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 March 31, 1996
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 May 1, 1996.
Number of
Shares
Title of Class Outstanding
Common Stock, $1 Par Value 43,886,548
<PAGE>
VALERO ENERGY CORPORATION AND SUBSIDIARIES
INDEX
Page
PART I. FINANCIAL INFORMATION
Consolidated Balance Sheets - March 31, 1996 and
December 31, 1995. . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Income - For the Three
Months Ended March 31, 1996 and 1995 . . . . . . . . . .
Consolidated Statements of Cash Flows - For the
Three Months Ended March 31, 1996 and 1995 . . . . . . .
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>
March 31,
1996 December 31,
(Unaudited) 1995
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and temporary cash investments. . . . . . . . . . . . . $ 16,853 $ 28,054
Cash held in debt service escrow . . . . . . . . . . . . . . - 36,627
Receivables, less allowance for doubtful accounts of
$1,335 (1996) and $1,193 (1995). . . . . . . . . . . . . . 308,309 339,189
Inventories. . . . . . . . . . . . . . . . . . . . . . . . . 164,427 140,822
Current deferred income tax assets . . . . . . . . . . . . . 21,326 29,530
Prepaid expenses and other . . . . . . . . . . . . . . . . . 11,285 47,321
522,200 621,543
PROPERTY, PLANT AND EQUIPMENT - including
construction in progress of $46,791 (1996)
and $37,472 (1995), at cost. . . . . . . . . . . . . . . . . 2,731,834 2,697,494
Less: Accumulated depreciation. . . . . . . . . . . . . . 653,466 622,123
2,078,368 2,075,371
INVESTMENT IN AND ADVANCES TO JOINT VENTURES . . . . . . . . . 41,488 41,890
DEFERRED CHARGES AND OTHER ASSETS. . . . . . . . . . . . . . . 128,213 137,876
$2,770,269 $2,876,680
<FN>
See Notes to Consolidated Financial Statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
PART I - FINANCIAL INFORMATION
VALERO ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Thousands of Dollars)
<CAPTION>
March 31,
1996 December 31,
(Unaudited) 1995
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
CURRENT LIABILITIES:
Short-term debt. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 45,000 $ -
Current maturities of long-term debt . . . . . . . . . . . . . . . . . . 72,258 81,964
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . 309,180 312,672
Accrued interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,413 31,104
Other accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . 30,523 42,542
468,374 468,282
LONG-TERM DEBT, less current maturities. . . . . . . . . . . . . . . . . . 919,356 1,035,641
DEFERRED INCOME TAXES. . . . . . . . . . . . . . . . . . . . . . . . . . . 272,850 276,013
DEFERRED CREDITS AND OTHER LIABILITIES . . . . . . . . . . . . . . . . . . 55,482 56,031
REDEEMABLE PREFERRED STOCK, SERIES A, issued
1,150,000 shares, outstanding 69,000 (1996 and 1995) shares. . . . . . . 6,900 6,900
COMMON STOCK AND OTHER STOCKHOLDERS' EQUITY:
Preferred stock, $1 par value - 20,000,000 shares authorized
including redeemable preferred shares:
$3.125 Convertible Preferred Stock, issued and outstanding
3,450,000 (1996 and 1995) shares ($172,500 aggregate
involuntary liquidation value) . . . . . . . . . . . . . . . . . . 3,450 3,450
Common stock, $1 par value - 75,000,000 shares authorized;
issued 43,784,123 (1996) and 43,739,380 (1995) shares. . . . . . . . . 43,784 43,739
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . 531,063 530,177
Unearned Valero Employees' Stock Ownership Plan
Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (10,269) (11,318)
Retained earnings. . . . . . . . . . . . . . . . . . . . . . . . . . . . 479,328 467,943
Treasury stock, 1,967 (1996) and 6,904 (1995)
common shares, at cost . . . . . . . . . . . . . . . . . . . . . . . . (49) (178)
1,047,307 1,033,813
$2,770,269 $2,876,680
<FN>
See Notes to Consolidated Financial Statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
VALERO ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Thousands of Dollars, Except Per Share Amounts)
(Unaudited)
<CAPTION>
Three Months Ended
