UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1994
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-4718
VALERO ENERGY CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 74-1244795
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
530 McCullough Avenue
San Antonio, Texas
(Address of principal executive offices)
78215
(Zip Code)
(210) 246-2000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Indicated below is the number of shares outstanding of the
registrant's only class of common stock, as of August 5, 1994.
Number of
Shares
Title of Class Outstanding
Common Stock, $1 Par Value 43,398,809
<PAGE>
VALERO ENERGY CORPORATION AND SUBSIDIARIES
INDEX
Page
PART I. FINANCIAL INFORMATION
Consolidated Balance Sheets - June 30, 1994 and
December 31, 1993. . . . . . . . . . . . . . . . . . .
Consolidated Statements of Income - For the Three
Months Ended and Six Months Ended June 30, 1994
and 1993 . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Cash Flows - For the Six
Months Ended June 30, 1994 and 1993. . . . . . . . . .
Notes to Consolidated Financial Statements . . . . . . .
Management's Discussion and Analysis of Financial
Condition and Results of Operations. . . . . . . . . .
PART II. OTHER INFORMATION. . . . . . . . . . . . . . . .
SIGNATURE. . . . . . . . . . . . . . . . . . . . . . . . .
<PAGE>
<TABLE>
PART I - FINANCIAL INFORMATION
VALERO ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Thousands of Dollars)
<CAPTION>
June 30,
1994 December 31,
(Unaudited) 1993
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and temporary cash investments. . . . . . . . . . . . . . . . . $ 47,994 $ 7,252
Cash held in debt service escrow . . . . . . . . . . . . . . . . . . 20,262 -
Receivables, less allowance for doubtful accounts of
$2,609 (1994) and $359 (1993). . . . . . . . . . . . . . . . . . . 226,581 64,521
Inventories. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 142,472 113,384
Current deferred income tax assets . . . . . . . . . . . . . . . . . 14,037 12,304
Prepaid expenses and other . . . . . . . . . . . . . . . . . . . . . 30,707 38,025
482,053 235,486
PROPERTY, PLANT AND EQUIPMENT - including
construction in progress of $37,679 (1994)
and $10,158 (1993), at cost. . . . . . . . . . . . . . . . . . . . . 2,567,303 1,640,136
Less: Accumulated depreciation. . . . . . . . . . . . . . . . . . 484,821 346,570
2,082,482 1,293,566
INVESTMENT IN AND LEASES RECEIVABLE FROM
VALERO NATURAL GAS PARTNERS, L.P.. . . . . . . . . . . . . . . . . . - 130,557
INVESTMENT IN AND ADVANCES TO JOINT
VENTURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30,239 28,343
DEFERRED CHARGES AND OTHER ASSETS. . . . . . . . . . . . . . . . . . . 117,367 76,485
$2,712,141 $1,764,437
<FN>
See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
<TABLE>
PART I - FINANCIAL INFORMATION
VALERO ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Thousands of Dollars)
<CAPTION>
June 30,
1994 December 31,
(Unaudited) 1993
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
CURRENT LIABILITIES:
Current maturities of long-term debt . . . . . . . . . . . . . . . . $ 77,161 $ 28,737
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . 290,732 90,994
Accrued interest . . . . . . . . . . . . . . . . . . . . . . . . . . 19,753 5,063
Other accrued expenses . . . . . . . . . . . . . . . . . . . . . . . 33,431 28,233
Income taxes payable . . . . . . . . . . . . . . . . . . . . . . . . 104 -
421,181 153,027
LONG-TERM DEBT, less current maturities. . . . . . . . . . . . . . . . 972,616 485,621
DEFERRED INCOME TAXES. . . . . . . . . . . . . . . . . . . . . . . . . 237,085 232,564
DEFERRED CREDITS AND OTHER LIABILITIES . . . . . . . . . . . . . . . . 58,004 37,128
REDEEMABLE PREFERRED STOCK, SERIES A . . . . . . . . . . . . . . . . . 13,800 13,800
COMMON STOCK AND OTHER STOCKHOLDERS' EQUITY:
Preferred stock, $1 par value - 20,000,000 shares authorized:
Redeemable Preferred Stock, Series A, issued 1,150,000
shares, outstanding 138,000 (1994 and 1993) shares . . . . . . - -
$3.125 Convertible Preferred Stock, issued and outstanding
3,450,000 (1994) and -0- (1993) shares ($172,500
aggregate involuntary liquidation value) . . . . . . . . . . . 3,450 -
Common stock, $1 par value - 75,000,000 shares authorized;
issued 43,400,060 (1994) and 43,391,685 (1993) shares . . . . . . 43,400 43,392
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . 534,421 371,303
Unearned Valero Employees' Stock Ownership Plan
Compensation. . . . . . . . . . . . . . . . . . . . . . . . . . . (14,848) (15,958)
Retained earnings. . . . . . . . . . . . . . . . . . . . . . . . . . 443,545 446,931
Treasury stock, 22,238 (1994) and 145,119 (1993)
common shares, at cost. . . . . . . . . . . . . . . . . . . . . . (513) (3,371)
1,009,455 842,297
$2,712,141 $1,764,437
<FN>
See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
<TABLE>
VALERO ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Thousands of Dollars, Except Per Share Amounts)
(Unaudited)
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1994 1993 1994 1993
<S> <C> <C> <C> <C>
OPERATING REVENUES . . . . . . . . . . . . . . . . . . $416,143 $321,072 $697,420 $616,834
COSTS AND EXPENSES:
Cost of sales. . . . . . . . . . . . . . . . . . . . 338,273 238,422 548,380 467,135
Operating expenses . . . . . . . . . . . . . . . . . 29,252 31,633 59,276 61,389
Depreciation expense . . . . . . . . . . . . . . . . 18,542 12,899 34,110 25,539
Total. . . . . . . . . . . . . . . . . . . . . . . 386,067 282,954 641,766 554,063
OPERATING INCOME . . . . . . . . . . . . . . . . . . . 30,076 38,118 55,654 62,771
EQUITY IN EARNINGS (LOSSES) OF AND
INCOME FROM VALERO NATURAL GAS
PARTNERS, L.P. . . . . . . . . . . . . . . . . . . . (7,790) 7,926 (10,698) 14,575
OTHER INCOME (EXPENSE), NET. . . . . . . . . . . . . . 438 (516) (480) (49)
INTEREST AND DEBT EXPENSE:
Incurred . . . . . . . . . . . . . . . . . . . . . . (16,323) (12,685) (28,371) (25,383)
Capitalized. . . . . . . . . . . . . . . . . . . . . 521 6,040 800 11,280
INCOME BEFORE INCOME TAXES . . . . . . . . . . . . . . 6,922 38,883 16,905 63,194
INCOME TAX EXPENSE . . . . . . . . . . . . . . . . . . 2,700 14,200 6,400 22,900
NET INCOME . . . . . . . . . . . . . . . . . . . . . . 4,222 24,683 10,505 40,294
Less: Preferred stock dividend requirements . . . . 2,989 317 3,521 635
NET INCOME APPLICABLE
