SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): May 31, 1994
VALERO ENERGY CORPORATION
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation)
1-4718 74-1244795
(Commission File Number) (IRS Employer Identification No.)
530 McCullough Avenue, San Antonio, Texas 78215
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:
(210/246-2000)
<PAGE>
Item 2. Acquisition or Disposition of Assets.
(a) Acquisition of Control. On May 31, 1994, a special
meeting (the "Special Meeting") of the holders of common units of
limited partner interests ("Common Units") of Valero Natural Gas
Partners, L.P. ("VNGP, L.P.") was held at the offices of Valero
Natural Gas Company ("VNGC"), the general partner of VNGP, L.P.
At the Special Meeting, the holders of Common Units approved a
proposal providing for the merger (the "Merger") of VNGP, L.P.
with a wholly owned subsidiary of Valero Energy Corporation
("VEC" and, collectively with its consolidated subsidiaries, the
"Company"). The Merger was consummated on May 31, 1994, upon
satisfaction of all preconditions to the Merger and the filing of
a certificate of merger with the Office of the Secretary of State
of the State of Delaware.
As a result of the Merger, VNGP, L.P. has become a wholly
owned subsidiary of VEC. Upon consummation of the Merger, the
Common Units held by persons other than the Company (the "Public
Unitholders") were converted into the right to receive cash in
the amount of $12.10 per Common Unit, while the Common Units
owned by subsidiaries of VEC have remained outstanding. Prior to
the Merger, approximately 52.5% of the outstanding Common Units
were held by the Public Unitholders, and approximately 47.5% of
the outstanding Common Units were held by the Company. As a
result of the Merger, all of the outstanding Common Units are
held by the Company. VNGC has made available against delivery of
Common Unit certificates and other proper documentation
approximately $117.5 million to the Public Unitholders as payment
of the cash consideration required in the Merger. A portion of
the proceeds from an underwritten public offering of VEC's $3.125
Convertible Preferred Stock, completed in March 1994, was
advanced from VEC to VNGC to fund the payment to the Public
Unitholders.
(b) Business and Assets Acquired. VNGP, L.P. and its
subsidiary partnerships (collectively, the "Partnership") own and
operate natural gas pipeline systems serving Texas intrastate and
various interstate markets. The Partnership's wholly owned,
jointly owned and leased natural gas pipeline systems include
approximately 7,200 miles of mainlines, lateral lines and
gathering lines. The Partnership purchases natural gas for
resale to gas distribution companies, electric utilities, other
pipeline companies and industrial customers throughout the United
States and Mexico, and provides gas transportation services to
third parties. The Partnership is also a major producer and
marketer of natural gas liquids ("NGLs"). The Partnership owns
or operates for its own account nine gas processing plants in
Texas which extract from natural gas a mixed stream of NGLs. The
Partnership's NGL operations also include the fractionation of
mixed NGLs into component products, and the transportation and
marketing of NGLs. After the Merger, the Company intends to
continue the business conducted by the Partnership, and to
continue to devote the assets of the Partnership to such
businesses.
Item 7. Financial Statements and Exhibits.
(a) Financial Statements of Businesses Acquired. The
following Consolidated Financial Statements of Valero Natural
Gas Partners, L.P. and its consolidated subsidiaries are
included herein as a part of this Current Report:
<TABLE>
<CAPTION> Page
Audited Financial Statements:
<S> <C>
Report of Independent Public Accountants. . . . . . . . . . . . . . . . . . . . .
Consolidated Balance Sheets -- December 31, 1993 and 1992 . . . . . . . . . . . .
Consolidated Statements of Income -- For the Years Ended
December 31, 1993, 1992 and 1991 . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Partners' Capital -- For the Years Ended
December 31, 1993, 1992 and 1991 . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Cash Flows -- For the Years Ended
December 31, 1993, 1992 and 1991 . . . . . . . . . . . . . . . . . . . . . .
Notes to Consolidated Financial Statements. . . . . . . . . . . . . . . . . . . .
Unaudited Financial Statements:
Consolidated Balance Sheets -- March 31, 1994 and December 31, 1993 (audited) . .
Consolidated Statements of Income -- For the Three Months Ended
March 31, 1994 and 1993. . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Partners' Capital -- For the Three Months Ended
March 31, 1994 and 1993. . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Cash Flows -- For the Three Months Ended
March 31, 1994 and 1993. . . . . . . . . . . . . . . . . . . . . . . . . . .
Notes to Consolidated Financial Statements. . . . . . . . . . . . . . . . . . . .
</TABLE>
(b) Pro Forma Financial Information. The following pro
forma information of Valero Energy Corporation and its
consolidated subsidiaries is included herein as a part of this
Current Report:
<TABLE>
<S> <C>
Pro Forma Condensed Consolidated Balance Sheet -- March 31, 1994 . . . . . . . .
Pro Forma Consolidated Statements of Income -- For the Three Months Ended
March 31, 1994. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pro Forma Consolidated Statement of Income For the Year Ended
December 31, 1993 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Notes to Pro Forma Condensed Consolidated Financial Statements . . . . . . . . .
</TABLE>
(c) Exhibits. The following are filed as exhibits to this
Current Report:
2.1 Agreement of Merger, dated December 20, 1993, among
Valero Energy Corporation; Valero Natural Gas Partners, L.P.;
Valero Natural Gas Company; and Valero Merger Partnership,
L.P.--incorporated by reference from Exhibit 2.1 to Amendment No.
2 to the Valero Energy Corporation Registration Statement on Form
S-3 (Commission File No. 33-70454, filed December 29, 1993).
*23.1 Consent of Arthur Andersen & Co.
* filed herewith
<PAGE>
Item 7(a). Financial Statements of Business Acquired.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of Valero Natural Gas Company
as General Partner of Valero Natural Gas Partners, L.P.
and to the Common Unitholders:
We have audited the accompanying consolidated balance
sheets of Valero Natural Gas Partners, L.P. (a Delaware limited
partnership) as of December 31, 1993 and 1992, and the related
consolidated statements of income, partners' capital and cash
flows for each of the three years in the period ended December
31, 1993. These financial statements are the responsibility
of the Partnership'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 Natural Gas Partners, L.P. as of December 31,
1993 and 1992, and the results of its operations and its cash
flows for each of the three years in the period ended
December 31, 1993, in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN & CO.
San Antonio, Texas
February 17, 1994
<PAGE>
<TABLE>
VALERO NATURAL GAS PARTNERS, L.P.
CONSOLIDATED BALANCE SHEETS
(Thousands of Dollars)
<CAPTION>
December 31,
1993 1992
A S S E T S
<S> <C> <C>
CURRENT ASSETS:
Cash and temporary cash investments. . . . . . . . . . . . . . . . . . . $ 5,523 $ 6,598
Cash held in debt service escrow . . . . . . . . . . . . . . . . . . . . 34,186 32,864
Receivables, less allowance for doubtful accounts of $2,102 (1993)
and $633 (1992). . . . . . . . . . . . . . . . . . . . . . . . . . . . 154,503 171,660
Inventories. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25,434 35,080
Prepaid expenses and other . . . . . . . . . . . . . . . . . . . . . . . 5,321 8,273
224,967 254,475
PROPERTY, PLANT AND EQUIPMENT-including construction in
progress of $16,728 (1993) and $14,341 (1992), at cost . . . . . . . . . 939,565 916,734
Less: Accumulated depreciation . . . . . . . . . . . . . . . . . . . . 199,763 173,518
739,802 743,216
DEFERRED CHARGES AND OTHER ASSETS. . . . . . . . . . . . . . . . . . . . . 80,313 86,790
$1,045,082 $1,084,481
L I A B I L I T I E S A N D P A R T N E R S' C A P I T A L
CURRENT LIABILITIES:
Current maturities of long-term debt and capital lease obligations . . . $ 28,908 $ 26,121
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . 216,953 237,176
Accrued interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,692 16,710
Other accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . 8,719 7,422
273,272 287,429
LONG-TERM DEBT, less current maturities. . . . . . . . . . . . . . . . . . 506,429 534,286
CAPITAL LEASE OBLIGATIONS, less current maturities . . . . . . . . . . . . 103,787 104,075
DEFERRED CREDITS AND OTHER LIABILITIES . . . . . . . . . . . . . . . . . . 1,548 2,672
LIMITED PARTNERS' CAPITAL. . . . . . . . . . . . . . . . . . . . . . . . . 158,448 154,461
GENERAL PARTNERS' CAPITAL. . . . . . . . . . . . . . . . . . . . . . . . . 1,598 1,558
$1,045,082 $1,084,481
See Notes to Consolidated Financial Statements.
</TABLE>
<TABLE>
VALERO NATURAL GAS PARTNERS, L.P.
CONSOLIDATED STATEMENTS OF INCOME
(Thousands of Dollars, Except Per Unit Amounts)
<CAPTION>
Year Ended December 31,
1993 1992 1991
<S> <C> <C> <C>
OPERATING REVENUES . . . . . . . . . . . . . . . . . $1,326,458 $1,197,129 $1,144,001
COSTS AND EXPENSES:
Cost of sales. . . . . . . . . . . . . . . . . . . 1,090,363 954,600 896,322
Operating expenses . . . . . . . . . . . . . . . . 120,171 118,284 108,614
Depreciation expense . . . . . . . . . . . . . . . 36,446 34,404 39,231
Total. . . . . . . . . . . . . . . . . . . . . . 1,246,980 1,107,288 1,044,167
OPERATING INCOME . . . . . . . . . . . . . . . . . . 79,478 89,841 99,834
OTHER INCOME, NET. . . . . . . . . . . . . . . . . . 1,263 624 4,013
INTEREST AND DEBT EXPENSE:
Incurred . . . . . . . . . . . . . . . . . . . . . (68,007) (66,679) (67,532)
Capitalized. . . . . . . . . . . . . . . . . . . . 1,713 1,200 721
NET INCOME . . . . . . . . . . . . . . . . . . . . . 14,447 24,986 37,036
Less: General Partners' interest . . . . . . . . . 1,217 1,596 1,973
NET INCOME ALLOCABLE TO LIMITED
PARTNERS . . . . . . . . . . . . . . . . . . . . . $ 13,230 $ 23,390 $ 35,063
NET INCOME PER LIMITED PARTNER
UNIT . . . . . . . . . . . . . . . . . . . . . . . $ .72 $ 1.27 $ 1.90
WEIGHTED AVERAGE LIMITED PARTNER
UNITS OUTSTANDING (in thousands) . . . . . . . . . 18,487 18,487 18,487
See Notes to Consolidated Financial Statements.
</TABLE>
<TABLE>
VALERO NATURAL GAS PARTNERS, L.P.
CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL
(Thousands of Dollars)
<CAPTION>
Limited Partners' Capital General
Preference Common Preference Common Partners'
Units Units Total Unitholders Unitholders Total Capital
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE - December 31, 1990. . . 9,690,980 8,795,558 18,486,538 $ 151,436 $ 18,518 $169,954 $ 1,611
Net income . . . . . . . . . . - - - 14,307 20,756 35,063 1,973
Distributions. . . . . . . . . - - - (24,277) (21,939) (46,216) (1,820)
Conversion of Common Units
to Preference Units . . . . . 26,400 (26,400) - 35 (35) - -
BALANCE - December 31, 1991. . . 9,717,380 8,769,158 18,486,538 141,501 17,300 158,801 1,764
Net income . . . . . . . . . . - - - 231 23,159 23,390 1,596
Distributions. . . . . . . . . - - - (12,188) (15,542) (27,730) (1,802)
Conversion of Common Units
to Preference Units . . . . . 32,620 (32,620) - 54 (54) - -
Conversion of Preference Units
to Common Units upon termi-
nation of the Preference
Period . . . . . . . . . . . (9,750,000) 9,750,000 - (129,598) 129,598 - -
BALANCE - December 31, 1992. . . - 18,486,538 18,486,538 - 154,461 154,461 1,558
Net income . . . . . . . . . . - - - - 13,230 13,230 1,217
Distributions. . . . . . . . . - - - - (9,243) (9,243) (1,177)
BALANCE - December 31, 1993. . . - 18,486,538 18,486,538 $ - $158,448 $158,448 $ 1,598
See Notes to Consolidated Financial Statements.