March 31,
1996 1995
<S> <C> <C>
OPERATING REVENUES . . . . . . . . . . . . . . . . . . . . $1,067,122 $690,535
COSTS AND EXPENSES:
Cost of sales and operating expenses . . . . . . . . . . 970,430 619,543
Selling and administrative expenses. . . . . . . . . . . 19,108 17,456
Depreciation expense . . . . . . . . . . . . . . . . . . 25,346 24,869
Total. . . . . . . . . . . . . . . . . . . . . . . . . 1,014,884 661,868
OPERATING INCOME . . . . . . . . . . . . . . . . . . . . . 52,238 28,667
EQUITY IN EARNINGS OF JOINT VENTURES . . . . . . . . . . . 222 1,869
OTHER INCOME, NET. . . . . . . . . . . . . . . . . . . . . 2,444 758
INTEREST AND DEBT EXPENSE:
Incurred . . . . . . . . . . . . . . . . . . . . . . . . (25,753) (26,076)
Capitalized. . . . . . . . . . . . . . . . . . . . . . . 563 941
INCOME BEFORE INCOME TAXES . . . . . . . . . . . . . . . . 29,714 6,159
INCOME TAX EXPENSE . . . . . . . . . . . . . . . . . . . . 9,800 2,400
NET INCOME . . . . . . . . . . . . . . . . . . . . . . . . 19,914 3,759
Less: Preferred stock dividend requirements . . . . . . 2,841 2,964
NET INCOME APPLICABLE TO COMMON STOCK. . . . . . . . . . . $ 17,073 $ 795
EARNINGS PER SHARE OF COMMON STOCK . . . . . . . . . . . . $ .39 $ .02
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
(in thousands) . . . . . . . . . . . . . . . . . . . . . 43,749 43,573
DIVIDENDS PER SHARE OF COMMON STOCK. . . . . . . . . . . . $ .13 $ .13
<FN>
See Notes to Consolidated Financial Statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
VALERO ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands of Dollars)
(Unaudited)
<CAPTION>
Three Months Ended
March 31,
1996 1995
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 19,914 $ 3,759
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation expense . . . . . . . . . . . . . . . . . . . . . . . . . . 25,346 24,869
Amortization of deferred charges and other, net. . . . . . . . . . . . . 8,832 5,890
Changes in current assets and current liabilities. . . . . . . . . . . . 20,093 63,576
Deferred income tax expense. . . . . . . . . . . . . . . . . . . . . . . 4,000 2,000
Equity in earnings in excess of distributions of joint ventures. . . . . (222) (1,346)
Changes in deferred items and other, net . . . . . . . . . . . . . . . . 2,191 (4,425)
Net cash provided by operating activities. . . . . . . . . . . . . . . 80,154 94,323
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . (31,669) (29,832)
Deferred turnaround and catalyst costs . . . . . . . . . . . . . . . . . . . (947) (28,287)
Investment in and advances to joint ventures, net. . . . . . . . . . . . . . 1,665 (275)
Dispositions of property, plant and equipment. . . . . . . . . . . . . . . . 2,667 12
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 242 (59)
Net cash used in investing activities. . . . . . . . . . . . . . . . . . . (28,042) (58,441)
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in short-term debt. . . . . . . . . . . . . . . . . . . . . . . . . 45,000 10,000
Long-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 6,500
Long-term debt reduction, net. . . . . . . . . . . . . . . . . . . . . . . . (125,143) (78,857)
Decrease in cash held in debt service escrow for principal . . . . . . . . . 24,643 22,768
Common stock dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . (5,687) (5,665)
Preferred stock dividends. . . . . . . . . . . . . . . . . . . . . . . . . . (2,842) (2,964)
Issuance of common stock, net. . . . . . . . . . . . . . . . . . . . . . . . 716 1,089
Net cash used in financing activities. . . . . . . . . . . . . . . . . . . (63,313) (47,129)
NET DECREASE IN CASH AND TEMPORARY
CASH INVESTMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (11,201) (11,247)
CASH AND TEMPORARY CASH INVESTMENTS AT
BEGINNING OF PERIOD. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28,054 26,210
CASH AND TEMPORARY CASH INVESTMENTS AT
END OF PERIOD. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 16,853 $ 14,963
<FN>
See Notes to Consolidated Financial Statements.