TO COMMON STOCK. . . . . . . . . . . . . . . . . . . $ 1,233 $ 24,366 $ 6,984 $ 39,659
EARNINGS PER SHARE OF
COMMON STOCK . . . . . . . . . . . . . . . . . . . . $ .03 $ .56 $ .16 $ .92
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING (in thousands) . . . . . . . . . . . . . 43,347 43,072 43,334 43,055
DIVIDENDS PER SHARE OF
COMMON STOCK . . . . . . . . . . . . . . . . . . . . $ .13 $ .11 $ .26 $ .22
<FN>
See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
<TABLE>
VALERO ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands of Dollars)
(Unaudited)
<CAPTION>
Six Months Ended
June 30,
1994 1993
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 10,505 $ 40,294
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation expense . . . . . . . . . . . . . . . . . . . . . . 34,110 25,539
Amortization of deferred charges and other, net. . . . . . . . . 7,705 10,455
Changes in current assets and current liabilities. . . . . . . . (52,398) (17,226)
Deferred income tax expense. . . . . . . . . . . . . . . . . . . 3,900 12,300
Equity in (earnings) losses of Valero Natural Gas
Partners, L.P. in excess of distributions. . . . . . . . . . . 16,179 (5,261)
Changes in deferred items and other, net . . . . . . . . . . . . (87) (8,536)
Net cash provided by operating activities. . . . . . . . . . . 19,914 57,565
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital additions. . . . . . . . . . . . . . . . . . . . . . . . . . (31,362) (71,626)
Deferred turnaround and catalyst costs . . . . . . . . . . . . . . . (869) (7,202)
Investment in and advances to joint ventures, net. . . . . . . . . . (3,864) (3,459)
Investment in Valero Natural Gas Partners, L.P.. . . . . . . . . . . (124,264) -
Distributions from Valero Natural Gas Partners, L.P. . . . . . . . . 2,789 -
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,278 884
Net cash used in investing activities. . . . . . . . . . . . . . . (156,292) (81,403)
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term borrowings, net. . . . . . . . . . . . . . . . . . . . . . 29,700 32,000
Increase in notes payable. . . . . . . . . . . . . . . . . . . . . . - 200
Increase in cash held in debt service escrow for principal . . . . . (7,589) -
Common stock dividends . . . . . . . . . . . . . . . . . . . . . . . (11,268) (9,473)
Preferred stock dividends. . . . . . . . . . . . . . . . . . . . . . (2,623) (635)
Issuance of Convertible Preferred Stock, net . . . . . . . . . . . . 167,878 -
Issuance of common stock, net. . . . . . . . . . . . . . . . . . . . 1,022 1,378
Net cash provided by financing activities. . . . . . . . . . . . . 177,120 23,470
NET INCREASE (DECREASE) IN CASH AND
TEMPORARY CASH INVESTMENTS . . . . . . . . . . . . . . . . . . . . . 40,742 (368)
CASH AND TEMPORARY CASH INVESTMENTS AT
BEGINNING OF PERIOD. . . . . . . . . . . . . . . . . . . . . . . . . 7,252 8,174
CASH AND TEMPORARY CASH INVESTMENTS AT
END OF PERIOD. . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 47,994 $ 7,806
<FN>
See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
VALERO ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1
Basis of Presentation
The consolidated financial statements included herein have
been prepared by Valero Energy Corporation ("Energy") and
subsidiaries (collectively referred to as the "Company"), without
audit, pursuant to the rules and regulations of the Securities
and Exchange Commission. However, all adjustments have been made
to the accompanying financial statements which are, in the
opinion of the Company's management, necessary for a fair
presentation of the Company's results of operations for the
periods covered. Certain information and footnote disclosures
normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed
or omitted pursuant to such rules and regulations, although the
Company believes that the disclosures are adequate to make the
information presented herein not misleading. These consolidated
financial statements should be read in conjunction with the
consolidated financial statements and the notes thereto included
in the Company's latest Annual Report on Form 10-K. Certain
prior period amounts have been reclassified for comparative
purposes.
Note 2
Acquisition of Valero Natural Gas Partners, L.P.
In March 1994, Energy issued 3,450,000 shares of $3.125
convertible preferred stock ("Convertible Preferred Stock") with
a stated value of $50 per share and received cash proceeds, net
of underwriting discounts and certain issuance costs, of
approximately $168 million. The Convertible Preferred Stock was
primarily issued to fund the merger (the "Merger") of Valero
Natural Gas Partners, L.P. ("VNGP, L.P.") with a wholly owned
subsidiary of Energy. On May 31, 1994, the holders of common
units of limited partner interests ("Common Units") of VNGP, L.P.
approved the Merger. Upon consummation of the Merger, VNGP, L.P.
became a wholly owned subsidiary of Energy and the publicly
traded Common Units (the "Public Units") were converted into the
right to receive cash in the amount of $12.10 per Common Unit.
The Company utilized $117.5 million of the net proceeds from the
Convertible Preferred Stock issuance to fund the acquisition of
the Public Units. The remaining net proceeds of $50.4 million
were used to reduce outstanding indebtedness under bank credit
lines and to pay expenses of the acquisition. As a result of the
Merger, all of the outstanding Common Units are held by the
Company.
As a result of the Merger, the Company changed its method
of accounting for its investment in VNGP, L.P. and its
consolidated subsidiaries, collectively referred to herein as the
"Partnership," from the equity method to the full consolidation
method of accounting as of May 31, 1994. The acquisition has
been accounted for as a purchase. The consolidated statements of
income of the Company for the three months and six months ended
June 30, 1994 and 1993, reflect the Company's effective equity
interest of approximately 49% in the Partnership's operations for
periods prior to and including May 31, 1994, and reflect 100% of
the Partnership's operations for the month of June 1994.
The following unaudited pro forma financial information of
Valero Energy Corporation and subsidiaries assumes that the above
described transactions occurred at the beginning of each period
presented. Such pro forma information is not necessarily
indicative of the results of future operations.