</TABLE>
<TABLE>
VALERO NATURAL GAS PARTNERS, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands of Dollars)
<CAPTION>
Year Ended December 31,
1993 1992 1991
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . $ 14,447 $ 24,986 $ 37,036
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation expense . . . . . . . . . . . . . . . . . . . 36,446 34,404 39,231
Amortization of deferred charges and other, net. . . . . . 2,459 3,520 3,075
Changes in current assets and current liabilities. . . . . 13,364 26,676 (1,336)
Changes in deferred items and other, net . . . . . . . . . 3,765 (11,700) 6,275
Net cash provided by operating activities. . . . . . . 70,481 77,886 84,281
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital additions. . . . . . . . . . . . . . . . . . . . . . . (36,061) (35,893) (33,074)
Dispositions of property, plant and equipment. . . . . . . . . 2,585 934 7,926
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . 334 1,493 269
Net cash used in investing activities. . . . . . . . . . . . (33,142) (33,466) (24,879)
CASH FLOWS FROM FINANCING ACTIVITIES:
Reduction of long-term debt and capital lease obligations. . . (26,119) (22,971) (17,500)
Increase in cash held in debt service escrow for principal . . (1,875) (1,875) (4,018)
Proceeds from unexpended debt proceeds held by trustee . . . . - - 937
Partnership distributions. . . . . . . . . . . . . . . . . . . (10,420) (29,532) (48,036)
Net cash used in financing activities. . . . . . . . . . . . (38,414) (54,378) (68,617)
NET DECREASE IN CASH AND TEMPORARY
CASH INVESTMENTS . . . . . . . . . . . . . . . . . . . . . . . (1,075) (9,958) (9,215)
CASH AND TEMPORARY CASH INVESTMENTS AT
BEGINNING OF PERIOD. . . . . . . . . . . . . . . . . . . . . . 6,598 16,556 25,771
CASH AND TEMPORARY CASH INVESTMENTS AT
END OF PERIOD. . . . . . . . . . . . . . . . . . . . . . . . . $ 5,523 $ 6,598 $ 16,556
See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
VALERO NATURAL GAS PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Control
Valero Natural Gas Partners, L.P. ("VNGP, L.P."), Valero
Management Partnership, L.P. (the "Management Partnership") and
various subsidiary operating partnerships (the "Subsidiary
Operating Partnerships"), all Delaware limited partnerships, are
the successors to substantially all of the natural gas and
natural gas liquids businesses, assets and liabilities of
substantially all of the subsidiaries of Valero Natural Gas
Company ("VNGC") and the transmission division of Rio Grande
Valley Gas Company ("Rio"). VNGC is, and Rio at the time of such
succession was, a wholly owned subsidiary of Valero Energy
Corporation (unless otherwise required by the context, the term
"Energy" as used herein refers to Valero Energy Corporation and
its consolidated subsidiaries, both individually and
collectively). VNGC is the general partner of VNGP, L.P. and the
Management Partnership (in such capacity, the "General Partner"),
while subsidiaries of VNGC are general partners (the "Subsidiary
General Partners") of the respective Subsidiary Operating
Partnerships.
In March 1987, VNGP, L.P. sold in an underwritten public
offering 9.5 million preference units of limited partner
interests (the "Preference Units"), representing a 52% limited
partner interest in VNGP, L.P. VNGP, L.P. concurrently issued
approximately 8.6 million common units of limited partner
interests (the "Common Units"), representing a 47% limited
partner interest, to subsidiaries of Energy, and issued a 1%
general partner interest in VNGP, L.P. to VNGC. Subsequent to
March 1987, VNGP, L.P. issued .4 million additional Common Units
to a subsidiary of Energy. In addition, approximately .2 million
Common Units held by a subsidiary of Energy were transferred to
employees of Energy and converted into Preference Units in
connection with an employee benefit plan adopted by Energy.
During 1992, all outstanding Preference Units were automatically
converted into Common Units (see "Allocation of Net Income and
Cash Distributions"). The original Common Units and former
Preference Units converted into Common Units are collectively
referred to herein as the "Units." Holders of the Units are
referred to herein as the "Unitholders."
Under the partnership structure, VNGP, L.P. holds a 99%
limited partner interest and VNGC holds a 1% general partner
interest in the Management Partnership. The Management
Partnership in turn holds a 99% limited partner interest and
various wholly owned subsidiaries of VNGC each hold a 1% general
partner interest in the various Subsidiary Operating Partnerships
to which the acquired businesses, assets and liabilities were
transferred. Valero Transmission, L.P. ("Transmission"), one of
the Subsidiary Operating Partnerships, owns and operates the
principal pipeline system of the Partnership. (References to
Transmission prior to March 25, 1987 refer to Valero Transmission
Company, a wholly owned subsidiary of VNGC, and after that date
to its successor in interest, Valero Transmission, L.P.)
Transmission is principally a transporter of natural gas as it
transports gas for affiliates and third parties. Transmission
also sells natural gas to intrastate customers under long-term
contracts; however, most of the Partnership's gas sales are made
through other Subsidiary Operating Partnerships which operate
special marketing programs ("SMPs"). Subsequent to March 1987,
VNGP, L.P. acquired a wholly owned subsidiary that makes certain
intrastate gas sales, and formed certain subsidiary partnerships,
one of which leases certain assets from Energy under capital
leases as described in Note 5. Also, during 1992, an additional
Subsidiary Operating Partnership was formed to make certain
intrastate gas sales. VNGP, L.P., the Management Partnership,
the original Subsidiary Operating Partnerships and the additional
entities acquired or formed subsequent to March 1987 are
collectively referred to herein as the "Partnership." As of
December 31, 1993, Energy's total effective equity interest in
the Partnership was approximately 49%.
In October 1993, Energy publicly announced its proposal
to acquire the 9.7 million issued and outstanding Common Units in
VNGP, L.P. held by persons other than Energy (the "Public
Unitholders") pursuant to a merger of VNGP, L.P. with a wholly
owned subsidiary of Energy. The Board of Directors of VNGC
appointed a special committee of outside directors (the "Special
Committee") to consider the merger and to determine the fairness
of the transaction to the Public Unitholders. The Special
Committee thereafter retained independent financial and legal
advisors to assist the Special Committee. Upon the
recommendation of the Special Committee, the Board of Directors
of VNGC unanimously approved the merger. Effective December 20,
1993, Energy, VNGP, L.P. and VNGC entered into an agreement of
merger (the "Merger Agreement") providing for the merger. In the
merger, the Common Units held by the Public Unitholders will be
converted into the right to receive cash in the amount of $12.10
per Common Unit. As a result of the merger, VNGP, L.P. would
become a wholly owned subsidiary of Energy.
Consummation of the merger is subject to, among other
things, (i) approval of the Merger Agreement by the holders of a
majority of the issued and outstanding Common Units;
(ii) approval by the holders of a majority of the Common Units
held by the Public Unitholders and voted at a special meeting of
holders of Common Units to be called to consider the Merger
Agreement; (iii) receipt of satisfactory waivers, consents or
amendments to certain of Energy's financial agreements; and (iv)
completion of an underwritten public offering of convertible
preferred stock by Energy. Energy currently owns approximately
47.5% of the outstanding Common Units and intends to vote its
Common Units in favor of the merger.
Basis of Presentation
The accompanying consolidated financial statements have
been prepared in accordance with generally accepted accounting
principles and are not the basis for reporting taxable income to
Unitholders. The consolidated financial statements include the
accounts of VNGP, L.P. and its consolidated subsidiaries. All
significant interpartnership transactions have been eliminated in
consolidation.
Statements of Cash Flows
In order to determine net cash provided by operating
activities, net income has been adjusted by, among other things,
changes in current assets and current liabilities, excluding
changes in cash and temporary cash investments, cash held in debt
service escrow for principal (see Note 3), and current maturities
of long-term debt and capital lease obligations. Those changes,
shown as an (increase)/decrease in current assets and an
increase/ (decrease) in current liabilities, are provided in the
following table. Temporary cash investments are highly liquid
low-risk debt instruments which have a maturity of three months
or less when acquired and whose carrying amount approximates fair
value. (Dollars in thousands.)
<TABLE>
<CAPTION>
Year Ended December 31,
1993 1992 1991
<S> <C> <C> <C>
Cash held in debt service escrow for interest. $ 553 $ 483 $ 343
Receivables, net . . . . . . . . . . . . . . . 17,157 3,118 19,963
Inventories. . . . . . . . . . . . . . . . . . 9,646 (656) (10,430)
Prepaid expenses and other . . . . . . . . . . 2,952 (3,679) (2,005)
Accounts payable . . . . . . . . . . . . . . . (20,223) 31,504 (13,277)
Accrued interest . . . . . . . . . . . . . . . 1,982 (2,653) 2,011
Other accrued expenses . . . . . . . . . . . . 1,297 (1,441) 2,059
Total. . . . . . . . . . . . . . . . . . . . $ 13,364 $ 26,676 $ (1,336)
</TABLE>
Cash interest paid by the Partnership (net of amounts
capitalized) for the years ended December 31, 1993, 1992 and 1991
was $62.7 million, $66.4 million and $62.5 million, respectively.
No cash payments for federal income taxes were made during these
periods as the Partnership is not subject to federal income taxes
(see "Income Taxes" below). Cash payments for state income taxes
made during these periods were insignificant.
Noncash investing and financing activities for the years
ended December 31, 1992 and 1991 included $26 million and $75
million, respectively, of various natural gas and natural gas
liquids facilities acquired by the Partnership through capital
lease transactions entered into with Energy. See Note 5.
Transactions with Energy
The Partnership enters into various types of
transactions with Energy in the normal course of business on
market-related terms and conditions. The Partnership is charged
a management fee for the direct and indirect costs incurred by
Energy on behalf of the Partnership that are associated with
managing its operations. The Partnership sells natural gas and
natural gas liquids ("NGLs") to, and purchases NGLs from,
Energy's refining subsidiary. The Partnership sold natural gas
to Energy's retail natural gas distribution business operated by
Rio until September 30, 1993, when Rio was sold by Energy. The
Partnership operates for a fee two natural gas processing plants
and related facilities for Energy and sells natural gas to,
purchases natural gas and NGLs from, and processes natural gas
owned by Energy in connection with these NGL operations. The
Partnership also enters into other operating transactions with
Energy, including certain leasing transactions discussed in Note
5. As of December 31, 1993 and 1992, the Partnership had
recorded approximately $31.8 million and $13.5 million,
respectively, of accounts payable and accrued expenses, net of
accounts receivable, due to Energy.
During the fourth quarter of 1992, the Partnership
recognized a charge to earnings through the management fee billed
by Energy of approximately $4.4 million, or $.23 per limited
partner unit, representing the Partnership's allocable portion of
the cost of a voluntary early retirement program implemented by
Energy.
The following table summarizes transactions between the
Partnership and Energy for the years ended December 31, 1993,
1992 and 1991 (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
1993 1992 1991
<S> <C> <C> <C>
NGL sales to and services for Energy . . . . . . $ 98,590 $ 96,696 $ 86,936
Natural gas sales to Energy. . . . . . . . . . . 59,735 50,991 38,072
Purchases of NGLs and natural gas,
and transportation and other charges
from Energy. . . . . . . . . . . . . . . . . . 38,868 54,674 19,752
Interest expense from capital lease transactions
with Energy. . . . . . . . . . . . . . . . . . 12,828 10,071 9,584
Management fees for direct and indirect
costs billed by the General Partner
and affiliated companies . . . . . . . . . . . 80,727 82,024 73,324
</TABLE>
The direct and indirect costs incurred by the General
Partner on behalf of the Partnership that are charged to the
Partnership through the management fee include, among other
things, salaries and wages and other employee-related costs.