</FN>
</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
Inventories
Refinery feedstocks and refined products and blendstocks 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 excess of the replacement cost of such inventories
over their LIFO values was approximately $41 million at
March 31,1996. Natural gas in underground storage, natural gas
liquids ("NGLs") and materials and supplies are carried principally
at weighted average cost not in excess of market. Inventories as
of March 31, 1996 and December 31, 1995 were as follows (in
thousands):
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
<S> <C> <C>
Refinery feedstocks . . . . . . . . . . . . . . $ 75,343 $ 48,295
Refined products and blendstocks. . . . . . . . 62,364 41,967
Natural gas in underground storage. . . . . . . 8,012 31,156
NGLs. . . . . . . . . . . . . . . . . . . . . . 2,085 3,280
Materials and supplies. . . . . . . . . . . . . 16,623 16,124
$164,427 $140,822
</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 deferred income tax assets,
short-term debt and current maturities of long-term debt. The
changes in the Company's current assets and current liabilities,
excluding the items noted above, 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. (Dollars in
thousands.)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1996 1995
<S> <C> <C>
Cash held in debt service escrow for interest . . . . $ 11,984 $ 12,673
Receivables, net. . . . . . . . . . . . . . . . . . . 30,880 30,390
Inventories . . . . . . . . . . . . . . . . . . . . . (23,605) 61,406
Prepaid expenses and other. . . . . . . . . . . . . . 36,036 6,274
Accounts payable. . . . . . . . . . . . . . . . . . . (3,492) (30,733)
Accrued interest. . . . . . . . . . . . . . . . . . . (19,691) (8,413)
Other accrued expenses. . . . . . . . . . . . . . . . (12,019) (8,021)
Total. . . . . . . . . . . . . . . . . . . . . . . $ 20,093 $ 63,576
</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>
Three Months Ended
March 31,
1996 1995
<S> <C> <C>
Interest (net of amount capitalized of $563 (1996)
and $941 (1995)) . . . . . . . . . . . . . . . . . . . $44,682 $33,150
Income taxes. . . . . . . . . . . . . . . . . . . . . . . - 74
</TABLE>
Note 4
Litigation and Contingencies
Approximately a dozen lawsuits have been filed against
various pipeline owners and other parties, including the Company,
arising from the rupture of several pipelines and fire as a result
of severe flooding of the San Jacinto River in Harris County, Texas
on October 20, 1994. The Company is a defendant in nine of these
lawsuits. The plaintiffs are property owners in surrounding areas
who allege that the defendant pipeline owners were negligent and
grossly negligent in failing to bury the pipelines at a proper
depth to avoid rupture or explosion and in allowing the pipelines
to leak chemicals and hydrocarbons into the flooded area. The
plaintiffs assert claims for property damage, costs for medical
monitoring, personal injury and nuisance, and seek an unspecified
amount of actual and punitive damages.
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 a gas
processing plant in 1991 and 1992. The plaintiff alleges that it
performed work for the defendants for which it was not compensated.
The plaintiff asserts claims for breach of contract, quantum
meruit, and numerous other contract and tort claims. In the
plaintiff's fourth amended petition filed March 29, 1996, the
plaintiff alleges actual damages of approximately $1.3 million,
plus retainage, interest and attorneys fees, and punitive damages
of at least four times the amount of actual damages. The
defendants' motion for summary judgment regarding certain of the
plaintiff's tort claims was denied. A trial date of July 22, 1996
has been set.
In 1987, certain subsidiaries of the Company entered into a
settlement agreement with a producer from whom they had purchased
natural gas to resolve a take-or-pay dispute between the parties.