<TABLE>
<CAPTION>
Six Months Ended June 30,
1994 1993
(Thousands of dollars, except
per share amounts)
<S> <C> <C>
Operating revenues. . . . . . . . . . . . . . . . . . . . $1,193,962 $1,129,722
Operating income. . . . . . . . . . . . . . . . . . . . . 55,672 109,461
Net income. . . . . . . . . . . . . . . . . . . . . . . . 3,012 44,958
Net income (loss) applicable to common stock. . . . . . . (2,966) 38,932
Earnings (loss) per share of common stock . . . . . . . . (.07) .90
</TABLE>
Note 3
Statements of Cash Flows
In order to determine net cash provided by operating
activities, net income has been adjusted by, among other things,
changes in current assets and current liabilities, excluding
changes in cash and temporary cash investments, cash held in debt
service escrow for principal, current maturities of long-term
debt and notes payable. Also excluded are the Partnership's
current assets and current liabilities as of the acquisition date
(see Note 2). Changes in the Company's current assets and
current liabilities are shown in the following table as an
(increase) decrease in current assets and an increase (decrease)
in current liabilities. The Company's temporary cash investments
are highly liquid, low-risk debt instruments which have a
maturity of three months or less when acquired and whose carrying
amounts approximate fair value. (Dollars in thousands.)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
1994 1993
<S> <C> <C>
Cash held in debt service escrow for interest . . . . . . . . . . $(12,673) $ -
Receivables, net. . . . . . . . . . . . . . . . . . . . . . . . . (58,628) 766
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,647 (523)
Current deferred income tax assets. . . . . . . . . . . . . . . . (1,733) (3,132)
Prepaid expenses and other. . . . . . . . . . . . . . . . . . . . 9,637 (115)
Accounts payable. . . . . . . . . . . . . . . . . . . . . . . . . 4,743 (13,904)
Accrued interest. . . . . . . . . . . . . . . . . . . . . . . . . 3,961 394
Other accrued expenses. . . . . . . . . . . . . . . . . . . . . . (456) (1,819)
Income taxes payable. . . . . . . . . . . . . . . . . . . . . . . 104 1,107
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(52,398) $(17,226)
</TABLE>
The following table provides information related to cash
interest and income taxes paid by the Company for the periods
indicated (in thousands):
<TABLE>
<CAPTION>
Six Months Ended
June 30,
1994 1993
<S> <C> <C>
Interest (net of amount capitalized of $800 (1994)
and $11,280 (1993)). . . . . . . . . . . . . . . . . . . . . . $22,968 $12,883
Income taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . 4,962 9,242
</TABLE>
Note 4
Inventories
Valero Refining and Marketing Company, a wholly owned
subsidiary of Energy, and its principal subsidiary, Valero
Refining Company ("VRC"), are collectively referred to herein as
"Refining." Refining's inventories (refinery feedstocks and
blendstocks and refined products) are carried at the lower of
cost or market with cost determined primarily under the last-in,
first-out ("LIFO") method of inventory pricing. The Company's
other inventories are carried principally at weighted average
cost not in excess of market. Inventories as of June 30, 1994
and December 31, 1993 were as follows (in thousands):
<TABLE>
<CAPTION>
June 30, December 31,
1994 1993
<S> <C> <C>
Refinery feedstocks and blendstocks . . . . . . . . . . . . . . . $ 75,823 $ 70,807
Refined products. . . . . . . . . . . . . . . . . . . . . . . . . 40,998 42,577
Natural gas in underground storage. . . . . . . . . . . . . . . . 17,631 -
Natural gas liquids ("NGLs"). . . . . . . . . . . . . . . . . . . 8,020 -
$142,472 $113,384
</TABLE>
Refining's inventory volumes totalled 8.2 million barrels
("MMbbls") and 8.1 MMbbls at June 30, 1994 and December 31, 1993,
respectively. Natural gas volumes in underground storage and in
third-party storage facilities totalled approximately 7.3
trillion British thermal units ("TBtus") at June 30, 1994.
Amounts relating to natural gas volumes in third-party storage
facilities are included in receivables in the accompanying
June 30, 1994 consolidated balance sheet. The excess of the
replacement cost of Refining's inventories over their LIFO values
was approximately $23 million at June 30, 1994.
Note 5
Price Risk Management Activities
The Company enters into various exchange-traded and other
financial instrument contracts with third parties to hedge the
purchase costs and sales prices of inventories, operating margins
and certain anticipated purchases of natural gas to be consumed
in operations. Changes in the market value of such contracts are
deferred until the gain or loss is recognized on the hedged
transaction. The Company also enters into a limited amount of
contracts that are not specific hedges, and gains or losses
resulting from changes in the market value of these contracts are
recognized in income currently. As of June 30, 1994, the Company
had outstanding contracts for natural gas with notional or
contract volumes totalling approximately 30.5 TBtus for which the
Company is the fixed price payor and 25.1 TBtus for which the
Company is the fixed price receiver. These contracts run for a
period of one to eight months. As of June 30, 1994, the Company
also had outstanding contracts for refinery feedstocks and
refined products with notional or contract volumes totalling 3.6
MMbbls for which the Company is the fixed price payor and 3.9
MMbbls for which the Company is the fixed price receiver. These
contracts run for a period of one to six months. As of
December 31, 1993, such amounts were 2.7 MMbbls and 2.6 MMbbls,
respectively.
Note 6
Bank Credit Agreement
Energy has entered into an unsecured $250 million revolving
bank credit and letter of credit facility that is available for
working capital and general corporate purposes. This bank credit
facility became effective upon the consummation of the Merger on
May 31, 1994 and replaced Refining's $160 million secured
revolving credit facility, Energy's $30 million unsecured
revolving credit facility, and all of the Partnership's committed
unsecured revolving credit facilities. This new facility, which
will expire March 29, 1996, permits direct advances of up to
$200 million and up to $150 million for letters of credit,
subject to the overall $250 million commitment limit. The
commitment amount will be reduced $16.7 million per quarter
beginning June 30, 1995, with 80% of each reduction applied to
direct advances and 20% to letters of credit. Borrowings under
the facility bear interest, at the Company's option, at LIBOR
plus 1.25% or at the agent bank's prime rate. The Company is
charged various fees, including commitment fees on the unutilized
portion, and various letter of credit and facility fees. The new
bank credit facility contains covenants limiting Energy's ability
to make certain "restricted payments," including dividend
payments on and purchases, redemptions or exchanges of its
capital stock, to make certain "restricted disbursements,"
including the restricted payments described above plus capital
expenditures and certain capital investments, and to make
advances and capital contributions to the Partnership. The
facility also contains covenants which require Energy to maintain
a minimum consolidated working capital and net worth and also
contains various financial tests including debt-to-
capitalization, fixed charge and earnings coverage ratios. The
Company was in compliance with all of its restrictive covenants
as of June 30, 1994.
Note 7
Litigation and Contingencies
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. ("VT, L.P."). The franchise agreement was
assigned to and assumed by VT, 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 owed to the City franchise fees and accrued
interest thereon aggregating approximately $13.5 million. In a
letter dated November 9, 1993, the City claimed an additional
$18 million in damages related to the City's allegations that VTC
engaged in unauthorized activities under the franchise agreement
by transmitting gas for resale and by transporting gas for third
parties on the franchised premises. During the second quarter of
1994, the Company, the Partnership and the City executed a
settlement agreement with respect to this dispute under which VT,
L.P. agreed to a total settlement of $14 million payable in three
approximately equal payments. The first of these payments was
made in June 1994, with the remaining payments to be made in
January 1995 and January 1996.