Effective January 1, 1993, Energy adopted the Financial
Accounting Standards Board's Statement of Financial Accounting
Standards ("SFAS") No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions." This statement
requires a change in Energy's accounting for postretirement
benefits other than pensions from a pay-as-you-go basis to an
accrual basis of accounting. Energy is amortizing the transition
obligation over 20 years, which is greater than the average
remaining service period until eligibility of active plan
participants. As a result of Energy's adoption of this
statement, the Partnership's proportionate share of other
postretirement employee benefits included in the management fee
in 1993 increased by approximately $1.5 million and the
Partnership's proportionate share of the total accumulated
postretirement benefit obligation at December 31, 1993 was
approximately $15 million. The adoption of this statement by
Energy did not affect the Partnership's cash flows in 1993, nor
is it expected to affect the Partnership's future cash flows, as
Energy expects to continue to fund its postretirement benefits
other than pensions, and require reimbursement from the
Partnership for the Partnership's proportionate share of such
funding, on a pay-as-you-go basis.
Gas Sales and Transportation
In the course of making gas sales and providing
transportation services to customers, Transmission experiences
measurement and other volumetric differences related to the
amounts of gas received and delivered. Transmission has in the
past experienced overall net volume gains due to such differences
and its Rate Order allows such volumes to be sold to its
customers. Transmission historically has derived a substantial
benefit from such sales. The amount included in operating income
in 1993 was substantially the same as in 1992. However, the
implementation of more precise gas measurement equipment and
standards and the reduction in Transmission's total sales
volumes, discussed in Note 6 - "Customer Audit of Transmission",
is expected to reduce operating income from such sales in future
periods.
Inventories
Inventories are carried principally at weighted average
cost not in excess of market. Inventories as of December 31,
1993 and 1992 were as follows (in thousands):
<TABLE>
<CAPTION>
December 31,
1993 1992
<S> <C> <C>
Natural gas in underground storage . . . . $ 23,184 $ 27,768
Natural gas liquids. . . . . . . . . . . . 2,250 7,312
$ 25,434 $ 35,080
</TABLE>
In addition to the above noted natural gas storage
inventories, which are located at the Wilson Storage Facility in
Wharton County, Texas (see Note 5), the Partnership also had
natural gas in third-party storage facilities, available under
exchange agreements, totalling $10.8 million and $1.2 million at
December 31, 1993 and 1992, respectively. Such amounts are
included in receivables in the accompanying consolidated balance
sheets.
Property, Plant and Equipment
Property, plant and equipment at date of inception of
the Partnership was increased by the excess of the acquisition
cost of the holders of the Preference Units over VNGC's
historical net cost basis. Accordingly, approximately 51% of
property, plant and equipment was recorded at fair value
reflecting the value attributable to the holders of the
Preference Units while the remaining 49% was recorded at
historical net book cost to reflect the value attributable to the
General Partner and the holders of the original Common Units.
Property additions and betterments include capitalized
interest and acquisition and administrative costs allocable to
construction and property purchases. Assets under capital leases
are included in property, plant and equipment and are recorded at
the lesser of the fair value of the leased property at the
inception of the lease or the present value of the related future
minimum lease payments.
The costs of minor property units (or components
thereof), net of salvage, retired or abandoned are charged or
credited to accumulated depreciation. Gains or losses on sales
or other dispositions of major units of property are credited or
charged to income.
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. Assets
under capital leases are depreciated on a straight-line basis
over the lease term. The rates for depreciation are as follows:
<TABLE>
<S> <C>
Natural gas facilities . . . . . 2 1/4%-20%
Natural gas liquids facilities . 4 1/2%-20%
</TABLE>
During the fourth quarter of 1992, the Partnership
extended the estimated useful lives of the majority of its
natural gas liquids facilities from 14 to 20 years to better
reflect the estimated periods during which such assets are
expected to remain in service. The effect of this change in
accounting estimate, which was made retroactive to January 1,
1992, was to decrease depreciation expense and increase net
income for 1992 by approximately $5.6 million, or $.29 per
limited partner unit.
Other Assets
Payments made or agreed to be made in connection with
the settlement of certain disputed contractual issues with gas
suppliers of Transmission are initially deferred. The balance of
such payments is subsequently reduced as recoveries are made
through Transmission's rates. The balance of deferred gas costs
of $67 million and $72 million at December 31, 1993 and 1992,
respectively, is included in noncurrent other assets and is
expected to be recovered over future periods. See Note 6 -
"Customer Audit of Transmission."
Debt issuance costs are included in deferred charges and
other assets and are amortized by the effective interest method
over the term of each respective issue of the Management
Partnership's First Mortgage Notes ("First Mortgage Notes"). See
Note 3.
Income Taxes
Income and deductions of the Partnership for federal
income tax purposes are includable in the tax returns of the
individual partners. Accordingly, no recognition has been given
to federal income taxes in the accompanying consolidated
financial statements of the Partnership. At December 31, 1993
and 1992, the net difference between the tax bases and the
reported amounts of assets and liabilities in the accompanying
Consolidated Balance Sheets was $314 million and $322 million,
respectively. Under the Revenue Act of 1987, certain publicly
traded limited partnerships will be taxed as corporations after
December 31, 1997 unless specifically exempted. This Act
exempted natural resource partnerships including those dealing
with natural gas transportation and processing of natural gas
liquids, such as the Partnership, from its taxation provision.
Price Risk Management Activities
The Partnership, through its Market Center Services
Program established in 1992, enters into exchange-traded
futures and options contracts, forward contracts, swaps and
other financial instruments with third parties to hedge natural
gas inventories and certain anticipated natural gas purchase
requirements in order to minimize the risk of market
fluctuations. The Partnership also utilizes such price risk
management techniques to provide services to gas producers
and end users. Changes in the market value of these contracts
are deferred until the gain or loss is recognized on the hedged
transaction. As of December 31, 1993 and 1992, the Partnership
had outstanding contracts for natural gas totalling approximately
15.0 billion cubic feet ("Bcf") and 4.8 Bcf, respectively, for
which the Partnership is the fixed price payor and 27.1 Bcf and
10.0 Bcf, respectively, for which the Partnership is the fixed
price receiver. Such contracts run for a period of one to twelve
months. A portion of such contracts represented hedges of
natural gas volumes in underground storage and in third-party
storage facilities which totalled approximately 10.3 Bcf and 7.4
Bcf at December 31, 1993 and 1992, respectively. See
"Inventories" above.
In 1993 and 1992, the Partnership recognized $18.7
million and $12.9 million, respectively, in gas cost reductions
and other benefits from this program. An additional $5.1 million
and $3.6 million in other reductions of cost of gas was generated
by transactions entered into in 1993 and 1992, respectively,
which is recognized in income in the subsequent year as the
related gas is sold.
Allocation of Net Income and Cash Distributions
Net income is allocated to partners based on their
effective ownership interest in the operating results of the
Partnership, except that additional depreciation expense
pertaining to the excess of the Partnership's acquisition cost
over the historical cost basis in net property, plant and
equipment and certain other assets in which the former holders of
Preference Units have an ownership interest is allocated solely
to such holders as a noncash charge to net income. The
allocation of additional depreciation expense to the former
holders of Preference Units does not affect the cash
distributions with respect to the Units. Under the Partnership
structure, the income of the Subsidiary Operating Partnerships is
allocated to the Subsidiary General Partners, which hold a 1%
general partner interest, and to the Management Partnership,
which holds a 99% limited partner interest. As a result, net
income allocable to the Subsidiary General Partners is not
reduced by interest expense associated with the Management
Partnership's First Mortgage Notes.
The Partnership is required to make quarterly cash
distributions with respect to all Units in an amount equal to
"Distributable Cash Flow" as defined in the Second Amended and
Restated Agreement of Limited Partnership of VNGP, L.P. (the
"Partnership Agreement") and as determined by the General
Partner. With the payment on May 30, 1992 of the cash
distribution of $.625 per Unit for the first quarter of 1992, the
Partnership completed the payment of cumulative cash
distributions of $12.50 per Preference Unit resulting in the
termination of the period (the "Preference Period") during which
the holders of Preference Units were entitled to a preferential
distribution amount. As a result of the termination of the
Preference Period, all outstanding Preference Units were
automatically converted into Common Units in accordance with the
terms of the Partnership Agreement. The Partnership subsequently
reduced cash distributions to $.125 per Unit for the remaining
quarters of 1992 and the first three quarters of 1993. On
January 25, 1994, the VNGC Board of Directors declared a cash
distribution of $.125 per Unit for the fourth quarter of 1993
that is payable March 1, 1994 to holders of record as of
February 7, 1994.
If the proposed merger with Energy described above under
"Organization and Control" occurs after March 9, 1994, the
General Partner intends and expects to declare and pay a pro rata
distribution to holders of record of the Common Units on the
effective date of the merger based upon the number of days
elapsed between February 7, 1994 and such effective date.
2. SHORT-TERM BANK LINES
The Partnership, through the Management Partnership,
currently maintains five separate short-term bank lines of credit
totalling $80 million. In accordance with the terms of the
indenture of mortgage and deed of trust pursuant to which the
Management Partnership's First Mortgage Notes were issued (the
"Mortgage Note Indenture"), at least $20 million of revolving
credit agreements must be maintained at all times; however, no
more than $50 million of borrowings are permitted to be
outstanding at any time. See Note 3. The Partnership had
borrowings of as much as $39.9 million under its short-term bank
lines during 1993. No borrowings were outstanding under these
lines at December 31, 1993 or 1992. The lines of credit mature
at various times during 1994, bear interest at each respective
bank's prime, quoted money market or Eurodollar rate and require
commitment fees based on the unused amount of the credit. If
the proposed merger with Energy does not occur, the General
Partner believes that these short-term bank lines could be
renewed or replaced with other short-term lines during 1994 on
terms and conditions similar to those currently existing. If
the proposed merger with Energy is completed, the General
Partner anticipates that new bank credit agreements will be
negotiated and that the Partnership's existing short-term bank
lines will be cancelled.
3. LONG-TERM DEBT
Long-term debt balances were as follows (in thousands):
<TABLE>
<CAPTION>
December 31,
1993 1992
<S> <C> <C>
First Mortgage Notes . . . . . . . . . . . . . $534,286 $559,643
Less current maturities. . . . . . . . . . . 27,857 25,357
Long-term debt, less current maturities . . $506,429 $534,286
</TABLE>
The First Mortgage Notes, which are currently comprised
of eight remaining series due serially from 1994 through 2009,
are secured by mortgages on and security interests in
substantially all of the currently existing and after-acquired
property, plant and equipment of the Management Partnership and
each Subsidiary Operating Partnership and by the Management
Partnership's limited partner interest in each Subsidiary
Operating Partnership (the "Mortgaged Property"). As of December
31, 1993, the First Mortgage Notes have a remaining weighted
average life of approximately 7.3 years and a weighted average
interest rate of 10.12% per annum. Interest on the First
Mortgage Notes is payable semiannually, but one-half of each
interest payment and one-fourth of each annual principal payment
are escrowed quarterly in advance. At December 31, 1993 and
1992, $34.2 million and $32.9 million, respectively, had been
deposited with the Mortgage Note Indenture trustee ("Trustee") in
an escrow account. The amount on deposit is classified as a
current asset (cash held in debt service escrow) and the
liability to be paid off when the cash is released by the Trustee
from escrow is classified as a current liability.
The Mortgage Note Indenture contains covenants
prohibiting the Management Partnership and the Subsidiary
Operating Partnerships (collectively referred to herein as the
"Operating Partnerships") from incurring additional indebtedness,
including any additional First Mortgage Notes, other than (i) up
to $50 million of indebtedness to be incurred for working capital
purposes (provided that for a period of 45 consecutive days
during each 16 consecutive calendar month period no such
indebtedness will be permitted to be outstanding) and (ii) up to
the amount of any future capital improvements financed through
the issuance of debt or equity by VNGP, L.P. and the contribution
of such amounts as additional equity to the Management
Partnership. The Mortgage Note Indenture also prohibits the
Operating Partnerships from (a) creating new indebtedness unless
certain cash flow to debt service requirements are met; (b)
creating certain liens; or (c) making cash distributions in any
quarter in excess of the cash generated in the prior quarter,
less (i) capital expenditures during such prior quarter (other
than capital expenditures financed with certain permitted
indebtedness), (ii) an amount equal to one-half of the interest
to be paid on the First Mortgage Notes on the interest payment
date occurring in or next following such prior quarter and (iii)
an amount equal to one-quarter of the principal required to be
paid on the First Mortgage Notes on the principal payment date
occurring in or next following such prior quarter, plus cash
which could have been distributed in any prior quarter but which
was not distributed. The Operating Partnerships are further
prohibited from purchasing or owning any securities of any person
or making loans or capital contributions to any person other than
investments in the Subsidiary Operating Partnerships, advances
and contributions of up to $20 million per year and $100 million
in the aggregate to entities engaged in substantially similar
business activities as the Operating Partnerships, temporary
investments in certain marketable securities and certain other
exceptions.