As part of the settlement, the parties terminated their
then-existing gas sales contracts and entered into new gas sales
contracts. Under the settlement agreement, the Company's
subsidiaries agreed to pay one-half of any "excess royalty claim"
brought against the producer relating to any natural gas produced
and sold to the subsidiaries after the date of the settlement
agreement. In May 1995, certain mineral interest owners in South
Texas brought a lawsuit against the producer and several other
defendants, including the Company, asserting several claims in
connection with an alleged underpayment of royalties. In their
lawsuit, the mineral interest owners allege that the numerous
"operator defendants" (excluding the Company) breached certain
covenants and duties thereby depriving the plaintiffs of the full
value of their royalty interests. The plaintiffs allege that the
Company conspired with the producer to deprive plaintiffs of
royalties that they would have earned but for the settlement of the
gas contract dispute. The plaintiffs seek unspecified actual and
punitive damages.
On April 15, 1994, certain trusts named certain subsidiaries
of the Company as additional defendants (the "Valero Defendants")
to a lawsuit filed in 1989 against a supplier with whom the Valero
Defendants have contractual relationships under gas purchase
contracts. In order to resolve certain potential disputes with
respect to the gas purchase contracts, the Valero Defendants agreed
to bear a substantial portion of any settlement or any
nonappealable final judgment rendered against the supplier. In
January 1993, the District Court ruled in favor of the trusts'
motion for summary judgment against the supplier. Damages, if any,
were not determined. The trusts seek $50 million in damages from
the Valero Defendants as a result of the Valero Defendants' alleged
interference between the trusts and the supplier, plus punitive
damages in an amount in excess of treble the amount of actual
damages proven at trial. The trusts also seek approximately $56
million in take-or-pay damages from the supplier and $70 million as
damages for the supplier's failure to take the trusts' gas ratably.
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.
A federal securities fraud class action lawsuit was filed
against Energy and certain of its subsidiaries by a former owner of
approximately 19,500 units of limited partnership interests of
Valero Natural Gas Partners, L.P. ("VNGP, L.P."). The plaintiff
alleges that the proxy statement used in connection with the
solicitation of votes for approval of a merger (the "Merger") of
the Company and VNGP, L.P. contained fraudulent misrepresentations.
The plaintiff also alleges breach of fiduciary duty in connection
with the merger transaction. The subject matter of this lawsuit
was the subject matter of a prior Delaware class action lawsuit
which was settled prior to consummation of the Merger. The
plaintiff challenges the class action settlement on grounds that
the class members were not given an opportunity to "opt-out" of the
class and that the class members were not adequately represented by
counsel. The lawsuit is scheduled for trial on December 2, 1996.
A lawsuit was filed against a subsidiary of Energy in June
1994 by certain residents of the Mobile Estate subdivision located
near the Company's specialized petroleum refinery (the "Refinery")
in Corpus Christi, Texas, alleging that air, soil and water in the
subdivision have been contaminated by emissions from the Refinery
of allegedly hazardous chemicals and toxic hydrocarbons. The
plaintiffs' claims include negligence, gross negligence, strict
liability, nuisance and trespass. In May 1995, the plaintiffs
filed a motion for nonsuit, seeking a dismissal of the case against
the Company. Various filings and motions by both parties are
before the court with respect to the attempted termination of this
lawsuit.
The Company owns a 20% general partner interest in Javelina,
a general partnership that owns a refinery off-gas processing plant
in Corpus Christi. Javelina has been named as a defendant in eight
lawsuits filed since 1992 in state district courts in Nueces County
and Duval 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. The plaintiffs seek an unspecified
amount of actual and punitive damages. The remaining four suits
were brought by plaintiffs who either live or have businesses near
the Javelina plant. The plaintiffs in these suits allege claims
similar to those described above and seek unspecified actual and
punitive damages.
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 statements; however, due to the
inherent uncertainty of litigation, the range of possible loss, if
any, cannot be estimated with a reasonable degree of precision and
there can be no assurance that the resolution of any particular
claim or proceeding would not have an adverse effect on the
Company's results of operations for the interim period in which
such resolution occurred.
