preferred
securities, expressed as a bond equivalent on the basis of a year of 365 or 366
days, as applicable, and applied on a daily basis, and computed by taking the
arithmetic mean of the secondary market bid rates, as of 10:30 a.m., New York
City time, on the third business day prior to the purchase contract settlement
date of three leading United States government securities dealers selected by
the remarketing agent (after consultation with us) (which may include the
remarketing agent or an affiliate thereof).
The term "applicable spread" means the spread determined as set forth
below, based on the prevailing rating, as defined below, of our senior notes in
effect at the close of business on the business day immediately preceding the
date of a failed remarketing:
<TABLE>
<CAPTION>
PREVAILING RATING ON OUR SENIOR NOTES SPREAD
------------------------------------- ------
<S> <C>
AA/"Aa"..................................................... 3.00%
A/"a"....................................................... 4.00%
BBB/"Baa"................................................... 5.00%
Below BBB/"Baa"............................................. 7.00%
</TABLE>
You should know that we are using the rating on our senior notes as a
convenient bench mark to ascertain the "applicable spread" and that if a rating
were given to your trust preferred securities by a nationally recognized rating
agency, it may or may not be the same as the rating on our senior notes.
For purposes of this definition, the "prevailing rating" of our senior
notes shall be:
(1) AA/"Aa" if our senior notes have a credit rating of AA- or better
by Standard & Poor's Ratings Services and "Aa3" or better by Moody's
Investors Service, Inc. or the equivalent of such ratings by such agencies
or a substitute rating agency or substitute rating agencies selected by the
remarketing agent (after consultation with us);
(2) if not under clause (1) above, then A/"a" if our senior notes
have a credit rating of A- or better by S&P and "A3" or better by Moody's
or the equivalent of such ratings by such agencies or a substitute rating
agency or substitute rating agencies selected by the remarketing agent
(after consultation with us);
(3) if not under clauses (1) or (2) above, then BBB/"Baa" if our
senior notes have a credit rating of BBB- or better by S&P and "Baa3" or
better by Moody's or the equivalent of such ratings by such agencies or a
substitute rating agency or substitute rating agencies selected by the
remarketing agent (after consultation with us); or
(4) if not under clauses (1) through (3) above, then Below BBB/"Baa".
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Notwithstanding the foregoing, (A) if (i) the credit rating of our senior notes
by S&P shall be on the "Credit Watch" of S&P with a designation of "negative
implications" or "developing", or (ii) the credit rating of our senior notes by
Moody's shall be on the "Corporate Credit Watch List" of Moody's with a
designation of "downgrade" or "uncertain", or, in each case, on any successor
list of S&P or Moody's with a comparable designation, the prevailing ratings of
our senior notes shall be deemed to be within a range one full level lower in
the above table than those actually assigned to our senior notes by Moody's and
S&P and (B) if our senior notes are rated by only one rating agency on or before
the remarketing date, the prevailing rating will at all times be determined
without reference to the rating of any other rating agency; provided that if no
such rating agency shall have in effect a rating of our senior notes and the
remarketing agent is unable to identify a substitute rating agency or rating
agencies, the prevailing rating shall be Below BBB/"Baa".
By approximately 4:30 p.m., New York City time, on the remarketing date,
provided that there has not been a failed remarketing, the remarketing agent
will advise (1) DTC, the Trust, the property trustee and us of the reset rate
determined in the remarketing and the number of trust preferred securities sold
in the remarketing, (2) each person purchasing trust preferred securities in the
remarketing (or the appropriate DTC participant) of the reset rate and the
number of trust preferred securities such person is to purchase and (3) each
such purchaser to give instructions to its DTC participant to pay the purchase
price on the purchase contract settlement date in same day funds against
delivery of the trust preferred securities purchased through the facilities of
DTC.
In accordance with DTC's normal procedures, three business days after the
remarketing date, the transactions described above with respect to each trust
preferred security tendered for purchase and sold in the remarketing will be
executed through DTC, and the accounts of the respective DTC participants will
be debited and credited and such trust preferred securities delivered by book
entry as necessary to effect purchases and sales of such trust preferred
securities. DTC will make payment in accordance with its normal procedures.
If any trust preferred securities holder selling trust preferred securities
in the remarketing fails to deliver such trust preferred securities, the direct
or indirect DTC participant of such selling holder and of any other person that
was to have purchased trust preferred securities in the remarketing may deliver
to any such other person a number of trust preferred securities that is less
than the number of trust preferred securities that otherwise was to be purchased
by such person. In such event, the number of trust preferred securities to be so
delivered will be determined by such direct or indirect participant, and
delivery of such lesser number of trust preferred securities will constitute
good delivery.
The right of each holder to have trust preferred securities tendered for
purchase will be limited to the extent that (1) the remarketing agent conducts a
remarketing pursuant to the terms of the remarketing agreement, (2) the
remarketing agent is able to find a purchaser or purchasers for tendered trust
preferred securities and (3) such purchaser or purchasers deliver the purchase
price therefor to the remarketing agent.
The remarketing agent is not obligated to purchase any trust preferred
securities that would otherwise remain unsold in the remarketing. Neither we nor
the Trust nor the property trustee nor the remarketing agent will be obligated
in any case to provide funds to make payment upon tender of trust preferred
securities for remarketing. Whether or not there has been a "failed remarketing"
will be determined in the sole, reasonable discretion of the remarketing agent.
We will be liable for any and all costs and expenses incurred in connection
with the remarketing. However, for the performance of its services, the
remarketing agent will retain from the proceeds of the remarketing an amount
equal to .25% of the aggregate stated liquidation amount of all remarketed trust
preferred securities.
REMARKETING AGENT
The remarketing agent will be Morgan Stanley & Co. Incorporated. We, the
Trust and the remarketing agent will enter into the remarketing agreement which
provides, among other things, that Morgan Stanley & Co. Incorporated, will act
as the exclusive remarketing agent and will use reasonable efforts to
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remarket securities tendered or deemed tendered for purchase in the remarketing.
Under certain circumstances, some portion of the trust preferred securities
tendered in the remarketing may be purchased by the remarketing agent.
The remarketing agreement provides that the remarketing agent will incur no
liability to us or the Trust or to any holder of the PEPS Units or the trust
preferred securities in its individual capacity or as remarketing agent for any
action or failure to act in connection with a remarketing or otherwise, except
as a result of the negligence or willful misconduct on its part.
We have agreed to indemnify the remarketing agent against certain
liabilities, including liabilities under the Securities Act of 1933, arising out
of or in connection with its duties under the remarketing agreement.
The remarketing agreement also will provide that the remarketing agent may
resign and be discharged from its duties and obligations under the remarketing
agreement. No such resignation, however, will become effective unless a
nationally recognized broker-dealer has been appointed by us as successor
remarketing agent and that successor remarketing agent has entered into a
remarketing agreement with the Trust and us. In such case, we will use
reasonable efforts to appoint a successor remarketing agent and enter into a
remarketing agreement with such person as soon as reasonably practicable.
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DESCRIPTION OF THE SENIOR DEFERRABLE NOTES
The following description is a summary of the terms of the senior
deferrable notes. It supplements the description of the debt securities in the
accompanying prospectus and, to the extent it is inconsistent with the
accompanying prospectus, replaces the description in the accompanying
prospectus. The senior deferrable notes will be issued under an indenture dated
as of December 12, 1997, as supplemented by a first supplemental indenture
relating to the senior deferrable notes, between us and The Bank of New York, as
indenture trustee. The descriptions in this prospectus supplement and the
accompanying prospectus contain a description of certain terms of the senior
deferrable notes and the indenture but do not purport to be complete, and
reference is hereby made to the indenture, the supplemental indenture, and the
form of senior deferrable note that are or will be filed as exhibits or
incorporated by reference to the registration statement and to the Trust
Indenture Act.
GENERAL
The senior deferrable notes will be our direct, unsecured obligations and
will rank without preference or priority among themselves and equally with all
of our existing and future unsecured and unsubordinated indebtedness. The senior
deferrable notes initially will be issued in aggregate principal amount equal to
$150 million, such amount being the sum of the maximum aggregate stated
liquidation amounts of the trust preferred securities and the common securities.
If the over-allotment option is exercised in full by the underwriters an
additional $22.5 million of the senior deferrable notes will be issued to the
Trust.
The senior deferrable notes will not be subject to a sinking fund
provision. Unless a tax event redemption occurs, the entire principal amount of
the senior deferrable notes will mature and become due and payable, together
with any accrued and unpaid interest thereon, on August 18, 2005.
We will have the right at any time, subject to certain conditions, to
dissolve the Trust and cause the senior deferrable notes to be distributed to
the holders of the trust securities. If the Trust is dissolved after the
purchase contract settlement date (other than as a result of the redemption of
the senior deferrable notes) and you continue to hold trust preferred
securities, you will receive your pro rata share of the senior deferrable notes
held by the Trust (after any creditors of the Trust have been paid). If the
Trust is dissolved prior to the purchase contract settlement date, then these
senior deferrable notes will be substituted for the trust preferred securities
and will be pledged as collateral to secure your obligation to purchase our
common stock under your purchase contracts.
If the senior deferrable notes are distributed to the holders of the trust
securities in liquidation of such holders' interests in the Trust, the senior
deferrable notes will initially be issued in the form of one or more global
certificates deposited with DTC. Under certain limited circumstances, the senior
deferrable notes may be issued in certificated form in exchange for the global
certificates. In the event that the senior deferrable notes are issued in
certificated form, the senior deferrable notes will be in denominations of $25
and integral multiples thereof and may be transferred or exchanged at the
offices described below. Payments on senior deferrable notes issued as global
certificates will be made to DTC, a successor depositary or, in the event that
no depositary is used, to a paying agent for the senior deferrable notes. In the
event the senior deferrable notes are issued in certificated form, principal and
interest will be payable, the transfer of the senior deferrable notes will be
registrable and the senior deferrable notes will be exchangeable for senior
deferrable notes of other denominations of a like aggregate principal amount at
the corporate trust office or agency of the indenture trustee in New York City,
provided that at our option, payment of interest may be made by check.
Notwithstanding the foregoing, so long as the holder of any senior deferrable
notes is the property trustee, we will make payment of principal and interest on
the senior deferrable notes held by the property trustee at such place and to
such account as may be designated by the property trustee.
The indenture does not contain provisions that afford holders of the senior
deferrable notes protection in the event we are involved in a highly leveraged
transaction or other similar transaction that may adversely affect such holders.
We and the Trust will treat the senior deferrable notes as our indebtedness for
all United States tax purposes. There is, however, no statutory, administrative
or judicial authority that directly addresses
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this treatment. If the IRS were to disregard this classification, it could have
a material adverse effect on our financial condition.
INTEREST
Each senior deferrable note will bear interest at the rate of % per year
from , 2000 until August 18, 2003, and at the reset rate thereafter,
payable quarterly in arrears on February 18, May 18, August 18 and November 18
of each year, each an "interest payment date", commencing August 18, 2000, to
the person in whose name such senior deferrable note is registered, subject to
certain exceptions, at the close of business on the business day preceding such
interest payment date. In the event the senior deferrable notes do not remain in
book-entry only form, the record date will be 15 business days prior to each
interest payment date. The interest rate on the senior deferrable notes will be
reset on August 18, 2003.
The amount of interest payable on the senior deferrable notes for any
period will be computed (1) for any full quarterly period on the basis of a
360-day year of twelve 30-day months and (2) for any period shorter than a full
quarterly period, on the basis of a 30-day month and, for any period less than a
month, on the basis of the actual number of days elapsed per 30-day month. In
the event that any date on which interest is payable on the senior deferrable
notes is not a business day, then payment of the interest payable on such date
will be made on the next day that is a business day (and without any interest or
other payment in respect of any such delay), except that, if such business day
is in the next calendar year, then such payment will be made on the preceding
business day.
OPTION TO DEFER INTEREST PAYMENTS ON THE SENIOR DEFERRABLE NOTES
So long as no event of default has occurred and is continuing, we have the
right under the indenture at any time during the term of the senior deferrable
notes to defer the payment of interest for a period not extending beyond the
maturity date of the senior deferrable notes. We refer to any such period of
deferral as an "extension period". During such extension period the Trust will
no longer have sufficient funds to make quarterly distribution payments on the
trust preferred securities, but such distribution payments will continue to
accrue. At the end of an extension period, we must pay all interest then accrued
and unpaid (together with accrued interest at the deferral rate compounded on
each succeeding interest payment date) to the Trust. At the end of an extension
period, the Trust will make all unpaid distributions (together with accrued
distribution payments at the deferral rate compounded on each succeeding payment
date) to holders of the trust preferred securities.
During any extension period, we may not take any of the prohibited actions
described under "--Certain Covenants of Valero" in this prospectus supplement.
Prior to the expiration of any extension period, we may further extend the
extension period, but not beyond the maturity date of the senior deferrable
notes. Upon the termination of any extension period and the payment of all
amounts then due on any interest payment date, we may elect to begin a new
extension period, subject to the same requirements as described above. No
interest will be due and payable during an extension period. We must give the
indenture trustee written notice of our election of any extension period (or our
further extension) at least five business days prior to the earlier of:
-- the date the interest on the senior deferrable notes would have been
payable except for the election to begin or extend the extension
period;
-- the date the indenture trustee is required to give notice to any
securities exchange or to holders of the senior deferrable notes of
the record date or the date the interest is payable; and
-- the record date.
The indenture trustee must give notice of our election to begin a new
extension period or continue an extension period to the holders of the senior
deferrable notes. There is no limitation on the number of times that we may
elect to begin an extension period.
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CERTAIN COVENANTS OF VALERO
We will covenant that during an extension period or during the continuance
of an event of default, we will not:
-- declare or pay any dividends or distributions on, or redeem,
purchase, acquire, or make a liquidation payment with respect to, any
of our capital stock; or
-- make any payment of principal, interest or premium, if any, on or
repay, repurchase or redeem any debt securities that rank equally
with or junior in interest to the senior deferrable notes or make any
guarantee payments with respect to any guarantee by us of the debt of
any subsidiary of ours if such guarantee ranks equally with or junior
in interest to the senior deferrable notes; provided that during an
extension period, we will be permitted to make payments of principal,
interest or premium, if any, on or repay, repurchase or redeem any
debt securities that rank equally with or senior in interest to the
senior deferrable notes and to make guarantee payments with respect
to any guarantee by us of the debt of any subsidiary of ours if such
guarantee ranks equally with or senior in interest to the senior
deferrable notes.
However, we may:
-- purchase or acquire our capital stock in connection with the
satisfaction by us of our obligations under any employee benefit
plans or pursuant to any contract or security outstanding on the
first day of any extension period requiring us to purchase our
capital stock;
-- reclassify our capital stock or exchange or convert one class or
series of our capital stock for another class or series of our
capital stock;
-- purchase fractional interests in shares of our capital stock pursuant
to the conversion or exchange provisions of such capital stock or the
security being converted or exchanged;
-- declare dividends or distributions in our capital stock;
-- redeem or repurchase any rights pursuant to a rights agreement; and
-- make payments under the guarantee related to the trust preferred
securities.
OPTIONAL REDEMPTION
Upon the occurrence and continuation of a tax event we will have the right
to redeem the senior deferrable notes. If we redeem the senior deferrable notes
upon the occurrence of a tax event, the proceeds from such redemption will be
applied simultaneously to redeem trust securities having an aggregate stated
liquidation amount equal to the aggregate principal amount of the senior
deferrable notes so redeemed, at a price per trust security equal to the
redemption amount (as defined under "--Tax Event Redemption" in this prospectus
supplement) plus any accumulated and unpaid distributions thereon to the date of
such redemption, and the Trust will be dissolved. If the tax event redemption
occurs prior to the purchase contract settlement date, the redemption price
payable to the securities intermediary, in liquidation of the PEPS Unit holders'
interests in the Trust, will be applied by the securities intermediary to
purchase the treasury portfolio. The applicable ownership interest of the
treasury portfolio will be pledged to the collateral agent to secure the
obligations of the holders of the PEPS Units to purchase our common stock under
the related purchase contract.
TAX EVENT REDEMPTION
If a tax event, as defined below, occurs and is continuing, we may redeem,
at our option, the senior deferrable notes in whole (but not in part), at a
price equal to, for each senior deferrable note, the redemption amount, as
defined below, plus accrued and unpaid interest thereon to the date of
redemption, the "tax event redemption date". Upon a tax event redemption, the
Trust will use the proceeds of such tax event redemption to redeem trust
securities having an aggregate liquidation amount equal to the aggregate
principal amount of
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the senior deferrable notes redeemed by distributing the redemption amount plus
any accumulated and unpaid distributions. If a tax event redemption occurs prior
to the purchase contract settlement date, the redemption price payable in
liquidation of the PEPS Unit holders' interests in the Trust will be distributed
to the securities intermediary, which in turn will apply an amount equal to the
redemption amount of such redemption price to purchase the treasury portfolio on
behalf of the holders of the PEPS Units and remit the remaining portion, if any,
of such redemption price to the purchase contract agent for payment to the
holders of the PEPS Units. Thereafter, the applicable ownership interest of the
treasury portfolio will be substituted for the trust preferred securities and
will be pledged to the collateral agent to secure the PEPS Unit holders'
obligations to purchase our common stock under the related purchase contract. If
a tax event redemption occurs after the purchase contract settlement date, the
treasury portfolio will not be purchased and the proceeds will be distributed to
the purchase contract agent for payment to the holders of the PEPS Units. If a
tax event redemption occurs, holders of trust preferred securities that are not
part of PEPS Units will directly receive proceeds from the redemption of the
senior notes.
"Tax event" means the receipt by us and the Trust of an opinion of counsel,
rendered by a law firm having a recognized national tax practice, to the effect
that, as a result of any amendment to, change in or announced proposed change in
the laws (or any regulations thereunder) of the United States or any political
subdivision or taxing authority thereof or therein, or as a result of any
official administrative decision, pronouncement, judicial decision or action
interpreting or applying such laws or regulations, which amendment or change is
effective or which proposed change, pronouncement, action or decision is
announced on or after the date of issuance of the trust preferred securities,
there is more than an insubstantial increase in the risk that (1) the Trust is,
or within 90 days of the date of such opinion will be, subject to United States
federal income tax with respect to income received or accrued on the senior
deferrable notes, (2) interest payable by us on the senior deferrable notes is
not, or within 90 days of the date of such opinion, will not be, deductible by
us, in whole or in part, for United States federal income tax purposes, or (3)
the Trust is, or within 90 days of the date of such opinion will be, subject to
more than a de minimis amount of other taxes, duties or other governmental
charges.
"Redemption amount" means, for each senior deferrable note, the product of
the principal amount of such senior deferrable note and a fraction, the
numerator of which is the treasury portfolio purchase price, as defined below,
and the denominator of which is the applicable principal amount, as defined
below.
"Treasury portfolio purchase price" means the lowest aggregate price quoted
by a primary U.S. government securities dealer in New York City, a "primary
treasury dealer", to the quotation agent, as defined below, on the third
business day preceding the tax event redemption date for the purchase of the
treasury portfolio for settlement on the tax event redemption date.
"Applicable principal amount" means either (1) if the tax event redemption
date occurs prior to the purchase contract settlement date, the aggregate
principal amount of the senior deferrable notes corresponding to the aggregate
stated liquidation amount of the trust preferred securities that are part of the
PEPS Units on the tax event redemption date or (2) if the tax event redemption
date occurs on or after the purchase contract settlement date, the aggregate
principal amount of the senior deferrable notes corresponding to the aggregate
stated liquidation amount of the trust preferred securities outstanding on the
tax event redemption date.
"Treasury portfolio" means, with respect to the applicable principal amount
of senior deferrable notes, a portfolio of zero-coupon U.S. treasury securities
consisting of (a) principal or interest strips of U.S. treasury securities that
mature on or prior to the purchase contract settlement date in an aggregate
amount at maturity equal to the applicable principal amount and (b) with respect
to each scheduled interest payment date on the senior deferrable notes that
occurs after the tax event redemption date, principal or interest strips of U.S.
treasury securities that mature on or prior to such date in an aggregate amount
at maturity equal to the aggregate interest payment that would be due on the
applicable principal amount of the senior deferrable notes on such date.
"Quotation agent" means (1) Morgan Stanley & Co. Incorporated and its
respective successors, provided that if Morgan Stanley & Co. Incorporated ceases
to be a primary treasury dealer, we will substitute another primary treasury
dealer therefor, or (2) any other primary treasury dealer selected by us.
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ADDITIONAL INDENTURE PROVISIONS APPLICABLE TO THE SENIOR DEFERRABLE NOTES
As long as the senior deferrable notes are held by the Trust, it will be an
event of default with respect to the senior deferrable notes if the Trust
voluntarily or involuntarily dissolves, winds-up its business or otherwise
terminates its existence except in connection with (1) the distribution of the
senior deferrable notes to holders of trust preferred securities and trust
common securities in liquidation of their interests in the Trust, (2) the
redemption of all of the outstanding trust preferred securities and trust common
securities, or (3) certain mergers, consolidations or amalgamations, each as
permitted by the declaration of trust.
We will covenant that, so long as any trust securities remain outstanding,
if an event of default under the indenture occurs and written notice of such
event has been given to us, then we may not:
-- declare or pay any dividends or distributions on, or redeem,
purchase, acquire, or make a liquidation payment with respect to, any
of our capital stock; or
-- make any payment of principal, interest or premium, if any, on or
repay, repurchase or redeem any debt securities that rank equally
with or junior in interest to the senior deferrable notes or make any
guarantee payments with respect to any guarantee by us of the debt of
any subsidiary of ours if such guarantee ranks equally with or junior
in interest to the senior deferrable notes.
However, we may:
-- purchase or acquire our capital stock in connection with the
satisfaction by us of our obligations under any employee benefit
plans or pursuant to any contract or security outstanding on the
first day of any extension period requiring us to purchase our
capital stock;
-- reclassify our capital stock or exchange or convert one class or
series of our capital stock for another class or series of our
capital stock;
-- purchase fractional interests in shares of our capital stock pursuant
to the conversion or exchange provisions of such capital stock or the
security being converted or exchanged;
-- declare dividends or distributions in our capital stock;
-- redeem or repurchase any rights pursuant to a rights agreement; and
-- make payments under the guarantee related to the trust preferred
securities.
BOOK-ENTRY ISSUANCE
If distributed to holders of trust preferred securities in connection with
the involuntary or voluntary dissolution of the Trust, the senior deferrable
notes will be issued as one or more global certificates registered in the name
of DTC or its nominee. The senior deferrable notes will be issued only as
fully-registered securities registered in the name of Cede & Co., DTC's nominee.
The senior deferrable notes will be issued in accordance with the procedures set
forth in this prospectus supplement under "Book-Entry Systems".
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DESCRIPTION OF THE GUARANTEE
The following description is a summary of the terms of the guarantee that
will be executed and delivered by us for the benefit of the holders of the trust
preferred securities. It supplements the description of the guarantee in the
accompanying prospectus and, to the extent it is inconsistent with the
accompanying prospectus, replaces the description in the accompanying
prospectus. The terms of the guarantee will be those set forth in the guarantee
and those made part of the guarantee by the Trust Indenture Act. The
descriptions contained in this prospectus supplement and the accompanying
prospectus contain a description of certain terms of the guarantee, but do not
purport to be complete, and reference is hereby made to the form of guarantee
(including definitions of certain terms used therein) that is filed as an
exhibit or incorporated by reference to the registration statement.
GENERAL
To the extent described below, we will agree to pay the following amounts
in full if they are not paid by the Trust:
-- any accumulated and unpaid distributions and additional amounts on
the trust preferred securities to the extent we have made
corresponding payments on the senior deferrable notes to the property
trustee;
-- the redemption price for any trust preferred securities called for
redemption by the trust, including all accumulated and unpaid
distributions to the date of redemption, to the extent we have made
corresponding payments on the senior deferrable notes to the property
trustee; and
-- payments upon the dissolution, winding-up or termination of the Trust
equal to the lesser of:
-- the liquidation amount plus all accumulated and unpaid
distributions and additional amounts on the trust preferred
securities to the extent the Trust has funds legally available for
those payments; and
-- the amount of assets of the trust remaining legally available for
distribution to the holders of the trust preferred securities in
liquidation of the trust.
We will not be required to make these liquidation payments if:
-- the Trust distributes the senior deferrable notes to the holders of
the trust preferred securities in exchange for their trust preferred
securities; or
-- the trust redeems the trust preferred securities in full upon the
maturity or redemption of the senior deferrable notes.
The guarantee is a guarantee from the time of issuance of the trust
preferred securities. We will be obligated to make guarantee payments when due,
regardless of any defense, right of set-off or counterclaim that the Trust may
have or assert. We may satisfy our obligations to make guarantee payments either
by making payments directly to holders of the trust preferred securities or to
the guarantee trustee for remittance to the holders or by causing the Trust to
make the payments to them.
The guarantee only covers distributions and other payments on the trust
preferred securities if and to the extent we have made corresponding payments on
the senior deferrable notes to the property trustee. If we do not make those
corresponding payments:
-- the property trustee will not make distributions on the trust
preferred securities;
-- the Trust will not have funds available for payments on the trust
preferred securities; and
-- we will not be obligated to make guarantee payments.
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Our obligation to make guarantee payments will be:
-- unsecured;
-- senior in right of payment to our subordinated liabilities or
subordinated guarantees entered into relating to our other
liabilities;
-- equal in rank to any securities or guarantees that are expressly made
equal by their terms; and
-- senior to our share capital.
We have, through the guarantee, the senior deferrable notes and the
indenture, taken together, fully and unconditionally guaranteed all of the
Trust's obligations under the trust preferred securities. No single document
standing alone or operating in conjunction with fewer than all of the other
documents constitutes such guarantee. It is only the combined operation of the
documents that has the effect of providing a full and unconditional guarantee of
the Trust's obligations under the declaration of trust.
COVENANTS OF VALERO
Under the guarantee, we will agree that, as long as any trust preferred
securities issued by the Trust are outstanding, we will not make the payments
and distributions described below if:
- we are in default on our guarantee payments or other payment obligations
under the guarantee;
- any event of default under the declaration of trust has occurred and is
continuing; or
- we have elected to defer payments of interest on the related debt
securities by extending the interest payment period and that deferral
period is continuing.
In these circumstances, we will agree that we will not:
- declare or pay any dividends or distributions on, or redeem, purchase,
acquire, or make a liquidation payment with respect to, any of our
capital stock; or
- make any payment of principal, interest or premium, if any, on or repay,
repurchase or redeem any debt securities that rank equally with or junior
in interest to the senior deferrable notes or make any guarantee payments
with respect to any guarantee by us of the debt of any subsidiary of ours
if such guarantee ranks equally with or junior in interest to the senior
deferrable notes; provided that during any election specified in the
third bullet point above, we will be permitted to make payments of
principal, interest or premium, if any, on or repay, repurchase or redeem
any debt securities that rank equally with or senior in interest to the
senior deferrable notes and to make guarantee payments with respect to
any guarantee by us of the debt of any subsidiary of ours if such
guarantee ranks equally with or senior in interest to the senior
deferrable notes.
However, even during such circumstances, we may:
- purchase or acquire our capital stock in connection with the satisfaction
by us of our obligations under any employee benefit plans or pursuant to
any contract or security outstanding on the first day of any extension
period requiring us to purchase our capital stock;
- reclassify our capital stock or exchange or convert one class or series
of our capital stock for another class or series of our capital stock;
- purchase fractional interests in shares of our capital stock pursuant to
the conversion or exchange provisions of such capital stock or the
security being converted or exchanged;
- declare dividends or distributions in our capital stock;
- redeem or repurchase any rights pursuant to a rights agreement; and
- make payments under the guarantee related to the trust preferred
securities.
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BOOK-ENTRY SYSTEMS
The Depository Trust Company will act as securities depository for the PEPS
Units, the Treasury PEPS Units, the trust preferred securities and the senior
deferrable notes, as applicable the "securities". The securities will be issued
in fully-registered form in the name of Cede & Co. (DTC's partnership nominee).
We will issue one or more fully registered certificates as global securities for
each of the securities in their respective aggregate principal or stated amounts
and deposit the certificates with DTC.
DTC has provided us with the following information: DTC is a
limited-purpose trust company organized under the New York Banking Law, a
"banking organization" within the meaning of the New York Banking Law, a member
of the United States Federal Reserve System, a "clearing corporation" within the
meaning of the New York Uniform Commercial Code, and a "clearing agency"
registered under Section 17A of the Securities Exchange Act of 1934. DTC holds
securities that its participants deposit with DTC. DTC also facilitates the
settlement among direct participants of securities transactions, such as
transfers and pledges, in deposited securities through computerized book-entry
changes in direct participants' accounts. This eliminates the need for physical
movement of securities certificates. Direct participants include securities
brokers and dealers, banks, trust companies, clearing corporations, and other
organizations. DTC is owned by a number of its direct participants and by the
New York Stock Exchange, Inc., the American Stock Exchange, Inc., and the
National Association of Securities Dealers, Inc. Access to the DTC system is
also available to others such as securities brokers and dealers, banks, and
trust companies that clear through or maintain a custodial relationship with a
direct participant, either directly or indirectly. The rules that apply to DTC
and its participants are on file with the Securities and Exchange Commission.
If you intend to purchase any of the securities in the manner provided by
this prospectus supplement you must do so through the DTC system by or through
direct participants. The participant that you purchase through will receive a
credit for the applicable security on DTC's records. The ownership interest of
each actual purchaser of the applicable security, who we refer to as a
"beneficial owner", is in turn to be received on the participants' records.
Beneficial owners will not receive written confirmation from DTC of their
purchases, but beneficial owners are expected to receive written confirmations
providing details of the transaction, as well as periodic statements of their
holdings, from the participant through which the beneficial owner entered into
the transaction. Transfers of ownership interests in the securities are to be
accomplished by entries made on the books of participants acting on behalf of
beneficial owners. Beneficial owners will not receive certificates representing
their ownership interests in the applicable security except in the event that
use of the book-entry system for the securities is discontinued.
To facilitate subsequent transfers, all securities deposited by direct
participants with DTC are registered in the name of DTC's partnership nominee,
Cede & Co. The deposit of securities with DTC and their registration in the name
of Cede & Co. effect no change in beneficial ownership. DTC has no knowledge of
the actual beneficial owners of the securities. DTC's records reflect only the
identity of the direct participants to whose accounts such securities are
credited, which may or may not be the beneficial owners. The participants will
remain responsible for keeping account of their holdings on behalf of their
customers.
Conveyance of notices and other communications by DTC to direct
participants, by direct participants to indirect participants, and by
participants to beneficial owners will be governed by arrangements among them,
subject to any statutory or regulatory requirements as may be in effect from
time to time.
Neither DTC nor Cede & Co. will consent or vote with respect to the
securities. Under its usual procedures, DTC would mail an Omnibus Proxy to us as
soon as possible after the record date. The Omnibus Proxy assigns Cede & Co.'s
consenting or voting rights to those direct participants to whose accounts the
securities are credited on the record date (identified in a listing attached to
the Omnibus Proxy).
We will make any payments on the securities to DTC. DTC's practice is to
credit direct participants' accounts on the payable date in accordance with
their respective holdings shown on DTC's records unless DTC has reason to
believe that it will not receive payment on the payable date. Payments by
participants to beneficial owners will be governed by standing instructions and
customary practices, as is the case with securities held for the accounts of
customers in bearer form or registered in "street name", and will be the
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responsibility of such participant and not of DTC, us or any trustee, subject to
any statutory or regulatory requirements as may be in effect from time to time.
We or the applicable trustee will be responsible for the payment of all
amounts to DTC. DTC will be responsible for the disbursement of those payments
to its participants, and the participants will be responsible for disbursements
of those payments to beneficial owners.
DTC may discontinue providing its service as securities depository with
respect to the securities at any time by giving reasonable notice to us or the
trustee. Under these circumstances, in the event that a successor securities
depository is not obtained, we will print and deliver to you certificates for
the securities.
Also, in case we decide to discontinue use of the system of book-entry
transfers through DTC (or a successor securities depository) we will print and
deliver to you certificates for the various certificates you may own.
The information in this section concerning DTC and DTC's book-entry system
has been obtained from sources that we believe to be reliable (including DTC),
but we take no responsibility for its accuracy.
Neither we, nor any trustee nor the underwriters will have any
responsibility or obligation to participants, or the persons for whom they act
as nominees, with respect to:
-- the accuracy of the records of DTC its nominee or any participant,
-- any ownership interest in the securities, or
-- any payments to, or the providing of notice to participants or
beneficial owners.
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UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of the material United States federal income tax
consequences of the purchase, ownership and disposition of PEPS Units, Treasury
PEPS Units, trust preferred securities, and our common stock acquired under the
purchase contracts. Unless otherwise stated, this summary applies only to
holders who acquire PEPS Units, Treasury PEPS Units, trust preferred securities,
and our common stock as capital assets. The tax consequences to Non-U.S. holders
are summarized separately from the tax consequences to U.S. holders. U.S.
holders include the following:
-- a person who is a citizen or resident of the United States;
-- a corporation created or organized in or under the laws of the United
States or any state thereof or the District of Columbia;
-- an estate the income of which is subject to United States federal
income taxation, regardless of its source; and
-- a trust
-- that is subject to the supervision of a court within the United
States and the control of one or more United States persons; or
-- that has a valid election in effect under applicable Treasury
regulations to be treated as a United States person.
You are a "Non-U.S. holder" if you are not a U.S. holder. But if a
partnership holds PEPS Units, Treasury PEPS Units, trust preferred securities,
or our common stock, the tax treatment of a partner will generally depend upon
the status of the partner and upon the activities of the partnership. Partners
of partnerships holding any of the above instruments should consult their tax
advisors.
The tax treatment of holders varies depending on their particular
situations. Unless otherwise stated, this summary assumes that you use the cash
method for tax accounting. This summary does not deal with special classes of
holders. For example, this summary does not address:
-- tax consequences to holders who may be subject to special tax
treatment, such as banks, thrifts, real estate investment trusts,
regulated investment companies, insurance companies, dealers in
securities or currencies, and tax-exempt investors;
-- tax consequences to persons that will hold PEPS Units, Treasury PEPS
Units, trust preferred securities, or the common stock acquired under
the purchase contracts as a position in a "straddle," "synthetic
security," "hedge," "integrated transaction," "conversion
transaction" or "constructive sale;"
-- tax consequences to holders of PEPS Units, Treasury PEPS Units, trust
preferred securities, or our common stock whose functional currency
is not the U.S. dollar;
-- tax consequences to stockholders, partners or beneficiaries of a
holder of PEPS Units, Treasury PEPS Units, trust preferred
securities, or our common stock acquired under a purchase contract;
-- alternative minimum tax consequences, if any; or
-- any state, local or foreign tax consequences.
This summary is based upon the Internal Revenue Code of 1986, Treasury
regulations (including proposed Treasury regulations) issued under the Code, IRS
rulings and pronouncements and judicial decisions now in effect, all of which
are subject to change. Any such change may be applied retroactively in a manner
that could cause the tax consequences to vary materially from the consequences
described below, possibly adversely affecting you.
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No statutory, administrative or judicial authority directly addresses the
treatment of PEPS Units or instruments similar to PEPS Units for United States
federal income tax purposes. As a result, we cannot assure you that the IRS will
agree with the tax consequences described below. We urge you to consult your own
tax advisor with respect to the tax consequences to you of the purchase,
ownership and disposition of the PEPS Units, including the tax consequences
under state, local, foreign and other tax laws and the possible effects of
changes in United States federal or other tax laws.
UNITED STATES HOLDERS
The following summary discusses the tax consequences to U.S. holders.
PEPS UNITS
ALLOCATION OF THE PURCHASE PRICE
Your acquisition of a PEPS Unit will be treated as an acquisition of the
trust preferred security and the purchase contract constituting the PEPS Unit.
The purchase price will be allocated between the trust preferred security and
the purchase contract in proportion to their respective fair market values at
the time of purchase. This allocation will establish your initial tax basis in
the trust preferred security and the purchase contract. We will report the fair
market value as of the date of issuance of the PEPS Units of each trust
preferred security as $ and the fair market value of each purchase contract
as $ . This position will be binding on you (but not on the IRS) unless
you explicitly disclose a contrary position in a statement attached to your
timely filed United States federal income tax return for the taxable year in
which you acquire a PEPS Unit. Thus, absent such disclosure, you should allocate
the purchase price for a PEPS Unit in accordance with the foregoing. The
remainder of this discussion assumes that this allocation of the purchase price
will be respected for United States federal income tax purposes.
TRUST PREFERRED SECURITIES
Ownership of Trust Preferred Securities. We, the Trust and you, by
acquiring PEPS Units, agree to treat you as the owner, for United States
federal, state and local income and franchise tax purposes, of the trust
preferred securities that are a part of the PEPS Units that you own. The
remainder of this summary assumes that you will be treated as owning the trust
preferred securities that are a part of such PEPS Units for United States
federal, state and local income and franchise tax purposes.
Classification of the Trust. In connection with the issuance of the PEPS
Units, Baker Botts L.L.P., our counsel and tax counsel to the Trust, is of the
opinion that, under current law, assuming compliance with the terms of the
declaration of trust, and based on certain facts and assumptions contained in
the opinion, the Trust will be classified as a grantor trust and not as an
association taxable as a corporation for United States federal income tax
purposes. As a result, each U.S. holder of trust preferred securities will be
treated as owning an undivided beneficial interest in the senior deferrable
notes held by the Trust. Accordingly, you will be required to include in your
gross income your pro rata share of the income arising from the senior
deferrable notes. See "--Interest Income and Original Issue Discount." No
corporate dividends received deduction applies to income from the senior
deferrable notes.
Classification of the Senior Deferrable Notes. In the opinion of Baker
Botts L.L.P., the senior deferrable notes will be classified for federal income
tax purposes as indebtedness. No assurance can be given, however, that such
position will not be challenged by the IRS or, if so challenged, that the
challenge would not be successful. The remainder of this discussion assumes that
the senior deferrable notes will be classified for federal income tax purposes
as our indebtedness.
Interest Income And Original Issue Discount. Except as set forth below, you
will be required to include your allocable share of the stated interest on the
senior deferrable notes in your income at the time the interest is paid or
accrues in accordance with your regular method of tax accounting.
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You will also be required to include in income your allocable share of the
original issue discount on the senior deferrable notes as it accrues, in
accordance with a constant-yield-to-maturity method based on a compounding of
interest, over the first three years of the term of the senior deferrable notes.
The amount of original issue discount allocable to each trust preferred security
will be $ , which is equal to the excess of the remarketed price of the
trust preferred security of $25.0625 over the amount of the purchase price
allocated to the trust preferred security. You must accrue the original issue
discount regardless of your method of tax accounting. Your initial basis in the
trust preferred security will equal the amount of the purchase price allocated
to the trust preferred security, and this basis will be increased by the amount
of original issue discount includable in your gross income as it accrues.
Moreover, if we exercise our right to defer payments of the stated interest
on the senior deferrable notes, the stated interest will also become original
issue discount. In such case, you will be required to accrue (in addition to the
original issue discount amount discussed above) an amount of interest income
each year that approximates your allocable share of the stated interest payments
called for under the terms of the senior deferrable notes using the
constant-yield-to-maturity method. You must accrue this additional amount of
original issue discount regardless of your method of tax accounting. You will
not separately report the actual cash payments of interest on the senior
deferrable notes as taxable income. Any amount of original issue discount
included in your gross income (whether or not during a deferral period) with
respect to the senior deferrable notes will increase your tax basis in the trust
preferred securities, and the amount of cash payments received in respect of the
accrued original issue discount will reduce your tax basis in the trust
preferred securities.
Treasury regulations would require deferrable interest on the senior
deferrable notes to be treated as original issue discount from the date of
issuance unless the likelihood of deferral is remote. We have determined that
the likelihood of interest deferral is remote and that original issue discount
attributable to the stated interest need not be reported in the absence of
actual deferral.
The Treasury regulations dealing with original issue discount and
deferrable payments have not been addressed in any rulings or other
interpretations by the IRS. It is possible that the IRS could take a position
contrary to that set forth in this summary. If the IRS were to assert
successfully that the stated interest on the senior deferrable notes was
original issue discount regardless of whether we exercise our right to defer
payments, you would be required to treat the stated interest as original issue
discount from the date of issuance of the senior deferrable notes.
