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PROSPECTUS Filed pursuant to Rule No. 424(b)(1)
File No. 033-70454
3,000,000 SHARES
[LOGO] VALERO
ENERGY CORPORATION
$3.125 CONVERTIBLE PREFERRED STOCK
(LIQUIDATION PREFERENCE $50.00 PER SHARE)
Each share of the $3.125 Convertible Preferred Stock ("New Preferred Stock") has
a stated value of $50.00 per share ("Stated Value") and is convertible at the
option of the holder at any time, unless previously redeemed, into shares of
Common Stock, $1.00 par value ("Common Stock"), of Valero Energy Corporation
("Energy" and, collectively with its subsidiaries, the "Company"), at an initial
conversion price of $27.03 (equivalent to a conversion rate of 1.8498 shares of
Common Stock for each share of New Preferred Stock), subject to adjustment in
certain events. On March 16, 1994, the last reported sale price of the Common
Stock on the New York Stock Exchange (symbol: VLO) was $21 5/8.
The New Preferred Stock may not be redeemed prior to June 1, 1997. Thereafter,
the New Preferred Stock may be redeemed, in whole or in part at the option of
Energy, at a redemption price of $52.188 per share of New Preferred Stock
through May 31, 1998, and at ratably declining prices thereafter, plus dividends
accrued to the redemption date.
Dividends on the New Preferred Stock are cumulative from the date of first
issuance and are payable quarterly on March 1, June 1, September 1 and December
1 of each year, beginning June 1, 1994. See "Description of the New Preferred
Stock -- Optional Redemption" and "-- Dividend Rights."
The New Preferred Stock has been approved for listing on the New York Stock
Exchange.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT COMPANY(1)
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Per Share.............................. $50.00 $1.25 $48.75
Total(2)............................... $150,000,000 $3,750,000 $146,250,000
</TABLE>
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(1) Before deducting expenses payable by the Company estimated to be $310,000.
(2) The Company has granted to the Underwriters a 30-day option to purchase up
to 450,000 additional shares of New Preferred Stock at the Price to Public,
less the Underwriting Discount, solely to cover over-allotments, if any. If
the Underwriters exercise such option in full, the total Price to Public,
Underwriting Discount and Proceeds to Company will be $172,500,000,
$4,312,500 and $168,187,500, respectively. See "Underwriting."
The shares of New Preferred Stock are offered subject to receipt and acceptance
by the Underwriters, to prior sale and to the Underwriters' right to reject any
order in whole or in part and to withdraw, cancel or modify the offer without
notice. It is expected that the shares of New Preferred Stock will be delivered
at the office of Salomon Brothers Inc, Seven World Trade Center, New York, New
York, or through the facilities of The Depository Trust Company, on or about
March 24, 1994.
SALOMON BROTHERS INC LEHMAN BROTHERS
The date of this Prospectus is March 17, 1994.
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IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE NEW PREFERRED
STOCK OR THE COMMON STOCK OF THE COMPANY AT LEVELS ABOVE THOSE WHICH MIGHT
OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE
NEW YORK STOCK EXCHANGE, IN THE OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
AVAILABLE INFORMATION
Energy is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith, files reports, proxy statements, and other information with the
Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements, and other information filed by Energy can be inspected and copied at
the Public Reference Room of the Commission at Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549 and at the public reference facilities
maintained by the Commission at Seven World Trade Center, Suite 1300, New York,
New York 10048 and at Room 1400, Northwestern Atrium Center, 500 West Madison
Street, Chicago, Illinois 60661. Copies of such materials can be obtained at
prescribed rates from the Public Reference Section of the Commission at 450
Fifth Street, N.W., Washington, D.C. 20549. Documents filed by Energy can also
be inspected at the offices of the New York Stock Exchange, 20 Broad Street, New
York, New York 10005, on which exchange certain of Energy's securities are
listed.
This Prospectus constitutes a part of a Registration Statement on Form S-3
(the "Registration Statement") filed by Energy with the Commission under the
Securities Act of 1933, as amended (the "Securities Act"), relating to the
securities offered hereby. This Prospectus omits certain of the information
contained in the Registration Statement, as permitted by the Commission's rules
and regulations, and reference is hereby made to the Registration Statement and
to the exhibits relating thereto for further information with respect to Energy
and the securities offered hereby. Any statements contained herein concerning
the provisions of any document are not necessarily complete, and in each
instance reference is made to the copy of such document filed as an exhibit to
the Registration Statement or otherwise filed with the Commission. Each such
statement is qualified in its entirety by such reference.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
Energy hereby incorporates into this Prospectus by reference its Annual
Report on Form 10-K for the year ended December 31, 1993 (the "Form 10-K") and
its Registration Statement on Form 8-A dated November 21, 1985, as amended.
All documents subsequently filed by Energy pursuant to Section 13(a),
13(c), 14, or 15(d) of the Exchange Act, subsequent to the date of this
Prospectus and prior to the termination of the offering made hereby, shall be
deemed to be incorporated by reference in this Prospectus and to be a part of
this Prospectus from the date of the filing of such documents. Any statement
contained in a document incorporated or deemed to be incorporated by reference
herein shall be deemed to be modified or superseded for purposes of this
Prospectus to the extent that a statement contained herein or in any
subsequently filed document which also is or is deemed to be incorporated by
reference herein modifies or supersedes such statement. Any statement so
modified or superseded shall not be deemed, except as so modified or superseded,
to constitute a part of this Prospectus.
Any person receiving a copy of this Prospectus may obtain, without charge,
upon written or oral request, a copy of any of the documents incorporated by
reference herein, except for the exhibits to such documents (other than the
exhibits expressly incorporated by reference into the information that this
Prospectus incorporates). Written requests should be directed to: Investor
Relations, Valero Energy Corporation, P.O. Box 500, San Antonio, Texas
78292-0500 (telephone (210) 246-2099).
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the detailed
information and financial statements, including the notes thereto, set forth
elsewhere in or incorporated by reference into this Prospectus. All references
in this Prospectus to the number of shares of New Preferred Stock offered and to
be outstanding assumes that the Underwriters' over-allotment option is not
exercised unless otherwise noted.
THE COMPANY
Valero Energy Corporation, through subsidiaries, owns and operates a
specialized petroleum refinery (the "Refinery") and engages in petroleum product
marketing operations. The Company also is the general partner of, and owns an
effective equity interest of approximately 49% in, Valero Natural Gas Partners,
L.P. ("VNGP, L.P."), which, through its subsidiary operating partnerships, owns
and operates natural gas pipeline systems serving Texas intrastate, interstate
and Mexico markets and processes natural gas to extract natural gas liquids. The
Company has agreed to acquire, through a merger, the outstanding limited partner
interests in VNGP, L.P. not owned by the Company. See "Recent
Developments -- Agreement to Acquire the Partnership."
THE OFFERING
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Issue............................ 3,000,000 shares of $3.125 Convertible Preferred Stock.
Dividends........................ Annual cumulative dividends of $3.125 per share of New
Preferred Stock, accruing from the date of first issuance,
payable quarterly on each March 1, June 1, September 1 and
December 1, commencing June 1, 1994 when, as and if
declared by the Board of Directors. See "Description of
the New Preferred Stock -- Dividend Rights."
Conversion Rights................ Convertible into Common Stock at an initial conversion
price of $27.03 (equivalent to a conversion rate of
approximately 1.8498 shares of Common Stock for each share
of New Preferred Stock), subject to adjustment under
certain circumstances. See "Description of the New
Preferred Stock -- Conversion Rights."
Redemption at Option Not redeemable prior to June 1, 1997. Thereafter,
of Energy...................... redeemable for cash at any time at the option of Energy in
whole or in part, at a redemption price of $52.188 per
share of the New Preferred Stock through May 31, 1998, and
at prices declining to $50.00 per share on or after June
1, 2004, plus accrued and unpaid dividends to the
redemption date. See "Description of the New Preferred
Stock -- Optional Redemption."
Use of Proceeds.................. Approximately $117.5 million of the net proceeds from the
sale of the New Preferred Stock will be utilized to fund
the proposed acquisition by the Company of the limited
partner interests in VNGP, L.P. not currently held by the
Company. Of the remaining net proceeds of $28.4 million,
approximately $4.3 million will be used to pay expenses of
the merger, and approximately $24.1 million will be used
for general corporate purposes, including the reduction of
existing indebtedness under the Company's bank credit
agreements. In the event that the proposed merger of VNGP,
L.P. with the Company is not ultimately consummated, the
proceeds from the Offering would be added to the Company's
funds and used for general corporate purposes, including
the repayment of existing indebtedness, financing of
capital projects and additions to working capital. See
"Use of Proceeds."
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Liquidation Preference........... $50.00 per share, plus accrued and unpaid dividends. See
"Description of the New Preferred Stock -- Priority in
Event of Liquidation."
Voting Rights.................... Except as required by law, holders will not be entitled to
vote in the election of directors unless dividends on the
New Preferred Stock are in arrears for the equivalent of
at least six full quarterly dividends, in which case
holders of the New Preferred Stock will be entitled
(voting separately as a class together with holders of
shares of any one or more other series of Preferred Stock
of the Company) to elect two additional directors until
such dividend arrearage is eliminated. See "Description of
New Preferred Stock -- Voting Rights."
Ranking.......................... The New Preferred Stock will be senior to Energy's Common
Stock and Serial Preference Stock with respect to
dividends and upon liquidation, dissolution or winding up.
See "Description of the New Preferred Stock -- Priority in
Event of Liquidation" and "Description of Other Equity
Securities."
NYSE Symbol...................... The New Preferred Stock has been approved for listing on
the New York Stock Exchange. The Common Stock is traded on
the New York Stock Exchange under the symbol "VLO."
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SUMMARY FINANCIAL INFORMATION
The following table sets forth, for the periods and dates indicated,
certain historical consolidated financial data and pro forma consolidated
financial data of the Company after giving effect to the issuance of the New
Preferred Stock and the application of the net proceeds therefrom to, among
other things, acquire the limited partner interests in VNGP, L.P. not held by
the Company. The data should be read in conjunction with the consolidated
financial statements and related notes incorporated by reference herein, and the
pro forma condensed consolidated financial statements and related notes included
elsewhere in this Prospectus. See also "Selected Historical and Pro Forma
Financial Data" and "Recent Developments." Dollar amounts are in millions of
dollars, except for per share amounts.
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AS OF OR
FOR
THE YEAR
ENDED
DECEMBER
31, AS OF OR FOR THE
1993 YEAR ENDED DECEMBER 31,
PRO --------------------------------------------------------
FORMA(1) 1993(2) 1992 1991 1990 1989
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INCOME STATEMENT DATA:
Operating revenues.............. $2,275.3 $1,222.2 $1,234.6 $1,011.8 $1,168.9 $ 941.3
Depreciation expense............ 92.9 56.7 48.2 36.6 35.6 34.4
Amortization of deferred charges
and other, net................ 18.4 22.8 20.1 18.1 18.9 8.6
Operating income................ 161.6 75.5 134.0 119.3 134.4 69.7
Equity in earnings of and income
from VNGP, L.P................ -- 23.7 26.4 32.4 29.2 11.6
Net income...................... 43.8 36.4 83.9 98.7 94.7 41.5
Net income applicable to common
stock......................... 33.2 35.2 82.4 92.6 87.6 28.2
Earnings per share of common
stock(3)...................... .77 .82 1.94 2.28 2.31 .98
Ratio of earnings to fixed
charges and preferred and
preference stock
dividends(4).................. 1.40x 1.95x 3.21x 3.29x 4.18x 2.13x
CASH FLOW DATA:
Net cash provided by operating
activities.................... $ 206.8 $ 141.3 $ 152.5 $ 182.8 $ 196.4 $ 43.4
Net (increase)/decrease in
working capital............... 52.5 39.0 (15.1) (2.4) 6.2 (21.7)
Capital additions............... 172.7 136.6 282.8 229.7 137.8 36.9
BALANCE SHEET DATA:
Total assets.................... $2,645.7 $1,764.4 $1,759.1 $1,502.4 $1,266.2 $1,019.6
Total debt (including current
maturities of long-term debt
and notes payable)............ 1,040.9 514.4 505.4 381.7 249.0 243.4
Redeemable preferred stock...... 13.8 13.8 15.0 16.1 17.3 18.4
Common stock and other
stockholders' equity.......... 988.2 842.3 820.8 686.5 658.1 512.5
Total debt as a percentage of
total capitalization.......... 51.0% 37.5% 37.7% 35.2% 26.9% 31.4%
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(1) The pro forma income statement and cash flow data for the period ended
December 31, 1993 assume that the acquisition of the outstanding interests
in VNGP, L.P. and the issuance of the New Preferred Stock to provide funds
therefor occurred on January 1, 1993. The pro forma balance sheet data
assume such transactions occurred on December 31, 1993. The pro forma data
also assume the repayment of long-term bank debt with the excess of the net
proceeds of the Offering over the acquisition cost of the outstanding
limited partner interests and the other costs of the proposed acquisition.