Energy and certain of its subsidiaries are defendants in a
lawsuit originally filed in January 1993. The lawsuit is based
upon construction work performed by the plaintiff at certain of
the Partnership's gas processing plants in 1991 and 1992. The
plaintiff alleges that it performed work for the defendants for
which it was not compensated. The plaintiff's second amended
petition, filed April 30, 1994, asserts claims for breach of
contract, quantum meruit, wrongful failure to pay retainage,
fraudulent misrepresentation, conspiracy, breach of the implied
covenant of good faith and fair dealing, and other commercial
tort claims. The plaintiff alleges actual damages of
approximately $9.7 million and punitive damages of $45.5 million.
The defendants have filed a motion for summary judgment and a
motion to transfer venue to Bexar County.
In 1987, VT, L.P. and a producer from whom VT, L.P. has
purchased natural gas entered into an agreement resolving certain
take-or-pay issues between the parties in which VT, L.P. agreed
to pay one-half of certain excess royalty claims arising after
the date of the agreement. The royalty owners of the producer
recently completed an audit of the producer and have presented to
the producer a claim for additional royalty payments in the
amount of approximately $17.3 million, and accrued interest
thereon of approximately $19.8 million. Approximately $8 million
of the royalty owners' claim, excluding interest, accrued after
the effective date of the agreement between the producer and VT,
L.P. The producer and VT, L.P. are reviewing the royalty owners'
claims. VT, L.P. has received no indication that any lawsuit has
been filed by the royalty owners. The Company believes that
various defenses may reduce or eliminate any liability of VT,
L.P. to the producer in this matter.
VTC and one of its gas suppliers are parties to various gas
purchase contracts assigned to and assumed by VT, L.P. upon
formation of the Partnership in 1987. The supplier is also a
party to a series of gas purchase contracts between the supplier,
as buyer, and certain trusts, as seller. In 1989, the trusts
brought suit against the supplier, alleging breach of various
minimum take, take-or-pay and other contractual provisions, and
asserting a statutory nonratability claim. In the trusts' claims
against the supplier, the trusts seek alleged actual damages,
including interest, of approximately $30 million. Neither VTC
nor VT, L.P. was originally a party to the lawsuit. However,
because of the relationship between VTC's contracts with the
supplier and the supplier's contracts with the trusts, and in
order to resolve existing and potential disputes, the supplier,
VTC and VT, L.P. agreed in March 1991 to cooperate in the conduct
of the litigation, and agreed that VTC and VT, L.P. will bear a
substantial portion of the costs of any appeal and any
nonappealable final judgment rendered against the supplier. In
January 1993, the District Court ruled on the trusts' motion for
summary judgment, finding that as a matter of law the three gas
purchase contracts at issue were fully binding and enforceable,
the supplier breached the minimum take obligations under one of
the contracts, the supplier is not entitled to claimed offsets
for gas purchased by third parties and the "availability" of gas
for take-or-pay purposes is established solely by the delivery
capacity testing procedures in the contracts. Damages, if any,
were not determined. On April 15, 1994, the trusts named VTC and
VT, L.P. as additional defendants (the "Valero Defendants") to
the lawsuit, alleging that the Valero Defendants maliciously
interfered with the trusts' contracts with the supplier. In the
trusts' claim against the Valero Defendants, the trusts seek
unspecified actual and punitive damages. The Company believes
that the claims brought by the trusts have been significantly
overstated, and that the supplier and the Valero Defendants have
a number of meritorious defenses to the claims. This litigation
is not currently set for trial.
In June 1994, VRC was added as a defendant in a lawsuit
filed by several plaintiffs who are residents of San Patricio
County, Texas. The suit was brought against numerous defendants
whom the plaintiffs allege are either owners or operators of a
landfill site in San Patricio County, or generators of hazardous
wastes accepted into the landfill. VRC is named as a "generator"
of hazardous wastes accepted into the landfill. The plaintiffs
claim that hazardous wastes escaped from the landfill and were
released into the surrounding ground, water and air, allegedly
causing damages including bodily injury, emotional distress,
costs for medical monitoring and devaluation of property. The
plaintiffs seek an unspecified amount of actual and punitive
damages.
A lawsuit was filed against VRC in June 1994 by certain
residents of the Mobile Estate subdivision located near the
Refinery in Corpus Christi, Texas, alleging that air, soil and
water in the subdivision have been contaminated by emissions of
allegedly hazardous chemicals and toxic hydrocarbons produced by
VRC. The plaintiffs' claims include negligence, gross
negligence, strict liability, nuisance and trespass. The
plaintiffs seek certification as a class and an unspecified
amount of damages, based on an alleged diminution in the value of
their property, loss of use and enjoyment of property, emotional
distress and other costs.
Valero Javelina Company, a wholly owned subsidiary of
Energy, owns a 20% general partner interest in Javelina Company,
a general partnership. Javelina Company has been named as a
defendant in six lawsuits filed since 1992 in state district
courts in Nueces County, Texas. Four of the suits include as
defendants other companies that own refineries or other
industrial facilities in Nueces County. These suits were brought
by a number of plaintiffs who reside in neighborhoods near the
facilities. The plaintiffs claim injuries relating to an alleged
exposure to toxic chemicals, and generally claim that the
defendants were negligent, grossly negligent and committed
trespass. The plaintiffs claim personal injury and property
damages resulting from soil and ground water contamination and
air pollution allegedly caused by the operations of the
defendants. One of the suits seeks certification of the
litigation as a class action. The plaintiffs seek unspecified
actual and punitive damages. The other two suits were brought by
plaintiffs who either live or have businesses near the Javelina
Plant. The suits allege claims similar to those described above.
These plaintiffs do not specify an amount of damages claimed.
The Company is also a party to additional claims and legal
proceedings arising in the ordinary course of business. The
Company believes it is unlikely that the final outcome of any of
the claims or proceedings to which the Company is a party,
including those described above, would have a material adverse
effect on the Company'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 any particular claim or
proceeding would not have an adverse effect on the Company's
results of operations for the fiscal period in which such
resolution occurred.
<PAGE>
VALERO ENERGY CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ACQUISITION OF VNGP, L.P.
As described in Note 2 of Notes to Consolidated Financial
Statements, the merger of VNGP, L.P. with a wholly owned
subsidiary of Energy was consummated on May 31, 1994. As a
result of the merger, all of the outstanding Common Units of
VNGP, L.P. are held by the Company and VNGP, L.P. has become a
wholly owned subsidiary of Energy. The accompanying consolidated
statements of income of the Company for the three months and six
months ended June 30, 1994 and 1993 include the Company's
approximate 49% effective equity interest in the Partnership's
operations for all periods prior to and including May 31, 1994
and include 100% of the Partnership's operations for the month of
June 1994. However, the discussion of the Company's natural gas
and natural gas liquids operations which follows includes 100% of
the Partnership's operations rather than only the Company's
effective interest in the Partnership's operating results. Such
discussion is based on pro forma operating results assuming that
the merger of VNGP, L.P. with a subsidiary of Energy occurred at
the beginning of 1994 and 1993, respectively.