Sale, Exchange or Other Disposition of Trust Preferred Securities. Upon the
sale, exchange or other disposition of trust preferred securities (including the
remarketing thereof), you will recognize capital gain or loss in an amount equal
to the difference between your amount realized (which does not include amounts
equal to any accrued but unpaid interest that you have not previously included
in gross income, which will be taxable as interest) and your tax basis in the
trust preferred securities (which includes the amount of original issue discount
that you have previously included in gross income). Selling expenses will reduce
your gain or increase your loss. Gains of individuals from capital assets held
for more than one year are taxed up to a maximum rate of 20%. Your ability to
deduct capital losses is subject to limitations.
Distribution of the Senior Deferrable Notes. Under current law, a
distribution by the Trust of the senior deferrable notes generally will not be
taxable. You will have an aggregate tax basis in the senior deferrable notes
received in the liquidation equal to your aggregate tax basis in the trust
preferred securities surrendered, and the holding period of distributed senior
deferrable notes will include the period during which you held the trust
preferred securities. You will continue to include interest and original issue
discount from the senior deferrable notes you receive from the Trust. Upon
occurrence of a tax event as described in "Description of Senior Deferrable
Notes--Tax Event Redemption" in this prospectus supplement, we will have the
option to redeem the senior deferrable notes which will be taxable to you. See
"--Tax Event Redemption."
Possible Alternative Characterization. How the Treasury regulations deal
with instruments involving a reset mechanism identical to the reset in the
senior deferrable notes is unclear. Thus, it is possible that the IRS could
treat the senior deferrable notes as "contingent payment debt instruments."
Under that treatment (1) regardless of your regular method of tax accounting,
you would be required to use an accrual method with
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respect to the senior deferrable notes; (2) interest income that accrues may
exceed stated interest payments actually received; and (3) any gain and all or a
portion of any loss on the sale, exchange or other disposition of the senior
deferrable notes or the trust preferred securities generally would be ordinary
rather that capital in nature.
PURCHASE CONTRACTS
Acquisition of Common Stock under a Purchase Contract. You generally will
not recognize gain or loss on the purchase of shares of our common stock under a
purchase contract, except with respect to any cash paid instead of a fractional
share of our common stock. Subject to the following discussion, your aggregate
initial tax basis in the shares of our common stock received under a purchase
contract generally should equal (1) the purchase price paid for those shares,
plus (2) your tax basis in the purchase contract, less (3) the portion of such
purchase price and tax basis allocable to any fractional share. The holding
period for shares of our common stock received under a purchase contract will
commence on the day you receive the shares.
Ownership of Common Stock Acquired under the Purchase Contract. Any
dividend paid to you on shares of our common stock will be treated as dividend
income to you to the extent paid out of current or accumulated earnings and
profits, as determined under United States federal income tax principles. You
will be required to include any such dividend in your gross income as ordinary
income on the day you receive the dividend. Such dividends will be eligible for
the dividends received deduction allowed to corporations.
You will recognize capital gain or loss on any sale or exchange of our
common stock in an amount equal to the difference between your amount realized
upon the sale of our common stock and your tax basis in our common stock.
Capital gains of individuals derived with respect to capital assets held for
more than one year are taxed up to a maximum rate of 20%. Your ability to deduct
capital losses is subject to limitations.
Early Settlement of a Purchase Contract. You will not recognize gain or
loss on the receipt of trust preferred securities, treasury portfolio or
treasury securities, as the case may be, upon early settlement of a purchase
contract and you will have the same tax basis and holding period in such trust
preferred securities, treasury portfolio or treasury securities, as the case
maybe, as before the early settlement.
Termination of a Purchase Contract. If a purchase contract terminates, you
will recognize capital gain or loss equal to the difference between your amount
realized (if any) upon such termination and your adjusted tax basis in the
purchase contract at the time of the termination. Capital gains of individuals
derived in respect of capital assets held for more than one year are taxed up to
a maximum rate of 20%. Your ability to deduct capital losses is subject to
limitations. You will not recognize gain or loss on the receipt of the trust
preferred securities, treasury portfolio or treasury securities, as the case may
be, upon termination of the purchase contract and you will have the same tax
basis in the trust preferred securities, treasury portfolio or treasury
securities, as the case may be, as before termination.
Adjustment to Settlement Rate. You might be treated as receiving a
constructive distribution from us if (1) the settlement rate is adjusted and as
a result of that adjustment your proportionate interest in our assets or
earnings and profits is increased and (2) the adjustment is not made pursuant to
a bona fide, reasonable anti-dilution formula. An adjustment in the settlement
rate would not be considered made pursuant to such a formula if the adjustment
were made to compensate you for certain taxable distributions with respect to
our common stock. Thus, under some circumstances, an increase in the settlement
rate might give rise to a taxable dividend to you even though you would not
receive any cash.
TREASURY PEPS UNITS
Substitution of Treasury Security to Create Treasury PEPS Units. If you
hold PEPS Units and deliver a treasury security to the securities intermediary
in substitution for the trust preferred securities, you generally will not
recognize gain or loss upon the delivery of the treasury security or the release
of the trust preferred securities. You will continue to include in income any
interest and original issue discount with respect to the trust preferred
securities, and your tax basis in the trust preferred securities and the
purchase contracts will not be affected by the delivery and release.
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Ownership of Treasury Securities. We, the trust and you, by acquiring a
PEPS Unit, agree to treat you as the owner, for United States federal, state and
local income and franchise tax purposes, of the treasury security that is part
of the PEPS unit that you own. Your initial tax basis in the treasury security
will be equal to the amount paid for the treasury security. The treasury
security will earn original issue discount over its life. As a result, you will
be required to include in income each year that the securities intermediary
holds a treasury security on your behalf the portion of the original issue
discount or acquisition discount that accrues on the treasury security in that
year. The tax treatment of original issue discount is described under
"--Treasury Portfolio--Interest Income and Original Issue Discount."
Substitution of Trust Preferred Securities to Recreate PEPS Units. If you
hold Treasury PEPS Units and deliver trust preferred securities to the
securities intermediary to recreate PEPS Units, you generally will not recognize
gain or loss upon the delivery of the trust preferred securities or the release
of the treasury security. You will continue to include in income any interest,
original issue discount or acquisition discount otherwise includable with
respect to the treasury security and the trust preferred securities, and your
tax basis in the treasury security, the trust preferred securities and the
purchase contract will not be affected by the delivery and release.
SALE OR DISPOSITION OF UNITS
Upon a disposition of a PEPS Unit or Treasury PEPS Unit, you will be
treated as having sold, exchanged or disposed of the purchase contract and the
trust preferred security or treasury security, as the case may be, that
constitute the PEPS Unit or Treasury PEPS Unit. You generally will have capital
gain or loss equal to the difference between the portion of your proceeds
allocable to the purchase contract and the trust preferred security or treasury
security, as the case may be, and your respective tax basis in the purchase
contract and the trust preferred security or treasury security. For purposes of
determining gain or loss, your proceeds will not include an amount equal to
accrued and unpaid interest on the senior deferrable note underlying the trust
preferred security or the treasury security not previously included in income,
which will be treated as ordinary interest income, and your basis in the trust
preferred security or treasury security will include the amount of original
issue discount that you have previously included in gross income with respect to
the underlying senior deferrable note or treasury security. Capital gains of
individuals derived in respect of capital assets held for more than one year are
taxed up to a maximum rate of 20%. Your ability to deduct capital losses is
subject to limitations. For a possible recharacterization of gain or loss on the
sale, exchange or other disposition of a trust preferred security, see "--PEPS
Units--Trust Preferred Securities--Possible Alternative Characterization."
If the disposition of a PEPS Unit or Treasury PEPS Unit occurs when the
purchase contract has a negative value to you, you will be considered to have
received additional consideration for the trust preferred security or treasury
security in an amount equal to such negative value, and to have paid such amount
to be released from your obligation under the purchase contract. You should
consult your tax advisor regarding a disposition of a PEPS Unit or Treasury PEPS
Unit at a time when the purchase contract has a negative value.
TAX EVENT REDEMPTION
A tax event redemption will be a taxable event. You will generally
recognize capital gain or loss in an amount equal to the difference between (1)
the redemption price of the trust preferred securities (whether paid directly to
you or applied by the securities intermediary to the purchase of the treasury
portfolio on behalf of holders of the PEPS Units), except to the extent of
amounts paid in respect of accrued but unpaid interest not previously included
in income, which will be taxable as such, and (2) your adjusted tax basis in the
trust preferred securities. Capital gains of individuals derived in respect of
capital assets held for more than one year are taxed up to a maximum tax rate of
20%. Your ability to deduct capital losses is subject to limitations.
TREASURY PORTFOLIO
Ownership of Treasury Portfolio. We, the Trust and you, by acquiring a PEPS
Unit, agree to treat you as the owner, for United States federal, state and
local income and franchise tax purposes, of that portion of the treasury
portfolio that is a part of the PEPS Units that you own. You will be required to
include in income
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any amount earned on your pro rata share of the treasury portfolio for all
United States federal, state and local income and franchise tax purposes. The
remainder of this summary assumes that U.S. holders of the PEPS Units will be
treated as the owners of the applicable ownership interest of the treasury
portfolio that are a part of their PEPS Units for United States federal, state
and local income and franchise tax purposes.
Interest Income and Original Issue Discount. The treasury portfolio will
consist of stripped treasury securities. You will be required to treat your pro
rata share of each treasury security in the treasury portfolio as a bond that
was originally issued on the date the securities intermediary acquired the
relevant treasury securities and to include original issue discount in income
over the life of the treasury securities in an amount equal to your pro rata
share of the excess of the amounts payable on the treasury securities over the
value of the treasury securities at the time the securities intermediary
acquired them on behalf of holders of the PEPS Units. The amount of that excess
will constitute only a portion of the total amount payable in respect to the
treasury portfolio. Consequently, a substantial portion of each scheduled
payment to you will be treated as a tax-free return of your investment in the
treasury portfolio and will not be considered current taxable income for federal
income tax purposes.
Whether you use the cash or accrual method of tax accounting, you will be
required to include original issue discount (other than original issue discount
on short-term treasury securities, as defined below) in income for federal
income tax purposes as it accrues on a constant-yield-to-maturity basis. In the
case of any treasury security with a maturity of one year or less from the date
it is purchased, a "short-term treasury security", in general, only accrual
basis taxpayers are required to include original issue discount in income as it
is accrued. If you use the accrual method of tax accounting you are required to
accrue original issue discount on short-term treasury securities on a
straight-line basis unless you elect to accrue the original issue discount using
a constant-yield-to-maturity method.
Tax Basis of the Treasury Portfolio. Your tax basis in your applicable
ownership interest of the treasury portfolio will equal your pro rata share of
the amount paid by the securities intermediary for the treasury portfolio. Your
tax basis in your applicable ownership interest of the treasury portfolio will
be increased by the amount of original issue discount that you include in your
income with respect thereto and decreased by the amount of cash you receive in
respect of it.
NON-UNITED STATES HOLDERS
The following summary discusses the tax consequences to Non-U.S. holders.
UNITED STATES FEDERAL WITHHOLDING TAX
The 30% United States federal withholding tax will not apply to any payment
of principal or interest (including original issue discount) on the senior
deferrable notes (unless the notes are treated as equity for federal income tax
purposes, see "--Trust Preferred Securities--Classification of the Senior
Deferrable Notes"), treasury portfolio or treasury securities provided that:
-- you do not actually (or constructively) own 10% or more of the total
combined voting power of all classes of our voting stock within the
meaning of the Code and the Treasury regulations;
-- you are not a controlled foreign corporation that is related to us
through stock ownership;
-- you are not a bank whose receipt of interest on the senior deferrable
notes is described in section 881(c)(3)(A) Code; and
-- (a) you provide your name and address on an IRS Form W-8 (or successor
form W-8BEN), and certify, under penalties of perjury, that you are
not a United States person or (b) a financial institution holding the
PEPS or Treasury PEPS on your behalf certifies, under penalty of
perjury, that it has received an IRS Form W-8 (or successor form
W-8BEN) from the beneficial owner and provides us with a copy.
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We will not withhold on payments of principal and interest if these
requirements are met. We generally will withhold tax at a rate of 30% on the
dividends paid on the shares of our common stock acquired under the purchase
contract.
You may reduce or eliminate the 30% withholding tax applicable to you on
interest (including original issue discount) or dividends if you provide us with
a properly executed (1) IRS Form 1001 (or successor form W-8BEN) claiming a
reduction of or an exemption from withholding under an applicable tax treaty or
(2) IRS Form 4224 (or successor form W-8ECI) stating that such payments paid are
not subject to withholding tax because they are effectively connected with your
conduct of a trade or business in the United States.
The 30% U.S. federal withholding tax will not apply to any gain or income
that you realize on the sale, exchange, or other disposition of the PEPS Units,
the Treasury PEPS Units, trust preferred securities, the purchase contracts,
treasury securities or our common stock acquired under the purchase contracts.
UNITED STATES FEDERAL INCOME TAX
If you are engaged in a trade or business in the United States and interest
(including original issue discount) on the senior deferrable notes, original
issue discount on the treasury securities and dividends on our common stock are
effectively connected with the conduct of that trade or business (although
exempt from the 30% withholding tax), you will be subject to United States
federal income tax on the interest, original issue discount and dividends on a
net income basis in the same manner as if you were a U.S. holder. In addition,
if you are a foreign corporation, you may be subject to a branch profits tax
equal to 30% (or the lower applicable treaty rate) of your earnings and profits
for the taxable year, subject to adjustments, that are effectively connected
with your conduct of a trade or business in the United States. For this purpose,
interest (including original issue discount) on the senior deferrable notes,
original issue discount on the treasury securities and dividends on the our
common stock will be included in earnings and profits.
Any gain or income realized on the disposition of a PEPS Unit, a Treasury
PEPS Unit, a trust preferred security, a purchase contract, a senior deferrable
note, a treasury security, the treasury portfolio or our common stock acquired
under the purchase contract generally will not be subject to United States
federal income tax unless:
(1) that gain or income is effectively connected with your conduct of
a trade or business in the United States;
(2) you are an individual who is present in the United States for 183
days or more in the taxable year of that disposition, and certain other
conditions are met; or
(3) in the case of PEPS Units, Treasury PEPS Units or our common
stock, we are or have been a "U.S. real property holding corporation" for
United States federal income tax purposes.
We have determined that we are not a "U.S. real property holding
corporation" for United States federal income tax purposes. If we were or became
a U.S. real property holding corporation, so long as our common stock continued
to be regularly traded on an established securities market, you would not be
subject to U.S. federal income tax on the disposition of a purchase contract
(that is a part of a PEPS Unit or Treasury PEPS Unit) or our common stock if you
held (at all times during the shorter of the five year period preceding the date
of disposition or your holding period) less than five percent of the total
outstanding purchase contracts or shares of our common stock, respectively.
Special rules may apply to you if you are a "controlled foreign
corporation", "passive foreign investment company" or "foreign personal holding
company" and are subject special treatment under the Code. If you are such an
entity, you should consult your own tax advisor to determine the United States
federal, state, local and other tax consequences that may be relevant to you.
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INFORMATION REPORTING AND BACKUP WITHHOLDING
If you are a U.S. holder, unless you are an exempt recipient such as a
corporation, payments under the PEPS Units, Treasury PEPS Units, trust preferred
securities, treasury securities or our common stock, the proceeds received with
respect to a fractional share of our common stock upon the settlement of a
purchase contract, and the proceeds received from the sale, exchange or other
disposition of PEPS Units, Treasury PEPS Units, trust preferred securities,
purchase contracts, treasury securities or our common stock may be subject to
information reporting and may be subject to United States federal backup
withholding at the rate of 31% if you fail to supply an accurate taxpayer
identification number or otherwise fail to comply with applicable United States
information reporting or certification requirements.
If you are a Non-U.S. holder, no information reporting or backup
withholding will be required with respect to payments made by us if a statement
described above under "Non-U.S. Holders" has been received and we do not have
actual knowledge or reason to know that you are a U.S. holder.
Amounts withheld under the backup withholding rules may be allowed as a
refund or a credit against your United States federal income tax liability
provided the required information is furnished to the IRS.
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ERISA CONSIDERATIONS
Generally, employee benefit plans that are subject to the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"), plans and
individual retirement accounts that are subject to Section 4975 of the Code and
entities whose assets are considered assets of such plans (collectively,
"plans") may purchase PEPS Units subject to the investing fiduciary's
determination that the investment satisfies ERISA's fiduciary standards and
other requirements applicable to investments by plans. Accordingly, among other
factors, the fiduciary should consider whether the investment would satisfy the
prudence and diversification requirements of ERISA and would be consistent with
the documents and instruments governing the plans.
Section 406 of ERISA and Section 4975 of the Code prohibit fiduciaries from
engaging in specified transactions involving "plan assets" with persons that are
"parties in interest" under ERISA or "disqualified persons" under the Code with
respect to the plan. A violation of these "prohibited transaction" rules may
generate excise tax and other liabilities under ERISA and the Code. Thus, a plan
fiduciary considering an investment in PEPS Units also should consider whether
such an investment might constitute or give rise to a prohibited transaction
under ERISA or the Code for which no exemption is available. For example, the
purchase and holding of PEPS Units by a plan with respect to which we, the
underwriters or any of our affiliates is a party in interest or disqualified
person could constitute a prohibited transaction under ERISA or the Code unless
an exemption were available for such purchase.
In addition, the Department of Labor (the "DOL") has issued regulations
under which the assets of the Trust would be deemed to be "plan assets" for
purposes of ERISA and Section 4975 of the Code if 25% or more of the value of
any class of equity interests in the Trust were held by plans, other employee
benefit plans not subject to ERISA or Section 4975 of the Code (such as
governmental, church and foreign plans), or other entities holding "plan assets"
(collectively, "Benefit Plan Investors"). No assurance can be given that the
value of the PEPS Units held by Benefit Plan Investors will be less than 25% of
the total value of such PEPS Units at the completion of the initial offering or
thereafter, and no monitoring or other measures will be taken with respect to
the satisfaction of the conditions to this exception. Certain transactions
involving the Trust could be deemed to constitute direct or indirect prohibited
transactions if the PEPS Units were acquired with "plan assets" and the assets
of the Trust were deemed to be "plan assets" of plans investing in the Trust.
The United States Department of Labor has issued prohibited transaction
class exemptions, "PTCEs", that may apply to the acquisition and holding of the
PEPS Units, as well as transactions involving the Trust. These class exemptions
include PTCE 84-14 (respecting transactions determined by independent qualified
professional asset managers), PTCE 90-1 (respecting insurance company pooled
separate accounts), PTCE 91-38 (respecting bank collective trust funds), PTCE
95-60 (respecting insurance company general accounts) and PTCE 96-23 (respecting
transactions determined by in-house asset managers).
Due to the complexity of these rules and the penalties that may be imposed
upon persons involved in nonexempt prohibited transactions, it is particularly
important that fiduciaries or other persons considering purchasing the PEPS
Units on behalf of or with "plan assets" of any plan consult with counsel
regarding the potential consequences if the assets of the Trust were deemed to
be "plan assets" or if the acquisition and holding of the PEPS Units constitutes
a prohibited transaction and failed to satisfy applicable fiduciary requirements
imposed under ERISA. Any purchaser or holder of the PEPS Units or any interest
therein will be deemed to have represented by its purchase and holding thereof
that it: (a) is not a Plan or an entity holding "plan assets" and is not
purchasing such securities on behalf of or with "plan assets" of any plan or (b)
is eligible for exemptive relief and satisfies the applicable fiduciary
requirements of ERISA.
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UNDERWRITING
Under the terms and subject to the conditions contained in an underwriting
agreement dated the date of this prospectus supplement, the underwriters named
below (for whom Morgan Stanley & Co. Incorporated, Credit Suisse First Boston
Corporation, J.P. Morgan Securities Inc. and BMO Nesbitt Burns Corp. are acting
as representatives) have severally agreed to purchase, and Valero and the Trust
have agreed to sell to them, severally, the number of PEPS Units indicated
below:
<TABLE>
<CAPTION>
NUMBER OF
NAME PEPS UNITS
---- ----------
<S> <C>
Morgan Stanley & Co. Incorporated...........................
Credit Suisse First Boston Corporation......................
J.P. Morgan Securities Inc. ................................
BMO Nesbitt Burns Corp. ....................................
---------
Total............................................. 6,000,000
=========
</TABLE>
The underwriters are offering the PEPS Units subject to their acceptance of
the PEPS Units from Valero and the Trust and subject to prior sale. The
underwriting agreement provides that the obligations of the several underwriters
to pay for and accept delivery of the PEPS Units offered by this prospectus
supplement are subject to the approval of certain legal matters by their counsel
and to certain other conditions. The underwriters are obligated to take and pay
for all of the PEPS Units offered by this prospectus supplement if any such PEPS
Units are taken.
The per PEPS Unit price of any PEPS Unit sold by the underwriters shall be
the public offering price listed on the cover page of this prospectus
supplement, in United States dollars, less an amount not greater than the per
PEPS Unit amount of the concession to dealers described below.
The underwriters initially propose to offer part of the PEPS Units directly
to the public at the public offering price listed on the cover page of this
prospectus supplement and part to certain dealers at a price that represents a
concession not in excess of $ per PEPS Unit under the public offering price.
Any underwriter may allow, and such dealers may reallow, a concession not in
excess of $ per PEPS Unit to other underwriters or to certain dealers. After
the initial offering of the PEPS Units, the offering price and other selling
terms may from time to time be varied by the underwriters.
Valero and the Trust have granted to the underwriters an option,
exercisable for 30 days from the date of this prospectus supplement, to purchase
up to an additional 900,000 PEPS Units at the public offering price listed on
the cover page of this prospectus supplement, less underwriting discounts and
commissions. The underwriters may exercise this option solely for the purpose of
covering overallotments, if any, made in connection with this offering. If the
underwriters' over-allotment option is exercised in full, the total price to the
public would be $ , the total underwriters' discounts and commissions would
be $ and the total proceeds to Valero would be $ .
Prior to this offering, there has been no public market for the PEPS Units.
Valero has applied to list the PEPS Units on the New York Stock Exchange under
symbol "VLO PrU." In order to meet one of the requirements for listing on the
New York Stock Exchange, the underwriters have undertaken to sell the PEPS Units
to a minimum of 400 beneficial owners.
Each of Valero, the Trust and certain of Valero's executive officers and
directors has agreed that, without the prior written consent of Morgan Stanley &
Co. Incorporated on behalf of the underwriters, it will not, during the period
ending 90 days after the date of this prospectus supplement:
-- offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option,
right or warrant to purchase, lend or otherwise transfer or dispose
of directly or indirectly, any PEPS Units, purchase contracts or
shares of Valero's common stock or any securities convertible into or
exercisable or exchangeable for PEPS Units, purchase contracts or
shares of Valero's common stock; or
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-- enter into any swap or other arrangement that transfers to another,
in whole or in part, any of the economic consequences of ownership of
PEPS Units, purchase contracts or shares of Valero's common stock;
whether any transaction described above is to be settled by delivery of PEPS
Units, purchase contracts or shares of Valero's common stock or such other
securities, in cash or otherwise. The restrictions described in this paragraph
do not apply to, among other things:
-- the sale of shares or PEPS Units to the underwriters;
-- the issuance by Valero of shares of common stock upon the exercise of
an option outstanding on the date of this prospectus supplement or
with respect to awards under Valero's executive stock incentive plan
outstanding on the date of this prospectus supplement; or
-- the grant of options or awards pursuant to Valero's employee benefit
plans, provided that such options or awards do not vest prior to the
termination of the lock-up period.
In order to facilitate the offering of the common stock and the PEPS Units,
the underwriters in the respective offerings may engage in transactions that
stabilize, maintain or otherwise affect the price of the PEPS Units, the trust
preferred securities or Valero's common stock. Specifically, the underwriters
may over-allot in connection with the offering, creating a short position in the
PEPS Units for their own account. In addition, to cover over-allotments or to
stabilize the price of the PEPS Units or Valero's common stock, the underwriters
may bid for, and purchase, PEPS Units or Valero's common stock in the open
market. Finally, the underwriting syndicate may reclaim selling concessions
allowed to an underwriter or a dealer for distributing the PEPS Units in the
offering, if the syndicate repurchases previously distributed PEPS Units in
transactions to cover syndicate short positions, in stabilization transactions
or otherwise. Any of these activities may stabilize or maintain the market price
of the PEPS Units, the trust preferred securities or Valero's common stock above
independent market levels. The underwriters are not required to engage in these
activities, and may end any of these activities at any time.
From time to time, some of the underwriters and their affiliates have
provided, and continue to provide, investment banking and commercial banking
services to Valero. Valero, J.P. Morgan Securities Inc., Credit Suisse First
Boston Corporation and Morgan Stanley & Co. Incorporated served as underwriters
in Valero's public offering of notes in March 1999. Morgan Stanley & Co.
Incorporated, J.P. Morgan Securities Inc. and Credit Suisse First Boston
Corporation are also serving as underwriters for the Equity Offering and the
Debt Offering.
Valero and the Trust have agreed to indemnify the underwriters against
certain liabilities, including liabilities under the Securities Act.
LEGAL MATTERS
The validity of Valero's common stock, the PEPS Units, the purchase
contracts, the senior deferrable notes and the guarantee offered hereby will be
passed upon for us by Baker Botts L.L.P., Houston, Texas. Certain legal matters
will be passed upon for the underwriters by Davis Polk & Wardwell. Certain
matters of Delaware law relating to the validity of the trust preferred
securities, the enforceability of the declaration of trust and the creation of
the Trust will be passed upon by Richards Layton & Finger, P.A., Wilmington,
Delaware.
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EXPERTS
Valero's audited consolidated financial statements included in this
prospectus supplement and incorporated by reference from its annual report on
Form 10-K for the year ended December 31, 1999 have been audited by Arthur
Andersen LLP, independent public accountants, as indicated in their report with
respect thereto, and is included in this prospectus supplement and incorporated
by reference in reliance upon the authority of said firm as experts in
accounting and auditing in giving said report.
The financial statements of Exxon California Refinery, Terminal and Retail
Assets Business (as defined in the Sale and Purchase Agreement between Exxon
Mobil Corporation and Valero Refining Company--California) as of December 31,
1999 and 1998 and for each of the three years in the period ended December 31,
1999 included in this prospectus supplement have been so included in reliance on
the report of PricewaterhouseCoopers LLP, independent accountants, given on the
authority of said firm as experts in auditing and accounting.
INFORMATION WE INCORPORATE BY REFERENCE
We are incorporating by reference information we file with the SEC, which
means that we are disclosing important information to you by referring you to
those documents. The information we incorporate by reference is an important
part of this prospectus supplement, and information that we file later with the
SEC automatically will update and supersede this information. We incorporate by
reference the documents listed below and any future filings we make with the SEC
under Section 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934
until we sell all the securities:
-- our annual report on Form 10-K for the year ended December 31, 1999;
-- our quarterly report on Form 10-Q for the three months ended March
31, 2000;
-- the description of our common stock contained in our registration
statement on Form 8-A, as may be amended from time to time to update
that description;
-- the description of the rights associated with our common stock
contained in our registration statement on Form 8-A, as may be
amended from time to time to update that description;
-- our current report on Form 8-K dated May 15, 2000 and filed with the
SEC on May 30, 2000;
-- our current report on Form 8-K/A dated May 15, 2000 and filed with
the SEC on June 1, 2000, which amends our current report on Form 8-K
dated May 15, 2000 and filed with the SEC on May 30, 2000 and amends
and supercedes our current report on Form 8-K dated March 17, 2000
and filed with the SEC on March 20, 2000. As a result, your attention
is directed to the most recent information contained in this current
report on Form 8-K/A.
You may request a copy of these filings (other than an exhibit to those
filings unless we have specifically incorporated that exhibit by reference into
the filing), at no cost, by writing or telephoning us at the following address:
Valero Energy Corporation
One Valero Place
San Antonio, Texas 78212
Attention: Investor Relations
Telephone: (210) 370-2139
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INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
VALERO ENERGY CORPORATION AND SUBSIDIARIES
Report of Independent Public Accountants.................. F-2
Consolidated Balance Sheets as of December 31, 1999 and
1998................................................... F-3
Consolidated Statements of Income for the Years Ended
December 31, 1999, 1998 and 1997....................... F-4
Consolidated Statements of Common Stock and Other
Stockholders' Equity................................... F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1999, 1998
and 1997............................................... F-6
Notes to Consolidated Financial Statements for the Year
Ended December 31, 1999................................ F-7
Consolidated Balance Sheets as of March 31, 2000
(unaudited) and December 31, 1999...................... F-35
Consolidated Statements of Income for the Three Months
Ended March 31, 2000 and 1999 (unaudited).............. F-36
Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 2000 and 1999 (unaudited).............. F-37
Notes to Consolidated Financial Statements for the Three
Months Ended March 31, 2000............................ F-38
EXXON CALIFORNIA REFINERY, TERMINAL AND RETAIL ASSETS
BUSINESS (AS DEFINED IN THE SALE AND PURCHASE AGREEMENT
BETWEEN EXXON MOBIL CORPORATION AND VALERO REFINING
COMPANY -- CALIFORNIA)
Report of Independent Accountants......................... F-45
Balance Sheet as of December 31, 1999 and 1998............ F-46
Statement of Income for the Years Ended December 31, 1999,
1998 and 1997.......................................... F-47
Statement of Cash Flows for the Years Ended December 31,
1999, 1998 and 1997.................................... F-48
Statement of Changes in Exxon Mobil Corporation Net
Investment............................................. F-49
Notes to Financial Statements as of December 31, 1999..... F-50
Balance Sheet as of March 31, 2000 (unaudited) and
December 31, 1999...................................... F-56
Statement of Income for the Three Months Ended March 31,
2000 and 1999 (unaudited).............................. F-57
Statement of Cash Flows for the Three Months Ended March
31, 2000 and 1999 (unaudited).......................... F-58
Notes to Financial Statements as of March 31, 2000........ F-59
</TABLE>
F-1
<PAGE> 121
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders
of Valero Energy Corporation:
We have audited the accompanying consolidated balance sheets of Valero
Energy Corporation (a Delaware corporation) and subsidiaries as of December 31,
1999 and 1998, and the related consolidated statements of income, common stock
and other stockholders' equity and cash flows for each of the three years in the
period ended December 31, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Valero Energy Corporation
and subsidiaries as of December 31, 1999 and 1998, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1999, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
San Antonio, Texas
February 18, 2000
F-2
<PAGE> 122
VALERO ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1999 1998
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Current assets:
Cash and temporary cash investments....................... $ 60,087 $ 11,199
Receivables, less allowance for doubtful accounts of
$3,038 (1999) and $1,150 (1998)........................ 372,542 283,456
Inventories............................................... 303,388 316,405
Current deferred income tax assets........................ 79,307 4,851
Prepaid expenses and other................................ 13,534 23,799
---------- ----------
828,858 639,710
---------- ----------
Property, plant and equipment -- including construction in
progress of $114,747 (1999) and $179,136 (1998), at
cost...................................................... 2,686,684 2,572,190
Less: Accumulated depreciation............................ 702,170 612,847
---------- ----------
1,984,514 1,959,343
---------- ----------
Deferred charges and other assets........................... 165,900 126,611
---------- ----------
$2,979,272 $2,725,664
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt........................................... $ -- $ 160,000
Accounts payable.......................................... 616,895 283,183
Accrued expenses.......................................... 102,087 54,561
---------- ----------
718,982 497,744
---------- ----------
Long-term debt.............................................. 785,472 822,335
---------- ----------
Deferred income taxes....................................... 275,521 210,389
---------- ----------
Deferred credits and other liabilities...................... 114,528 109,909
---------- ----------
Common stockholders' equity:
Common stock, $.01 par value -- 150,000,000 shares
authorized; issued 56,331,166 (1999) and 56,314,798
(1998) shares.......................................... 563 563
Additional paid-in capital................................ 1,092,348 1,112,726
Accumulated deficit....................................... (3,331) (17,618)
Treasury stock, 264,464 (1999) and 378,130 (1998) shares,
at cost................................................ (4,811) (10,384)
---------- ----------
1,084,769 1,085,287
---------- ----------
$2,979,272 $2,725,664
========== ==========
</TABLE>
See Notes to Consolidated Financial Statements.
F-3
<PAGE> 123
VALERO ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1999 1998 1997
------------ ------------ ------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Operating revenues....................................... $7,961,168 $5,539,346 $5,756,220
---------- ---------- ----------
Costs and expenses:
Cost of sales and operating expenses................... 7,731,151 5,271,473 5,426,438
Write-down of inventories to market value.............. -- 170,929 --
Selling and administrative expenses.................... 68,463 69,482 53,573
Depreciation expense................................... 92,413 78,660 65,175
---------- ---------- ----------
Total.......................................... 7,892,027 5,590,544 5,545,186
---------- ---------- ----------
Operating income (loss).................................. 69,141 (51,198) 211,034
Other income, net........................................ 6,475 586 6,978
Interest and debt expense:
Incurred............................................... (61,182) (37,819) (44,150)
Capitalized............................................ 5,753 5,340 1,695
---------- ---------- ----------
Income (loss) from continuing operations before income
taxes.................................................. 20,187 (83,091) 175,557
Income tax expense (benefit)............................. 5,900 (35,800) 63,789
---------- ---------- ----------
Income (loss) from continuing operations................. 14,287 (47,291) 111,768
Loss from discontinued operations, net of income tax
benefit of $8,889 (1997)............................... -- -- (15,672)
---------- ---------- ----------
Net income (loss)........................................ 14,287 (47,291) 96,096
Less: Preferred stock dividend requirements and
redemption premium.................................. -- -- 4,592
---------- ---------- ----------
Net income (loss) applicable to common stock............. $ 14,287 $ (47,291) $ 91,504
========== ========== ==========
Earnings (loss) per share of common stock:
Continuing operations.................................. $ .25 $ (.84) $ 2.16
Discontinued operations................................ -- -- (.39)
---------- ---------- ----------
Total.......................................... $ .25 $ (.84) $ 1.77
========== ========== ==========
Weighted average common shares outstanding
(in thousands)...................................... 56,086 56,078 51,662
Earnings (loss) per share of common stock -- assuming
dilution:
Continuing operations.................................. $ .25 $ (.84) $ 2.03
Discontinued operations................................ -- -- (.29)
---------- ---------- ----------
Total.......................................... $ .25 $ (.84) $ 1.74
========== ========== ==========
Weighted average common shares outstanding
(in thousands)...................................... 56,758 56,078 55,129
Dividends per share of common stock...................... $ .32 $ .32 $ .42
</TABLE>
See Notes to Consolidated Financial Statements.
F-4
<PAGE> 124
VALERO ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMMON STOCK AND OTHER STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
RETAINED
CONVERTIBLE NUMBER OF ADDITIONAL UNEARNED EARNINGS
PREFERRED COMMON COMMON PAID-IN VESOP (ACCUMULATED TREASURY
STOCK SHARES STOCK CAPITAL COMPENSATION DEFICIT) STOCK
----------- ---------- -------- ---------- ------------ ------------ --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1996............ $ 3,450 44,185,513 $44,186 $ 540,133 $(8,783) $ 496,839 $ --
Net income.......................... -- -- -- -- -- 96,096 --
Dividends on redeemable preferred
stock............................. -- -- -- -- -- (32) --
Dividends on convertible preferred
stock............................. -- -- -- -- -- (5,387) --
Dividends on common stock........... -- -- -- -- -- (21,031) --
Redemption/conversion of convertible
preferred stock................... (3,450) 6,377,432 6,377 (3,116) -- -- --
Special spin-off dividend to Old
Valero............................ -- -- -- (210,000) -- -- --
Recapitalization in connection with
the Restructuring................. -- -- (55,533) 622,500 -- (518,859) --
Issuance of common stock in
connection with acquisition of
Basis
Petroleum, Inc. .................. -- 3,429,796 3,430 110,570 -- -- --
Valero Employees' Stock Ownership
Plan compensation earned.......... -- -- -- -- 8,783 -- --
Shares repurchased and shares issued
in connection with employee stock
plans and other................... -- 2,143,291 2,101 50,567 -- -- --
------- ---------- -------- ---------- ------- --------- --------
Balance, December 31, 1997............ -- 56,136,032 561 1,110,654 -- 47,626 --
Net loss............................ -- -- -- -- -- (47,291) --
Dividends on common stock........... -- -- -- -- -- (17,953) --
Shares repurchased and shares issued
in connection with employee stock
plans and other................... -- 178,766 2 2,072 -- -- (10,384)
------- ---------- -------- ---------- ------- --------- --------
Balance, December 31, 1998............ -- 56,314,798 563 1,112,726 -- (17,618) (10,384)
Net income.......................... -- -- -- -- -- 14,287 --
Dividends on common stock........... -- -- -- (17,931) -- -- --
Shares repurchased and shares issued
in connection with employee stock
plans and other................... -- 16,368 -- (2,447) -- -- 5,573
------- ---------- -------- ---------- ------- --------- --------
Balance, December 31, 1999............ $ -- 56,331,166 $ 563 $1,092,348 $ -- $ (3,331) $ (4,811)
======= ========== ======== ========== ======= ========= ========
</TABLE>
See Notes to Consolidated Financial Statements.
F-5
<PAGE> 125
VALERO ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1999 1998 1997
--------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities:
Income (loss) from continuing operations................. $ 14,287 $ (47,291) $ 111,768
Adjustments to reconcile income (loss) from continuing
operations to net cash provided by continuing
operations:
Depreciation expense.................................. 92,413 78,660 65,175
Amortization of deferred charges and other, net....... 46,610 47,889 27,252
Write-down of inventories to market value............. -- 170,929 --
Changes in current assets and current liabilities..... 296,255 (46,179) (32,113)
Deferred income tax expense (benefit)................. (9,400) (31,700) 32,827
Changes in deferred items and other, net.............. (5,054) (6,483) (8,264)
--------- --------- -----------
Net cash provided by continuing operations.......... 435,111 165,825 196,645
Net cash provided by discontinued operations........ -- -- 24,452
--------- --------- -----------
Net cash provided by operating activities........ 435,111 165,825 221,097
--------- --------- -----------
Cash flows from investing activities:
Capital expenditures:
Continuing operations................................. (100,594) (165,507) (69,284)
Discontinued operations............................... -- -- (52,674)
Deferred turnaround and catalyst costs................... (72,681) (56,346) (10,860)
Purchase of Paulsboro Refinery........................... -- (335,249) --
Acquisition of Basis Petroleum, Inc. .................... -- -- (355,595)
Earn-out payment in connection with Basis acquisition.... -- (10,325) --
Other.................................................... 1,107 1,159 1,693
--------- --------- -----------
Net cash used in investing activities............ (172,168) (566,268) (486,720)
--------- --------- -----------
Cash flows from financing activities:
Increase (decrease) in short-term debt, net.............. (160,000) 38,000 155,088
Long-term borrowings..................................... 922,794 538,434 1,530,809
Long-term debt reduction................................. (961,000) (147,000) (1,217,668)
Special spin-off dividend, including intercompany note
settlement............................................ -- -- (214,653)
Common stock dividends................................... (17,931) (17,953) (21,031)
Preferred stock dividends................................ -- -- (5,419)
Issuance of common stock................................. 15,620 6,677 59,054
Purchase of treasury stock............................... (13,538) (16,451) (9,293)
Redemption of preferred stock............................ -- -- (1,339)
--------- --------- -----------
Net cash provided by (used in) financing
activities..................................... (214,055) 401,707 275,548
--------- --------- -----------
Net increase in cash and temporary cash investments........ 48,888 1,264 9,925
Cash and temporary cash investments at beginning of
period................................................... 11,199 9,935 10
--------- --------- -----------
Cash and temporary cash investments at end of period....... $ 60,087 $ 11,199 $ 9,935
========= ========= ===========
</TABLE>
See Notes to Consolidated Financial Statements.
F-6
<PAGE> 126
VALERO ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1999
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION
As used in this report, the terms "Valero" and the "Company" may, depending
upon the context, refer to Valero Energy Corporation, one or more of its
consolidated subsidiaries, or all of them taken as a whole.
