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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 1-13175
VALERO ENERGY CORPORATION
(Exact name of registrant as specified in its charter)
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DELAWARE 74-1828067
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
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ONE VALERO PLACE
SAN ANTONIO, TEXAS 78212
(Address of principal executive offices) (Zip Code)
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Registrant's telephone number, including area code (210) 370-2000
Securities registered pursuant to Section 12(b) of the Act:
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NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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Common Stock, $.01 Par Value New York Stock Exchange
Preferred Share Purchase Rights New York Stock Exchange
</TABLE>
Securities registered pursuant to Section 12(g) of the Act:
NONE.
Indicate by check mark whether the registrant (1) has filed all reports to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value on February 1, 2000, of the registrant's Common
Stock, $.01 par value, held by nonaffiliates of the registrant, based on the
average of the high and low prices as quoted in the New York Stock Exchange
Composite Transactions listing for that date, was approximately $1.2 billion. As
of February 1, 2000, 55,753,583 shares of the registrant's Common Stock were
issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The Company intends to file with the Securities and Exchange Commission in
March 2000 a definitive Proxy Statement for the Company's Annual Meeting of
Stockholders scheduled for May 4, 2000, at which directors of the Company will
be elected. Portions of the 2000 Proxy Statement are incorporated by reference
in Part III of this Form 10-K and shall be deemed to be a part hereof.
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CROSS-REFERENCE SHEET
The following table indicates the headings in the 2000 Proxy Statement
where the information required in Part III of Form 10-K may be found.
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FORM 10-K ITEM NO. AND CAPTION HEADING IN 2000 PROXY STATEMENT
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10. "Directors and Executive Officers of the
Registrant".............................. "Proposal No. 1 -- Election of Directors,"
and "Information Concerning Nominees and
Other Directors" and "Section 16(a)
Beneficial Ownership Reporting Compliance"
11. "Executive Compensation"................. "Executive Compensation," "Stock Option
Grants and Related Information," "Report of
the Compensation Committee of the Board of
Directors on Executive Compensation,"
"Retirement Benefits," "Arrangements with
Certain Officers and Directors" and
"Performance Graph"
12. "Security Ownership of Certain Beneficial
Owners and Management"................... "Beneficial Ownership of Valero Securities"
13. "Certain Relationships and Related
Transactions"............................ "Transactions with Management and Others"
</TABLE>
Copies of all documents incorporated by reference, other than exhibits to
such documents, will be provided without charge to each person who receives a
copy of this Form 10-K upon written request to Jay D. Browning, Corporate
Secretary, Valero Energy Corporation, P.O. Box 500, San Antonio, Texas
78292-0500.
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CONTENTS
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PAGE
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Cross Reference Sheet....................................... ii
PART I
Item 1. Business.................................................... 1
Proposed Acquisition of California Refining and Marketing
Assets...................................................... 2
Valero's Strategic Direction................................ 3
Refining, Marketing and Feedstock Supply.................... 4
Refining.................................................... 4
Corpus Christi Refinery..................................... 4
Texas City Refinery......................................... 5
Paulsboro Refinery.......................................... 5
Houston Refinery............................................ 6
Krotz Springs Refinery...................................... 6
Selected Operating Results.................................. 7
Marketing................................................... 7
Feedstock Supply............................................ 8
Factors Affecting Operating Results......................... 8
Competition................................................. 10
Environmental Matters....................................... 10
Executive Officers of the Registrant........................ 12
Employees................................................... 13
Item 2. Properties.................................................. 13
Item 3. Legal Proceedings........................................... 13
Environmental Proceedings Related to Paulsboro
Acquisition................................................. 13
Other Environmental Proceedings............................. 13
Litigation Relating to Discontinued Operations.............. 13
Other Litigation............................................ 14
General..................................................... 14
Item 4. Submission of Matters to a Vote of Security Holders......... 14
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters......................................... 15
Item 6. Selected Financial Data..................................... 16
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 17
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk........................................................ 30
Item 8. Financial Statements........................................ 34
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 67
PART III
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K......................................................... 67
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iii
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CAUTIONARY STATEMENTS RELEVANT TO FORWARD-LOOKING INFORMATION FOR THE PURPOSE OF
"SAFE HARBOR" PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995.
This annual report on Form 10-K contains forward-looking statements
relating to Valero Energy Corporation's operations that are based on
management's current expectations, estimates and projections about the petroleum
and chemicals industries. Words such as "expects," "intends," "plans,"
"projects," "believes," "estimates" and similar expressions are used to identify
forward-looking statements. These statements are not guarantees of future
performance and involve certain risks, uncertainties and assumptions that are
difficult to predict. Therefore, actual outcomes and results may differ
materially from Valero's expressed expectations or forecasts. While these
forward-looking statements, and any assumptions upon which they are based, are
made in good faith and reflect Valero's current judgment regarding the direction
of its business, actual results will almost always vary, sometimes materially,
from any current estimates, predictions, projections, assumptions, or other
indication of future performance. Some important factors (but not necessarily
all factors) that could affect Valero's sales volumes, growth strategies, future
profitability and operating results, or that otherwise could cause actual
results to differ materially from those expressed or forecast by Valero are
discussed in "Item 1. Business" under the headings "Factors Affecting Operating
Results," "Competition," and "Environmental Matters," and in "Management's
Discussion and Analysis of Financial Condition and Results of Operations" under
the heading "Forward-Looking Statements" as well as in Valero's other filings
with the Securities and Exchange Commission. Valero undertakes no obligation to
update or publicly release the result of any revisions to any forward-looking
statements to reflect events or circumstances after the date of this Form 10-K
or to reflect the occurrence of unanticipated events.
PART I
ITEM 1. BUSINESS
Valero Energy Corporation(1) is one of the United States' largest
independent petroleum refiners and marketers, and the largest on the Gulf Coast.
Valero owns and operates five refineries in Texas, Louisiana and New Jersey with
a combined throughput capacity of approximately 785,000 barrels per day, or BPD.
Valero principally produces premium, environmentally clean products such as
reformulated gasoline, low-sulfur diesel and oxygenates and can produce gasoline
meeting specifications of the California Air Resources Board, or CARB gasoline.
Valero also produces a substantial slate of middle distillates, jet fuel and
petrochemicals. The Company's products are marketed in 31 states and selected
export markets.
As used in this report, the terms "Valero" and the "Company" 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.
Valero's principal executive offices are located at One Valero Place, San
Antonio, Texas, 78212 and its telephone number is (210) 370-2000.
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(1) 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 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."
1
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For financial and statistical information regarding the Company's
operations, see "Management's Discussion and Analysis of Financial Condition and
Results of Operations." For a discussion of cash flows provided by and used in
the Company's operations, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
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 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
2
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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.
VALERO'S STRATEGIC DIRECTION
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 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. Over 55% of Valero's total
gasoline production is premium or reformulated gasoline, or RFG, which sells for
a premium over conventional grades of gasoline. The Company also produces over
75% of its distillate slate as low-sulfur diesel and jet fuel, which sell for 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 the
Company 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.
Valero intends to remain a premier, independent refining and marketing
company that adds stockholder value through innovative, efficient upgrading of
low-cost feedstocks into high value, environmentally clean products. The
following are some specific components of its strategic plan for 2000:
- Growth through acquisitions. Valero has continued to focus on growth and
diversification through acquisitions. In 2000, Valero will continue to
seek refinery acquisition opportunities that are accretive to and
diversify earnings and cash flow.
- Cost effective upgrading. 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, the Company plans to expand the Paulsboro
Refinery's fluid catalytic cracking unit by 6,500 BPD and its crude unit
by approximately 2,000 BPD.
- Cost savings initiatives. 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. The
components of Valero's cost savings program include: improving mechanical
availability, reducing maintenance costs, improving energy efficiency,
replicating best operating practices at all refineries, improving
purchasing efficiencies through multi-refinery contracts, reducing
warehouse inventory and reducing the use of outside professional
services.
- Diversification. Valero continues to evaluate several strategies that
offer opportunities to diversify earnings, including retail petroleum
marketing, petrochemical ventures, and other ancillary businesses.
- Safety and environmental. Safety is a core business value and Valero will
continue to focus on and devote significant time and resources to safety
training and accountability programs across the Company. Valero has a
reputation for being environmentally proactive and will continue actively
monitoring developments with the EPA's proposed air emissions reduction
rules and other regulatory changes.
3
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REFINING, MARKETING AND FEEDSTOCK SUPPLY
Refining
Valero's five refineries have a combined total throughput capacity of
approximately 785,000 BPD. The following table lists the location of each of its
refineries and their respective feedstock throughput capacities.
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FEEDSTOCK THROUGHPUT
REFINERY LOCATION CAPACITY IN BPD
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Corpus Christi Refinery.................. Corpus Christi, Texas 215,000
Texas City Refinery...................... Texas City, Texas 200,000
Paulsboro Refinery....................... Paulsboro, New Jersey 165,000
Houston Refinery......................... Houston, Texas 120,000
Krotz Springs Refinery................... Krotz Springs, Louisiana 85,000
--------
Total.................................................... 785,000(1)
========
</TABLE>
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(1) Crude unit capacity = 528,000 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.
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.
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 oxygenates(2) 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 the
Company'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,
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(2) "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.
4
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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, the Company 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.
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 the Company'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.
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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.
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SELECTED OPERATING RESULTS
The following tables set forth certain consolidated operating results for
the last three fiscal years (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>
YEAR ENDED DECEMBER 31,
--------------------------
1999 1998 1997
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<S> <C> <C> <C>
Refinery Throughput Volumes.............................. 712 579(3) 417(4)
Sales Volumes............................................ 1,033 894(3) 630(4)
Average Throughput Margin per Barrel..................... $ 2.93 $3.53 $4.35
Average Operating Cost per Barrel:
Cash (Fixed and Variable).............................. $ 1.85 $2.06 $2.00
Depreciation and Amortization.......................... .53 .57 .61
------ ----- -----
Total Operating Cost per Barrel........................ $ 2.38 $2.63 $2.61
====== ===== =====
Charges:
Crude Oils:
Sour................................................ 48% 37% 26%
Heavy sweet......................................... 12 20 21
Light sweet......................................... 9 11 10
------ ----- -----
Total Crude Oils.................................... 69 68 57
High-sulfur residual fuel oil.......................... 3 9 17
Low-sulfur residual fuel oil........................... 6 3 3
Other feedstocks and blendstocks....................... 22 20 23
------ ----- -----
Total Charges.................................. 100% 100% 100%
====== ===== =====
Yields:
Gasolines and blendstocks.............................. 51% 53% 53%
Distillates............................................ 29 28 25
Petrochemicals......................................... 5 4 6
Lubes and asphalts..................................... 3 1 --
Other products......................................... 12 14 16
------ ----- -----
Total Yields................................... 100% 100% 100%
====== ===== =====
</TABLE>
For additional information regarding the Company's operating results for
the three years ended December 31, 1999, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
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(3) For the fourth quarter of 1998 following the acquisition of the Paulsboro
Refinery, refinery throughput volumes and sales volumes were 640 MBPD and
949 MBPD, respectively.
(4) For the eight months following the acquisition of Basis Petroleum, Inc.,
refinery throughput volumes and sales volumes were 543 MBPD and 740 MBPD,
respectively.
Marketing
The Company's product slate is presently comprised of approximately 90%
premium products such as gasoline and related components, distillates, lubricant
basestocks and petrochemicals. Valero sells refined products under spot and term
contracts to bulk and truck rack customers at over 190 locations in 31 states
throughout the United States and selected export markets in Latin America. Total
product sales volumes
7
<PAGE> 11
during 1999 averaged approximately 1,033,000 BPD. Sales volumes include amounts
produced at the Company'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. Currently, Valero markets over 180,000
BPD of gasoline and distillates through truck rack facilities. The principal
purchasers of its products from truck racks have been wholesalers and
distributors in the Northeast, Southeast, Midwest 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 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. In 1999, 13% of Valero's consolidated operating revenues were derived
from Mobil Oil Corporation. Other than sales to Mobil, no single purchaser of
the Company'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. 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 "Factors Affecting Operating Results" and
"Outlook" under "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
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 now 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.
Approximately 80% of Valero's total crude oil feedstock requirements are
purchased through term feedstock contracts totaling approximately 425,000 BPD.
The remainder of its crude oil feedstock requirements are 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, the Company 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 (discussed in footnote 1
above), 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 all of 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.
Valero owns feedstock and refined product storage facilities and leases
feedstock and refined product storage facilities in various locations. The
Company believes its storage facilities are generally adequate for its refining
and marketing operations.
FACTORS AFFECTING OPERATING RESULTS
The Company's earnings and cash flow from operations are primarily affected
by the relationship between refined product prices and the prices for crude oil
and other feedstocks. The cost to acquire feedstocks and the price for which
refined products are ultimately sold depends on numerous factors beyond the
Company's control, including the 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,
8
<PAGE> 12
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 and
installation of additional refinery crude distillation and upgrading facilities,
price volatility, international political and economic developments and other
factors beyond the Company'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.
A large portion of Valero's feedstock supplies are secured under term
contracts. There is no assurance 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, the Company's operations could be adversely affected. In
addition, the loss of, or an adverse change in the terms of, certain of its
feedstock supply agreements or the loss of sources or means of delivery of its
feedstock supplies, could 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 in
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 will necessarily need to reduce the sulfur, benzene and
vapor pressure of gasoline, which could effectively reduce the production
capacity of U.S. refiners.
MTBE margins are affected by the price of MTBE and its feedstocks, methanol
and butane, as well as the demand for RFG, oxygenated gasoline and premium
gasoline. The worldwide movement to reduce lead and aromatics in gasoline is
expected to increase worldwide demand for oxygenates to replace the octane
provided by lead-based compounds. The general growth in demand for cleaner
burning gasolines could lead to continued growth in the demand for MTBE.
However, initiatives have been passed in California seeking to ban the use of
MTBE as a gasoline component by 2003 in California. If MTBE were to be
restricted or banned throughout the U.S., the Company believes that its major
MTBE-producing facilities could be modified to produce other high-octane
gasoline blendstocks or other petrochemicals for a minimal capital investment.