<PAGE>
RESULTS OF OPERATIONS
The following are the Company's financial and operating
highlights for the three months ended and six months ended
June 30, 1994 and 1993. The 1993 amounts of operating revenues
and operating income (loss) by segment have been restated to
conform to the 1994 segment presentation. The amounts in the
following table are in thousands of dollars, unless otherwise
noted:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1994 1993 1994 1993
<S> <C> <C> <C> <C>
OPERATING REVENUES:
Refining and marketing . . . . . . . . . . . . . . . . . . . . . . . $284,161 $275,263 $531,687 $524,571
Natural gas <F1>:
Sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67,195 11,701 67,218 22,247
Transportation . . . . . . . . . . . . . . . . . . . . . . . . . . 5,486 1,116 5,561 2,214
Natural gas liquids <F1> . . . . . . . . . . . . . . . . . . . . . . 49,518 13,837 61,698 29,353
Other operations . . . . . . . . . . . . . . . . . . . . . . . . . . 21,033 21,183 42,506 42,105
Intersegment eliminations. . . . . . . . . . . . . . . . . . . . . . (11,250) (2,028) (11,250) (3,656)
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $416,143 $321,072 $697,420 $616,834
OPERATING INCOME (LOSS):
Refining and marketing . . . . . . . . . . . . . . . . . . . . . . . $ 16,735 $ 38,516 $ 45,175 $ 60,860
Natural gas <F1> . . . . . . . . . . . . . . . . . . . . . . . . . . 5,377 807 5,367 2,557
Natural gas liquids <F1> . . . . . . . . . . . . . . . . . . . . . . 5,612 2,923 6,801 6,294
Corporate expenses, net. . . . . . . . . . . . . . . . . . . . . . . 2,352 (4,128) (1,689) (6,940)
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 30,076 $ 38,118 $ 55,654 $ 62,771
Equity in earnings (losses) of Valero Natural Gas
Partners, L.P. <F2>. . . . . . . . . . . . . . . . . . . . . . . . . $ (9,984) $ 4,630 $(16,179) $ 7,998
Interest and debt expense, net . . . . . . . . . . . . . . . . . . . . $ 15,802 $ 6,645 $ 27,571 $ 14,103
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,222 $ 24,683 $ 10,505 $ 40,294
Net income applicable to common stock. . . . . . . . . . . . . . . . . $ 1,233 $ 24,366 $ 6,984 $ 39,659
Earnings per share of common stock . . . . . . . . . . . . . . . . . . $ .03 $ .56 $ .16 $ .92
PRO FORMA OPERATING INCOME (LOSS) <F3>:
Refining and marketing . . . . . . . . . . . . . . . . . . . . . . . $ 16,735 $ 38,516 $ 45,175 $ 60,860
Natural gas. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,301 19,729 9,465 32,730
Natural gas liquids. . . . . . . . . . . . . . . . . . . . . . . . . 9,444 13,315 10,528 31,550
Corporate expenses, net. . . . . . . . . . . . . . . . . . . . . . . (723) (8,626) (9,496) (15,679)
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 26,757 $ 62,934 $ 55,672 $109,461
OPERATING STATISTICS:
Refining and marketing:
Throughput volumes (Mbbls per day) . . . . . . . . . . . . . . . . 149 137 147 129
Average throughput margin per barrel . . . . . . . . . . . . . . . $ 4.95 $ 6.94 $ 5.50 $ 6.47
Sales volumes (Mbbls per day). . . . . . . . . . . . . . . . . . . 147 127 145 126
Natural gas <F3>:
Gas volumes (BBtu per day):
Sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,080 1,083 1,184 1,123
Transportation . . . . . . . . . . . . . . . . . . . . . . . . . 1,606 1,816 1,622 1,734
Total gas volumes. . . . . . . . . . . . . . . . . . . . . . . 2,686 2,899 2,806 2,857
Average gas sales price per MMBtu. . . . . . . . . . . . . . . . . $ 2.08 $ 2.38 $ 2.24 $ 2.29
Average gas transportation fee per MMBtu . . . . . . . . . . . . . $ .111 $ .097 $ .112 $ .097
Natural gas liquids <F3>:
Plant production (Mbbls per day) . . . . . . . . . . . . . . . . . 78.0 77.5 78.1 77.4
Average market price per gallon. . . . . . . . . . . . . . . . . . $ .266 $ .310 $ .259 $ .313
Average gas cost per MMBtu . . . . . . . . . . . . . . . . . . . . $ 1.79 $ 2.06 $ 1.92 $ 1.92
<FN>
<F1>
Includes 100% of the operations of the Partnership
commencing June 1, 1994.
<F2>
Represents the Company's approximate 49% effective equity
interest in the operations of the Partnership for the
periods prior to June 1, 1994.
<F3)
Pro forma operating income (loss) and operating statistics
for the natural gas and natural gas liquids segments as
presented herein assume that the merger of VNGP, L.P. with a
subsidiary of Energy occurred at the beginning of each
respective year.
</FN>
</TABLE>
<PAGE>
Consolidated Results
The Company reported net income of $4.2 million or $.03 per
share for the second quarter of 1994 compared to $24.7 million or
$.56 per share for the second quarter of 1993. For the first six
months of 1994, net income was $10.5 million or $.16 per share
compared to $40.3 million or $.92 per share for the first six
months of 1993. The decrease in net income and earnings per
share for the current quarter and year-to-date periods was due
primarily to a decrease in equity in earnings of the Partnership,
an increase in net interest expense and a decrease in operating
income. Earnings per share were also reduced by an increase in
preferred stock dividend requirements resulting from the issuance
in the first quarter of 1994 of 3.45 million shares of Energy's
$3.125 Convertible Preferred Stock. See Note 2 of Notes to
Consolidated Financial Statements.
Operating revenues increased $95.1 million or 30% and $80.6
million or 13% during the second quarter and first six months of
1994, respectively, compared to the same periods in 1993 due
primarily to the inclusion in the 1994 periods of operating
revenues for the month of June 1994 attributable to the
Partnership which was merged with the Company effective May 31,
1994, and to a lesser extent to increases in operating revenues
from refining and marketing operations which are explained below
under "Segment Results." The increases attributable to these
factors were partially offset by decreases in natural gas sales
and transportation revenues from certain of the Company's natural
gas distribution operations which were sold in the latter half of
1993.
Operating income decreased $8 million or 21% and $7.1
million or 11% during the second quarter and first six months of
1994, respectively, compared to the same periods in 1993 due
primarily to a decrease in operating income from refining and
marketing operations as explained below. This decrease was
partially offset by the inclusion of $8.4 million of Partnership
operating income for the month of June 1994 resulting from the
May 31, 1994 merger. Operating income further benefitted from a
decrease in corporate expenses, net, due primarily to the
recognition in income in the 1994 periods of the $6.7 million
remaining balance of deferred management fees resulting from the
merger. Such fees were recorded upon the formation of the
Partnership in March 1987 and were being amortized to income over
the ten-year period during which Valero Natural Gas Company
agreed not to withdraw as general partner of VNGP, L.P.