The Company was incorporated in Delaware in 1981 under the name Valero
Refining and Marketing Company as a wholly owned subsidiary of Valero Energy
Corporation, referred to as 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 the Company to Old Valero's stockholders
by distributing to them all of the Company's common stock. Immediately after
this distribution, Old Valero, with its remaining natural gas related services
business, merged with a wholly owned subsidiary of PG&E Corporation. The
spin-off of the Company to Old Valero's stockholders and the merger of Old
Valero with PG&E are collectively referred to as the "Restructuring." Upon
completion of the Restructuring, the Company's name was changed from Valero
Refining and Marketing Company to Valero Energy Corporation.
As a result of the Restructuring, the Company became a "successor
registrant" to Old Valero for financial reporting purposes under the federal
securities laws. Accordingly, for periods after the Restructuring, the
accompanying consolidated financial statements include the accounts of Valero
and its consolidated subsidiaries, while for periods before the Restructuring,
the accompanying consolidated financial statements include the accounts of Old
Valero restated to reflect its natural gas related services business as
discontinued operations. All significant intercompany transactions have been
eliminated in consolidation. Certain prior period amounts have been reclassified
for comparative purposes.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
REVENUE RECOGNITION
Revenues generally are recorded when products have been delivered.
PRICE RISK MANAGEMENT ACTIVITIES
The Company uses derivative commodity instruments such as price swaps,
options and futures contracts with third parties to hedge certain refinery
feedstock and refined product inventories in order to reduce the impact of
adverse price changes on these inventories before the conversion of the
feedstock to finished products and ultimate sale. Hedges of inventories are
accounted for under the deferral method with gains and losses included in the
carrying amounts of inventories and ultimately recognized in cost of sales as
those inventories are sold.
The Company also uses derivative commodity instruments such as price swaps,
options and futures contracts with third parties to hedge the price risk of
anticipated transactions. These instruments are used to hedge anticipated
feedstock, product and natural gas purchases, product sales, and refining
operating margins by locking in purchase or sales prices or components of
refining operating margins, including feedstock discounts, crack spreads and
premium product differentials. Hedges of anticipated transactions are also
accounted for under the deferral method with gains and losses on these
transactions recognized when the hedged transaction occurs, or when the amount
of the hedged transaction, combined with the hedging instrument, is not deemed
to be recoverable.
F-7
<PAGE> 127
VALERO ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1999 -- (CONTINUED)
Derivative commodity contracts are designated at inception as a hedge when
there is a direct relationship to the price risk associated with the Company's
inventories, future purchases and sales of commodities used in the Company's
operations, or components of the Company's refining operating margins. If this
direct relationship ceases to exist, the related contract is designated "for
trading purposes" and accounted for as described below.
Gains and losses on early terminations of financial instrument contracts
designated as hedges are deferred and included in cost of sales in the
measurement of the hedged transaction. When an anticipated transaction being
hedged is no longer likely to occur, the related derivative contract is
accounted for similar to a contract entered into for trading purposes.
The Company also uses derivative commodity instruments such as price swaps,
options and futures contracts with third parties for trading purposes using its
fundamental and technical analysis of market conditions to earn additional
income. Contracts entered into for trading purposes are accounted for under the
fair value method. Changes in the fair value of these contracts are recognized
as gains or losses in cost of sales currently and are recorded in the
Consolidated Balance Sheets in "Prepaid expenses and other" and "Accounts
payable" at fair value at the reporting date. The Company determines the fair
value of its exchange-traded contracts based on the settlement prices for open
contracts, which are established by the exchange on which the instruments are
traded. The fair value of the Company's over-the-counter contracts is determined
based on market-related indexes or by obtaining quotes from brokers.
The Company's derivative contracts and their related gains and losses are
reported in the Consolidated Balance Sheets and Consolidated Statements of
Income as discussed above, depending on whether they are designated as a hedge
or for trading purposes. In the Consolidated Statements of Cash Flows, cash
transactions related to derivative contracts are included in "Changes in current
assets and current liabilities."
CASH AND TEMPORARY CASH INVESTMENTS
The Company's temporary cash investments are highly liquid, low-risk debt
instruments which have a maturity of three months or less when acquired.
INVENTORIES
Refinery feedstocks and refined products and blendstocks are carried at the
lower of cost or market, with the cost of feedstocks purchased for processing
and produced products determined primarily under the last-in, first-out ("LIFO")
method of inventory pricing, and the cost of feedstocks and products purchased
for resale determined 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 an increase in net income of $6.8 million, or $.12 per share.
An additional LIFO liquidation in the fourth quarter of 1999 resulted in a
decrease in cost of sales of $9.3 million and an increase in net income of $6.1
million, or $.11 per share. At December 31, 1999, the replacement cost of the
Company's LIFO inventories exceeded their LIFO carrying values by approximately
$146 million. During 1998, the Company incurred pre-tax inventory write-downs
totaling $170.9 million due to a significant decline in feedstock and refined
product prices. Materials and supplies are carried principally at weighted
average cost not in excess of market. Inventories as of December 31, 1999 and
1998 were as follows (in thousands):
F-8
<PAGE> 128
VALERO ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1999 -- (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1999 1998
-------- --------
<S> <C> <C>
Refinery feedstocks......................................... $ 61,649 $ 80,036
Refined products and blendstocks............................ 183,519 174,125
Materials and supplies...................................... 58,220 62,244
-------- --------
$303,388 $316,405
======== ========
</TABLE>
Refinery feedstock and refined product and blendstock inventory volumes
totaled 15.2 million barrels and 20.5 million barrels as of December 31, 1999
and 1998, respectively. See Note 7 for information concerning the Company's
hedging activities related to its refinery feedstock and refined product
inventories.
PROPERTY, PLANT AND EQUIPMENT
Property additions and betterments include capitalized interest and
acquisition costs allocable to construction and property purchases.
The costs of minor property units (or components of property units), net of
salvage, retired or abandoned are charged or credited to accumulated
depreciation under the composite method of depreciation. Gains or losses on
sales or other dispositions of major units of property are credited or charged
to income.
Major classes of property, plant and equipment as of December 31, 1999 and
1998 were as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1999 1998
---------- ----------
<S> <C> <C>
Crude oil processing facilities............................. $2,123,518 $1,980,082
Butane processing facilities................................ 243,050 242,996
Other processing facilities................................. 80,230 80,230
Other....................................................... 125,139 89,746
Construction in progress.................................... 114,747 179,136
---------- ----------
$2,686,684 $2,572,190
========== ==========
</TABLE>
Provision for depreciation of property, plant and equipment is made
primarily on a straight-line basis over the estimated useful lives of the
depreciable facilities. A summary of the principal rates used in computing the
annual provision for depreciation, primarily utilizing the composite method and
including estimated salvage values, is as follows:
<TABLE>
<CAPTION>
WEIGHTED
RANGE AVERAGE
------------ --------
<S> <C> <C>
Crude oil processing facilities............................. 3.2% - 5.1% 3.5%
Butane processing facilities................................ 3.3% 3.3%
Other processing facilities................................. 3.6% 3.6%
Other....................................................... 2.3% - 47.8% 15.5%
</TABLE>
DEFERRED CHARGES AND OTHER ASSETS
Refinery Turnaround Costs
Refinery turnaround costs are deferred when incurred and amortized on a
straight-line basis over that period of time estimated to lapse until the next
turnaround occurs. As of December 31, 1999 and 1998, the balance of deferred
turnaround costs was $49.2 million and $27.4 million, respectively.
F-9
<PAGE> 129
VALERO ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1999 -- (CONTINUED)
Fixed-Bed Catalyst Costs
Fixed-bed catalyst costs are deferred when incurred and amortized on a
straight-line basis over the estimated useful life of that catalyst, normally
one to three years. As of December 31, 1999 and 1998, the balance of deferred
catalyst costs was $16.8 million and $13.1 million, respectively.
Technological Royalties and Licenses
Technological royalties and licenses are deferred when incurred and
amortized on a straight-line basis over the estimated useful life of each
particular royalty or license.
Other Deferred Charges and Other Assets
Other deferred charges and other assets include the Company's 20% interest
in Javelina Company, a general partnership that owns a refinery off-gas
processing plant in Corpus Christi, Texas. The Company accounts for its interest
in Javelina on the equity method of accounting. Also included in other deferred
charges and other assets are prefunded benefit costs, debt issuance costs and
certain other costs.
ACCRUED EXPENSES
Accrued expenses as of December 31, 1999 and 1998 were as follows (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1999 1998
-------- -------
<S> <C> <C>
Accrued interest expense.................................... $ 9,906 $ 3,620
Accrued taxes............................................... 52,020 29,905
Accrued employee benefit costs.............................. 21,053 12,414
Other....................................................... 19,108 8,622
-------- -------
$102,087 $54,561
======== =======
</TABLE>
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of the Company's financial instruments approximate
fair value, except for certain long-term debt and financial instruments used in
price risk management activities. See Notes 6 and 7.
STOCK-BASED COMPENSATION
The Company accounts for its employee stock compensation plans using the
"intrinsic value" method of accounting set forth in Accounting Principles Board
("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations. Accordingly, compensation cost for stock options is measured as
the excess, if any, of the quoted market price of the Company's common stock at
the date of the grant over the amount an employee must pay to acquire the stock.
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock-Based Compensation," encourages, but does not require companies to measure
and recognize in their financial statements a compensation cost for stock-based
employee compensation plans based on the "fair value" method of accounting set
forth in the statement. See Note 13 for the pro forma effects on net income and
earnings per share had compensation cost for the Company's stock-based
compensation plans been determined consistent with SFAS No. 123.
F-10
<PAGE> 130
VALERO ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1999 -- (CONTINUED)
EARNINGS PER SHARE
Basic and diluted earnings per share are presented on the face of the
accompanying income statements in accordance with the provisions of SFAS No.
128, "Earnings per Share," which became effective for the Company's financial
statements beginning with the year ended December 31, 1997. Basic earnings per
share is computed by dividing income available to common stockholders by the
weighted average number of common shares outstanding for the period. Diluted
earnings per share reflects the potential dilution of the Company's outstanding
stock options and performance awards granted to employees in connection with the
Company's stock compensation plans (see Note 13) for all periods presented. For
1997, diluted earnings per share also reflected the potential dilution of Old
Valero's convertible preferred stock (see Note 9). In determining basic earnings
per share for the year ended December 31, 1997, dividends on Old Valero's
convertible preferred stock were deducted from income from discontinued
operations as this preferred stock was issued in connection with Old Valero's
natural gas related services business. The weighted average number of common
shares outstanding for the years ended December 31, 1999, 1998 and 1997 was
56,086,381, 56,077,671 and 51,662,449, respectively.
A reconciliation of the basic and diluted per-share computations for income
(loss) from continuing operations is as follows (dollars and shares in
thousands, except per share amounts):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------------------
1999 1998 1997
------------------------- -------------------------- --------------------------
PER- PER- PER-
SHARE SHARE SHARE
INCOME SHARES AMT. LOSS SHARES AMT. INCOME SHARES AMT.
------- ------- ----- -------- ------- ----- -------- ------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Income (loss) from
continuing operations... $14,287 $(47,291) $111,768
======= ======== ========
BASIC EARNINGS PER SHARE:
Income (loss) from
continuing operations
available to common
stockholders............ $14,287 56,086 $.25 $(47,291) 56,078 $(.84) $111,768 51,662 $2.16
==== ===== =====
EFFECT OF DILUTIVE
SECURITIES:
Stock options............. -- 292 -- -- -- 881
Performance awards........ -- 380 -- -- -- 91
Convertible preferred
stock................... -- -- -- -- -- 2,495
------- ------- -------- ------- -------- -------
DILUTED EARNINGS PER
SHARE:
Income (loss) from
continuing operations
available to common
stockholders plus
assumed conversions..... $14,287 56,758 $.25 $(47,291) 56,078 $(.84) $111,768 55,129 $2.03
======= ======= ==== ======== ======= ===== ======== ======= =====
</TABLE>
Because the Company reported a net loss from continuing operations for the
year ended December 31, 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 1998 were not included in the computation of
diluted earnings per share because the effect would have been antidilutive. At
December 31, 1998, options to purchase approximately 5.5 million common shares
and performance awards totaling approximately 100,000 shares were outstanding.
F-11
<PAGE> 131
VALERO ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1999 -- (CONTINUED)
STATEMENTS OF CASH FLOWS
In order to determine net cash provided by continuing operations, income
(loss) from continuing operations has been adjusted by, among other things,
changes in current assets and current liabilities. The changes in the Company's
current assets and current liabilities are shown in the following table as an
(increase)/decrease in current assets and an increase/(decrease) in current
liabilities (in thousands). These amounts exclude (i) noncash write-downs of
inventories to market value in 1998 totaling $170.9 million and (ii) the current
assets and current liabilities of the Paulsboro Refinery and Basis Petroleum,
Inc. as of their acquisition dates in 1998 and 1997, respectively (see Note 3),
both of which are reflected separately in the Statements of Cash Flows. Also
excluded from the following table are changes in "Cash and temporary cash
investments," "Current deferred income tax assets," "Short-term debt" and
"Current maturities of long-term debt."
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1999 1998 1997
-------- --------- --------
<S> <C> <C> <C>
Receivables, net.................................... $(89,086) $ 83,103 $ 36,287
Inventories......................................... 11,180 (9,962) 37,007
Prepaid expenses and other.......................... 10,265 1,980 (12,703)
Accounts payable.................................... 326,536 (116,502) (95,318)
Accrued expenses.................................... 37,360 (4,798) 2,614
-------- --------- --------
Total..................................... $296,255 $ (46,179) $(32,113)
======== ========= ========
</TABLE>
Cash flows related to interest and income taxes, including amounts related
to discontinued operations for the seven months ended July 31, 1997, were as
follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Interest paid (net of amount capitalized)............... $49,023 $30,735 $66,008
Income tax refunds received............................. 7,530 15,513 --
Income taxes paid....................................... 13,582 5,284 24,526
</TABLE>
Noncash investing and financing activities for 1999 and 1998 included
various adjustments to property, plant and equipment and certain current assets
and current liabilities resulting from the completion of independent appraisals
performed in connection with the September 1998 acquisition of the Paulsboro
Refinery and the May 1997 acquisition of Basis, and the allocation of the
respective purchase prices to the assets acquired and liabilities assumed.
Noncash investing and financing activities for 1997 included the issuance of Old
Valero common stock to Salomon as partial consideration for the acquisition of
the stock of Basis, and an $18.3 million accrual as of December 31, 1997 related
to the Company's estimate of a contingent earn-out payment in 1998 in
conjunction with this acquisition. See Note 3. In addition, noncash investing
and financing activities for 1997 included various adjustments to debt and
equity, including the assumption of certain debt by PG&E that was previously
allocated to the Company, resulting from the Restructuring discussed above under
"Principles of Consolidation and Basis of Presentation."
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
F-12
<PAGE> 132
VALERO ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1999 -- (CONTINUED)
statements beginning January 1, 1999, with its requirements applied to costs
incurred on or after this date. The adoption of this SOP did not have a material
effect on the Company's consolidated financial statements.
In June 1998, the Financial Accounting Standards Board ("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. As issued, this statement was to become effective for the
Company's financial statements beginning January 1, 2000. However, in June 1999,
the FASB issued SFAS No. 137 which delayed for one year the effective date of
SFAS No. 133. As a result, SFAS No. 133 will become effective for the Company's
financial statements beginning January 1, 2001 and is not allowed to be applied
retroactively to financial statements of prior periods. At this effective date,
SFAS No. 133 must be applied to (i) all freestanding derivative instruments and
(ii) all embedded derivative instruments required by the statement to be
separated from their host contracts (or, at the Company's election, only those
derivatives embedded in hybrid instruments issued, acquired or substantively
modified on or after either January 1, 1998 or January 1, 1999). The Company is
currently evaluating the impact on its financial statements of adopting this
statement. Adoption of this statement could result in increased volatility in
the Company's earnings and other comprehensive income.
2. ACCOUNTS RECEIVABLE
In September 1999, the Company entered into an agreement with a financial
institution to sell up to $100 million of an undivided percentage ownership
interest in a designated pool of accounts receivable. As of December 31, 1999,
proceeds of $100 million had been received under this program and were used to
reduce indebtedness under the Company's bank credit facilities.
3. ACQUISITIONS
PAULSBORO REFINERY
On September 16, 1998, the Company and Mobil Oil Corporation 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 refinery in Paulsboro, New Jersey. The
purchase price was $228 million plus approximately $107 million representing the
value of inventories and certain other items acquired in the transaction and was
paid in cash from borrowings under the Company's bank credit facilities. The
acquisition was accounted for using the purchase method of accounting and the
purchase price was allocated to the assets acquired and liabilities assumed
based on fair values as determined by an independent appraisal. Under the
purchase method of accounting, the accompanying Consolidated Statements of
Income include the results of operations of the Paulsboro Refinery beginning
September 17, 1998.
As part of 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 these years exceed a specified level. Any
payments under this earn-out arrangement, which are determined in September of
each year beginning in 1999, are limited to $20 million in any year and $50
million in the aggregate. No earn-out amount was due for the year ended
September 16, 1999.
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
F-13
<PAGE> 133
VALERO ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1999 -- (CONTINUED)
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, measured from the September 16,
1998 closing date, 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
December 31, 1999, the 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 these costs are expected to be incurred in
relatively level amounts over the next 19 years.
BASIS PETROLEUM, INC.
Effective May 1, 1997, Old Valero acquired the outstanding common stock of
Basis Petroleum, Inc., a wholly owned subsidiary of Salomon Inc. Prior to the
Restructuring, Old Valero transferred the stock of Basis to the Company
resulting in Basis being a part of the Company at the time of the Restructuring.
The primary assets acquired in the Basis acquisition included petroleum
refineries located in Texas at Texas City and Houston and in Louisiana at Krotz
Springs, and an extensive wholesale marketing business. The acquisition was
accounted for using the purchase method of accounting and the purchase price was
allocated to the assets acquired and liabilities assumed based on fair values as
determined by an independent appraisal. Under the purchase method of accounting,
the accompanying Consolidated Statements of Income include the results of
operations related to the Texas City, Houston and Krotz Springs refineries
beginning May 1, 1997.
The stock of Basis was acquired for approximately $470 million. This amount
included certain costs incurred in connection with the acquisition and was net
of $9.5 million received from Salomon in December 1997 representing a final
resolution between the parties relating to certain contingent environmental
obligations for which Salomon was responsible under the purchase agreement. The
purchase price was paid, in part, with 3,429,796 shares of Old Valero common
stock having a fair market value of $114 million, with the remainder paid in
cash from borrowings under Old Valero's bank credit facilities. As part of the
purchase agreement, Salomon is entitled to receive payments in any of the 10
years following the acquisition if certain average refining margins during any
of these years exceed a specified level. Any payments under this earn-out
arrangement, which are determined as of May 1 of each year beginning in 1998,
are limited to $35 million in any year and $200 million in the aggregate. The
earn-out amount for the year ended May 1, 1998 was $10.3 million, while no
earn-out amount was due for the year ended May 1, 1999.
F-14
<PAGE> 134
VALERO ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1999 -- (CONTINUED)
PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma financial information of the Company for
the years ended December 31, 1998 and 1997 assumes that the acquisition of the
Paulsboro Refinery occurred at the beginning of 1998 and 1997 and that the
acquisition of Basis occurred at the beginning of 1997. This pro forma
information is not necessarily indicative of the results of future operations.
(Dollars in thousands, except per share amounts.)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1998 1997
---------- ----------
<S> <C> <C>
Operating revenues.......................................... $6,246,790 $8,907,487
Operating income (loss)..................................... (14,422) 250,625
Income (loss) from continuing operations.................... (33,663) 123,440
Loss from discontinued operations........................... -- (15,672)
Net income (loss)........................................... (33,663) 107,768
Earnings (loss) per common share:
Continuing operations..................................... (.60) 2.39
Discontinued operations................................... -- (.39)
Total............................................. (.60) 2.00
Earnings (loss) per common share -- assuming dilution:
Continuing operations..................................... (.60) 2.24
Discontinued operations................................... -- (.29)
Total............................................. (.60) 1.95
</TABLE>
4. DISCONTINUED OPERATIONS
Revenues of the discontinued natural gas related services business were
$1.7 billion for the seven months ended July 31, 1997. This amount is not
included in operating revenues as reported in the accompanying 1997 Consolidated
Statement of Income.
Total interest expense for the discontinued natural gas related services
business was $32.7 million for the seven months ended July 31, 1997. This amount
includes interest specifically attributed to the natural gas related services
business, plus an allocated portion of interest on Old Valero's corporate debt
as Old Valero's historical practice was to utilize a centralized cash management
system and to incur certain indebtedness for its consolidated group at the
parent company level rather than at the operating subsidiary level.
5. SHORT-TERM DEBT
The Company currently has various uncommitted short-term bank credit
facilities under which amounts up to $240 million may be borrowed. As of
December 31, 1999, there were no borrowings outstanding under these facilities.
These short-term bank credit facilities bear interest at each respective bank's
quoted money market rate, have no commitment or other fees or compensating
balance requirements and are unsecured and unrestricted as to use.
F-15
<PAGE> 135
VALERO ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1999 -- (CONTINUED)
6. LONG-TERM DEBT AND BANK CREDIT FACILITIES
Long-term debt balances as of December 31, 1999 and 1998 were as follows
(in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1999 1998
-------- --------
<S> <C> <C>
Industrial revenue bonds:
Tax-exempt Revenue Refunding Bonds:
Series 1997A, 5.45%, due April 1, 2027................. $ 24,400 $ 24,400
Series 1997B, 5.40%, due April 1, 2018................. 32,800 32,800
Series 1997C, 5.40%, due April 1, 2018................. 32,800 32,800
Series 1997D, 5.13%, due April 1, 2009................. 8,500 8,500
Tax-exempt Waste Disposal Revenue Bonds:
Series 1999, 5.7%, due April 1, 2032................... 25,000 --
Series 1998, 5.6%, due April 1, 2032................... 25,000 25,000
Series 1997, 5.6%, due December 1, 2031................ 25,000 25,000
Taxable Waste Disposal Revenue Bonds,
Series 1998, 6.5% at December 31, 1999, due April 1,
2032................................................. 18,500 43,500
7.375% notes, due March 15, 2006............................ 300,000 --
6.75% notes, due December 15, 2032 (notes are callable or
putable on December 15, 2002)............................. 150,000 150,000
$835 million revolving bank credit and letter of credit
facility, approximately 7% at December 31, 1999, due
November 28, 2002......................................... 140,000 475,000
Net unamortized premium and discount........................ 3,472 5,335
-------- --------
Total long-term debt (no current maturities)...... $785,472 $822,335
======== ========
</TABLE>
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 this
credit facility are subject to adjustment based upon the credit ratings assigned
to the Company's long-term debt. The credit facility includes certain
restrictive covenants including a coverage ratio, a capitalization ratio, and a
minimum net worth test. As of December 31, 1999, outstanding borrowings under
this committed facility totaled $140 million, while letters of credit
outstanding were approximately $25 million. The Company also has various
uncommitted bank letter of credit facilities totaling $285 million,
approximately $88 million of which was outstanding as of December 31, 1999.
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 bank credit facilities.
In March 1999, the Gulf Coast Waste Disposal Authority issued and sold for
the benefit of the Company $25 million of new tax-exempt Waste Disposal Revenue
Bonds which have a fixed interest rate of 5.7% and mature on April 1, 2032. The
proceeds from the sale of these tax-exempt fixed-rate bonds were used to redeem
$25 million of the $43.5 million of taxable variable-rate Waste Disposal Revenue
Bonds which were issued in March 1998 at an initial interest rate of 5.7% and
also mature on April 1, 2032. The remaining $18.5 million of
F-16
<PAGE> 136
VALERO ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1999 -- (CONTINUED)
Series 1998 taxable bonds bear interest at a variable rate determined weekly,
with the Company having the right to convert this rate to a daily, weekly,
short-term or long-term rate, or to a fixed rate. In March 1998, the Gulf Coast
Waste Disposal Authority issued and sold for the benefit of the Company $25
million of tax-exempt Waste Disposal Revenue Bonds at a fixed interest rate of
5.6%. Additionally, the Company converted the interest rates on its $98.5
million of Series 1997 tax-exempt Revenue Refunding Bonds and $25 million of
Series 1997 tax-exempt Waste Disposal Revenue Bonds from variable rates to a
weighted average fixed rate of approximately 5.4%. The Series 1997 Revenue
Refunding Bonds were issued in four series with due dates ranging from 2009 to
2027, while the Series 1997 Waste Disposal Revenue Bonds were issued in one
series and mature on December 1, 2031.
In December 1997, the Company issued $150 million principal amount of 6.75%
notes for net proceeds of approximately $156 million. These notes are unsecured
and unsubordinated and rank equally with all other unsecured and unsubordinated
obligations of the Company. The notes were issued to the Valero Pass-Through
Asset Trust 1997-1, or the Trust, which funded the acquisition of the notes
through a private placement of $150 million principal amount of 6.75%
Pass-Through Asset Trust Securities, or PATS. The PATS represent a fractional
undivided beneficial interest in the Trust. In exchange for certain
consideration paid to the Trust, a third party has an option to purchase the
notes under certain circumstances at par on December 15, 2002, at which time the
term of the notes would be extended 30 years to December 15, 2032. If the third
party does not exercise its purchase option, then under the terms of the notes,
the Company would be required to repurchase the notes at par on December 15,
2002.
As of December 31, 1999, the Company's debt to capitalization ratio was
42%, a decrease from 47.5% as of December 31, 1998.
Based on long-term debt outstanding at December 31, 1999, the Company has
no maturities of long-term debt during the next five years except for $140
million due in November 2002 under its revolving bank credit and letter of
credit facility. See above for maturities under the terms of the 6.75% notes
issued in 1997.
As of December 31, 1999 and 1998, the carrying amounts of the Company's
taxable industrial revenue bonds and revolving bank credit facility approximated
fair value due to their variable interest rates. For the Company's fixed-rate
industrial revenue bonds, 7.375% notes and 6.75% notes, their estimated fair
value as of December 31, 1999 was approximately $563 million compared to a
carrying amount of $627 million. As of December 31, 1998, the estimated fair
value of the Company's fixed-rate industrial revenue bonds and 6.75% notes was
approximately $298.2 million compared to a carrying amount of $303.8 million.
The fair values of these instruments were estimated based on borrowing rates
available to the Company for long-term debt with similar terms and average
maturities.
7. PRICE RISK MANAGEMENT ACTIVITIES
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 certain refinery inventories and anticipated transactions. The Company
also uses derivative commodity instruments for trading purposes. In the tables
below detailing the Company's open derivative commodity instruments as of
December 31, 1999 and 1998, the total gain or (loss) as of either date on price
swaps is the net of the fixed price payor and receiver fair value amounts, while
the total gain or (loss) on options and futures is (i) the excess of the fair
value amount over the contract amount for fixed price payor positions, combined
with (ii) the excess of the contract amount over the fair value amount for fixed
price receiver positions. As discussed above in Note 1 under Price Risk
Management Activities, gains and losses on hedging activities are deferred and
recognized when the hedged transaction occurs while gains and losses on trading
activities are recognized currently.
F-17
<PAGE> 137
VALERO ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1999 -- (CONTINUED)
HEDGING ACTIVITIES
The Company uses derivative commodity instruments such as price swaps,
options and futures contracts with third parties to hedge certain refinery
feedstock and refined product inventories in order to reduce the impact of
adverse price changes on these inventories before the conversion of the
feedstock to finished products and ultimate sale. Swaps and futures contracts
held to hedge refining inventories at the end of 1999 and 1998 had remaining
terms of less than one year. As of December 31, 1999 and 1998, 19.5% and 5%,
respectively, of the Company's refining inventory position was hedged. As of
December 31, 1999, $2.1 million of deferred hedge losses were included as an
increase in refining inventories, while no deferred hedge losses or gains were
included in refining inventories as of December 31, 1998.
The following table provides information about the Company's derivative
commodity instruments held to hedge refining inventories as of December 31, 1999
(which mature in 2000) and December 31, 1998 (which matured in 1999)(dollars in
thousands, except amounts per barrel, or bbl). Volumes shown for swaps represent
notional volumes which are used to calculate amounts due under the agreements.
<TABLE>
<CAPTION>
DECEMBER 31, 1999 DECEMBER 31, 1998
(MATURE IN 2000) (MATURED IN 1999)
------------------- ------------------
FIXED PRICE FIXED PRICE
------------------- ------------------
PAYOR RECEIVER PAYOR RECEIVER
-------- -------- ------- --------
<S> <C> <C> <C> <C>
Swaps:
Notional volumes (thousands of barrels, or
Mbbls).................................... 1,200 2,850 -- --
Weighted average pay price (per bbl)......... $ 1.87 $ 1.68 -- --
Weighted average receive price (per bbl)..... $ 1.70 $ 1.88 -- --
Fair value................................... $ (203) $ 568 -- --
Futures:
Volumes (Mbbls).............................. 6,821 7,410 4,958 5,274
Weighted average price (per bbl)............. $ 27.72 $ 28.71 $ 12.54 $ 13.51
Contract amount.............................. $189,061 $212,729 $62,178 $71,242
Fair value................................... $186,176 $208,327 $62,178 $71,242
</TABLE>
The Company also uses derivative commodity instruments such as price swaps,
options and futures contracts with third parties to hedge the price risk of
anticipated transactions. In 1999 and 1998, price swaps and futures were used to
hedge anticipated feedstock and product purchases, product sales and refining
operating margins by locking in purchase or sales prices or components of the
margins, including feedstock discounts, conventional gasoline and heating oil
crack spreads and premium product differentials. Price swaps were also used in
1999 and 1998 to hedge anticipated purchases of natural gas used in the
Company's refining operations. The majority of contracts hedging anticipated
transactions mature in 2000 with certain contracts extending through 2002. There
were no significant explicit deferrals of hedging gains or losses related to
these anticipated transactions as of the end of 1999 or 1998.
F-18
<PAGE> 138
VALERO ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1999 -- (CONTINUED)
The following table provides information about the Company's derivative
commodity instruments held to hedge anticipated feedstock, product and natural
gas purchases, product sales and refining margins as of December 31, 1999 (which
mature in 2000) and December 31, 1998 (which matured in 1999)(dollars in
thousands, except amounts per barrel or per million British thermal units, or
MMBtus). Volumes shown for swaps represent notional volumes which are used to
calculate amounts due under the agreements.
<TABLE>
<CAPTION>
DECEMBER 31, 1999 DECEMBER 31, 1998
(MATURE IN 2000) (MATURED IN 1999)
------------------ -----------------
FIXED PRICE FIXED PRICE
------------------ -----------------
PAYOR RECEIVER PAYOR RECEIVER
------- -------- ------ --------
<S> <C> <C> <C> <C>
Swaps:
Notional volumes (Mbbls)....................... 6,000 7,950 1,860 4,650
Weighted average pay price (per bbl)........... $ 1.87 $ 1.70 $ 5.68 $ .83
Weighted average receive price (per bbl)....... $ 1.66 $ 2.04 $ 5.97 $ 64
Fair value..................................... $(1,287) $2,704 $ 554 $ (853)
Notional volumes (billion Btus, or BBtus)...... -- -- 5,700 1,200
Weighted average pay price (per MMBtu)......... -- -- $ 2.01 $ 1.93
Weighted average receive price (per MMBtu)..... -- -- $ 1.93 $ 2.32
Fair value..................................... -- -- $ (444) $ 460
Futures:
Volumes (Mbbls)................................ 105 101 45 --
Weighted average price (per bbl)............... $ 23.66 $24.22 $17.22 --
Contract amount................................ $ 2,484 $2,446 $ 775 --
Fair value..................................... $ 2,501 $2,446 $ 671 --
</TABLE>
In addition to the above, as of December 31, 1999 and 1998, 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, have
notional volumes totaling approximately 7.5 million barrels, and have a weighted
average pay price of $20.11 per barrel. As of December 31, 1999, these swaps had
a weighted average receive price of $18.02 per barrel and a net unrecognized
fair value of approximately $7.4 million. As of December 31, 1998, these swaps
had a weighted average receive price of $17.04 per barrel with no unrecognized
fair value.
TRADING ACTIVITIES
The Company also uses derivative commodity instruments such as price swaps,
options and futures contracts with third parties for trading purposes using its
fundamental and technical analysis of market conditions to earn additional
income. These contracts run for periods of up to 24 months. As a result,
contracts outstanding as of December 31, 1999 will mature in 2000 or 2001.
F-19
<PAGE> 139
VALERO ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1999 -- (CONTINUED)
The following table provides information about the Company's derivative
commodity instruments held or issued for trading purposes as of December 31,
1999 (which mature in 2000 or 2001) and December 31, 1998 (which matured in 1999
or 2000) (dollars in thousands, except amounts per barrel or per million British
thermal units). Volumes shown for swaps represent notional volumes which are
used to calculate amounts due under the agreements.
<TABLE>
<CAPTION>
DECEMBER 31, 1999 DECEMBER 31, 1998
---------------------------------------- -------------------------------------
MATURE IN 2000 MATURE IN 2001 MATURED IN 1999 MATURE IN 2000
------------------- ------------------ ------------------ ----------------
FIXED PRICE FIXED PRICE FIXED PRICE FIXED PRICE
------------------- ------------------ ------------------ ----------------
PAYOR RECEIVER PAYOR RECEIVER PAYOR RECEIVER PAYOR RECEIVER
-------- -------- ------- -------- ------- -------- ----- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Swaps:
Notional volumes (Mbbls)............... 21,600 23,125 600 600 15,150 9,050 -- 1,650
Weighted average pay price (per bbl)... $ 2.93 $ 2.43 $ 1.95 $ 1.91 $ 2.39 $ 1.77 -- $ 2.10
Weighted average receive price (per
bbl)................................. $ 2.94 $ 2.62 $ 1.90 $ 2.18 $ 2.25 $ 1.90 -- $ 2.30
Fair value............................. $ 204 $ 4,377 $ (28) $ 163 $(2,130) $ 1,244 -- $ 330
Options:
Volumes (Mbbls)........................ 1,400 1,400 -- -- 400 400 -- --
Weighted average strike price (per
bbl)................................. $ 24.36 $ 24.36 -- -- $ 16.91 $ 16.91 -- --
Contract amount........................ $ (11) $ (220) -- -- $ 723 $ 707 -- --
Fair value............................. $ 200 $ 200 -- -- $ 641 $ 714 -- --
Futures:
Volumes (Mbbls)........................ 25,933 26,158 3,125 3,125 5,301 5,401 -- --
Weighted average price (per bbl)....... $ 21.39 $ 21.48 $ 19.48 $ 18.90 $ 14.66 $ 14.97 -- --
Contract amount........................ $554,604 $561,979 $60,883 $59,050 $77,701 $80,865 -- --
Fair value............................. $621,949 $623,768 $60,938 $60,938 $72,583 $76,592 -- --
Volumes (BBtus)........................ 750 750 -- -- -- 250 -- --
Weighted average price (per MMBtu)..... $ 2.77 $ 2.69 -- -- -- $ 1.96 -- --
Contract amount........................ $ 2,074 $ 2,020 -- -- -- $ 490 -- --
Fair value............................. $ 1,747 $ 1,747 -- -- -- $ 488 -- --
</TABLE>
The following table discloses the net gains (losses) from trading
activities and average fair values of contracts held or issued for trading
purposes for the periods ended December 31, 1999 and 1998 (dollars in
thousands):
<TABLE>
<CAPTION>
AVERAGE FAIR VALUE
NET GAINS (LOSSES) OF ASSETS (LIABILITIES)
------------------- ------------------------
1999 1998 1999 1998
------- ------- ----------- --------
<S> <C> <C> <C> <C>
Swaps...................................... $13,521 $ 2,585 $ 1,127 $215
Options.................................... (115) 205 391 22
Futures.................................... 3,764 (1,758) (2,953) 448
------- -------
Total............................ $17,170 $ 1,032
======= =======
</TABLE>
MARKET AND CREDIT RISK
The Company's price risk management activities involve the receipt or
payment of fixed price commitments into the future. These transactions give rise
to market risk, the risk that future changes in market conditions may make an
instrument less valuable. The Company closely monitors and manages its exposure
to market risk on a daily basis in accordance with policies approved by the
Company's Board of Directors. Market risks are monitored by a risk control group
to ensure compliance with the Company's stated risk management policy.
Concentrations of customers in the refining industry may impact the Company's
overall exposure to credit risk, in that these customers may be similarly
affected by changes in economic or
F-20
<PAGE> 140
VALERO ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1999 -- (CONTINUED)
other conditions. The Company believes that its counterparties will be able to
satisfy their obligations under contracts.
8. REDEEMABLE PREFERRED STOCK
On March 30, 1997, Old Valero redeemed the remaining 11,500 outstanding
shares of its $8.50 Series A cumulative preferred stock. The redemption price
was $104 per share, plus dividends accrued to the redemption date of $.685 per
share.
9. CONVERTIBLE PREFERRED STOCK
In April 1997, Old Valero called all of its outstanding $3.125 convertible
preferred stock for redemption on June 2, 1997. The redemption price was $52.188
per share, plus accrued dividends of $.0086 per share for the one-day period
from June 1 to June 2, 1997. This preferred stock was convertible into Old
Valero common stock at a price of $27.03 per share, or approximately 1.85 shares
of Old Valero common stock for each share of convertible preferred stock. Before
the redemption, substantially all of the outstanding shares of convertible
preferred stock were converted into Old Valero common stock.
10. PREFERRED SHARE PURCHASE RIGHTS
Each outstanding share of the Company's common stock is accompanied by one
Preferred Share Purchase Right, or Right. With certain exceptions, each Right
entitles the registered holder to purchase from the Company one one-hundredth of
a share of the Company's Junior Participating Preferred Stock, Series I at a
price of $100 per one one-hundredth of a share, subject to adjustment for
certain recapitalization events.
The Rights are transferable only with the common stock until the earlier of
(i) 10 days following a public announcement that a person or group of affiliated
or associated persons, any such person, group or associates being referred to as
an Acquiring Person, has acquired beneficial ownership of 15% or more of the
outstanding shares of the Company's common stock, (ii) 10 business days (or
later date as may be determined by action of the Company's Board of Directors)
following the initiation of a tender offer or exchange offer which would result
in an Acquiring Person having beneficial ownership of 15% or more of the
Company's outstanding common stock (the earlier of the date of the occurrence of
(i) or (ii) being called the Rights Separation Date), or (iii) the earlier
redemption or expiration of the Rights. The Rights are not exercisable until the
Rights Separation Date. At any time prior to the acquisition by an Acquiring
Person of beneficial ownership of 15% or more of the outstanding common stock,
the Company's Board of Directors may redeem the Rights at a price of $.01 per
Right. The Rights will expire on June 30, 2007, unless extended or the Rights
are earlier redeemed or exchanged by the Company.
If after the Rights Separation Date the Company is acquired in a merger or
other business combination transaction, or if 50% or more of its consolidated
assets or earning power are sold, each holder of a Right will have the right to
receive, upon the exercise of the Right at its then current exercise price, that
number of shares of common stock of the acquiring company which at the time of
the transaction will have a market value of two times the exercise price of the
Right. In the event that any Acquiring Person becomes the beneficial owner of
15% or more of the outstanding common stock, each holder of a Right, other than
Rights beneficially owned by the Acquiring Person (which will thereafter be
void), will thereafter have the right to receive upon exercise that number of
shares of common stock having a market value of two times the exercise price of
the Right.
At any time after an Acquiring Person acquires beneficial ownership of 15%
or more of the outstanding common stock and prior to the acquisition by the
Acquiring Person of 50% or more of the outstanding common stock, the Company's
Board of Directors may exchange the Right (other than Rights owned by the
F-21
<PAGE> 141
VALERO ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1999 -- (CONTINUED)
Acquiring Person which have become void), at an exchange ratio of one share of
common stock, or one one-hundredth of a share of Junior Preferred Stock, per
Right (subject to adjustment).
Until a Right is exercised, the holder will have no rights as a stockholder
of the Company including, without limitation, the right to vote or to receive
dividends.