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, the Company's results of operations
could potentially be adversely affected. The Company 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 the Company's various alternative products, and as a result, such an
action would not be expected to have a material adverse effect on the Company.
9
<PAGE> 13
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, the Company has generally been able to
recover its higher operating costs by generating higher margins than many
conventional refiners that use lighter 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. The Company
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.
In April 1995, six major oil refiners filed a lawsuit against Unocal
Corporation in Los Angeles, California seeking a determination that Unocal's
claimed patent on certain gasoline compositions was invalid and unenforceable.
The Company was not a party to this litigation. Unocal's claimed patent covers a
substantial portion of the reformulated gasoline compositions required by the
CARB Phase II regulations that went into effect in March 1996. In 1997, a
federal court jury upheld the validity of Unocal's patent and awarded Unocal
royalty damages based on infringement of the patent. The case is on appeal, but
no decision has been reached. Unocal also has three related gasoline patents not
involved in the litigation. If Valero were required to pay a royalty on the
compositions claimed by Unocal's patents, such amounts could affect its
operating results and alter the blending economics for compositions not covered
by the patents. Valero is unable to predict the validity or effect of any
claimed Unocal patent.
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 the Company's crude oil and feedstock
supplies are purchased from third party sources, while some competitors have
proprietary sources of crude oil available for their own refineries.
The refining industry is highly competitive with respect to both feedstock
supply and marketing. 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 or own retail outlets
for its refined products. Many of its competitors, however, obtain a significant
portion of their feedstocks from company-owned production and are able to
dispose of refined products at their own retail outlets. Competitors that have
their own production or 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.
The Company expects a continuation of the trend of industry restructuring
and consolidation through mergers, acquisitions, divestitures, joint ventures
and similar transactions, making for a more competitive business environment
while providing 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.
ENVIRONMENTAL MATTERS
Valero's operations are subject to environmental regulation by federal,
state and local authorities, including but not limited to, the EPA, the Texas
Natural Resource Conservation Commission, the New Jersey Department of
Environmental Protection and the Louisiana Department of Environmental Quality.
The regulatory requirements relate primarily to discharge of materials into the
environment, waste management and pollution prevention measures. Several of the
more significant federal laws applicable to the Company's operations include the
Clean Air Act, the Clean Water Act, the Comprehensive Environmental Response,
Compensation and Liability Act, 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
10
<PAGE> 14
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 December 1999, the Tier II gasoline standard was published by the EPA 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.
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 significant capital
expenditures will be required to comply with the MACT II rule.
CERCLA and RCRA, and related state law, subject the Company to the
potential obligation to remove or mitigate the environmental impact of the
disposal or release of certain pollutants from Valero's facilities and at
formerly owned sites. Under CERCLA, the Company is subject to potential joint
and several liability for the costs of remediation at "superfund" sites at which
it has been identified as a "potentially responsible party." Pursuant to the
terms of the Basis Petroleum, Inc. acquisition, Salomon agreed to indemnify the
Company 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 terms, conditions and limitations. See Note
3 of Notes to Consolidated Financial Statements for information regarding the
settlement of certain contingent environmental obligations for which Salomon was
responsible in connection with the Company's acquisition of Basis. As of
December 31, 1999, Valero has not been designated as a "potentially responsible
party" under CERCLA for any sites or costs not covered by Salomon's indemnity.
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 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 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. 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 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.
The Company 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 control technology greater operational
flexibility, including increased throughput capacities, as long as a
facility-wide emissions cap is not exceeded.
11
<PAGE> 15
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 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 and Valero is financing the scrubber through a
lease 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 the Company 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 discussed above and do not include any amounts related to
constructed facilities for which the portion of expenditures relating to
compliance with environmental regulations is not determinable.
Governmental regulations are complex and subject to different
interpretations. Therefore, future action and regulatory initiatives could
result in changes to expected operating permits, additional remedial actions or
increased capital expenditures and operating costs that cannot be assessed with
certainty at this time.
EXECUTIVE OFFICERS OF THE REGISTRANT
<TABLE>
<CAPTION>
NAME AGE POSITIONS HELD WITH VALERO OFFICER SINCE
- ---- --- -------------------------- -------------
<S> <C> <C> <C>
William E. Greehey................ 63 Chairman of the Board, President 1979
and Chief Executive Officer
Gregory C. King................... 39 Senior Vice President and Chief 1997
Operating Officer
John D. Gibbons................... 46 Vice President -- Finance and 1997
Chief Financial Officer,
Keith D. Booke.................... 41 Vice President and Chief 1997
Administrative Officer
S. Eugene Edwards................. 43 Vice President 1998
John F. Hohnholt.................. 47 Vice President 1998
</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, resumed this position in November 1996. Mr. Greehey has served as
Valero's as 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 the Company 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 the Company 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 of the Company since 1998. Prior to that he served as Vice
President -- Administration of the Company 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 the Company in January 1998 and
functions as head of the Supply, Marketing and Transportation Division. Mr.
Edwards joined Old Valero in 1982 and held various
12
<PAGE> 16
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 the Company 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.
EMPLOYEES
As of January 31, 2000, the Company had 2,518 employees.
ITEM 2. PROPERTIES
The Company's properties include its five refineries described above and
related facilities located in the States of Texas, Louisiana and New Jersey. See
"Refining, Marketing and Feedstock Supply" for additional information regarding
properties of the Company. Valero believes that its facilities are generally
adequate for their respective operations and that its facilities are maintained
in a good state of repair. The Company is the lessee under a number of
cancelable and non-cancelable leases for certain real properties, including
office facilities and various facilities and equipment used to store, transport
and produce refinery feedstocks and/or refined products. See Note 14 of Notes to
Consolidated Financial Statements.
ITEM 3. LEGAL PROCEEDINGS
Environmental Proceedings Related to Paulsboro Acquisition
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
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.
One of these orders has been consolidated with pre-existing Mobil orders.
Collectively, these proceedings potentially involve the imposition of monetary
sanctions in excess of $100,000 and other equitable relief which could
ultimately include required capital expenditures or permit modification or
revocation. Pursuant to the terms of the purchase agreement, Mobil agreed to
indemnify the Company for a period of five years from the closing of the
acquisition for any governmental environmental fines or penalties assessed
against the Company that relate to events that occurred prior to September 17,
1998. The Company believes that the foregoing proceedings should not have a
material adverse effect upon the Company's operations or financial condition.
Other Environmental Proceedings
On June 11, 1999, the Texas Natural Resources Conservation Commission
notified the Company of its commencement of proceedings against the Company's
Texas City refinery concerning certain record keeping deficiencies and alleged
emissions exceedances, most of which occurred prior to the Company'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 the Company paid an agreed penalty of $174,455.
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 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
13
<PAGE> 17
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
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 117th State District Court, Nueces County,
Texas. 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of 1999.
14
<PAGE> 18
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is listed under the symbol "VLO" on the New York
Stock Exchange, which is the principal trading market for this security. As of
February 1, 2000, there were approximately 5,445 holders of record and an
estimated 10,800 additional beneficial owners of the Company's common stock. The
Company's common stock began trading on the New York Stock Exchange on August 1,
1997 (the business day immediately following the Restructuring).
The following table sets forth the range of the high and low sales prices
of the common stock as quoted in The Wall Street Journal New York Stock
Exchange -- Composite Transactions listing, and the amount of per-share
dividends for each quarter in the preceding two years.
<TABLE>
<CAPTION>
SALES PRICES OF THE
COMMON STOCK
--------------------- DIVIDENDS PER
QUARTER ENDED HIGH LOW COMMON SHARE
- ------------- ---------- -------- -------------
<S> <C> <C> <C>
1999:
March 31............................................ $ 24 7/8 $ 16 3/4 $ .08
June 30............................................. 25 19 .08
September 30........................................ 23 13/16 19 1/4 .08
December 31......................................... 23 1/8 17 3/8 .08
1998:
March 31............................................ $ 36 1/2 $ 27 9/16 $ .08
June 30............................................. 36 31 5/16 .08
September 30........................................ 33 13/16 17 5/8 .08
December 31......................................... 26 1/16 17 3/4 .08
</TABLE>
The Company's Board of Directors declared a quarterly dividend of $.08 per
share of common stock at its January 20, 2000 meeting. Dividends are considered
quarterly by the Board of Directors and may be paid only when approved by the
Board.
15
<PAGE> 19
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data set forth below for the year ended December 31,
1999 is derived from the Company's Consolidated Financial Statements contained
in this report. The selected financial data for the years ended prior to
December 31, 1999 is derived from the selected financial data contained in the
Company's Annual Report on Form 10-K for the year ended December 31, 1998.
The following summaries are in thousands of dollars except for per share
amounts:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------
1999 1998(1)(2) 1997(3) 1996 1995
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Operating revenues................. $7,961,168 $5,539,346 $5,756,220 $2,757,853 $1,772,638
Operating income (loss)............ $ 69,141 $ (51,198) $ 211,034 $ 89,748 $ 123,755
Income (loss) from continuing
operations....................... $ 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).................. $ 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..................... $ 14,287 $ (47,291) $ 91,504 $ 61,374 $ 48,020
========== ========== ========== ========== ==========
Earnings (loss) per share of common
stock:
Continuing operations............ $ .25 $ (.84) $ 2.16 $ .51 $ 1.33
Discontinued operations.......... -- -- (.39) .89 (.23)
---------- ---------- ---------- ---------- ----------
Total.................... $ .25 $ (.84) $ 1.77 $ 1.40 $ 1.10
========== ========== ========== ========== ==========
Earnings (loss) per share of common
stock -- assuming dilution:
Continuing operations............ $ .25 $ (.84) $ 2.03 $ .44 $ 1.16
Discontinued operations.......... -- -- (.29) .98 .01
---------- ---------- ---------- ---------- ----------
Total.................... $ .25 $ (.84) $ 1.74 $ 1.42 $ 1.17
========== ========== ========== ========== ==========
Total assets....................... $2,979,272 $2,725,664 $2,493,043 $1,985,631 $1,904,655
Long-term obligations and
redeemable preferred stock....... $ 785,472 $ 822,335 $ 430,183 $ 354,457 $ 461,521
Dividends per share of common
stock............................ $ .32 $ .32 $ .42 $ .52 $ .52
</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 Old Valero's natural gas related services business
for periods prior to the July 31, 1997 Restructuring.
See Notes to Consolidated Financial Statements.
16
<PAGE> 20
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following review of the results of operations and financial condition
of the Company should be read in conjunction with Item 1. Business and Item 8.
Financial Statements included elsewhere in this report. In the discussions that
follow, all "per share" amounts are on a diluted basis.
RESTRUCTURING
As described in Note 1 of Notes to Consolidated Financial Statements under
Principles of Consolidation and Basis of Presentation, on July 31, 1997, Old
Valero spun off the Company to Old Valero's stockholders and merged its
remaining natural gas related services business with PG&E. These events are
collectively referred to as the "Restructuring." 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 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 report, reflect Old Valero's
natural gas related services business as discontinued operations of the Company.
FORWARD-LOOKING STATEMENTS
The following discussion contains certain estimates, predictions,
projections and other "forward-looking statements" (within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934) that involve various risks and uncertainties. While these
forward-looking statements, and any assumptions upon which they are based, are
made in good faith and reflect the Company's current judgment regarding the
direction of its business, actual results will almost always vary, sometimes
materially, from any estimates, predictions, projections, assumptions, or other
future performance suggested herein. Some important factors (but not necessarily
all factors) that could affect the Company's sales volumes, growth strategies,
future profitability and operating results, or that otherwise could cause actual
results to differ materially from those expressed in any forward-looking
statement include the following: renewal or satisfactory replacement of the
Company's feedstock arrangements as well as market, political or other forces
generally affecting the pricing and availability of refinery feedstocks and
refined products; write-downs of inventories caused by a material decline in
petroleum prices; accidents or other unscheduled shutdowns affecting the
Company's, its suppliers' or its customers' pipelines, plants, machinery or
equipment; excess industry capacity; competition from products and services
offered by other energy enterprises; changes in the cost or availability of
third-party vessels, pipelines and other means of transporting feedstocks and
products; cancellation of or failure to implement planned capital projects and
realize the various assumptions and benefits projected for such projects; state
and federal environmental, economic, safety and other policies and regulations,
any changes therein, and any legal or regulatory delays or other factors beyond
the Company's control; weather conditions affecting the Company's operations or
the areas in which the Company's products are marketed; rulings, judgments, or
settlements in litigation or other legal matters, including unexpected
environmental remediation costs in excess of any reserves; the introduction or
enactment of federal or state legislation which may adversely affect the
Company's business or operations; and changes in the credit ratings assigned to
the Company's debt securities and trade credit. All subsequent written and oral
forward-looking statements attributable to the Company or persons acting on its
behalf are expressly qualified in their entirety by the foregoing. The Company
undertakes no obligation to publicly release the result of any revisions to any
such forward-looking statements that may be made to reflect events or
circumstances after the date of this report or to reflect the occurrence of
unanticipated 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. 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. See Note 17 of Notes to Consolidated
Financial Statements for additional information about this proposed acquisition.
17
<PAGE> 21
RESULTS OF OPERATIONS
1999 Compared to 1998
FINANCIAL HIGHLIGHTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------
CHANGE
-------------------
1999 1998(1) AMOUNT %
----------- ----------- ----------- ----
<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.
18
<PAGE> 22
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(4):
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(4):
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
(U.S. GULF COAST) (DOLLARS PER BARREL)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
CHANGE
------------
1999 1998 AMOUNT %
------ ------ ------ ---
<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 (Arab medium)(5).................. $ 2.91 $ 3.37 $ (.46) (14)
WTI less heavy sweet crude oil (Cabinda)(5)............... $ 1.05 $ 1.40 $ (.35) (25)
WTI less high-sulfur resid (Singapore)(5)................. $ 1.63 $ 1.57 $ .06 4
Products:
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) Charges and yields for 1998 have been restated from amounts reported in the
1998 Form 10-K to conform to feedstock and product classifications used in
1999.