The Company's equity in losses of the Partnership for the
second quarter and first six months of 1994 were $10 million and
$16.2 million, respectively, compared to equity in earnings of
$4.6 million and $8 million for the same periods in 1993.
Included in the 1994 amounts was the Company's approximate 49%
equity interest in the $14 million cost of a settlement among the
Company, the Partnership and the City of Houston regarding a
franchise fee dispute. See Note 7 of Notes to Consolidated
Financial Statements. The Company's equity in losses of the
Partnership for the 1994 periods includes the Company's effective
equity interest in the Partnership's operations for the periods
prior to the merger on May 31, 1994. See "Segment Results" below
for a discussion of the Company's natural gas and natural gas
liquids operations.
Net interest and debt expense increased $9.2 million and
$13.5 million during the second quarter and first six months of
1994, respectively, compared to the same periods in 1993 due
primarily to decreases in capitalized interest resulting from the
placing in service in the second quarter of 1993 of the
Refinery's butane upgrade facility, and the inclusion in the 1994
amounts of interest expense attributable to the Partnership for
the month of June 1994. Income tax expense decreased in the 1994
second quarter and year-to-date periods compared to the same
periods in 1993 due primarily to lower pre-tax income.
Segment Results
Refining and Marketing
Operating revenues from the Company's refining and
marketing operations increased $8.9 million, or 3%, during the
second quarter of 1994 compared to the same period in 1993 due
primarily to a 16% increase in average daily sales volumes
partially offset by a 10% decrease in the average sales price per
barrel. Sales and throughput volumes increased as a result of
the placing in service of the Refinery's butane upgrade facility
and other Refinery units during the second and fourth quarters of
1993, respectively. Although the average sales price per barrel
in the second quarter of 1994 still remained below second quarter
1993 levels, such price improved compared to the first quarter of
1994 as a result of rising crude oil and refined product prices.
Operating income from the Company's refining and marketing
operations decreased $21.8 million, or 57%, during the second
quarter of 1994 compared to the same period in 1993 due primarily
to a decrease in throughput margins resulting from lower refined
product prices as noted above and narrower discounts for the
Company's residual oil feedstocks, more than offsetting a 9%
increase in average daily throughput volumes. The Refinery's
average throughput margin per barrel, before operating costs and
depreciation expense, decreased from $6.94 during the second
quarter of 1993 to $4.95 for the second quarter of 1994.
Refining and marketing operating income was also reduced by an
increase in depreciation expense due to the placing in service of
various Refinery assets in 1993 described above.
Operating revenues from the Company's refining and
marketing operations increased $7.1 million, or 1%, during the
first six months of 1994 compared to the same period in 1993 as a
15% increase in average daily sales volumes was mostly offset by
a 12% decrease in the average sales price per barrel. Operating
income decreased $15.7 million, or 26%, during the first six
months of 1994 compared to the same period in 1993 primarily due
to a decrease in throughput margins and an increase in
depreciation expense and other operating costs resulting from the
above noted placing in service of various Refinery units in 1993.
Operating costs per barrel decreased, however, due to a 14%
increase in average daily throughput volumes. The Refinery's
average throughput margin per barrel decreased from $6.47 during
the first six months of 1993 to $5.50 for the first six months of
1994.
Natural Gas
Pro forma operating income from the Company's natural gas
operations decreased $18.4 million, or 93%, during the second
quarter of 1994 compared to the same period in 1993 due to an
increase in operating and general expenses, lower gas sales
margins and reduced fixed cost recoveries. Operating and general
expenses increased due primarily to the City of Houston
settlement discussed above. Gas sales margins were lower for the
special marketing programs due primarily to a $7 million decrease
in income generated by the Market Center Services Program and the
return to service of the South Texas Project nuclear plant
("STP") during the 1994 second quarter. VT, L.P.'s fixed cost
recoveries, principally related to gas gathering costs, decreased
as the result of a customer audit settlement effective July 1,
1993. The decreases in operating income resulting from these
factors were partially offset by an increase in income from new
term sales business generated during the latter part of 1993 in
connection with the implementation of FERC Order 636.
Transportation revenues were essentially flat in the second
quarter of 1994 compared to the 1993 period as a 14% increase in
average transportation fees was largely offset by a 12% decrease
in average daily transportation volumes. The increase in average
transportation fees was due primarily to higher fees received on
existing transportation business and reduced deliveries to PEMEX
at below-average rates, while the decrease in average
transportation volumes resulted from the expiration of certain
contracts, reduced deliveries to PEMEX and decreased gas
shrinkage volumes transported for the Company's NGL operations.
Pro forma operating income from the Company's natural gas
operations decreased $23.3 million, or 71%, during the first six
months of 1994 compared to the same period in 1993 due to the
factors noted above, partially offset by an increase in
transportation revenues. Average transportation fees for the
first six months of 1994 increased 15% compared to the same
period in 1993, more than offsetting a 6% decrease in
transportation volumes.
Natural Gas Liquids
Pro forma operating income from the Company's NGL
operations decreased $3.9 million, or 29%, during the second
quarter of 1994 compared to the same period in 1993 due to a 14%
decrease in the average NGL market price and an increase in
transportation and fractionation expense, partially offset by a
decrease in fuel and shrinkage costs resulting from a 13%
decrease in the average cost of natural gas and lower operating
and general expenses. Although NGL market prices in the second
quarter of 1994 still remained below second quarter 1993 levels,
such prices improved compared to the first quarter of 1994 as a
result of rising crude oil and refined product prices. Average
natural gas costs decreased as a result of milder weather
experienced during a majority of the second quarter of 1994,
higher industry-wide natural gas storage inventories and the
return to service of the STP during the 1994 second quarter.
Pro forma NGL operating income decreased $21 million, or
67%, during the first six months of 1994 compared to the same
period in 1993 due to the factors noted above and a decrease in
third party transportation and fractionation volumes.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by the Company's operating activities
totalled $19.9 million during the first half of 1994 compared to
$57.6 million during the first half of 1993. The decrease in
1994 from 1993 was due primarily to the decrease in income
described above under "Results of Operations" and an increase in
refining and marketing working capital requirements. During the
1994 period, the Company utilized the cash provided by its
operating activities, additional bank borrowings and cash
distributions received from the Partnership prior to the merger
to fund capital expenditures and investments in joint ventures,
to pay common and preferred stock dividends and to make principal
escrow payments under the Partnership's First Mortgage Notes.