If the acquisition of the outstanding interests in VNGP, L.P. does not
occur, earnings per share of common stock would be $.67, the ratio of
earnings to fixed charges and preferred and preference stock dividends would
be 1.57x and total debt as a percentage of total capitalization would be
30.5%, assuming the net proceeds of the Offering were applied to retire all
outstanding indebtedness under the Company's bank credit agreements, with
the remainder added to working capital.
(2) 1993 results of operations were reduced by a $27.6 million, or $17.9 million
after-tax, write-down in the carrying value of the Company's refinery
inventories during the fourth quarter of 1993 to reflect existing market
prices.
(3) Conversion of the New Preferred Stock into Common Stock is antidilutive to
pro forma earnings per share of common stock for the year ended December 31,
1993.
(4) The ratio of earnings to fixed charges and preferred and preference stock
dividends, is computed by dividing (i) the sum of pre-tax income,
amortization of previously capitalized interest, distributions in excess
of/(less than) equity in earnings of the Partnership, and fixed charges
(excluding capitalized interest) by (ii) the sum of fixed charges and
pre-tax earnings required to cover preferred and preference stock dividend
requirements. Fixed charges consist of total interest, whether expensed or
capitalized, amortization of debt expense and one-third of rents, which is
deemed representative of the interest portion of rental expense.
5
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THE COMPANY
Valero Energy Corporation ("Energy" and, collectively with its consolidated
subsidiaries, the "Company") was incorporated under the laws of the State of
Delaware in 1955 and became a publicly-held corporation in 1979. Its principal
executive offices are located at 530 McCullough Avenue, San Antonio, Texas 78215
(telephone number (210) 246-2000).
The Company, through its subsidiaries, owns and operates a specialized
petroleum refinery (the "Refinery") located in Corpus Christi, Texas, and
engages in petroleum product marketing operations. The Company also is the
general partner of, and owns an approximate 49% equity interest in, Valero
Natural Gas Partners, L.P. ("VNGP, L.P." and, collectively with its consolidated
subsidiaries, the "Partnership").
The Refinery, which commenced operations in 1984, is primarily designed to
process high-sulfur atmospheric tower bottoms, a type of residual fuel oil
("resid"), into a product slate of higher-value products, principally unleaded
gasoline and middle distillates. The Refinery also processes some crude oil in
certain of its refining units. The Refinery has the capacity to produce
approximately 140,000 barrels per day ("bpd") of refined products, with gasoline
and gasoline-related products comprising approximately 85% of the Refinery's
throughput. In the second quarter of 1993, the Company began operation of a
facility which converts butane into methyl tertiary butyl ether ("MTBE"), a
high-octane blendstock used to manufacture oxygenated and reformulated
gasolines. In the fourth quarter of 1993, the Company placed in service a
MTBE/TAME complex, which produces additional MTBE and TAME, another oxygen-rich
gasoline blendstock, and a reformate splitter, which extracts a benzene
concentrate stream from reformate produced in the Refinery's naphtha reformer
unit. These projects represent investments totalling approximately $300 million.
The Partnership operates in two business segments, natural gas and natural
gas liquids ("NGLs"). The Partnership owns and operates natural gas pipeline
systems which are located in Texas and serve customers in the Texas intrastate
markets and throughout the United States and in Mexico. These natural gas
pipeline systems currently have combined gas sales and transportation throughput
of approximately 2.5 Bcf of gas per day. The Partnership operates approximately
7,200 miles of mainlines, lateral lines and gathering systems and has more than
100 interconnections with 33 other interstate and intrastate pipelines.
The Partnership owns and operates eight NGL processing plants and leases an
additional plant from the Company. These plants currently process approximately
1.3 Bcf of gas per day. The Partnership's NGL operations include the processing
of natural gas to extract a mixed stream of ethane, propane, butanes and natural
gasoline, the transportation and marketing of NGLs and the separation of mixed
NGLs into component products. The Partnership's NGL production is sold primarily
in the Corpus Christi and Mont Belvieu (Houston) markets. A substantial portion
of the Partnership's butane production is being sold to the Company for
upgrading in the MTBE facility recently completed at the Refinery.
RECENT DEVELOPMENTS
AGREEMENT TO ACQUIRE THE PARTNERSHIP
Effective December 20, 1993, Energy, Valero Natural Gas Company ("VNGC"),
general partner of VNGP, L.P., and VNGP, L.P. entered into an agreement of
merger. In the merger, the 9.7 million issued and outstanding common units of
limited partner interests ("Common Units") in VNGP, L.P. held by persons other
than the Company (the "Public Unitholders") will be converted into a right to
receive cash consideration of $12.10 per Common Unit, and VNGP, L.P. will become
a wholly-owned subsidiary of Energy. A special committee of outside directors
(the "Special Committee") of VNGC, appointed to consider the fairness of the
transaction to the Public Unitholders, has received an opinion from its
independent financial advisor, Dillon, Read & Co., Inc., that the consideration
to be received by the Public Unitholders in the transaction is fair from a
financial point of view. The Special Committee has determined
6
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that such transaction is fair to, and in the best interest of, the Public
Unitholders. The Board of Directors of VNGC has unanimously recommended that the
Public Unitholders vote in favor of the merger. The transaction is subject,
among other things, to: (i) approval 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 to be
called for the purpose of considering such merger; (iii) receipt of satisfactory
waivers, consents or amendments to certain of the Company's financial
agreements; and (iv) completion of the offering of the New Preferred Stock. The
Company currently owns approximately 47.5% of the Common Units and intends to
vote such Common Units in favor of the transaction. A proposal to approve the
merger agreement will be submitted to the holders of Common Units at a special
meeting of unitholders expected to be held during the second quarter of 1994.
There can be no assurance, however, that the merger can be completed.
The Company believes that the natural gas and NGL businesses are undergoing
a period of restructuring and consolidation that may create opportunities for
expansions, acquisitions or strategic alliances which, if the Partnership could
take advantage of them, could enable the Partnership to compete more effectively
in the competitive natural gas environment. Because of the Federal Energy
Regulatory Commission's Order No. 636, which requires interstate pipeline
companies to offer various services on an unbundled, nondiscriminatory basis,
the Company believes that intrastate pipelines such as the Partnership may enjoy
increased opportunities to compete for interstate business. In addition, an
emerging trend of west-to-east movement of gas across the United States may
provide beneficial transportation opportunities for the Partnership if the
Partnership were able to make the necessary capital expenditures for added
west-to-east capacity on its pipeline system. However, the Partnership's
competitive position could be eroded if the Partnership is unable to respond
effectively to the changing dynamics of the industry. The merger was proposed
because the Company believes that the Partnership has insufficient financial
flexibility to participate fully in opportunities that may arise in the natural
gas and NGL industries. The Company believes that the ability of the Partnership
to compete effectively in these businesses will be enhanced through the merger.
The Company also believes that potential conflict of interest between the
Partnership and the Company can be eliminated through the merger.
LAWSUITS FILED BY UNITHOLDERS
Seven lawsuits were filed in the Delaware Chancery Court in response to the
announcement by the Company on October 14, 1993 of the proposed merger. 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 holders of the Common Units 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 the Company 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.
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., an indirect subsidiary partnership of VNGP, 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
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<PAGE> 8
gas for third parties on the franchised premises. While any liability of VTC
with respect to the City's claims has been assumed by the Partnership, if the
proposed merger with VNGP, L.P. is consummated, the Company's financial position
would necessarily reflect the full amount of any Partnership liability.
Additionally, in the event that the Partnership failed to pay any such
liability, the Company could remain ultimately responsible. The Company believes
that the City's claims are significantly overstated, and that VTC has a number
of meritorious defenses to the claims. The Company and the Partnership believe
it is unlikely that the final outcome of this claim would have a material
adverse effect on either the Company's or the Partnership's financial position
or results of operations; however, due to the inherent uncertainty of
litigation, the range of possible loss, if any, cannot be estimated with a
reasonable degree of precision and there can be no assurance that the resolution
of this claim would not have an adverse effect on either the Company's or the
Partnership's results of operations for the fiscal period in which the
resolution occurred.
1993 RESULTS OF OPERATIONS
The Company reported net income of $36.4 million or $.82 per share for the
year ended December 31, 1993, compared to $83.9 million or $1.94 per share,
respectively, for 1992. Operating income was $75.5 million in 1993 compared to
$134 million in 1992. The 1993 results were reduced by a $27.6 million, or $17.9
million after-tax, write-down in the carrying value of the Company's refinery
inventories during the fourth quarter of 1993 to reflect existing market prices.
Crude oil, refined product prices and refining margins were weak throughout
1993. During the late November meeting of the Organization of Petroleum
Exporting Countries, the member countries decided to forego any cuts in
production. This decision, combined with increased production from the North Sea
region, continued uncertainty regarding Iraq's possible re-entry into world oil
markets and weak global demand for energy caused a precipitous drop in crude oil
prices to their lowest levels in five years. Refined product prices decreased
faster and further than crude oil prices due to continuing high refinery
capacity utilization rates and high gasoline inventories. In addition, the
discount at which resid sells to crude oil generally decreases with decreases in
crude oil prices due to price competition for resid from natural gas and other
markets. These conditions resulted in a substantial decline in refining margins
and the write-down in the carrying value of the Company's refinery inventories.
Refined product prices and refining margins have increased since late December.
The Company's operating income and net income for the first quarter of 1994,
however, are expected to be in the same range as operating income and net income
for the fourth quarter of 1993, excluding the effect of the write-down in the
carrying value of the Company's refinery inventories.
The Company's equity in earnings of the Partnership decreased in 1993 due
primarily to a decrease in operating income from the Partnership's natural gas
liquids operations, partially offset by an increase in operating income from the
Partnership's natural gas operations. The profitability of the Partnership's NGL
operations depends principally on the margin between NGL sales prices and the
cost of the natural gas from which such liquids are extracted ("shrinkage
cost"). Operating income from the Partnership's NGL operations decreased $31.3
million, or 55%, in 1993 compared to 1992 due primarily to a decrease in NGL
prices in the last six months of 1993 resulting from continuing high levels of
NGL inventories and the significant decline in refined product prices discussed
above, combined with an increase in fuel and shrinkage costs resulting from a
22% increase in the cost of natural gas. Operating income from the Partnership's
natural gas operations increased $21 million, or 65%, for 1993 compared to 1992
due to a 10% increase in daily natural gas sales volumes and a 12% increase in
transportation revenues resulting from continued strong demand for natural gas,
certain favorable measurement, fuel usage and customer billing adjustments and
an increase in income generated by the Partnership's Market Center Services
Program. The Market Center Services Program was established in 1992 to provide
price risk management services to gas producers and end users through the use of
forward contracts and other tools which have traditionally been used in
financial risk management. The Partnership recognized gas cost reductions and
other benefits from this program of $18.7 million in 1993, which represented an
increase of $5.8 million from 1992. During the first quarter of 1994, NGL prices
have increased modestly since late Decem-
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ber 1993, but remain below first quarter 1993 levels. Concurrently, natural gas
prices and resulting shrinkage costs have increased during the first quarter of
1994 compared to the same period in 1993. As a result, Partnership operating
income and the Company's equity in earnings of the Partnership are expected to
be substantially lower in the first quarter of 1994 than in the fourth quarter
of 1993.
During 1993, net cash provided by the Company's operating activities
totalled $141.3 million compared to $152.5 million during 1992. Net cash
provided by operating activities includes a $39 million favorable effect in 1993
and a $15.1 million unfavorable effect in 1992 from cyclical changes in current
assets and liabilities. These changes for 1993 include a decrease in inventories
compared to 1992, attributable to the inventory write-down discussed above. The
Company utilized the cash provided by its operating activities, as well as bank
borrowings and proceeds from the disposition of its natural gas distribution
subsidiary, to fund capital expenditures, deferred turnaround and catalyst costs
and investments in joint ventures, to pay dividends and to repay principal on
outstanding debt.
The Company currently maintains a $160 million revolving credit and letter
of credit facility that is available for working capital purposes and matures
September 30, 1996. Energy also has an unsecured $30 million revolving credit
and letter of credit facility which matures February 29, 1996. As of December
31, 1993, approximately $52 million and $29 million, respectively, were
available under these committed bank credit facilities for additional borrowings
and letters of credit. Energy also currently has $60 million of unsecured
short-term credit lines which are unrestricted as to use. No amounts were
outstanding under these short-term lines at December 31, 1993. Total borrowings
under Energy's bank credit facility and short-term lines are limited to $50
million.
Certain of the Company's financing agreements contain various financial
ratio requirements, including fixed charge coverage and debt-to-capitalization
tests, and also require the Company (and its refining subsidiary) to maintain a
minimum consolidated net worth and positive working capital. Certain of these
financial ratio requirements were amended, effective as of the fourth quarter of
1993, to improve the financial flexibility of the Company. Under the most
restrictive of the debt-to-capitalization tests, the Company's indebtedness for
borrowed money may not exceed 40% of its capitalization. At December 31, 1993,
this ratio, as calculated under the most restrictive of the Company's financing
agreements, was 38% and would permit additional borrowings or guarantees of $47
million. Increases or decreases in the Company's stockholders' equity, such as
those resulting from incremental earnings or losses, cash dividends, stock
issuances, or stock redemptions or repurchases, will disproportionately increase
or decrease the amount of additional permitted borrowings or guarantees. At
December 31, 1993, the Company had the ability to pay $47.6 million in Common
Stock dividends and other restricted payments under its principal bank credit
agreements, which contained the most restrictive provisions concerning
restricted payments.