(5) Excludes $.25 to $.50 per barrel for other delivery related costs into the
Company's refineries.
19
<PAGE> 23
GENERAL
The Company 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. For the fourth quarter of
1999, the Company reported net income of $16.5 million, or $.29 per share,
compared to a net loss of $85.7 million, or $1.53 per share, for the fourth
quarter of 1998. Non-cash inventory write-downs resulting from significant
declines in feedstock and refined product prices reduced the fourth quarter and
total year 1998 results by $133.2 million and $170.9 million, respectively.
Before the effect of the inventory write-downs, net income for the fourth
quarter of 1998 was $.9 million, or $.02 per share, and net income for the full
year of 1998 was $63.8 million, or $1.14 per share.
Excluding the effect of the 1998 inventory write-down, results for the
fourth quarter of 1999 increased from fourth quarter 1998 levels due to higher
throughput volumes combined with an improvement in product margins, reductions
in cash operating costs, and reduced LIFO inventories. Partially offsetting
these increases in fourth quarter income were lower discounts for the Company's
crude oil feedstocks. Full year 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 the Company's Corpus Christi refinery in early 1999 due to a major
maintenance turnaround and expansion of the heavy oil cracker and related units,
and increased interest expense. Partially offsetting these decreases in full
year 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 the Company'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 the
Company'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
20
<PAGE> 24
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 the Company's price risk management
program. In 1999, the Company'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 Item 7A. Quantitative and Qualitative
Disclosures About Market Risk, Note 1 of Notes to Consolidated Financial
Statements under "Price Risk Management Activities," and Note 7 of Notes to
Consolidated Financial Statements for additional information regarding the
Company'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 the Company's 20% equity
interest in the Javelina off-gas processing plant in Corpus Christi (see Note 1
of Notes to Consolidated Financial Statements 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.
21
<PAGE> 25
1998 Compared to 1997
FINANCIAL HIGHLIGHTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------
CHANGE
----------------
1998(1) 1997(2) AMOUNT %
----------- ----------- --------- ----
<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).
22
<PAGE> 26
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(6):
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(6):
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
(U.S. GULF COAST) (DOLLARS PER BARREL)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
CHANGE
------------
1998 1997 AMOUNT %
------ ------ ------ ---
<S> <C> <C> <C> <C>
Feedstocks:
WTI crude oil............................................. $14.41 $20.61 $(6.20) (30)%
WTI less sour crude oil (Arab medium)(7).................. $ 3.37 $ 3.05 $ .32 10
WTI less heavy sweet crude oil (Cabinda)(7)............... $ 1.40 $ 1.08 $ .32 30
WTI less high-sulfur resid (Singapore)(7)................. $ 1.57 $ 2.61 $(1.04) (40)
Products:
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) Charges and yields have been restated from amounts reported in the 1998 Form
10-K to conform to feedstock and product classifications used in 1999.
(7) Excludes $.25 to $.50 per barrel for other delivery related costs into the
Company's refineries.
23
<PAGE> 27
GENERAL
The Company 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. For
the fourth quarter of 1998, the Company reported a net loss of $85.7 million, or
$1.53 per share, compared to net income of $12.4 million, or $.22 per share, for
the fourth quarter of 1997. The fourth quarter 1998 results were reduced by a
$133.2 million non-cash write-down in the carrying amount of the Company's
refinery inventories resulting from a significant decline in feedstock and
refined product prices during the quarter. Coupled with a $37.7 million non-cash
inventory write-down in the first quarter of 1998, full-year 1998 results were
reduced by non-cash inventory write-downs totaling $170.9 million.
Excluding the effects of the inventory write-downs, fourth quarter 1998 net
income ($.9 million, or $.02 per share), and total year 1998 net income ($63.8
million, or $1.14 per share) were 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 July 31, 1997 Restructuring. 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
24
<PAGE> 28
products and feedstocks under the Company's price risk management program. In
1998, the Company'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 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 the Company'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.
OUTLOOK
During the last half of 1998 and throughout most of 1999, the Company
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 extreme 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 the Company's primary
feedstocks, thus resulting in higher feedstock costs and lower discounts. These
conditions combined to create an exceptionally difficult period for refiners,
including the Company.
25
<PAGE> 29
However, beginning in late 1999, the weak refining industry fundamentals
that had prevailed during the latter half of 1998 and most of 1999 finally began
to show signs of improvement. At times during the last several months of 1999
and into 2000, crude oil and refined product inventories fell dramatically and
are currently at historically low levels. In early February, inventories, when
compared to the corresponding period in prior years, were at their lowest levels
in 15 years for gasoline while distillate inventories were as low as they have
been since 1990. The recent 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.
Primarily as a result of these substantial declines in inventory levels,
refining margins have improved significantly in the early part of 2000. In
January 2000, the U.S. Gulf Coast margins on gasoline and heating oil averaged
$1.87 per barrel and $2.94 per barrel, respectively, an increase of $.70 per
barrel for gasoline and $1.93 per barrel for heating oil compared to December
1999. This also represents a substantial increase from comparable margins in
January 1999 of $1.29 per barrel for gasoline and $.53 per barrel for heating
oil.
Valero anticipates that margins for 2000 will be favorable as a result of
strong refined product demand combined with limited growth in the supply of
refined products. This expectation is based on several factors, including the
following:
- A projected growth in worldwide crude oil demand for 2000 of about 2.2
million barrels per day, up from 1 million barrels per day growth in
1999, which should result in improved feedstock discounts as the
increased production required to meet the demand growth will most likely
result in more production of heavy crude oils.
- Inventories of refined products are at historically low levels. Because
demand for refined products is expected to remain strong, additional
supplies will be necessary to compensate for the low refined product
inventory levels. Accordingly, increased crude supplies will be needed
just to maintain refined product inventories at current levels.
- A healthy U.S. economy resulting in a projected 1.5% growth in gasoline
demand as well as increased demand for low-sulfur diesel and jet fuel.
- Stronger demand for light products in Europe and Asia, resulting in
reduced available volumes for imports.
- A reduction in refinery light product yields resulting from more
stringent fuel specifications in the U.S. and Europe that became
effective at the beginning of 2000.
- Slowdowns in additions to industry refining capacity due to the poor
margin conditions in 1998 and 1999.
- Petrochemical demand is also growing once again, which means that
petrochemicals that were being blended into gasoline are now being sold
as individual products in the petrochemical market. Valero believes that
this has already reduced gasoline production by over 100,000 barrels per
day.
- These supply reductions, combined with strong demand growth, should
further draw down inventories and support higher refined product margins.
Beyond 2000, Valero anticipates, based on projected supply and demand
fundamentals, that refining margins should show a steady but moderate
improvement. Refined product supply and demand balances are
26
<PAGE> 30
expected to tighten in the U.S., Europe and Asia as the combined effect of
increasing demand, more stringent gasoline specifications, and refinery closures
resulting from both pipeline competition and increased capital requirements to
meet the increasingly stringent fuel specifications should more than offset the
effect of refinery capacity additions, conversion unit expansions, and certain
new refineries that are being put into service in Asia. Crude oil demand is
expected to continue to grow longer term. If, as anticipated, OPEC production
increases in response to the increased demand for crude oil, then the spread
between light and heavy crudes should increase as a higher percentage of crude
oil production will be heavy rather than lighter crudes. This should improve the
discount realized by Valero on the purchase of its heavier feedstocks.
Demand, both domestically and worldwide, for clean-burning fuels such as
RFG is expected to continue to increase as a result of the worldwide movement to
reduce lead and certain other pollutants and contaminants in gasoline. This
increasing demand for clean-burning fuels should sustain increased demand for
oxygenates such as MTBE. However, certain initiatives have been passed in
California which would ban the use of MTBE as a gasoline component by 2003. If
MTBE were to be restricted or banned throughout the U.S., Valero believes that
its MTBE-producing facilities could be modified to produce other gasoline
blendstocks or other petrochemicals for a minimal capital investment. 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, the Company's results of operations
could potentially be adversely affected. The Company 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 the Company's various alternative products, and as a result, such an
action would not be expected to have a material adverse effect on the Company.
Valero expects that various industry consolidations through mergers and
acquisitions will continue, making for a more competitive business environment
while providing Valero with opportunities to expand its operations. As refining
margins merit, the Company 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 such capital improvements are anticipated to be performed during
scheduled maintenance turnarounds.
LIQUIDITY AND CAPITAL RESOURCES
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 the Company 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 the Company to collect accounts
receivable, and the sale of receivables in September 1999 as described in Note 2
of Notes to Consolidated Financial Statements, helped reduce the 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 the Company'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 the Company'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.
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
27
<PAGE> 31
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 facility totaled $140 million, while
letters of credit outstanding were approximately $25 million. The Company also
currently has various uncommitted short-term bank credit facilities under which
amounts up to $240 million may be borrowed, along with various uncommitted bank
letter of credit facilities totaling $285 million. As of December 31, 1999, no
borrowings were outstanding under the short-term bank credit facilities, and
letters of credit totaling approximately $88 million were outstanding under the
uncommitted letter of credit facilities. See Notes 5 and 6 of Notes to
Consolidated Financial Statements.
During 1999, the Company 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.
As of December 31, 1999, the Company's debt to capitalization ratio was
42%, a decrease from 47.5% as of December 31, 1998.
As described in Note 3 of Notes to Consolidated Financial Statements,
Salomon is entitled to receive payments from the Company 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 May and September of 2000, the Company
currently expects that no earn-out payments will be due to Salomon or Mobil
during 2000.
During 1999, the Company 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. For 2000, the Company currently expects to incur approximately $225
million for capital investments, including approximately $145 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 Company'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, the Company had repurchased common
shares at a cost of approximately $15 million, and during the fourth quarter of
1999 and early in 2000, the Company 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 the
Company's employee benefit plans.
Dividends on the Company's common stock are considered quarterly by the
Company's Board of Directors, are determined by the Board on the basis of
earnings and cash flows, and may be paid only when approved by the Board. The
Company has declared a dividend of $.08 per common share for each quarter since
the Restructuring.
The Company believes it has sufficient funds from operations, and to the
extent necessary, from the public and private capital markets and bank markets,
to fund its ongoing operating requirements. The
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<PAGE> 32
Company expects that, to the extent necessary, it can raise additional funds
from time to time through equity or debt financings. See Note 17 of Notes to
Consolidated Financial Statements for a description of the Company's financing
plans in connection with its proposed acquisition of certain California refining
and marketing assets from ExxonMobil Corporation.
The Company'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 the Company'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, the Company
believes that its portfolio of accounts receivable is sufficiently diversified
to the extent necessary to minimize potential credit risk. Historically, the
Company has not had any significant problems collecting its accounts receivable.
The Company's accounts receivable are not collateralized. See Note 2 of Notes to
Consolidated Financial Statements for information regarding a program entered
into by the Company 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 1 of Notes to Consolidated Financial Statements,
various new financial accounting pronouncements have been issued by the AICPA
and FASB which either became effective for the Company's financial statements
beginning in 1999 or become effective in 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 has not
had a material effect on the Company's consolidated financial statements.
YEAR 2000 UPDATE
BACKGROUND AND CURRENT STATUS
The transition to January 1, 2000 posed potential problems for almost all
users of information technology ("IT"). These potential problems resulted from
the fact that many computer programs created in the past were programmed to
identify calendar dates with only the last two digits of the year. As a result,
these programs were unable to distinguish between the year 1900 and the year
2000, potentially resulting in program miscalculations, malfunctions or
failures. In addition to its potential effect on computer systems, the century
date change may also have resulted in malfunctions or failures of non-IT
equipment which contain embedded systems with date-sensitive functions. These
potential consequences were generally referred to as the "Year 2000" problem.
In order to address the Year 2000 problem with respect to its IT systems
and non-IT embedded systems, the Company developed a comprehensive compliance
plan with respect to those systems and services that were deemed to be critical
to the Company's operations and safety of its employees. As a result of the
Company's extensive plans and preparations, no material Year 2000 problems
occurred and the transition to January 1, 2000 has had no adverse effect on the
Company, its business, or its financial condition or results of operations. The
Company will continue to monitor its internal systems and external service
providers for potential problems that may arise in the near future.
The Company's Year 2000 compliance plan was completed primarily by Company
personnel. However, in certain cases, outside contractors or consultants were
engaged to assist in the Company's Year 2000 efforts. No significant IT projects
were delayed due to the implementation of this plan. Total external costs
required to complete the Company's Year 2000 compliance plan were approximately
$2 million. The Company did not separately track internal costs, principally
consisting of payroll and related costs for its information systems group and
certain other employees, incurred in connection with its Year 2000 compliance
efforts. The above amount does not include costs associated with certain
client/server based systems which were substantially implemented by the end of
1998 for the purpose of improving business processes, reducing costs,
integrating and improving access to business information, and providing
flexibility for ongoing business changes.
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<PAGE> 33
YEAR 2000 INFORMATION AND READINESS DISCLOSURE ACT
To the maximum extent permitted by applicable law, the above information is
designated as a "Year 2000 Readiness Disclosure" under the "Year 2000
Information and Readiness Disclosure Act" which was signed into law on October
19, 1998.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
COMMODITY PRICE RISK
As discussed in Item 1. Business -- Factors Affecting Operating Results,
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 feedstock and refined product inventories. The Company also
uses derivative commodity instruments to hedge the price risk of anticipated
transactions such as anticipated feedstock, product and natural gas purchases,
product sales and refining operating margins. In addition, the Company uses
derivative commodity instruments for trading purposes using its fundamental and
technical analysis of market conditions to earn additional revenues.
The types of instruments used in the Company's hedging and trading
activities described above include price swaps, options, and futures contracts
with third parties. The Company's positions in derivative commodity instruments
are monitored and managed on a daily basis by a risk control group to ensure
compliance with the Company's stated risk management policy which has been
approved by the Company's Board of Directors. See Note 1 of Notes to
Consolidated Financial Statements under "Price Risk Management Activities" for a
discussion of the Company's accounting policies related to its derivative
commodity instrument transactions.
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 in Note 1 of Notes
to Consolidated Financial Statements 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.
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.