The Mortgage Note Indenture also prohibits the Operating
Partnerships from consolidating with or conveying, selling,
leasing or otherwise disposing of all or any material portion of
their property, assets or business as an entirety to any other
person unless the surviving entity meets certain net worth
requirements and certain other conditions are met, or from
selling or otherwise disposing of any part of the Mortgaged
Property, subject to certain exceptions. The Mortgage Note
Indenture also provides that it will be an event of default if
VNGC withdraws as General Partner of the Management Partnership
prior to 1997, if VNGC is removed as General Partner but the
Subsidiary General Partners are not also removed, or if the
General Partner or any Subsidiary General Partner withdraws or is
removed and is not replaced within 30 days.
Maturities of long-term debt for the years ending
December 31, 1995 through 1998 are $30.3 million, $32.9 million,
$35.3 million and $37.9 million, respectively.
Based on the borrowing rates currently available to the
Partnership for long-term debt with similar terms and average
maturities, the fair value of the Partnership's First Mortgage
Notes, including current maturities, at December 31, 1993 was
approximately $562 million. At December 31, 1992, the fair value
of the First Mortgage Notes was essentially equal to their
carrying value.
4. INDUSTRY SEGMENT INFORMATION
<TABLE>
<CAPTION>
Year Ended December 31,
1993 1992 1991
(Thousands of Dollars)
<S> <C> <C> <C>
Operating revenues:
Natural gas. . . . . . . . . . . . $ 900,252 $ 743,026 $ 764,226
Natural gas liquids . . . . . . . 441,741 466,017 390,708
Intersegment eliminations. . . . . (15,535) (11,914) (10,933)
Total. . . . . . . . . . . . . . $1,326,458 $1,197,129 $1,144,001
Operating income:
Natural gas. . . . . . . . . . . . $ 53,458 $ 32,484 $ 37,140
Natural gas liquids. . . . . . . . 26,020 57,357 62,694
Total. . . . . . . . . . . . . . 79,478 89,841 99,834
Other income, net. . . . . . . . . . 1,263 624 4,013
Interest expense, net. . . . . . . . (66,294) (65,479) (66,811)
Net income . . . . . . . . . . . $ 14,447 $ 24,986 $ 37,036
Identifiable assets:
Natural gas. . . . . . . . . . . . $ 865,487 $ 889,620 $ 900,588
Natural gas liquids. . . . . . . . 154,767 174,170 126,380
Other. . . . . . . . . . . . . . . 43,008 43,292 52,489
Intersegment eliminations. . . . . (18,180) (22,601) (17,967)
Total. . . . . . . . . . . . . . $1,045,082 $1,084,481 $1,061,490
Depreciation expense:
Natural gas. . . . . . . . . . . . $ 28,549 $ 28,136 $ 27,977
Natural gas liquids. . . . . . . . 7,897 6,268 11,254
Total. . . . . . . . . . . . . . $ 36,446 $ 34,404 $ 39,231
Capital expenditures:
Natural gas. . . . . . . . . . . . $ 20,511 $ 22,537 $ 26,931
Natural gas liquids. . . . . . . . 15,550 13,356 6,143
Total. . . . . . . . . . . . . . $ 36,061 $ 35,893 $ 33,074
</TABLE>
The Partnership operates in the natural gas and natural
gas liquids industry segments. The natural gas operations
consist of purchasing, gathering, transporting and selling
natural gas, principally to gas distribution companies, electric
utilities, pipeline companies and industrial customers. The
Partnership also transports gas for a fee for sales customers,
other pipelines and end users and provides price risk management
services to gas producers and end users through its Market Center
Services Program. The natural gas liquids operations include the
extraction of natural gas liquids, principally from natural gas
throughput of the natural gas operations, and the fractionation
and transportation of natural gas liquids. The primary markets
for sales of natural gas liquids are petrochemical plants,
refineries and domestic fuel distributors. Intersegment revenue
eliminations relate primarily to transportation provided by the
natural gas segment for the natural gas liquids segment. During
1993, natural gas sales and transportation revenues from San
Antonio City Public Service accounted for approximately 11% of
the Partnership's total consolidated operating revenues. No
single unaffiliated customer accounted for more than 10% of the
Partnership's total consolidated operating revenues during 1992
or 1991. Energy and its consolidated subsidiaries accounted for
approximately 12%, 12% and 11% of the Partnership's total
consolidated operating revenues during 1993, 1992 and 1991,
respectively.
The Partnership's natural gas segment has a
concentration of customers in the natural gas transmission and
distribution industries while its natural gas liquids segment has
a concentration of customers in the refining and petrochemical
industries. These concentrations of customers may impact the
Partnership's overall exposure to credit risk, either positively
or negatively, in that the customers may be similarly affected by
changes in economic or other conditions. However, the General
Partner believes that the Partnership's portfolio of accounts
receivable is sufficiently diversified to the extent necessary to
minimize any potential credit risk. Historically, the
Partnership has not had any significant problems in collecting
its accounts receivable. The Partnership's accounts receivable
are generally not collateralized.
5. LEASE AND OTHER COMMITMENTS
Valero Gas Storage Company ("Gas Storage"), a wholly
owned subsidiary of VNGC, is the lessee under an operating lease
for a gas storage facility (the "Wilson Storage Facility"). Gas
Storage and Valero Transmission Company had previously entered
into a gas storage agreement ("Gas Storage Agreement") which
required Valero Transmission Company to pay to Gas Storage
amounts essentially equivalent to the lease payments and
operating costs in connection with Valero Transmission Company's
use of the Wilson Storage Facility. Upon formation of the
Partnership, Valero Transmission Company assigned the Gas Storage
Agreement to Valero Transmission, L.P., and Valero Transmission,
L.P. assumed Valero Transmission Company's obligation to make
such payments to Gas Storage. The remaining primary lease term
for the Wilson Storage Facility is six years with options to
renew at varying terms. The future minimum lease payments
related to this lease are included in the table below. The
Partnership has other noncancelable operating leases with
remaining terms ranging generally from one year to 13 years.
During 1992, the Partnership entered into a capital
lease with Energy to lease a gas processing plant near
Thompsonville in South Texas and 48 miles of NGL product pipeline
(the "Thompsonville Project"). The Thompsonville Project lease
commenced December 1, 1992 and has a term of 15 years. During
1991, the Partnership entered into capital leases with Energy to
lease an interest in an approximate 105-mile pipeline in East
Texas (the "East Texas pipeline") and certain fractionation
facilities in Corpus Christi, Texas. The East Texas pipeline
lease commenced February 1, 1991 and has a term of 25 years while
the lease for the fractionation facilities commenced December 1,
1991 and has a term of 15 years. As a result of the settlement
and dismissal in 1992 of certain claims asserted in litigation
filed against Energy and certain of its affiliates, officers and
directors, Energy agreed to adjust the payments and certain other
terms under these capital leases. Such adjusted payments are
reflected in the table of future minimum lease payments shown
below.
The assets and associated obligations related to the
capital leases with Energy described above are not subject to the
Mortgage Note Indenture. The Partnership has the right to
purchase all or any portion of these assets, subject to certain
restrictions, under purchase option provisions of the respective
lease agreements. The total cost of these leased facilities,
which is included in the accompanying consolidated balance sheets
under property, plant and equipment, was approximately $101
million. Amortization of these capital leases, which is included
in depreciation expense in the accompanying consolidated income
statements, was $5.3 million, $3.5 million and $2.2 million for
1993, 1992 and 1991, respectively.
The related future minimum lease payments under the
Partnership's capital leases and noncancelable operating leases
as of December 31, 1993 are as follows (in thousands):
<TABLE>
<CAPTION>
Operating Leases
Other Partnership
Partnership Commitments
Capital Lease (Wilson Storage
Leases Commitments Facility)
<S> <C> <C> <C>
1994 . . . . . . . . . . . . . . . . $ 12,867 $1,873 $ 10,438
1995 . . . . . . . . . . . . . . . . 12,867 147 10,438
1996 . . . . . . . . . . . . . . . . 13,867 134 10,438
1997 . . . . . . . . . . . . . . . . 15,114 105 9,832
1998 . . . . . . . . . . . . . . . . 15,361 103 10,156
Remainder. . . . . . . . . . . . . . 213,557 449 15,660
Total minimum lease payments . . . . 283,633 $2,811 $66,962
Less amount representing interest. 178,795
Net present value of minimum lease
payments . . . . . . . . . . . . . 104,838
Less current maturities. . . . . . 1,051
Capital lease obligations. . . . . $ 103,787
</TABLE>
The future minimum lease payments listed above under the
caption "Partnership Lease Commitments" exclude certain operating
lease commitments which are cancelable by the Partnership upon
notice of one year or less. Consolidated rent expense was
approximately $698,000, $833,000 and $746,000 for the years ended
December 31, 1993, 1992 and 1991, respectively, and excludes
amounts billed by Energy to the Partnership for its proportionate
use of Energy's corporate headquarters office complex and related
charges which are included in the management fee charged to the
Partnership. See Note 1 - "Transactions with Energy." Rentals
paid of $10,438,000 per year for 1993, 1992 and 1991 in
connection with the Wilson Storage Facility were included in the
computation of Transmission's weighted average cost of gas.
The obligations of Gas Storage under the gas storage
facility lease include its obligation to make scheduled lease
payments and, in the event of a declaration of default and
acceleration of the lease obligation, to make certain lump sum
payments based on a stipulated loss value for the gas storage
facility less the fair market sales price or fair market rental
value of the gas storage facility. Under certain circumstances,
a default by Energy or a subsidiary of Energy, including VNGC,
with respect to its own indebtedness could result in a cross
default under the gas storage facility lease. The General
Partner
believes that it is unlikely that a default by Energy or a
subsidiary of Energy would result in acceleration of the gas
storage facility lease, and further believes that such event, if
it occurred, would not have a material adverse effect on the
Partnership.
6. LITIGATION AND CONTINGENCIES
Take-or-Pay and Related Claims
As a result of past market conditions and contracting
practices in the natural gas industry, numerous producers and
other suppliers brought claims against Transmission asserting
that it was in breach of contractual provisions requiring that
it take, or pay for if not taken, certain specified volumes of
natural gas. The Partnership has settled substantially all of
the significant take-or-pay claims, pricing differences and
contractual disputes heretofore brought against it. Although
additional claims may arise under older contracts until their
expiration or renegotiation, the General Partner believes that
the Partnership has resolved substantially all of the significant
take-or-pay claims that are likely to be made. As described
below, Energy and/or the Partnership have agreed to bear a
portion of certain potential liabilities that may be incurred by
certain Partnership suppliers. Although the General Partner is
currently unable to predict the total amount Transmission or the
Partnership ultimately may pay or be required to pay in
connection with the resolution of existing and potential take-or-
pay claims, the General Partner believes that any remaining
claims can be resolved on terms satisfactory to the Partnership
and that the resolution of such claims and any potential claims
has not had and will not have a material adverse effect on the
Partnership's financial position or results of operations.
In 1987, Transmission and a producer from whom
Transmission has purchased natural gas entered into an agreement
resolving certain take-or-pay issues between the parties in which
Transmission agreed to pay one-half of certain excess royalty
claims arising after the date of the agreement. The royalty
owners of the producer recently completed an audit of the
producer and have presented to the producer a claim for
additional royalty payments in the amount of approximately $17.3
million, and accrued interest thereon of approximately $19.8
million. Approximately $8 million of the royalty owners' claim
accrued after the effective date of the agreement between the
producer and Transmission. The producer and Transmission are
reviewing the royalty owners' claims. No lawsuit has been filed
by the royalty owners. The General Partner believes that various
defenses under the agreement may reduce any liability of
Transmission to the producer in this matter.