The Rights may have certain anti-takeover effects. The Rights will cause
substantial dilution to any Acquiring Person that attempts to acquire the
Company on terms not approved by the Company's Board of Directors, except
pursuant to an offer conditioned on a substantial number of Rights being
acquired. The Rights should not interfere with any merger or other business
combination approved by the Company's Board of Directors since the Rights may be
redeemed by the Company prior to the time that an Acquiring Person has acquired
beneficial ownership of 15% or more of the common stock.
11. SEGMENT INFORMATION
The Company's operations consist primarily of five petroleum refineries
located in Texas at Corpus Christi, Texas City and Houston, in Louisiana at
Krotz Springs, and in New Jersey at Paulsboro, which have a combined throughput
capacity of approximately 785,000 barrels per day. In applying the requirements
of SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," the Company's five refineries, each of which represents an
operating segment as defined by the statement, have been aggregated as allowed
by the statement for reporting purposes. As a result, the Company has one
reportable segment, which is the refining and wholesale marketing of premium,
environmentally clean products.
The Company's principal products include reformulated and conventional
gasolines, low-sulfur diesel and oxygenates. The Company also produces a
substantial slate of middle distillates, jet fuel and petrochemicals, in
addition to lube oils and asphalt. The Company currently markets its products to
wholesale customers in 31 states and in selected export markets in Latin
America. Revenues from external customers for the Company's principal products
for the years ended December 31, 1999, 1998 and 1997 were as follows (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Gasolines and blendstocks........................ $4,381,112 $3,040,103 $3,209,552
Distillates...................................... 1,848,621 1,270,859 1,124,958
Petrochemicals................................... 258,850 166,769 269,418
Lubes and asphalts............................... 178,653 44,239 --
Other products and revenues...................... 1,293,932 1,017,376 1,152,292
---------- ---------- ----------
Total operating revenues............... $7,961,168 $5,539,346 $5,756,220
========== ========== ==========
</TABLE>
In 1999, 1998 and 1997, the Company had no significant amount of export
sales and no significant foreign operations. In 1999, 13% of the Company's
consolidated operating revenues were derived from sales to Mobil Oil
Corporation, while in 1998 and 1997, no single customer accounted for more than
10% of the Company's consolidated operating revenues.
F-22
<PAGE> 142
VALERO ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1999 -- (CONTINUED)
12. INCOME TAXES
Components of income tax expense (benefit) applicable to continuing
operations were as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1999 1998 1997
------- -------- -------
<S> <C> <C> <C>
Current:
Federal.............................................. $14,896 $ (3,196) $29,501
State................................................ 404 (904) 1,461
------- -------- -------
Total current................................ 15,300 (4,100) 30,962
Deferred:
Federal.............................................. (9,400) (31,700) 32,827
------- -------- -------
Total income tax expense (benefit)........... $ 5,900 $(35,800) $63,789
======= ======== =======
</TABLE>
The following is a reconciliation of total income tax expense (benefit)
applicable to continuing operations to income taxes computed by applying the
statutory federal income tax rate (35% for all years presented) to income (loss)
from continuing operations before income taxes (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1999 1998 1997
------- -------- -------
<S> <C> <C> <C>
Federal income tax expense (benefit) at the statutory
rate................................................. $ 7,065 $(29,082) $61,445
State income taxes, net of federal income tax effect... 263 (588) 950
Research and experimentation tax credit................ -- (5,800) --
Basis difference on disposition of investment.......... (1,894) -- --
Other -- net........................................... 466 (330) 1,394
------- -------- -------
Total income tax expense (benefit)........... $ 5,900 $(35,800) $63,789
======= ======== =======
</TABLE>
The tax effects of significant temporary differences representing deferred
income tax assets and liabilities are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1999 1998
--------- ---------
<S> <C> <C>
Deferred income tax assets:
Tax credit carryforwards.................................. $ 34,131 $ 18,549
Net operating loss carryforward........................... 48,682 41,904
Compensation and employee benefit liabilities............. 28,437 23,910
Environmental liabilities................................. 9,868 9,705
Inventory and related adjustments......................... 36,047 8,578
Accrued liabilities and other............................. 9,585 8,418
--------- ---------
Total deferred income tax assets.................. $ 166,750 $ 111,064
========= =========
Deferred income tax liabilities:
Depreciation.............................................. $(334,077) $(299,082)
Other..................................................... (28,887) (17,520)
--------- ---------
Total deferred income tax liabilities............. $(362,964) $(316,602)
========= =========
</TABLE>
F-23
<PAGE> 143
VALERO ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1999 -- (CONTINUED)
As of December 31, 1999, the Company had federal net operating loss
carryforwards of approximately $139 million which are available to reduce future
federal taxable income, some of which will expire in 2018 and the remainder in
2019 if not utilized. In addition, the Company had an alternative minimum tax
credit carryforward of approximately $28 million, and a research and
experimentation credit carryforward of approximately $6 million, both of which
are available to reduce future federal income tax liabilities. The alternative
minimum tax credit carryforward has no expiration date, while the research and
experimentation credit carryforward expires between 2004 and 2011. No valuation
allowances were recorded against deferred income tax assets as of December 31,
1999 and 1998.
The Company's taxable years through 1995 are closed to adjustment by the
Internal Revenue Service. The Company believes that adequate provisions for
income taxes have been reflected in its consolidated financial statements.
13. EMPLOYEE BENEFIT PLANS
PENSION PLANS AND POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The Company's pension plan, which is subject to the provisions of the
Employee Retirement Income Security Act of 1974, or ERISA, is designed to
provide eligible employees with retirement income. Participation in the plan
commences upon the completion of one year of continuous service. Upon becoming a
participant, all service since date of hire is included in determining vesting
and credited service, except for employees of the Company who were formerly
employed by Mobil or Basis (see Note 3). For former Mobil employees who became
employees of the Company, full credit was given for service with Mobil prior to
September 17, 1998 for vesting and eligibility purposes, but for benefit accrual
purposes, only service on and after this date is counted under the plan. For
former Basis employees who became employees of the Company, full credit was
given for service with Basis prior to May 1, 1997 for vesting and eligibility
purposes, but for benefit accrual purposes, only service on and after January 1,
1998 is counted under the plan. A participant generally vests in plan benefits
after five years of vesting service or upon reaching normal retirement.
At the time of the Restructuring, the Company became solely responsible for
(i) pension liabilities existing immediately prior to the Restructuring to, or
relating to, Old Valero employees which became employees of PG&E after the
Restructuring, which will become payable upon their retirement, (ii) all
liabilities to, or relating to, former employees of Old Valero and the Company,
and (iii) all liabilities to, or relating to, current employees of the Company.
In connection with the Restructuring, Old Valero approved the establishment of a
supplement to the pension plan, referred to as the 1997 Window Plan, which
permitted certain employees to retire from employment during 1997. Also, the
Company became the sponsor of Old Valero's nonqualified Supplemental Executive
Retirement Plan, or SERP, which is designed to provide additional pension
benefits to executive officers and certain other employees, and assumed all
liabilities with respect to current and former employees of both Old Valero and
the Company under this plan.
The pension plan provides a monthly pension payable upon normal retirement
of an amount equal to a set formula which is based on the participant's 60
consecutive highest months of compensation during the latest 10 years of
credited service under the plan. All contributions to the plan are made by the
Company and contributions by participants are neither required nor permitted.
Company contributions, if and when permitted under ERISA, are actuarially
determined in an amount sufficient to fund the currently accruing benefits and
amortize any prior service cost over the expected life of the then current work
force. The Company's contributions to the pension plan and SERP in 1999, 1998
and 1997 were approximately $7.4 million, $7.2 million and $8.8 million,
respectively, and are currently estimated to be $4.8 million in 2000.
The Company also provides certain health care and life insurance benefits
for retired employees, referred to as postretirement benefits other than
pensions. Substantially all of the Company's employees may become
F-24
<PAGE> 144
VALERO ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1999 -- (CONTINUED)
eligible for these benefits if, while still working for the Company, they either
reach normal retirement age or take early retirement. Health care benefits are
offered by the Company through a self-insured plan and a health maintenance
organization while life insurance benefits are provided through an insurance
company. The Company funds its postretirement benefits other than pensions on a
pay-as-you-go basis. Employees of the Company who were formerly employees of
Mobil and Basis became eligible for postretirement benefits other than pensions
under the Company's plan effective September 17, 1998 and May 1, 1997,
respectively. At the time of the Restructuring, the Company became responsible
for all liabilities to former employees of both Old Valero and the Company as
well as current employees of the Company arising under Old Valero's health care
and life insurance programs.
The following tables set forth for the Company's (i) pension plans,
including the SERP, and (ii) postretirement benefits other than pensions, the
funded status of the plans and amounts recognized in the Company's consolidated
financial statements as of December 31, 1999 and 1998, as well as changes in the
benefit obligation and plan assets for the years then ended (in thousands):
<TABLE>
<CAPTION>
PENSION BENEFITS OTHER BENEFITS
------------------- -------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
CHANGE IN BENEFIT OBLIGATION:
Benefit obligation, January 1.................. $152,430 $129,430 $ 42,325 $ 32,721
Service cost................................. 9,466 6,934 2,047 1,703
Interest cost................................ 10,114 9,031 2,818 2,411
Plan amendments.............................. -- 3,549 -- --
Acquisition of Paulsboro Refinery............ -- -- -- 8,107
Participant contributions.................... -- -- 131 108
Benefits paid................................ (6,399) (6,967) (1,986) (1,826)
Actuarial loss (gain)........................ (2,269) 10,453 (2,706) (899)
-------- -------- -------- --------
Benefit obligation, December 31................ $163,342 $152,430 $ 42,629 $ 42,325
======== ======== ======== ========
CHANGE IN PLAN ASSETS:
Plan assets at fair value, January 1........... $139,262 $121,393 $ -- $ --
Actual return on plan assets................. 31,498 17,644 -- --
Company contributions........................ 7,354 7,192 1,855 1,718
Participant contributions.................... -- -- 131 108
Benefits paid................................ (6,399) (6,967) (1,986) (1,826)
-------- -------- -------- --------
Plan assets at fair value, December 31......... $171,715 $139,262 $ -- $ --
======== ======== ======== ========
RECONCILIATION OF FUNDED STATUS, DECEMBER 31:
Plan assets at fair value...................... $171,715 $139,262 $ -- $ --
Less: Benefit obligation....................... 163,342 152,430 42,629 42,325
-------- -------- -------- --------
Funded status.................................. 8,373 (13,168) (42,629) (42,325)
Unrecognized transition obligation (asset)..... (913) (1,057) 4,071 4,388
Unrecognized prior service cost................ 6,921 7,787 1,558 1,672
Unrecognized net (gain) loss................... (16,121) 5,347 (688) 2,019
-------- -------- -------- --------
Accrued benefit cost......................... $ (1,740) $ (1,091) $(37,688) $(34,246)
======== ======== ======== ========
</TABLE>
F-25
<PAGE> 145
VALERO ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1999 -- (CONTINUED)
<TABLE>
<CAPTION>
PENSION BENEFITS OTHER BENEFITS
------------------- -------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
AMOUNTS RECOGNIZED IN CONSOLIDATED BALANCE
SHEETS AS OF DECEMBER 31:
Prepaid benefit cost........................... $ 15,054 $ 8,145 $ -- $ --
Accrued benefit liability...................... (16,794) (9,236) (37,688) (34,246)
-------- -------- -------- --------
Accrued benefit cost......................... $ (1,740) $ (1,091) $(37,688) $(34,246)
======== ======== ======== ========
</TABLE>
Total benefit cost for the years ended December 31, 1999, 1998 and 1997
included the following components (in thousands):
<TABLE>
<CAPTION>
PENSION BENEFITS OTHER BENEFITS
----------------------------- ------------------------
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
----------------------------- ------------------------
1999 1998 1997 1999 1998 1997
-------- -------- ------- ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
COMPONENTS OF TOTAL BENEFIT COST:
Service cost............................... $ 9,466 $ 6,934 $ 3,710 $2,047 $1,703 $1,028
Interest cost.............................. 10,114 9,031 7,298 2,818 2,411 1,842
Expected return on plan assets............. (12,642) (11,149) (9,563) -- -- --
Amortization of transition obligation
(asset).................................. (144) (142) (142) 317 317 513
Amortization of prior service cost......... 866 747 703 114 114 184
Amortization of net loss (gain)............ 343 53 (154) -- -- 46
-------- -------- ------- ------ ------ ------
Net periodic benefit cost................ 8,003 5,474 1,852 5,296 4,545 3,613
Curtailment loss (gain) resulting from the
Restructuring............................ -- -- (2,083) -- -- 576
1997 Window Plan........................... -- -- 3,168 -- -- 171
-------- -------- ------- ------ ------ ------
Total benefit cost............... $ 8,003 $ 5,474 $ 2,937 $5,296 $4,545 $4,360
======== ======== ======= ====== ====== ======
</TABLE>
Amortization of prior service cost as shown in the above table is based on
the average remaining service period of employees expected to receive benefits
under the plan. The weighted-average assumptions used in computing the actuarial
present value of the pension benefit and other postretirement benefit
obligations for the years ended December 31, 1999 and 1998 were as follows:
<TABLE>
<CAPTION>
PENSION BENEFITS OTHER BENEFITS
---------------- --------------
1999 1998 1999 1998
----- ----- ----- -----
<S> <C> <C> <C> <C>
WEIGHTED-AVERAGE ASSUMPTIONS, DECEMBER 31:
Discount rate...................................... 7.50% 6.75% 7.50% 6.75%
Expected long-term rate of return on plan assets... 9.25% 9.25% -- --
Rate of compensation increase...................... 5.05% 4.00% -- --
Health care cost trend rate........................ -- -- 5.00% 5.00%
</TABLE>
For measurement purposes, the health care cost trend rate is assumed to
remain at five percent for all years after 1999. Assumed health care cost trend
rates have a significant effect on the amounts reported for
F-26
<PAGE> 146
VALERO ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1999 -- (CONTINUED)
health care plans. A one percentage-point change in assumed health care cost
trend rates would have the following effects on postretirement benefits other
than pensions:
<TABLE>
<CAPTION>
ONE ONE
PERCENTAGE-POINT PERCENTAGE-POINT
INCREASE DECREASE
---------------- ----------------
<S> <C> <C>
Effect on total of service and interest cost
components........................................... $1,073 $ (891)
Effect on benefit obligation........................... $7,948 $(6,729)
</TABLE>
PROFIT-SHARING/SAVINGS PLANS
The Company is the sponsor of the Valero Energy Corporation Thrift Plan
which is a qualified employee profit-sharing plan. The purpose of the Thrift
Plan is to provide a program whereby contributions of participating employees
and their employers are systematically invested to provide the employees an
interest in the Company and to further their financial independence.
Participation in the Thrift Plan is voluntary and is open to employees of the
Company who become eligible to participate upon the completion of one month of
continuous service. Employees of the Company who were formerly employed by Mobil
and Basis became eligible to participate in the Thrift Plan on September 17,
1998 and January 1, 1998, respectively, under the same service requirements as
required for other Company employees, with service including prior employment
with Mobil or Basis. Effective January 1999, former Mobil employees who became
employees of the Company could elect to transfer their balances from the Mobil
employee savings plan into the Thrift Plan or maintain these amounts in the
Mobil plan. For former Basis employees who became employees of the Company,
Basis' previously existing 401(k) profit-sharing and retirement savings plan was
maintained through December 31, 1997 and was merged into the Company's Thrift
Plan effective January 1, 1998. At the time of the Restructuring, the Company
became solely responsible for all Thrift Plan liabilities arising after the
Restructuring with respect to current Company employees and former employees of
both Old Valero and the Company. Each Old Valero employee participating in the
Thrift Plan before the Restructuring who became a PG&E employee after the
Restructuring had their account balance transferred to the PG&E savings plan.
Participating employees may contribute from 2% up to 22% of their total
annual compensation, subject to certain limitations, to the Thrift Plan.
Participants may elect to make these contributions on either a before-tax or
after-tax basis, or both, with federal income taxes on before-tax contributions
being deferred until a distribution is made to the participant. Participants'
contributions of up to 8% of their base annual compensation are matched 75% by
the Company, with an additional match of up to 25% subject to certain
conditions. Participants' contributions in excess of 8% of their base annual
compensation are not matched by the Company. Up until the termination in 1997 of
the Valero Employees' Stock Ownership Plan, or VESOP, a leveraged employee stock
ownership plan established by Old Valero in 1989, the Company's matching
contributions were made to the VESOP in the amount of the VESOP's debt service,
with any excess made to the Thrift Plan. After the VESOP termination, all
Company matching contributions were made to the Thrift Plan. Company
contributions to the Thrift Plan were $6,670,841, $5,298,870 and $2,247,491 (net
of forfeitures) for the years 1999, 1998 and 1997, respectively. During 1997,
the Company contributed $586,000 to the VESOP. This amount consisted of $58,000
of interest on the VESOP's debt and $541,000 of compensation expense. Dividends
on VESOP shares of common stock were recorded as a reduction of retained
earnings. Dividends on allocated shares of common stock were paid to
participants. Dividends paid on unallocated shares were used to reduce the
Company's contributions to the VESOP during 1997 by $13,000. VESOP shares of
common stock were considered outstanding for earnings per share computations.
F-27
<PAGE> 147
VALERO ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1999 -- (CONTINUED)
STOCK COMPENSATION PLANS
The Company has various fixed and performance-based stock compensation
plans. The Company's Executive Stock Incentive Plan, or ESIP, which was
maintained by Old Valero before the Restructuring, authorizes the grant of
various stock and stock-related awards to executive officers and other key
employees. Awards available under the ESIP include options to purchase shares of
common stock, performance shares which vest upon the achievement of an objective
performance goal, and restricted stock which vests over a period determined by
the Company's compensation committee. (Note: All restricted stock issued before
the Restructuring under Old Valero's stock compensation plans became fully
vested either upon the approval of the Restructuring by Old Valero's
stockholders on June 18, 1997 or upon the completion of the Restructuring on
July 31, 1997.) A total of 2,500,000 shares of Company common stock may be
issued under the ESIP, of which no more than 1,000,000 shares may be issued as
restricted stock. The Company also has a non-qualified stock option plan which,
at the date of the Restructuring, replaced three non-qualified stock option
plans previously maintained by Old Valero. Awards under the stock option plan
are granted to key officers, employees and prospective employees of the Company.
A total of 2,000,000 shares of Company common stock may be issued under this
plan. The Company also maintains an Executive Incentive Bonus Plan, under which
200,000 shares of Company common stock may be issued, that provides bonus
compensation to key employees of the Company based on individual contributions
to Company profitability. Bonuses are payable either in cash, Company common
stock, or both. The Company also has a non-employee director stock option plan,
under which 200,000 shares of Company common stock may be issued, and a
non-employee director restricted stock plan, under which 100,000 shares of
Company common stock may be issued.
The number and weighted-average grant-date fair value of shares of Company
common stock granted under the above-noted plans (other than shares related to
stock options which are presented in a separate table below) during 1999, 1998
and 1997 were as follows:
<TABLE>
<CAPTION>
1999 1998 1997
-------------------- -------------------- -------------------------------------------
AUGUST 1-
DECEMBER 31 JANUARY 1-JULY 31
-------------------- --------------------
WEIGHTED- WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE AVERAGE
SHARES GRANT-DATE SHARES GRANT-DATE SHARES GRANT-DATE SHARES GRANT-DATE
PLAN GRANTED FAIR VALUE GRANTED FAIR VALUE GRANTED FAIR VALUE GRANTED FAIR VALUE
---- ------- ---------- ------- ---------- ------- ---------- ------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ESIP:
Restricted stock............. 26,000 $20.30 163,986 $31.51 6,250 $31.78 -- $ --
Performance awards........... 225,500 21.31 54,000 31.25 -- -- 31,400 32.50
Executive Incentive Bonus
Plan......................... 59,937 19.25 2,516 31.25 -- -- 109,691 32.50
Non-employee director
restricted stock plan........ 4,190 21.48 -- -- 9,336 28.94 -- --
</TABLE>
Under the terms of the ESIP, the stock option plan and the non-employee
director stock option plan, the exercise price of options granted will not be
less than the fair market value of the Company's common stock at the date of
grant. Stock options become exercisable pursuant to the individual written
agreements between the Company and the participants, usually in three equal
annual installments beginning one year after the date of grant, with unexercised
options generally expiring ten years from the date of grant. In connection with
the Restructuring, all stock options held by Old Valero employees under any of
Old Valero's various stock compensation plans that were granted prior to January
1, 1997 became 100% vested and immediately exercisable upon the approval of the
Restructuring by Old Valero's stockholders on June 18, 1997. For all options
still outstanding at the time of the Restructuring, each option to purchase Old
Valero common stock held by a current or former employee of the Company was
converted into an option to acquire shares of Company common stock, and each
option held by a current or former employee of Old Valero's natural gas related
services business was converted into an option to acquire shares of PG&E common
stock. In each case,
F-28
<PAGE> 148
VALERO ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1999 -- (CONTINUED)
the number of options and related exercise prices were converted so that the
aggregate option value for each holder immediately after the Restructuring was
equal to the aggregate option value immediately before the Restructuring. The
other terms and conditions of these converted options remained essentially
unchanged.
A summary of the status of the Company's stock option plans, including
options granted under the ESIP, the stock option plan, the non-employee director
stock option plan and Old Valero's previously existing stock compensation plans,
as of December 31, 1999, 1998, and 1997, and changes during the years then ended
is presented in the table below. (Note: The outstanding shares at July 31, 1997
before the Restructuring are different from the outstanding shares at August 1,
1997 after the Restructuring because the August 1 amount: (i) reflects the
conversion of Old Valero options held by current or former employees of the
Company to an equivalent number of Company options and (ii) excludes options
held by current or former employees of Old Valero's natural gas related services
business which were converted to PG&E options.)
<TABLE>
<CAPTION>
1999 1998 1997
--------------------- --------------------- ----------------------------------------------
AUGUST 1 -
DECEMBER 31 JANUARY 1 - JULY 31
--------------------- ----------------------
WEIGHTED- WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE SHARES PRICE
--------- --------- --------- --------- --------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of
period.................... 5,528,996 $21.01 3,780,418 $19.15 3,802,584 $19.05 4,229,092 $22.02
Granted..................... 1,580,062 20.29 2,049,755 24.00 36,550 29.35 1,365,875 33.71
Exercised................... (17,806) 14.77 (235,235) 15.80 (44,144) 17.21 (2,925,687) 21.81
Forfeited................... (29,677) 23.41 (65,942) 25.62 (14,572) 23.07 (17,028) 25.84
--------- --------- --------- ----------
Outstanding at end of
period.................... 7,061,575 20.86 5,528,996 21.01 3,780,418 19.15 2,652,252 28.25
========= ========= ========= ==========
Exercisable at end of
period.................... 3,788,724 19.93 2,524,643 18.16 1,758,479 15.08 1,288,977 22.47
Weighted-average fair value
of options granted........ $6.61 $5.53 $6.86 $8.09
</TABLE>
The following table summarizes information about stock options outstanding
under the ESIP, the stock option plan and the non-employee director stock option
plan as of December 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------------- ----------------------------
NUMBER WEIGHTED-AVG. NUMBER
RANGE OF OUTSTANDING REMAINING WEIGHTED-AVG. EXERCISABLE WEIGHTED-AVG.
EXERCISE PRICES AT 12/31/99 CONTRACTUAL LIFE EXERCISE PRICE AT 12/31/99 EXERCISE PRICE
--------------- ----------- ---------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$11.47 - $17.50............... 1,725,563 6.4 years $14.95 1,078,001 $13.43
$18.03 - $25.57............... 4,651,457 7.9 21.53 2,448,342 21.60
$28.06 - $34.91............... 684,555 8.1 31.19 262,381 31.12
--------- ---------
$11.47 - $34.91............... 7,061,575 7.6 20.86 3,788,724 19.93
========= =========
</TABLE>
The fair value of each option grant was estimated on the grant date using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1999, 1998 and 1997, respectively: risk-free
interest rates of 5.5 percent, 5.0 percent and 6.3 percent; expected dividend
yields of 1.6 percent, 1.4 percent and 1.5 percent; expected lives of 3.2 years,
3.1 years and 3.2 years; and expected volatility of 42.3 percent, 28.2 percent
and 26.2 percent. As a result of insufficient stock price history for Valero
subsequent to the Restructuring, the expected volatility assumption for grants
in 1998 and 1997 was based on the stock price history of Old Valero, whereas the
expected volatility assumption for 1999 grants was based on the stock price
history of Valero subsequent to the Restructuring.
F-29
<PAGE> 149
VALERO ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1999 -- (CONTINUED)
For each common share that can be purchased in connection with a stock
option, the stock option plan provides, and the predecessor stock option plans
of Old Valero provided, that a stock appreciation right, or SAR, may also be
granted. A SAR is a right to receive a cash payment equal to the difference
between the fair market value of common stock on the exercise date and the
option price of the stock to which the SAR is related. SARs are exercisable only
upon the exercise of the related stock options. At the end of each reporting
period during the exercise period, the Company recorded an adjustment to
compensation expense based on the difference between the fair market value of
common stock at the end of each reporting period and the option price of the
stock to which the SAR was related. There were no SARs outstanding as of
December 31, 1999, 1998 or 1997. A summary of SAR activity for the seven months
ended July 31, 1997 is presented in the table below.
<TABLE>
<CAPTION>
WEIGHTED-
AVERAGE
NO. OF EXERCISE
SARS PRICE
------- ---------
<S> <C> <C>
Outstanding at January 1, 1997.............................. 89,087 $14.52
Granted..................................................... -- --
Exercised................................................... (88,087) 14.52
Forfeited................................................... (1,000) 14.52
-------
Outstanding at July 31, 1997................................ -- --
=======
</TABLE>
The Company applies APB Opinion No. 25 and related Interpretations in
accounting for its plans. Accordingly, no compensation cost has been recognized
for its fixed stock option plans. The after-tax compensation cost reflected in
net income for stock-based compensation plans was $4 million, $3 million and
$4.6 million for 1999, 1998 and 1997, respectively. Of the 1997 amount, $2.1
million related to the discontinued natural gas related services business. Had
compensation cost for the Company's stock-based compensation plans been
determined based on the fair value at the grant dates for 1999, 1998 and 1997
awards under those plans consistent with the method of SFAS No. 123, the
Company's net income and earnings per share for the years ended December 31,
1999 and 1997 would have been reduced, and the Company's net loss and loss per
share for the year ended December 31, 1998 would have increased to the pro forma
amounts indicated below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1999 1998 1997
------- -------- -------
<S> <C> <C> <C> <C>
Net income (loss)............................ As Reported $14,287 $(47,291) $96,096
Pro Forma $ 7,869 $(52,398) $92,304
Earnings (loss) per share.................... As Reported $ .25 $ (.84) $ 1.77
Pro Forma $ .14 $ (.93) $ 1.70
Earnings (loss) per share -- assuming
dilution................................... As Reported $ .25 $ (.84) $ 1.74
Pro Forma $ .14 $ (.93) $ 1.67
</TABLE>
Because the SFAS No. 123 method of accounting has not been applied to
awards granted prior to January 1, 1995, the resulting pro forma compensation
cost may not be representative of that to be expected in future years.
14. LEASE AND OTHER COMMITMENTS
The Company has long-term operating lease commitments in connection with
land, office facilities and equipment, and various facilities and equipment used
in the storage, transportation and production of refinery
F-30
<PAGE> 150
VALERO ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1999 -- (CONTINUED)
feedstocks and refined products. Long-term leases for land have remaining
primary terms of up to 24.7 years, while long-term leases for office facilities
have remaining primary terms of up to 2.5 years. The Company's long-term leases
for production equipment, feedstock and refined product storage facilities and
transportation assets have remaining primary terms of up to 5.25 years and in
certain cases provide for various contingent payments based on, among other
things, throughput volumes in excess of a base amount.
Future minimum lease payments and minimum rentals to be received under
subleases as of December 31, 1999 for operating leases having initial or
remaining noncancelable lease terms in excess of one year are as follows (in
thousands):
<TABLE>
<S> <C>
2000...................................................... $ 30,834
2001...................................................... 25,426
2002...................................................... 17,082
2003...................................................... 11,979
2004...................................................... 9,576
Remainder................................................. 8,432
--------
103,329
Less future minimum rentals to be received under
subleases............................................... 78
--------
$103,251
========
</TABLE>
Consolidated rental expense under operating leases for continuing
operations amounted to approximately $57,005,000, $47,779,000, and $39,578,000
for 1999, 1998 and 1997, respectively. These amounts are included in the
accompanying Consolidated Statements of Income under "Cost of sales and
operating expenses" and "Selling and administrative expenses" and include
various month-to-month and other short-term rentals in addition to rents paid
and accrued under long-term lease commitments.
In addition to commitments under operating leases, the Company also has a
commitment under a product supply arrangement to pay a reservation fee of
approximately $10.8 million annually through August 2002. In addition, during
1999, in order to secure a firm supply of hydrogen for the Texas City Refinery,
the Company entered into long-term hydrogen supply arrangements with initial
terms of approximately 15 years. Under these agreements, the Company is
obligated to make fixed minimum payments of approximately $4.9 million annually,
as well as other minimum payments which vary based on certain natural gas
reference prices.
15. LITIGATION AND CONTINGENCIES
LITIGATION RELATING TO DISCONTINUED OPERATIONS
Old Valero and certain of its natural gas related subsidiaries, and the
Company, have been sued by Teco Pipeline Company regarding the operation of the
340-mile West Texas Pipeline in which a subsidiary of Old Valero holds a 50%
undivided interest. In 1985, a subsidiary of Old Valero sold a 50% undivided
interest in the pipeline and entered into a joint venture through an ownership
agreement and an operating agreement, with the purchaser of the interest. In
1988, Teco succeeded to that purchaser's 50% interest. A subsidiary of Old
Valero has at all times been the operator of the pipeline. Despite the written
ownership and operating agreements, the plaintiff contends that a separate,
unwritten partnership agreement exists, and that the defendants have exercised
improper control over this alleged partnership's affairs. The plaintiff also
contends that the defendants acted in bad faith and negatively affected the
economics of the joint venture in order to provide financial advantages to
facilities or entities owned by the defendants, and by allegedly taking 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
F-31
<PAGE> 151
VALERO ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1999 -- (CONTINUED)
malpractice and other claims, and seeks unquantified actual and punitive
damages. Old Valero's motion to require arbitration of the case as required in
the written agreements was denied by the trial court, but Old Valero appealed,
and in August 1999, the court of appeals ruled in Old Valero's favor and ordered
arbitration of the entire dispute. Teco has since waived efforts to further
appeal this ruling, and an arbitration panel has been selected. The Company has
been formally added to this proceeding. The arbitration panel has scheduled the
arbitration hearing for October 2000. Although PG&E previously acquired Teco and
now owns both Teco and Old Valero, PG&E's Teco acquisition agreement purports to
assign the benefit or detriment of this lawsuit to the former shareholders of
Teco. In connection with the Restructuring, the Company has agreed to indemnify
Old Valero with respect to this lawsuit for 50% of any final judgment or
settlement amount up to $30 million, and 100% of that part of any final judgment
or settlement amount over $30 million.
OTHER LITIGATION
In 1986, the Company filed suit against M.W. Kellogg Company for damages
arising from certain alleged design and construction defects in connection with
a major construction project at the Corpus Christi Refinery. Ingersoll-Rand
Company was added as a defendant in 1989. In 1991, the trial court granted
summary judgment against Valero based in part on certain exculpatory provisions
in various agreements connected with the project. In 1993, the court of appeals
affirmed the summary judgment and the Texas Supreme Court denied review.
Subsequent to the summary judgment, Kellogg and Ingersoll-Rand brought indemnity
claims against Valero for attorney's fees and expenses incurred in defending the
original action. In 1996, the trial court rendered summary judgment against
Kellogg and Ingersoll-Rand based on procedural grounds, and the court of appeals
affirmed that ruling in 1997. However, in 1999, the Texas Supreme Court reversed
the court of appeals and remanded Kellogg's and Ingersoll-Rand's claims for
attorney's fees and expenses to the trial court. The Company has denied that it
has any liability with respect to these claims and has raised several
substantive defenses to these claims in the trial court.
GENERAL
The Company is also a party to additional claims and legal proceedings
arising in the ordinary course of business. The Company believes it is unlikely
that the final outcome of any of the claims or proceedings to which it is a
party would have a material adverse effect on its 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 or financial
condition.
F-32
<PAGE> 152
VALERO ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1999 -- (CONTINUED)
16. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The Company's results of operations by quarter for the years ended December
31, 1999 and 1998 were as follows (in thousands of dollars, except per share
amounts):
<TABLE>
<CAPTION>
1999 -- QUARTER ENDED
-----------------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 TOTAL
---------- ---------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C>
Operating revenues............. $1,337,103 $1,824,450 $2,161,938 $2,637,677 $7,961,168
Operating income (loss)........ 8,520 (20,733) 47,438 33,916 69,141
Net income (loss).............. (2,716) (22,085) 22,612 16,476 14,287
Earnings (loss) per common
share........................ (.05) (.39) .40 .29 .25
Earnings (loss) per common
share -- assuming dilution... (.05) (.39) .40 .29 .25
</TABLE>
<TABLE>
<CAPTION>
1998 -- QUARTER ENDED(1)
-----------------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 TOTAL
---------- ---------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C>
Operating revenues............. $1,362,359 $1,448,104 $1,338,649 $1,390,234 $5,539,346
Operating income (loss)(2)..... (2,417) 64,324 13,726 (126,831) (51,198)
Net income (loss)(2)........... (5,884) 39,939 4,311 (85,657) (47,291)
Earnings (loss) per common
share(2)..................... (.11) .71 .08 (1.53) (.84)
Earnings (loss) per common
share -- assuming
dilution(2).................. (.11) .70 .08 (1.53) (.84)
</TABLE>
---------------
(1) Includes the operations of the Paulsboro Refinery beginning September 17,
1998.
(2) The first quarter, fourth quarter and total year 1998 operating income
(loss) includes the unfavorable effect of inventory write-downs to market of
$37,673, $133,256, and $170,929, respectively. These write-downs resulted in
a reduction in net income for those periods of $24,488, $86,616, and
$111,104, respectively, and a reduction in earnings per common share of
$.43, $1.55, and $1.98, respectively.
17. SUBSEQUENT EVENTS
PROPOSED ACQUISITION OF CALIFORNIA REFINING AND MARKETING ASSETS
On March 2, 2000, Valero and ExxonMobil Corporation executed a sale and
purchase agreement for the purchase by Valero of ExxonMobil's Benicia,
California refinery and all Exxon-branded California retail assets for a
purchase price of $895 million plus an amount representing the value of
inventories acquired in the transaction, which will be based on market-related
prices at closing. ExxonMobil agreed to sell these assets as a result of Consent
Decrees issued by the Federal Trade Commission and the State of California
providing that certain assets be divested by ExxonMobil to satisfy
anticompetitive issues in connection with the recent merger of Exxon Corporation
and Mobil Corporation. Valero's acquisition of the ExxonMobil California assets
is pending approval from the Federal Trade Commission and the State of
California.
The Benicia Refinery is located on the Carquinez Straits of the San
Francisco Bay. It is considered a highly complex refinery and has a rated crude
oil capacity of 130,000 barrels per day. The Benicia Refinery produces a high
percentage of light products, with limited production of natural gas liquids and
other products. Over 95% of the gasoline produced by the Benicia Refinery meets
the California Air Resources Board specifications for gasoline sold in
California. The refinery has significant liquid storage capacity including
storage for crude oil and other feedstocks. Also included with the refinery
assets are a deepwater dock located offsite on the Carquinez Straits which is
capable of berthing large crude carriers, petroleum coke storage silos
F-33
<PAGE> 153
VALERO ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1999 -- (CONTINUED)
located on an adjacent dock, a 20-inch crude pipeline connecting the refinery to
a southern California crude delivery system, and an adjacent truck terminal for
regional truck rack sales. Under the Consent Decrees, ExxonMobil was required to
offer the buyer of the divested assets a crude oil supply contract. As a
consequence, the sale and purchase agreement includes a contract allowing Valero
to purchase up to 100,000 barrels per day of Alaska North Slope crude oil at
market-related prices delivered to the Benicia Refinery.
The retail assets include 10 company-owned and operated sites and 70
company-owned lessee-dealer sites, 75 of which are in the San Francisco Bay
area. Under the Consent Decrees, the Federal Trade Commission and the State of
California ordered that ExxonMobil withdraw the "Exxon" brand name from this
area. As a result, ExxonMobil has notified the dealers in this market area that
their franchise right to market "Exxon" branded products is being terminated
effective June 15, 2000. Valero will offer its own brand to market retail
petroleum products at these locations. Due to the timing requirements of
ExxonMobil's franchise termination notice to various dealers as described above,
ExxonMobil cannot close the transaction until (i) all of the dealers agree to
terminate their franchise agreements or (ii) June 15, 2000, whichever comes
first.
Also included in the retail assets are up to 260 independently-owned and
operated distributor facilities which are located outside of the San Francisco
Bay area. The distributor locations will retain the right to use the Exxon
brand, continue to accept the Exxon proprietary credit card and receive Exxon
brand support, while Valero will receive the exclusive rights to offer the Exxon
brand throughout the state (except for the San Francisco Bay area) for a
ten-year period. In connection with the acquisition, ExxonMobil will assign to
Valero all of the existing Exxon California distributor contracts under which
the distributors will purchase Exxon branded products from Valero after the
acquisition. Valero will supply distributors either directly through a refined
products pipeline or indirectly through petroleum product exchange transactions.
The acquisition will be funded through a mix of debt, equity and structured
lease financing. The debt would be a combination of borrowings under Valero's
existing bank credit facility and new term debt. The equity component will be
between $250 million and $350 million of some combination of common stock and
convertible preferred stock, including mandatory convertible preferred stock. In
case any of these financing sources are not finalized or available at the
closing date, Valero will close the purchase with interim financing consisting
of (i) a committed $600 million bank bridge facility which has been established
and (ii) borrowings under its existing bank credit facilities with related
amendments to these facilities providing for a higher debt-to-capitalization
limit (which amendments will be underwritten by the provider of the bridge
financing).
It is anticipated that the transaction will close on June 15, 2000;
however, there can be no assurance that the transaction will close on this date
or that all of the conditions required to close the transaction will be met.
OTHER
On January 20, 2000, the Company's Board of Directors declared a regular
quarterly cash dividend of $.08 per common share payable March 15, 2000, to
holders of record at the close of business on February 16, 2000.
F-34
<PAGE> 154
VALERO ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2000 AND DECEMBER 31, 1999
<TABLE>
<CAPTION>
MARCH 31,
2000 DECEMBER 31,
(UNAUDITED) 1999
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Current assets:
Cash and temporary cash investments....................... $ 8,509 $ 60,087
Receivables, less allowance for doubtful accounts of
$3,221 (2000) and $3,038 (1999)........................ 403,557 372,542
Inventories............................................... 436,197 303,388
Current deferred income tax assets........................ 89,477 79,307
Prepaid expenses and other................................ 22,591 13,534
---------- ----------
960,331 828,858
---------- ----------
Property, Plant and Equipment -- including construction in
progress of $128,860 (2000) and $114,747 (1999), at
cost...................................................... 2,711,907 2,686,684
Less: Accumulated depreciation......................... 726,723 702,170
---------- ----------
1,985,184 1,984,514
---------- ----------
Deferred charges and other assets........................... 175,659 165,900
---------- ----------
$3,121,174 $2,979,272
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt........................................... $ 126,500 $ --
Accounts payable.......................................... 732,561 616,895
Accrued expenses.......................................... 96,213 102,087
---------- ----------
955,274 718,982
---------- ----------
Long-term debt.............................................. 645,155 785,472
---------- ----------
Deferred income taxes....................................... 296,628 275,521
---------- ----------
Deferred credits and other liabilities...................... 115,413 114,528
---------- ----------
Common stockholders' equity:
Common stock, $.01 par value -- 150,000,000 shares
authorized; issued 56,331,166 (2000 and 1999) shares... 563 563
Additional paid-in capital................................ 1,088,829 1,092,348
Retained earnings (accumulated deficit)................... 27,408 (3,331)
Treasury stock, 398,632 (2000) and 264,464 (1999) shares,
at cost................................................ (8,096) (4,811)
---------- ----------
1,108,704 1,084,769
---------- ----------
$3,121,174 $2,979,272
========== ==========
</TABLE>
See Notes to Consolidated Financial Statements.