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<PAGE> 34
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.
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>
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<PAGE> 35
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.
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
OF
NET GAINS (LOSSES) 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>
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<PAGE> 36
INTEREST RATE RISK
The Company's primary market risk exposure for changes in interest rates
relates to the Company's long-term debt obligations. The Company manages its
exposure to changing interest rates principally through the use of a combination
of fixed and floating rate debt (see Note 6 of Notes to Consolidated Financial
Statements) and currently does not use derivative financial instruments to
manage such risk. See Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources for a
discussion of various initiatives undertaken by the Company to reduce its
exposure to increases in interest rates and increase its financial flexibility.
33
<PAGE> 37
ITEM 8. FINANCIAL STATEMENTS
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders
of Valero Energy Corporation:
We have audited the accompanying consolidated balance sheets of Valero
Energy Corporation (a Delaware corporation) and subsidiaries as of December 31,
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
34
<PAGE> 38
VALERO ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1999 1998
---------- ----------
<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.
35
<PAGE> 39
VALERO ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1999 1998 1997
---------- ---------- ----------
<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.
36
<PAGE> 40
VALERO ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMMON STOCK AND OTHER STOCKHOLDERS' EQUITY
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
RETAINED
CONVERTIBLE NUMBER OF ADDITIONAL UNEARNED EARNINGS
PREFERRED COMMON COMMON PAID-IN VESOP (ACCUMULATED TREASURY
STOCK SHARES STOCK CAPITAL COMPENSATION DEFICIT) STOCK
----------- ---------- -------- ---------- ------------ ------------ --------
<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.
37
<PAGE> 41
VALERO ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1999 1998 1997
--------- --------- -----------
<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.
38
<PAGE> 42
VALERO ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
39
<PAGE> 43
VALERO ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (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
40
<PAGE> 44
VALERO ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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):
<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>
41
<PAGE> 45
VALERO ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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
42
<PAGE> 46
VALERO ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
forma effects on net income and earnings per share had compensation cost for the
Company's stock-based compensation plans been determined consistent with SFAS
No. 123.
EARNINGS PER SHARE
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.
43
<PAGE> 47
VALERO ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (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
44
<PAGE> 48
VALERO ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (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 to assume Mobil's
environmental liabilities, with certain limited exceptions (including
"superfund" liability
45
<PAGE> 49
VALERO ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
46
<PAGE> 50
VALERO ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (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.
47
<PAGE> 51
VALERO ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (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 Series 1998 taxable
bonds bear interest at a variable rate determined weekly, with the Company
having the
48
<PAGE> 52
VALERO ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
49
<PAGE> 53
VALERO ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (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.
50
<PAGE> 54
VALERO ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (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.
51
<PAGE> 55
VALERO ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (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
52
<PAGE> 56
VALERO ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (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
53
<PAGE> 57
VALERO ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (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.
54
<PAGE> 58
VALERO ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (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>
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
55
<PAGE> 59
VALERO ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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.
56
<PAGE> 60
VALERO ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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)
======== ======== ======== ========
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>
57
<PAGE> 61
VALERO ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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
58
<PAGE> 62
VALERO ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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
59
<PAGE> 63
VALERO ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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, 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.
60
<PAGE> 64
VALERO ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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
61
<PAGE> 65
VALERO ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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.
62
<PAGE> 66
VALERO ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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
63
<PAGE> 67
VALERO ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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>
64
<PAGE> 68
VALERO ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<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 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
65
<PAGE> 69
VALERO ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
66
<PAGE> 70
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information on directors required by Items 401 and 405 of Regulation
S-K is incorporated herein by reference to the Company's definitive Proxy
Statement which will be filed with the Commission by April 28, 2000.
Information concerning the Company's executive officers appears in Part I
of this Annual Report on Form 10-K.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) 1. Financial Statements. The following Consolidated Financial
Statements of Valero Energy Corporation and its subsidiaries are included in
Part II, Item 8 of this Form 10-K:
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of independent public accountants.................... 34
Consolidated balance sheets as of December 31, 1999 and
1998...................................................... 35
Consolidated statements of income for the years ended
December 31, 1999, 1998 and 1997.......................... 36
Consolidated statements of common stock and other
stockholders' equity for the years ended December 31,
1999, 1998 and 1997....................................... 37
Consolidated statements of cash flows for the years ended
December 31, 1999, 1998 and 1997.......................... 38
Notes to consolidated financial statements.................. 39
</TABLE>
2. Financial Statement Schedules and Other Financial Information. No
financial statement schedules are submitted because either they are inapplicable
or because the required information is included in the Consolidated Financial
Statements or notes thereto.
3. Exhibits. Filed as part of this Form 10-K are the following exhibits:
<TABLE>
<C> <S>
2.1 -- Agreement and Plan of Merger, dated as of January 31,
1997, as amended, by and among Valero Energy Corporation,
PG&E Corporation, and PG&E Acquisition
Corporation -- incorporated by reference from Exhibit 2.1
to the Company's Registration Statement on Form S-1 (File
No. 333-27013, filed May 13, 1997).
2.2 -- Form of Agreement and Plan of Distribution between Valero
Energy Corporation and Valero Refining and Marketing
Company -- incorporated by reference from Exhibit 2.2 to
the Company's Registration Statement on Form S-1 (File
No. 333-27013, filed May 13, 1997).
2.3 -- Form of Tax Sharing Agreement among Valero Energy
Corporation, Valero Refining and Marketing Company and
PG&E Corporation - incorporated by reference from Exhibit
2.3 to the Company's Registration Statement on Form S-1
(File No. 333-27013, filed May 13, 1997).
</TABLE>
67
<PAGE> 71
<TABLE>
<C> <S>
2.4 -- Form of Employee Benefits Agreement between Valero Energy
Corporation and Valero Refining and Marketing
Company -- incorporated by reference from Exhibit 2.4 to
the Company's Registration Statement on Form S-1 (File
No. 333-27013, filed May 13, 1997).
2.5 -- Form of Interim Services Agreement between Valero Energy
Corporation and Valero Refining and Marketing
Company -- incorporated by reference from Exhibit 2.5 to
the Company's Registration Statement on Form S-1 (File
No. 333-27013, filed May 13, 1997).
2.6 -- Stock Purchase Agreement dated as of April 22, 1997,
among Valero Energy Corporation, Valero Refining and
Marketing Company, Salomon Inc and Basis Petroleum,
Inc. -- incorporated by reference from Exhibit 2.1 to the
Company's Current Report on Form 8-K.
3.1 -- Amended and Restated Certificate of Incorporation of
Valero Energy Corporation (formerly known as Valero
Refining and Marketing Company) -- incorporated by
reference from Exhibit 3.1 to the Company's Registration
Statement on Form S-1 (File No. 333-27013, filed May 13,
1997).
3.2 -- By-Laws of Valero Energy Corporation (formerly known as
Valero Refining and Marketing Company) -- incorporated by
reference from Exhibit 3.2 to the Company's Registration
Statement on Form S-1 (File No. 333-27013, filed May 13,
1997).
*3.3 -- Amended and Restated By-Laws of Valero Energy
Corporation.
4.1 -- Rights Agreement between Valero Refining and Marketing
Company and Harris Trust and Savings Bank, as Rights
Agent -- incorporated by reference from Exhibit 4.1 to
the Company's Registration Statement on Form S-8 (File
No. 333-31709, filed July 21, 1997).
4.2 -- Amended and Restated Credit Agreement dated as of
November 28, 1997, among Valero Energy Corporation, the
Banks listed therein, Morgan Guaranty Trust Company of
New York, as Administrative Agent, and Bank of Montreal,
as Syndicating Agent and Issuing Bank -- incorporated by
reference from Exhibit 4.2 to the Company's Annual Report
on Form 10-K for the fiscal year ended December 31, 1997.
4.3 -- Amendment No. 1 to Credit Agreement dated December 23,
1998, among Valero Energy Corporation, the Banks listed
therein, Morgan Guaranty Trust Company of New York, as
Administrative Agent, and Bank of Montreal, as
Syndicating Agent and Issuing Bank -- incorporated by
reference from Exhibit 4.3 to the Company's Annual Report
on Form 10-K for the fiscal year ended December 31, 1998.
+10.1 -- Valero Energy Corporation Executive Incentive Bonus Plan,
as amended, dated as of April 23, 1997 -- incorporated by
reference from Exhibit 10.1 to the Company's Registration
Statement on Form S-1 (File No. 333-27013, filed May 13,
1997).
+10.2 -- Valero Energy Corporation Executive Stock Incentive Plan,
as amended, dated as of April 23, 1997 -- incorporated by
reference from Exhibit 10.2 to the Company's Registration
Statement on Form S-1 (File No. 333-27013, filed May 13,
1997).
+10.3 -- Valero Energy Corporation Stock Option Plan, as amended,
dated as of April 23, 1997 -- incorporated by reference
from Exhibit 10.3 to the Company's Registration Statement
on Form S-1 (File No. 333-27013, filed May 13, 1997).
+10.4 -- Valero Energy Corporation Restricted Stock Plan for
Non-Employee Directors, as amended, dated as of April 23,
1997 -- incorporated by reference from Exhibit 10.4 to
the Company's Registration Statement on Form S-1 (File
No. 333-27013, filed May 13, 1997).
</TABLE>
68
<PAGE> 72
<TABLE>
<C> <S>
+10.5 -- Valero Energy Corporation Non-Employee Director Stock
Option Plan, as amended, dated as of April 23,
1997 -- incorporated by reference from Exhibit 10.5 to
the Company's Registration Statement on Form S-1 (File
No. 333-27013, filed May 13, 1997).
+10.6 -- Executive Severance Agreement between Valero Energy
Corporation and William E. Greehey, dated as of December
15, 1982, as adopted and ratified by Valero Refining and
Marketing Company -- incorporated by reference from
Exhibit 10.6 to the Company's Registration Statement on
Form S-1 (File No. 333-27013, filed May 13, 1997).
+10.7 -- Schedule of Executive Severance
Agreements -- incorporated by reference from Exhibit 10.7
to the Company's Registration Statement on Form S-1 (File
No. 333-27013, filed May 13, 1997).
+10.8 -- Form of Indemnity Agreement between Valero Refining and
Marketing Company and William E. Greehey-incorporated by
reference from Exhibit 10.8 to the Company's Registration
Statement on Form S-1 (File No. 333-27013, filed May 13,
1997).
+10.9 -- Schedule of Indemnity Agreements -- incorporated by
reference from Exhibit 10.9 to the Company's Registration
Statement on Form S-1 (File No. 333-27013, filed May 13,
1997).
+10.10 -- Form of Incentive Bonus Agreement between Valero Refining
and Marketing Company and Gregory C. King -- incorporated
by reference from Exhibit 10.10 to the Company's
Registration Statement on Form S-1 (File No. 333-27013,
filed May 13, 1997).
+10.11 -- Schedule of Incentive Bonus Agreements -- incorporated by
reference from Exhibit 10.11 to the Company's
Registration Statement on Form S-1 (File No. 333-27013,
filed May 13, 1997).
+10.12 -- Employment Agreement between Valero Refining and
Marketing Company and William E. Greehey, dated as of
June 18, 1997 -- incorporated by reference from Exhibit
10.12 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1997.
+10.13 -- Employment Agreement between Valero Refining and
Marketing Company and Edward C. Benninger, dated as of
June 18, 1997 -- incorporated by reference from Exhibit
10.13 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1997.
+10.14 -- Form of Management Stability Agreement between Valero
Energy Corporation and Gregory C. King -- incorporated by
reference from Exhibit 10.14 to the Company's Annual
Report on Form 10-K for the fiscal year ended December
31, 1997.
*+10.15 -- Schedule of Management Stability Agreements.
+10.16 -- Consulting Agreement between Valero Energy Corporation
and Edward C. Benninger, effective as of January 1,
1999 -- incorporated by reference from Exhibit 10.16 to
the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1998.
+10.17 -- Letter Agreement between Valero Energy Corporation and
Edward C. Benninger, dated as of December 15,
1998 -- incorporated by reference from Exhibit 10.17 to
the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1998.
</TABLE>
69
<PAGE> 73
<TABLE>
<S> <C>
+10.18 -- Employment Agreement dated March 25, 1999, effective as of April 29, 1999 between
Valero Energy Corporation and William E. Greehey -- incorporated by reference from
Exhibit 10.18 to the Company's Quarterly Report on Form 10-Q for the quarter ended June
30, 1999.
*11.1 -- Computation of Earnings Per Share.
*12.1 -- Computation of Ratio of Earnings to Fixed Charges.
*21.1 -- Valero Energy Corporation subsidiaries, including state or other jurisdiction of
incorporation or organization.
*23.1 -- Consent of Arthur Andersen LLP, dated March 8, 2000.
*24.1 -- Power of Attorney, dated March 2, 2000 (set forth on the signatures page of this Form
10-K).
**27.1 -- Financial Data Schedule (reporting financial information as of and for the year ended
December 31, 1999).
</TABLE>
- ---------------
* Filed herewith
+ Identifies management contracts or compensatory plans or arrangements
required to be filed as an exhibit hereto pursuant to Item 14(c) of Form
10-K.
** The Financial Data Schedule shall not be deemed "filed" for purposes of
Section 11 of the Securities Act of 1933 or Section 18 of the Securities
Exchange Act of 1934, and is included as an exhibit only to the electronic
filing of this Form 10-K in accordance with Item 601(c) of Regulation S-K and
Section 401 of Regulation S-T.
Copies of exhibits filed as a part of this Form 10-K may be obtained by
stockholders of record at a charge of $.15 per page, minimum $5.00 each request.
Direct inquiries to Jay D. Browning, Corporate Secretary, Valero Energy
Corporation, P.O. Box 500, San Antonio, Texas 78292.
Pursuant to paragraph 601(b)(4)(iii)(A) of Regulation S-K, the registrant
has omitted from the foregoing listing of exhibits, and hereby agrees to furnish
to the Commission upon its request, copies of certain instruments, each relating
to long-term debt not exceeding 10% of the total assets of the registrant and
its subsidiaries on a consolidated basis.