In connection with the proposed merger discussed above, the Company is
currently negotiating a new bank credit agreement as well as amendments to other
financial agreements to permit the proposed merger. While Energy believes that
it will obtain satisfactory new agreements and amendments, there can be no
assurance in this regard.
During 1993, the Company incurred $166 million for capital expenditures,
deferred turnaround and catalyst costs, investments and related expenditures.
Expenditures for 1993 included $149 million for Refinery expenditures, such as
the butane upgrade facility, the MTBE/TAME complex, the reformate splitter and
the scheduled maintenance and catalyst change for the Refinery's
hydrodesulfurization unit completed in December 1993. Such amounts include $37
million for capital expenditures incurred in 1993, but not payable until 1994.
For 1994, the Company currently expects to incur approximately $80 million for
capital expenditures, deferred turnaround and catalyst costs, investments and
related expenditures. In addition, the Company expects to pay approximately
$117.5 million for an effective equity interest of 51% in VNGP, L.P. The
Partnership currently expects to incur approximately $40 million in capital
expenditures in 1994, much of which would be incurred after the expected merger
date. The Company believes it has sufficient funds from operations and to the
extent necessary, from the public markets and private capital markets, to fund
its current and ongoing operating requirements.
9
<PAGE> 10
MTBE PLANT IN MEXICO
Productos Ecologicos, S.A. de C.V., a Mexican corporation ("Proesa") in
which the Company is a shareholder, has executed a Memorandum of Understanding
with Petroleos Mexicanos, S.A., the Mexican state-owned oil company ("PEMEX"),
to construct a MTBE plant in Mexico, and has proposed a butane supply contract
and MTBE sales contract with PEMEX. Proesa is owned 35% by the Company; 10% by
Dragados y Construcciones, the largest construction company in Spain; and 55% by
a corporation formed by subsidiaries of Banamex, Mexico's largest bank, and
Groupo Infomin, a privately held Mexican company. Proesa has also executed an
option agreement for a plant site near the Bay of Campeche. The proposed Mexican
MTBE plant is expected to have a capacity of approximately 15,000 barrels per
day and to be similar to the recently-completed butane upgrade facility at the
Refinery. The project is expected to cost approximately $440 million and is
subject to, among other things, the arrangement of satisfactory financing.
Proesa has been advised by lenders with whom it is negotiating for project
financing that certain provisions will be required in the proposed PEMEX
contracts in order to secure satisfactory financing for the project. Proesa has
entered into negotiations with PEMEX regarding such provisions. However, as a
result of delays incurred in completing financing, Proesa has determined that
the commencement of plant construction will be delayed. If satisfactory
financing is obtained, construction of the MTBE plant could not begin before
late 1994, with approximately two years required for completion. As of February
1994, no material amounts have been invested in the project. The amount of the
Company's equity contribution will depend upon the level of debt financing
obtained by Proesa and the ultimate equity interest of each partner. Under the
proposed commercial contracts, PEMEX will purchase approximately 75% of the MTBE
plant's production, one-half at a formula price and one-half at market-related
prices, with the remainder of the plant's production being sold to the Company
at a formula price. In addition, the butane feedstocks required by the plant
will be purchased from PEMEX at market-related prices. A subsidiary of Energy
has agreed to provide technical advice and assistance to Proesa in connection
with the design, engineering, construction and operation of the MTBE plant.
There can be no assurance that financing for the project can be obtained or that
the plant will be constructed.
USE OF PROCEEDS
Assuming no exercise of the over-allotment option, the net proceeds from
the sale of the New Preferred Stock in the offering made hereby (the "Offering")
will be approximately $145.9 million. Assuming that the proposed merger of VNGP,
L.P. with the Company is consummated, the net proceeds from the Offering will be
utilized by the Company to fund the cash payment of approximately $117.5 million
to Public Unitholders required under the terms of the merger. Of the remaining
net proceeds of approximately $28.4 million, approximately $4.3 million will be
used to pay expenses of the merger, and the remaining approximately $24.1
million will be used for general corporate purposes, including the reduction of
existing indebtedness under the Company's bank credit agreements. At December
31, 1993, $75 million in borrowings were outstanding under the Company's
principal bank credit agreements and other short-term credit lines at a weighted
average interest rate of 4.59%. Until so utilized, such proceeds will be placed
temporarily in investment grade money market instruments. If the over-allotment
option is exercised in full, the net proceeds to the Company will be
approximately $167.9 million.
In the event that the proposed merger of VNGP, L.P. with the Company is not
ultimately consummated, the proceeds from the Offering would be added to the
Company's funds and used for general corporate purposes, including the repayment
of existing indebtedness, financing of capital projects and additions to working
capital.
10
<PAGE> 11
CONSOLIDATED CAPITALIZATION
The following table sets forth the unaudited consolidated capitalization of
the Company at December 31, 1993, and as adjusted to give effect to the issuance
of 3,000,000 shares of the New Preferred Stock in the Offering and: (1) the
application of the net proceeds therefrom to fund the costs of the proposed
merger of VNGP, L.P. with the Company and reduce outstanding indebtedness under
the Company's bank credit agreements and (2) the application of the net proceeds
therefrom to retire all outstanding indebtedness under the Company's bank credit
agreements, with the remainder added to working capital. See "Use of Proceeds."
The table should be read in conjunction with the Consolidated Financial
Statements of the Company and related notes in the Form 10-K, which is
incorporated by reference herein, and the Pro Forma Condensed Consolidated
Financial Statements and related notes included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
DECEMBER 31, 1993
------------------------------------
AS AS
ADJUSTED ADJUSTED
WITH WITHOUT
MERGER MERGER ACTUAL
-------- -------- --------
(IN MILLIONS)
<S> <C> <C> <C>
Total debt (including current maturities of long-term
debt)................................................. $1,040.9 $ 439.4 $ 514.4
-------- -------- --------
Redeemable Preferred Stock, Series A.................... 13.8 13.8 13.8
-------- -------- --------
Common stock and other stockholders' equity:
New Preferred Stock (1)............................... 150.0 150.0 --
Common stockholders' equity........................... 838.2 838.2 842.3
-------- -------- --------
Total common stock and other stockholders'
equity...................................... 988.2 988.2 842.3
-------- -------- --------
Total capitalization.................................... $2,042.9 $1,441.4 $1,370.5
======== ======== ========
</TABLE>
- ---------------
(1) Reflects the sale of 3,000,000 shares of New Preferred Stock at an offering
price of $50 per share.
11
<PAGE> 12
SELECTED HISTORICAL AND PRO FORMA FINANCIAL DATA
The following table sets forth, for the periods and the dates indicated,
selected historical consolidated financial data and pro forma consolidated
financial data of the Company after giving effect to the issuance of the New
Preferred Stock and the application of the net proceeds therefrom to, among
other things, acquire the limited partner interests in VNGP, L.P. not currently
held by the Company. This table should be read in conjunction with the financial
statements, related notes and Management's Discussion and Analysis of Financial
Condition and Results of Operations included in the Form 10-K for the year ended
December 31, 1993, which is incorporated by reference herein, and the pro forma
condensed consolidated financial statements and related notes included elsewhere
in this Prospectus. Dollar amounts are in thousands of dollars, except for per
share amounts.
<TABLE>
<CAPTION>
AS OF OR
FOR THE AS OF OR FOR THE
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1993 ----------------------------------------------------------------------------------
PRO FORMA(1) 1993(2) 1992 1991 1990 1989
-------------- -------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Operating revenues.......... $ 2,275,331 $ 1,222,239 $ 1,234,618 $ 1,011,835 $ 1,168,867 $ 941,258
-------------- -------------- -------------- -------------- -------------- --------------
Costs and expenses:
Cost of sales............. 1,863,333 970,435 926,189 740,623 884,973 732,040
Operating expenses........ 157,484 119,567 126,185 115,339 113,861 105,138
Depreciation expense...... 92,910 56,733 48,214 36,607 35,642 34,401
-------------- -------------- -------------- -------------- -------------- --------------
Total................. 2,113,727 1,146,735 1,100,588 892,569 1,034,476 871,579
-------------- -------------- -------------- -------------- -------------- --------------
Operating income............ 161,604 75,504 134,030 119,266 134,391 69,679
Equity in earnings of and
income from VNGP, L.P..... -- 23,693 26,360 32,389 29,161 11,628
Other income, net........... 7,686 6,209 1,452 7,252 108 2,355
Interest and debt expense:
Incurred.................. (103,827) (49,517) (46,276) (37,948) (24,566) (24,971)
Capitalized............... 14,048 12,335 15,853 25,408 6,499 610
-------------- -------------- -------------- -------------- -------------- --------------
Income before income
taxes..................... 79,511 68,224 131,419 146,367 145,593 59,301
Income tax expense.......... 35,700 31,800 47,500 47,700 50,900 17,800
-------------- -------------- -------------- -------------- -------------- --------------
Net income.................. 43,811 36,424 83,919 98,667 94,693 41,501
Less: preferred and
preference stock dividend
requirements.............. 10,637 1,262 1,475 6,044 7,060 13,347
-------------- -------------- -------------- -------------- -------------- --------------
Net income applicable to
common stock.............. $ 33,174 $ 35,162 $ 82,444 $ 92,623 $ 87,633 $ 28,154
============== ============== ============== ============== ============== ==============
Earnings per share of common
stock(3).................. $ .77 $ .82 $ 1.94 $ 2.28 $ 2.31 $ .98
============== ============== ============== ============== ============== ==============
Ratio of earnings to fixed
charges and preferred and
preference stock
dividends(4).............. 1.40x 1.95x 3.21x 3.29x 4.18x 2.13x
============== ============== ============== ============== ============== ==============
CASH FLOW DATA:
Net cash provided by
operating activities...... $ 206,825 $ 141,281 $ 152,511 $ 182,773 $ 196,383 $ 43,376
Net (increase)/decrease in
working capital........... 52,466 39,048 (15,123) (2,399) 6,152 (21,657)
Capital additions........... 172,655 136,594 282,755 229,747 137,798 36,896
Dividends per common
share..................... .46 .46 .42 .34 .26 .15
BALANCE SHEET DATA:
Total assets................ $ 2,645,660 $ 1,764,437 $ 1,759,100 $ 1,502,430 $ 1,266,223 $ 1,019,551
Investment in and leases
receivable from VNGP,
L.P....................... -- 130,557 125,285 96,682 20,129 14,573
Total debt (including
current maturities of
long-term debt and notes
payable).................. 1,040,928 514,358 505,385 381,656 249,033 243,375
Redeemable preferred
stock..................... 13,800 13,800 14,950 16,100 17,250 18,400
Common stock and other
stockholders' equity:
New Preferred Stock....... 150,000 -- -- -- -- --
Common stockholders'
equity.................. 838,237 842,297 820,758 686,535 658,076 512,467
-------------- -------------- -------------- -------------- -------------- --------------
Total................. 988,237 842,297 820,758 686,535 658,076 512,467
Total debt as a percentage of
total capitalization........ 51.0% 37.5% 37.7% 35.2% 26.9% 31.4%
</TABLE>
- ---------------
(1) The pro forma income statement and cash flow data for the period ended
December 31, 1993 assume that the acquisition of the outstanding interests
in VNGP, L.P. and the issuance of the New Preferred Stock to provide funds
therefor occurred on January 1, 1993. The pro forma balance sheet data
assume such transactions occurred on December 31, 1993. The pro forma data
also assume the repayment of long-term bank debt with the excess of the net
proceeds of the Offering over the acquisition cost of the outstanding
limited partner interests and the other costs of the proposed acquisition.
If the acquisition of the outstanding interests in VNGP, L.P. does not
occur, earnings per share of common stock would be $.67, the ratio of
earnings to fixed charges and preferred and preference stock dividends would
be 1.57x and the total debt as a percentage of total capitalization would be
30.5%, assuming the net proceeds of the Offering were applied to retire all
outstanding indebtedness under the Company's bank credit agreements, with
the remainder added to working capital.
(2) 1993 results of operations were reduced by a $27.6 million, or $17.9 million
after-tax, write-down in the carrying value of the Company's refinery
inventories during the fourth quarter of 1993 to reflect existing market
prices.
(3) Conversion of the New Preferred Stock into Common Stock is antidilutive to
pro forma earnings per share of Common Stock for the year ended December 31,
1993.
(4) The ratio of earnings to fixed charges and preferred and preference stock
dividends, is computed by dividing (i) the sum of pre-tax income,
amortization of previously capitalized interest, distributions in excess
of/(less than) equity in earnings of the Partnership, and fixed charges
(excluding capitalized interest) by (ii) the sum of fixed charges and
pre-tax earnings required to cover preferred and preference stock dividend
requirements. Fixed charges consist of total interest, whether expensed or
capitalized, amortization of debt expense and one-third of rents, which is
deemed representative of the interest portion of rental expense.