Valero Transmission Company and one of its gas suppliers
are parties to various gas purchase contracts assigned to and
assumed by Valero Transmission, L.P. upon formation of the
Partnership in 1987. The supplier is also a party to a series of
gas purchase contracts between the supplier, as buyer, and
certain trusts, as seller, which are in litigation. Neither the
Partnership nor Valero Transmission Company is a party to this
litigation or the contracts between Transmission's supplier and
the trusts. However, because of the relationship between
Transmission's contracts with the supplier and the supplier's
contracts with the trusts, and in order to resolve existing and
potential disputes, the supplier, Valero Transmission Company and
Valero Transmission, L.P. have agreed that they will cooperate in
the conduct of this litigation, and that Valero Transmission
Company and Valero Transmission, L.P. will bear a substantial
portion of the costs of any appeal and any nonappealable final
judgment rendered against the supplier. In the litigation, the
trusts allege that Transmission's supplier has breached various
minimum take, take-or-pay and other contractual provisions, and
assert a statutory nonratability claim. The trusts seek alleged
actual damages, including interest, of approximately $30 million
and an unspecified amount of punitive damages. The District
Court ruled on the plaintiff's motion for summary judgment,
finding, among other things, that as a matter of law the three
gas purchase contracts at issue were fully binding and
enforceable, the supplier breached the minimum take obligations
under one of the contracts, the supplier is not entitled to
claimed offsets for gas purchased by third parties and the
"availability" of gas for take-or-pay purposes is established
solely by the delivery capacity testing procedures in the
contracts. Damages, if any, have not been determined. Because
of existing contractual obligations of Valero Transmission, L.P.
to its supplier, the lawsuit may ultimately involve a contingent
liability for Valero Transmission, L.P. The General Partner
believes that the claims brought against the supplier have been
significantly overstated, and that the supplier has a number of
meritorious defenses to the claims including various regulatory,
statutory, contractual and common law defenses. The Court
recently granted the supplier's Motion for Continuance of the
former January 10, 1994 trial date. This litigation is not
currently set for trial.
Payments that Transmission has made or agreed to make in
connection with settlements to date are included in its deferred
gas costs. The General Partner believes that the rate order
under which Transmission currently operates (the "Rate Order"),
issued in 1979 by the Railroad Commission of Texas (the "Railroad
Commission," which regulates the sale and transportation of
natural gas by intrastate pipeline systems in Texas), allows for
the recovery of such costs. See Note 1 - "Other Assets" and
"Customer Audit of Transmission" below. Certain take-or-pay and
other claims have been resolved through the Partnership agreeing
to provide discounted transportation services. These agreements
do not involve a cash outlay by the Partnership but in certain
cases have the effect of reducing transportation margins over an
extended period of time.
Any liability of Energy with respect to take-or-pay
claims involving Transmission's intrastate pipeline operations
has been assumed by the Partnership. Based upon the General
Partner's beliefs and rate considerations discussed above, no
liabilities have been recorded for any unresolved take-or-pay
claims.
Other Litigation
Seven lawsuits were filed in Chancery Court in Delaware
against VNGP, L.P., VNGC and Energy and certain officers and
directors of VNGC and/or Energy in response to the
announcement by Energy on October 14, 1993 of its proposal to
acquire the publicly traded Common Units of VNGP, L.P. pursuant
to a proposed merger of VNGP, L.P. with a wholly owned subsidiary
of Energy. See Note 1 - "Organization and Control." The suits
were consolidated into a single proceeding by the Chancery Court
on November 23, 1993. The plaintiffs sought to enjoin or
rescind the proposed merger, alleging that the corporate
defendants and the individual defendants, as officers or
directors of the corporate defendants, engaged in actions in
breach of the defendants' fiduciary duties to the Public
Unitholders by proposing the merger. The plaintiffs
alternatively sought an increase in the proposed merger
consideration, unspecified compensatory damages and attorneys'
fees. In December 1993, the parties reached a tentative
settlement of the consolidated lawsuit. The terms of the
settlement will not require a material payment by Energy or
the Partnership. However, there can be no assurance that the
settlement will be completed, or that it will be approved by the
Chancery Court.
In March 1993, two indirect wholly owned subsidiaries of
Energy serving as general partners of two of VNGP, L.P.'s
principal Subsidiary Operating Partnerships were served as third-
party defendants in a lawsuit originally filed in 1991 by a
subsidiary of The Coastal Corporation ("Coastal") against
TransAmerican Natural Gas Corporation ("TANG"). In August 1993,
Energy, VNGP, L.P. and certain of their respective subsidiaries
were named as additional third-party defendants (collectively,
including the original defendant subsidiaries, the "Valero
Defendants") in this lawsuit. In its counterclaims against
Coastal and third-party claims against the Valero Defendants,
TANG alleges that it contracted to sell natural gas to Coastal at
the posted field price of one of the Valero Defendants and that
the Valero Defendants and Coastal conspired to set the posted
field price at an artificially low level. TANG also alleges that
the Valero Defendants and Coastal conspired to cause TANG to
deliver unprocessed or "wet" gas, thus precluding TANG from
extracting NGLs from its gas prior to delivery. TANG seeks
actual damages of approximately $50 million, trebling of damages
under antitrust claims, punitive damages of $300 million, and
attorneys' fees. The General Partner believes that the
plaintiff's claims have been exaggerated, and that Energy and the
Partnership have meritorious defenses to such claims. In the
event of an adverse determination involving Energy, Energy likely
would seek indemnification from the Partnership under terms of
the partnership agreements and other applicable agreements
between VNGP, L.P., its subsidiary partnerships and their
respective general partners. The Valero Defendants' motion for
summary judgment on TANG's antitrust claims was argued on January
24, 1994. The court has not ruled on such motion. The current
trial setting for this case is March 14, 1994.
In September 1991, a lawsuit was filed by Valero
Transmission, L.P. alleging breach of contract against a
producer. On January 11, 1993, the defendant filed a cross-
action against Valero Transmission, L.P., Valero Industrial Gas,
L.P. and Reata Industrial Gas, L.P. The defendant asserted
claims for actual damages for failure to pay for goods and
services delivered. Additionally, the defendant asserted various
other cross-claims, including conversion, breach of contract,
breach of an alleged duty to market gas in good faith, tortious
breach of a duty imposed by law and tortious negligence. The
defendant sought actual damages aggregating not less than
$1 million, injunctive relief, attorneys fees and costs, and
exemplary damages in the amount of not less than $20 million. In
January 1994, the parties reached a tentative settlement of the
lawsuit on terms immaterial to the Partnership.
The Partnership was a party to a lawsuit originally
filed in 1988 in which Energy, Valero Transmission Company, VNGP,
L.P., the Management Partnership and Valero Transmission, L.P.
(the "Valero Defendants") and a subsidiary of Coastal were
alleged to be liable for failure to take minimum quantities of
gas, failure to make take-or-pay payments and other breach of
contract and breach of fiduciary duty claims. The plaintiffs
sought declaratory relief, actual damages in excess of $37
million and unspecified punitive damages. During the third
quarter of 1992, the plaintiffs, Coastal and the Valero
Defendants settled this lawsuit on terms which were not material
to the Valero Defendants and on July 19, 1993, this lawsuit was
dismissed. On November 16, 1992, prior to entry of the order of
dismissal, NationsBank of Texas, N.A., as trustee for certain
trusts (the "Intervenors"), filed a plea in intervention to
intervene in the lawsuit. The Intervenors asserted that they
held a non-participating mineral interest in the lands subject to
the litigation and that their rights were not protected by the
plaintiffs in the settlement. On February 4, 1993, the Court
struck the Intervenors' plea in intervention. However, on
February 2, 1993, the Intervenors had filed a separate suit in
the 160th State District Court, Dallas County, Texas, against all
prior defendants and an additional defendant, substantially
adopting in form and substance the allegations and claims in the
original litigation. In February 1994, the parties reached a
tentative settlement of the lawsuit on terms immaterial to the
Partnership.
City of Houston Franchise Fee Audit
In a letter dated September 1, 1993 from the City of
Houston (the "City") to Valero Transmission Company ("VTC"), the
City stated its intent to bring suit against VTC for certain
claims asserted by the City under the franchise agreement between
the City and VTC. VTC is the general partner of Valero
Transmission, L.P. The franchise agreement was assigned to and
assumed by Valero Transmission, L.P. upon formation of the
Partnership in 1987. In the letter, the City declared a
conditional forfeiture of the franchise rights based on the
City's claims. In a letter dated October 27, 1993, the City
claimed that VTC owes to the City franchise fees and accrued
interest thereon aggregating approximately $13.5 million. In a
letter dated November 9, 1993, the City claimed an additional
$18 million in damages related to the City's allegations that VTC
engaged in unauthorized activities under the franchise agreement
by transmitting gas for resale and by transporting gas for third
parties on the franchised premises. The City has not filed a
lawsuit. The General Partner believes that the City's claims are
significantly overstated and that VTC has a number of meritorious
defenses to the claims. Any liability of VTC with respect to the
City's claims has been assumed by the Partnership.
Customer Audit of Transmission
Transmission's Rate Order provides for Transmission to
sell gas at its weighted average cost of gas, as defined
("WACOG"), plus a margin of $.15 per Mcf. In addition to the
cost of gas purchases, Transmission's WACOG has included storage,
gathering and other fixed costs totalling approximately $19
million per year, and amortization of deferred gas costs related
to the settlement of take-or-pay and related claims (see Note 1 -
"Other Assets" and "Take-or-Pay and Related Claims" above).
Transmission's gas purchases include high-cost casinghead gas and
certain special allowable gas that Transmission is required to
purchase contractually and under the Railroad Commission's
priority rules. Transmission's sales volumes have been
decreasing with the expiration of its sales contracts including
the July 1992 expiration of a contract representing approximately
37% of Transmission's sales volumes for the first six months of
1992. As a result of each of these factors, Transmission's WACOG
and gas sales price are substantially in excess of market
clearing levels.
Transmission's WACOG has been periodically audited by
certain of its customers, as allowed under the Rate Order. One
such customer (the "Customer") questioned the application of
certain of Transmission's current rate policies to future periods
in light of the decreases that have occurred in Transmission's
throughput, and the Customer has recently completed its audit of
Transmission's WACOG with respect thereto. For 1993, the
Customer represented approximately 70% of Transmission's sales
volumes and such percentage is expected to increase as other
sales contracts expire and are not renewed. As a result of the
Customer's audit, Transmission and the Customer entered into a
settlement agreement which excludes certain of the fixed costs
described above from Transmission's WACOG, effective with July
1993 sales, resulting in a reduction of the Partnership's annual
net income by approximately $6 million. Upon the termination of
Transmission's gas sales contract with the Customer in 1998,
Transmission's fixed costs, including storage (see Note 5), would
be charged to income instead of recovered through its gas sales
rates. Transmission expects to recover its deferred gas costs
over a period of approximately eight years. The recovery of any
additional payments made in connection with any future
settlements would be limited.
The Partnership is also a party to additional claims and
legal proceedings arising in the ordinary course of business.
The General Partner believes it is unlikely that the final
outcome of any of the claims or proceedings to which the
Partnership is a party, including those described above, would
have a material adverse effect on the Partnership's financial
position or results of operations; however, due to the inherent
uncertainties 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
Partnership's results of operations for the fiscal period in
which such resolution occurred.