As described in Note 2 of Notes to Consolidated Financial
Statements, the Company used a portion of the approximate $168
million proceeds from its March 1994 Convertible Preferred Stock
issuance to fund the acquisition of the publicly traded Common
Units of VNGP, L.P. and to pay expenses of the acquisition. The
remaining proceeds were used to reduce bank borrowings.
As described in Note 6 of Notes to Consolidated Financial
Statements, Energy's unsecured $250 million revolving bank credit
and letter of credit facility became effective on May 31, 1994,
replacing all of the Company's and the Partnership's then
existing committed bank credit facilities. As of June 30, 1994,
Energy had approximately $113 million available under this
committed bank credit facility for additional borrowings and
letters of credit. Energy also currently has $75 million of
unsecured short-term credit lines, no more than $50 million of
which may be outstanding at any one time, which are unrestricted
as to use but which, if used, reduce the availability under the
$250 million credit facility. As of June 30, 1994, no amounts
were outstanding under these short-term lines. Energy's new
revolving bank credit and letter of credit facility (which is the
most restrictive of the Company's various financing agreements)
contains various restrictive covenants, including restrictions on
its ability to pay dividends and make certain other "restricted
payments." The Company was in compliance with all of the
restrictive covenants under this facility at June 30, 1994, and
under the most restrictive of such covenants had the ability to
pay approximately $46 million in common and preferred stock
dividends and other restricted payments.
For total year 1994, the Company currently expects to
expend approximately $115 million for capital expenditures,
deferred turnaround and catalyst costs and investments in joint
ventures, $37.4 million of which was expended during the first
half of 1994. The Company believes it has sufficient funds from
operations, and to the extent necessary, from the public and
private capital markets and bank market, to fund its current and
ongoing operating requirements.
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Garcia, et al. v. Coastal Chemical Company, Inc., Valero
Refining Company, Javelina Company, et al., 347th Judicial
District Court, Nueces County, Texas (filed August 31, 1993).
This action was brought by certain residents of the Oak Park
Triangle area of Corpus Christi, Texas, against several
defendants including VRC. All named defendants are either
refiners or gas processors having facilities located at or
near Up River Road in Corpus Christi. Plaintiffs allege in
general terms damages resulting from ground water contamination
and air pollution allegedly caused by the operations of the
defendants. On August 5, 1994, VRC was dismissed from this
lawsuit by order of the court.
Harding, et al. v. Browning-Ferris Industries, Inc., Valero
Refining Company, et al., 229th State District Court, Duval
County, Texas (filed March 1, 1994). VRC was added as a
defendant in this case by service dated June 10, 1994. The
several named plaintiffs, residents of San Patricio County,
Texas, brought suit against numerous defendants whom the
plaintiffs allege are either owners or operators of a landfill
site in San Patricio County, or generators of hazardous wastes
accepted into the landfill. VRC is named as a "generator" of
hazardous wastes accepted into the landfill. The plaintiffs
claim that hazardous wastes escaped from the landfill and were
released into the surrounding ground, water and air, allegedly
causing damages including bodily injury, emotional distress,
costs for medical monitoring and devaluation of property. The
plaintiffs seek an unspecified amount of actual and punitive
damages.
NationsBank of Texas, N.A., Trustee of The Charles Gilpin
Hunter Trust, et al. v. Coastal Oil & Gas Corporation, Valero
Transmission Company, et al., 160th State District Court, Dallas
County, Texas (filed February 2, 1993). In a lawsuit filed in
1988, certain plaintiffs alleged that defendants Coastal Oil &
Gas Corporation ("Coastal") and Energy, VTC, VNGP, L.P., Valero
Management Partnership, L.P. and VT, L.P. (the "Valero
Defendants") were liable for failure to take minimum quantities
of gas, failure to make take-or-pay payments and other breach of
contract and breach of fiduciary duty claims. This lawsuit was
settled on terms immaterial to the Valero Defendants, and the
parties agreed to a dismissal of the lawsuit. However, in
February 1993, NationsBank of Texas, N.A., as trustee for certain
trusts, filed a separate suit against all prior defendants,
substantially adopting the allegations and claims of the original
litigation. In June 1994, the parties executed a settlement
agreement with respect to this lawsuit on terms immaterial to the
Company.
Valero Energy Corporation, et al. v. M.W. Kellogg Company,
et al., 117th Judicial District Court, Nueces County, Texas
(filed July 11, 1986). In the Company's suit against the
defendants, the Company asserted breach of contract and warranty
claims, Deceptive Trade Practices Act ("DTPA") claims, and
negligence, fraud and other common law claims. The Company
claimed actual damages in excess of $165 million plus exemplary
damages, statutory penalties, attorneys' fees and costs of court.
In 1991, the court entered judgment granting the motions for
summary judgment of defendants Kellogg and Ingersoll-Rand with
respect to the contract and DTPA claims, and entered a take
nothing judgment against the Company. In 1993, the Company
appealed the trial court's decision to the Thirteenth Court of
Appeals, Corpus Christi, Texas, which affirmed the trial court's
decision. The Texas Supreme Court denied the Company's
application for writ of error, and in May 1994 denied the
Company's motion for rehearing. The trial court has scheduled a
conference for August 25, 1994, to consider the status of
remaining claims of the Company and to consider claims asserted
by the defendants against the Company for attorneys' fees and
costs.
In re Valero Natural Gas Partners, L.P. Litigation,
Consolidated Civil Action No. 13194, Court of Chancery, New
Castle County, Delaware (first suit filed October 15, 1993; all
suits consolidated November 23, 1993). Seven lawsuits were filed
in the Delaware Court of Chancery for New Castle County (the
"Chancery Court") in response to the announcement of Energy's
proposal to acquire the publicly traded Common Units of
VNGP, L.P. pursuant to a proposed merger of VNGP, L.P. with a
wholly owned subsidiary of Energy. In December 1993, attorneys
representing the plaintiffs entered into a memorandum of
understanding with Energy and VNGP, L.P. pursuant to which the
attorneys agreed to recommend that the Chancery Court approve a
settlement of the litigation. The settlement was approved by the
Chancery Court on May 31, 1994. The settlement did not require a
material payment by the Company.
Ventura, et al. v. Valero Refining Company, 105th State
District Court, Nueces County, Texas (filed June 17, 1994). A
lawsuit was filed against VRC by certain residents of the Mobile
Estate subdivision located near the Refinery in Corpus Christi,
Texas, alleging that air, soil and water in the subdivision have
been contaminated by emissions of allegedly hazardous chemicals
and toxic hydrocarbons produced by VRC. The plaintiffs' claims
include negligence, gross negligence, strict liability, nuisance
and trespass. The plaintiffs seek certification as a class and
an unspecified amount of damages, based on an alleged diminution
in the value of their property, loss of use and enjoyment of
property, emotional distress and other costs.