<PAGE>
VALERO ENERGY CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following are the Company's financial and operating
highlights for the three months ended March 31, 1996 and 1995. The
1995 amounts of operating revenues and operating income (loss) by
segment and certain natural gas/natural gas liquids operating
statistics have been restated to conform to the 1996 segment
presentation. The amounts in the following table are in thousands
of dollars, unless otherwise noted:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1996 1995
<S> <C> <C>
OPERATING REVENUES:
Refining and marketing . . . . . . . . . . . . . . . . . . . . . . . . $ 574,507 $404,181
Natural gas/natural gas liquids. . . . . . . . . . . . . . . . . . . . 534,948 327,205
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 32
Intersegment eliminations. . . . . . . . . . . . . . . . . . . . . . . (42,365) (40,883)
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,067,122 $690,535
OPERATING INCOME (LOSS):
Refining and marketing . . . . . . . . . . . . . . . . . . . . . . . . $ 15,233 $ 15,111
Natural gas/natural gas liquids. . . . . . . . . . . . . . . . . . . . 47,466 21,744
Corporate general and administrative expenses and other, net . . . . . (10,461) (8,188)
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 52,238 $ 28,667
Equity in earnings of joint ventures . . . . . . . . . . . . . . . . . . $ 222 $ 1,869
Other income, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,444 $ 758
Interest and debt expense, net . . . . . . . . . . . . . . . . . . . . . $ 25,190 $ 25,135
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 19,914 $ 3,759
Net income applicable to common stock. . . . . . . . . . . . . . . . . . $ 17,073 $ 795
Earnings per share of common stock . . . . . . . . . . . . . . . . . . . $ .39 $ .02
OPERATING STATISTICS:
Refining and marketing:
Throughput volumes (Mbbls per day) . . . . . . . . . . . . . . . . . 169 149
Average throughput margin per barrel . . . . . . . . . . . . . . . . $ 4.55 $ 4.86
Natural gas/natural gas liquids:
Gas volumes (MMcf per day):
Sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,776 1,460
Transportation . . . . . . . . . . . . . . . . . . . . . . . . . . 1,426 1,370
Total gas volumes. . . . . . . . . . . . . . . . . . . . . . . . 3,202 2,830
Average gas sales margin per Mcf . . . . . . . . . . . . . . . . . . $ .246 $ .160
Average gas transportation fee per Mcf . . . . . . . . . . . . . . . $ .101 $ .097
NGL plant production (Mbbls per day) . . . . . . . . . . . . . . . . 78.9 85.4
Average NGL market price per gallon. . . . . . . . . . . . . . . . . $ .305 $ .263
Average gas cost per Mcf . . . . . . . . . . . . . . . . . . . . . . $ 1.60 $ 1.41
Average NGL margin per gallon. . . . . . . . . . . . . . . . . . . . $ .095 $ .079
</TABLE>
<PAGE>
Consolidated Results
The Company reported net income of $19.9 million, or $.39 per
share, for the first quarter of 1996 compared to $3.8 million, or
$.02 per share, for the same period in 1995. Net income and
earnings per share increased due primarily to an increase in
operating income from the Company's natural gas/natural gas liquids
operations, partially offset by increases in corporate expenses and
income tax expense.
Operating revenues increased $376.6 million, or 55%, to
$1.1 billion during the first quarter of 1996 compared to the
same period in 1995 due primarily to an increase in operating
revenues from the Company's natural gas/natural gas liquids
operations and to a lesser extent to an increase in operating
revenues from refining and marketing operations. Operating income
increased $23.5 million, or 82%, to $52.2 million during the first
quarter of 1996 compared to the 1995 period due primarily to an
increase in natural gas/natural gas liquids operating income,
partially offset by an increase in corporate expenses, net,
resulting from higher employee-related costs. Changes in operating
revenues and operating income by business segment are explained
below under "Segment Results."