7. QUARTERLY RESULTS OF OPERATIONS (Unaudited)
The results of operations by quarter for the years ended
December 31, 1993 and 1992 were as follows (in thousands of
dollars, except per Unit amounts):
<TABLE>
<CAPTION>
Net Income
Net (Loss) Per
Operating Operating Income Limited
Revenues Income (Loss) Partner Unit
<S> <C> <C> <C> <C>
1993-Quarter Ended:
March 31 . . . . . . $ 331,484 $ 21,747 $ 5,133 $ .26
June 30. . . . . . . 326,259 23,496 7,699 .39
September 30 . . . . 336,893 19,812 3,621 .18
December 31. . . . . 331,822 14,423 (2,006) (.11)
Total. . . . . . . $1,326,458 $ 79,478 $ 14,447 $ .72
1992-Quarter Ended:
March 31 . . . . . . $ 265,745 $ 18,785 $ 2,617 $ .13
June 30. . . . . . . 276,609 22,035 6,155 .31
September 30 . . . . 314,245 30,032 13,901 .72
December 31. . . . . 340,530 18,989 2,313 .11
Total. . . . . . . $1,197,129 $ 89,841 $ 24,986 $ 1.27
</TABLE>
<PAGE>
VALERO NATURAL GAS PARTNERS, L.P.
CONSOLIDATED BALANCE SHEETS
(Thousands of Dollars)
<TABLE>
<CAPTION>
March 31,
1994 December 31,
(Unaudited) 1993
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and temporary cash investments. . . . . . . . . $ 9,703 $ 5,523
Cash held in debt service escrow . . . . . . . . . . - 34,186
Receivables, less allowance for doubtful accounts of
$2,102 (1994 and 1993) . . . . . . . . . . . . . . 167,900 154,503
Inventories. . . . . . . . . . . . . . . . . . . . . 18,280 25,434
Prepaid expenses and other . . . . . . . . . . . . . 8,058 5,321
203,941 224,967
PROPERTY, PLANT AND EQUIPMENT-including
construction in progress of $5,435 (1994)
and $16,728 (1993), at cost. . . . . . . . . . . . . 943,434 939,565
Less: Accumulated depreciation. . . . . . . . . . 208,143 199,763
735,291 739,802
DEFERRED CHARGES AND OTHER ASSETS. . . . . . . . . . . 79,297 80,313
$1,018,529 $1,045,082
LIABILITIES AND PARTNERS' CAPITAL
CURRENT LIABILITIES:
Current maturities of long-term debt and capital
lease obligations. . . . . . . . . . . . . . . . . $ 31,438 $ 28,908
Notes payable. . . . . . . . . . . . . . . . . . . . 21,000 -
Accounts payable . . . . . . . . . . . . . . . . . . 233,019 216,953
Accrued interest . . . . . . . . . . . . . . . . . . 5,269 18,692
Other accrued expenses . . . . . . . . . . . . . . . 2,987 8,719
293,713 273,272
LONG-TERM DEBT, less current maturities. . . . . . . . 476,072 506,429
CAPITAL LEASE OBLIGATIONS, less current maturities . . 103,741 103,787
DEFERRED CREDITS AND OTHER LIABILITIES . . . . . . . . 2,006 1,548
LIMITED PARTNERS' CAPITAL. . . . . . . . . . . . . . . 141,933 158,448
GENERAL PARTNERS' CAPITAL. . . . . . . . . . . . . . . 1,064 1,598
$1,018,529 $1,045,082
See Notes to Consolidated Financial Statements.
</TABLE>
VALERO NATURAL GAS PARTNERS, L.P.
CONSOLIDATED STATEMENTS OF INCOME
(Thousands of Dollars, Except Per Unit Amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1994 1993
<S> <C> <C>
OPERATING REVENUES . . . . . . . . . . . . . . . . . . $379,664 $367,310
COSTS AND EXPENSES:
Cost of sales. . . . . . . . . . . . . . . . . . . . 335,331 307,483
Operating expenses . . . . . . . . . . . . . . . . . 33,347 29,061
Depreciation expense . . . . . . . . . . . . . . . . 9,234 9,019
Total. . . . . . . . . . . . . . . . . . . . . . . 377,912 345,563
OPERATING INCOME . . . . . . . . . . . . . . . . . . . 1,752 21,747
OTHER INCOME, NET. . . . . . . . . . . . . . . . . . . 501 348
INTEREST AND DEBT EXPENSE:
Incurred . . . . . . . . . . . . . . . . . . . . . . (16,836) (17,279)
Capitalized. . . . . . . . . . . . . . . . . . . . . 136 317
NET INCOME (LOSS). . . . . . . . . . . . . . . . . . . (14,447) 5,133
Less: General Partners' interest. . . . . . . . . . (243) 359
NET INCOME (LOSS) ALLOCABLE TO LIMITED
PARTNERS . . . . . . . . . . . . . . . . . . . . . . $(14,204) $ 4,774
NET INCOME (LOSS) PER LIMITED PARTNER UNIT . . . . . . $ (.77) $ .26
WEIGHTED AVERAGE LIMITED PARTNER UNITS
OUTSTANDING (in thousands) . . . . . . . . . . . . . 18,487 18,487
See Notes to Consolidated Financial Statements.
</TABLE>
VALERO NATURAL GAS PARTNERS, L.P.
CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL
(Thousands of Dollars)
(Unaudited)
<TABLE>
<CAPTION>
Limited Partners' Capital General
Common Common Partners'
Units Unitholders Capital
<S> <C> <C> <C>
BALANCE - December 31, 1993. . . . . . 18,486,538 $158,448 $1,598
Net loss . . . . . . . . . . . . . . - (14,204) (243)
Distributions. . . . . . . . . . . . - (2,311) (291)
BALANCE - March 31, 1994 . . . . . . . 18,486,538 $141,933 $1,064
BALANCE - December 31, 1992. . . . . . 18,486,538 $154,461 $1,558
Net income . . . . . . . . . . . . . - 4,774 359
Distributions. . . . . . . . . . . . - (2,311) (262)
BALANCE - March 31, 1993 . . . . . . . 18,486,538 $156,924 $1,655
See Notes to Consolidated Financial Statements.
</TABLE>
VALERO NATURAL GAS PARTNERS, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands of Dollars)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1994 1993
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss). . . . . . . . . . . . . . . . . . . . . . . . . . $ (14,447) $ 5,133
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities:
Depreciation expense . . . . . . . . . . . . . . . . . . . . . . 9,234 9,019
Amortization of deferred charges and other, net. . . . . . . . . 484 910
Changes in current assets and current liabilities. . . . . . . . 1,224 506
Changes in deferred items and other, net . . . . . . . . . . . . 1,225 2,445
Net cash provided by (used in) operating activities. . . . . (2,280) 18,013
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital additions. . . . . . . . . . . . . . . . . . . . . . . . . . (4,641) (10,787)
Dispositions of property, plant and equipment. . . . . . . . . . . . 180 1,906
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (262) 268
Net cash used in investing activities. . . . . . . . . . . . . . . (4,723) (8,613)
CASH FLOWS FROM FINANCING ACTIVITIES:
Reduction of long-term debt and capital lease obligations. . . . . . (28,108) (25,400)
Increase in notes payable. . . . . . . . . . . . . . . . . . . . . . 21,000 -
Decrease in cash held in debt service escrow for principal . . . . . 20,893 19,018
Partnership distributions. . . . . . . . . . . . . . . . . . . . . . (2,602) (2,573)
Net cash provided by (used in) financing activities. . . . . . . . 11,183 (8,955)
NET INCREASE IN CASH AND TEMPORARY
CASH INVESTMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . 4,180 445
CASH AND TEMPORARY CASH INVESTMENTS AT
BEGINNING OF PERIOD. . . . . . . . . . . . . . . . . . . . . . . . . 5,523 6,598
CASH AND TEMPORARY CASH INVESTMENTS AT
END OF PERIOD . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 9,703 $ 7,043
See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
VALERO NATURAL GAS PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1
Basis of Presentation
The consolidated financial statements included herein
have been prepared by the general partner of Valero Natural Gas
Partners, L.P. ("VNGP, L.P.", and together with its consolidated
subsidiaries, the "Partnership") without audit, pursuant to the
rules and regulations of the Securities and Exchange Commission.
However, all adjustments have been made to the accompanying
financial statements which are, in the opinion of the general
partner, necessary for a fair presentation of the results of
operations for the periods covered. Certain information and
footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules
and regulations, although the general partner believes that the
disclosures are adequate to make the information presented herein
not misleading. These consolidated financial statements should
be read in conjunction with the consolidated financial statements
and the notes thereto included in VNGP, L.P.'s latest Annual
Report on Form 10-K. Certain prior period amounts have been
reclassified for comparative purposes.
Note 2
Statements of Cash Flows
In order to determine net cash provided by (used in)
operating activities, net income (loss) has been adjusted by,
among other things, changes in current assets and current
liabilities, excluding changes in cash and temporary cash
investments, cash held in debt service escrow for principal,
current maturities of long-term debt and capital lease
obligations, and notes payable. Those changes, shown as an
(increase)/decrease in current assets and an increase/(decrease)
in current liabilities, are provided in the following table.
Temporary cash investments are highly liquid low-risk debt
instruments which have a maturity of three months or
less when acquired and whose carrying amount approximates
fair value. (Dollars in thousands.)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1994 1993
<S> <C> <C>
Cash held in debt service escrow for interest . . $ 13,293 $ 13,846
Receivables, net. . . . . . . . . . . . . . . . . (13,397) (34,363)
Inventories . . . . . . . . . . . . . . . . . . . 7,154 23,422
Prepaid expenses and other. . . . . . . . . . . . (2,737) 2,260
Accounts payable. . . . . . . . . . . . . . . . . 16,066 11,746
Accrued interest. . . . . . . . . . . . . . . . . (13,423) (11,576)
Other accrued expenses. . . . . . . . . . . . . . (5,732) (4,829)
Total . . . . . . . . . . . . . . . . . . . . . $ 1,224 $ 506
</TABLE>
Cash interest paid by the Partnership (net of amounts
capitalized) for the three months ended March 31, 1994 and 1993
was $29.8 million and $27.9 million, respectively. No cash
payments for income taxes were made during these periods. The
Partnership is not subject to federal income taxes.
Note 3
Valero Energy Corporation
VNGP, L.P., Valero Management Partnership, L.P. (the
"Management Partnership") and various subsidiary operating
partnerships (the "Subsidiary Operating Partnerships"), all
Delaware limited partnerships, are the successors to
substantially all of the natural gas pipeline and natural gas
liquids businesses, assets and liabilities of substantially all
of the subsidiaries of Valero Natural Gas Company ("VNGC") and
the transmission division of Rio Grande Valley Gas Company
("Rio"). VNGC is, and Rio at the time of such succession was, a
wholly owned subsidiary of Valero Energy Corporation. (Unless
otherwise required by the context, the term "Energy" as used
herein refers to Valero Energy Corporation and its consolidated
subsidiaries, both individually and collectively). VNGC is the
general partner of VNGP, L.P. and the Management Partnership (in
such capacity, the "General Partner"), while subsidiaries of VNGC
are general partners (the "Subsidiary General Partners") of the
respective Subsidiary Operating Partnerships. As of March 31,
1994, Energy's total effective equity interest in the Partnership
was approximately 49%.
The Partnership enters into various types of
transactions with Energy in the normal course of business on
market-related terms and conditions. As of March 31, 1994 and
December 31, 1993, the Partnership had recorded approximately
$24.2 million and $31.8 million, respectively, in accounts
payable and accrued expenses, net of accounts receivable, due to
Energy. The following table summarizes transactions between the
Partnership and Energy for the three months ended March 31, 1994
and 1993 (in thousands):
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1994 1993
<S> <C> <C>
Natural gas liquid ("NGL") sales to and services for Energy . $21,513 $19,790
Natural gas sales to Energy . . . . . . . . . . . . . . . . . 6,069 14,216
Purchases of NGLs and natural gas, and
transportation and other charges from Energy. . . . . . . . 6,524 10,298
Interest expense from capital lease transactions with
Energy. . . . . . . . . . . . . . . . . . . . . . . . . . . 3,193 3,195
Management fees for direct and indirect costs billed
by the General Partner and affiliated companies . . . . . . 20,702 20,072
</TABLE>
In October 1993, Energy publicly announced its
proposal to acquire the 9.7 million issued and outstanding common
units of limited partner interests ("Common Units") in VNGP, L.P.
held by persons other than Energy (the "Public Unitholders")
pursuant to a merger of VNGP, L.P. with a wholly owned subsidiary
of Energy. Effective December 20, 1993, Energy, VNGP, L.P. and
VNGC entered into an agreement of merger (the "Merger
Agreement"). In the merger, the Common Units held by the Public
Unitholders will be converted into the right to receive cash in
the amount of $12.10 per Common Unit. As a result of the merger,
VNGP, L.P. would become a wholly owned subsidiary of Energy. A
proposal to approve the merger will be submitted to the holders
of Common Units at a special meeting of Unitholders scheduled to
be held May 31, 1994. Consummation of the merger is subject to,
among other things, approval of the merger by the holders of a
majority of the issued and outstanding Common Units and by a
majority of the Common Units held by the Public Unitholders voted
at the special meeting. Energy owns approximately 47.5% of the
outstanding Common Units and intends to vote its Common Units in
favor of the merger. There can be no assurance that the merger
will be completed.