(b) Reports on Form 8-K. The Company did not file any Current Reports on
Form 8-K during the quarter ended December 31, 1999.
For the purposes of complying with the rules governing Form S-8 under the
Securities Act of 1933, the undersigned registrant hereby undertakes as follows,
which undertaking shall be incorporated by reference into registrant's
Registration Statements on Form S-8 No. 333-31709 (filed July 21, 1997), No.
333-31721 (filed July 21, 1997), No. 333-31723 (filed July 21, 1997) and No.
333-31727 (filed July 21, 1997):
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
of 1933 and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question of whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
70
<PAGE> 74
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
VALERO ENERGY CORPORATION
(Registrant)
By /s/ WILLIAM E. GREEHEY
-----------------------------------
(William E. Greehey)
Chairman of the Board, President and
Chief Executive Officer
Date: March 2, 2000
71
<PAGE> 75
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below hereby constitutes and appoints William E. Greehey, John D. Gibbons and
Jay D. Browning, or any of them, each with power to act without the other, his
true and lawful attorney-in-fact and agent, with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign any or all subsequent amendments and supplements to this
Annual Report on Form 10-K, and to file the same, or cause to be filed the same,
with all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto each said attorney-in-fact and
agent full power to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully to all intents and
purposes as he might or could do in person, hereby qualifying and confirming all
that said attorney-in-fact and agent or his substitute or substitutes may
lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ WILLIAM E. GREEHEY Director, Chairman of the March 2, 2000
- ----------------------------------------------------- Board, President and Chief
(William E. Greehey) Executive Officer (Principal
Executive Officer)
/s/ JOHN D. GIBBONS Chief Financial Officer March 2, 2000
- ----------------------------------------------------- (Principal Financial and
(John D. Gibbons) Accounting Officer)
/s/ EDWARD C. BENNINGER Director March 2, 2000
- -----------------------------------------------------
(Edward C. Benninger)
Director
- -----------------------------------------------------
(Ronald K. Calgaard)
/s/ DONALD M. CARLTON Director March 2, 2000
- -----------------------------------------------------
(Donald M. Carlton)
/s/ JERRY D. CHOATE Director March 2, 2000
- -----------------------------------------------------
(Jerry D. Choate)
/s/ ROBERT G. DETTMER Director March 2, 2000
- -----------------------------------------------------
(Robert G. Dettmer)
/s/ RUBEN M. ESCOBEDO Director March 2, 2000
- -----------------------------------------------------
(Ruben M. Escobedo)
/s/ JAMES L. JOHNSON Director March 2, 2000
- -----------------------------------------------------
(James L. Johnson)
/s/ LOWELL H. LEBERMANN Director March 2, 2000
- -----------------------------------------------------
(Lowell H. Lebermann)
/s/ SUSAN KAUFMAN PURCELL Director March 2, 2000
- -----------------------------------------------------
(Susan Kaufman Purcell)
</TABLE>
72
<PAGE> 76
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
2.1 -- Agreement and Plan of Merger, dated as of January 31,
1997, as amended, by and among Valero Energy Corporation,
PG&E Corporation, and PG&E Acquisition
Corporation -- incorporated by reference from Exhibit 2.1
to the Company's Registration Statement on Form S-1 (File
No. 333-27013, filed May 13, 1997)
2.2 -- Form of Agreement and Plan of Distribution between Valero
Energy Corporation and Valero Refining and Marketing
Company -- incorporated by reference from Exhibit 2.2 to
the Company's Registration Statement on Form S-1 (File
No. 333-27013, filed May 13, 1997)
2.3 -- Form of Tax Sharing Agreement among Valero Energy
Corporation, Valero Refining and Marketing Company and
PG&E Corporation - incorporated by reference from Exhibit
2.3 to the Company's Registration Statement on Form S-1
(File No. 333-27013, filed May 13, 1997)
2.4 -- Form of Employee Benefits Agreement between Valero Energy
Corporation and Valero Refining and Marketing
Company -- incorporated by reference from Exhibit 2.4 to
the Company's Registration Statement on Form S-1 (File
No. 333-27013, filed May 13, 1997)
2.5 -- Form of Interim Services Agreement between Valero Energy
Corporation and Valero Refining and Marketing
Company -- incorporated by reference from Exhibit 2.5 to
the Company's Registration Statement on Form S-1 (File
No. 333-27013, filed May 13, 1997)
2.6 -- Stock Purchase Agreement dated as of April 22, 1997,
among Valero Energy Corporation, Valero Refining and
Marketing Company, Salomon Inc and Basis Petroleum,
Inc. -- incorporated by reference from Exhibit 2.1 to the
Company's Current Report on Form 8-K
3.1 -- Amended and Restated Certificate of Incorporation of
Valero Energy Corporation (formerly known as Valero
Refining and Marketing Company) -- incorporated by
reference from Exhibit 3.1 to the Company's Registration
Statement on Form S-1 (File No. 333-27013, filed May 13,
1997)
3.2 -- By-Laws of Valero Energy Corporation (formerly known as
Valero Refining and Marketing Company) -- incorporated by
reference from Exhibit 3.2 to the Company's Registration
Statement on Form S-1 (File No. 333-27013, filed May 13,
1997)
*3.3 -- Amended and Restated By-Laws of Valero Energy Corporation
4.1 -- Rights Agreement between Valero Refining and Marketing
Company and Harris Trust and Savings Bank, as Rights
Agent -- incorporated by reference from Exhibit 4.1 to
the Company's Registration Statement on Form S-8 (File
No. 333-31709, filed July 21, 1997)
4.2 -- Amended and Restated Credit Agreement dated as of
November 28, 1997, among Valero Energy Corporation, the
Banks listed therein, Morgan Guaranty Trust Company of
New York, as Administrative Agent, and Bank of Montreal,
as Syndicating Agent and Issuing Bank -- incorporated by
reference from Exhibit 4.2 to the Company's Annual Report
on Form 10-K for the fiscal year ended December 31, 1997.
</TABLE>
<PAGE> 77
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
4.3 -- Amendment No. 1 to Credit Agreement dated December 23,
1998, among Valero Energy Corporation, the Banks listed
therein, Morgan Guaranty Trust Company of New York, as
Administrative Agent, and Bank of Montreal, as
Syndicating Agent and Issuing Bank -- incorporated by
reference from Exhibit 4.3 to the Company's Annual Report
on Form 10-K for the fiscal year ended December 31, 1998.
+10.1 -- Valero Energy Corporation Executive Incentive Bonus Plan,
as amended, dated as of April 23, 1997 -- incorporated by
reference from Exhibit 10.1 to the Company's Registration
Statement on Form S-1 (File No. 333-27013, filed May 13,
1997)
+10.2 -- Valero Energy Corporation Executive Stock Incentive Plan,
as amended, dated as of April 23, 1997 -- incorporated by
reference from Exhibit 10.2 to the Company's Registration
Statement on Form S-1 (File No. 333-27013, filed May 13,
1997)
+10.3 -- Valero Energy Corporation Stock Option Plan, as amended,
dated as of April 23, 1997 -- incorporated by reference
from Exhibit 10.3 to the Company's Registration Statement
on Form S-1 (File No. 333-27013, filed May 13, 1997)
+10.4 -- Valero Energy Corporation Restricted Stock Plan for
Non-Employee Directors, as amended, dated as of April 23,
1997 -- incorporated by reference from Exhibit 10.4 to
the Company's Registration Statement on Form S-1 (File
No. 333-27013, filed May 13, 1997)
+10.5 -- Valero Energy Corporation Non-Employee Director Stock
Option Plan, as amended, dated as of April 23,
1997 -- incorporated by reference from Exhibit 10.5 to
the Company's Registration Statement on Form S-1 (File
No. 333-27013, filed May 13, 1997)
+10.6 -- Executive Severance Agreement between Valero Energy
Corporation and William E. Greehey, dated as of December
15, 1982, as adopted and ratified by Valero Refining and
Marketing Company -- incorporated by reference from
Exhibit 10.6 to the Company's Registration Statement on
Form S-1 (File No. 333-27013, filed May 13, 1997)
+10.7 -- Schedule of Executive Severance
Agreements -- incorporated by reference from Exhibit 10.7
to the Company's Registration Statement on Form S-1 (File
No. 333-27013, filed May 13, 1997)
+10.8 -- Form of Indemnity Agreement between Valero Refining and
Marketing Company and William E. Greehey-incorporated by
reference from Exhibit 10.8 to the Company's Registration
Statement on Form S-1 (File No. 333-27013, filed May 13,
1997)
+10.9 -- Schedule of Indemnity Agreements -- incorporated by
reference from Exhibit 10.9 to the Company's Registration
Statement on Form S-1 (File No. 333-27013, filed May 13,
1997)
+10.10 -- Form of Incentive Bonus Agreement between Valero Refining
and Marketing Company and Gregory C. King -- incorporated
by reference from Exhibit 10.10 to the Company's
Registration Statement on Form S-1 (File No. 333-27013,
filed May 13, 1997)
+10.11 -- Schedule of Incentive Bonus Agreements -- incorporated by
reference from Exhibit 10.11 to the Company's
Registration Statement on Form S-1 (File No. 333-27013,
filed May 13, 1997)
+10.12 -- Employment Agreement between Valero Refining and
Marketing Company and William E. Greehey, dated as of
June 18, 1997 -- incorporated by reference from Exhibit
10.12 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1997.
</TABLE>
<PAGE> 78
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
+10.13 -- Employment Agreement between Valero Refining and
Marketing Company and Edward C. Benninger, dated as of
June 18, 1997 -- incorporated by reference from Exhibit
10.13 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1997.
+10.14 -- Form of Management Stability Agreement between Valero
Energy Corporation and Gregory C. King -- incorporated by
reference from Exhibit 10.14 to the Company's Annual
Report on Form 10-K for the fiscal year ended December
31, 1997.
*+10.15 -- Schedule of Management Stability Agreements
+10.16 -- Consulting Agreement between Valero Energy Corporation
and Edward C. Benninger, effective as of January 1,
1999 -- incorporated by reference from Exhibit 10.16 to
the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1998.
+10.17 -- Letter Agreement between Valero Energy Corporation and
Edward C. Benninger, dated as of December 15,
1998 -- incorporated by reference from Exhibit 10.17 to
the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1998.
+10.18 -- Employment Agreement dated March 25, 1999, effective as
of April 29, 1999 between Valero Energy Corporation and
William E. Greehey -- incorporated by reference from
Exhibit 10.18 to the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 1999.
*11.1 -- Computation of Earnings Per Share
*12.1 -- Computation of Ratio of Earnings to Fixed Charges
*21.1 -- Valero Energy Corporation subsidiaries, including state
or other jurisdiction of incorporation or organization
*23.1 -- Consent of Arthur Andersen LLP, dated March 8, 2000.
*24.1 -- Power of Attorney, dated March 2, 2000 (set forth on the
signatures page of this Form 10-K)
**27.1 -- Financial Data Schedule (reporting financial information
as of and for the year ended December 31, 1999)
</TABLE>
- ---------------
* Filed herewith
+ Identifies management contracts or compensatory plans or arrangements
required to be filed as an exhibit hereto pursuant to Item 14(c) of Form
10-K.
** The Financial Data Schedule shall not be deemed "filed" for purposes of
Section 11 of the Securities Act of 1933 or Section 18 of the Securities
Exchange Act of 1934, and is included as an exhibit only to the electronic
filing of this Form 10-K in accordance with Item 601(c) of Regulation S-K and
Section 401 of Regulation S-T.
<PAGE> 1
EXHIBIT 3.3
VALERO ENERGY CORPORATION
(FORMERLY KNOWN AS VALERO REFINING AND MARKETING COMPANY)
BY-LAWS
(AMENDED AND RESTATED EFFECTIVE AS OF JULY 29, 1999)
ARTICLE I.
MEETINGS OF STOCKHOLDERS
SECTION 1. The annual meeting of stockholders shall be held at such date and
time and at such place as shall be designated from time to time by the Board of
Directors and stated in the notice of the meeting, for the purposes of electing
directors and of transacting such other business as may properly come before
the meeting. At least ten days' notice shall be given to the stockholders of
the date, time and place so fixed. Any previously scheduled annual meeting of
the stockholders may be postponed by resolution of the Board of Directors upon
public notice given on or prior to the date previously scheduled for such
annual meeting of stockholders.
SECTION 2. Except as otherwise provided by law or by the Restated Certificate
of Incorporation of the Corporation, as from time to time amended (the
"Restated Certificate of Incorporation"), special meetings of the stockholders
may be called only by the Chief Executive Officer or by the Board of Directors
pursuant to a resolution adopted by a majority of the directors which the
Corporation would have if there were no vacancies. Upon written request of any
person or persons who have duly called a special meeting, it shall be the duty
of the Secretary to fix the date and time of the special meeting (which date
shall be not less than ten nor more than sixty days after receipt of the
request) and to give due notice thereof. If the Secretary shall neglect or
refuse to fix the date or time of the meeting or to give notice thereof, the
person or persons calling the meeting may do so. Any such notice shall include
a statement of the purpose or purposes for which the special meeting is called.
Any previously scheduled special meeting of the stockholders may be postponed
by resolution of the Board of Directors upon public notice given on or prior to
the date previously scheduled for such special meeting of stockholders.
SECTION 3. Every special meeting of the stockholders shall be held at such
place within or without the State of Delaware as the Board of Directors may
designate, or, in the absence of such designation, at the registered office of
the Corporation in the State of Delaware.
SECTION 4. Written notice of every meeting of the stockholders shall be given
by the Secretary to each stockholder of record entitled to vote at the meeting,
by placing such notice in the mail at least ten days, but not more than sixty
days, prior to the date fixed for the meeting addressed to each stockholder at
his address appearing on the books of the Corporation or supplied by him to the
Corporation for the purpose of notice.
<PAGE> 2
SECTION 5. The Board of Directors may fix a date, which date shall not precede
the date upon which the resolution fixing such record date is adopted by the
Board of Directors, and which date shall be not less than ten nor more than
sixty days preceding the date of any meeting of stockholders, as a record date
for the determination of stockholders entitled to notice of, or to vote at, any
such meeting. The Board of Directors shall not close the books of the
Corporation against transfers of shares during the whole or any part of such
period.