Equity in earnings of joint ventures decreased $1.7 million
to $.2 million during the first quarter of 1996 compared to the
same period in 1995 due to a decrease in the Company's equity in
earnings of Javelina resulting primarily from lower petrochemical
product prices and higher feedstock costs. Offsetting the decrease
in equity in earnings of joint ventures was a $1.7 million increase
in Other income, net, resulting primarily from income recognized in
the 1996 period in connection with a minor investment in a natural
gas development project. Income tax expense increased $7.4 million
to $9.8 million in the first quarter of 1996 compared to the same
period in 1995 due primarily to higher pre-tax income partially
offset by the recognition in the 1996 period of certain income tax
credits related to the natural gas development project noted above.
Segment Results
Refining and Marketing
Operating revenues from the Company's refining and marketing
operations increased $170.3 million, or 42%, to $574.5 million
during the first quarter of 1996 compared to the same period in
1995 due primarily to an increase in sales volumes resulting
from trading and rack marketing activities and to a lesser extent
from an increase in throughput volumes. Average daily throughput
volumes increased due to various unit improvements and enhancements
made during 1995 and the nonrecurrence of various unit turnarounds
and downtimes which occurred during the first quarter of 1995.
Operating income from the Company's refining and marketing
operations of $15.2 million during the first quarter of 1996 was
basically flat compared to the $15.1 million of operating income
during the same period in 1995 as an approximate $5 million, or 7%,
increase in total throughput margins was offset by an approximate
$5 million increase in operating expenses. Total throughput
margins increased due to higher oxygenate margins resulting from
lower methanol feedstock costs, an increase in margins between
conventional refined product prices and crude oil resulting from
more stable gasoline markets during the 1996 period, and the unit
improvements and nonrecurrence of unit turnarounds and downtimes
noted above. These increases in throughput margins were partially
offset by narrower feedstock discounts, including narrower
discounts for residual oil ("resid") feedstocks due to an increase
in worldwide demand as a result of exceptionally cold weather
during the 1996 period, lower prices on sales of petrochemical
feedstocks, and narrower premiums on sales of reformulated gasoline
("RFG") and other products. Although total throughput margins
increased due to the factors noted above, the Refinery's average
throughput margin per barrel decreased from $4.86 in the first
quarter of 1995 to $4.55 in the first quarter of 1996 due to
volumes produced but not sold in the 1996 period. See "Liquidity
and Capital Resources" below. Operating expenses increased due
primarily to higher variable costs resulting from increased
throughput and costs associated with the methanol plant which
commenced operations in the latter half of 1995, although operating
expenses per barrel decreased by approximately 3% due to the
above-noted increase in throughput volumes.
Natural Gas/Natural Gas Liquids
Operating revenues from the Company's natural gas/natural gas
liquids operations increased $207.8 million, or 64%, during the
first quarter of 1996 compared to the same period in 1995 due
primarily to a 55% increase in average natural gas sales prices and
a 22% increase in daily natural gas sales volumes, primarily
off-system sales. These increases were due to significantly
stronger natural gas demand resulting from extreme cold winter
weather during the 1996 period.
Operating income from the Company's natural gas/natural gas
liquids operations increased $25.7 million, or 118%, during the
first quarter of 1996 compared to the same period in 1995 due
primarily to an approximate $19 million increase in total gas sales
margins and higher NGL margins of approximately $4 million. Total
gas sales margins increased due to the significant increase in gas
sales volumes and prices noted above and to an increased
contribution of $6.6 million from price risk management activities,
partially offset by reduced volumetric gains. Total NGL margins
were higher due to a 16% increase in the average NGL sales price
resulting from firm petrochemical and refining demand and low NGL
inventory levels, partially offset by an increase in fuel and
shrinkage costs and an 8% decrease in NGL production volumes. A
$5.1 million increase in benefits from price risk management
activities reduced fuel and shrinkage costs to below-market levels,
however, resulting in only a 13% increase in the average cost of
natural gas. NGL production volumes were down primarily due to the
sale of the Company's two West Texas processing plants in August
1995, which more than offset production increases at the remaining
plants resulting from the completion in 1995 of certain operational
improvements and production enhancements.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by the Company's operating activities
decreased $14.2 million during the first quarter of 1996 compared
to the same period in 1995 due primarily to an increase in refining
inventories in the 1996 period compared to a decrease in refining
inventories in the 1995 period, partially offset by the increase in
income described above under "Results of Operations" and a decrease
in commodity deposits and deferrals. Refining inventories
increased in 1996 due primarily to weather-related shipment delays
at the end of the quarter, while such inventories decreased in 1995
resulting from a decrease in volumes available under feedstock
contracts and higher-than-normal refined product inventory levels
at the end of 1994. During the 1996 period, the Company utilized
the cash provided by its operating activities and a portion of its
existing cash balances to fund capital expenditures, reduce bank
debt, repay principal on certain outstanding nonbank debt including
Valero Management Partnership, L.P.'s (the "Management
Partnership") First Mortgage Notes (the "First Mortgage Notes"),
and pay common and preferred stock dividends.