In order to provide for the proposed merger, during
the first quarter of 1994, Energy completed an underwritten
public offering of convertible preferred stock and obtained
satisfactory waivers, consents or amendments to certain of its
financial agreements. Energy also completed a $250 million bank
credit agreement, which will become effective only if the merger
is completed, to replace its current principal bank credit
agreement and the short-term bank lines of the Management
Partnership. It is also a condition precedent to the
effectiveness of Energy's new bank credit agreement that the
litigation seeking to prevent the proposed merger and described
in Note 6 under "Other Litigation" is settled.
Note 4
Deferred Gas Costs
Payments made or agreed to be made to date in
connection with the settlement of certain disputed contractual
issues with gas suppliers of Transmission are initially deferred.
(References to Transmission prior to March 25, 1987 refer to
Valero Transmission Company, a wholly owned subsidiary of VNGC,
and after that date to its successor in interest, Valero
Transmission, L.P., a Subsidiary Operating Partnership). The
balance of such payments is subsequently reduced as recoveries
are made through Transmission's rates. The balance of deferred
gas costs of $67 million at December 31, 1993 is included in
noncurrent other assets. The balance of deferred gas costs of
$71 million at March 31, 1994 is included in noncurrent other
assets and current receivables and is expected to be recovered
over future periods. The recovery of any additional payments
made in connection with any future settlements, however, would be
limited.
Note 5
Price Risk Management Activities
The Partnership, through its Market Center Services
Program established in 1992, enters into exchange-traded futures
and options contracts, forward contracts, swaps and other
financial instruments with third parties to hedge the prices for
purchases and sales of natural gas inventories and certain
anticipated purchases of natural gas to be consumed in NGL
operations, in order to reduce the risk of market fluctuations.
Changes in the market value of these contracts are deferred until
the gain or loss is recognized on the hedged transaction.
Natural gas volumes in storage totalled approximately 4.7 billion
cubic feet ("Bcf") and 10.3 Bcf at March 31, 1994 and December
31, 1993, respectively. The Partnership also utilizes price risk
management techniques to provide services to gas producers and
end users for a fee. As of March 31, 1994, the Partnership had
outstanding contracts for natural gas with notional or contract
volumes totalling approximately 48.6 Bcf for which the
Partnership is the fixed price payor and 20.6 Bcf for which the
Partnership is the fixed price receiver. Such contracts run for
a period of one to nine months. The General Partner believes
that there will not be a significant effect on financial position
or results of operations of the Partnership related to such
contracts as a result of market fluctuations. As of December 31,
1993, the notional or contract volumes of outstanding natural gas
contracts for which the Partnership was the fixed price payor and
receiver totalled approximately 18.5 Bcf and 30.6 Bcf,
respectively. During the first quarter of 1994 and 1993, the
Partnership recognized approximately $.8 million and $4.2
million, respectively, in gas cost reductions and other benefits
from this program.
Note 6
Litigation and Contingencies
Take-or-Pay and Related Claims
As a result of past market conditions and contracting
practices in the natural gas industry, numerous producers and
other suppliers brought claims against Transmission asserting
that it was in breach of contractual provisions requiring that it
take, or pay for if not taken, certain specified volumes of
natural gas. The Partnership has settled substantially all of
the significant take-or-pay claims, pricing differences and
contractual disputes heretofore brought against it. Although
additional claims may arise under older contracts until their
expiration or renegotiation, the General Partner believes that
the Partnership has resolved substantially all of the significant
take-or-pay claims that are likely to be made. As described
below, Energy and/or the Partnership have agreed to bear a
portion of certain potential liabilities that may be incurred by
certain Partnership suppliers. However, any liability of Energy
with respect to these claims or any take-or-pay claims involving
Transmission's intrastate pipeline operations has been assumed by
the Partnership. Although the General Partner is currently
unable to predict the total amount Transmission or the
Partnership ultimately may pay or be required to pay in
connection with the resolution of existing and potential take-or-
pay claims, the General Partner believes that any remaining
claims can be resolved on terms satisfactory to the Partnership
and that the resolution of such claims and any potential claims
has not had and will not have a material adverse effect on the
Partnership's financial position or results of operations.
In 1987, Transmission and a producer from whom
Transmission has purchased natural gas entered into an agreement
resolving certain take-or-pay issues between the parties in which
Transmission agreed to pay one-half of certain excess royalty
claims arising after the date of the agreement. The royalty
owners of the producer recently completed an audit of the
producer and have presented to the producer a claim for
additional royalty payments in the amount of approximately $17.3
million, and accrued interest thereon of approximately $19.8
million. Approximately $8 million of the royalty owners' claim
accrued after the effective date of the agreement between the
producer and Transmission. The producer and Transmission are
reviewing the royalty owners' claims. No lawsuit has been filed
by the royalty owners. The General Partner believes that various
defenses may reduce or eliminate any liability of Transmission to
the producer in this matter.
Valero Transmission Company and one of its gas
suppliers are parties to various gas purchase contracts assigned
to and assumed by Valero Transmission, L.P. upon formation of the
Partnership in 1987. The supplier is also a party to a series of
gas purchase contracts between the supplier, as buyer, and
certain trusts, as seller. In 1989, the trusts brought suit
against the supplier, alleging breach of various minimum take,
take-or-pay and other contractual provisions, and asserting a
statutory nonratability claim. In the trusts' claims against the
supplier, the trusts seek alleged actual damages, including
interest, of approximately $30 million. Neither Valero
Transmission Company nor Valero Transmission, L.P. was originally
a party to this lawsuit. However, because of the relationship
between Transmission's contracts with the supplier and the
supplier's contracts with the trusts, and in order to resolve
existing and potential disputes, the supplier, Valero
Transmission Company and Valero Transmission, L.P. agreed in
March 1991 to cooperate in the conduct of the litigation, and
agreed that Valero Transmission Company and Valero Transmission,
L.P. will bear a substantial portion of the costs of any appeal
and any nonappealable final judgment rendered against the
supplier. In January 1993, the District Court ruled on the
trusts' motion for summary judgment, finding that as a matter of
law the three gas purchase contracts at issue were fully binding
and enforceable, the supplier breached the minimum take
obligations under one of the contracts, the supplier is not
entitled to claimed offsets for gas purchased by third parties
and the "availability" of gas for take-or-pay purposes is
established solely by the delivery capacity testing procedures in
the contracts. Damages, if any, were not determined. On
April 15, 1994, the trusts named Valero Transmission Company and
Valero Transmission, L.P. as additional defendants (the "Valero
Defendants") to the lawsuit, alleging that the Valero Defendants
maliciously interfered with the trusts' contracts with the
supplier. In the trusts' claim against the Valero Defendants,
the trusts seek unspecified actual and punitive damages. The
General Partner believes that the claims brought by the trusts
have been significantly overstated, and that the supplier and the
Valero Defendants have a number of meritorious defenses to the
claims. This litigation is not currently set for trial.
Payments that Transmission has made or agreed to make
in connection with settlements to date are included in its
deferred gas costs. The General Partner believes that the rate
order under which Transmission currently operates (the "Rate
Order"), issued in 1979 by the Railroad Commission of Texas (the
"Railroad Commission," which regulates the sale and
transportation of natural gas by intrastate pipeline systems in
Texas), allows for the recovery of such costs. See Note 4.
Certain take-or-pay and other claims have been resolved through
the Partnership agreeing to provide discounted transportation
services. These agreements do not involve a cash outlay by the
Partnership but in certain cases have the effect of reducing
transportation margins over an extended period of time.
Other Litigation
Seven lawsuits were filed in Chancery Court in
Delaware against VNGP, L.P., VNGC and Energy and certain officers
and directors of VNGC and/or Energy in response to the
announcement by Energy on October 14, 1993 of its proposal to
acquire the publicly traded Common Units of VNGP, L.P. pursuant
to a proposed merger of VNGP, L.P. with a wholly owned subsidiary
of Energy. See Note 3. The suits were consolidated into a
single proceeding by the Chancery Court on November 23, 1993.
The plaintiffs sought to enjoin or rescind the proposed merger,
alleging that the corporate defendants and the individual
defendants, as officers or directors of the corporate defendants,
engaged in actions in breach of the defendants' fiduciary duties
to the Public Unitholders by proposing the merger. The
plaintiffs alternatively sought an increase in the proposed
merger consideration, unspecified compensatory damages and
attorneys' fees. In December 1993, the attorneys representing
the plaintiffs entered into a memorandum of understanding with
Energy and VNGP, L.P. pursuant to which the attorneys have agreed
to recommend that the Chancery Court approve a settlement of the
litigation. The proposed settlement will not require a material
payment by Energy or the Partnership. On April 29, 1994, notice
of the proposed settlement, including a description of the terms
of the settlement, was mailed to the Public Unitholders by order
of the Chancery Court. A hearing to consider approval of the
settlement has been scheduled in the Chancery Court for May 31,
1994. There can be no assurance that the settlement will be
approved by the Chancery Court.
Energy, VNGP, L.P., and certain of their respective
subsidiaries are defendants in a lawsuit originally filed in
January 1993. The lawsuit is based upon construction work
performed by the plaintiff at certain of the Partnership's gas
processing plants in 1991 and 1992. The plaintiff alleges that
it performed work for the defendants for which it was not
compensated. The plaintiff's second amended petition, filed
April 30, 1994, asserts claims for breach of contract, quantum
meruit, wrongful failure to pay retainage, fraudulent
misrepresentation, conspiracy, breach of the implied covenant of
good faith and fair dealing, and other commercial tort claims.
The plaintiff alleges actual damages of approximately
$9.7 million and punitive damages of $45.5 million. The
defendants have filed a motion for summary judgment and a motion
to transfer venue to Bexar County.
The Partnership was a party to a lawsuit originally
filed in 1988 in which Energy, Valero Transmission Company, VNGP,
L.P., the Management Partnership and Valero Transmission, L.P.
(the "Valero Defendants") and a subsidiary of The Coastal
Corporation ("Coastal") were alleged to be liable for failure to
take minimum quantities of gas, failure to make take-or-pay
payments and other breach of contract and breach of fiduciary
duty claims. The plaintiffs sought declaratory relief, actual
damages in excess of $37 million and unspecified punitive
damages. During the third quarter of 1992, the plaintiffs,
Coastal and the Valero Defendants settled this lawsuit on terms
which were not material to the Valero Defendants and on July 19,
1993, this lawsuit was dismissed. On November 16, 1992, prior to
entry of the order of dismissal, NationsBank of Texas, N.A., as
trustee for certain trusts (the "Intervenors"), filed a plea in
intervention to intervene in the lawsuit. The Intervenors
asserted that they held a non-participating mineral interest in
the lands subject to the litigation and that their rights were
not protected by the plaintiffs in the settlement. On
February 4, 1993, the Court struck the Intervenors' plea in
intervention. However, on February 2, 1993, the Intervenors had
filed a separate suit in the 160th State District Court, Dallas
County, Texas, against all prior defendants and an additional
defendant, substantially adopting in form and substance the
allegations and claims in the original litigation. In
February 1994, the parties reached a tentative settlement of
the lawsuit on terms immaterial to the Partnership.