12
<PAGE> 13
DIVIDENDS AND PRICE RANGE OF THE COMMON STOCK
The Common Stock is traded on the New York Stock Exchange (symbol: VLO).
The following table sets forth on a per share basis for the periods indicated
the high and low sales prices of the Common Stock in the New York Stock
Exchange -- Composite Transactions listing, as reported by The Wall Street
Journal, and the amount of per-share dividends for each quarter on the Common
Stock. As of February 14, 1994, there were 8,095 holders of record of the Common
Stock and an estimated 20,000 beneficial owners of Common Stock.
<TABLE>
<CAPTION>
DIVIDENDS
PER
COMMON
HIGH LOW SHARE
------ ------ --------
<S> <C> <C> <C>
1992
First Quarter................................................. $33 3/8 $27 7/8 $.09
Second Quarter................................................ 32 22 1/8 .11
Third Quarter................................................. 26 7/8 21 1/2 .11
Fourth Quarter................................................ 25 1/2 19 1/2 .11
1993
First Quarter................................................. $24 1/2 $20 7/8 $.11
Second Quarter................................................ 24 7/8 21 5/8 .11
Third Quarter................................................. 26 1/8 22 .11
Fourth Quarter................................................ 26 1/8 19 5/8 .13
1994
First Quarter (through March 16, 1994)........................ $24 1/8 $19 1/2 $.13
</TABLE>
On March 16, 1994, the last sales price of the Common Stock in the New York
Stock Exchange -- Composite Transactions listing was $21 5/8.
See "1993 Results of Operations" for a description of financial ratio
requirements under certain of the Company's financing agreements. The aggregate
annual dividend requirement on Energy's Preferred Stock outstanding at February
14, 1994, is approximately $1.2 million.
13
<PAGE> 14
DESCRIPTION OF THE NEW PREFERRED STOCK
GENERAL
The following statements are brief summaries of certain provisions relating
to the New Preferred Stock of Energy, as contained in the Restated Certificate
of Incorporation of Energy and the form of Certificate of Designation for the
New Preferred Stock (the "Certificate of Designation"), both of which are filed
or incorporated by reference as exhibits to the Registration Statement. Such
summaries do not purport to be complete, and for a full and complete statement
of the provisions thereof reference is made to such exhibits. Such summaries
shall be deemed to be qualified in their entirety by such reference.
The New Preferred Stock has been authorized as a new series of Energy's
Preferred Stock consisting of 3,450,000 shares. Pursuant to its Restated
Certificate of Incorporation, Energy is authorized to issue, without any action
on the part of its stockholders, an aggregate of 20,000,000 shares of Preferred
Stock. Energy's Preferred Stock, $8.50 Cumulative Series A ("Series A Preferred
Stock") is the only series of Preferred Stock currently issued and outstanding.
Of the 1,150,000 shares of Series A Preferred Stock originally issued, 138,000
remain outstanding as of February 14, 1994. See "Description of Other Equity
Securities". The Board of Directors has broad authority to divide the Preferred
Stock into one or more series and broad authority to fix and determine the
relative rights and preferences, including the voting rights, of the shares of
each series. Preferred Stock redeemed or otherwise retired will generally assume
the status of authorized but unissued shares and may be reissued in the same
manner as other authorized but unissued shares. However, shares of Series A
Preferred Stock redeemed pursuant to the optional or mandatory redemption
provisions described below may not be reissued.
DIVIDEND RIGHTS
The holders of the New Preferred Stock are entitled to receive, when and as
declared by Energy's Board of Directors, out of funds legally available
therefor, in preference to the holders of Common Stock, the Serial Preference
Stock and of any other stock ranking junior to the New Preferred Stock ("junior
stock") in respect of dividends or distributions of assets upon liquidation,
dissolution or winding up of the affairs of Energy (collectively referred to
herein as "liquidation"), cash dividends at the per share rate set forth on the
front cover of this Prospectus. Dividends on the New Preferred Stock will accrue
from the date of first issuance of the New Preferred Stock and will be payable
quarterly, in arrears on the first day of each March, June, September and
December, commencing on June 1, 1994, except that if such date is not a business
day then such dividends shall be payable on the first immediately succeeding
business day.
Dividends upon shares of the New Preferred Stock are cumulative so that, if
in respect of any past quarterly dividend period or periods full dividends upon
the outstanding shares of the New Preferred Stock shall not have been paid, the
amount of the deficiency must be fully paid or declared and set apart for
payment before any dividend may be declared and paid or set apart for payment
upon any capital stock ranking on a parity therewith or any junior stock, before
any other distributions of assets shall be made with respect to any capital
stock ranking on a parity therewith or any junior stock, before the purchase of
any shares of any capital stock ranking on a parity therewith or any junior
stock, or before the purchase or redemption of any shares of any series of
Preferred Stock (other than the purchase or redemption of junior stock acquired
in exchange for or out of the proceeds of the issue of other junior stock). Each
share of New Preferred Stock will rank on a parity with each other share of
Preferred Stock, irrespective of series, with respect to preferential dividends
at the respective rates fixed for such series. No dividend may be declared and
paid or set apart for payment for Preferred Stock of any other series unless at
the same time a dividend in like proportion to the dividends accrued upon the
Preferred Stock of each other series is declared and paid or set apart for
payment, as the case may be, on the New Preferred Stock and the Preferred Stock
of each other series having provisions for cumulative dividends then
outstanding. Accruals of dividends on the New Preferred Stock will not bear
interest.
Each dividend on the New Preferred Stock will be paid when, as and if
declared by the Board of Directors to the holders of record of shares of the New
Preferred Stock as they appear on the stock
14
<PAGE> 15
register of Energy on such record date, not exceeding 30 days preceding the
payment date thereof, as is fixed by the Board of Directors. Dividends on
account of arrears for any past quarterly dividend period may be declared and
paid at any time, without reference to any regular dividend payment date, to
holders of record on such date, not exceeding 45 days preceding the payment date
thereof, as may be fixed by the Board of Directors.
OPTIONAL REDEMPTION
Shares of the New Preferred Stock will not be redeemable prior to June 1,
1997. The shares of New Preferred Stock will be redeemable at the option of
Energy, in whole or in part, at any time or from time to time, out of funds
legally available therefor, on or after June 1, 1997, at the redemption prices
per share of New Preferred Stock set forth below during the 12-month periods
beginning on June 1 of the years shown below, plus in each case an amount equal
to accrued and unpaid dividends, if any, to (and including) the redemption date,
whether or not earned or declared (the "Redemption Price").
<TABLE>
<CAPTION>
PRICE
PER
YEAR SHARE
- ---- --------
<S> <C>
1997.............................. $ 52.188
1998.............................. 51.875
1999.............................. 51.563
2000.............................. 51.250
<CAPTION>
PRICE
PER
YEAR SHARE
- ---- --------
<S> <C>
2001.............................. $ 50.938
2002.............................. 50.625
2003.............................. 50.313
2004 and thereafter............... 50.000
</TABLE>
In case of the redemption of only part of the New Preferred Stock at the
time outstanding, at the option of the Board of Directors of Energy such
redemption may be made pro rata or the shares to be redeemed will be chosen by
lot in such manner as may be prescribed by the Board of Directors.
Notice of any proposed redemption of New Preferred Stock shall be given by
Energy by mailing a copy of such notice at least 30 days prior to the date fixed
for such redemption to each holder of record of the shares to be redeemed at its
address appearing on the books of Energy. If on or before the redemption date
specified in such notice all funds necessary for such redemption shall have been
set aside by Energy, separate and apart from its other funds, in trust for the
pro rata benefit of the holders of the shares so called for redemption, so as to
be available therefor, then from and after the date of redemption so designated,
notwithstanding that any certificate representing shares of New Preferred Stock
so called for redemption shall not have been surrendered for cancellation, the
shares represented thereby shall no longer be deemed outstanding, the right to
receive dividends thereon shall cease to accrue and all rights with respect to
such shares of New Preferred Stock so called for redemption shall forthwith on
such redemption date cease and terminate, except only the right of the holders
thereof to receive the redemption price of such shares so to be redeemed plus
accrued and unpaid dividends up to the date fixed for redemption, but without
interest thereon. Energy may, however, prior to the redemption date specified in
the notice of redemption, deposit in trust for the account of the holders of the
shares of New Preferred Stock to be redeemed with a bank or trust company all
funds necessary for such redemption together with irrevocable written
instructions authorizing such bank or trust company, on behalf and at the
expense of Energy, to cause the notice of redemption to be mailed as herein
provided.
So long as any shares of New Preferred Stock are outstanding, Energy may
not purchase, redeem or otherwise acquire for value any shares of Preferred
Stock (other than the purchase or redemption of Preferred Stock acquired in
exchange for or out of the proceeds of the issue of Preferred Stock or junior
stock) during the continuance of any default in the payment of dividends on the
New Preferred Stock.
All shares of New Preferred Stock redeemed pursuant to the optional
redemption provisions will be retired and restored to the status of authorized
and unissued shares of Preferred Stock undesignated as to series. Such shares
may not be reissued as shares of New Preferred Stock but may be reissued as
shares of another series of Preferred Stock.
For information regarding restrictions on the payment of dividends and
other "restricted disbursements", see "Dividends and Price Range of the Common
Stock."
15
<PAGE> 16
CONVERSION RIGHTS
Each share of the New Preferred Stock is convertible, at the option of the
holder thereof, into Common Stock at the initial conversion price and equivalent
conversion rate set forth on the front cover of this Prospectus. See "Dividends
and Price Range of the Common Stock" for information regarding recent sales
prices of the Common Stock. For purposes of conversion, each share of the New
Preferred Stock shall be valued at $50.00 per share, which shall be divided by
the then current conversion price to determine the number of shares of Common
Stock issuable upon conversion (the conversion rate). No fractional shares will
be issued upon conversion, but any fractions will be settled in cash. If more
than one share of New Preferred Stock is surrendered for conversion, the values
of all such shares surrendered by the same holder for conversion will be
aggregated in determining the number of shares of Common Stock and the payment,
if any, in lieu of fractional shares that a holder of New Preferred Stock will
receive upon conversion. Upon conversion, no payment or allowance will be made
in respect of any accrued dividends on the New Preferred Stock or in respect of
any dividends which may have been declared on the Common Stock. The right of
conversion with respect to shares of the New Preferred Stock called for
redemption will terminate at the close of business on the fifth trading day
prior to the date fixed for redemption. Holders of New Preferred Stock that is
converted into Common Stock will be treated for all purposes, including the
determination of stockholders entitled to receive dividends on such New
Preferred Stock or to receive notice of and to vote at any meeting of
stockholders, as holders of record of Common Stock as of the date on which
shares of New Preferred Stock are surrendered for conversion. However, in the
event of a notice of redemption being issued prior to June 1, 1997, holders of
the shares of New Preferred Stock called for redemption as of the record date
for the June 1, 1997 dividend would be entitled to that dividend, irrespective
of whether conversion into the Common Stock had occurred prior to the dividend
payment date.
The conversion price shall be subject to adjustment if Energy shall (i) pay
a stock dividend or stock dividends or otherwise make a distribution or
distributions on shares of its capital stock payable in shares of its Common
Stock or other capital stock, (ii) subdivide outstanding shares of Common Stock
into a larger number of shares, (iii) combine outstanding shares of Common Stock
into a smaller number of shares, (iv) issue by reclassification of shares of
Common Stock any shares of capital stock of Energy of any class or classes, (v)
issue rights or warrants to all holders of Common Stock entitling them (for a
period expiring within 45 days after the record date for determining the holders
entitled to receive such rights or warrants) to subscribe for or purchase shares
of Common Stock at a price per share less than the average of the closing prices
of the Common Stock for the 20 consecutive trading days ending on the last
trading day prior to such record date, or (vi) distribute to all holders of
Common Stock evidences of its indebtedness or assets (excluding cash dividends
or cash distributions paid out of earned surplus) or rights to subscribe (except
as described in clause (v) above), and shall also be subject to adjustment if
the Distribution Date with respect to the Preference Share Purchase Rights shall
occur. See "Description of the Preference Share Purchase Rights." There will be
no upward adjustment in the conversion price, except in the event of a reverse
stock split or if rights or warrants the issuance of which previously resulted
in an adjustment in the conversion price were to expire unexercised. Energy is
not required to make adjustments of less than 1% in the conversion price, but
any adjustment that would otherwise be required to be made will be taken into
account in the computation of any subsequent adjustment. In the case of certain
mergers, consolidations or sales or transfer of assets of Energy, holders of the
New Preferred Stock shall have the right to convert such shares only into the
kind and amount of securities and other property receivable by holders of Common
Stock in connection with any such transaction.
Whenever the conversion price is adjusted, Energy will mail to each holder
of record of New Preferred Stock a notice setting forth the conversion price
after such adjustment and a brief statement of the facts requiring such
adjustment. Such notice prepared in good faith will be conclusive evidence of
the correctness of such adjustment absent manifest error. In addition, if Energy
shall declare a dividend or any other distribution on its Common Stock (payable
otherwise than in cash out of earned surplus), declare a special nonrecurring
cash dividend on or a redemption of its Common Stock, authorize the granting of
rights or warrants to holders of its Common Stock, or enter into a merger,
consolidation or
16
<PAGE> 17
transfer of assets or undertake a reclassification of its Common Stock for which
stockholder approval is required, or in the event of the voluntary or
involuntary liquidation of Energy, Energy will mail a notice of such event to
each holder of record of New Preferred Stock, at least 10 days prior to the
record date therefor.