SECTION 6. The notice of every meeting of the stockholders may be accompanied
by a form of proxy approved by the Board of Directors in favor of such person
or persons as the Board of Directors may select.
SECTION 7. (a) Except as otherwise provided by law or by the Restated
Certificate of Incorporation or by these By-Laws, at any meeting of stockholders
the presence in person or by proxy of the holders of the outstanding shares of
stock of the Corporation entitled to vote thereat and having a majority of the
voting power with respect to a subject matter shall constitute a quorum for the
transaction of business as to that subject matter, and all questions with
respect to a subject matter, except the election of directors, shall be decided
by vote of the shares having a majority of the voting power so represented in
person or by proxy at the meeting and entitled to vote thereat. Election of
directors shall be determined by a plurality vote of the shares present in
person or by proxy and entitled to vote on the election of directors. The
stockholders present at any duly organized meeting may continue to do business
until adjournment, notwithstanding the withdrawal of enough stockholders to
leave less than a quorum.
(b) Every stockholder having the right to vote shall be entitled to
vote in person, or by proxy appointed by an instrument in writing subscribed by
such stockholder (which for purposes hereof may include a signature and form of
proxy pursuant to a facsimile or telegraphic form of proxy or any other
instrument acceptable to the duly appointed inspector or inspectors of such
election), bearing a date not more than three years prior to voting, unless
such instrument provides for a longer period, and filed with the Secretary of
the Corporation before, or at the time of, the meeting, or by such other method
as may be permitted under the General Corporation Law of the State of Delaware,
as the same exists or may hereafter be amended (the "DGCL"), and approved by
the Board of Directors. If such instrument shall designate two or more persons
to act as proxies, unless such instrument shall provide to the contrary, a
majority of such persons present at any meeting at which their powers
thereunder are to be exercised shall have and may exercise all the powers of
voting thereby conferred, or if only one be present, then such powers may be
exercised by that one; or, if an even number attend and a majority do not agree
on any particular issue, each proxy so attending shall be entitled to exercise
such powers in respect of the same portion of the shares as he is of the
proxies representing such shares.
(c) Any other corporation owning voting shares in the Corporation may
vote the same by its President or by proxy appointed by him, unless some other
person shall be appointed to vote such shares by resolution of the Board of
Directors of such shareholder corporation. A partnership holding shares of the
Corporation may vote such shares by any general partner or by proxy appointed
by any general partner.
(d) Shares standing in the name of a deceased person may be voted by
the executor or administrator of such deceased person, either in person or by
proxy. Shares standing in the name of a guardian,
<PAGE> 3
conservator or trustee may be voted by such fiduciary, either in person or by
proxy, but no such fiduciary shall be entitled to vote shares held in such
fiduciary capacity without a transfer of such shares into the name of such
fiduciary. Shares standing in the name of a receiver may be voted by such
receiver. A stockholder whose shares are pledged shall be entitled to vote such
shares, unless in the transfer by the pledgor on the books of the Corporation,
he has expressly empowered the pledgee to vote thereon, in which case only the
pledgee, or his proxy, may represent the stock and vote thereon.
SECTION 8. Except as otherwise provided by law or by the Restated Certificate
of Incorporation, the presiding officer of any meeting or the holders of a
majority of the shares of stock of the Corporation entitled to vote at such
meeting, present in person or represented by proxy, whether a quorum is
present, shall have the power to adjourn the meeting from time to time, without
notice other than announcement at the meeting. At any such adjourned meeting at
which a quorum shall be present any action may be taken that could have been
taken at the meeting originally called; provided, that if the adjournment is
for more than thirty days or if after the adjournment a new record date is
fixed for the adjourned meeting, a notice of the adjourned meeting shall be
given to each stockholder of record entitled to vote at the adjourned meeting.
SECTION 9. (a) Nominations of persons for election to the Board of Directors of
the Corporation and the proposal of business to be considered by the
stockholders may be made at an annual meeting of stockholders (i) pursuant to
the Corporation's notice of meeting, (ii) by or at the direction of the Board
of Directors or (iii) by any stockholder of the Corporation who was a
stockholder of record at the time of giving of the notice provided for in this
Section 9, who is entitled to vote with respect to such matter at the meeting
and who complies with the notice procedures set forth in this Section 9. At any
annual meeting of stockholders, the presiding officer of such meeting may
announce the nominations and other business to be considered which are set
forth in the Corporation's notice of meeting and proxy statement and, by virtue
thereof, such nominations and other business so announced shall be properly
before such meeting and may be considered and voted upon by the stockholders of
the Corporation entitled to vote thereat without further requirement of
nomination, motion or second.
(b) In order for nominations or other business to be properly brought
before an annual meeting by a stockholder pursuant to clause (iii) of Paragraph
(a) of this Section 9, the stockholder making such nominations or proposing
such other business must theretofore have given timely notice thereof in
writing to the Secretary of the Corporation and such other business must
otherwise be a proper matter for stockholder action. To be timely, a
stockholder's notice shall be delivered to the Secretary at the principal
executive offices of the Corporation not later than the close of business on
the 60th day nor earlier than the close of business on the 90th day prior to
the first anniversary of the preceding year's annual meeting; provided,
however, that in the event that the date of the annual meeting is more than 30
days before or more than 60 days after such anniversary date, notice by the
stockholder to be timely must be so delivered not earlier than the close of
business on the 90th day prior to such annual meeting and not later than the
close of business on the later of the 60th day prior to such annual meeting or
the 10th day following the day on which public announcement of the date of such
meeting is first made by the Corporation. In no event shall the public
announcement of an adjournment of an annual meeting commence a new time period
for the giving of a stockholder's notice as described above. Such stockholder's
notice shall set forth (i) a description of any arrangements or understandings
that exist with respect to the election or reelection of directors of the
Corporation between such
<PAGE> 4
stockholder or the beneficial owner, if any, on whose behalf such notice is
given and any other person (or, if no such arrangements or understandings
exist, a statement to such effect), together with, as to each person whom the
stockholder proposes to nominate at the meeting for election or reelection as a
director, all information relating to such person that is required to be
disclosed in solicitations of proxies for election of directors in an election
contest, or is otherwise required, in each case pursuant to Regulation 14A
under the Securities Exchange Act of 1934, as amended (the "Exchange Act") and
Rule 14a-11 thereunder (including such person's written consent to serving as a
director if elected); (ii) as to any other business that the stockholder
proposes to bring before the meeting, a brief description of the business
desired to be brought before the meeting, the reasons for conducting such
business at the meeting and any material interest in such business of such
stockholder and the beneficial owner, if any, on whose behalf the proposal is
made; and (iii) as to the stockholder giving the notice and the beneficial
owner, if any, on whose behalf the nomination or proposal is made (A) the name
and address of such stockholder, as they appear on the Corporation's books, and
of such beneficial owner, and (B) the class and number of shares of the
Corporation which are owned beneficially and of record by such stockholder and
such beneficial owner.
(c) Notwithstanding anything in the second sentence of Paragraph (b)
of this Section 9 to the contrary, in the event that the number of directors to
be elected to the Board of Directors of the Corporation at an annual meeting is
increased, whether by increase in the size of the Board of Directors, or by any
vacancy in the Board of Directors to be filled at such annual meeting, and
there is no public announcement by the Corporation naming all of the nominees
for director or specifying the size of the increased Board of Directors made by
the Corporation at least 70 days prior to the first anniversary of the
preceding year's annual meeting, a stockholder's notice required by this
Section 9 shall also be considered timely, but only with respect to nominees
for such vacant positions and for any new positions created by such increase,
if it shall be delivered to the Secretary at the principal executive offices of
the Corporation not later than the close of business on the 10th day following
the day on which such public announcement is first made by the Corporation.
SECTION 10. Only such business shall be conducted at a special meeting of
stockholders as shall have been brought before the meeting pursuant to the
Corporation's notice of meeting. Nominations of persons for election to the
Board of Directors may be made at a special meeting of stockholders at which
directors are to be elected pursuant to the Corporation's notice of meeting (a)
by or at the direction of the Board of Directors or (b) provided that the Board
of Directors has determined that directors shall be elected at such meeting, by
any stockholder of the Corporation who is a stockholder of record at the time
of giving of notice provided for in this Section 10, who shall be entitled to
vote at the meeting and who complies with the notice procedures set forth in
this Section 10. In the event the Corporation calls a special meeting of
stockholders for the purpose of electing one or more directors to the Board of
Directors, any such stockholder may nominate a person or persons (as the case
may be), for election to such position(s) as specified in the Corporation's
notice of meeting, if the stockholder's notice required by Paragraph (b) of
Section 9 of this Article I shall be delivered to the Secretary at the
principal executive offices of the Corporation not earlier than the close of
business on the 90th day prior to such special meeting and not later than the
close of business on the later of the 60th day prior to such special meeting or
the 10th day following the day on which public announcement is first made of
the date of the special meeting and of the nominees proposed by the Board of
Directors to be elected at such meeting. In no event shall the public
announcement of an adjournment of a special meeting commence a new time period
for the giving of a stockholder's notice as described above.
<PAGE> 5
SECTION 11. (a) Only such persons who are nominated in accordance with the
procedures set forth in Sections 9 and 10 of this Article I shall be eligible
to serve as directors and only such business shall be conducted at a meeting of
stockholders as shall have been brought before the meeting in accordance with
the procedures set forth in such Sections. The presiding officer of the meeting
shall have the power and duty to determine whether a nomination or any business
proposed to be brought before the meeting was made or proposed, as the case may
be, in accordance with the procedures set forth in these By-Laws, and if any
proposed nomination or business is not in compliance with these By-Laws, to
declare that such defective proposal shall be disregarded.
(b) For purposes of Sections 9 and 10 of this Article I, "public
announcement" shall mean disclosure in a press release reported by the Dow
Jones News Services, Associated Press, Reuters or comparable national news
service or in a document publicly filed by the Corporation with the Securities
and Exchange Commission pursuant to Section 13, 14 or 15(d) of the Exchange
Act.
(c) Notwithstanding the provisions of Sections 9, 10 and 11 of this
Article I, a stockholder shall also comply with all applicable requirements of
the Exchange Act and the rules and regulations thereunder with respect to the
matters set forth herein. Nothing in these By-Laws shall be deemed to affect
any rights (i) of stockholders to request inclusion of proposals in the
Corporation's proxy statement pursuant to Rule 14a-8 under the Exchange Act or
(ii) of the holders of any class or series of Preferred Stock of the
Corporation to elect directors under specified circumstances.
SECTION 12. In accordance with Article VI of the Restated Certificate of
Incorporation, the stockholders shall not be entitled to consent to corporate
action in writing without a meeting.
ARTICLE II.
BOARD OF DIRECTORS
SECTION 1. The business and affairs of the Corporation shall be managed by or
under the direction of the Board of Directors. Except as otherwise fixed
pursuant to the provisions of the Restated Certificate of Incorporation
relating to the rights of the holders of any class or series of stock having a
preference over the Common Stock as to dividends or upon liquidation to elect
additional directors under specified circumstances, the number of directors
shall be as fixed in such manner as may be determined by the vote of not less
than a majority of the directors then in office, but shall not be less than
five nor more than thirteen directors. The Board of Directors, excluding
however, directors elected pursuant to the provisions of the Restated
Certificate of Incorporation relating to the rights of holders of any class or
series of stock having a preference over the Common Stock as to dividends or
upon liquidation to elect additional directors under specified circumstances,
shall be divided into three classes as provided in the Restated Certificate of
Incorporation. The directors shall be elected as provided in the Restated
Certificate of Incorporation at the annual meeting of stockholders, except as
provided in Section 2 of this Article II. Each director shall hold office for
the full term to which he shall have been elected and until his successor is
duly elected and shall qualify, or until his earlier death, resignation or
removal. A director need not be a resident of the State of Delaware or a
stockholder of the Corporation. Any person who is 70 years of age or more (or,
in the case of any person first elected or appointed as a director of the
Company, or of the Company's predecessor--Valero Energy Corporation, on or
prior to February 24, 1993,
<PAGE> 6
72 years of age or more) shall not be eligible to hold a directorship;
provided, however, that any person who reaches the age of 70 (or, in the case
of any person first elected or appointed as a director of the Company, or of
the Company's predecessor--Valero Energy Corporation, on or prior to February
24, 1993, 72 years of age) while a director may serve the remainder of his term
of office but may not be reelected.
SECTION 2. Any vacancy in the Board of Directors, including vacancies resulting
from an increase in the number of directors, shall be filled by a majority of
the remaining members of the Board, though less than a quorum. When newly
created directorships are filled by the Board of Directors, such additional
directors shall not be assigned to a director class until the next annual
meeting of stockholders. Subject to the foregoing, directors elected to fill a
vacancy shall hold office for a term expiring at the annual meeting at which
the term of the class to which they shall have been elected expires.
SECTION 3. Any director may resign at any time by written notice to the
Corporation. Any such resignation shall take effect at the date of receipt of
such notice or at any later time specified therein, and, unless otherwise
specified therein, the acceptance of such resignation shall not be necessary to
make it effective.
SECTION 4. Regular meetings of the Board of Directors shall be held at such
place or places within or without the State of Delaware, at such hour and on
such day as may be fixed by resolution of the Board of Directors, without
further notice of such meetings. The time or place of holding regular meetings
of the Board of Directors may be changed by the Chairman of the Board or the
Chief Executive Officer by giving written notice thereof as provided in Section
6 of this Article II.
SECTION 5. Special meetings of the Board of Directors shall be held, whenever
called by the Chairman of the Board or the Chief Executive Officer, by a
majority of the Board of Directors or by resolution adopted by the Board of
Directors, at such place or places within or without the State of Delaware as
may be stated in the notice of the meeting.