F-35
<PAGE> 155
VALERO ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED MARCH 31, 2000 AND 1999
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-----------------------
2000 1999
---------- ----------
(IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
(UNAUDITED)
<S> <C> <C>
Operating revenues.......................................... $2,928,617 $1,337,103
---------- ----------
Costs and expenses:
Cost of sales and operating expenses...................... 2,827,341 1,287,347
Selling and administrative expenses....................... 19,669 18,188
Depreciation expense...................................... 24,555 23,048
---------- ----------
Total............................................. 2,871,565 1,328,583
---------- ----------
Operating income............................................ 57,052 8,520
Other income (expense), net................................. 2,647 (79)
Interest and debt expense:
Incurred.................................................. (14,147) (14,288)
Capitalized............................................... 1,387 1,831
---------- ----------
Income (loss) before income taxes........................... 46,939 (4,016)
Income tax expense (benefit)................................ 16,200 (1,300)
---------- ----------
Net income (loss)........................................... $ 30,739 $ (2,716)
========== ==========
Earnings (loss) per share of common stock................... $ .55 $ (.05)
Weighted average common shares outstanding (in
thousands)............................................. 55,874 56,057
Earnings (loss) per share of common stock -- assuming
dilution.................................................. $ .54 $ (.05)
Weighted average common shares outstanding (in
thousands)............................................. 57,234 56,057
Dividends per share of common stock......................... $ .08 $ .08
</TABLE>
See Notes to Consolidated Financial Statements.
F-36
<PAGE> 156
VALERO ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2000 AND 1999
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------
2000 1999
--------- ---------
(IN THOUSANDS)
(UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)......................................... $ 30,739 $ (2,716)
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation expense................................... 24,555 23,048
Amortization of deferred charges and other, net........ 8,043 13,827
Changes in current assets and current liabilities...... (63,089) 113,981
Deferred income tax expense (benefit).................. 11,200 (1,300)
Changes in deferred items and other, net............... (271) 1,579
--------- ---------
Net cash provided by operating activities......... 11,177 148,419
--------- ---------
Cash flows from investing activities:
Capital expenditures...................................... (25,229) (38,871)
Deferred turnaround and catalyst costs.................... (16,741) (30,053)
Other, net................................................ 4 (150)
--------- ---------
Net cash used in investing activities............. (41,966) (69,074)
--------- ---------
Cash flows from financing activities:
Increase (decrease) in short-term debt, net............... 126,500 (97,000)
Long-term borrowings...................................... 60,000 448,323
Long-term debt reduction.................................. (200,000) (426,000)
Common stock dividends.................................... (4,469) (4,486)
Issuance of common stock.................................. 5,912 2,586
Purchase of treasury stock................................ (8,732) (624)
--------- ---------
Net cash used in financing activities............. (20,789) (77,201)
--------- ---------
Net increase (decrease) in cash and temporary cash
investments............................................... (51,578) 2,144
Cash and temporary cash investments at beginning of
period.................................................... 60,087 11,199
--------- ---------
Cash and temporary cash investments at end of period........ $ 8,509 $ 13,343
========= =========
</TABLE>
See Notes to Consolidated Financial Statements.
F-37
<PAGE> 157
VALERO ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 2000
1. BASIS OF PRESENTATION
As used in this report, the term "Valero" may, depending upon the context,
refer to Valero Energy Corporation, one or more of its consolidated
subsidiaries, or all of them taken as a whole.
The consolidated financial statements included in this report have been
prepared by Valero without audit, in accordance with the rules and regulations
of the Securities and Exchange Commission, or SEC. However, all adjustments have
been made to these financial statements which are, in the opinion of Valero's
management, necessary for a fair presentation of Valero'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 as permitted under the
SEC's rules and regulations, although Valero believes that the disclosures are
adequate to make the information presented not misleading.
2. PROPOSED ACQUISITION OF CALIFORNIA REFINING AND MARKETING ASSETS
On March 2, 2000, Valero and Exxon Mobil Corporation executed a sale and
purchase agreement under which Valero agreed to acquire ExxonMobil's Benicia,
California refinery (the "Benicia Refinery") and Exxon-branded California retail
assets, which consist of approximately 80 service stations (the "Service Station
Assets") and branded supplier relationships with approximately 260 Exxon-branded
service stations (the "Distribution Assets") (collectively, the "Benicia
Acquisition"). The agreement provides for Valero to acquire the Benicia
Refinery, the Distribution Assets and the Service Station Assets for a purchase
price of $895 million plus an amount for refinery inventories acquired in the
transaction based on market-related prices at the time of closing. ExxonMobil
agreed to sell these assets as a result of consent decrees issued by the Federal
Trade Commission and the State of California providing that certain assets be
divested by ExxonMobil to satisfy anticompetitive issues in connection with the
recent merger of Exxon Corporation and Mobil Corporation. The consummation of
the Benicia Acquisition has been approved by the Federal Trade Commission and
the Office of the Attorney General of the State of California. There are
expected to be two closings for the Benicia Acquisition. The acquisition of the
Benicia Refinery and the Distribution Assets is expected to close on or about
May 15, 2000, and the acquisition of the Service Station Assets is expected to
close on or about June 15, 2000.
In connection with the Benicia Acquisition, Valero will assume the
environmental liabilities of ExxonMobil with certain exceptions. ExxonMobil will
retain liability for (i) pending penalties assessed for violations relating to
the Benicia Refinery, (ii) pending lawsuits, (iii) all costs associated with
compliance with a variance issued in connection with control of nitrogen oxides,
(iv) claims in connection with offsite transportation and disposal of wastes
prior to closing that are asserted within three years of closing or asserted
with respect to abandoned disposal sites, (v) the capital costs incurred within
five years of closing for specified corrective action of groundwater and soil
contamination, (vi) all covered contamination at the Service Station Assets
caused by ExxonMobil or its lessees that is reflected in baseline reports
prepared prior to closing and (vii) the repair or replacement of any underground
storage tanks at the Service Station Assets found to be leaking prior to
closing. ExxonMobil has agreed to indemnify Valero for all losses related to
these retained liabilities, provided that ExxonMobil will indemnify Valero for
losses related to covered contamination at the Service Station Assets for a
period of five years from the date of closing. In addition, ExxonMobil will
indemnify Valero for breaches of its representations and warranties to the
extent that the aggregate amount of Valero's losses resulting from such breaches
exceeds $1 million and ExxonMobil receives notice of such losses within one year
after the closing date.
The Benicia Refinery is located on the Carquinez Straits of the San
Francisco Bay. It is considered a highly complex refinery and has a total
throughput capacity of 160,000 barrels per day, or "BPD." The Benicia
F-38
<PAGE> 158
VALERO ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 2000 -- (CONTINUED)
Refinery produces a high percentage of light products, with limited production
of other products. It can produce approximately 110,000 BPD of gasoline, 14,000
BPD of jet fuel, 11,000 BPD of diesel and 8,000 BPD of natural gas liquids. Over
95% of the gasoline produced by the Benicia Refinery meets the California Air
Resources Board ("CARB") II specifications for gasoline sold in California.
Valero believes that the Benicia Refinery could be modified to produce gasoline
meeting the CARB III specifications which become effective January 2003 with a
capital investment of approximately $20 million. The refinery has significant
liquid storage capacity including storage for crude oil and other feedstocks.
Also included with the refinery assets are a deepwater dock located offsite on
the Carquinez Straits which is capable of berthing large crude carriers,
petroleum coke storage silos located on an adjacent dock, a 20-inch crude
pipeline connecting the refinery to a southern California crude delivery system,
and an adjacent truck terminal for regional truck rack sales. Under the consent
decrees, ExxonMobil was required to offer the buyer of the divested assets a
crude oil supply contract. As a consequence, the sale and purchase agreement
provides for a ten-year term contract for ExxonMobil to supply and for Valero to
purchase 100,000 BPD of Alaska North Slope ("ANS") crude oil at market-related
prices, to be reduced to 65,000 BPD on January 1, 2001. Prior to January 1,
2001, Valero will have an option to reduce the volume of ANS crude to 65,000 BPD
with 90 days prior notice. After January 1, 2001, Valero will have an option to
reduce the required volumes by an additional 20,000 BPD once per year.
The Service Station Assets include 10 company-owned and operated service
stations and 70 company-owned lessee-dealer service stations, 75 of which are in
the San Francisco Bay area. Under the consent decrees, the Federal Trade
Commission and the State of California ordered that ExxonMobil withdraw the
"Exxon" brand name from the San Francisco Bay area. As a result, ExxonMobil has
notified the dealers in this market area that their franchise right to market
"Exxon" branded products is being terminated effective June 15, 2000. Valero
plans to introduce its own brand of retail petroleum products in the San
Francisco Bay area and has offered to the dealers at these locations a franchise
right to market products under the new Valero brand. Due to the timing
requirements of ExxonMobil's franchise termination notice to the Bay-area
dealers as described above, ExxonMobil cannot close the acquisition of the
Service Station Assets until (i) all of the dealers agree to terminate their
franchise agreements or (ii) June 15, 2000, whichever comes first. Subsequent to
the anticipated June 15, 2000 closing date, Valero plans to offer those dealers
who accept Valero's franchise offering an option to purchase the stations that
they are currently leasing. As part of the purchase option, the dealers must
enter into a fuels purchase agreement with Valero for a term of 15 years. The
dealers will have 90 days to exercise or reject their purchase option.
The Distribution Assets include up to 260 independently-owned and operated
distributor facilities which are located outside of the San Francisco Bay area.
The distributor locations will retain the right to use the Exxon brand, continue
to accept the Exxon proprietary credit card and receive Exxon brand support,
while Valero will receive the exclusive rights to offer the Exxon brand
throughout the state (except for the San Francisco Bay area) for a ten-year
period. In connection with the Benicia Acquisition, ExxonMobil will assign to
Valero all of the existing Exxon California distributor contracts under which
the distributors will purchase Exxon-branded products from Valero after the
acquisition.
Valero established with a group of banks a $600 million bridge loan
facility to provide interim financing in connection with the Benicia
Acquisition. The bridge facility has a term of one year, and Valero has an
option to extend the term for an additional two years. The bridge facility has
covenants similar to those contained in Valero's $835 million revolving bank
credit and letter of credit facility. Any amounts borrowed under the bridge
facility bear interest at LIBOR plus an applicable margin. Additionally, Valero
has amended its existing bank credit and letter of credit facility to provide
for, among other things, higher debt-to-capitalization limits necessary to
complete the Benicia Acquisition. These amendments, which become effective upon
closing of the acquisition of the Benicia Refinery and the Distribution Assets,
increase the total debt-to-capitalization limit from 50% to 65%. This ratio will
decrease to 60% at the earlier of March 31, 2001
F-39
<PAGE> 159
VALERO ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 2000 -- (CONTINUED)
or upon the issuance of $300 million of certain equity securities, and will
further decrease to 55% on September 30, 2001.
The acquisition of the Benicia Refinery and the Distribution Assets will be
initially funded through interim financing consisting of (i) the $600 million
bank bridge facility described above, (ii) borrowings under Valero's existing
bank credit facilities and (iii) an interim lease arrangement to accommodate the
acquisition of the Benicia Refinery's dock facility. It is expected that this
interim financing will be repaid and the acquisition of the Service Station
Assets will be funded through a mix of debt, equity and structured lease
financing.
Although Valero anticipates that the acquisition will be completed as
described above, there can be no assurance that the transaction will close on
the above-noted dates, that it will be funded as described, or that all of the
conditions required to close the transaction will be met. If completed, this
acquisition will be accounted for under the purchase method of accounting.
Accordingly, the results of operations of the acquired refining and retail
assets will be included in the consolidated financial statements of Valero
beginning on the respective effective dates of the transaction.
On March 31, 2000, Valero filed a $1.3 billion universal shelf registration
statement on Form S-3 with the SEC, which has not yet been declared effective,
to register various securities including common stock, preferred stock,
warrants, debt securities and trust preferred securities.
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 primarily 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. At March 31, 2000,
the replacement cost of Valero's LIFO inventories exceeded their LIFO carrying
values by approximately $194 million. Materials and supplies are carried
principally at weighted average cost not in excess of market. Inventories as of
March 31, 2000 and December 31, 1999 were as follows (in thousands):
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
--------- ------------
<S> <C> <C>
Refinery feedstocks....................................... $115,790 $ 61,649
Refined products and blendstocks.......................... 264,417 183,519
Materials and supplies.................................... 55,990 58,220
-------- --------
$436,197 $303,388
======== ========
</TABLE>
F-40
<PAGE> 160
VALERO ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 2000 -- (CONTINUED)
4. STATEMENTS OF CASH FLOWS
In order to determine net cash provided by operating activities, net income
(loss) has been adjusted by, among other things, changes in current assets and
current liabilities. The changes in Valero'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 changes in "Cash and temporary cash investments," "Current
deferred income tax assets" and "Short-term debt."
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
2000 1999
--------- --------
<S> <C> <C>
Receivables, net............................................ $ (31,015) $(13,463)
Inventories................................................. (132,809) 16,060
Prepaid expenses and other.................................. (9,057) (1,543)
Accounts payable............................................ 115,666 121,961
Accrued expenses............................................ (5,874) (9,034)
--------- --------
Total............................................. $ (63,089) $113,981
========= ========
</TABLE>
Cash flows related to interest and income taxes were as follows (in
thousands):
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
MARCH 31,
----------------
2000 1999
------- ------
<S> <C> <C>
Interest paid (net of amount capitalized)................... $13,621 $6,989
Income tax refunds received................................. -- 7,212
Income taxes paid........................................... 3,051 5
</TABLE>
F-41
<PAGE> 161
VALERO ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 2000 -- (CONTINUED)
5. 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,
---------------------------------------------------
2000 1999
------------------------ ------------------------
PER- PER-
NET SHARE NET SHARE
INCOME SHARES AMT. (LOSS) SHARES AMT.
------- ------ ----- ------- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Net income (loss)....................... $30,739 $(2,716)
======= =======
Basic Earnings Per Share:
Net income (loss) available to common
stockholders....................... $30,739 55,874 $.55 $(2,716) 56,057 $(.05)
==== =====
Effect Of Dilutive Securities:
Stock options......................... -- 838 -- --
Performance awards.................... -- 522 -- --
------- ------ ------- ------
Diluted Earnings Per Share:
Net income (loss) available to common
stockholders plus assumed
conversions........................ $30,739 57,234 $.54 $(2,716) 56,057 $(.05)
======= ====== ==== ======= ====== =====
</TABLE>
Because Valero reported a net loss for the three months ended March 31,
1999, various stock options and performance awards which were granted to
employees in connection with Valero's stock compensation plans and were
outstanding during such period were not included in the computation of diluted
earnings per share because the effect would have been antidilutive. At March 31,
1999, options to purchase approximately 6.4 million common shares and
performance awards totaling approximately 317,000 common shares were
outstanding.
6. NEW ACCOUNTING PRONOUNCEMENTS
In March 2000, the FASB issued Interpretation No. 44, "Accounting for
Certain Transactions involving Stock Compensation." This interpretation
clarifies the application of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," for certain issues including, among
other things, (i) the definition of employee for purposes of applying Opinion
25, (ii) the criteria for determining whether a plan qualifies as a
noncompensatory plan, (iii) the accounting consequence of various modifications
to the terms of a previously fixed stock option or award, and (iv) the
accounting for an exchange of stock compensation awards in a business
combination. This interpretation will become effective for Valero's financial
statements beginning July 1, 2000, including the effects of applying this
interpretation to certain specific events that occur after either December 15,
1998 or January 12, 2000. The adoption of this interpretation is not expected to
have a material effect on Valero'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
F-42
<PAGE> 162
VALERO ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 2000 -- (CONTINUED)
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. As issued, this statement was to become effective for Valero's
financial statements beginning January 1, 2000. However, in June 1999, the FASB
issued SFAS No. 137 which delayed for one year the effective date of SFAS No.
133. As a result, SFAS No. 133 will become effective for Valero's financial
statements beginning January 1, 2001 and is not allowed to be applied
retroactively to financial statements of prior periods. At this effective date,
SFAS No. 133 must be applied to (i) all freestanding derivative instruments and
(ii) all embedded derivative instruments required by the statement to be
separated from their host contracts (or, at Valero's election, only those
derivatives embedded in hybrid instruments issued, acquired or substantively
modified on or after either January 1, 1998 or January 1, 1999). Valero is
currently evaluating the impact on its financial statements of adopting this
statement. Adoption of this statement could result in increased volatility in
Valero's earnings and other comprehensive income.
7. LITIGATION AND CONTINGENCIES
Prior to July 31, 1997, Valero was a wholly owned subsidiary of Valero
Energy Corporation, referred to as 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 and, with its remaining natural gas related services business,
merged with a wholly owned subsidiary of PG&E Corporation (the "Restructuring").
Old Valero and certain of its natural gas related subsidiaries, and Valero, have
been sued by Teco Pipeline Company regarding the operation of the 340-mile West
Texas Pipeline in which a subsidiary of Old Valero holds a 50% undivided
interest. In 1985, a subsidiary of Old Valero sold a 50% undivided interest in
the pipeline and entered into a joint venture with the purchaser of the 50%
interest through an ownership agreement and an operating agreement. In 1988,
Teco succeeded to that purchaser's 50% interest. A subsidiary of Old Valero has
at all times been the operator of the pipeline. Despite the written ownership
and operating agreements, the plaintiff contends that a separate, unwritten
partnership agreement exists, and that the defendants have exercised improper
control over this alleged partnership's affairs. The plaintiff also contends
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 taking 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. Old Valero's motion
to require arbitration of the case as required in the written agreements was
denied by the trial court, but Old Valero appealed, and in August 1999, the
court of appeals ruled in Old Valero's favor and ordered arbitration of the
entire dispute. Teco has since waived efforts to further appeal this ruling, and
an arbitration panel has been selected. Valero has been formally added to this
proceeding. The arbitration panel has scheduled the arbitration hearing for
October 2000. Although PG&E acquired Teco and now owns both Teco and Old Valero,
PG&E's Teco acquisition agreement purports to assign the benefit or detriment of
this lawsuit to the former shareholders of Teco. In connection with the
Restructuring, Valero has agreed to indemnify Old Valero with respect to this
lawsuit for 50% of any final judgment or settlement amount up to $30 million,
and 100% of that part of any final judgment or settlement amount over $30
million.
In 1986, Valero filed suit against M.W. Kellogg Company for damages arising
from certain alleged design and construction defects in connection with a major
construction project at the Corpus Christi Refinery. Ingersoll-Rand Company was
added as a defendant in 1989. In 1991, the trial court granted summary judgment
against Valero based in part on certain exculpatory provisions in various
agreements connected with the project. In 1993, the court of appeals affirmed
the summary judgment and the Texas Supreme Court denied review. Subsequent to
the summary judgment, Kellogg and Ingersoll-Rand brought indemnity claims
against Valero for attorneys' fees and expenses incurred in defending the
original action. In 1996, the trial
F-43
<PAGE> 163
VALERO ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 2000 -- (CONTINUED)
court rendered summary judgment against Kellogg and Ingersoll-Rand based on
procedural grounds, and the court of appeals affirmed that ruling in 1997.
However, in 1999, the Texas Supreme Court reversed the court of appeals and
remanded Kellogg's and Ingersoll-Rand's claims for attorneys' fees and expenses
to the trial court.
Valero is also a party to additional claims and legal proceedings arising
in the ordinary course of business. Valero believes it is unlikely that the
final outcome of any of the claims or proceedings to which it is a party would
have a material adverse effect on its 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 Valero's results of operations or financial condition.
8. SUBSEQUENT EVENTS
On May 4, 2000, Valero's Board of Directors declared a regular quarterly
cash dividend of $.08 per common share payable June 14, 2000, to holders of
record at the close of business on May 30, 2000.
Valero disclosed in its Annual Report on Form 10-K for the year ended
December 31, 1999, that it had received two New Jersey Department of
Environmental Protection ("NJDEP") Administrative Orders and Notices of Civil
Administrative Penalty Assessment related to particulate emissions from the
fluid catalytic cracking unit ("FCC Unit") at Valero's Paulsboro Refinery. These
orders and assessments related to emissions from the FCC Unit that occurred
after Valero's acquisition of the refinery, but that related to conditions
existing prior to the acquisition. On May 5, 2000, Valero entered into a
comprehensive administrative consent order with the NJDEP to resolve all pending
enforcement actions and related but unasserted claims regarding particulate
emissions from the refinery. The order authorizes an expansion of the refinery
allowing for production of reformulated gasoline ("RFG"), provides for interim
emissions limits, and requires a penalty payment of $600,000 on the particulate
emissions issues. Under the order, Valero also agreed to install a wet-gas
scrubber on the refinery's FCC Unit by December 31, 2003. Valero believes that
the terms of the foregoing settlement will not have a material adverse effect on
its operations or financial condition.
F-44
<PAGE> 164
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
Exxon Mobil Corporation
In our opinion, the accompanying balance sheet and the related statements
of income, of cash flows and of changes in Exxon Mobil Corporation net
investment present fairly, in all material respects, the financial position of
the Exxon California Refinery, Terminal and Retail Assets Business (as defined
in the Sale and Purchase Agreement between Exxon Mobil Corporation and Valero
Refining Company--California) at December 31, 1999 and 1998, and the results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1999, in conformity with accounting principles generally
accepted in the United States. These financial statements are the responsibility
of Exxon Mobil Corporation's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with auditing standards
generally accepted in the United States, which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
As discussed in Note 3 to the financial statements, Exxon Mobil Corporation
changed its method of accounting for the cost of start-up activities in 1998.
PricewaterhouseCoopers LLP
Houston, Texas
May 10, 2000
F-45
<PAGE> 165
EXXON CALIFORNIA REFINERY, TERMINAL AND RETAIL ASSETS BUSINESS
BALANCE SHEET
DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
-------- --------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Current assets:
Cash...................................................... $ 4 $ 246
Receivables............................................... 41,039 28,002
Inventories............................................... 41,680 38,218
Other current assets...................................... 3,922 10,124
-------- --------
Total current assets.............................. 86,645 76,590
Property, plant and equipment, net.......................... 476,687 478,928
Prepaids and deferred charges............................... 8,422 6,940
Other noncurrent assets..................................... 7,360 6,587
-------- --------
Total assets...................................... $579,114 $569,045
======== ========
LIABILITIES AND EXXON MOBIL CORPORATION NET INVESTMENT
Current liabilities:
Accounts payable.......................................... $ 23,949 $ 19,142
Payroll and benefits payable.............................. 2,080 2,000
Taxes other than income taxes............................. 17,481 10,263
Deferred income tax....................................... 1,147 2,451
Other current liabilities................................. 5,932 3,311
-------- --------
Total current liabilities......................... 50,589 37,167
Long-term deferred income taxes............................. 85,654 71,575
Deferred credits and other liabilities...................... 6,057 1,430
-------- --------
Total liabilities................................. 142,300 110,172
Exxon Mobil Corporation net investment...................... 436,814 458,873
-------- --------
Total liabilities and Exxon Mobil Corporation net
investment....................................... $579,114 $569,045
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-46
<PAGE> 166
EXXON CALIFORNIA REFINERY, TERMINAL AND RETAIL ASSETS BUSINESS
STATEMENT OF INCOME
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Revenues:
Sales and other operating revenue, including excise
taxes:
Unrelated parties................................... $1,818,355 $1,611,327 $1,793,767
Related parties..................................... 7,726 13,698 20,529
---------- ---------- ----------
1,826,081 1,625,025 1,814,296
---------- ---------- ----------
Costs and expenses:
Crude oil and product purchases........................ 962,718 785,040 1,060,502
Operating expenses..................................... 214,506 160,291 188,282
Selling, general and administrative expenses........... 25,478 27,961 30,705
Depreciation and amortization.......................... 26,474 22,748 20,983
Excise taxes........................................... 474,506 497,714 414,370
Taxes other than income taxes.......................... 10,020 9,957 9,493
Loss on property, plant and equipment sales............ 825 740 418
---------- ---------- ----------
Total costs and expenses....................... 1,714,527 1,504,451 1,724,753
---------- ---------- ----------
Income before income taxes............................... 111,554 120,574 89,543
Income taxes............................................. 46,023 48,317 36,549
---------- ---------- ----------
Income before cumulative effect of accounting change..... 65,531 72,257 52,994
Cumulative effect of accounting change................... (2,925)
---------- ---------- ----------
Net income............................................... $ 65,531 $ 69,332 $ 52,994
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-47
<PAGE> 167
EXXON CALIFORNIA REFINERY, TERMINAL AND RETAIL ASSETS BUSINESS
STATEMENT OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities:-
Net income................................................ $ 65,531 $ 69,332 $ 52,994
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization.......................... 26,474 22,748 20,983
Deferred income taxes.................................. 12,775 14,411 19,335
Cumulative effect of accounting change................. 2,925
Loss on sale of property, plant and equipment.......... 825 740 418
Increase in accounts receivable........................ (13,037) (11,483) 16,820
Decrease (increase) in inventories..................... (3,462) 4,312 (13,052)
Decrease (increase) in other current assets............ 6,202 (5,044) (2,876)
Decrease (increase) in prepaids and deferred charges... (1,482) 3,440 4,263
Decrease (increase) in other noncurrent assets......... (773) (3,587) (1,529)
Increase (decrease) in accounts payable and accrued
liabilities.......................................... 7,508 (1,909) 507
Decrease (increase) in taxes other than income......... 7,218 23,094 (4,557)
Increase in deferred credits and other liabilities..... 4,627 413 1,017
-------- -------- --------
Net cash provided by operating activities......... 112,406 119,392 94,323
-------- -------- --------
Cash flows from investing activities:
Additions to property, plant and equipment................ (25,058) (37,866) (31,267)
-------- -------- --------
Net cash used in investing activities............. (25,058) (37,866) (31,267)
-------- -------- --------
Cash flows from financing activities:
Net cash distributions to Exxon Mobil Corporation........... (87,590) (81,413) (63,023)
-------- -------- --------
Net cash used in financing activities............. (87,590) (81,413) (63,023)
-------- -------- --------
Net increase (decrease) in cash............................. (242) 113 33
Cash at beginning of year................................... 246 133 100
-------- -------- --------
Cash at end of year......................................... $ 4 $ 246 $ 133
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-48
<PAGE> 168
EXXON CALIFORNIA REFINERY, TERMINAL AND RETAIL ASSETS BUSINESS
STATEMENT OF CHANGES IN EXXON MOBIL CORPORATION NET INVESTMENT
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Exxon Mobil Corporation net investment at December 31,
1996...................................................... $480,983
Net income................................................ 52,994
Net cash distributions to Exxon Mobil Corporation......... (63,023)
--------
Exxon Mobil Corporation net investment at December 31,
1997...................................................... 470,954
Net income................................................ 69,332
Net cash distributions to Exxon Mobil Corporation......... (81,413)
--------
Exxon Mobil Corporation net investment at December 31,
1998...................................................... 458,873
Net income................................................ 65,531
Net cash distributions to Exxon Mobil Corporation......... (87,590)
--------
Exxon Mobil Corporation net investment at December 31,
1999...................................................... $436,814
========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-49
<PAGE> 169
EXXON CALIFORNIA REFINERY, TERMINAL AND RETAIL ASSETS BUSINESS
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
1. BUSINESS DESCRIPTION AND BASIS OF PRESENTATION
Exxon Mobil Corporation (ExxonMobil) operates a refinery and marketing
assets in the state of California which are collectively referred to herein as
the Exxon California Refinery, Terminal and Retail Assets Business (the
Business). The Business is engaged in the manufacturing, purchasing and
marketing of petroleum products in the state of California. Operating assets
primarily consist of: (a) the Benicia Refinery, located in the San Francisco Bay
area, including a deepwater dock, (b) a 20-inch crude pipeline and an adjacent
truck terminal for regional truck rack sales and (c) Exxon-branded retail assets
comprised of 80 marketing sites, of which ten are ExxonMobil owned and operated
and 70 are owned by ExxonMobil and leased to dealers. The retail assets owned by
ExxonMobil are primarily located in the San Francisco Bay area. In addition,
there are 260 independently owned and operated, Exxon-branded retail assets
located throughout California.
On March 2, 2000, ExxonMobil agreed to sell to Valero Refining
Company--California (a subsidiary of Valero Energy Corporation) these assets as
a result of Consent Decrees issued by the Federal Trade Commission and the state
of California, which provided that certain assets be divested by ExxonMobil in
connection with the merger of Exxon Corporation and Mobil Corporation. The
anticipated closing date for the refinery sale is May 15, 2000 with a secondary
close for the remaining assets scheduled for June 15, 2000. The accompanying
financial statements do not include any adjustments that might result from the
proposed sale.
The accompanying financial statements represent a carve-out financial
statement presentation of the Business' operations and reflect ExxonMobil
historical cost basis. The financial statements include allocations and
estimates of direct and indirect ExxonMobil administrative costs attributable to
the Business' operations. The methods by which such amounts are attributed or
allocated are deemed reasonable by management. However, these allocations and
estimates are not necessarily indicative of the costs and expenses that would
have resulted if the Business had been operated as a separate entity.
2. SUMMARY OF PRINCIPAL ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates that affect
the reported amounts of assets, liabilities, revenues and expenses and the
disclosure of contingent assets and liabilities. Actual results could differ
from these estimates.
Revenue Recognition
Revenues associated with sales of petroleum products and all other items
are recorded when title passes to the customer.
Inventories
Inventories are carried at lower of current market value or cost. Cost of
crude oil and refined products inventories is determined under the last-in,
first-out (LIFO) method. Crude oil and product purchases are reflected in the
income statement at cost. Costs include applicable purchase costs and operating
expenses but not general and administrative expenses or research and development
costs. Inventory is adjusted for any ExxonMobil consolidated LIFO effect at the
end of each period. Cost of materials and supplies is determined under the
average cost method.
F-50
<PAGE> 170
EXXON CALIFORNIA REFINERY, TERMINAL AND RETAIL ASSETS BUSINESS
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999--(CONTINUED)
Property, Plant and Equipment
Property, plant and equipment is carried at cost, less accumulated
depreciation. Depreciation, based on cost less estimated salvage value of the
asset, is determined under the straight-line method. When a major facility
depreciated on an individual basis is sold or otherwise disposed of, any gain or
loss is reflected in income. Expenditures for maintenance and repairs, including
those for refinery turnarounds, are expensed as incurred.
Assets are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amounts may not be recoverable.
ExxonMobil estimates undiscounted future cash flows to judge the recoverability
of carrying amounts.
Environmental Conservation
Liabilities for environmental conservation are recorded when it is probable
that obligations have been incurred and the amounts can be reasonably estimated.
These liabilities are not reduced by possible recoveries from third parties, and
projected cash expenditures are not discounted.
Income Taxes
Historically, the Business' results have been included in the consolidated
federal income tax returns filed by ExxonMobil. The income tax provision for
each period presented represents the current and deferred income taxes that
would have resulted if the Business were a stand-alone taxable entity filing its
own income tax returns. Accordingly, the calculation of tax provisions and
deferred taxes necessarily require certain assumptions, allocations and
estimates which management believes are reasonable to reflect the tax reporting
for the Business as a stand-alone taxpayer.
Fair Value of Financial Instruments
The reported amounts of financial instruments such as receivables and
payables approximate fair value because of their short maturities.
3. ACCOUNTING CHANGE
The American Institute of Certified Public Accountants' Statement of
Position 98-5, "Reporting on the Costs of Start-up Activities", was implemented
by ExxonMobil in the fourth quarter of 1998, effective as of January 1, 1998.
This statement requires that costs of start-up activities and organizational
costs be expensed as incurred. The cumulative effect of this accounting change
on years prior to 1998 applicable to the Business was a charge of $2.9 million
(net of $2 million income tax effect).
4. EXXON MOBIL CORPORATION NET INVESTMENT, ALLOCATIONS AND RELATED-PARTY
TRANSACTIONS
For purposes of these carve-out financial statements, payables and
receivables related to transactions between the Business and ExxonMobil, as well
as liabilities and refunds related to current income taxes, are included as a
component of the Exxon Mobil Corporation net investment. Such amounts related to
current income taxes are deemed to have been paid in cash to ExxonMobil in the
year in which the income taxes were recorded.
The Business purchased crude oil from ExxonMobil, at transfer prices that
were intended to reflect market prices, in the amounts of $755 million, $565
million and $802 million for the years ended December 31, 1999, 1998 and 1997,
respectively. The Business' sales of refined products to ExxonMobil for the
years ended December 31, 1999, 1998 and 1997, were $8 million, $14 million and
$21 million, respectively.
F-51
<PAGE> 171
EXXON CALIFORNIA REFINERY, TERMINAL AND RETAIL ASSETS BUSINESS
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999--(CONTINUED)
Throughout the period covered by the financial statements, ExxonMobil
provided the Business with certain services, including data processing, legal,
human resources and financial services and certain corporate-funded research
programs. Charges for these services were allocated based on various formulas
that incorporate indicators such as expenditures, personnel head counts and
refinery throughputs. Such charges amounted to $21 million, $20 million and $22
million for the years ended December 31, 1999, 1998 and 1997, respectively.
These amounts include research and development expenses of $3 million, $2
million and $2 million, respectively. ExxonMobil uses a centralized cash
management system under which cash receipts of the Business are remitted to
ExxonMobil and cash disbursements of the Business are funded by ExxonMobil. No
interest has been charged or credited on transactions with ExxonMobil.
5. EMPLOYEE BENEFIT PLANS
ExxonMobil has noncontributory defined benefit pension plans covering
substantially all employees of the Business. Benefits under these plans are
based primarily upon years of service and final earnings. The funding policy for
all plans provides that payments to the pension trusts shall be equal to the
minimum funding requirements of the Employee Retirement and Income Security Act,
plus such additional amounts as may be approved.
ExxonMobil also has defined benefit retiree life and health insurance plans
covering most of the Business' employees upon their retirement. Health benefits
are primarily provided through comprehensive hospital, surgical and major
medical benefit provisions subject to various cost-sharing features.
For the purposes of these carve-out financial statements, the Business is
considered to be participating in multiemployer benefit plans of ExxonMobil.
For 1999, 1998 and 1997, the Business' allocated share of compensation
expense related to these plans was approximately $3 million for each of the
three years.
6. INCOME TAXES
Income tax provisions and related assets and liabilities are determined on
a stand-alone basis (Note 2).
Income tax provision consists of the following:
<TABLE>
<CAPTION>
1999 1998 1997
---------------------------- ---------------------------- ----------------------------
CURRENT DEFERRED TOTAL CURRENT DEFERRED TOTAL CURRENT DEFERRED TOTAL
------- -------- ------- ------- -------- ------- ------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Federal.................... $26,035 $ 9,330 $35,365 $27,098 $11,958 $39,056 $16,571 $12,048 $28,619
State...................... 7,213 3,445 10,658 6,808 2,453 9,261 643 7,287 7,930
------- ------- ------- ------- ------- ------- ------- ------- -------
Total.............. $33,248 $12,775 $46,023 $33,906 $14,411 $48,317 $17,214 $19,335 $36,549
======= ======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
A reconciliation of federal statutory tax rate (35%) to total provisions
follows:
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Statutory rate applied to income before income taxes.... $39,044 $42,201 $31,340
State income taxes (net of federal income tax benefit
and California business tax credits).................. 6,928 6,019 5,154
Other................................................... 51 97 55
------- ------- -------
Total provisions.............................. $46,023 $48,317 $36,549
======= ======= =======
</TABLE>
F-52
<PAGE> 172
EXXON CALIFORNIA REFINERY, TERMINAL AND RETAIL ASSETS BUSINESS
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999--(CONTINUED)
Deferred tax assets and liabilities resulted from the following temporary
differences as of December 31, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
------- -------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Accrued liabilities....................................... $ 3,898 $ 1,519
------- -------
Total deferred tax assets......................... 3,898 1,519
------- -------
Deferred tax liabilities:
Depreciation.............................................. 75,524 62,390
Inventory................................................. 2,935 3,154
Other..................................................... 12,240 10,001
------- -------
Total deferred tax liabilities.................... 90,699 75,545
------- -------
Net deferred tax liabilities...................... $86,801 $74,026
======= =======
</TABLE>
7. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
1999 1998
------- -------
(IN THOUSANDS)
<S> <C> <C>
Crude oil................................................... $12,892 $ 7,872
Refined products............................................ 17,416 16,111
Materials and supplies...................................... 11,372 14,235
------- -------
Total inventories................................. $41,680 $38,218
======= =======
</TABLE>
The LIFO method accounted for 73% and 63% of total inventory at December
31, 1999 and 1998, respectively. The aggregate replacement cost of inventories
was estimated to exceed their LIFO carrying values by $115 million and $39
million at December 31, 1999 and 1998, respectively.
8. OTHER CURRENT ASSETS
Other current assets consist of the following:
<TABLE>
<CAPTION>
1999 1998
------ -------
(IN THOUSANDS)
<S> <C> <C>
Prepaid expenses............................................ $ 7,853
Catalyst.................................................... $2,699 1,937
Other....................................................... 1,223 334
------ -------
Total............................................. $3,922 $10,124
====== =======
</TABLE>
F-53
<PAGE> 173
EXXON CALIFORNIA REFINERY, TERMINAL AND RETAIL ASSETS BUSINESS
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999--(CONTINUED)
9. PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
1999 1998
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Refining.................................................... $811,868 $788,295
Marketing................................................... 84,300 83,990
-------- --------
896,168 872,285
Less--accumulated depreciation and amortization............. 419,481 393,357
-------- --------
Total property, plant and equipment, net.......... $476,687 $478,928
======== ========
</TABLE>
The depreciation lives used in computing the annual provision for
depreciation are substantially as follows:
<TABLE>
<S> <C>
Refining............................................... 25-33 years
Marketing.............................................. 3-21 years
</TABLE>
10. LEASES
The Business leases a wide variety of facilities and equipment under
operating leases, including office equipment and transportation equipment. Rent
expense approximated $5 million, $4 million and $3 million for December 31,
1999, 1998 and 1997, respectively.
11. CONTINGENCIES AND COMMITMENTS
ExxonMobil is the subject of, or party to, a number of pending or
threatened legal actions, contingencies and commitments relating to the Business
involving a variety of matters, including laws and regulations relating to the
environment. The more significant of these matters are discussed below.
Environmental Matters
The Business is subject to federal, state and local environmental laws and
regulations that in the future may require ExxonMobil to take action to correct
or reduce the effects on the environment of prior disposal or release of
chemical or petroleum substances, including MTBE, by ExxonMobil or other
parties. These laws generally provide for control of pollutants released into
the environment and require responsible parties to undertake remediation of
hazardous waste disposal sites. Penalties may be imposed for noncompliance. At
December 31, 1999 and 1998, accrued liabilities for remediation totaled $11
million and $4 million, respectively. Environmental expenses were $11 million,
$5 million and $3 million during the years ended December 31, 1999, 1998 and
1997, respectively, and are included in operating expenses. It is not presently
possible to estimate the ultimate amount of all remediation costs that might be
incurred or the penalties that might be imposed.
For a number of years, the Business has made substantial capital
expenditures to maintain compliance with various laws relating to the
environment at existing facilities. The Business anticipates making additional
such expenditures in the future; however, the exact amounts and timing of such
expenditures are uncertain because of the continuing evolution of specific
regulatory requirements.
UNOCAL Patent Litigation
ExxonMobil and four other refiners filed a lawsuit against Unocal
Corporation (UNOCAL) in Los Angeles, California, seeking a determination that a
UNOCAL patent on certain gasoline compositions
F-54
<PAGE> 174
EXXON CALIFORNIA REFINERY, TERMINAL AND RETAIL ASSETS BUSINESS
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999--(CONTINUED)
(commonly referred to as the "'393 patent") is invalid and unenforceable.