PRIORITY IN EVENT OF LIQUIDATION
In the event of any liquidation, dissolution or winding up of the affairs
of Energy, after payment or provision for payment of the debts and other
liabilities of Energy, the holders of the New Preferred Stock will be entitled
to receive, out of the remaining net assets of Energy, (i) if such liquidation,
dissolution or winding up of the affairs of Energy is involuntary, the amount of
$50 in cash for each share of New Preferred Stock, or, (ii) in the event such
liquidation, dissolution or winding up of the affairs of Energy is voluntary, an
amount in cash per share of New Preferred Stock equal to the Redemption Price
that would apply to an optional redemption of the New Preferred Stock on the
date fixed for distribution, plus in each case an amount equal to all dividends
accrued and unpaid on each such share (whether or not declared) up to the date
fixed for distribution, before any distribution shall be made to the holders of
the Serial Preference Stock or the Common Stock of Energy. If upon any
liquidation, dissolution or winding up of the affairs of Energy, the assets
distributable among the holders of any series of Preferred Stock shall be
insufficient to permit the payment in full to the holders of all series of the
Preferred Stock of all preferential amounts payable to all such holders, then
the entire assets of Energy thus distributable shall be distributed ratably
among the holders of all series of the Preferred Stock in proportion to the
respective amounts that would be payable per share if such assets were
sufficient to permit payment in full.
Neither the merger or consolidation of Energy into or with another
corporation nor the merger of any other corporation into Energy shall be deemed
to be a liquidation, dissolution or winding up of Energy within the meaning of
this provision, but the sale, lease or conveyance of all or substantially all of
Energy's assets will be deemed a liquidation, dissolution or winding up of
Energy within the meaning of this provision.
VOTING RIGHTS
Except under the limited circumstances described below and as required by
applicable law, the holders of New Preferred Stock will have no voting rights.
If and whenever cumulative dividends on any series of Preferred Stock are in
arrears in an amount equal to six full quarterly payments or more per share,
then during the period (hereinafter called the "class voting period") commencing
with such time and ending with the time when all arrears in dividends on all the
Preferred Stock shall have been paid and the full dividend on all the Preferred
Stock for the then current quarterly dividend period shall have been paid or
declared and set apart for payment, the holders of all such series of Preferred
Stock, voting together as a class, will be entitled to elect two members of the
Board of Directors of Energy and each share of Preferred Stock will be entitled
to one vote. At any election of directors held during a class voting period,
holders of shares of the Preferred Stock will be entitled to cumulate their
votes. The term of any director so elected shall expire at the end of the class
voting period.
Energy may not, without the consent of the holders of at least two-thirds
of the total number of shares of Preferred Stock at the time outstanding, (a)
create or authorize any shares of any class of stock ranking prior to the
Preferred Stock in respect of dividends or distributions of assets on
liquidation of Energy (hereinafter sometimes referred to as "prior stock") or
any securities convertible into any such prior stock; or (b) amend, alter or
repeal any of the rights, preferences or powers of the holders of Preferred
Stock so as to affect adversely any such rights, preferences or powers;
provided, however, that if such amendment, alteration or repeal affects
adversely the rights, preferences or powers of one or more, but not all, series
of Preferred Stock at the time outstanding, only the consent of the holders of
at least two-thirds of the total number of shares of all series so affected are
required.
In addition, Energy may not, without the consent of the holders of at least
a majority of the total number of shares of the Preferred Stock at the time
outstanding, create or authorize any shares of any
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class of stock ranking on a parity with the Preferred Stock in respect of
dividends or distributions of assets on liquidation of Energy (hereinafter
sometimes referred to as "parity stock") or any securities convertible into any
such parity stock may not merge or consolidate into or with any other
corporation or sell or otherwise dispose of all or substantially all of Energy's
assets nor may any other corporation be merged into Energy. However, no such
consent is required in connection with a merger or consolidation which does not,
under applicable statutes, require any vote of the stockholders of Energy.
PREFERENCE SHARE PURCHASE RIGHTS
Each share of Common Stock issued upon conversion prior to the time the
Preference Share Purchase Rights detach from the Common Stock and become
separately tradable (or such earlier time as the Preference Share Purchase
Rights expire or are redeemed) will be issued with an associated Preference
Share Purchase Right. The Preference Share Purchase Rights are not currently
tradeable separately from and are evidenced by the certificate for shares of the
Common Stock. Unless the context indicates otherwise, all references to "Common
Stock" in this Prospectus include the Common Stock and the Preference Share
Purchase Rights trading therewith. For additional information regarding the
Preference Share Purchase Rights, see "Description of the Preference Share
Purchase Rights."
NEW YORK STOCK EXCHANGE LISTING
The New Preferred Stock has been approved for listing on the New York Stock
Exchange.
MISCELLANEOUS
The New Preferred Stock, when issued and paid for, will be fully paid and
nonassessable. The New Preferred Stock has no preemptive rights and is not
subject to any sinking fund.
Energy, in its capacity as a registered transfer agent, will act as
Transfer Agent and Registrar for the New Preferred Stock. Energy will also act
as paying agent for the New Preferred Stock. Energy will appoint Norwest Trust
Company, New York, New York, as its agent for receipt and delivery of shares of
the New Preferred Stock in The City of New York, the Borough of Manhattan.
DESCRIPTION OF THE COMMON STOCK
The authorized Common Stock of Energy consists of 75,000,000 shares, $1.00
par value. At February 14, 1994, there were 43,334,901 shares of Common Stock
issued and outstanding. After the requirements with respect to preferential
dividends upon any outstanding Preferred Stock (including the New Preferred
Stock) and Serial Preference Stock have been met, the holders of the Common
Stock shall be entitled to receive such dividends as may be declared from time
to time by the Board of Directors. For information regarding restrictions on
payments of dividends, see "Dividends and Price Range of the Common Stock." Each
share of Common Stock shall entitle the holder thereof to one vote for each
share held. At present, the Common Stock trades with the Preference Share
Purchase Rights. See "Description of the Preference Share Purchase Rights."
In the event of any liquidation of Energy, after the holders of the
Preferred Stock of each series, the Serial Preference Stock of each series and
any other class of stock ranking prior to the Common Stock in respect of
distributions of assets on liquidation of Energy shall have been paid in full
the amount to which they respectively shall be entitled or a sum sufficient for
such payment in full shall have been set apart, the remaining net assets of
Energy shall be distributed pro rata to the holders of the Common Stock in
accordance with their respective rights and interests, to the exclusion of the
holders of the Preferred Stock, the Serial Preference Stock and any other such
class of stock ranking prior to the Common Stock.
The Restated Certificate of Incorporation of Energy provides for cumulative
voting and provides that directors are to be elected in three classes of as
nearly an equal number as possible for terms of three years. As a result, a
person acquiring a majority of the Common Stock may be unable to promptly gain
control of Energy's Board of Directors. In general, the Restated Certificate of
Incorporation also requires
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the affirmative vote of holders of 80% of the voting stock of Energy prior to
any merger, consolidation, sale or lease of all or substantially all of the
assets of Energy or certain other transactions involving the issuance of the
securities of Energy and involving any person beneficially owning 5% or more of
any class or series of voting stock of Energy. The voting requirement is not
applicable to certain transactions, including those that are approved by
Energy's Board of Directors prior to such person becoming such a beneficial
owner. The foregoing provisions may have certain anti-takeover effects in that a
person gaining voting control of Energy may be prevented from or delayed in
taking actual control. For purposes of the provision of the Restated Certificate
of Incorporation described above, "voting stock" would mean all stock entitled
to vote in an election of directors at the time the determination is being made.
Accordingly, New Preferred Stock does not constitute "voting stock" unless, at
the time the determination is being made, the New Preferred Stock is entitled to
vote for the election of two directors, as described above.
Energy's Restated Certificate of Incorporation also contains a provision
that limits the liability of Energy's directors, as permitted by the Delaware
General Corporation Law. The provision eliminates the personal liability of
directors to Energy and its stockholders for monetary damages for breaches of
their fiduciary duty of care. As a result, stockholders may be unable to recover
monetary damages against directors for negligent or grossly negligent acts or
omissions in violation of their duty of care. The provision does not change the
liability of a director for breach of his duty of loyalty to Energy or to
stockholders, acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, the declaration or payment of
dividends or improper repurchases, or redemptions of Energy's stock in violation
of Delaware law or in respect of any transaction from which a director received
an improper personal benefit.
As a Delaware corporation, Energy is subject to Section 203 of the Delaware
General Corporation Law. In general, Section 203 prevents an "interested
stockholder" (defined generally as a person owning 15% or more of a
corporation's outstanding voting stock) from engaging in a "business
combination" (as defined) with a Delaware corporation for three years following
the date such person became an interested stockholder unless (i) before such
person became an interested stockholder, the board of directors of the
corporation approved the transaction in which the interested stockholder became
an interested stockholder or approved the business combination; (ii) upon
consummation of the transaction that resulted in the interested stockholder
becoming an interested stockholder, the interested stockholder owns at least 85%
of the voting stock of the corporation outstanding at the time the transaction
commenced (excluding stock held by directors who are also officers of the
corporation and by employee stock plans that do not provide employees with the
right to determine confidentially whether shares held subject to the plan will
be tendered in a tender or exchange offer); or (iii) following the transaction
in which such person became an interested stockholder, the business combination
is approved by the board of directors of the corporation and authorized at a
meeting of stockholders by the affirmative vote of the holders of at least
two-thirds of the outstanding voting stock of the corporation not owned by the
interested stockholder. Under Section 203, the restrictions described above also
do not apply to certain business combinations proposed by an interested
stockholder following the announcement or notification of one of certain
extraordinary transactions involving the corporation and a person who had not
been an interested stockholder during the previous three years or who became an
interested stockholder with the approval of a majority of the corporation's
directors, if such extraordinary transaction is approved or not opposed by a
majority of the directors who were directors prior to any person's becoming an
interested stockholder during the previous three years or were recommended for
election or elected to succeed such directors by a majority of such directors.
For purposes of Section 203, "voting stock" means stock entitled to vote
generally in elections for the board of directors.
The Common Stock has no preemptive, redemption or conversion rights.
Energy, in its capacity as a registered transfer agent, acts as Transfer
Agent and Registrar for the Common Stock. Energy also acts as paying agent for
the Common Stock upon the declaration of any dividend. Energy has appointed
Norwest Trust Company, 3 New York Plaza, 15th Floor, New York, New York, 10004
as its agent for receipt and delivery of shares of Common Stock in The City of
New York, the Borough of Manhattan.
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DESCRIPTION OF THE PREFERENCE SHARE PURCHASE RIGHTS
On November 25, 1985, Energy's Board of Directors declared a dividend
distribution of one Preference Share Purchase Right for each outstanding share
of Common Stock to the stockholders of record on that date. In addition, the
Board determined that each authorized but then unissued share of Common Stock
issued on or after such date and prior to the Distribution Date (as defined
below) would also be accompanied by a Preference Share Purchase Right. Each
Preference Share Purchase Right entitles the registered holder to purchase from
Energy 1/100 of a share of a series of the Serial Preference Stock of Energy
designated as Junior Participating Serial Preference Stock, Series II, $1.00 par
value (the "Junior Preference Stock"), at a price of $35 per 1/100 of a share of
Junior Preference Stock (the "Purchase Price"). The complete description and
terms of the Preference Share Purchase Rights are set forth in an Amended and
Restated Rights Agreement, dated as of October 17, 1991 (the "Rights
Agreement"), between Energy and Ameritrust Texas N.A., as successor Rights Agent
(the "Rights Agent"), which has been incorporated by reference as an exhibit to
the Registration Statement. The following statements are summaries of certain
provisions relating to the Preference Share Purchase Rights, do not purport to
be complete, and are qualified in their entirety by reference to the Rights
Agreement.
An aggregate of 500,000 shares of Junior Preference Stock have been
authorized for issuance. The Junior Preference Stock issuable upon exercise of
the Preference Share Purchase Rights is nonredeemable, and is subordinate to
Energy's Preferred Stock but prior to the Common Stock as to dividends and
distributions of assets upon liquidation. Each share of the Junior Preference
Stock will have a minimum cumulative quarterly dividend rate of $25 per share,
but will be entitled to an aggregate dividend of 100 times any dividend declared
per share of Common Stock. In the event of a liquidation, holders of the Junior
Preference Stock would receive a minimum liquidation payment of $100 per share,
but if any liquidation payment is made with respect to the Common Stock, the
holders of the Junior Preference Stock would be entitled to receive an aggregate
liquidation payment equal to 100 times the payment made per share of Common
Stock. Each share of Junior Preference Stock will have 100 votes, voting
together as a class with the Common Stock and the Series A Preferred Stock, but
will have no separate voting rights in the event of a dividend arrearage. In the
event of a merger, consolidation or other transaction in which Common Stock is
exchanged, each share of Junior Preference Stock will be entitled to receive 100
times the amount received per share of Common Stock.