Energy currently maintains an unsecured $300 million
revolving bank credit and letter of credit facility. As of March
31, 1996, Energy had approximately $258 million available under
this committed bank credit facility for additional borrowings and
letters of credit. Energy also has numerous uncommitted short-term
bank credit lines and bank letter of credit facilities. As of
March 31, 1996, $45 million was outstanding under these short-term
bank lines and letters of credit aggregating $43 million were
issued and outstanding under these uncommitted letter of credit
facilities. The Company was in compliance with all covenants
contained in its various debt facilities as of March 31, 1996.
During the first quarter of 1996, the Company expended
approximately $33 million for capital investments, primarily
capital expenditures, $15 million of which related to refining and
marketing operations while $16 million related to natural
gas/natural gas liquids operations. For total year 1996, the
Company currently expects to incur approximately $185 million for
capital expenditures and deferred turnaround and catalyst costs.
The Company currently owns a 35% interest in Productos
Ecologicos, S.A. de C.V. ("Proesa"), a Mexican corporation which is
involved in a project (the "Project") to design, construct and
operate a plant in Mexico to produce MTBE. In January 1995, the
Company suspended further investment in the Project pending the
resolution of certain key issues. Proesa and the Project
participants are continuing to engage in discussions with Petroleos
Mexicanos, S.A. ("Pemex"), the Mexican state-owned oil company, in
order to renegotiate the purchase and sales agreements between
Proesa and Pemex. The Project participants are also engaged in
negotiations to restructure the participants' ownership interests
in Proesa and reach agreement on funding arrangements for the
Project, including procedures for funding any possible cost
overruns. The Company believes that it will be necessary to
attract new participants in order for the Project to proceed.
However, despite indications of interest by other potential
participants, as well as some indications of improvement in the
Mexican economy, there can be no assurance that mutually
satisfactory agreements can be reached between Proesa and Pemex,
that the present and potential Project participants can reach
agreement on the Project ownership structure, or that financing
satisfactory to all participants can be arranged. If the Project
is terminated, there can be no assurance that the Company's
investment in the Project could be recovered. At March 31, 1996,
the Company had a total investment in the Project of approximately
$16.5 million, and Proesa had incurred additional obligations
totalling approximately $11 million which have not been funded by
its owners. Proesa has also furnished a surety bond in connection
with the plant's first year of operations under an existing MTBE
sales agreement between Proesa and Pemex. Based on the exchange
rate at April 30, 1996, the insurable value of such surety bond was
approximately $5.6 million. Proesa currently has no independent
source of funding. Therefore, in the event of any cash
requirements resulting from the above, Proesa would necessarily
request additional funding from its owners.
During the first quarter of 1996, the Company entered into a
sublease agreement for unused space in its corporate headquarters
office complex. The sublease has a primary term of 20 years, with
the sublessee having an option to terminate the lease after 10
years. The sublessee is scheduled to occupy the premises in
phases, with full occupancy expected in the latter part of 1996.
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 ongoing operating
requirements. The Company expects that it will raise additional
funds from time to time through equity or debt financings; however,
except for borrowings under bank credit agreements or debt
securities that may be issued from time to time under the Company's
$250 million shelf registration statement, the Company has no
specific financing plans as of the date hereof.