UNOCAL's '393 patent potentially covers a substantial portion of the
reformulated gasoline compositions required by the CARB Phase II regulations
that went into effect in March 1996. In 1997, a federal court found that the
refiners had not proven the '393 patent to be invalid or unforceable and,
furthermore, found the reasonable royalty for infringement to be 5.75 cents per
gallon. The case was appealed and, in March 2000, the Court of Appeals for the
Federal Circuit affirmed. In April 2000, ExxonMobil and the other four refiners
filed a petition for reconsideration and for rehearing en banc with the
appellate court. The ultimate outcome of the litigation is uncertain. ExxonMobil
has retained, and will continue to retain, even after transfer of the Business
to Valero Refining Company--California, any and all liability associated with
the UNOCAL patent litigation arising prior to the date of transfer of the
assets. For operations subsequent to the transfer of the Business, Valero
Refining Company--California will be responsible for any UNOCAL patent exposure.
Other Matters
Claims have been made against ExxonMobil relating to the Business in other
pending lawsuits, the outcome of which is not expected to have a materially
adverse effect on the Business' operations, cash flows or financial position.
12. RECENTLY ISSUED STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board released Statement
No. 133, "Accounting for Derivative Instruments and Hedging Activities
Information." As amended by Statement No. 137 issued in June 1999, this
statement, which must be adopted no later than January 1, 2001 for calendar-year
companies such as the Business, establishes accounting and reporting standards
for derivative instruments. The statement requires that an entity recognize all
derivatives as either assets or liabilities in the financial statements and
measure those instruments at fair value, and it defines the accounting for
changes in the fair value of the derivatives depending on the intended use of
the derivative. Adoption of this statement is not expected to have a material
effect upon the Business' operations or financial condition.
F-55
<PAGE> 175
EXXON CALIFORNIA REFINERY, TERMINAL AND RETAIL ASSETS BUSINESS
BALANCE SHEET
MARCH 31, 2000 AND DECEMBER 31, 1999
<TABLE>
<CAPTION>
MARCH 31,
2000 DECEMBER 31,
(UNAUDITED) 1999
------------- --------------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Current assets:
Cash...................................................... $ 99 $ 4
Receivables............................................... 44,998 41,039
Inventories............................................... 30,345 41,680
Other current assets...................................... 3,224 3,922
---------- ----------
Total current assets.............................. 78,666 86,645
Property, plant and equipment, net.......................... 475,450 476,687
Prepaids and deferred charges............................... 9,901 8,422
Other noncurrent assets..................................... 8,208 7,360
---------- ----------
Total assets...................................... $ 572,225 $ 579,114
========== ==========
LIABILITIES AND EXXON MOBIL CORPORATION NET INVESTMENT
Current liabilities:
Accounts payable.......................................... $ 37,768 $ 23,949
Payroll and benefits payable.............................. 2,080 2,080
Taxes other than income taxes............................. 14,856 17,481
Deferred income tax....................................... 1,147 1,147
Other current liabilities................................. 6,429 5,932
---------- ----------
Total current liabilities......................... 62,280 50,589
Long-term deferred income taxes............................. 88,560 85,654
Deferred credits and other liabilities...................... 11,503 6,057
---------- ----------
Total liabilities................................. 162,343 142,300
Exxon Mobil Corporation net investment...................... 409,882 436,814
---------- ----------
Total liabilities and Exxon Mobil Corporation net
investment...................................... $ 572,225 $ 579,114
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-56
<PAGE> 176
EXXON CALIFORNIA REFINERY, TERMINAL AND RETAIL ASSETS BUSINESS
STATEMENT OF INCOME
THREE MONTHS ENDED MARCH 31, 2000 AND 1999
<TABLE>
<CAPTION>
2000 1999
-------- --------
(IN THOUSANDS)
(UNAUDITED)
<S> <C> <C>
Revenues:-
Sales and other operating revenue, including excise taxes:
Unrelated parties...................................... $619,358 $233,106
Related parties........................................ 3,979 1,497
-------- --------
623,337 234,603
-------- --------
Costs and expenses:
Crude oil and product purchases........................... 397,081 79,006
Operating expenses........................................ 39,158 86,966
Selling, general and administrative expenses.............. 7,501 7,722
Depreciation and amortization............................. 6,723 6,496
Excise taxes.............................................. 128,538 108,337
Taxes other than income taxes............................. 2,758 2,647
Loss on property, plant and equipment sales............... 45 203
-------- --------
Total costs and expenses.......................... 581,804 291,377
-------- --------
Income (loss) before income taxes........................... 41,533 (56,774)
Income taxes................................................ 16,923 (23,133)
-------- --------
Net income (loss)........................................... $ 24,610 $(33,641)
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-57
<PAGE> 177
EXXON CALIFORNIA REFINERY, TERMINAL AND RETAIL ASSETS BUSINESS
STATEMENT OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2000 AND 1999
<TABLE>
<CAPTION>
2000 1999
-------- --------
(IN THOUSANDS)
(UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:-
Net income (loss)......................................... $ 24,610 $(33,641)
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation and amortization.......................... 6,723 6,496
Deferred income taxes.................................. 2,906 2,813
Loss on sale of property, plant and equipment.......... 45 203
Increase in accounts receivable........................ (3,959) (24,740)
Decrease (increase) in inventories..................... 11,335 (3,530)
Decrease in other current assets....................... 698 9,656
Increase in prepaids and deferred charges.............. (1,479) (2,348)
Increase in other noncurrent assets.................... (848) (262)
Increase in accounts payable and accrued liabilities... 14,316 6,984
Decrease in taxes other than income.................... (2,625) (9,004)
Increase in deferred credits and other liabilities..... 5,446 4,038
-------- --------
Net cash provided by (used in) operating
activities....................................... 57,168 (43,335)
-------- --------
Cash flows from investing activities:
Additions to property, plant and equipment................ (5,531) (9,498)
-------- --------
Net cash used in investing activities............. (5,531) (9,498)
-------- --------
Cash flows from financing activities:
Net cash advances from (distributions to)
Exxon Mobil Corporation................................ (51,542) 52,787
-------- --------
Net cash provided by (used in) financing
activities....................................... (51,542) 52,787
-------- --------
Net increase (decrease) in cash............................. 95 (46)
Cash at beginning of period................................. 4 246
-------- --------
Cash at end of period....................................... $ 99 $ 200
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-58
<PAGE> 178
EXXON CALIFORNIA REFINERY, TERMINAL AND RETAIL ASSETS BUSINESS
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2000
1. BUSINESS DESCRIPTION AND BASIS OF PRESENTATION
Exxon Mobil Corporation (ExxonMobil) operates a refinery and marketing
assets in the state of California which are collectively referred to herein as
the Exxon California Refinery, Terminal and Retail Assets Business (the
Business). The Business is engaged in the manufacturing, purchasing and
marketing of petroleum products in the state of California. Operating assets
primarily consist of: (a) the Benicia Refinery, located in the San Francisco Bay
area, including a deepwater dock, (b) a 20-inch crude pipeline and an adjacent
truck terminal for regional truck rack sales and (c) Exxon-branded retail assets
comprised of 80 marketing sites, of which ten are ExxonMobil owned and operated
and 70 are owned by ExxonMobil and leased to dealers. The retail assets owned by
ExxonMobil are primarily located in the San Francisco Bay area. In addition,
there are 260 independently owned and operated, Exxon-branded retail assets
located throughout California.
On March 2, 2000, ExxonMobil agreed to sell to Valero Refining
Company -- California (a subsidiary of Valero Energy Corporation) these assets
as a result of Consent Decrees issued by the Federal Trade Commission and the
state of California, which provided that certain assets be divested by
ExxonMobil in connection with the merger of Exxon Corporation and Mobil
Corporation. The closing date for the refinery sale was May 15, 2000 with a
secondary close for the remaining assets scheduled for June 15, 2000. The
accompanying unaudited financial statements do not include any adjustments that
might result from the proposed sale.
The accompanying unaudited financial statements represent a carve-out
financial statement presentation of the Business' operations and reflect
ExxonMobil historical cost basis. The unaudited financial statements include
allocations and estimates of direct and indirect ExxonMobil administrative costs
attributable to the Business' operations. The methods by which such amounts are
attributed or allocated are deemed reasonable by management. However, these
allocations and estimates are not necessarily indicative of the costs and
expenses that would have resulted if the Business had been operated as a
separate entity.
These unaudited financial statements should be read in the context of the
carve-out financial statements and notes thereto included in Valero Energy
Corporation's Form 8-K/A filed with the Securities and Exchange Commission. In
the opinion of management, the information furnished herein reflects all known
accruals and adjustments necessary for a fair statement of the results for the
periods reported herein. All such adjustments are of a normal recurring nature.
2. EXXON MOBIL CORPORATION NET INVESTMENT, ALLOCATIONS AND RELATED-PARTY
TRANSACTIONS
For purposes of these unaudited carve-out financial statements, payables
and receivables related to transactions between the Business and ExxonMobil, as
well as liabilities and refunds related to current income taxes, are included as
a component of the Exxon Mobil Corporation net investment. Such amounts related
to current income taxes are deemed to have been paid in cash to ExxonMobil in
the year in which the income taxes were recorded. ExxonMobil uses a centralized
cash management system under which cash receipts of the Business are remitted to
ExxonMobil and cash disbursements of the Business are funded by ExxonMobil. No
interest has been charged or credited on transactions with ExxonMobil.
F-59
<PAGE> 179
EXXON CALIFORNIA REFINERY, TERMINAL AND RETAIL ASSETS BUSINESS
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
3. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
--------- ------------
(IN THOUSANDS)
<S> <C> <C>
Crude oil................................................... $ 7,481 $12,892
Refined products............................................ 10,980 17,416
Materials and supplies...................................... 11,884 11,372
------- -------
Total inventories................................. $30,345 $41,680
======= =======
</TABLE>
4. CONTINGENCIES AND COMMITMENTS
ExxonMobil is the subject of, or party to, a number of pending or
threatened legal actions, contingencies and commitments relating to the Business
involving a variety of matters, including laws and regulations relating to the
environment. The more significant of these matters are discussed below.
Environmental Matters
The Business is subject to federal, state and local environmental laws and
regulations that in the future may require ExxonMobil to take action to correct
or reduce the effects on the environment of prior disposal or release of
chemical or petroleum substances, including MTBE, by ExxonMobil or other
parties. These laws generally provide for control of pollutants released into
the environment and require responsible parties to undertake remediation of
hazardous waste disposal sites. Penalties may be imposed for noncompliance. At
March 31, 2000 and December 31, 1999, accrued liabilities for remediation
totaled $11 million and $11 million, respectively.
For a number of years, the Business has made substantial capital
expenditures to maintain compliance with various laws relating to the
environment at existing facilities. The Business anticipates making additional
such expenditures in the future; however, the exact amounts and timing of such
expenditures are uncertain because of the continuing evolution of specific
regulatory requirements.
UNOCAL Patent Litigation
ExxonMobil and four other refiners filed a lawsuit against Unocal
Corporation (UNOCAL) in Los Angeles, California, seeking a determination that a
UNOCAL patent on certain gasoline compositions (commonly referred to as the "
'393 patent") is invalid and unenforceable. UNOCAL's '393 patent potentially
covers a substantial portion of the reformulated gasoline compositions required
by the CARB Phase II regulations that went into effect in March 1996. In 1997, a
federal court found that the refiners had not proven the '393 patent to be
invalid or unforceable and, furthermore, found the reasonable royalty for
infringement to be 5.75 cents per gallon. The case was appealed and, in March
2000, the Court of Appeals for the Federal Circuit affirmed. In April 2000,
ExxonMobil and the other four refiners filed a petition for reconsideration and
for rehearing en banc with the appellate court. In May 2000, the federal appeals
court denied this petition. ExxonMobil is currently reviewing its options and
the ultimate outcome of the litigation is uncertain. ExxonMobil has retained,
and will continue to retain, even after transfer of the Business to Valero
Refining Company -- California, any and all liability associated with the UNOCAL
patent litigation arising prior to the date of transfer of the assets. For
operations subsequent to the transfer of the Business, Valero Refining
Company -- California will be responsible for any UNOCAL patent exposure.
F-60
<PAGE> 180
EXXON CALIFORNIA REFINERY, TERMINAL AND RETAIL ASSETS BUSINESS
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Other Matters
Claims have been made against ExxonMobil relating to the Business in other
pending lawsuits, the outcome of which is not expected to have a materially
adverse effect on the Business' operations, cash flows or financial position.
5. RECENTLY ISSUED STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board released Statement
No. 133, "Accounting for Derivative Instruments and Hedging Activities
Information." As amended by Statement No. 137 issued in June 1999, this
statement, which must be adopted no later than January 1, 2001 for calendar-year
companies such as the Business, establishes accounting and reporting standards
for derivative instruments. The statement requires that an entity recognize all
derivatives as either assets or liabilities in the financial statements and
measure those instruments at fair value, and it defines the accounting for
changes in the fair value of the derivatives depending on the intended use of
the derivative. Adoption of this statement is not expected to have a material
effect upon the Business' operations or financial condition.
F-61
<PAGE> 181
Prospectus
$1,300,000,000
[VALERO ENERGY CORPORATION LOGO]
Senior Debt Securities
Junior Subordinated Debt Securities
Common Stock
Stock Purchase Contracts
Stock Purchase Units
VEC Trust I
VEC Trust II
TRUST PREFERRED SECURITIES FULLY AND UNCONDITIONALLY GUARANTEED,
AS DESCRIBED HEREIN, BY
VALERO ENERGY CORPORATION
ONE VALERO PLACE, SAN ANTONIO, TEXAS 78212 (210) 370-2000
---------------------
<TABLE>
<S> <C>
THE TRUSTS
We will provide the specific VEC Trust I and VEC Trust II are subsidiaries of Valero
terms of the securities in one or more Energy Corporation. They exist for the purpose of issuing
supplements to this prospectus. You trust preferred securities.
should read this prospectus and the THE OFFERING
related prospectus supplement Trust Preferred Securities
carefully before you invest in our The trusts may offer from time to time trust preferred
securities. This prospectus may not be securities representing undivided beneficial interests in
used to offer and sell our securities the assets of the issuing trust. The trusts will use the
unless accompanied by a prospectus proceeds from the sale of their trust preferred securities
supplement. to purchase Valero's debt securities.
Debt Securities
Valero may issue from time to time its debt securities to
the trusts. These debt securities may be distributed to
holders of the trust preferred securities if and when a
trust is dissolved. The debt securities may be convertible
into shares of Valero's common stock. The debt securities
will be unsecured, and can be either pari passu with or
subordinate and junior in right of payment to Valero's
senior debt. We will indicate the type of debt securities to
be issued in a prospectus supplement.
Guarantee
Valero will guarantee the trusts' payment obligations on the
trust preferred securities as described in this prospectus
and the prospectus supplement. We will provide the specific
terms of the guarantee in a prospectus supplement.
Stock Purchase Contracts
Valero may issue stock purchase contracts obligating holders
to purchase from Valero a specified number of shares of
common stock in the future. The stock purchase contracts may
be issued separately or as a part of stock purchase units
consisting of a stock purchase contract and debt securities,
trust preferred securities or debt obligations of third
parties, including U.S. treasury securities, securing the
holders' obligations to purchase common stock under the
stock purchase contracts. We will provide the specific terms
of the stock purchase contracts and stock purchase units in
a prospectus supplement.
Our common stock is listed on the New York Stock Exchange
under the symbol "VLO."
</TABLE>
---------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this prospectus is May 30, 2000
<PAGE> 182
TABLE OF CONTENTS
<TABLE>
<S> <C>
About This Prospectus....................................... 3
Summary Information -- Q&A.................................. 4
About Valero Energy Corporation............................. 6
Forward-Looking Information................................. 7
Use of Proceeds............................................. 8
Accounting Treatment Relating to Trust Securities........... 9
Ratio of Earnings to Fixed Charges.......................... 9
The Trusts.................................................. 9
Description of the Trust Preferred Securities............... 11
Description of the Trust Preferred Securities Guarantee..... 23
Description of the Debt Securities.......................... 26
Relationship Among the Trust Preferred Securities, the Debt
Securities and the Guarantee.............................. 34
Description of Stock Purchase Contracts and Stock Purchase
Units..................................................... 36
Description of Capital Stock................................ 36
Plan of Distribution........................................ 40
Legal Matters............................................... 41
Experts..................................................... 41
Where You Can Find More Information......................... 41
Information We Incorporate by Reference..................... 42
</TABLE>
---------------------
THIS PROSPECTUS IS PART OF A REGISTRATION STATEMENT WE FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. YOU SHOULD RELY ONLY ON THE INFORMATION WE
HAVE PROVIDED OR INCORPORATED BY REFERENCE IN THIS PROSPECTUS OR ANY PROSPECTUS
SUPPLEMENT. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH ADDITIONAL OR
DIFFERENT INFORMATION. WE ARE NOT MAKING AN OFFER OF THESE SECURITIES IN ANY
JURISDICTION WHERE THE OFFER IS NOT PERMITTED. YOU SHOULD ASSUME THAT THE
INFORMATION IN THIS PROSPECTUS OR ANY PROSPECTUS SUPPLEMENT IS ACCURATE ONLY AS
OF THE DATE ON THE FRONT OF THE DOCUMENT AND THAT ANY INFORMATION WE HAVE
INCORPORATED BY REFERENCE IS ACCURATE ONLY AS OF THE DATE OF THE DOCUMENT
INCORPORATED BY REFERENCE.
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<PAGE> 183
ABOUT THIS PROSPECTUS
This prospectus is part of a registration statement we have filed with the
Securities and Exchange Commission using a "shelf" registration process. The
registration statement also includes a prospectus under which Valero may offer
from time to time its senior debt securities, subordinated debt securities,
shares of common or preferred stock and warrants. Under the shelf process, we
may offer any combination of the securities described in these two prospectuses
in one or more offerings with a total initial offering price of up to
$1,300,000,000. This prospectus provides you with a general description of the
trust preferred securities, the debt securities to be issued by Valero, the
Valero common stock into which the debt securities may be convertible or which
may be issued pursuant to Valero's stock purchase contracts, Valero's guarantee,
Valero's stock purchase contracts and Valero's stock purchase units. Each time
we use this prospectus to offer securities, we will provide a prospectus
supplement that will contain specific information about the terms of that
offering. The prospectus supplement may also add, update or change information
contained in this prospectus. Please carefully read this prospectus and the
prospectus supplement together with the additional information described under
the heading "Where You Can Find More Information."
We have not included separate financial statements of the trusts in this
prospectus. We do not consider that such financial statements are material to
holders of the trust preferred securities because:
- each trust is a newly created special purpose entity
- neither trust has any operating history or independent operations
- neither trust is engaged in, nor will it engage in, any activity other
than issuing trust preferred and trust common securities, investing in
and holding Valero's debt securities and engaging in related activities
Furthermore, the combination of Valero's obligations under the debt
securities, the associated indentures, the declarations of trust and the
guarantees provide a full, irrevocable and unconditional guarantee of payments
of distributions and other amounts due on the trust preferred securities. In
addition, we do not expect that the trusts will file reports with the SEC under
the Securities Exchange Act of 1934.
References in this prospectus to the terms "we," "us" or "Valero" or other
similar terms mean Valero Energy Corporation, unless we state otherwise or the
context indicates otherwise.
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SUMMARY INFORMATION -- Q&A
This summary provides a brief overview of the key aspects of the trusts,
the trust preferred securities, the stock purchase contracts and the stock
purchase contract units. The term "trust" refers to the VEC Trust for the
specific transaction. This summary does not contain all information that is
important to you. We encourage you to read carefully this prospectus and the
prospectus supplement to understand fully the terms of the securities that are
important to you in making a decision about whether to invest.
WHAT ARE THE TRUST PREFERRED SECURITIES?
Each trust preferred security represents an undivided beneficial interest
in the assets of a trust. Each trust preferred security will entitle the holder
to receive cash distributions as described in this prospectus and the prospectus
supplement.
WHO ARE THE TRUSTS?
Each of VEC Trust I and VEC Trust II is a Delaware business trust. The
principal office of each trust is One Valero Place, San Antonio, TX 78212 and
the telephone number is (210) 370-2000.
Valero will own all common securities of each trust. Each trust will use
the proceeds from the sale of the trust preferred securities and the trust
common securities to purchase a series of Valero's debt securities with the same
financial terms as the trust preferred and trust common securities. The debt
securities may be subordinated debt securities or senior debt securities. We
will specify the type of debt security in a prospectus supplement. The trusts
exist only to issue the trust preferred and trust common securities, invest in
and hold Valero's debt securities and engage in related activities.
There are five trustees of each trust. Three of them, referred to as
regular trustees, are officers or employees of Valero. The Bank of New York will
act as the property trustee of each trust, and The Bank of New York (Delaware)
will act as the Delaware trustee of each trust.
We will provide in the prospectus supplement additional information about
the issuing trust.
WHEN WILL YOU RECEIVE DISTRIBUTIONS ON THE TRUST PREFERRED SECURITIES?
The only source of cash to make payments on the trust preferred securities
issuable by each trust will be payments on the debt securities it purchases from
Valero.
If you purchase trust preferred securities of a trust, you are entitled to
receive cash distributions at the rate specified in the prospectus supplement.
Unless we inform you otherwise in the prospectus supplement, distributions will
accumulate from the date the trust issues the trust preferred securities and
will be paid in arrears on the dates we specify in the prospectus supplement. We
may, however, defer distributions as described below.
WHEN WILL PAYMENT OF YOUR DISTRIBUTIONS BE DEFERRED?
If Valero defers interest payments on the debt securities held by a trust,
the trust will defer distributions on the related trust preferred securities. We
will describe in the prospectus supplement any rights to defer distributions on
the trust preferred securities by extending the interest payment period on the
debt securities.
During any deferral period, except as described on page 12, Valero will not
be permitted to:
- declare or pay a dividend on its shares of capital stock
- except in limited circumstances, redeem, purchase, acquire or make a
distribution or liquidation payment on any of its shares of capital stock
- make a payment on or repay, repurchase or redeem any debt that ranks
equally with or junior to the debt securities or
- make a guarantee payment on any guarantee by Valero of the debt of any of
its subsidiaries if that guarantee ranks equally with or junior to the
debt securities
WHAT IS VALERO'S GUARANTEE OF THE TRUST PREFERRED SECURITIES?
Under each trust preferred securities guarantee, to the extent provided
herein, Valero will irrevocably and unconditionally guarantee that
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<PAGE> 185
if it makes a payment on the debt securities to the relevant trust but, for any
reason, the trust does not make the corresponding distribution or redemption
payment to the holders of the related trust preferred securities, then Valero
will make the payments directly to the holders of the trust preferred
securities.
The following obligations of Valero taken together will provide a full and
unconditional guarantee of payments due on the trust preferred securities:
- its obligations to make payments on the debt securities
- its obligations under the trust preferred securities guarantee and its
obligations under the amended and restated declaration of trust of the
trust, which establishes the terms of the trust
We will provide the specific terms of the guarantee in a prospectus supplement.
WHEN COULD THE DEBT SECURITIES BE DISTRIBUTED TO YOU?
Unless we inform you otherwise in the prospectus supplement, the holder of
the trust common securities has the right to dissolve the trust at any time. If
the trust is dissolved, after satisfaction of the trust's creditors, the trust
may distribute debt securities on a proportionate basis to the holders of trust
preferred and trust common securities.
WILL THE TRUST PREFERRED SECURITIES BE LISTED ON A STOCK EXCHANGE?
If specified in the prospectus supplement, we will apply to list the trust
preferred securities on the New York Stock Exchange.
WILL HOLDERS OF THE TRUST PREFERRED SECURITIES HAVE ANY VOTING RIGHTS?
Generally, the holders of the trust preferred securities will not have any
voting rights.
WHAT ARE THE STOCK PURCHASE CONTRACTS?
The stock purchase contracts are contracts obligating holders to purchase
from Valero, and Valero to sell to the holders, a specified number of shares of
Valero's common stock at a future date or dates. The price per share of common
stock and the number of shares of common stock may be fixed at the time the
stock purchase contracts are issued or may be determined by reference to a
specific formula set forth in the stock purchase contracts.
WHAT ARE THE STOCK PURCHASE UNITS?
Each stock purchase unit consists of a stock purchase contract and debt
securities, trust preferred securities or debt obligations of third parties,
including U.S. treasury securities, which secure the holders' obligations to
purchase the common stock under the stock purchase contract.
5
<PAGE> 186
ABOUT VALERO ENERGY CORPORATION
We are one of the largest and most geographically diverse independent
petroleum refining and marketing companies in the United States. As of March 31,
2000, we owned five refineries in Texas, Louisiana and New Jersey, providing us
with core operations on both the Gulf Coast and the East Coast. These refineries
are located in Corpus Christi, Houston, and Texas City in Texas, Krotz Springs,
Louisiana and Paulsboro, New Jersey. In addition, on March 2, 2000, we entered
into an agreement to purchase Exxon Mobil Corporation's Benicia, California
refinery and Exxon-branded California retail assets, which consist of
approximately 80 service station facilities and branded supplier relationships
with approximately 260 Exxon-branded service stations, for a purchase price of
$895 million plus the value of refinery inventories acquired in the transaction.
We believe the acquisition of these assets will provide us with a significant
presence on the West Coast and extends our geographic reach from coast to coast.
The acquisition of the Benicia refinery and the branded supplier relationships
closed on May 15, 2000, and the acquisition of the service station facilities is
expected to close on or about June 15, 2000. The acquisition of the Benicia
refinery increased our throughput capacity from approximately 790,000 barrels
per day to approximately 950,000 barrels per day.
We produce premium, environmentally clean products such as reformulated
gasoline, low sulfur diesel and oxygenates and are able to produce gasoline
meeting the specifications of the California Air Resources Board, or CARB
gasoline. We also produce a substantial slate of middle distillates, jet fuel
and petrochemicals. We have distinguished our company among independent refiners
by cost effectively upgrading our refineries to not only increase output but
also increase overall refining complexity and flexibility, enhancing our ability
to process lower cost feedstocks into higher value-added premium products. We
process a wide slate of feedstocks including medium sour crude oils, heavy sweet
crudes and residual fuel oils, or resid, which can typically be purchased at a
discount to West Texas Intermediate, a benchmark crude oil. Excluding the
production of the Benicia refinery, over 55% of our total gasoline production is
reformulated gasoline, which sells at a premium over conventional grades of
gasoline. The Benicia refinery produces approximately 110,000 barrels per day of
gasoline, approximately 95% of which is CARB gasoline. Excluding the production
of the Benicia refinery, we also produce over 75% of our distillate slate as
low-sulfur diesel and jet fuel, which sell for a premium over high-sulfur
heating oil. In addition to our feedstock and product advantages, we have
synergies among our Gulf Coast refineries which allow us to transfer
intermediate feedstocks, such as deasphalted oil and atmospheric tower bottoms,
among the Texas City, Houston and Corpus Christi refineries. Our products are
marketed in 35 states as well as to select export markets.
We were incorporated in Delaware in 1981 as Valero Refining and Marketing
Company, a wholly owned subsidiary of our predecessor company. On July 31, 1997,
our stock was distributed, or spun off, by our predecessor company to its
shareholders, and we changed our name to Valero Energy Corporation. Our common
stock is listed for trading on the New York Stock Exchange under the symbol
"VLO."
We have our principal executive offices at One Valero Place, San Antonio,
Texas, 78212, and our telephone number is (210) 370-2000.
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<PAGE> 187
FORWARD-LOOKING INFORMATION
This prospectus, including the information we incorporate by reference,
contains certain estimates, predictions, projections and other "forward-looking
statements" (as defined in 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 our current judgment
regarding the direction of our business, actual results will almost always vary,
sometimes materially, from any estimates, predictions, projections, assumptions,
or other future performance suggested herein. These forward-looking statements
can generally be identified by the words "anticipate," "believe," "expect,"
"plan," "intend," "estimate," "project," "budget," "forecast," "will," "could,"
"should," "may" and similar expressions. These forward-looking statements
include, among other things, statements regarding:
- the acquisition of Exxon Mobil Corporation's Benicia, California refinery
and Exxon-branded California retail assets and our results of operations
following the acquisition
- future refining margins, including gasoline and heating oil margins
- the expected cost of feedstocks, including crude oil discounts, and
refining products
- anticipated levels of crude oil and refined product inventories
- our anticipated level of capital investments, including deferred
turnaround and catalyst costs and capital expenditures for regulatory
compliance and other purposes, and the effect of these capital
investments on our results of operations
- refinery utilization rates
- anticipated trends in the supply and demand for crude oil feedstocks and
refined products in the United States and elsewhere
- expectations regarding environmental and other regulatory initiatives,
and
- the effect of general economic and other conditions on refining industry
fundamentals
We have based our forward-looking statements on our beliefs and assumptions
derived from information available to us at the time the statements are made.
Differences between actual results and any future performance suggested in our
forward-looking statements or projections could result from a variety of
factors, including the following:
- the domestic and foreign supplies of refined products such as gasoline,
diesel, heating oil and petrochemicals
- the domestic and foreign supplies of crude oil and other feedstocks
- the ability of the members of the Organization of Petroleum Exporting
Countries to agree to and maintain oil price and production controls
- the level of consumer demand, including seasonal fluctuations
- refinery overcapacity or undercapacity
- the actions taken by competitors, including both pricing and the
expansion and retirement of refining capacity in response to market
conditions
- environmental and other regulations at both the state and federal levels
and in foreign countries
- political conditions in oil producing regions, including the Middle East
- the level of foreign imports
- accidents or other unscheduled shutdowns affecting our plants, machinery,
pipelines or equipment, or those of our suppliers or customers
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<PAGE> 188
- changes in the cost or availability of transportation for feedstocks and
refined products
- write-downs of inventories caused by a material decline in petroleum
prices
- the price, availability and acceptance of alternative fuels
- cancellation of or failure to implement planned capital projects and
realize the various assumptions and benefits projected for such projects
- irregular weather, which can unforeseeably affect the price or
availability of feedstocks and refined products
- rulings, judgments, or settlements in litigation or other legal matters,
including unexpected environmental remediation costs in excess of any
reserves and claims of product liability
- the introduction or enactment of federal or state legislation which may
adversely affect our business or operations
- changes in the credit ratings assigned to our debt securities and trade
credit, and
- overall economic conditions
We caution you that any one of these factors, or a combination of these
factors, could materially affect our future results of operations and whether
our forward-looking statements ultimately prove to be accurate. These
forward-looking statements are not guarantees of our future performance, and our
actual results and future performance may differ materially from those suggested
in our forward-looking statements. When considering these forward-looking
statements, you should keep in mind the factors described under the heading
"Risk Factors" and other cautionary statements in this prospectus and the
documents we have incorporated by reference. We do not intend to update these
statements unless the securities laws require us to do so.
All subsequent written and oral forward-looking statements attributable to
us or persons acting on our behalf are expressly qualified in their entirety by
the foregoing. We undertake 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 of this report or to reflect the
occurrence of unanticipated events.
USE OF PROCEEDS
Unless we inform you otherwise in the prospectus supplement, we expect to
use the net proceeds from the sale of securities for general corporate purposes.
These purposes may include, but are not limited to:
- equity investments in existing and future projects
- acquisitions
- working capital
- capital expenditures
- repayment or refinancing of debt or other corporate obligations
- repurchases and redemptions of securities
Pending any specific application, we may initially invest funds in short-term
marketable securities or apply them to the reduction of short-term indebtedness.
Each trust will use all proceeds from the sale of the trust preferred
securities and the trust common securities to purchase Valero's debt securities.
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<PAGE> 189
ACCOUNTING TREATMENT RELATING TO TRUST SECURITIES
The financial statements of any trust issuing securities will be
consolidated with our financial statements, with the trust preferred securities
shown on our consolidated financial statements as Valero-obligated mandatorily
redeemable preferred capital trust securities of a subsidiary trust holding
solely Valero senior notes. Our financial statements will include a footnote
that discloses, among other things, that the assets of the trust consist of our
debt securities and will specify the designation, principal amount, interest
rate and maturity date of the debt securities.
RATIO OF EARNINGS TO FIXED CHARGES
The following table sets forth the ratio of earnings to fixed charges for
the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
MARCH 31, YEARS ENDED DECEMBER 31,
------------- -------------------------------------
2000 1999 1999 1998 1997 1996 1995
----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Ratio of earnings to fixed charges.... 3.42x -- 1.23x -- 4.08x 1.74x 2.61x
</TABLE>
We have computed the ratios of earnings to fixed charges by dividing
earnings by fixed charges. For this purpose, earnings consist of consolidated
income from continuing operations before income taxes and fixed charges
(excluding capitalized interest), with certain other adjustments. Fixed charges
consist of total interest, whether expensed or capitalized, including
amortization of debt expense and premiums or discounts related to outstanding
indebtedness, and one-third (the proportion deemed representative of the
interest factor) of rental expense. For the three months ended March 31, 1999,
our earnings were insufficient to cover fixed charges by $4.4 million. This
deficiency was due primarily to (i) depressed refined product margins resulting
from weak refining industry fundamentals and (ii) the effect of significant
downtime at our Corpus Christi refinery in early 1999 due to a major maintenance
turnaround and expansion of the heavy oil cracker and related units. For the
year ended December 31, 1998, our earnings were insufficient to cover fixed
charges by $80.6 million. This deficiency was due primarily to a $170.9 million
pre-tax charge to earnings to write down the carrying amount of our refinery
inventories to market value. Excluding the effect of the inventory write-down,
the ratio of earnings to fixed charges would have been 2.68x.
Prior to our spin-off from our former parent on July 31, 1997, our parent
had preferred stock outstanding which was issued in connection with the
discontinued natural gas related services business. We had no preferred stock
outstanding with respect to continuing operations for any period presented. As a
result, the ratio of earnings to combined fixed charges and preferred stock
dividends is the same as the ratio of earnings to fixed charges.
THE TRUSTS
Each of the trusts is created under the Delaware Business Trust Act and
will be governed by an amended and restated declaration of trust among the
trustees of each trust and Valero. Each declaration will be qualified under the
Trust Indenture Act of 1939.
We have summarized selected provisions of the declarations below. This
summary is not complete. For a complete description, we encourage you to read
the applicable form of declaration, which we have filed with the SEC. Please
read "Where You Can Find More Information."
The address of the principal office of each trust is One Valero Place, San
Antonio, Texas 78212, and the telephone number of each trust at that address is
(210) 370-2000.
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SECURITIES OF EACH TRUST
When a trust issues its trust preferred securities, you and the other
holders of the trust preferred securities will own all of the issued and
outstanding trust preferred securities of the trust. Valero will acquire all of
the issued and outstanding trust common securities of each trust, representing
an undivided beneficial interest in the assets of each trust of at least 3%. The
trust preferred securities will be substantially identical to the trust common
securities and will rank equally with the trust common securities, except that:
- if a trust enforcement event under the declaration of trust occurs and is
continuing, the holders of trust preferred securities will have the right
to receive payments before the holders of the trust common securities
receive payments
- the holders of trust common securities have the exclusive right to
appoint, remove or replace the trustees and to increase or decrease the
number of trustees
Each trust will exist primarily for the purposes of:
- issuing its trust preferred and trust common securities
- investing the proceeds from the sale of its securities in Valero's debt
securities
- engaging in only such other activities as are necessary or incidental to
issuing its securities and purchasing and holding Valero's debt
securities
The rights of the holders of the trust preferred securities of a trust,
including economic rights, rights to information and voting rights, will be
contained in and governed by the applicable declaration of trust, the Delaware
Business Trust Act and the Trust Indenture Act of 1939.
POWERS AND DUTIES OF TRUSTEES
The number of trustees of each trust will initially be five. Three of the
trustees will be individuals who are officers or employees of Valero. The fourth
trustee will be The Bank of New York, which will serve as the property trustee
under the declaration of trust for purposes of the Trust Indenture Act of 1939.
The fifth trustee will be The Bank of New York (Delaware), which has its
principal place of business in the State of Delaware.
The property trustee will own and hold for your benefit Valero's debt
securities purchased by a trust. The property trustee will also:
- generally exercise the rights, powers and privileges of a holder of the
debt securities
- maintain exclusive control of a segregated non-interest bearing bank
account to hold all payments on the debt securities
- promptly make distributions to the holders of the trust securities out of
funds from the property account
The Bank of New York, acting in its capacity as guarantee trustee, will hold for
your benefit a trust preferred securities guarantee, which will be separately
qualified under the Trust Indenture Act of 1939.
Because Valero will own all of the trust common securities of each trust,
Valero will have the exclusive right to appoint, remove or replace trustees and
to increase or decrease the number of trustees. In most cases, there will be at
least five trustees. The term of a trust will be described in the applicable
prospectus supplement, but may dissolve earlier as provided in the applicable
declaration of trust.
The duties and obligations of the trustees of a trust will be governed by
the declaration of that trust, the Delaware Business Trust Act and the Trust
Indenture Act of 1939.
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BOOKS AND RECORDS
The books and records of each trust will be maintained at the principal
office of the trust and will be open for inspection by each holder of trust
preferred securities of the trust or any authorized representative for any
purpose reasonably related to the holder's interest in the trust during normal
business hours.
THE PROPERTY TRUSTEE
The property trustee, for the benefit of the holders of the trust
securities, generally will exercise all rights under the applicable indenture
for the debt securities deposited in the trust as trust assets, including the
right to enforce Valero's obligations under the debt securities upon the
occurrence of an event of default under the applicable indenture.
The declaration of trust provides that if we fail to make interest or other
payments on the debt securities when due (taking account of any extension
period), the holders of the trust preferred securities may direct the property
trustee to enforce its rights under the applicable indenture. If the property
trustee fails to enforce its rights under the indenture in respect of an event
of default under the indenture, any holder of record of trust preferred
securities may, to the fullest extent permitted by applicable law, institute a
legal proceeding against us to enforce the property trustee's rights under the
indenture without first instituting any legal proceeding against the property
trustee or any other person or entity. Notwithstanding the foregoing, if a trust
enforcement event has occurred and is continuing and such event is attributable
to our failure to pay interest, premium or principal on the debt securities on
the date such interest, premium or principal is otherwise payable, then a holder
of trust preferred securities may institute a direct action against us for
payment of such holder's pro rata share. If a holder brings such a direct
action, we will be entitled to that holder's rights under the applicable
declaration of trust to the extent of any payment made by us to that holder.
EXCEPT AS EXPRESSLY PROVIDED IN THE PRECEDING SENTENCES OR IN THE APPLICABLE
PROSPECTUS SUPPLEMENT, THE HOLDERS OF THE TRUST PREFERRED SECURITIES WILL NOT BE
ABLE TO EXERCISE DIRECTLY ANY OTHER REMEDY AVAILABLE TO THE HOLDERS OF THE
APPLICABLE SERIES OF DEBT SECURITIES.
DESCRIPTION OF THE TRUST PREFERRED SECURITIES
TERMS
The terms of the trust preferred securities will include those stated in
the amended and restated declaration of trust and those made a part of that
declaration by the Trust Indenture Act of 1939. For a complete description of
the trust preferred securities, we encourage you to read the prospectus
supplement and the amended and restated declaration of trust, a form of which we
have filed with the SEC. Please read "Where You Can Find More Information."
The prospectus supplement relating to trust preferred securities being
offered will include specific terms relating to the offering. These terms will
include some or all of the following:
- the designation of the trust preferred securities
- the number of trust preferred securities issued by the trust
- the annual distribution rate, the distribution payment dates, the record
dates for distribution payments and the additional amounts, if any, that
may be payable with respect to the trust preferred securities
- whether distributions will be cumulative and compounding and, if so, the
dates from which distributions will be cumulative or compounded
- the amounts that will be paid out of the assets of the trust to the
holders of trust preferred securities upon dissolution, winding-up or
termination of the trust
- any repurchase or redemption provisions
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- any voting rights of the trust preferred securities in addition to those
required by law
- terms for any conversion or exchange of the debt securities or the trust
preferred securities into other securities
- any rights to defer distributions on the trust preferred securities by
extending the interest payment period on the debt securities
- any other relevant terms, rights, preferences, privileges, limitations or
restrictions of the trust preferred securities
We also will describe in the prospectus supplement the material United States
federal income tax considerations applicable to any offering of trust preferred
securities.
The regular trustees, on behalf of the trust and pursuant to the
declaration of trust, will issue one class of trust preferred securities and one
class of trust common securities. The trust securities will represent undivided
beneficial ownership interests in the assets of the trust.