Until the earlier to occur of (i) 10 days following a public announcement
that a person or group of affiliated or associated persons (the "Acquiring
Person") has acquired, or obtained the right to acquire, beneficial ownership of
20% or more of the outstanding Common Stock of Energy or (ii) 10 days (or such
later date as may be determined by the Board of Directors prior to such time as
any person becomes an Acquiring Person) following the commencement or
announcement of an intention to make a tender offer or exchange offer which
would result in any person becoming the beneficial owner of 20% or more of such
outstanding Common Stock (the earlier of such dates being called the
"Distribution Date"), the Preference Share Purchase Rights will automatically
trade with and be evidenced by the certificates for the Common Stock. Until the
Distribution Date (or the earlier redemption or expiration of the Preference
Share Purchase Rights), the surrender for transfer of any certificates for
Common Stock will also constitute the transfer of the Preference Share Purchase
Rights associated with the Common Stock represented by such certificate. As soon
as practicable following the Distribution Date, separate certificates evidencing
the Preference Share Purchase Rights ("Right Certificates") will be mailed to
holders of record of the Common Stock as of the close of business on the
Distribution Date and such separate Right Certificates alone will then evidence
the Preference Share Purchase Rights. The Rights Agreement may be amended by the
Board of Directors prior to the time an Acquiring Person becomes such so as to
reduce the 20% thresholds described above to not less than 10%.
Except as described below, in the event any person becomes an Acquiring
Person, each holder of a Preference Share Purchase Right (other than the
Acquiring Person) shall thereafter have the right to receive, upon the exercise
thereof at the then current exercise price of the Preference Share Purchase
Right, that number of shares of Common Stock which, at the time of exercise,
would have a market value
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of two times the exercise price of the Preference Share Purchase Right. In the
event that Energy is involved in a merger or other business combination where
Energy is not the surviving corporation or where the Common Stock is changed or
exchanged or in a transaction where 50% or more of Energy's consolidated assets
or earning power are sold or transferred, proper provisions will be made so that
each holder of a Preference Share Purchase Right will thereafter have the right
to receive, upon the exercise thereof at the then current exercise price of the
Preference Share Purchase Right, that number of shares of common stock of the
acquiring company which at the time of such transaction would have a market
value of two times the exercise price of the Preference Share Purchase Right. At
any time after an Acquiring Person becomes such, and prior to such time as the
Acquiring Person (together with all affiliates and associates of such Acquiring
Person) becomes the beneficial owner of 50% or more of the Common Stock then
issued and outstanding, the Board of Directors of Energy may exchange the
outstanding and exercisable Preference Share Purchase Rights for Common Stock at
an exchange ratio of one share of Common Stock per Preference Share Purchase
Right, subject to adjustment as described below.
The Preference Share Purchase Rights will have certain anti-takeover
effects. The Preference Share Purchase Rights will cause substantial dilution to
a person or group that attempts to acquire Energy on terms not approved by
Energy's Board of Directors, except pursuant to an offer conditioned on a
substantial number of Preference Share Purchase Rights being acquired. The
Preference Share Purchase Rights should not interfere with any merger or other
business combination approved by the Board of Directors since the Preference
Share Purchase Rights may be redeemed by Energy at $.05 per Preference Share
Purchase Right prior to the time that any Acquiring Person becomes such and may
be exchanged for Common Stock as described herein.
The Preference Share Purchase Rights are not exercisable until the
Distribution Date. The Preference Share Purchase Rights will expire on November
25, 1995, unless earlier redeemed by Energy as described in the Rights
Agreement. The Purchase Price payable, and the number of Preference Shares or
other securities or property issuable, upon exercise of the Preference Share
Purchase Rights are subject to adjustment from time to time to prevent dilution,
as specified in the Rights Agreement.
Until a Preference Share Purchase Right is exercised, the holder thereof,
as such, will have no rights as a stockholder of Energy, including, without
limitation, the right to vote or to receive dividends.
Additional information regarding the Preference Share Purchase Rights is
set forth in Energy's Registration Statement on Form 8-A under the Exchange Act,
dated November 25, 1985, as amended April 27, 1990, June 7, 1990 and October 17,
1991 (Commission File No. 1-4718), which is incorporated by reference herein.
DESCRIPTION OF OTHER EQUITY SECURITIES
The following statements are summaries of certain provisions relating to
the Preferred Stock and Serial Preference Stock of Energy. The complete
designations, rights and preferences of these securities are contained in the
Restated Certificate of Incorporation of Energy and the Certificate of
Designation, which are filed as Exhibits to the Registration Statement. Such
summaries do not purport to be complete, and for a full and complete statement
of the provisions thereof, reference is hereby made to such Exhibits. Such
summaries are qualified in their entirety by such reference.
Energy is authorized by its Restated Certificate of Incorporation to issue
20,000,000 shares of Preferred Stock and 10,000,000 shares of Serial Preference
Stock, each issuable in series. At February 14, 1994, there were 138,000 shares
of Series A Preferred Stock issued and outstanding. An additional 552,000 shares
of Series A Preferred Stock are held by a subsidiary of Energy. Such shares are
not considered outstanding for purposes of voting but are considered outstanding
for purposes of applying the sinking fund provisions discussed below. No shares
of any other series of Preferred Stock are outstanding. No shares of any series
of Serial Preference Stock are currently issued and outstanding.
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The Board of Directors has authority to divide the Preferred Stock and
Serial Preference Stock into one or more series and has broad authority to fix
and determine the relative rights and preferences of the shares of each such
series. Preferred Stock or Serial Preference Stock redeemed or otherwise retired
will assume the status of authorized but unissued shares. However, shares of
Series A Preferred Stock redeemed pursuant to the optional or mandatory
redemption provisions described below may not be reissued.
The outstanding Preferred Stock has preference over the Serial Preference
Stock and the Common Stock as to dividends and distribution of assets upon
liquidation. If Energy has not met the requirements for dividend payments or for
any sinking fund created with respect to any series of the Preferred Stock,
dividends may not be paid on the Serial Preference Stock or on the Common Stock.
Similarly, if Energy has not met the requirements for dividend payments or any
sinking fund requirements created with respect to any series of the Serial
Preference Stock, dividends may not be paid on the Common Stock. The holders of
Series A Preferred Stock are entitled to one vote for each share held. Except as
otherwise provided in the Restated Certificate of Incorporation, the Series A
Preferred Stock and Common Stock vote together as a class on all matters voted
on by the stockholders, including the election of directors.
Whenever dividends on the Preferred Stock are in arrears in an amount equal
to or exceeding six quarterly dividends, then during the period commencing with
such time and ending with the time when all arrears in dividends on the
Preferred Stock have been paid and the full dividend on all series of the
Preferred Stock for the then current quarterly dividend period has been paid or
set apart for payment, the holders of the Preferred Stock, voting together as a
class, are entitled (in addition to the Series A Preferred Stock voting together
with the Common Stock as a class) to elect two directors, with each share of
Preferred Stock entitling the holder thereof to one vote.
The dividend rate on the Series A Preferred Stock is cumulative and payable
at the rate of $8.50 per share per annum. The Series A Preferred Stock is
redeemable, in whole or in part, at the option of Energy at $105.50 per share
prior to December 1, 1994, and at prices decreasing $0.50 annually to $100 after
November 30, 2004. Energy is required to redeem 57,500 shares (only 11,500
shares of which relate to shares that are currently issued and outstanding and
held by a third party), and may at its option redeem up to an additional 57,500
shares, of Series A Preferred Stock on December 1 of each year. Such mandatory
redemptions are made at the price of $100 per share of Series A Preferred Stock.
In the event of a liquidation of Energy, holders of the Series A Preferred Stock
are entitled to receive, if the liquidation is voluntary, the amount they would
have been entitled to receive had Energy then voluntarily redeemed the Series A
Preferred Stock, or, if the liquidation is involuntary, $100 per share, plus in
each case an amount equal to the amount of accrued and unpaid dividends to date
of liquidation.
Certain actions by Energy which do not require the consent of holders of
Preferred Stock of all series or of the New Preferred Stock, do require the
consent of holders of the Series A Preferred Stock voting as a separate class.
Without the consent of the holders of at least two-thirds of the total number of
shares of Series A Preferred Stock outstanding, Energy may not issue any shares
of prior stock or issue any debt obligations convertible into prior stock if, as
of the time of any such issue, after giving effect thereto and to the
application of proceeds therefrom:
(a) The net earnings of Energy available for dividends (as defined in
the Restated Certificate of Incorporation) for a period of twelve
consecutive calendar months out of the fifteen months immediately preceding
such issue amount to less than 1 1/2 times the annual dividend requirements
on all then outstanding shares of Preferred Stock, prior stock and parity
stock (assuming conversion of all debt obligations convertible into any
such stock); or
(b) The net assets of Energy amount to less than 150% of the amount to
which holders of all then outstanding Preferred Stock, prior stock and
parity stock (assuming conversion of all debt obligations convertible into
any such stock) would be entitled upon the involuntary liquidation of
Energy.
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In addition, without the consent of the holders of at least a majority of
the total number of shares of Series A Preferred Stock outstanding, Energy may
not issue any additional shares of Preferred Stock (other than Preferred Stock
issued in exchange for Series A Preferred Stock or Preferred Stock the proceeds
of which are used to redeem or repurchase Series A Preferred Stock) or parity
stock or issue any debt obligations convertible into Preferred Stock or parity
stock if, as of the time of any such issue, after giving effect thereto and to
the application of proceeds therefrom:
(a) The net earnings of Energy available for dividends for a period of
twelve consecutive calendar months out of the fifteen months immediately
preceding such issue amount to less than 1 1/2 times the annual dividend
requirements on all then outstanding shares of Preferred Stock, prior stock
and parity stock (assuming conversion of all debt obligations convertible
into any such stock); or
(b) The net assets of Energy amount to less than 150% of the amount to
which holders of all then outstanding Preferred Stock, prior stock and
parity stock (assuming conversion of all debt obligations convertible into
any such stock) would be entitled upon the involuntary liquidation of
Energy.
CERTAIN U.S. FEDERAL INCOME TAX CONSEQUENCES
The following discussion is a summary of certain U.S. federal income tax
considerations relevant to the purchase, ownership and disposition of the New
Preferred Stock but does not purport to be a complete analysis of all the
potential tax effects thereof. The discussion is limited to U.S. federal income
tax matters, and is based upon the Internal Revenue Code of 1986, as amended
(the "Code"), Treasury regulations, and Internal Revenue Service ("IRS") rulings
and judicial decisions now in effect, all of which are subject to change at any
time, possibly with retroactive effect, by legislative, judicial or
administrative action. Except as otherwise indicated, references to Common Stock
are to the Common Stock issuable upon conversion of New Preferred Stock.
The information provided herein is directed to investors who will hold the
New Preferred Stock and the Common Stock issuable upon conversion of the New
Preferred Stock as a "capital asset" within the meaning of Section 1221 of the
Code. In addition, the tax consequences to a particular holder (including life
insurance companies, tax exempt organizations, financial institutions, dealers
in securities, foreign corporations and nonresident alien individuals) may be
affected by matters not discussed herein.
This discussion represents the opinion of Fulbright & Jaworski L.L.P.,
counsel to the Company, insofar as concerns conclusions of law, as to the
principal U.S. federal income tax consequences of the purchase, ownership and
disposition of the New Preferred Stock. The opinion is subject to the
assumptions and limitations set forth herein. In providing such opinion, counsel
have relied upon the accuracy of certain factual information which (i) is set
forth in this Prospectus, (ii) is contained in other documents filed by the
Company with the Commission and incorporated by reference herein (see
"Incorporation of Certain Documents by Reference"), (iii) is contained in
corporate records of the Company, or (iv) has otherwise been provided by
representatives of the Company. The Company has not sought, nor does it intend
to seek, a ruling from the IRS as to any of the matters covered by the
discussion, and there can be no assurance that the IRS will not successfully
challenge certain of the conclusions reached in the discussion. BECAUSE THE
FEDERAL INCOME TAX CONSEQUENCES DISCUSSED BELOW DEPEND UPON EACH HOLDER'S
PARTICULAR TAX STATUS, AND DEPEND FURTHER UPON FEDERAL INCOME TAX LAWS,
REGULATIONS, RULINGS AND DECISIONS WHICH ARE SUBJECT TO CHANGE (WHICH CHANGES
MAY BE RETROACTIVE IN EFFECT), PROSPECTIVE INVESTORS SHOULD CONSULT THEIR OWN
TAX ADVISORS REGARDING THE PARTICULAR TAX CONSEQUENCES OF AN INVESTMENT IN THE
NEW PREFERRED STOCK INCLUDING, BUT NOT LIMITED TO, THE APPLICATION AND EFFECT OF
ANY STATE, LOCAL, FOREIGN AND OTHER TAX LAWS, AS WELL AS THE CONSEQUENCES OF ANY
RECENT, PENDING OR PROPOSED CHANGES IN THE APPLICABLE TAX LAWS.