City of Houston Franchise Fee Audit
In a letter dated September 1, 1993 from the City of
Houston (the "City") to Valero Transmission Company ("VTC"), the
City stated its intent to bring suit against VTC for certain
claims asserted by the City under the franchise agreement between
the City and VTC. VTC is the general partner of Valero
Transmission, L.P. The franchise agreement was assigned to and
assumed by Valero Transmission, L.P. upon formation of the
Partnership in 1987. In the letter, the City declared a
conditional forfeiture of the franchise rights based on the
City's claims. In a letter dated October 27, 1993, the City
claimed that VTC owes to the City franchise fees and accrued
interest thereon aggregating approximately $13.5 million. In a
letter dated November 9, 1993, the City claimed an additional
$18 million in damages related to the City's allegations that VTC
engaged in unauthorized activities under the franchise agreement
by transmitting gas for resale and by transporting gas for third
parties on the franchised premises. The City has not filed a
lawsuit. The General Partner believes that the City's claims are
overstated and that VTC has a number of defenses to the claims.
Energy and the City have engaged in formal discussions regarding
the possible settlement of the City's claims, but no agreement
has been concluded. Any liability of VTC with respect to the
City's claims has been assumed by the Partnership.
The Partnership is also a party to additional claims
and legal proceedings arising in the ordinary course of business.
The General Partner believes it is unlikely that the final
outcome of any of the claims or proceedings to which the
Partnership is a party, including those described above, would
have a material adverse effect on the Partnership's financial
position or results of operations; however, due to the inherent
uncertainties 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
Partnership's results of operations for the fiscal period in
which such resolution occurred.
<PAGE>
Item 7(b). Pro Forma Financial Information.
<TABLE>
VALERO ENERGY CORPORATION AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
March 31, 1994
(Thousands of dollars)
(Unaudited)
<CAPTION>
VALERO
VALERO VNGP, ENERGY
ENERGY L.P. Pro Forma
ASSETS Historical Historical ADJUSTMENTS Consolidated
<S> <C> <C> <C> <C>
CURRENT ASSETS. . . . . . . . . . . . $ 346,536 $ 203,941 $(160,397) <F1> $ 390,080
PROPERTY, PLANT AND
EQUIPMENT, NET . . . . . . . . . . . 1,294,376 735,291 28,758 <F2> 2,058,425
INVESTMENT IN AND LEASES
RECEIVABLE FROM VALERO
NATURAL GAS PARTNERS, L.P. . . . . . 123,055 - (123,055) <F3> -
INVESTMENT IN AND ADVANCES TO
JOINT VENTURES . . . . . . . . . . . 29,674 - - 29,674
DEFERRED CHARGES AND OTHER
ASSETS . . . . . . . . . . . . . . . 74,548 79,297 (24,279) <F2> 129,566
$1,868,189 $1,018,529 $(278,973) $2,607,745
LIABILITIES AND STOCKHOLDERS'
EQUITY/PARTNERS' CAPITAL
CURRENT LIABILITIES . . . . . . . . . $ 141,275 $ 293,713 $ (40,167) <F1><F3> $ 394,821
LONG-TERM DEBT,
less current maturities. . . . . . . 424,844 476,072 - 900,916
CAPITAL LEASE OBLIGATIONS,
less current maturities. . . . . . . - 103,741 (103,741) <F3> -
DEFERRED INCOME TAXES . . . . . . . . 235,640 - - 235,640
DEFERRED CREDITS AND
OTHER LIABILITIES. . . . . . . . . . 40,021 2,006 7,932 <F2> 49,959
REDEEMABLE PREFERRED STOCK,
SERIES A . . . . . . . . . . . . . . 13,800 - - 13,800
STOCKHOLDERS' EQUITY. . . . . . . . . 1,012,609 - - 1,012,609
PARTNERS' CAPITAL . . . . . . . . . . - 142,997 (142,997) <F3> -
$1,868,189 $1,018,529 $(278,973) $2,607,745
</TABLE>
<TABLE>
VALERO ENERGY CORPORATION AND SUBSIDIARIES
PRO FORMA CONSOLIDATED STATEMENT OF INCOME
For the Three Months Ended March 31, 1994
(Thousands of Dollars, Except per Share Amounts)
(Unaudited)
<CAPTION>
VALERO
VALERO VNGP, ENERGY
ENERGY L.P. Pro Forma
Historical Historical ADJUSTMENTS Consolidated
<S> <C> <C> <C> <C>
OPERATING REVENUES. . . . . . . . . . . . $281,277 $379,664 $(53,768) <F1><F2> $607,173
COSTS AND EXPENSES:
Cost of sales. . . . . . . . . . . . . . 210,107 335,331 (34,170) <F1><F2> 511,268
Operating expenses . . . . . . . . . . . 30,024 33,347 (21,022) <F1><F2> 42,349
Depreciation expense . . . . . . . . . . 15,568 9,234 (147) <F2> 24,655
255,699 377,912 (55,339) 578,272
OPERATING INCOME. . . . . . . . . . . . . 25,578 1,752 1,571 28,901
EQUITY IN EARNINGS (LOSSES) OF AND
INCOME FROM VALERO NATURAL
GAS PARTNERS, L.P. . . . . . . . . . . . (2,908) - 2,908 <F3> -
OTHER INCOME (EXPENSE), NET . . . . . . . (918) 501 226 <F2> (191)
INTEREST AND DEBT EXPENSE:
Incurred . . . . . . . . . . . . . . . . (12,048) (16,836) 4,837 <F2><F3><F4> (24,047)
Capitalized. . . . . . . . . . . . . . . 279 136 - 415
INCOME (LOSS) BEFORE INCOME
TAXES. . . . . . . . . . . . . . . . . . 9,983 (14,447) 9,542 5,078
INCOME TAX EXPENSE. . . . . . . . . . . . 3,700 - (1,700) <F5> 2,000
NET INCOME (LOSS) . . . . . . . . . . . . 6,283 (14,447) 11,242 3,078
Less: preferred stock
dividend requirements. . . . . . . . . 532 - 2,456 <F6> 2,988
NET INCOME (LOSS) APPLICABLE TO
COMMON STOCK . . . . . . . . . . . . . . $ 5,751 $(14,447) $ 8,786 $ 90
EARNINGS PER SHARE OF COMMON
STOCK. . . . . . . . . . . . . . . . . . $ .13 $ .00
</TABLE>
<TABLE>
VALERO ENERGY CORPORATION AND SUBSIDIARIES
PRO FORMA CONSOLIDATED STATEMENT OF INCOME
For the Year Ended December 31, 1993
(Thousands of Dollars, Except per Share Amounts)
(Unaudited)
<CAPTION>
VALERO
VALERO VNGP, ENERGY
ENERGY L.P. Pro Forma
Historical Historical ADJUSTMENTS Consolidated
<S> <C> <C> <C> <C>
OPERATING REVENUES. . . . . . . . . . $1,222,239 $1,326,458 $(273,338) <F1><F2> $2,275,359
COSTS AND EXPENSES:
Cost of sales. . . . . . . . . . . . 970,435 1,090,363 (197,465) <F1><F2> 1,863,333
Operating expenses . . . . . . . . . 119,567 120,171 (82,254) <F1><F2> 157,484
Depreciation expense . . . . . . . . 56,733 36,446 (282) <F2> 92,897
1,146,735 1,246,980 (280,001) 2,113,714
OPERATING INCOME. . . . . . . . . . . 75,504 79,478 6,663 161,645
EQUITY IN EARNINGS OF AND INCOME
FROM VALERO NATURAL
GAS PARTNERS, L.P. . . . . . . . . . 23,693 - (23,693) <F3> -
GAIN ON DISPOSITION OF ASSETS
AND OTHER INCOME, NET. . . . . . . . 6,209 1,263 246 <F2> 7,718
INTEREST AND DEBT EXPENSE:
Incurred . . . . . . . . . . . . . . (49,517) (68,007) 14,437 <F2><F3><F4> (103,087)
Capitalized. . . . . . . . . . . . . 12,335 1,713 - 14,048
INCOME BEFORE INCOME TAXES. . . . . . 68,224 14,447 (2,347) 80,324
INCOME TAX EXPENSE. . . . . . . . . . 31,800 - 4,200 <F5> 36,000
NET INCOME. . . . . . . . . . . . . . 36,424 14,447 (6,547) 44,324
Less: preferred stock
dividend requirements. . . . . . . 1,262 - 10,781 <F6> 12,043
NET INCOME APPLICABLE TO
COMMON STOCK . . . . . . . . . . . . $ 35,162 $ 14,447 $ (17,328) $ 32,281
EARNINGS PER SHARE OF COMMON
STOCK. . . . . . . . . . . . . . . . $ .82 $ .75
</TABLE>
<PAGE>
VALERO ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The accompanying pro forma condensed consolidated
financial statements of the Company give effect to the
acquisition by the Company of the Common Units held by the Public
Unitholders. The $117.5 million cost of such Common Units is
funded by the net proceeds from the sale of $172.5 million of
$3.125 Convertible Preferred Stock that was completed in March
1994. Such net proceeds were used to reduce outstanding
indebtedness under bank credit lines and for temporary cash
investments as of March 31, 1994. The acquisition is accounted
for as a purchase. The pro forma condensed consolidated
financial statements are based on the historical consolidated
financial statements of the Company and VNGP, L.P. after certain
adjustments as described below. The pro forma condensed
consolidated balance sheet assumes that the acquisition by the
Company of the Common Units held by the Public Unitholders
occurred on March 31, 1994. The pro forma consolidated
statements of income assume that the above described
transactions occurred at the beginning of each period presented.
Such pro forma condensed consolidated financial statements are
not necessarily indicative of the results of future operations.
Note 1
Reflects the utilization of cash proceeds from the sale of
$3.125 Convertible Preferred Stock to fund the acquisition of the
Common Units held by the Public Unitholders and the remaining
expenses of the acquisition. Also included is the elimination of
transactions between the Company and VNGP, L.P., including
product sales and purchases, fees billed by the Company to the
Partnership for direct and indirect costs, and accrued interest
receivable and payable on leases.
Note 2
Adjustment to fair value of the portion of VNGP, L.P.'s
assets acquired and liabilities assumed not currently held by the
Company and the related income statement effects. Also included
is the elimination of the noncurrent receivable and payable
between the Company and VNGP, L.P. for postretirement benefits
other than pensions.
Note 3
Reflects the elimination of the Company's investment in and
leases receivable from VNGP, L.P. and related equity in earnings
and interest income. The corresponding VNGP, L.P. partners'
capital and current and long-term portions of VNGP, L.P.'s
capital lease obligations to the Company and related interest
expense are also eliminated.
Note 4
Represents a decrease in interest expense due to the
repayment of $43.6 million of indebtedness under bank credit
lines as of the beginning of each period presented with the
excess proceeds from the sale of $3.125 Convertible Preferred
Stock.
Note 5
Reflects the tax effects of the consolidation of VNGP, L.P.
into the Company, primarily the taxability of VNGP, L.P.'s net
income after its merger into the Company.
Note 6
Represents an increase in preferred stock dividends due to
the sale of $172.5 million of $3.125 Convertible Preferred Stock
as of the beginning of each period presented. The preferred
stock is convertible into VEC common stock ("Common Stock") at a
premium of 25% above a Common Stock market price of $21 5/8 per
share. Conversion of the Convertible Preferred Stock into Common
Stock is antidilutive to earnings per share of common stock for
the three months ended March 31, 1994 and the year ended
December 31, 1993.
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned hereunto duly authorized.
VALERO ENERGY CORPORATION
By: /s/ Don M. Heep
Don M. Heep
Senior Vice President and
Chief Financial Officer
Date: June 2, 1994
(Exhibit 23.1)
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the
incorporation of our reports included in this Form 8-K into the
Company's previously filed Registration Statements on Form S-8
(File No. 2-66297, 2-82001, 2-97043, 33-23103, 33-1445, 33-38405
and 33-53796) and on Form S-3 (File No. 33-45457).
ARTHUR ANDERSEN & CO.
San Antonio, Texas
May 31, 1994