GENERAL
Except as described below, the trust preferred securities will rank
equally, and payments will be made thereon proportionately, with the trust
common securities. The property trustee of the trust will hold legal title to
the debt securities in trust for the benefit of the holders of the trust
securities. We will execute a guarantee agreement for the benefit of the holders
of the trust preferred securities. The guarantee will not guarantee the payment
of distributions (as defined below) or any amounts payable on redemption or
liquidation of the trust preferred securities when the trust does not have funds
on hand available to make such payments. Certain material United States federal
income tax consequences and special considerations applicable to the trust
preferred securities will be described in the applicable prospectus supplement.
DISTRIBUTIONS
Distributions on each trust preferred security will accumulate and be
payable at a rate specified in the applicable prospectus supplement. The amount
of distributions payable for any period will be computed on the basis of a
360-day year of twelve 30-day months and the actual number of days elapsed per
30-day month unless otherwise specified in the applicable prospectus supplement.
Distributions that are in arrears will accumulate additional distributions at
the rate per annum if and as specified in the applicable prospectus supplement.
The term "distributions" means cumulative cash distributions that accumulate at
the per annum rate specified in the applicable prospectus supplement, together
with any additional amounts unless otherwise stated.
Unless otherwise specified in the applicable prospectus supplement,
distributions on the trust preferred securities will be cumulative, will
accumulate from the date of original issuance and will be payable on such dates
as are specified in the applicable prospectus supplement. If the date on which
any distributions on the trust securities are payable is not a business day (as
defined below), then payment of such distributions will be made on the next
business day (without any interest or other payment in respect of any such
delay), provided that if such next business day falls in the next calendar year,
then payment of such distributions will be made on the business day immediately
preceding the payment date. A "business day" means any day other than a Saturday
or Sunday or a day on which banking institutions in the city of New York, New
York or San Antonio, Texas are authorized or required by law or executive order
to remain closed, or a day on which the indenture trustee, or the principal
office of the property trustee, is closed for business.
If provided in the applicable prospectus supplement, we will have the right
under the indenture to defer payments of interest on the debt securities from
time to time by extending the applicable interest payment period for a period or
periods that will be specified in the applicable prospectus supplement. If we
exercise our right to defer interest payments on the debt securities, then any
payments of distributions on the trust preferred securities also would be
deferred. During an extension period, interest will continue to
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accrue on the debt securities (compounded quarterly), and, as a result,
distributions would continue to accumulate at the rate per annum if and as
specified in the applicable prospectus supplement. During any extension period,
we may not:
- declare or pay any dividends or distributions on, or redeem, purchase,
acquire, or make a liquidation payment with respect to, any of our
capital stock
- make any payment of principal, interest or premium, if any, on or repay,
repurchase or redeem any debt securities that rank equally with or junior
in interest to the debt securities or make any guarantee payments with
respect to any guarantee by us of the debt of any subsidiary of ours if
such guarantee ranks equally with or junior in interest to the debt
securities
However, even during an extension period, we may:
- purchase or acquire our capital stock in connection with the satisfaction
by us of our obligations under any employee benefit plans or pursuant to
any contract or security outstanding on the first day of any extension
period requiring us to purchase our capital stock
- reclassify our capital stock or exchange or convert one class or series
of our capital stock for another class or series of our capital stock
- purchase fractional interests in shares of our capital stock pursuant to
the conversion or exchange provisions of such capital stock or the
security being converted or exchanged
- declare dividends or distributions in our capital stock
- redeem or repurchase any rights pursuant to a rights agreement, and
- make payments under the guarantee related to the trust preferred
securities
Prior to the termination of any extension period, we may further extend the
extension period, but the total duration of any extension period may not exceed
20 consecutive quarters or extend beyond the stated maturity of the debt
securities. Once any extension period terminates and we have paid all amounts
then due, we may commence a new extension period, provided that such extension
period together with all extensions thereof may not exceed 20 quarters or extend
beyond the stated maturity of the debt securities. Once an extension period has
terminated, any deferred distributions, including accumulated additional
amounts, will be paid to those holders of record of the trust securities
appearing on the books and records of the trust on the first record date,
following the termination of such extension period.
It is expected that any revenue available for the payment of distributions
to holders of the trust preferred securities will be limited to payments we make
to the trust under the debt securities. If we do not make interest payments on
the debt securities, then the property trustee will not have any funds available
to pay distributions on the trust preferred securities. The payment of
distributions (if and to the extent the trust has funds legally available for
the payment of such distributions and cash sufficient to make such payments) is
guaranteed by us as set forth under "Description of the Preferred Securities
Guarantee."
The property trustee will pay distributions to the holders of the trust
preferred securities as such holders appear on the trust's securities register
on the relevant record dates. As long as the trust preferred securities are
represented by one or more global securities, the relevant record dates will be
the close of business on the business day next preceding each distribution date,
unless a different regular record date is established or provided for the
corresponding interest payment date on the debt securities. If any trust
preferred securities are not represented by global securities, then the relevant
record date for such trust preferred securities will be the date, at least 15
days prior to the relevant distribution date, that is specified in the
applicable prospectus supplement.
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REDEMPTION OR EXCHANGE
Mandatory Redemption
Unless otherwise specified in the applicable prospectus supplement, if the
debt securities held by the trust are repaid or redeemed in whole or in part,
either upon their maturity date or earlier, then the property trustee will use
the proceeds from such repayment or redemption to redeem trust securities having
an aggregate liquidation amount equal to the aggregate principal amount of the
debt securities being repaid or redeemed. The redemption price per trust
security will be equal to the aggregate stated amount of the trust securities
being redeemed plus any accumulated and unpaid distributions thereon to the date
of redemption plus the related amount of the premium, if any, we paid upon the
concurrent redemption of the debt securities. In the event of a partial
redemption, the trust securities will be redeemed among all of the holders of
trust securities on a pro rata basis. Holders of the trust securities will
receive at least 30 days but not more than 60 days notice of such redemption.
Tax Event Redemption
If a tax event (as defined below) occurs and is continuing, we will have
the right to redeem the debt securities in whole (but not in part) and thereby
cause a mandatory redemption of the trust securities in whole (but not in part)
at the redemption price within 90 days following the occurrence of such tax
event. In the event a tax event has occurred and is continuing and we do not
elect to redeem the debt securities (thereby causing a mandatory redemption of
the trust preferred securities) or to liquidate the trust (causing the debt
securities to be distributed to holders of the trust securities), the trust
preferred securities will remain outstanding.
"Tax event" means the receipt by us and the trust of an opinion of counsel,
rendered by a law firm having a recognized national tax practice, to the effect
that, as a result of any amendment to, change in or announced proposed change in
the laws (or any regulations thereunder) of the United States or any political
subdivision or taxing authority thereof or therein, or as a result of any
official administrative decision, pronouncement, judicial decision or action
interpreting or applying such laws or regulations, which amendment or change is
effective or such proposed change, pronouncement, action or decision is
announced on or after the date on which the trust preferred securities are
issued and sold, there is more than an insubstantial increase in the risk that:
- the trust is, or within 90 days of the date of such opinion will be,
subject to United States federal income tax with respect to income
received or accrued on the debt securities;
- interest payable by us on the debt securities is not, or within 90 days
of the date of such opinion, will not be, deductible by us, in whole or
in part, for United States federal income tax purposes; or
- the trust is, or within 90 days of the date of such opinion will be,
subject to more than a de minimis amount of other taxes, duties or other
governmental charges.
Distribution of Debt Securities
Unless otherwise specified in the applicable prospectus supplement, we will
have the right to dissolve the trust at any time and, after satisfaction of any
liabilities to creditors of the trust as provided by applicable law, to cause
the debt securities to be distributed pro rata to the holders of the trust
securities in liquidation of the trust.
After the date fixed for any distribution of debt securities:
- the trust preferred securities will no longer be deemed to be
outstanding, and
- any certificates representing the preferred securities will be deemed to
represent debt securities in a principal amount equal to the liquidation
amount of the trust preferred securities, bearing accrued and unpaid
interest in an amount equal to the accumulated and unpaid distributions
on the trust
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preferred securities, until such certificates are presented to the
regular trustees or their agent for transfer or reissuance
There can be no assurance as to the market prices for the trust preferred
securities or for the debt securities that may be distributed in exchange for
trust preferred securities upon dissolution or liquidation of the trust.
Accordingly, the trust preferred securities that an investor may purchase, or
the debt securities that such investor may receive upon dissolution or
liquidation of the trust, may trade at a discount to the price that such
investor paid to purchase the trust preferred securities offered hereby.
REDEMPTION PROCEDURES
Any trust preferred securities being redeemed will be redeemed by the trust
at the applicable redemption price with the proceeds received by the trust from
our contemporaneous redemption of the debt securities. Redemptions of trust
preferred securities will be made and the applicable redemption price will be
payable only to the extent that the trust has funds on hand available for the
payment of such redemption price.
If the trust notifies the holders of the trust preferred securities of a
redemption and if the trust preferred securities to be redeemed are issued in
global form, then on the applicable redemption date, the property trustee will
deposit irrevocably with the depositary for the trust preferred securities funds
sufficient to pay the applicable redemption price, to the extent funds are
available. In addition, the property trustee will give the depositary
irrevocable instructions and authority to pay the redemption price to the
beneficial owners of the trust preferred securities. If the trust preferred
securities are not issued in global form, the property trustee will give the
paying agent irrevocable instructions and authority to pay the redemption price
to the holders of the trust preferred securities upon surrender of their
certificates evidencing the trust preferred securities. The property trustee
will pay the applicable redemption price to the holders of the trust preferred
securities by check mailed to their respective addresses appearing on the
register of the trust on the redemption date. Notwithstanding the foregoing,
distributions payable on or prior to a redemption date for the trust preferred
securities will be payable to the holders of the trust preferred securities on
the relevant record dates for the related distribution dates. If a notice of
redemption has been given and funds have been deposited as required, then upon
the date of such deposit, all of the rights of the holders of the trust
preferred securities to be redeemed will cease, except for the right of such
holders to receive the redemption price (without interest thereon), and the
trust preferred securities will cease to be outstanding. If the redemption date
is not a business day, then payment of the applicable redemption price will be
made on the next business day (and without any interest or other payment in
respect of any such delay). If, however, the next business day falls in the next
calendar year, then payment of the redemption price will be made on the business
day immediately preceding the redemption date.
If any payments for the redemption of any trust preferred securities are
improperly withheld or refused and not paid either by the trust or by us
pursuant to the guarantee relating to the trust preferred securities, then
distributions on the trust preferred securities will continue to accumulate at
the then applicable rate, from the redemption date originally established by the
trust until the date upon which such redemption payments actually are paid, in
which case the actual payment date will be the date fixed for redemption for
purposes of calculating the applicable redemption price.
Subject to applicable law (including, without limitation, U.S. federal
securities laws), we or our subsidiaries may purchase at any time and from time
to time outstanding preferred securities by tender, in the open market or by
private agreement.
Any notice of the redemption of trust securities or the distribution of
debt securities in exchange for trust securities will be mailed to each holder
of trust preferred securities being so redeemed at least 30 days but not more
than 60 days before the applicable redemption date, at such holder's registered
address. Unless we default in the payment of the redemption price on the debt
securities, interest will cease to accrue on the debt securities or portions
thereof (and distributions will cease to accumulate on the trust preferred
securities or portions thereof) called for redemption on and after the
redemption date.
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SUBORDINATION OF TRUST COMMON SECURITIES
The payment of distributions on, and any payment upon redemption of, the
trust preferred securities and trust common securities, as applicable, will be
made pro rata based on their respective liquidation amounts. If, however, an
event of default under the indenture (which is also a "trust enforcement event"
under the declaration of trust) has occurred and continues on any distribution
date or redemption date, then the amounts payable on such date will not be made
on any of the trust common securities, and no other payment on account of the
redemption, liquidation or other acquisition of any trust common securities will
be made until all accumulated and unpaid distributions or redemption payments,
as the case may be, on all of the outstanding trust preferred securities for
which distributions are to be paid or that have been called for redemption, as
the case may be, are fully paid. All funds available to the property trustee
first will be applied to the payment in full in cash of all distributions on, or
the redemption price of, the trust preferred securities then due and payable.
The trust will not issue any securities or other interests in the assets of the
trust other than the trust preferred securities and the trust common securities.
In the event that a trust enforcement event has occurred and is continuing
with respect to the trust preferred securities, then we, as sole holder of the
trust common securities, will be deemed to have waived any right to act with
respect to any such trust enforcement event until the effect of such trust
enforcement event with respect to the trust preferred securities has been cured,
waived or otherwise eliminated. Until such trust enforcement event has been so
cured, waived or otherwise eliminated, the property trustee will act solely on
behalf of the holders of the trust preferred securities and not on behalf of us,
as holder of the trust common securities, and only the holders of the trust
preferred securities will have the right to direct the property trustee to act
on their behalf.
DISSOLUTION OF THE TRUST AND DISTRIBUTIONS UPON DISSOLUTION
Unless otherwise specified in the applicable prospectus supplement,
pursuant to the declaration of trust, the trust will automatically dissolve upon
the expiration of its term or, if earlier, shall dissolve on the first to occur
of:
- certain events of bankruptcy, dissolution or liquidation of Valero
- the written direction to the property trustee from us at any time to
dissolve the trust and to distribute the debt securities in exchange for
the trust securities
- redemption of all of the trust preferred securities
- the direction of the property trustee after a tax event pursuant to which
all the debt securities have been distributed in exchange for the trust
securities
- the entry of an order for the dissolution of the trust, and
- the consent of the regular trustees and Valero to the dissolution of the
trust prior to the issuance of the trust securities
If an early dissolution occurs as described in the first, second, fourth
and fifth clauses above, the trust will be liquidated by the trustees as
expeditiously as the trustees determine to be possible by distributing, after
satisfaction of liabilities to creditors of the trust as provided by applicable
law, to the holders of the trust securities in exchange therefor debt
securities, unless such distribution is determined by the property trustee not
to be practical, in which event the holders of the trust securities will be
entitled to receive out of the assets of the trust distributions in cash or
other immediately available funds to the extent such funds are available for
distribution after satisfaction of the trust's liabilities to any creditors. The
amount of each liquidation distribution will be equal to the stated liquidation
amount plus accumulated and unpaid distributions thereon to the date of payment.
If, however, debt securities are to be distributed in connection with such
liquidation, then the holders of the trust securities will receive debt
securities in an aggregate principal amount equal to the stated liquidation
amount of the trust securities, with an interest rate identical to the
distribution rate of, and accrued and unpaid interest equal to accumulated and
unpaid distributions on, such trust securities.
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If the liquidation distribution can be paid only in part because the trust
has insufficient assets available to pay the aggregate amount in full, then the
amounts payable directly by the trust on the trust securities will be paid on a
pro rata basis. We, as sole holder of the trust common securities, will be
entitled to receive liquidation distributions on a pro rata basis with the
holders of the trust preferred securities, except that if an event of default
under the indenture has occurred and is continuing, then the trust preferred
securities will have a preference over the trust common securities with regard
to such liquidation distributions.
TRUST ENFORCEMENT EVENTS; NOTICE
Under the declaration of trust, the occurrence and continuation of any
event of default under the indenture is a trust enforcement event with respect
to the trust securities issued under the declaration. If a trust enforcement
event has occurred and is continuing, the trust preferred securities will have a
preference over the trust common securities upon dissolution of the trust, as
described above.
The property trustee will transmit by mail, first class postage prepaid,
notice of each trust enforcement event to the holders of the trust securities
within 90 days of the occurrence of the trust enforcement event, unless the
property trustee in good faith determines that the withholding of such notice is
in the holders' interests. We and the regular trustees are required to file
annually with the property trustee a certificate as to whether or not we are in
compliance with all the conditions and covenants applicable to us under the
declaration of trust as well as any reports that may be required to be filed
under the Trust Indenture Act.
REMOVAL OF TRUSTEES
The holder of the trust common securities may remove any trustee with or
without cause at any time. The removal of a property trustee, however, will not
be effective until a successor trustee possessing the qualifications to act as a
property trustee has accepted an appointment as property trustee in accordance
with the provisions of the declaration of trust.
MERGER OR CONSOLIDATION OF TRUSTEES
Any entity into which the property trustee, the Delaware trustee or any
regular trustee that is not a natural person may be merged or converted or with
which it may be consolidated, or any entity resulting from any merger,
conversion or consolidation to which such trustee may be a party, or any entity
succeeding to all or substantially all the corporate trust business of such
trustee, will be the successor of such trustee under the declaration of trust,
provided that such entity is otherwise qualified and eligible.
MERGERS, CONSOLIDATIONS OR AMALGAMATIONS
The trust may not consolidate with, convert into, amalgamate or merge with
or into, be replaced by or convey, transfer or lease its properties and assets
substantially as an entirety to any corporation or other body, except as
described below. At our request and with the consent of a majority of the
regular trustees, and without the consent of the holders of the trust preferred
securities, the Delaware trustee or the property trustee, the trust may
consolidate with, convert into, amalgamate or merge with or into, be replaced by
or convey, transfer or lease its properties substantially as an entirety to a
trust organized under the laws of any state. Such consolidation, conversion,
amalgamation, merger, replacement, conveyance, transfer or lease will be
subject, however, to the following limitations:
- if the trust is not the successor entity, then the successor entity
either must:
- expressly assume all of the trust's obligations with respect to the
trust securities, or
- substitute for the trust securities other securities having
substantially the same terms as the trust securities, so long as these
substitute securities rank the same as the trust securities with respect
to distributions and payments upon liquidation, redemption and otherwise
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- we must expressly appoint a trustee of a successor entity possessing the
same powers and duties as the property trustee as the holder of the debt
securities
- the trust preferred securities or any substitute securities must be
listed, or any substitute securities must be listed upon notification of
issuance, on any national securities exchange or with any other
organization on which the trust preferred securities are then listed or
quoted
- such consolidation, conversion, amalgamation, merger, replacement,
conveyance, transfer or lease must not cause the trust preferred
securities (including any substitute securities) to be downgraded by any
nationally recognized statistical rating organization
- such consolidation, conversion, amalgamation, merger, replacement,
conveyance, transfer or lease must not adversely affect the rights,
preferences and privileges of the holders of the trust preferred
securities (including any substitute securities) in any material respect
- such successor entity must have a purpose substantially identical to that
of the trust
- prior to such consolidation, conversion, amalgamation, merger,
replacement, conveyance, transfer or lease, we must have received an
opinion of independent counsel to the trust experienced in such matters
to the effect that:
- such consolidation, conversion, amalgamation, merger, replacement,
conveyance, transfer or lease does not adversely affect the rights,
preferences and privileges of the holders of the trust securities
(including any substitute securities) in any material respect
- following such consolidation, conversion, amalgamation, merger,
replacement, conveyance, transfer or lease, neither the trust nor such
successor entity will be required to register as an investment company
under the Investment Company Act, and
- following such consolidation, conversion, amalgamation, merger,
replacement, conveyance, transfer or lease, the trust (or the
successor entity) will continue to be classified as a grantor trust
for United States federal income tax purposes
- we or any permitted successor or assignee must own all of the trust
common securities and must guarantee the obligations of such successor
entity under the substitute securities, at least to the extent provided
by the guarantee related to the trust preferred securities, and
- such successor entity must expressly assume all of the obligations of the
trust
Notwithstanding the foregoing, unless holders of 100% in aggregate liquidation
amount of the trust securities give their consent, the trust will not
consolidate with, convert into, amalgamate or merge with or into, or be replaced
by or convey, transfer or lease its properties and assets substantially as an
entirety to, any other entity or permit any other entity to consolidate,
amalgamate, merge with or into, or replace it, if such consolidation,
conversion, amalgamation, merger, replacement, conveyance, transfer or lease
would cause the trust or the successor entity to be classified as other than a
grantor trust for United States federal income tax purposes or would cause each
holder of trust securities not to be treated as owning an undivided beneficial
ownership interest in the debt securities.
VOTING RIGHTS
Except as provided below and as otherwise required by the declaration of
trust, the Delaware Business Trust Act, the Trust Indenture Act and other
applicable law, the holders of the trust securities will have no voting rights.
Subject to the requirement of the property trustee obtaining a tax opinion
in certain circumstances set forth in the last sentence of this paragraph, the
holders of not less than a majority in aggregate liquidation amount of the trust
preferred securities, voting separately as a class, have the right to direct the
time, method and place of conducting any proceeding for any remedy available to
the property trustee, or to
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direct the exercise of any trust or power conferred upon the property trustee
under the declaration of trust. This includes the right to direct the property
trustee, as holder of the debt securities, to:
- exercise the remedies available to it under the indenture
- consent to any amendment or modification of the indenture or the debt
securities where such consent will be required, or
- waive any past default and its consequences that is waiveable under the
indenture; provided that if an event of default under the indenture has
occurred and is continuing, then the holders of not less than 25% of the
aggregate liquidation amount of the trust preferred securities may direct
the property trustee to declare the principal of and interest on the debt
securities due and payable; and provided further that where a consent or
action under the indenture would require the consent or act of the
holders of more than a majority of the aggregate principal amount of debt
securities affected thereby, the property trustee only may give such
consent or take such action at the direction of the holders of at least
the same proportion in aggregate stated liquidation amount of the
preferred securities
The property trustee will notify all holders of the trust preferred securities
of any notice of any event of default under the indenture that it has received
from us. The notice will state that the event of default also constitutes a
trust enforcement event. Except with respect to directing the time, method and
place of conducting a proceeding for a remedy, the property trustee will have no
obligation to take any of the actions described in the first and second bullets
above unless it first obtains an opinion of independent tax counsel experienced
in such matters to the effect that, as a result of such action, the trust will
not fail to be classified as a grantor trust for United States federal income
tax purposes and that each holder of trust securities will be treated as owning
an undivided beneficial ownership interest in the debt securities.
In the event the consent of the property trustee, as the holder of the debt
securities, is required under the indenture with respect to any amendment or
modification of the indenture, the property trustee will request the direction
of the holders of the trust securities with respect to such amendment or
modification and will vote with respect to such amendment or modification as
directed by the holders of a majority in stated liquidation amount of the trust
securities voting together as a single class; provided that where a consent
under the indenture would require the consent of the holders of more than a
majority of the aggregate principal amount of the debt securities, the property
trustee only may give such consent at the direction of the holders of at least
the same proportion in aggregate stated liquidation amount of the trust
securities. The property trustee will not take any action in accordance with the
directions of the holders of the trust securities unless the property trustee
has obtained an opinion of independent tax counsel to the effect that the trust
will not be classified as other than a grantor trust for United States federal
income tax purposes as a result of such action, and that each holder of trust
securities will be treated as owning an undivided beneficial ownership interest
in the debt securities.
A waiver of an event of default under the indenture with respect to the
debt securities will constitute a waiver of the corresponding trust enforcement
event.
Any required approval or direction of holders of trust preferred securities
may be given at a separate meeting of holders of preferred securities convened
for such purpose, at a meeting of all of the holders of preferred securities or
pursuant to written consent. The regular trustees will cause a notice of any
meeting at which holders of trust preferred securities are entitled to vote to
be mailed to each holder of record of trust preferred securities. Each notice
will include a statement setting forth:
- the date of the meeting
- a description of any resolution proposed for adoption at the meeting on
which the holders are entitled to vote, and
- instructions for the delivery of proxies
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No vote or consent of the holders of trust preferred securities will be
required for the trust to redeem and cancel trust preferred securities or
distribute debt securities in accordance with the declaration of trust and the
terms of the trust securities.
Notwithstanding that holders of trust preferred securities are entitled to
vote or consent under any of the circumstances described above, any of the trust
preferred securities that are owned at such time by us, the trustees or any
entity directly or indirectly controlled by, or under direct or indirect common
control with, us or any trustee will not be entitled to vote or consent and
will, for purposes of such vote or consent, be treated as if such trust
preferred securities were not outstanding.
Except during the continuance of an event of default under the indenture,
the holders of the trust preferred securities will have no rights to appoint or
remove the trustees, who may be appointed, removed or replaced solely by us as
the holder of all of the common trust securities. If an event of default has
occurred and is continuing, the property trustee and the Delaware trustee may be
removed and replaced by the holders of a majority in liquidation amount of the
trust preferred securities.
AMENDMENT OF THE DECLARATION
The declaration of trust may generally be amended on written agreement by
us and a majority of the regular trustees. If any proposed amendment provides
for:
- any action that would adversely affect the powers, preferences or special
rights of the trust securities, whether by way of amendment to the
declaration of trust, other than as described below, or otherwise or
- the dissolution, winding-up or termination of the trust other than
pursuant to the terms of the declaration of trust
then the amendment will not be effective except with the approval of at least 66
2/3% of outstanding trust securities. If, however, any amendment referred to in
the first bullet point above would adversely affect only the trust preferred
securities or the trust common securities, then only the affected class will be
entitled to vote on the amendment and the amendment will not be effective except
with the approval of 66 2/3% of the affected class outstanding.
If any proposed amendment provides for:
- changing the amount or timing of any distribution of the trust securities
or otherwise adversely affects the amount of any distribution required to
be made in respect of the trust securities as of a specified date or
- restricting the right of a holder of trust securities to institute suit
for the enforcement of such payment on or after such specified date
then the amendment will not be effective except with the approval of each holder
of trust securities affected.
Notwithstanding the provisions described in the prior paragraph, no
amendment may be made to the declaration of trust:
- unless the property trustee has received
- an officers' certificate from each of Valero and the trust that such
amendment is permitted by, and conforms to, the terms of the declaration
of trust, and
- in the case of an amendment that affects the rights, powers, duties,
obligations or immunities of the property trustee, an opinion of counsel
that such amendment is permitted by, and conforms to, the terms of the
declaration of trust
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Moreover, no amendment may be made to the extent the result of such
amendment would be to:
- cause the trust to be classified other than as a grantor trust for
purposes of United States federal income tax purposes
- reduce or otherwise adversely affect the rights or powers of the property
trustee in contravention of the Trust Indenture Act, or
- cause the trust to be deemed to be an "investment company" required to be
registered under the Investment Company Act of 1940
The amendment provision of the declaration of trust may not be amended
without the consent of all of the holders of the trust securities. No amendment
that adversely affects the rights, powers and privileges of the property trustee
or the Delaware trustee may be made without the consent of the property trustee
or the Delaware trustee, respectively. The rights of the holders of the common
securities under the declaration of trust to increase or decrease the number of,
and to appoint, or remove trustees may not be amended without the consent of the
holders of the common securities.
The declaration of trust may be amended without the consent of the holders
of the trust securities to:
- cure any ambiguity
- correct or supplement any provision in the declaration of trust that may
be defective or inconsistent with any other provision of the declaration
of trust
- add to the covenants, restrictions or obligations of Valero
- conform to changes in, or a change in interpretation or application by
any legislative body, court, government agency or regulatory authority of
regulations relating to whether the trust is required to register as an
investment company under the Investment Company Act of 1940
- modify, eliminate or add to any provisions of the declaration of trust to
ensure that (a) the trust will be classified for United States federal
income tax purposes as a grantor trust at all times that any trust
securities are outstanding or (b) the trust will not be required to
register as an "investment company" under the Investment Company Act of
1940; provided, in each case, that the rights, privileges or preferences
of any holder of trust securities are not adversely affected, and
- facilitate the tendering, remarketing and settlement of the trust
preferred securities as contemplated in the declaration of trust
GLOBAL PREFERRED SECURITIES
Unless otherwise specified in the applicable prospectus supplement, the
trust preferred securities may be issued in whole or in part in global form that
will be deposited with, or on behalf of, a depositary identified in the
applicable prospectus supplement. Global trust preferred securities may be
issued only in fully registered form and in either temporary or permanent form.
Unless and until a global trust preferred security is exchanged in whole or in
part for the individual trust preferred securities represented thereby, the
depositary holding the global trust preferred security may transfer the global
trust preferred security only to its nominee or successor depositary (or vice
versa) and only as a whole. Unless otherwise indicated in the applicable
prospectus supplement for the trust preferred securities, the depositary for the
global trust preferred securities will be The Depository Trust Company. The laws
of some jurisdictions require that certain purchasers of securities take
physical delivery of such securities in certificated form. Such limits and laws
may impair the ability to transfer beneficial interests in global trust
preferred securities.
The specific terms of the depositary arrangement for the trust preferred
securities will be described in the applicable prospectus supplement. We expect
that the applicable depositary or its nominee, upon receipt of any payment of
liquidation amount, premium or distributions in respect of a permanent global
trust preferred security representing any of the trust preferred securities,
immediately will credit participants' accounts with payments in amounts
proportionate to their respective beneficial interests in the
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aggregate principal amount of such global trust preferred security as shown on
the records of the depositary or its nominee. We also expect that payments by
participants to beneficial owners will be governed by standing instructions and
customary practices, as is now the case with securities held for the accounts of
customers in bearer form or registered in "street name." Such payments will be
the responsibility of such participants.
Unless otherwise specified in the applicable prospectus supplement, if at
any time the depositary is unwilling, unable or ineligible to continue as a
depositary for the trust preferred securities, the trust will appoint a
successor depositary with respect to the trust preferred securities. If a
successor depositary is not appointed by the trust within 90 days after the
trust receives such notice or becomes aware of such ineligibility, the trust's
election that the trust preferred securities be represented by one or more
global trust securities will no longer be effective, and a regular trustee on
behalf of the trust will execute, and the property trustee will authenticate and
deliver, trust preferred securities in definitive registered form, in any
authorized denominations, in an aggregate stated liquidation amount equal to the
principal amount of the global trust preferred securities representing the trust
preferred securities in exchange for such global trust preferred securities. In
addition, the trust may at any time and in its sole discretion, subject to any
limitations described in the applicable prospectus supplement, determine not to
have any trust preferred securities represented by one or more global trust
preferred securities, and, in such event, a regular trustee on behalf of the
trust will execute and the property trustee will authenticate and deliver trust
preferred securities in definitive registered form, in an aggregate stated
liquidation amount equal to the principal amount of the global trust preferred
securities representing such trust preferred securities, in exchange for such
global trust preferred securities.
PAYMENT AND PAYING AGENCY
Payments in respect of the trust preferred securities will be made to the
applicable depositary, which will credit the relevant participants' accounts on
the applicable distribution dates or, if the trust preferred securities are not
held by a depositary, such payments will be made by check mailed to the address
of the holder of the trust preferred security that appear on the trust's
security register. Unless otherwise specified in the applicable prospectus
supplement, the paying agent for the trust preferred securities initially will
be the property trustee. The paying agent will be permitted to resign as paying
agent upon 30 days' written notice to the property trustee and us.
REGISTRAR AND TRANSFER AGENT
Unless otherwise specified in the applicable prospectus supplement, the
property trustee will act as registrar and transfer agent for the trust
preferred securities.
Registration of transfers of trust preferred securities will be made
without charge by or on behalf of the trust, but the trust may require payment
of any tax or other governmental charges that may be imposed in connection with
any transfer or exchange of trust preferred securities.
INFORMATION CONCERNING THE PROPERTY TRUSTEE
The property trustee will not be liable for any action taken, suffered or
omitted to be taken by it without negligence, in good faith and reasonably
believed by it to be authorized or within the discretion, rights or powers
conferred upon it by the declaration of trust. The property trustee will be
under no obligation to exercise any rights or powers vested in it by the
declaration of trust at the request of a holder of trust securities, unless the
holder provides the property trustee security and indemnity, reasonably
satisfactory to the property trustee, against the costs and expenses and
liabilities that might be incurred.
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DESCRIPTION OF THE TRUST PREFERRED SECURITIES GUARANTEE
Valero will fully and unconditionally guarantee payments on the trust
preferred securities as described in this section. The guarantee covers the
following payments:
- periodic cash distributions on the trust preferred securities out of
funds held by the property trustee of the trust
- payments on liquidation of each trust
- payments on redemption of trust preferred securities of each trust
The Bank of New York, as guarantee trustee, will hold the guarantee for the
benefit of the holders of trust preferred securities.
We have summarized selected provisions of the guarantee below. This summary
is not complete. For a complete description, we encourage you to read the
guarantee, the form of which we have filed with the SEC. Please read "Where You
Can Find More Information."
Valero will irrevocably and unconditionally agree to pay you in full the
following amounts to the extent not paid by the trust:
- any accumulated and unpaid distributions and any additional amounts with
respect to the trust preferred securities and any redemption price for
trust preferred securities called for redemption by the trust, if and to
the extent that Valero has made corresponding payments on the debt
securities to the property trustee of the trust
- payments upon the dissolution, winding-up or termination of the trust
equal to the lesser of:
- the liquidation amount plus all accumulated and unpaid distributions and
additional amounts on the trust preferred securities to the extent the
trust has funds legally available for those payments and
- the amount of assets of the trust remaining legally available for
distribution to the holders of trust preferred securities in liquidation
of the trust
Valero will not be required to make these liquidation payments if:
- the trust distributes the debt securities to the holders of trust
preferred securities in exchange for their trust preferred securities or
- the trust redeems the trust preferred securities in full upon the
maturity or redemption of the debt securities
Valero may satisfy its obligation to make a guarantee payment either by
making payment directly to the holders of trust preferred securities or to the
guarantee trustee for remittance to the holders or by causing the applicable
trust to make the payment to them.
Each guarantee is a guarantee from the time of issuance of the applicable
series of trust preferred securities. THE GUARANTEE ONLY COVERS, HOWEVER,
DISTRIBUTIONS AND OTHER PAYMENTS ON TRUST PREFERRED SECURITIES IF AND TO THE
EXTENT THAT VALERO HAS MADE CORRESPONDING PAYMENTS ON THE DEBT SECURITIES TO THE
APPLICABLE PROPERTY TRUSTEE. IF VALERO DOES NOT MAKE THOSE CORRESPONDING
PAYMENTS ON THE DEBT SECURITIES, THE TRUST WILL NOT HAVE FUNDS AVAILABLE FOR
PAYMENTS AND VALERO WILL HAVE NO OBLIGATION TO MAKE A GUARANTEE PAYMENT.
Valero's obligations under the declaration of trust for each trust, the
guarantee, the debt securities and the associated indenture taken together will
provide a full and unconditional guarantee of payments due on the trust
preferred securities. We will describe the specific terms of the guarantee in a
prospectus supplement.
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COVENANTS OF VALERO
In each guarantee, Valero will agree that, as long as any trust preferred
securities issued by the applicable trust are outstanding, Valero will not make
the payments and distributions described below if:
- it is in default on its guarantee payments or other payment obligations
under the related guarantee
- any event of default under the applicable declaration of trust has
occurred and is continuing or
- Valero has elected to defer payments of interest on the related debt
securities by extending the interest payment period and that deferral
period is continuing
In these circumstances, Valero will agree that it will not:
- declare or pay any dividends or distributions on, or redeem, purchase,
acquire, or make a liquidation payment with respect to, any of its
capital stock
- make any payment of principal, interest or premium, if any, on or repay,
repurchase or redeem any debt securities that rank equally with or junior
in interest to the debt securities or make any guarantee payments with
respect to any guarantee by Valero of the debt of any subsidiary of
Valero if such guarantee ranks equally with or junior in interest to the
debt securities
However, even during such circumstances, Valero may:
- purchase or acquire its capital stock in connection with the satisfaction
by it of its obligations under any employee benefit plans or pursuant to
any contract or security outstanding on the first day of any extension
period requiring it to purchase its capital stock
- reclassify its capital stock or exchange or convert one class or series
of its capital stock for another class or series of its capital stock
- purchase fractional interests in shares of its capital stock pursuant to
the conversion or exchange provisions of such capital stock or the
security being converted or exchanged
- declare dividends or distributions in its capital stock
- redeem or repurchase any rights pursuant to a rights agreement, and
- make payments under the guarantee related to the trust preferred
securities
In addition, as long as trust preferred securities issued by any trust are
outstanding, Valero will agree that it will:
- remain the sole direct or indirect owner of all the outstanding common
securities of that trust, except as permitted by the applicable
declaration of trust
- permit the trust common securities of that trust to be transferred only
as permitted by the declaration of trust
- use reasonable efforts to cause that trust to continue to be treated as a
grantor trust for United States federal income tax purposes, except in
connection with a distribution of debt securities to the holders of trust
preferred securities as provided in the declaration of trust, in which
case the trust would be dissolved
AMENDMENTS AND ASSIGNMENT
Valero and the guarantee trustee may amend each guarantee without the
consent of any holder of trust preferred securities if the amendment does not
adversely affect the rights of the holders in any material respect. In all other
cases, Valero and the guarantee trustee may amend each guarantee only with the
prior approval of the holders of at least a majority of outstanding trust
preferred securities issued by the applicable trust.
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Valero may assign its obligations under the guarantees only in connection
with a consolidation, merger or asset sale involving Valero permitted under the
indenture governing the debt securities.
TERMINATION OF THE GUARANTEE
A guarantee will terminate upon:
- full payment of the redemption price of all trust preferred securities of
the applicable trust
- distribution of the related debt securities, or any securities into which
those debt securities are convertible, to the holders of the trust
preferred securities and trust common securities of that trust in
exchange for all the securities issued by that trust or
- full payment of the amounts payable upon liquidation of that trust
Each guarantee will, however, continue to be effective or will be reinstated if
any holder of trust preferred securities must repay any amounts paid on those
trust preferred securities or under the guarantee.
STATUS OF THE GUARANTEE
Valero's obligations under each guarantee will be unsecured and effectively
junior to all debt and preferred stock of its subsidiaries. BY YOUR ACCEPTANCE
OF THE TRUST PREFERRED SECURITIES, YOU AGREE TO ANY SUBORDINATION PROVISIONS AND
OTHER TERMS OF THE RELATED GUARANTEE. We will specify in a prospectus supplement
the ranking of each guarantee with respect to Valero's capital stock and other
liabilities, including other guarantees.
Each guarantee will be deposited with the guarantee trustee to be held for
your benefit. The guarantee trustee will have the right to enforce the guarantee
on your behalf. In most cases, the holders of a majority of outstanding trust
preferred securities issued by the applicable trust will have the right to
direct the time, method and place of:
- conducting any proceeding for any remedy available to the applicable
guarantee trustee or
- exercising any trust or other power conferred upon that guarantee trustee
under the applicable guarantee
Each guarantee will constitute a guarantee of payment and not merely of
collection. This means that the guarantee trustee may institute a legal
proceeding directly against Valero to enforce the payment rights under the
guarantee without first instituting a legal proceeding against any other person
or entity.
If the guarantee trustee fails to enforce the guarantee or Valero fails to
make a guarantee payment, you may institute a legal proceeding directly against
Valero to enforce your rights under that guarantee without first instituting a
legal proceeding against the applicable trust, the guarantee trustee or any
other person or entity.
PERIODIC REPORTS UNDER GUARANTEE
Valero will be required to provide annually to the guarantee trustee a
statement as to its performance of its obligations and its compliance with all
conditions under the guarantees.
DUTIES OF GUARANTEE TRUSTEE
The guarantee trustee normally will perform only those duties specifically
set forth in the applicable guarantee. The guarantees do not contain any implied
covenants. If a default occurs on a guarantee, the guarantee trustee will be
required to use the same degree of care and skill in exercise of its powers
under the guarantee as a prudent person would exercise or use under the
circumstances in the conduct of his own affairs. The guarantee trustee will
exercise any of its rights or powers under the guarantee at the request or
direction of holders of the applicable series of trust preferred securities only
if it is offered security and indemnity satisfactory to it.
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GOVERNING LAW
New York law will govern the guarantees.
DESCRIPTION OF THE DEBT SECURITIES
Valero may issue to a trust or as part of a stock purchase unit from time
to time one or more series of senior debt securities under an indenture dated as
of December 12, 1997 between us and The Bank of New York, a New York banking
corporation, as indenture trustee. Valero may issue to a trust or as part of a
stock purchase unit from time to time one or more series of subordinated debt
securities under an indenture to be entered into between us and The Bank of New
York, as indenture trustee. We will provide information about the senior or
subordinated debt securities in a prospectus supplement. Valero will issue only
one series of debt securities to each trust. The indenture for the senior debt
securities and the indenture for the subordinated debt securities will be
substantially identical, except for the provisions relating to subordination and
restrictive covenants. We sometimes refer to the senior indenture and the
subordinated indenture as the "indentures."
We have summarized selected provisions of the indentures and the debt
securities below. This summary is not complete. For a complete description, we
encourage you to read the indentures, which we have filed with the SEC. Please
read "Where You Can Find More Information."