SECTION 6. Written notice of the time and place of all special meetings of the
Board of Directors, and written notice of any change in the time or place of
holding the regular meetings of the Board of Directors, shall be given to each
director either personally or by mail, telephone, express delivery service,
facsimile, telex or similar means of communication at least one day before the
date of the meeting; provided, however, that notice of any meeting need not be
given to any director if waived by him in writing, or if he shall be present at
such meeting.
SECTION 7. A majority of the directors in office shall constitute a quorum of
the Board of Directors for the transaction of business; but a lesser number may
adjourn from day to day until a quorum is present. The directors present at a
duly organized meeting may continue to transact business until adjournment,
notwithstanding the withdrawal of enough directors to leave less than a quorum,
provided however, that such remaining directors constitute not less than
one-third of the total number of directors. Except as otherwise provided by law
or in these By-Laws, all questions shall be decided by the vote of a majority
of the directors present. Directors may participate in any meeting of the
directors, and members of any committee of directors may participate in any
meeting of such committee, by means of conference telephone or similar
<PAGE> 7
communications equipment by means of which all persons participating in such
meeting can hear each other, and such participation shall constitute presence
in person at any such meeting.
SECTION 8. Any action which may be taken at a meeting of the directors or
members of any committee of directors may be taken without a meeting if a
consent in writing setting forth the action so taken shall be signed by all of
the directors or members of such committee of directors, as the case may be,
and shall be filed with the Secretary.
SECTION 9. Directors shall be entitled to such compensation for their services
as may be approved by the Board of Directors, including, if so approved by
resolution of the Board of Directors, a fixed sum and expenses of attendance,
if any, for attendance at each regular or special meeting of the Board of
Directors or any meeting of a committee of directors. No provision of these
By-Laws shall be construed to preclude any director from serving the
Corporation in any other capacity and receiving compensation therefor.
SECTION 10. Subject to the rights of the holders of any series of Preferred
Stock with respect to such series of Preferred Stock, any director, or the
entire Board of Directors, may be removed from office at any time, but only for
cause and only by the affirmative vote of the holders of at least 60 percent of
the voting power of all of the then-outstanding shares of voting stock, voting
together as a single class.
ARTICLE III.
COMMITTEES OF DIRECTORS
SECTION 1. The Board of Directors may, by resolution adopted by a majority of
the whole Board, designate one or more committees of the Board, including, as
they shall so determine, an Executive Committee, an Audit Committee and a
Compensation Committee. Any committee of the Board designated by the Board of
Directors shall consist of one or more of the directors of the Corporation.
SECTION 2. The Executive Committee, during intervals between meetings of the
Board of Directors and while the Board is not in session, shall have and
exercise all the powers and authority of the Board of Directors in the
management of the business and affairs of the Corporation, including (except as
otherwise limited by law, the Restated Certificate of Incorporation or these
By-Laws) the power and authority to appoint officers and agents of the
Corporation, to approve guarantees, leases, contracts, notes, bonds and other
evidences of indebtedness, to declare dividends, to authorize the issuance of
stock, to adopt certificates of ownership and merger pursuant to the provisions
of the DGCL, and to approve commitments for expenditures subject to such
expenditure approval authority limits as the Board of Directors may from time
to time establish. In the absence of the appointment of a Nominating Committee,
the Executive Committee may also review possible director candidates, including
director recommendations properly presented by stockholders, and recommend to
the full Board of Directors individuals suited for election as directors. The
Executive Committee may recommend the establishment of committees of the Board
of Directors and review and recommend annually to the full Board of Directors
the slate of director nominees for election by the Corporation's stockholders.
The Executive Committee may also review the qualifications of the Corporation's
commercial and investment bankers, review
<PAGE> 8
relations with the Corporation's creditors, security holders and investment
bankers and recommend changes to the capital structure of the Corporation.
SECTION 3. The Audit Committee may make recommendations to the Board of
Directors concerning particular persons or firms to be employed by this
Corporation as its independent auditors and consult with the persons or firms
so chosen with regard to the plan of audit; review, in consultation with the
independent auditors, their audit report or proposed audit report and the
accompanying management letter, if any; consult with the independent auditors
periodically and out of the presence of management, if deemed appropriate, with
regard to the adequacy of internal reporting and controls, including those
concerning hedging and trading activities; consult with internal auditors, as
appropriate, and review and approve the annual internal audit program and
internal audit reports; and review and recommend approval of annual financial
statements and other financial statements, as required, of the Corporation. The
Audit Committee may review and make recommendations to the Board of Directors
concerning the Corporation's conflict of interest policy. The Audit Committee
may also review the Corporation's compliance with applicable environmental laws
and regulations; review and approve internal environmental assessment and
compliance programs, as it shall deem appropriate; and consult with such
officers and employees of the Corporation, and such independent persons or
firms, as it shall deem appropriate, with respect to environmental matters.
SECTION 4. The Compensation Committee may review the Corporation's compensation
policies and programs, review and adopt compensation and employee benefit plans
for the employees of the Corporation, administer the Corporation's stock bonus
plans, stock option plans, non-employee director stock plans and other
executive and director compensation arrangements, approve amendments to and
interpretations of all such plans for employees, executive officers or
directors, and have authority (which authority may be delegated to the Chief
Executive Officer or such other executive officers as the Compensation
Committee may determine) to appoint and remove, determine the term of office of
members of, and determine the size of any committee from time to time
administering employee benefit plans. The Compensation Committee shall make
recommendations to the Board of Directors with respect to directors'
compensation and shall approve compensation and management succession
arrangements for the executive officers of the Corporation, provided however,
that compensation and management succession arrangements for the Chief
Executive Officer and the President shall be approved by the Board of Directors
upon recommendation of the Compensation Committee. The Compensation Committee
may also delegate to the Chief Executive Officer or such other executive
officer as the Compensation Committee may determine the authority to approve
and cause to be placed into effect amendments to employee benefit plans deemed
necessary or appropriate in order to comply with any applicable federal or
state statute or regulation or otherwise deemed advisable by the Chief
Executive Officer or such other executive officer as the Compensation Committee
may determine, provided however, that each such amendment or related series of
amendments so approved shall involve costs to the Corporation not exceeding the
expenditure approval authority of the Chief Executive Officer as established
from time to time by the Board, and provided further, that neither the Chief
Executive Officer nor any such other executive officer shall have the authority
to approve any such amendment if such amendment would (a) materially increase
the benefits accruing to participants under such plan, (b) materially modify
the requirements for eligibility for participation in such plan, (c) increase
the securities issuable under such plan or (d) require stockholder approval
under any provision of the Restated Certificate of Incorporation, these
By-Laws, or any federal or state statute or regulation or the rules of the New
York Stock Exchange.
<PAGE> 9
SECTION 5. Any other committee of the Board designated by the Board of
Directors shall have and may, except as otherwise limited by statute, the
Restated Certificate of Incorporation or these By-Laws, exercise such powers
and authority of the Board of Directors in the management of the business of
the Corporation as may be provided in the resolution adopted by the Board of
Directors designating such committee of the Board of Directors. Each committee
of the Board of Directors may authorize the seal of the Corporation to be
affixed to all papers which may require it. The Board of Directors may
designate one or more directors as alternate members of any committee of the
Board of Directors who may replace any absent or disqualified member at any
meeting of such committee. In the absence or disqualification of any member of
such committee or committees, the member or members thereof present at any
meeting and not disqualified from voting, whether or not such member or members
constitute a quorum, may unanimously appoint another member of the Board of
Directors to act at the meeting in the place of any such absent or disqualified
member. Such committee or committees shall have such name or names and such
limitations of authority as may be determined from time to time by resolution
adopted by the Board of Directors.
SECTION 6. Each committee of directors shall keep regular minutes of its
proceedings and report the same to the Board of Directors when required.
SECTION 7. Members of special or standing committees of the Board shall be
entitled to receive such compensation for serving on such committees as the
Board of Directors shall determine.
ARTICLE IV.
CHAIRMAN OF THE BOARD
The Chairman of the Board of Directors, if there be one, shall be elected from
among the directors, shall have the power to preside at all meetings of the
Board of Directors and to sign (together with the Secretary or an Assistant
Secretary) certificates for shares of the Corporation, and shall have such
other powers and shall be subject to such other duties as the Board of
Directors may from time to time prescribe.
ARTICLE V.
OFFICERS
SECTION 1. The officers of the Corporation shall consist of a Chief Executive
Officer, a President, one or more Vice Presidents, any one or more of which may
be designated an Executive Vice President or a Senior Vice President, a Chief
Financial Officer, a Secretary, a Treasurer and a Controller. The Board of
Directors may appoint such other officers and agents, including Assistant Vice
Presidents, Assistant Secretaries and Assistant Treasurers, as it shall deem
necessary, who shall hold their offices for such terms and shall exercise such
powers and perform such duties as shall be determined by the Board of
Directors. Any two or more offices may be held by the same person.
SECTION 2. The officers of the Corporation shall be elected annually by the
Board of Directors at a regular meeting of the Board of Directors held
immediately prior to, or immediately following, the annual meeting of
<PAGE> 10
stockholders, or as soon thereafter as conveniently possible. Each officer
shall hold office until his successor shall have been chosen and shall have
qualified or until his death or the effective date of his resignation or
removal.
SECTION 3. Any officer or agent elected or appointed by the Board of Directors
or the Executive Committee may be removed without cause by the Board of
Directors whenever, in its judgment, the best interests of the Corporation
shall be served thereby, but such removal shall be without prejudice to the
contractual rights, if any, of the person so removed. Any officer may resign at
any time by giving written notice to the Corporation. Any such resignation
shall take effect at the date of the receipt of such notice or at any later
time specified therein, and unless otherwise specified therein, the acceptance
of such resignation shall not be necessary to make it effective.
SECTION 4. Any vacancy occurring in any office of the Corporation by death,
resignation, removal or otherwise, may be filled by the Board of Directors for
the unexpired portion of the term.
SECTION 5. The salaries of all officers and agents of the Corporation shall be
fixed by the Board of Directors or pursuant to its direction; and no officer
shall be prevented from receiving such salary by reason of his also being a
director.
SECTION 6. The Chief Executive Officer, the President and each Vice President
shall have authority to sign any deeds, bonds, mortgages, guarantees,
indemnities, contracts, checks, notes, drafts or other instruments authorized
to be executed by the Board of Directors or any duly authorized committee
thereof, or if so authorized in any approval authority policy or procedure
adopted by or at the direction of the Board of Directors, or if not
inconsistent with the Restated Certificate of Incorporation, these By-laws, any
action of the Board of Directors or any duly authorized committee thereof or
any such policy or procedure, and, together with the Secretary or any other
officer of the Corporation thereunto authorized by the Board or the Executive
Committee, may sign any certificates for shares of the Corporation which the
Board of Directors or the Executive Committee has authorized to be issued,
except in cases where the signing and execution of any such instrument or
certificate has been expressly delegated by these By-Laws or by the Board or
the Executive Committee to some other officer or agent of the Corporation or
shall be required by law to be otherwise executed.
SECTION 7. The Chief Executive Officer shall serve as general manager of the
business and affairs of the Corporation and shall report directly to the Board
of Directors, with all other officers, officials, employees and agents
reporting directly or indirectly to him. The Chief Executive Officer shall
preside at all meetings of the stockholders. In the absence of the Chairman of
the Board, or if there is no Chairman of the Board, the Chief Executive Officer
shall also preside at all meetings of the Board of Directors unless the Board
of Directors shall have chosen another presiding officer. The Chief Executive
Officer shall formulate and submit to the Board of Directors or the Executive
Committee matters of general policy for the Corporation; he shall keep the
Board of Directors and Executive Committee fully informed and shall consult
with them concerning the business of the Corporation. Subject to the
supervision, approval and review of his actions by the Board of Directors, the
Chief Executive Officer shall have authority to cause the employment or
appointment of and the discharge of assistant officers, employees and agents of
the Corporation, and to fix their compensation; and to suspend for
<PAGE> 11
cause, pending final action by the Board of Directors or Executive Committee,
any officer subordinate to the Chief Executive Officer. The Chief Executive
Officer shall vote, or give a proxy to any other officer of the Corporation to
vote, all shares of stock of any other corporation (or any partnership or other
interest in any partnership or other enterprise) standing in the name of the
Corporation, and in general he shall perform all other duties normally incident
to such office and such other duties as may be prescribed from time to time by
the Board of Directors or the Executive Committee. The Chief Executive Officer
shall designate the person or persons who shall exercise his powers and perform
his duties in his absence or disability and the absence or disability of the
President.
SECTION 8. The President shall be the chief operating officer of the
Corporation and, subject to the control of the Board of Directors and Chief
Executive Officer, shall in general supervise and control the business
operations of the Corporation. In the absence of the Chairman of the Board and
the Chief Executive Officer, the President shall preside at all meetings of the
Board of Directors and, in the absence of the Chief Executive Officer, he shall
preside at all meetings of the stockholders of the Corporation, unless in
either case the Board of Directors shall have chosen another presiding officer.
He shall keep the Chief Executive Officer fully informed and shall consult with
him concerning the business of the Corporation. He shall perform all other
duties normally incident to such office and such other duties as may be
prescribed from time to time by the Board of Directors, the Executive Committee
or the Chief Executive Officer. In the absence or disability of the Chief
Executive Officer, the President shall exercise the powers and perform the
duties of the Chief Executive Officer, unless such authority shall have been
designated by the Board of Directors, Executive Committee or Chief Executive
Officer to another person.
SECTION 9. The Vice Presidents shall perform all duties normally incident to
such office and such other duties as may be prescribed from time to time by the
Board of Directors, the Executive Committee, the Chief Executive Officer or the
President.
SECTION 10. The Chief Executive Officer shall appoint a chief legal officer of
the Corporation, who shall have charge of all matters of legal importance to
the Corporation and shall keep the Board of Directors, the Executive Committee,
the Chief Executive Officer and the President advised of the character and
progress of all legal proceedings and claims by and against the Corporation, or
in which it is interested by reason of its ownership of or affiliation with
other corporations or entities; when requested by the Board of Directors, the
Executive Committee, the Chief Executive Officer or the President, render his
opinion upon any subjects of interest to the Corporation which may be referred
to him; monitor activities of the Corporation to assure that the Corporation
complies with the laws applicable to the Corporation and in general perform all
other duties normally incident to such office and such other duties as may be
prescribed from time to time by the Board of Directors, the Executive
Committee, the Chief Executive Officer or the President.