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DIVIDENDS ON THE NEW PREFERRED STOCK
Distributions by the Company with respect to the New Preferred Stock will
be characterized as dividends taxable as ordinary income to the extent of the
Company's current or accumulated earnings and profits, if any, as determined for
federal income tax purposes. To the extent that a distribution on the New
Preferred Stock to a holder exceeds the holder's allocable share of the
Company's current and accumulated earnings and profits, such distribution first
will be treated as a return of capital that will reduce the holder's adjusted
tax basis in such New Preferred Stock, and the excess will be taxed as a capital
gain and will be long-term capital gain if the holder's holding period for such
New Preferred Stock is more than one year.
The availability of accumulated earnings and profits or current earnings
and profits, if any, in future years will depend primarily on future profits and
losses which cannot be accurately predicted. Thus, there can be no assurance
that all or any portion of a distribution on the New Preferred Stock will be
characterized as a dividend for federal income tax purposes. For the remainder
of this discussion, the term "dividends" refers to a distribution paid entirely
out of the Company's current or accumulated earnings and profits, unless the
context otherwise requires.
Dividends received by corporate holders of New Preferred Stock which own
less than 20 percent, by vote or value, of all outstanding stock of the Company
(excluding certain nonconvertible preferred stock) will qualify for the 70
percent dividends received deduction provided by Section 243(a)(1) of the Code
if the holding period and other requirements for such deduction are met, subject
to the limitations in Sections 246 and 246A of the Code. Under Section 246(b) of
the Code, the aggregate dividends received deduction allowed to such a corporate
holder of the New Preferred Stock may not exceed 70 percent of the taxable
income (with certain adjustments) of the corporate stockholder. Under Section
246(c) of the Code, the 70 percent dividends received deduction will not be
available with respect to any dividends with respect to New Preferred Stock that
is held for 45 days or less (90 days or less in the case of dividends which are
attributable to a period or periods aggregating more than 366 days). The length
of time that a stockholder will be deemed to have held the New Preferred Stock
for this purpose will be reduced for periods during which the stockholder's risk
of loss with respect to the stock is diminished by reason of the existence of
certain options, contracts to sell, short sales or similar transactions.
Moreover, the 70 percent dividends received deduction will not be available if
the taxpayer is under an obligation to make related payments with respect to a
position in substantially similar or related property. On May 27, 1993, the IRS
issued Proposed Treasury Regulation sec. 1.246-5, which among other things,
contains definitions for "diminished risk of loss" and "substantially similar or
related property." This regulation generally will become effective for dividends
received after the date that the regulation is published in final form in the
Federal Register on stock acquired after July 18, 1984 but will apply
retroactively to certain specified transactions, including a short sale of
common stock when the taxpayer holds convertible preferred stock of the same
issuer and the price changes of the common stock and the convertible preferred
stock are related. Section 246A of the Code may proportionately reduce the
percentage of the 70 percent dividends received deduction available to a
corporate holder that incurs indebtedness (including the proceeds from a short
sale) "directly attributable" to a "portfolio stock" investment in another
company (such as the New Preferred Stock). In addition, for purposes of
computing its alternative minimum tax liability, a corporate holder may, in
general, be required to include in its alternative minimum taxable income a
portion of any dividends received deduction allowed in computing regular taxable
income.
Section 1059 of the Code will require a corporate holder to reduce (but not
below zero) its basis in the New Preferred Stock by the "nontaxed portion" of
any "extraordinary dividend" if the holder has not held the New Preferred Stock
subject to a risk of loss for more than two years before the date the Company
declares, announces, or agrees to, the amount or payment of such dividend,
whichever is earliest. If the nontaxed portion of all extraordinary dividends
exceeds the holder's basis in the New Preferred Stock, the excess will be
treated as taxable gain at the time of disposition of the stock. Generally, the
nontaxed portion of an extraordinary dividend is the amount excluded from income
under Section 243 of the Code (relating to the dividends received deduction). An
extraordinary dividend on
24
<PAGE> 25
preferred stock, such as the New Preferred Stock, is a dividend that (i) equals
or exceeds 5 percent of the holder's adjusted tax basis in the stock (reduced
for this purpose by the nontaxed portion of any prior extraordinary dividend),
treating all dividends having ex-dividend dates within an 85-day period as one
dividend, or (ii) exceeds 20 percent of the holder's adjusted tax basis in the
stock, treating all dividends having ex-dividend dates within a 365-day period
as one dividend. An extraordinary dividend would also include any amount treated
as a dividend in the case of a redemption that is either non-pro rata as to all
stockholders or in partial liquidation of the Company, regardless of the
relative size of the dividend and regardless of the corporate holder's holding
period for the New Preferred Stock. A stockholder may elect to determine whether
a dividend on the New Preferred Stock is extraordinary by reference to the fair
market value of the stock on the day before the ex-dividend date (rather than by
reference to the stockholder's adjusted tax basis) for purposes of the 5 percent
or 20 percent tests described above if the holder is able to establish the fair
market value of the New Preferred Stock as of such date to the satisfaction of
the IRS.
Under Section 1059(e)(3) of the Code, the extraordinary dividend rules may
not apply with respect to "qualified preferred dividends." A qualified preferred
dividend is any fixed dividend payable with respect to preferred stock which (i)
provides for fixed preferred dividends payable no less often than annually and
(ii) is not in arrears as to dividends when acquired, provided the actual rate
of return, as determined under Section 1059(e)(3) of the Code, on such stock
does not exceed 15 percent. Where a qualified preferred dividend exceeds the 5
percent (or 20 percent) threshold for extraordinary dividend status described
above, (i) the extraordinary dividend rules will not apply if the taxpayer holds
the stock for more than five years, and (ii) if the taxpayer disposes of the
stock before it has been held for more than five years, the aggregate reduction
in basis cannot exceed the excess of the qualified preferred dividends paid on
such stock during the period held by the taxpayer over the qualified preferred
dividends which would have been paid during such period on the basis of the
stated rate of return, as determined under Section 1059(e)(3) of the Code. The
length of time that a taxpayer is deemed to have held stock for purposes of
Section 1059 of the Code is determined under principles similar to those
contained in Section 246(c) of the Code discussed above.
CONVERSION OF NEW PREFERRED STOCK INTO COMMON STOCK
Except in certain circumstances where there are dividends in arrears on the
New Preferred Stock, no gain or loss will be recognized upon conversion of New
Preferred Stock solely into shares of Common Stock. However, gain realized upon
the receipt of cash paid in lieu of fractional shares of Common Stock will be
taxed immediately. Except to the extent of cash paid in lieu of fractional
shares of Common Stock and of shares of Common Stock, if any, which are deemed
to be in payment of dividends in arrears, the adjusted tax basis for the shares
of Common Stock received upon the conversion or redemption will be equal to the
adjusted tax basis of the New Preferred Stock converted, and, provided the New
Preferred Stock is held as a capital asset, the holding period of the shares of
Common Stock will include the holding period of the New Preferred Stock
converted.
REDEMPTION PREMIUM
Under Section 305 of the Code and Treasury Regulations currently in force,
if the redemption price of redeemable preferred stock exceeds its issue price,
all or a portion of such excess may constitute an unreasonable redemption
premium and will be includable in ordinary gross income as a dividend (to the
extent of the issuer's current or accumulated earnings and profits) in
accordance with the economic accrual principles of Section 1272 of the Code over
the period during which the preferred stock cannot be redeemed. Under present
law, a premium is considered to be reasonable if it is in the nature of a
penalty for premature redemption and if it does not exceed the amount which the
issuer would be required to pay for such redemption right under market
conditions existing at the time of issuance of the preferred stock. The Company
believes that the redemption premium on the New Preferred Stock satisfies this
standard.
25
<PAGE> 26
The legislative history to statutory amendments to Section 305 in 1990
indicates that the IRS may treat accrued and unpaid dividends on cumulative
preferred stock, like the New Preferred Stock, as a disguised redemption premium
if, at the time of issuance of the stock, there is no intention for dividends to
be paid currently. If accrued and unpaid dividends were treated as a disguised
redemption premium, the holder would be required to accrue such dividends into
income without regard to whether they were paid in cash. While the IRS has not
yet published any regulations on this matter, the Company believes that it has
the requisite intention to pay dividends currently on the New Preferred Stock.
ADJUSTMENT OF CONVERSION PRICE
Pursuant to Section 305(c) of the Code and the Treasury regulations
thereunder, certain adjustments to the conversion price of the New Preferred
Stock, such as adjustments to reflect taxable distributions of cash or property
on any of the outstanding Common Stock of the Company, will be treated as a
constructive distribution of stock and will be treated as a dividend to the
holders of the New Preferred Stock to the extent of the current or accumulated
earnings and profits of the Company. Adjustments to reflect nontaxable stock
splits or distributions of stock, stock warrants or stock rights will, however,
generally not be so treated. The failure to adjust fully the conversion price
for the New Preferred Stock to reflect distributions of stock, stock warrants or
stock rights with respect to the Common Stock may result in a taxable dividend
to holders of the Common Stock.
REDEMPTION OF THE NEW PREFERRED STOCK FOR CASH
Even though, upon the exercise by the Company of its right to redeem the
New Preferred Stock for cash, a holder will surrender his New Preferred Stock to
the Company in return for cash, the transaction may be treated for federal
income tax purposes as a distribution with respect to the stock owned by such
holder taxable as a dividend under Section 301 of the Code to the extent of the
Company's current or accumulated earnings and profits. Such redemption is not
treated as a sale or exchange of the New Preferred Stock redeemed unless the
redeeming holder's interest in the Company is completely terminated by such
transaction or unless (i) the ratio of the voting stock owned by the holder
(including stock attributed to the holder under Section 302(c) of the Code)
immediately after the redemption to all the voting stock of the Company is less
than 80% of the same ratio for the voting stock owned by the holder immediately
before the redemption, (ii) there is a similar percentage reduction in the
ownership by the holder of common stock of the Company and (iii) the holder owns
less than 50% of the voting stock of the Company. If the holder's interest in
the Company is not completely terminated or the tests described in (i), (ii) and
(iii) of the preceding sentence are not satisfied, the transaction will still be
treated for federal income tax purposes as a sale or exchange rather than a
dividend if it is "not essentially equivalent to a dividend"; for example, where
a holder's interest in the Company is minimal (an interest of less than 1%
should satisfy this requirement), the holder exercises no control over the
Company and the holder's interest in the Company is actually reduced as a result
of the redemption. In determining whether a holder's interest in the Company is
actually reduced or completely terminated, the holder is deemed, under the
constructive ownership rules of Section 302(c) of the Code, to own any shares in
the Company owned by certain related persons and entities and any shares which
the holder or certain related persons and entities have an option to acquire. If
a redemption of New Preferred Stock is treated as a distribution taxable as a
dividend, then the holder's tax basis in the redeemed New Preferred Stock will
be transferred to any remaining stock in the Company held by such holder. If the
holder does not retain any stock ownership in the Company, then he may lose such
basis entirely.
A distribution in redemption of New Preferred Stock that is treated as a
dividend probably will also be considered an extraordinary dividend under
Section 1059 of the Code. See "Dividends on New Preferred Stock" above.
If a cash redemption of the New Preferred Stock qualifies as a sale or
exchange for federal income tax purposes, the redeemed holder will recognize
capital gain or loss equal to the difference between the amount of cash received
by such holder from the Company (other than cash which represents the payment of
a previously declared dividend and which will be taxed as a dividend) and the
holder's tax
26
<PAGE> 27
basis in the New Preferred Stock. If the holder holds such stock as a capital
asset, and if the holder's holding period exceeds one year, such capital gain or
loss will be long-term.
BACKUP WITHHOLDING AND INFORMATION REPORTING
General Rules
Under Section 3406 of the Code and applicable Treasury regulations, a
noncorporate holder of New Preferred Stock or Common Stock who is not otherwise
exempt from backup withholding may be subject to backup withholding at a rate of
31 percent with respect to dividends paid on, or the proceeds of a sale or a
exchange of, the New Preferred Stock or the Common Stock. Generally, backup
withholding applies only when the taxpayer (i) fails to furnish or certify his
correct taxpayer identification number to the payor in the manner required, (ii)
is notified by the IRS that he has failed to report payments of interest or
dividends properly or (iii) under certain circumstances, fails to certify that
he has not been notified by the IRS that he is subject to backup withholding for
failure to report interest or dividend payments. Under Treasury regulations
currently in force, backup withholding generally will not apply to dividends
paid with respect to New Preferred Stock or Common Stock to a holder at an
address outside the United States. Holders should consult their tax advisors
regarding their qualification for exemption from backup withholding and the
procedure for establishing any applicable exemption. Any amounts withheld under
the backup withholding rules from a payment to a holder will be allowed as a
refund or a credit against the holder's U.S. federal income tax liability,
provided that the required information is furnished to the IRS.