White, et al. v. Coastal Javelina, Inc., Valero Energy
Corporation, et al., 94th State District Court, Nueces County,
Texas (filed November 27, 1991). Plaintiffs, as owners of real
property near the Javelina Plant, alleged that the operation and
maintenance of the Javelina Plant interfered with the use and
enjoyment of their property and caused depreciation in the value
of their property and other damages. In June 1994, the parties
executed a settlement agreement with respect to this lawsuit on
terms immaterial to the Company.
City of Houston Claim. Beginning in a letter dated
September 1, 1993, from the City of Houston to VTC, the City
asserted certain claims against VTC under the franchise agreement
between the City and VTC. VTC is the general partner of VT, L.P.
The franchise agreement was assumed by VT, L.P. upon formation of
the Partnership in 1987. The City claimed that VTC owed to the
City approximately $13.5 million in franchise fees and accrued
interest thereon, and an additional $18 million in damages
related to the City's allegations that VTC engaged in
unauthorized activities under the franchise agreement by
transmitting gas for resale and by transporting gas for third
parties on the franchised premises. On June 1, 1994, the parties
executed a settlement agreement with respect to the City's claims
pursuant to which VT, L.P. agreed to pay approximately
$14 million to the City by January 1, 1996. VT, L.P. paid an
initial installment of approximately $5.5 million on June 1,
1994. VT, L.P. will pay approximately $4.2 million to the City
on January 1, 1995, with a final installment of approximately
$4.2 million payable on January 1, 1996.
Item 4. Submission of Matters to a Vote of Security Holders
Energy's Annual Meeting of Stockholders was held on
April 28, 1994. Matters voted upon at the meeting and the
results thereof included (i) a proposal to ratify the appointment
of Arthur Andersen & Co. as independent public accountants
(approved with 39,256,949 affirmative votes, 109,538 negative
votes, and 92,695 abstentions); and (ii) a proposal to elect the
following Class II directors to serve until 1997: Edward C.
Benninger (approved with 39,315,845 affirmative votes, and
143,337 abstentions); A. Ray Dudley (approved with 39,317,861
affirmative votes, and 141,321 abstentions); and James L. Johnson
(approved with 39,317,865 affirmative votes, and
141,317 abstentions). There were no broker non-votes with
respect to the matters voted upon at the Annual Meeting.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
*11 Computation of Earnings Per Share.
Pursuant to paragraph 601(b)(4)(iii)(A) of Regulation S-K,
the registrant has omitted from the foregoing listing of
exhibits, and hereby agrees to furnish to the Commission upon its
request, copies of certain instruments, each relating to
long-term debt not exceeding 10 percent of the total assets of
the registrant and its subsidiaries on a consolidated basis.
(b) Reports on Form 8-K.
A report on Form 8-K dated May 31, 1994, was filed
electronically on June 2, 1994, reporting Item 2. Acquisition or
Disposition of Assets and Item 7. Financial Statements and
Exhibits, in connection with the merger of Valero Natural Gas
Partners, L.P. with a wholly owned subsidiary of Energy on
May 31, 1994. The following financial statements were filed in
connection with Item 7. of the Form 8-K:
(1) The following Consolidated Financial Statements of
Valero Natural Gas Partners, L.P.:
Audited Financial Statements
Consolidated Balance Sheets -- December 31, 1993 and 1992
Consolidated Statements of Income -- For the Years Ended
December 31, 1993, 1992 and 1991
Consolidated Statements of Partners' Capital -- For the Years
Ended December 31, 1993, 1992 and 1991
Consolidated Statements of Cash Flows -- For the Years Ended
December 31, 1993, 1992 and 1991
Notes to Consolidated Financial Statements
Unaudited Financial Statements
Consolidated Balance Sheets -- March 31, 1994 and
December 31, 1993 (audited)
Consolidated Statements of Income -- For the Three Months
Ended March 31, 1994 and 1993
Consolidated Statements of Partners' Capital -- For the Three
Months Ended March 31, 1994 and 1993
Consolidated Statements of Cash Flows -- For the Three Months
Ended March 31, 1994 and 1993
Notes to Consolidated Financial Statements
(2) The following pro forma information of Valero Energy
Corporation and its consolidated subsidiaries:
Pro Forma Condensed Consolidated Balance Sheet --
March 31, 1994
Pro Forma Consolidated Statement of Income -- For the Three
Months Ended March 31, 1994
Pro Forma Consolidated Statement of Income -- For the Year
Ended December 31, 1993
Notes to Pro Forma Condensed Consolidated Financial
Statements
*Filed herewith.
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
VALERO ENERGY CORPORATION
(Registrant)
By: /s/ Don M. Heep
Don M. Heep
Senior Vice President and
Chief Financial Officer
(Duly Authorized Officer and Principal
Financial and Accounting Officer)
Date: August 11, 1994
<TABLE>
EXHIBIT 11
VALERO ENERGY CORPORATION AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE
(Thousands of Dollars, Except Per Share Amounts)
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1994 1993 1994 1993
<S> <C> <C> <C> <C>
COMPUTATION OF EARNINGS PER
SHARE ASSUMING NO DILUTION:
Net income. . . . . . . . . . . . . . . . . . . . . $ 4,222 $ 24,683 $ 10,505 $ 40,294
Less: Preferred stock dividend requirements. . . . (2,989) (317) (3,521) (635)
Net income applicable to common stock . . . . . . . $ 1,233 $ 24,366 $ 6,984 $ 39,659
Weighted average number of shares of
common stock outstanding. . . . . . . . . . . . . 43,347,260 43,072,410 43,333,843 43,055,181
Earnings per share assuming no dilution . . . . . . $ .03 $ .56 $ .16 $ .92
COMPUTATION OF EARNINGS PER
SHARE ASSUMING FULL DILUTION:
Net income. . . . . . . . . . . . . . . . . . . . . $ 4,222 $ 24,683 $ 10,505 $ 40,294
Less: Preferred stock dividend requirements. . . . (2,989) (317) (3,521) (635)
Add: Reduction of preferred stock
dividends applicable to the assumed
conversion of Convertible Preferred Stock . . . . 2,695 - 2,934 -
Net income applicable to common stock
assuming full dilution . . . . . . . . . . . . . $ 3,928 $ 24,366 $ 9,918 $ 39,659
Weighted average number of shares of
common stock outstanding. . . . . . . . . . . . . 43,347,260 43,072,410 43,333,843 43,055,181
Weighted average common stock
equivalents applicable to stock options . . . . . 30,374 70,167 39,694 72,427
Weighted average shares issuable upon
conversion of Convertible Preferred Stock . . . . 6,381,798 - 3,490,597 -
Weighted average shares used for computation. . . . 49,759,432 43,142,577 46,864,134 43,127,608
Earnings per share assuming full dilution . . . . . $ .08<F1> $ .56 $ .21<F1> $ .92
<FN>
<F1> This calculation is submitted in accordance with paragraph
601(b)(11) of Regulation S-K although it is contrary to APB
Opinion No. 15 because it produces an antidilutive result.
</FN>
</TABLE>