SECTION 11. The Chief Financial Officer shall be the principal financial
officer of the Corporation and, unless the Board of Directors shall so
designate another officer, shall also be the principal accounting officer of
the Corporation. The Chief Financial Officer shall in general supervise and
control the keeping and maintaining of proper and correct accounts of the
Corporation's assets, liabilities, receipts, disbursements, gains, losses,
capital, surplus, shares, properties and business transactions, as well as all
funds, securities, evidences of indebtedness and other valuable documents of
the Corporation. He shall keep the Chief Executive Officer fully
<PAGE> 12
informed and shall consult with him concerning financial matters affecting the
Corporation and shall render such reports to the Board of Directors, the
Executive Committee, the Chief Executive Officer or the President as they may
request. He shall perform all other duties normally incident to such office and
such other duties as may be prescribed from time to time by the Board of
Directors, the Executive Committee, the Chief Executive Officer or the
President.
SECTION 12. The Secretary shall attend, and record and have custody of, the
minutes of the meetings of the stockholders, the Board of Directors and
committees of directors; see that all notices are duly given in accordance with
the provisions of these By-Laws and as required by law; be custodian of the
corporate records and of the seal of the Corporation; sign with the Chairman of
the Board, the President or a Vice President, certificates for shares of the
Corporation, the issue of which shall have been authorized by resolution of the
Board of Directors or the Executive Committee; and in general, perform all
duties normally incident to such office and such other duties as may be
prescribed from time to time by the Board of Directors, the Executive
Committee, the Chief Executive Officer or the President.
SECTION 13. The Treasurer shall have charge and custody of and be responsible
for all funds of the Corporation; and in general, perform all the duties
incident to such office and such other duties as may be prescribed from time to
time by the Board of Directors, the Executive Committee, the Chief Executive
Officer or the President.
SECTION 14. The Controller shall have charge and supervision of and be
responsible for the accounting function of the Corporation and, in general
perform all duties incident to such office and such other duties as may be
prescribed from time to time by the Board of Directors, the Executive
Committee, Chief Executive Officer or the President.
ARTICLE VI.
SEAL
The seal of the Corporation shall be in such form as the Board of Directors
shall prescribe.
ARTICLE VII.
CERTIFICATES OF STOCK
The shares of stock of the Corporation shall be represented by certificates of
stock, signed by the Chairman of the Board, the President or such Vice
President or other officer as may be designated by the Board of Directors or
the Executive Committee, and countersigned by the Secretary or an Assistant
Secretary; and if such certificates of stock are signed or countersigned by a
transfer agent other than the Corporation, or by a registrar other than the
Corporation, such signature of the Chairman of the Board, President, Vice
President, or other officer, and such countersignature of the Secretary or an
Assistant Secretary, or any of them, may be executed in facsimile, engraved or
printed. In case any officer who has signed or whose facsimile signature has
been placed upon any share certificate shall have ceased to be such officer
because of death, resignation or otherwise before the certificate is issued, it
may be issued by the Corporation with the same effect as if the officer had
<PAGE> 13
not ceased to be such at the date of its issuance. Said certificate of stock
shall be in such form as the Board of Directors may from time to time prescribe.
ARTICLE VIII.
INDEMNIFICATION
SECTION 1. Each director or officer of the Corporation who was or is made a
party or is threatened to be made a party to or is involved in any threatened,
pending or completed action, suit or proceeding, whether civil, criminal,
administrative or investigative (hereinafter a "proceeding"), by reason of the
fact that he, or a person of whom he is the legal representative, is or was a
director or officer of the Corporation or is or was serving at the request of
the Corporation as a director, officer, employee or agent of another
corporation or of a partnership, joint venture, trust, non-profit or charitable
organization, or other enterprise, including service with respect to employee
benefit plans, whether the basis of such proceeding is alleged action in an
official capacity while serving as a director, officer, employee or agent,
shall be indemnified and held harmless by the Corporation to the fullest extent
authorized by the DGCL (but, in the case of any amendment thereto, only to the
extent that such amendment permits the Corporation to provide broader
indemnification rights than said law permitted the Corporation to provide prior
to such amendment), against all expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement actually and reasonably
incurred by such person in connection therewith and such indemnification shall
continue as to a person who has ceased to be a director, officer, employee or
agent and shall inure to the benefit of his heirs, executors and
administrators. The right to indemnification conferred in this Section shall be
a contract right and shall include the right to be paid by the Corporation the
expenses incurred in defending any such proceeding in advance of its final
disposition; provided, however, that, if the DGCL requires, the payment of such
expenses incurred by a director or officer in his capacity as a director or
officer (but not in any other capacity in which service was or is rendered by
such person while a director or officer, including, without limitation, service
with respect to an employee benefit plan) in advance of the final disposition
of a proceeding shall be made only upon delivery to the Corporation of an
undertaking, by or on behalf of such director or officer, to repay all amounts
so advanced if it shall ultimately be determined that such director or officer
is not entitled to be indemnified under the applicable provisions of the DGCL.
The Corporation may, by action of its Board of Directors or as required
pursuant to the Restated Certificate of Incorporation, provide indemnification
to employees and agents of the Corporation with the same scope and effect as
the foregoing indemnification of directors and officers.
SECTION 2. The indemnification and advancement of expenses provided herein
shall not be deemed exclusive of any other rights to which those seeking
indemnification or advancement of expenses may be entitled under any agreement,
vote of stockholders, vote of disinterested directors, insurance arrangement or
otherwise, both as to action in his official capacity and as to action in
another capacity or holding such office.
<PAGE> 14
ARTICLE IX.
AMENDMENTS
These By-laws may be altered, amended, added to or repealed by the Board of
Directors, acting by a majority vote of the members of the Board of Directors
in office, or by the stockholders having voting power with respect thereto,
provided that in the case of amendments by stockholders, the affirmative vote
of the holders of at least 80 percent of the voting power of the then
outstanding voting stock, voting together as a single class, shall be required
to alter, amend or repeal any provision of the By-laws.
<PAGE> 1
EXHIBIT 10.15
SCHEDULE OF MANAGEMENT STABILITY AGREEMENTS
EMPLOYEE DATE OF AGREEMENT
-------- -----------------
Keith D. Booke August 1, 1997
Mary Rose Brown February 25, 1999
Jay D. Browning August 1, 1997
Michael S. Ciskowski August 1, 1997
S. Eugene Edwards February 25, 1999
John D. Gibbons August 1, 1997
James A. Greenwood August 1, 1997
John F. Hohnholt February 25, 1999
Gregory C. King August 1, 1997
John H. Krueger August 1, 1997
William N. Latham August 1, 1997
Robert R. Taylor August 1, 1997
T. Wyatt Stripling August 1, 1997
<PAGE> 1
EXHIBIT 11.1
VALERO ENERGY CORPORATION AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------
1999 1998 1997
-------------- ------------- ------------
<S> <C> <C> <C>
COMPUTATION OF BASIC EARNINGS PER SHARE:
Income (loss) from continuing operations .................. $ 14,287 $ (47,291) $ 111,768
============== ============= ============
Loss from discontinued operations, net of
income tax benefit ..................................... $ - $ - $ (15,672)
Less: Preferred stock dividend requirements
and redemption premium ................................. - - (4,592)
-------------- ------------- ------------
Loss from discontinued operations
applicable to common stock ............................. $ - $ - $ (20,264)
============== ============= ============
Weighted average number of shares of
common stock outstanding ............................... 56,086,381 56,077,671 51,662,449
============== ============= ============
Earnings (loss) per share:
Continuing operations .................................. $ .25 $ (.84) $ 2.16
Discontinued operations ................................ - - (.39)
-------------- ------------- ------------
Total ............................................... $ .25 $ (.84) $ 1.77
============== ============= ============
COMPUTATION OF EARNINGS PER SHARE
ASSUMING DILUTION:
Income (loss) from continuing operations assuming dilution $ 14,287 $ (47,291) $ 111,768
============== ============= ============
Loss from discontinued operations, net of
income tax benefit ..................................... $ - $ - $ (15,672)
Less: Preferred stock dividend requirements
and redemption premium ................................. - - (4,592)
Add: Reduction of preferred stock dividends applicable
to the assumed conversion of convertible preferred stock
at the beginning of the period ......................... - - 4,522
-------------- ------------- ------------
Loss from discontinued operations applicable to
common stock assuming dilution ......................... $ - $ - $ (15,742)
============== ============= ============
Weighted average number of shares of
common stock outstanding ............................... 56,086,381 56,077,671 51,662,449
Effect of dilutive securities:
Stock options .......................................... 291,812 - (a) 880,864
Performance awards ..................................... 379,755 - (a) 91,151
Convertible preferred stock ............................ - - 2,494,905
-------------- ------------- ------------
Weighted average number of shares of
common stock outstanding assuming dilution .............. 56,757,948 56,077,671 55,129,369
============== ============= ============
Earnings (loss) per share - assuming dilution:
Continuing operations .................................. $ .25 $ (.84) $ 2.03
Discontinued operations ................................ - - (.29)
-------------- ------------- ------------
Total ............................................... $ .25 $ (.84) $ 1.74
============== ============= ============
</TABLE>
- ------------------
(a) Various stock options and performance awards granted to employees in
connection with the Company's stock compensation plans were outstanding
during 1998 but were not included in the computation of diluted earnings
per share from continuing operations because the effect would have been
antidilutive.
<PAGE> 1
EXHIBIT 12.1
VALERO ENERGY CORPORATION
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------
1999 1998 1997 1996 1995
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Pretax income (loss) from continuing operations........... $ 20,187 $ (83,091) $175,557 $ 39,083 $ 88,696
Add (Deduct):
Net interest expense (1).............................. 55,429 32,479 42,455 38,534 40,935
Amortization of previously capitalized interest....... 5,132 4,900 4,865 4,801 5,497
Interest portion of rental expense (2)................ 19,002 15,926 13,193 8,913 8,059
Distributions in excess of (less than)
equity in earnings of joint ventures (1).......... (1,172) 2,965 (1,851) (3,899) (4,304)
---------- ----------- ---------- ---------- ----------
Earnings as defined................................... $ 98,578 $ (26,821) $234,219 $ 87,432 $138,883
========= ========= ======== ========= ========
Net interest expense (1).................................. $ 55,429 $ 32,479 $ 42,455 $ 38,534 $ 40,935
Capitalized interest...................................... 5,753 5,340 1,695 2,884 4,117
Interest portion of rental expense (2).................... 19,002 15,926 13,193 8,913 8,059
---------- ---------- ---------- ----------- -----------
Fixed charges as defined.............................. $ 80,184 $ 53,745 $ 57,343 $ 50,331 $ 53,111
========= ========= ========= ========= =========
Ratio of earnings to fixed charges (4).................... 1.23x (3) 4.08x 1.74x 2.61x
============ ============= ============ ============ ===========
</TABLE>
- -----------------------------
(1) During 1995 through September 1997, the Company guaranteed its pro rata
share of the debt of Javelina Company, an equity method investee in which
the Company holds a 20% interest. The interest expense related to the
guaranteed debt is not included in the computation of the ratio as the
Company was not required to satisfy the guarantee.
(2) The interest portion of rental expense represents one-third of rents,
which is deemed representative of the interest portion of rental expense.
(3) For 1998, earnings were insufficient to cover fixed charges by $80.6
million. Such deficiency was due primarily to a $170.9 million pre-tax
charge to earnings to write down the carrying amount of the Company's
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.
(4) The Company paid no dividends on preferred stock with respect to its
continuing operations during the periods indicated; therefore, the ratio
of earnings to combined fixed charges and preferred stock dividends is the
same as the ratio of earnings to fixed charges.
<PAGE> 1
EXHIBIT 21.1
VALERO ENERGY CORPORATION
SCHEDULE OF SUBSIDIARIES
NAME OF SUBSIDIARY STATE OF ORGANIZATION
------------------ ---------------------
Valero Energy Corporation Delaware
Valero Corporate Services Company Delaware
Valero Coal Company Delaware
Valero Producing Company Delaware
VMGA Company Delaware
Valero Refining and Marketing Company Delaware
Valero Capital Corporation Delaware
Valero Marketing and Supply Company Delaware
Valero Natural Gas Pipeline Company Delaware
Valero Refining Company-California Delaware
Valero Refining Company-Louisiana Delaware
Valero Refining Company-New Jersey Delaware
Valero Refining Company-Texas Texas
Valero Javelina Company Delaware
Valero Mediterranean Company Delaware
Valero Mexico Company Delaware
Valero MTBE Investments Company Delaware
Valero MTBE Operating Company Delaware
Valero Technical Services Company Delaware
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of
our report included in this Form 10-K into the Company's previously filed
Registration Statements on Form S-8 (File Nos. 333-31709, 333-31721, 333-31723
and 333-31727) and Form S-3 (File No. 333-56599).
ARTHUR ANDERSEN LLP
San Antonio, Texas
March 8, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1999 AND THE CONSOLIDATED
STATEMENT OF INCOME FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1999 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 60,087
<SECURITIES> 0
<RECEIVABLES> 375,580
<ALLOWANCES> 3,038
<INVENTORY> 303,388
<CURRENT-ASSETS> 828,858
<PP&E> 2,686,684
<DEPRECIATION> 702,170
<TOTAL-ASSETS> 2,979,272
<CURRENT-LIABILITIES> 718,982
<BONDS> 785,472
0
0
<COMMON> 563
<OTHER-SE> 1,084,206
<TOTAL-LIABILITY-AND-EQUITY> 2,979,272
<SALES> 7,961,168
<TOTAL-REVENUES> 7,961,168
<CGS> 7,892,027
<TOTAL-COSTS> 7,892,027
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 55,429
<INCOME-PRETAX> 20,187
<INCOME-TAX> 5,900
<INCOME-CONTINUING> 14,287
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 14,287
<EPS-BASIC> .25
<EPS-DILUTED> .25
</TABLE>