RANKING
The senior debt securities will constitute senior debt and will rank
equally with all of our unsecured and unsubordinated debt. The subordinated debt
securities will be subordinated to, and thus have a junior position to, the
senior debt securities and all of our other senior debt. Neither indenture
limits the amount of debt securities that can be issued under that indenture or
the amount of additional indebtedness Valero or any of its subsidiaries may
incur. We may issue debt securities under either indenture from time to time in
one or more series, each in an amount we authorize prior to issuance. The
indenture trustee will authenticate and deliver debt securities executed and
delivered to it by us as set forth in the applicable indenture.
Valero is organized as a holding company that owns subsidiary companies.
Its subsidiary companies conduct substantially all of its business. The holding
company structure results in two principal risks:
- Valero's subsidiaries may be restricted by contractual provisions or
applicable laws from providing it the cash that it needs to pay parent
company debt service obligations, including payments on the debt
securities
- In any liquidation, reorganization or insolvency proceeding involving
Valero, your claim as a holder of trust preferred securities, which
represents in effect an interest in debt securities, or as a holder of
debt securities as part of a stock purchase unit, will be effectively
junior to the claims of holders of any indebtedness or preferred stock of
our subsidiaries
SUBSEQUENT DISTRIBUTION TO HOLDERS OF TRUST SECURITIES
If Valero issues debt securities to a trust in connection with the issuance
of trust preferred and trust common securities by that trust, those debt
securities subsequently may be distributed to the holders of the trust preferred
and trust common securities either:
- upon the dissolution of the trust or
- upon the occurrence of events that we will describe in the prospectus
supplement
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TERMS
The prospectus supplement relating to any series of debt securities we are
offering will include specific terms relating to that offering. These terms will
include some or all of the following:
- whether the debt securities are senior or subordinated debt securities
- the title of the debt securities
- any limit on the total principal amount of the debt securities
- the date or dates on which the principal of the debt securities will be
payable
- any interest rate, or the method of determining the interest rate, on the
debt securities, the date from which interest will accrue, interest
payment dates and record dates
- any right to extend or defer the interest payment periods and the
duration of the extension
- if other than as set forth in this prospectus, the place or places where
payments on the debt securities will be payable
- any optional redemption provisions
- any sinking fund or other provisions that would obligate us to redeem or
purchase the debt securities
- any provisions for the remarketing of the debt securities
- any changes or additions to the events of default or covenants
- whether we will issue the debt securities in individual certificates to
each holder in registered or bearer form, or in the form of temporary or
permanent global securities held by a depositary on behalf of holders
- the denominations in which we will issue the debt securities, if other
than denominations of an integral multiple of $1,000
- the terms of any right to convert debt securities into shares of our
common stock or other securities or property
- whether payments on the debt securities will be payable in foreign
currency or currency units (including composite currencies) or another
form
- any provisions that would determine the amount of principal, premium, if
any, or interest, if any, on the debt securities by references to an
index or pursuant to a formula
- the portion of the principal amount of the debt securities that will be
payable if the maturity is accelerated, if other than the entire
principal amount
- any other terms of the debt securities not inconsistent with the relevant
indentures
We may sell the debt securities at a discount, which may be substantial,
below their stated principal amount. These debt securities may bear no interest
or interest at a rate that at the time of issuance is below market rates. We
will describe in the prospectus supplement any material United States federal
income tax consequences applicable to those securities.
If we sell any of the debt securities for any foreign currency or currency
unit or if payments on the debt securities are payable in any foreign currency
or currency unit, we will describe in the prospectus supplement the
restrictions, elections, tax consequences, specific terms and other information
relating to those debt securities and the foreign currency or currency unit.
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CONSOLIDATION, MERGER AND SALE
Valero has agreed that we will consolidate with or merge into any entity or
transfer or dispose of all or substantially all of our assets to any entity only
if:
- Valero is the continuing corporation, or
- if Valero is not the continuing corporation, the successor is organized
and existing under the laws of any United States jurisdiction and assumes
all of Valero's obligations under the indenture and the debt securities,
and
- in either case, immediately after giving effect to the transaction, no
default or event of default would occur and be continuing
EVENTS OF DEFAULT
Unless we inform you otherwise in the prospectus supplement, the following
are events of default under the indentures with respect to a series of debt
securities:
- our failure to pay interest on any debt security of that series for 30
days
- our failure to pay principal of or any premium on any debt security of
that series when due
- our failure to make any sinking fund payment for any debt security of
that series when due
- our failure to perform any of our other covenants or breach of any of our
other warranties in that indenture, other than a covenant or warranty
included in the indenture solely for the benefit of another series of
debt securities, and that failure continues for 60 days after written
notice is given or received as provided in the indentures
- certain bankruptcy, insolvency or reorganization events involving Valero
Energy Corporation
- our failure to pay at final maturity, after the expiration of any
applicable grace periods, or upon the declaration of acceleration of
payment of, any of our indebtedness for borrowed money in excess of $25
million, if such indebtedness is not discharged, or such acceleration is
not annulled, within 10 days after written notice is given as provided in
the indentures
- any other event of default we may provide for that series
If an event of default for any series of debt securities occurs and is
continuing, the indenture trustee or the holders of at least 25% in principal
amount of the outstanding debt securities of the series affected by the default
may declare the principal amount of all the debt securities of that series to be
due and payable immediately. The holders of a majority in principal amount of
the outstanding debt securities of that series may in some cases rescind and
annul that acceleration. If required by the declaration of trust, any rescission
may be subject to the consent of the holders of the trust preferred securities
and the trust common securities.
In most cases, the indenture trustee will be under no obligation to
exercise any of its rights or powers under the indentures at the request or
direction of any of the holders, unless the holders have offered to the
indenture trustee reasonable indemnity. Subject to this provision for
indemnification, the holders of a majority in aggregate principal amount of the
outstanding debt securities of any series may direct the time, method and place
of:
- conducting any proceeding for any remedy available to the indenture
trustee
- exercising any trust or power conferred on the indenture trustee, with
respect to the debt securities of that series
Each indenture requires us to furnish to the indenture trustee annually a
statement as to our performance of certain of our obligations under the
indenture and as to any default in performance.
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An event of default under the applicable indenture for a series of debt
securities will constitute a trust enforcement event under the declaration of
trust for the applicable series of trust preferred securities. A holder of trust
preferred securities may directly institute a proceeding against Valero for
enforcement of payment to that holder of its pro rata share of principal,
premium, interest or any additional amounts if:
- an event of default under the applicable declaration of trust has
occurred and is continuing and
- that event of default is attributable to Valero's failure to pay
principal, any premium, interest or additional amounts on the applicable
series of debt securities when due
Except as described in the preceding sentences or in the prospectus supplement,
the holders of trust preferred securities will not be able to exercise directly
any other remedy available to the holders of the applicable series of debt
securities.
MODIFICATION AND WAIVER
We may modify or amend each of the indentures without the consent of any
holders of the debt securities in certain circumstances, including to:
- evidence the assumption of our obligations under the indenture and the
debt securities by a successor
- add further covenants for the protection of the holders
- cure any ambiguity or correct any inconsistency in the indenture, so long
as such action will not adversely affect the interests of the holders
- establish the form or terms of debt securities of any series
- evidence the acceptance of appointment by a successor indenture trustee
We may modify or amend each indenture with the consent of the holders of a
majority in principal amount of the outstanding debt securities of each series
issued under the indenture affected by the modification or amendment. Without
the consent of the holder of each outstanding debt security affected, however,
no modification may:
- change the stated maturity of the principal of, or any installment of
interest on, any debt security
- reduce the principal amount of, the interest on, or the premium payable
on, any debt security
- reduce the amount of principal of discounted debt securities payable upon
acceleration of maturity
- change the place of payment or the currency in which any debt security is
payable
- impair the right to institute suit for the enforcement of any payment on
any debt security
- reduce quorum or voting rights
The holders of a majority in aggregate principal amount of the outstanding
debt securities of each series may waive past defaults by us under the
indentures with respect to the debt securities of that series only. Those
holders may not, however, waive any default in any payment on any debt security
of that series or compliance with a provision that cannot be modified or amended
without the consent of each holder affected.
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DISCHARGE
We will be discharged from all obligations of any series of debt
securities, except for certain surviving obligations to register the transfer or
exchange of the debt securities and any right by the holders to receive
additional amounts under the indentures if:
- all debt securities of the series previously authenticated and delivered
under the relevant indenture have been delivered to the indenture trustee
for cancellation or
- all debt securities of that series have become due and payable or will
become due and payable within one year, at maturity or by redemption, and
we deposit with the indenture trustee, in trust, sufficient money to pay
the entire indebtedness of all the debt securities of the series on the
dates the payments are due in accordance with the terms of the debt
securities
To exercise the right of deposit described above, we must deliver to the
indenture trustee an opinion of counsel and an officers' certificate stating
that all conditions precedent to the satisfaction and discharge of the relevant
indenture have been complied with.
FORM, EXCHANGE, REGISTRATION AND TRANSFER
Unless we inform you otherwise in the prospectus supplement, we will issue
the debt securities only in fully registered form, without coupons, in
denominations of $1,000 and integral multiples.
Debt securities will be exchangeable for other debt securities of the same
series, the same total principal amount and the same terms in such authorized
denominations as may be requested. Holders may present debt securities for
registration of transfer at the office of the security registrar or any transfer
agent we designate. The security registrar or transfer agent will effect the
transfer or exchange when it is satisfied with the documents of title and
identity of the person making the request. We will not charge a service charge
for any transfer or exchange of the debt securities. We may, however, require
payment of any tax or other governmental charge payable for the registration of
the transfer or exchange.
We will appoint the indenture trustee under each indenture as security
registrar for the debt securities issued under that indenture. We are required
to maintain an office or agency for transfers and exchanges in each place of
payment. We may at any time designate additional transfer agents for any series
of debt securities.
We will not be required:
- to issue, register the transfer of or exchange debt securities of a
series during a period beginning 15 business days prior to the day of
mailing of a notice of redemption of debt securities of that series
selected for redemption and ending on the close of business on the day of
mailing of the relevant notice or
- to register the transfer of or exchange any debt security, or portion of
any debt security, called for redemption, except the unredeemed portion
of any debt security we are redeeming in part
PAYMENT AND PAYING AGENTS
Unless we inform you otherwise in the prospectus supplement, principal and
interest will be payable, and the debt securities will be transferable and
exchangeable, at the office or offices of the applicable indenture trustee or
any paying agent we designate. At our option, we will pay interest on the debt
securities by check mailed to the holder's registered address or by wire
transfer for global debt securities. Unless we inform you otherwise in a
prospectus supplement, we will make interest payments to the persons in whose
name the debt securities are registered at the close of business on the record
date for each interest payment date.
In most cases, the indenture trustee and paying agent will repay to us upon
written request any funds held by them for payments on the debt securities that
remain unclaimed for two years after the date upon
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which that payment has become due. After payment to us, holders entitled to the
money must look to us for payment.
BOOK-ENTRY AND SETTLEMENT
Valero may issue the debt securities of a series in the form of one or more
global debt securities that would be deposited with a depositary or its nominee
identified in the prospectus supplement. The prospectus supplement will
describe:
- any circumstances under which beneficial owners may exchange their
interests in a global debt security for certificated debt securities of
the same series with the same total principal amount and the same terms
- the manner in which Valero will pay principal of and any premium and
interest on a global debt security
- the terms of any depositary arrangement and the rights and limitations of
owners of beneficial interests in any global debt security
NOTICES
Notices to holders will be given by mail to the addresses of such holders
as they appear in the security register.
GOVERNING LAW
New York law will govern each indenture and the debt securities.
THE TRUSTEE
The Bank of New York is the indenture trustee under the senior indenture.
Its address is 101 Barclay Street, Floor 21 West, New York, New York 10286.
Pursuant to the senior indenture, The Bank of New York serves as indenture
trustee with regard to approximately $450,000,000 aggregate principal amount of
our senior unsecured notes and receives customary fees for its services. The
Bank of New York also will serve as indenture trustee under the subordinated
indenture. Please read "About This Prospectus."
The holders of a majority in principal amount of the outstanding debt
securities of any series issued under each indenture will have the right to
direct the time, method and place of conducting any proceeding for exercising
any remedy available to the indenture trustee, subject to certain exceptions. If
an event of default occurs and is continuing, the indenture trustee will be
required in the exercise of its powers to use the degree of care and skill of a
prudent person in the conduct of his own affairs. The indenture trustee will be
obligated to exercise any of its rights or powers under the relevant indenture
at the request of any holders of debt securities of any series issued under that
indenture only after those holders have offered the trustee indemnity reasonably
satisfactory to it. The indenture trustee may resign at any time or the holders
of a majority in principal amount of the debt securities may remove the trustee.
If the indenture trustee resigns, is removed or becomes incapable of acting as
trustee or if a vacancy occurs in the office of the trustee for any reason, we
will appoint a successor indenture trustee in accordance with the provisions of
the applicable indenture.
If the indenture trustee becomes one of our creditors, it will be subject
to limitations in the indenture on its rights to obtain payment of claims or to
realize on certain property received for any claim, as security or otherwise.
The indenture trustee may engage in other transactions with us. If, however, it
acquires any conflicting interest, it must eliminate that conflict or resign as
required under the indenture.
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SUBORDINATION UNDER THE SUBORDINATED INDENTURE
Under the subordinated indenture, payment of the principal, interest and
any premium on the subordinated debt securities will generally be subordinated
and junior in right of payment to the prior payment in full of all senior debt.
Unless we inform you otherwise in the prospectus supplement, we may not make any
payment of principal of, interest on, or any premium on, the subordinated debt
securities if:
- we fail to pay the principal, interest, premium or any other amounts on
any senior debt when due or
- we default in performing any other covenant (a "covenant default") in any
senior debt that we have designated if the covenant default allows the
holders of that senior debt to accelerate the maturity of the senior debt
they hold
Unless we inform you otherwise in the prospectus supplement, a covenant
default will prevent us from paying the subordinated debt securities only for up
to 179 days after holders of the senior debt give the indenture trustee for the
subordinated debt securities notice of the covenant default.
The subordination does not affect our obligation, which is absolute and
unconditional, to pay, when due, the principal of and any premium and interest
on the subordinated debt securities. In addition, the subordination does not
prevent the occurrence of any default under the subordinated indenture.
The subordinated indenture will not limit the amount of senior debt that we
may incur. As a result of the subordination of the subordinated debt securities,
if we became insolvent, holders of subordinated debt securities may receive less
on a proportionate basis than other creditors.
Unless we inform you otherwise in the prospectus supplement, "senior debt"
will mean all indebtedness, including guarantees, of Valero, unless the
indebtedness states that it is not senior to the subordinated debt securities or
our other junior debt.
RESTRICTIVE COVENANTS IN THE SENIOR INDENTURE
We have agreed to two principal restrictions on our activities for the
benefit of holders of the senior debt securities. Unless waived or amended, the
restrictive covenants summarized below will apply to a series of debt securities
issued under the senior indenture as long as any of those debt securities is
outstanding, unless the prospectus supplement for the series states otherwise.
We have used in this summary description terms that we have defined below under
"-- Glossary."
Limitations on Liens
We have agreed that when any senior debt securities are outstanding neither
we nor any of our subsidiaries will create or assume any liens upon any of our
receivables or other assets or any asset, stock or indebtedness of any of our
subsidiaries unless such senior debt securities are secured equally and ratably
with or prior to the debt secured by the lien. This covenant has exceptions that
permit:
- subject to certain limitations, any lien created to secure all or part of
the purchase price of any property or to secure a loan made to finance
the acquisition of the property described in such lien
- subject to certain limitations, any lien existing on any property at the
time of its acquisition or created not later than 12 months thereafter
- subject to certain limitations, any lien created in connection with the
operation or use of any property acquired or constructed by us and
created within 12 months after the acquisition, construction or
commencement of full operations on the property
- any mechanic's or materialmen's lien or any lien related to workmen's
compensation or other insurance
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- any lien arising by reason of deposits with or the giving of any form of
security to any governmental agency, including for taxes and other
governmental charges
- liens for taxes or charges which are not delinquent or are being
contested in good faith
- any judgment lien the execution of which has been stayed or which has
been adequately appealed and secured
- any lien incidental to the conduct of our business which was not incurred
in connection with the borrowing of money or the obtaining of advances or
credit and which does not materially interfere with the conduct of our
business
- any intercompany lien
- liens incurred in connection with the borrowing of funds, if such funds
are used within 120 days to repay indebtedness of at least an equal
amount secured by a lien on our property having a fair market value at
least equal to the fair market value of the property securing the new
lien
- any lien created to secure indebtedness and letter of credit
reimbursement obligations incurred in connection with the extension of
working capital financing
- any lien existing on the date of the indenture
- subject to an aggregate limit of $60 million, any lien on cash, cash
equivalents, options or futures positions and other account holdings
securing derivative obligations or otherwise incurred in connection with
margin accounts with brokerage or commodities firms
- subject to an aggregate limit of 10% of our consolidated net tangible
assets, any liens not otherwise permitted by any of the other exceptions
set forth in the indenture
Limitations on Sale/Leaseback Transactions
We have agreed that neither we nor our subsidiaries would enter into any
sale/leaseback transactions with regard to any principal property, providing for
the leasing back to us or a subsidiary by a third party for a period of more
than three years of any asset which has been or is to be sold or transferred by
us or such subsidiary to such third party or to any other person. This covenant
has exceptions that permit transactions of this nature under the following
circumstances:
- we would be entitled, pursuant to the "Limitations on Liens" covenant
described above, to incur indebtedness secured by a lien on the property
to be leased, without equally and ratably securing the senior debt
securities then outstanding or
- within 120 days of the effective date of such sale/leaseback transaction,
we apply an amount equal to the value of such transaction:
- to the voluntary retirement of funded debt or
- to the purchase of another principal property
In addition, subject to a limit (on an aggregated basis with indebtedness
secured by liens permitted by the limitations on liens covenant described above)
of 10% of our consolidated net tangible assets, we can enter into sale/leaseback
transactions not otherwise permitted by the express provisions of the indenture.
Glossary
We define the following terms in the senior indenture. We use them here
with the same definitions. Generally accepted accounting principles should be
used to determine all items in this section, unless otherwise indicated.
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"Consolidated net tangible assets" means the total amount of assets shown
on a consolidated balance sheet of us and our subsidiaries (excluding goodwill
and other intangible assets), less all current liabilities (excluding notes
payable and current maturities of long-term debt).
"Funded debt" means generally any indebtedness for money borrowed, created,
issued, incurred, assumed or guaranteed which would be classified as long-term
debt.
"Principal Property" means any of our or our subsidiaries' refineries or
refinery-related assets, distribution facilities or other real property which
has a net book value exceeding 2.5% of consolidated net tangible assets, but not
including any property which in our opinion is not material to our and our
subsidiaries' total business conducted as an entirety or any portion of a
particular property that is similarly found not to be material to the use or
operation of such property.
"Subsidiary" means any entity of which at the time of determination we or
one or more of our subsidiaries owns or controls directly or indirectly more
than 50% of the shares of voting stock or the outstanding partnership or similar
interests and any limited partnership of which we or any one of our subsidiaries
are a general partner.
RELATIONSHIP AMONG THE TRUST PREFERRED SECURITIES, THE
DEBT SECURITIES AND THE GUARANTEE
To the extent set forth in the guarantee and to the extent funds are
available, we will irrevocably guarantee the payment of distributions and other
amounts due on the trust securities. If and to the extent we do not make
payments on the debt securities, the trust will not have sufficient funds to pay
distributions or other amounts due on the trust securities. The guarantee does
not cover any payment of distributions or other amounts due on the trust
securities unless the trust has sufficient funds for the payment of such
distributions or other amounts. In such event, a holder of trust securities may
institute a legal proceeding directly against us to enforce payment of such
distributions or other amounts to such holder after the respective due dates.
Taken together, our obligations under the declaration of trust for each trust,
the debt securities, the indenture and the guarantee provide a full and
unconditional guarantee of payments of distributions and other amounts due on
the trust securities. No single document standing alone or operating in
conjunction with fewer than all of the other documents constitutes such
guarantee. It is only the combined operation of these documents that provides a
full and unconditional guarantee of the trust's obligations under the trust
securities.
SUFFICIENCY OF PAYMENTS
As long as payments of interest and other amounts are made when due on the
debt securities, such payments will be sufficient to cover distributions and
payments due on the trust securities because of the following factors:
- the aggregate principal amount of the debt securities will be equal to
the sum of the aggregate stated liquidation amount of the trust
securities
- the interest rate and the interest and other payment dates on the debt
securities will match the distribution rate and distribution and other
payment dates for the trust securities
- we, as issuer of the debt securities, will pay, and the trust will not be
obligated to pay, directly or indirectly, any costs, expenses, debts and
obligations of the trust (other than with respect to the trust
securities), and
- the declaration of trust further provides that the trust will not engage
in any activity that is not consistent with the limited purposes of the
trust
Notwithstanding anything to the contrary in the indenture, we have the
right to set-off any payment we are otherwise required to make thereunder
against and to the extent we have already made, or are concurrently on the date
of such payment making, a related payment under the guarantee.
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ENFORCEMENT RIGHTS OF HOLDERS OF PREFERRED SECURITIES
The declaration of trust provides that if we fail to make interest or other
payments on the debt securities when due (taking account of any extension
period), the holders of the trust preferred securities may direct the property
trustee to enforce its rights under the applicable indenture. If the property
trustee fails to enforce its rights under the indenture in respect of an event
of default under the indenture, any holder of record of trust preferred
securities may, to the fullest extent permitted by applicable law, institute a
legal proceeding against us to enforce the property trustee's rights under the
indenture without first instituting any legal proceeding against the property
trustee or any other person or entity. Notwithstanding the foregoing, if a trust
enforcement event has occurred and is continuing and such event is attributable
to our failure to pay interest, premium or principal on the debt securities on
the date such interest, premium or principal is otherwise payable, then a holder
of trust preferred securities may institute a direct action against us for
payment of such holder's pro rata share. If a holder brings such a direct
action, we will be entitled to that holder's rights under the applicable
declaration of trust to the extent of any payment made by us to that holder.
If we fail to make payments under the guarantee, a holder of trust
preferred securities may institute a proceeding directly against us for
enforcement of the guarantee for such payments.
LIMITED PURPOSE OF TRUST
The trust preferred securities evidence undivided beneficial ownership
interests in the trust, and the trust exists for the sole purpose of issuing and
selling the trust securities and using the proceeds to purchase our debt
securities. A principal difference between the rights of a holder of trust
preferred securities and a holder of debt securities is that a holder of debt
securities is entitled to receive from us the principal amount of and interest
accrued on the debt securities held, while a holder of trust preferred
securities is entitled to receive distributions and other payments from the
trust (or from us under the guarantee) only if and to the extent the trust has
funds available for the payment of such distributions and other payments.
RIGHTS UPON DISSOLUTION
Upon any voluntary or involuntary dissolution, winding-up or liquidation of
the trust involving the redemption or repayment of the debt securities, the
holders of the trust securities will be entitled to receive, out of assets held
by the trust, subject to the rights of creditors of the trust, if any, the
liquidation distribution in cash. Because we are the guarantor under the
guarantee and, as issuer of the debt securities, we have agreed to pay for all
costs, expenses and liabilities of the trust (other than the trust's obligations
to the holders of the trust securities), the positions of a holder of trust
securities and a holder of debt securities relative to other creditors and to
our stockholders in the event of liquidation or bankruptcy of Valero would be
substantially the same.
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DESCRIPTION OF STOCK PURCHASE CONTRACTS
AND STOCK PURCHASE UNITS
We may issue stock purchase contracts, including contracts obligating
holders to purchase from us, and us to sell to the holders, a specified number
of shares of common stock at a future date or dates, which we refer to herein as
"stock purchase contracts." The price per share of common stock and the number
of shares of common stock may be fixed at the time the stock purchase contracts
are issued or may be determined by reference to a specific formula set forth in
the stock purchase contracts. The stock purchase contracts may be issued
separately or as part of units consisting of a stock purchase contract and debt
securities, trust preferred securities or debt obligations of third parties,
including U.S. treasury securities, securing the holders' obligations to
purchase the common stock under the stock purchase contracts, which we refer to
herein as "stock purchase units." The stock purchase contracts may require
holders to secure their obligations thereunder in a specified manner. The stock
purchase contracts also may require us to make periodic payments to the holders
of the stock purchase units or vice versa, and such payments may be unsecured or
refunded on some basis.
The applicable prospectus supplement will describe the terms of the stock
purchase contracts or stock purchase units. The description in the prospectus
supplement will not necessarily be complete, and reference will be made to the
stock purchase contracts, and, if applicable, collateral or depositary
arrangements, relating to the stock purchase contracts or stock purchase units.
Material United States federal income tax considerations applicable to the stock
purchase units and the stock purchase contracts will also be discussed in the
applicable prospectus supplement.
DESCRIPTION OF CAPITAL STOCK
Our authorized capital stock consists of:
- 150,000,000 shares of common stock, par value $.01 per share
- 20,000,000 shares of preferred stock, par value $.01 per share, issuable
in series
We have summarized selected aspects of our capital stock below. The summary
is not complete. For a complete description, you should refer to our restated
certificate of incorporation, restated by-laws and the Rights Agreement, dated
as of July 17, 1997 between us and Harris Trust and Savings Bank, as rights
agent, all of which are exhibits to the registration statement of which this
prospectus is part.
COMMON STOCK
Each share of common stock is entitled to participate equally in dividends
as and when declared by our board of directors. The payment of dividends on our
common stock may be limited by obligations we may have to holders of any
preferred stock. For information regarding restrictions on payments of
dividends, see the prospectus supplement applicable to any issuance of common
stock.
Common stockholders are entitled to one vote for each share held on all
matters submitted to them. The common stock does not have cumulative voting
rights, meaning that holders of a majority of the shares of common stock voting
for the election of directors can elect all the directors if they choose to do
so.
If we liquidate or dissolve our business, the holders of common stock will
share ratably in the distribution of assets available for distribution to
stockholders after creditors are paid and preferred stockholders receive their
distributions. The shares of common stock have no preemptive rights and are not
convertible, redeemable or assessable or entitled to the benefits of any sinking
fund.
All issued and outstanding shares of common stock are fully paid and
nonassessable. Any shares of common stock we offer under this prospectus will be
fully paid and nonassessable.
The common stock is listed on the New York Stock Exchange and trades under
the symbol "VLO."
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PREFERRED STOCK
Our board of directors can, without action by stockholders, issue one or
more series of preferred stock. The board can determine for each series the
number of shares, designation, relative voting rights, dividend rates,
liquidation and other rights, preferences and limitations. In some cases, the
issuance of preferred stock could delay or discourage a change in control of us.
We have summarized material provisions of the preferred stock in this
section. This summary is not complete. We will file the form of the preferred
stock with the SEC before we issue any of it, and you should read it for
provisions that may be important to you.
The prospectus supplement relating to any series of preferred stock we are
offering will include specific terms relating to the offering. These terms will
include some or all of the following:
- the title of the preferred stock
- the maximum number of shares of the series
- the dividend rate or the method of calculating the dividend, the date
from which dividends will accrue and whether dividends will be cumulative
- any liquidation preference
- any redemption provisions
- any sinking fund or other provisions that would obligate us to redeem or
purchase the preferred stock
- any terms for the conversion or exchange of the preferred stock for other
securities of us or any other entity
- any voting rights
- any other preferences and relative, participating, optional or other
special rights or any qualifications, limitations or restrictions on the
rights of the shares
Any shares of preferred stock we issue will be fully paid and
nonassessable.
Our board of directors has reserved for issuance pursuant to our
Stockholder Rights Plan described below a total of 1,500,000 shares of Junior
Participating Preferred Stock, Series I. We have not issued any shares of
preferred stock at the date of this prospectus.
ANTI-TAKEOVER PROVISIONS
The provisions of Delaware law and our restated certificate of
incorporation and our restated by-laws summarized below may have an
anti-takeover effect and may delay, defer or prevent a tender offer or takeover
attempt that a stockholder might consider in his or her best interest, including
those attempts that might result in a premium over the market price for the
common stock.
Staggered Board of Directors
Our board of directors is divided into three classes that are elected for
staggered three-year terms. The classification of the board of directors has the
effect of requiring at least two annual stockholder meetings, instead of one, to
effect a change in control of the board of directors. Holders of 60% of the
shares of common stock entitled to vote in the election of directors may remove
a director for cause, but stockholders may not remove any director without
cause.
Fair Price Provision
Our restated certificate of incorporation contains a fair price provision.
Mergers, consolidations and other business combinations involving us and an
"interested stockholder" require the approval of holders of
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at least 66 2/3% of our outstanding voting stock not owned by the interested
stockholder. Interested stockholders include the holder of 15% or more of our
outstanding voting stock. The 66 2/3% voting requirement does not apply,
however, if the "continuing directors," as defined in our restated certificate
of incorporation, approve the business combination, or the business combination
meets other specified conditions.
Liability of Our Directors
As permitted by the Delaware corporations statute, we have included in our
restated certificate of incorporation a provision that limits our directors'
liability for monetary damages for breach of their fiduciary duty of care to us
and our stockholders. The provision does not affect the liability of a director:
- for any breach of his/her duty of loyalty to us or our stockholders
- for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law
- for the declaration or payment of unlawful dividends or unlawful stock
repurchases or redemptions or
- for any transaction from which the director derived an improper personal
benefit
This provision also does not affect a director's responsibilities under any
other laws, such as the federal securities laws or state or federal
environmental laws.
Stockholder Proposals and Director Nominations
Our stockholders can submit stockholder proposals and nominate candidates
for our board of directors if the stockholders follow advance notice procedures
described in our restated by-laws.
Generally, stockholders must submit a written notice between 60 and 90 days
before the first anniversary of the date of our previous year's annual
stockholders' meeting. To nominate directors, the notice must include the name
and address of the stockholder, the class and number of shares owned by the
stockholder, information about the nominee required by the SEC and a description
of any arrangements or understandings with respect to the election of directors
that exist between the stockholder and any other person. To make stockholder
proposals, the notice must include a description of the proposal, the reasons
for bringing the proposal before the meeting, the name and address of the
stockholder, the class and number of shares owned by the stockholder and any
material interest of the stockholder in the proposal.
In each case, if we have changed the date of the annual meeting to more
than 30 days before or 60 days after the anniversary date of our previous year's
annual stockholders' meeting, stockholders must submit the notice between 60 and
90 days prior to such annual meeting or no later than 10 days after the day we
make public the date of the annual meeting.
Director nominations and stockholder proposals that are late or that do not
include all required information may be rejected. This could prevent
stockholders from bringing certain matters before an annual meeting, including
making nominations for directors.
Delaware Anti-takeover Statute
We are a Delaware corporation and are subject to Section 203 of the
Delaware General Corporation Law. In general, Section 203 prevents us from
engaging in a business combination with an "interested stockholder" (generally,
a person owning 15% or more of our outstanding voting stock) for three years
following the time that person becomes a 15% stockholder unless one of the
following is satisfied:
- before that person became a 15% stockholder, our board of directors
approved the transaction in which the stockholder became a 15%
stockholder or approved the business combination
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- upon completion of the transaction that resulted in the stockholder's
becoming a 15% stockholder, the stockholder owns at least 85% of our
voting stock outstanding at the time the transaction began (excluding
stock held by directors who are also officers and by employee stock plans
that do not provide employees with the right to determine confidentially
whether shares held subject to the plan will be tendered in a tender or
exchange offer) or
- after the transaction in which that person became a 15% stockholder, the
business combination is approved by our board of directors and authorized
at a stockholders' meeting by at least two-thirds of the outstanding
voting stock not owned by the 15% stockholder
Under Section 203, these restrictions also do not apply to certain business
combinations proposed by a 15% stockholder following the disclosure of an
extraordinary transaction with a person who was not a 15% stockholder during the
previous three years or who became a 15% stockholder with the approval of a
majority of our directors. This exception applies only if the extraordinary
transaction is approved or not opposed by a majority of our directors who were
directors before any person became a 15% stockholder in the previous three
years, or the successors of these directors.
Other Provisions
Our restated certificate of incorporation also provides that:
- stockholders may act only at an annual or special meeting and not by
written consent
- an 80% vote of the outstanding voting stock is required for the
stockholders to amend our restated by-laws and
- an 80% vote of the outstanding voting stock is required to amend our
restated certificate of incorporation with respect to certain matters,
including those described in the first two bullet points above
TRANSFER AGENT AND REGISTRAR
Harris Trust and Savings Bank, Chicago, Illinois, is our transfer agent and
registrar.
STOCKHOLDER RIGHTS PLAN
We have a stockholder rights plan under which one preferred share purchase
right is attached to each outstanding share of our common stock. The rights
become exercisable under specified circumstances, including any person or group
(an "acquiring person") becoming the beneficial owner of 15% or more of our
outstanding common stock, subject to specified exceptions. Each right entitles
the registered holder to purchase from us one one-hundredth of a share of Junior
Participating Preferred Stock, Series I, at an exercise price of $100, subject
to adjustment under specified circumstances. If events specified in the
stockholder rights plan occur, each holder of rights other than the acquiring
person can exercise their rights. When a holder exercises a right, the holder
will be entitled to receive common stock valued at twice the exercise price of
the right. In some cases, the holder will receive cash, property or other
securities instead of common stock. We may redeem the rights for $0.01 per right
at any time prior to the tenth day after a person or group becomes an acquiring
person. The stockholder rights plan and the rights expire in June 2007.
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PLAN OF DISTRIBUTION
We and the trusts may sell the offered securities in and outside the United
States (a) through underwriters or dealers, (b) directly to purchasers,
including our affiliates, (c) through agents or (d) through a combination of any
of these methods. The prospectus supplement will include the following
information:
- the terms of the offering
- the names of any underwriters or agents
- the name or names of any managing underwriter or underwriters
- the purchase price of the securities
- the net proceeds from the sale of the securities
- any delayed delivery arrangements
- any underwriting discounts, commissions and other items constituting
underwriters' compensation
- any initial public offering price
- any discounts or concessions allowed or reallowed or paid to dealers
- any commissions paid to agents
SALE THROUGH UNDERWRITERS OR DEALERS
If underwriters are used in the sale, the underwriters will acquire the
securities for their own account. The underwriters may resell the securities
from time to time in one or more transactions, including negotiated
transactions, at a fixed public offering price or at varying prices determined
at the time of sale. Underwriters may offer securities to the public either
through underwriting syndicates represented by one or more managing underwriters
or directly by one or more firms acting as underwriters. Unless we inform you
otherwise in the prospectus supplement, the obligations of the underwriters to
purchase the securities will be subject to certain conditions, and the
underwriters will be obligated to purchase all the offered securities if they
purchase any of them. The underwriters may change from time to time any initial
public offering price and any discounts or concessions allowed or reallowed or
paid to dealers.
During and after an offering through underwriters, the underwriters may
purchase and sell the securities in the open market. These transactions may
include overallotment and stabilizing transactions and purchases to cover
syndicate short positions created in connection with the offering. The
underwriters may also impose a penalty bid, which means that selling concessions
allowed to syndicate members or other broker-dealers for the offered securities
sold for their account may be reclaimed by the syndicate if the offered
securities are repurchased by the syndicate in stabilizing or covering
transactions. These activities may stabilize, maintain or otherwise affect the
market price of the offered securities, which may be higher than the price that
might otherwise prevail in the open market. If commenced, the underwriters may
discontinue these activities at any time.
If dealers are used in the sale of securities, we or the trusts will sell
the securities to them as principals. They may then resell those securities to
the public at varying prices determined by the dealers at the time of resale. We
will include in the prospectus supplement the names of the dealers and the terms
of the transaction.
DIRECT SALES AND SALES THROUGH AGENTS
We and the trusts may sell the securities directly. In this case, no
underwriters or agents would be involved. We and the trusts may also sell the
securities through agents designated from time to time. In the prospectus
supplement, we will name any agent involved in the offer or sale of the offered
securities, and we will describe any commissions payable to the agent. Unless we
inform you otherwise in the
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prospectus supplement, any agent will agree to use its reasonable best efforts
to solicit purchases for the period of its appointment.
We and the trusts may sell the securities directly to institutional
investors or others who may be deemed to be underwriters within the meaning of
the Securities Act of 1933 with respect to any sale of those securities. We will
describe the terms of any such sales in the prospectus supplement.
DELAYED DELIVERY CONTRACTS
If we so indicate in the prospectus supplement, we and the trusts may
authorize agents, underwriters or dealers to solicit offers from certain types
of institutions to purchase securities from us or the trusts at the public
offering price under delayed delivery contracts. These contracts would provide
for payment and delivery on a specified date in the future. The contracts would
be subject only to those conditions described in the prospectus supplement. The
prospectus supplement will describe the commission payable for solicitation of
those contracts.
GENERAL INFORMATION
We may have agreements with the agents, dealers and underwriters to
indemnify them against certain civil liabilities, including liabilities under
the Securities Act of 1933, or to contribute with respect to payments that the
agents, dealers or underwriters may be required to make. Agents, dealers and
underwriters may be customers of, engage in transactions with or perform
services for us in the ordinary course of their businesses.
LEGAL MATTERS
Richards, Layton & Finger, P.A., our special Delaware counsel and special
Delaware counsel to the trusts, will issue opinions about the legality of the
trust preferred securities, the enforceability of the applicable declaration of
trust and the creation of the trusts for us. Mr. Jay D. Browning, Esq., Managing
Attorney, Corporate Law and Secretary of Valero, will issue opinions about the
legality of Valero's guarantees, debt securities, common stock, stock purchase
contracts and stock purchase units for us. Mr. Browning is our employee and at
May 1, 2000, beneficially owned 1,419 shares of our common stock (including
shares held under employee benefit plans) and held options under our employee
stock option plans to purchase an additional 28,412 shares of our common stock.
None of such shares or options were granted in connection with the offering of
the securities. Any underwriters will be advised about other issues relating to
any offering by their own legal counsel.
EXPERTS
Our audited consolidated financial statements incorporated by reference in
this prospectus from our annual report on Form 10-K for the year ended December
31, 1999 have been audited by Arthur Andersen LLP, independent public
accountants, as indicated in their report with respect thereto, and are
incorporated in this prospectus by reference in reliance upon the authority of
said firm as experts in accounting and auditing in giving said report.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements and other
information with the SEC. You can read and copy any materials we file with the
SEC at the SEC's public reference room at 450 Fifth Street, N.W., Washington,
D.C. 20549. You can obtain information about the operation of the SEC's public
reference room by calling the SEC at 1-800-SEC-0330. The SEC also maintains a
web site that contains information we file electronically with the SEC, which
you can access over the Internet at http://www.sec.gov. You can obtain
information about us at the offices of the New York Stock Exchange, 20 Broad
Street, New York, New York 10005.
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This prospectus is part of a registration statement we have filed with the
SEC relating to the securities we may offer. As permitted by SEC rules, this
prospectus does not contain all of the information we have included in the
registration statement and the accompanying exhibits and schedules we file with
the SEC. You may refer to the registration statement, the exhibits and schedules
for more information about us and our securities. The registration statement,
exhibits and schedules are available at the SEC's public reference room or
through its web site.
INFORMATION WE INCORPORATE BY REFERENCE
We are incorporating by reference information we file with the SEC, which
means that we are disclosing important information to you by referring you to
those documents. The information we incorporate by reference is an important
part of this prospectus, and information that we file later with the SEC
automatically will update and supersede this information. We incorporate by
reference the documents listed below and any future filings we make with the SEC
under Section 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934
until we sell all the securities:
- our annual report on Form 10-K for the year ended December 31, 1999
- our quarterly report on Form 10-Q for the quarterly period ended March
31, 2000
- the description of our common stock contained in our registration
statement on Form 8-A, as may be amended from time to time to update that
description
- the description of the rights associated with our common stock contained
in our registration statement on Form 8-A, as may be amended from time to
time to update that description
- our current report on Form 8-K dated March 17, 2000 and filed with the
SEC on March 20, 2000
You may request a copy of these filings (other than an exhibit to those
filings unless we have specifically incorporated that exhibit by reference into
the filing), at no cost, by writing or telephoning us at the following address:
Valero Energy Corporation
One Valero Place
San Antonio, Texas 78212
Attention: Investor Relations
Telephone: (210) 370-2139
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[valero energy corporation logo]