Sales of New Preferred Stock and Common Stock
Under Treasury regulations currently in force, the payment of the proceeds
of a sale of shares of New Preferred Stock or Common Stock to or through the
United States office of a broker is subject to information reporting and
possible backup withholding at a rate of 31 percent unless the owner establishes
an exemption in the manner required by the IRS. The payment of the proceeds of a
sale of New Preferred Stock or Common Stock to or through the foreign office of
a broker generally will not be subject to backup withholding. However,
information reporting requirements will apply to a payment of proceeds from the
sale of shares of New Preferred Stock or Common Stock through a foreign office
of a broker that is a United States person or a "U.S. related person," unless
the broker has documentary evidence in its files that the owner is a non-United
States holder and the broker has no actual knowledge to the contrary. For this
purpose, a U.S. related person is (i) a "controlled foreign corporation" for
U.S. federal income tax purposes or (ii) a foreign person 50 percent or more of
whose gross income from all sources for certain periods is effectively connected
with the conduct of a United States trade or business.
27
<PAGE> 28
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting
Agreement, Energy has agreed to sell to the Underwriters named below, and each
of the Underwriters has severally agreed to purchase from Energy, the respective
number of shares of New Preferred Stock set forth opposite its name below:
<TABLE>
<CAPTION>
NUMBER
UNDERWRITERS OF SHARES
---------------------------------------------------------------- ---------
<S> <C>
Salomon Brothers Inc ........................................... 1,500,000
Lehman Brothers Inc............................................. 1,500,000
---------
Total................................................. 3,000,000
---------
---------
</TABLE>
In the Underwriting Agreement, the Underwriters have agreed, subject to the
terms and conditions set forth therein, to purchase all the shares of New
Preferred Stock offered hereby (other than those subject to the over-allotment
option described below) if any are purchased. In the event of a default by an
Underwriter, the Underwriting Agreement provides that, in certain circumstances,
the purchase commitments of the non-defaulting Underwriters may be increased or
the Underwriting Agreement may be terminated. The Underwriters have advised
Energy that they propose to offer the shares of New Preferred Stock to the
public initially at the public offering price set forth on the cover page of
this Prospectus and to certain dealers at such offering price less a concession
not to exceed $.75 per share. After the initial public offering, the public
offering price and such concession may be changed.
Energy has granted to the Underwriters an option, exercisable during the
30-day period after the date of this Prospectus, to purchase up to 450,000
additional shares of New Preferred Stock from Energy at the same price per share
as the initial 3,000,000 shares to be purchased by the Underwriters. The
Underwriters may exercise such option only to cover over-allotments in the sale
of the shares of New Preferred Stock that the Underwriters have agreed to
purchase. To the extent that the Underwriters exercise such option, each
Underwriter will have a firm commitment, subject to certain conditions, to
purchase the same percentage of option shares as the number of shares to be
purchased by such Underwriter in the above table bears to the total number of
shares to be purchased by the Underwriters.
Energy has agreed that it will not, for a period of 90 days after the date
hereof, without prior written consent of the Underwriters, offer, sell or
contract to sell, or otherwise dispose of directly or indirectly, or announce
the offering of (i) shares of Common Stock or any securities convertible into,
or exchangeable for, shares of Common Stock (other than the New Preferred Stock
or pursuant to dividend reinvestment or existing stock option or other employee
incentive or benefit plans and other than upon conversion of the New Preferred
Stock or convertible securities outstanding on the date of this Prospectus) or
(ii) shares of any class of capital stock of Energy (other than New Preferred
Stock) which is preferred as to the payment of dividends, or as to the
distribution of assets upon any liquidation or dissolution of Energy, over
shares of any other class of capital stock of Energy.
The Underwriting Agreement provides that Energy will indemnify the several
Underwriters against certain liabilities, including liabilities under the
Securities Act, or contribute to payments that the Under-
writers may be required to make in respect thereof.
Salomon Brothers Inc and Lehman Brothers Inc. have performed various
investment banking services for Energy and the Partnership in the ordinary
course of business. Salomon Brothers Inc has been engaged to serve as financial
advisor to Energy in connection with the proposed merger with VNGP, L.P.
28
<PAGE> 29
LEGAL MATTERS
The validity of the issuance of the New Preferred Stock offered hereby and
certain other legal matters in connection with the Offering will be passed upon
for Energy by Stan L. McLelland, Esq., Executive Vice President and General
Counsel of Energy. Mr. McLelland is an employee of Energy and at January 31,
1994, beneficially owned approximately 99,000 shares of Energy's Common Stock
(including shares held under employee benefit plans) and held options under
employee stock option plans of Energy to purchase an additional 48,190 shares of
Energy's Common Stock. Fulbright & Jaworski L.L.P., Houston, Texas, have passed
upon certain tax matters for Energy in connection with the issuance of the New
Preferred Stock. Certain legal matters in connection with the Offering will be
passed upon for the Underwriters by Baker & Botts, L.L.P., Houston, Texas.
EXPERTS
The audited consolidated financial statements and schedules of Energy and
VNGP, L.P. contained in the Form 10-K incorporated by reference herein have been
audited by Arthur Andersen & Co., independent public accountants, as indicated
in their reports with respect thereto, and are included herein in reliance upon
the authority of said firm as experts in accounting and auditing in giving said
reports.
29
<PAGE> 30
VALERO ENERGY CORPORATION AND SUBSIDIARIES
INDEX TO PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Pro Forma Condensed Consolidated Balance Sheet as of December 31, 1993................ F-2
Pro Forma Consolidated Statement of Income for the Year Ended December 31, 1993....... F-3
Notes to Pro Forma Condensed Consolidated Financial Statements........................ F-4
</TABLE>
F-1
<PAGE> 31
VALERO ENERGY CORPORATION AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1993
(THOUSANDS OF DOLLARS)
(UNAUDITED)
<TABLE>
<CAPTION>
VALERO
VALERO VNGP, ENERGY
ENERGY L.P. PRO FORMA
HISTORICAL HISTORICAL ADJUSTMENTS CONSOLIDATED
----------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS....................... $ 235,486 $ 224,967 $ (46,717)(a) $ 413,736
PROPERTY, PLANT AND EQUIPMENT, NET... 1,293,566 739,802 37,888(b) 2,071,256
INVESTMENT IN AND LEASES RECEIVABLE
FROM VALERO NATURAL GAS PARTNERS,
L.P................................ 130,557 -- (130,557)(c) --
INVESTMENT IN AND ADVANCES TO JOINT
VENTURES........................... 28,343 -- -- 28,343
DEFERRED CHARGES AND OTHER ASSETS.... 76,485 80,313 (24,473)(b) 132,325
----------- ----------- ---------- -----------
$ 1,764,437 $ 1,045,082 $ (163,859) $ 2,645,660
=========== =========== ========== ===========
LIABILITIES AND STOCKHOLDERS'
EQUITY/PARTNERS' CAPITAL
CURRENT LIABILITIES, excluding
current maturities................. $ 124,290 $ 244,364 $ (46,643)(a) $ 322,011
----------- ----------- ---------- -----------
TOTAL DEBT:
Current maturities................. 28,737 27,857 -- 56,594
Long-term maturities............... 485,621 506,429 (7,716)(b)(d) 984,334
----------- ----------- ---------- -----------
514,358 534,286 (7,716) 1,040,928
----------- ----------- ---------- -----------
CAPITAL LEASE OBLIGATIONS:
Current maturities................. -- 1,051 (1,051)(c) --
Long-term maturities............... -- 103,787 (103,787)(c) --
----------- ----------- ---------- -----------
-- 104,838 (104,838) --
----------- ----------- ---------- -----------
DEFERRED INCOME TAXES................ 232,564 -- -- 232,564
----------- ----------- ---------- -----------
DEFERRED CREDITS AND OTHER
LIABILITIES........................ 37,128 1,548 9,444(b) 48,120
----------- ----------- ---------- -----------
REDEEMABLE PREFERRED STOCK, SERIES
A.................................. 13,800 -- -- 13,800
----------- ----------- ---------- -----------
STOCKHOLDERS' EQUITY................. 842,297 -- 145,940(e) 988,237
----------- ----------- ---------- -----------
PARTNERS' CAPITAL.................... -- 160,046 (160,046)(c) --
----------- ----------- ---------- -----------
$ 1,764,437 $ 1,045,082 $ (163,859) $ 2,645,660
=========== =========== ========== ===========
</TABLE>
F-2
<PAGE> 32
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)
<TABLE>
<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 $(273,366)(a)(b) $ 2,275,331
----------- ----------- ----------- -----------
COSTS AND EXPENSES:
Cost of sales................. 970,435 1,090,363 (197,465)(a)(b) 1,863,333
Operating expenses............ 119,567 120,171 (82,254)(a)(b) 157,484
Depreciation expense.......... 56,733 36,446 (269)(b) 92,910
----------- ----------- ----------- -----------
1,146,735 1,246,980 (279,988) 2,113,727
----------- ----------- ----------- -----------
OPERATING INCOME................ 75,504 79,478 6,622 161,604
EQUITY IN EARNINGS OF AND INCOME
FROM VALERO NATURAL GAS
PARTNERS, L.P. ............... 23,693 -- (23,693)(c) --
GAIN ON DISPOSITION OF ASSETS
AND OTHER INCOME, NET......... 6,209 1,263 214(b) 7,686
INTEREST AND DEBT EXPENSE:
Incurred...................... (49,517) (68,007) 13,697(b)(c)(d) (103,827)
Capitalized................... 12,335 1,713 -- 14,048
----------- ----------- ----------- -----------
INCOME BEFORE INCOME TAXES...... 68,224 14,447 (3,160) 79,511
INCOME TAX EXPENSE.............. 31,800 -- 3,900(f) 35,700
----------- ----------- ----------- -----------
NET INCOME...................... 36,424 14,447 (7,060) 43,811
Less: preferred stock dividend
requirements............... 1,262 -- 9,375(e) 10,637
----------- ----------- ----------- -----------
NET INCOME APPLICABLE TO COMMON
STOCK......................... $ 35,162 $ 14,447 $ (16,435) $ 33,174
=========== =========== ========== ===========
EARNINGS PER SHARE OF COMMON
STOCK......................... $ .82 $ .77
</TABLE>
F-3
<PAGE> 33
VALERO ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The accompanying pro forma condensed consolidated financial statements of
Valero Energy Corporation and subsidiaries (the "Company") give effect to the
sale of $150 million of New Preferred Stock and the utilization of approximately
$117.5 million of the net proceeds therefrom to fund the acquisition by the
Company of the limited partner interests in Valero Natural Gas Partners, L.P.
("VNGP, L.P.") not currently held by the Company for cash consideration of
$12.10 per unit. The remaining net proceeds, estimated to be approximately $28.4
million, are used to pay expenses of the proposed acquisition and reduce
outstanding indebtedness under bank credit lines. 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 above described transactions
occurred on December 31, 1993. The pro forma consolidated statement of income
assumes that the above described transactions occurred on January 1, 1993. Such
pro forma condensed consolidated financial statements are not necessarily
indicative of the results of future operations.
(a) Reflects the elimination of transactions between the Company and VNGP,
L.P., including product sales and purchases, management fees billed by the
Company to the Partnership for direct and indirect costs, and accrued interest
receivable and payable on leases.
(b) 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.
(c) 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.
(d) Represents the repayment of $21.7 million of indebtedness under bank
credit lines with the excess of the net proceeds of the Offering over the
acquisition cost of the limited partner interests in VNGP, L.P. not currently
held by the Company and the expenses of the acquisition, which causes a decrease
in interest expense.
(e) Represents the net proceeds from the sale of $150 million of New
Preferred Stock and the related increase in preferred stock dividends.
Conversion of the New Preferred Stock into Common Stock is antidilutive to
earnings per share of common stock for the year ended December 31, 1993.
(f) 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.
F-4
<PAGE> 34
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN OR
INCORPORATED BY REFERENCE IN THIS PROSPECTUS IN CONNECTION WITH THE OFFER MADE
BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE
UNDERWRITERS. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATES AS OF WHICH
INFORMATION IS GIVEN IN THIS PROSPECTUS. THIS PROSPECTUS DOES NOT CONSTITUTE AN
OFFER OR SOLICITATION BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR
SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR
SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANY PERSON TO WHOM IT IS UNLAWFUL
TO MAKE SUCH SOLICITATION.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---
<S> <C>
Available Information.................. 2
Incorporation of Certain Documents by
Reference............................ 2
Prospectus Summary..................... 3
The Company............................ 6
Recent Developments.................... 6
Use of Proceeds........................ 10
Consolidated Capitalization............ 11
Selected Historical and Pro Forma
Financial Data....................... 12
Dividends and Price Range of the Common
Stock................................ 13
Description of the New Preferred
Stock................................ 14
Description of the Common Stock........ 18
Description of the Preference Share
Purchase Rights...................... 20
Description of Other Equity
Securities........................... 21
Certain U.S. Federal Income Tax
Consequences......................... 23
Underwriting........................... 28
Legal Matters.......................... 29
Experts................................ 29
Index to Pro Forma Condensed
Consolidated Financial Statements.... F-1
</TABLE>
3,000,000 SHARES
[LOGO]
$3.125 CONVERTIBLE
PREFERRED STOCK
(LIQUIDATION PREFERENCE $50.00
PER SHARE)
SALOMON BROTHERS INC
LEHMAN BROTHERS
PROSPECTUS
DATED MARCH 17, 1994