This discussion contains certain "forward-looking statements"
(within the meaning of Section 27A of the Securities Act of 1933
and Section 21E of the Securities Exchange Act of 1934) regarding
estimates and projections of amounts of future earnings, cash
flows, capital expenditures, liabilities and other financial
matters of the Company; plans and objectives of management
regarding the Company's future operations; and certain assumptions
underlying such estimates, projections, plans and objectives.
While these forward-looking statements are made in good faith,
future operating, economic, legal, political and other conditions
could cause actual results to differ materially from those in the
forward-looking statements.
PART II OTHER INFORMATION
Item 1. Legal Proceedings
J.M. Davidson, Inc. v. Valero Energy Corporation; Valero
Hydrocarbons, L.P.; et al., 229th State District Court, Duval
County, Texas (filed January 21, 1993). This lawsuit is based upon
construction work performed by the plaintiff at a gas processing
plant in 1991 and 1992. The plaintiff alleges that it performed
work for the defendants for which it was not compensated. The
plaintiff asserts claims for breach of contract, quantum meruit,
and numerous other contract and tort claims. In the plaintiff's
fourth amended petition filed in March 1996, the plaintiff alleges
actual damages of approximately $1.3 million, plus retainage,
interest and attorneys' fees, and punitive damages of at least four
times the amount of actual damages. The court denied the
defendants' motion for summary judgment regarding certain of the
plaintiff's tort claims. Trial is scheduled for July 22, 1996.
The Long Trusts v. Tejas Gas Corporation; Valero Transmission,
L.P.; et al., 123rd Judicial District Court, Panola County, Texas
(filed March 1, 1989). On April 15, 1994, certain trusts (the
"Long Trusts") named Valero Transmission Company ("VTC") and Valero
Transmission, L.P. ("VT,L.P.") as additional defendants (the
"Valero Defendants") to a lawsuit filed in 1989 against Tejas Gas
Corporation ("Tejas"), a supplier with whom VT,L.P., as successor
to VTC, has contractual relationships under gas purchase contracts.
In order to resolve certain potential disputes with respect to the
gas purchase contracts, VT,L.P. agreed to bear a substantial
portion of any settlement or nonappealable final judgment rendered
against Tejas. In January 1993, the District Court ruled in favor
of the Long Trusts' motion for summary judgment against Tejas.
Damages, if any, were not determined. The trusts seek $50 million
in damages from the Valero Defendants as a result of the Valero
Defendants' alleged interference between the Long Trusts and Tejas,
plus punitive damages in an amount in excess of treble the amount
of actual damages proven at trial. The trusts also seek
approximately $56 million in take-or-pay damages from the supplier
and $70 million as damages for the supplier's failure to take the
trusts' gas ratably. The Company believes that the claims brought
by the Long Trusts have been significantly overstated, and that
Tejas and the Valero Defendants have a number of meritorious
defenses to the claims.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
11.1 Computation of Earnings Per Share.
27.1* Financial Data Schedule.
__________
* The Financial Data Schedule shall not be deemed
"filed" for purposes of Section 11 of the Securities
Act of 1933 or Section 18 of the Securities Exchange
Act of 1934, and is included as an exhibit only to the
electronic filing of this Form 10-Q in accordance with
Item 601(c) of Regulation S-K and Section 401 of
Regulation S-T.
(b) Reports on Form 8-K.
(i) The Company did not file a Current Report on Form 8-K
during the quarter ended March 31, 1996.
Pursuant to subparagraph 601(b)(4)(iii)(A) of Regulation S-K,
the registrant has omitted from the foregoing list 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.
<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: May 15, 1996
<TABLE>
EXHIBIT 11.1
VALERO ENERGY CORPORATION AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE
(Thousands of Dollars, Except Per Share Amounts)
<CAPTION>
Three Months Ended
March 31,
1996 1995
<S> <C> <C>
COMPUTATION OF EARNINGS PER SHARE
ASSUMING NO DILUTION:
Net income. . . . . . . . . . . . . . . . . . . . . . . . . . $ 19,914 $ 3,759
Less: Preferred stock dividend requirements. . . . . . . . . (2,841) (2,964)
Net income applicable to common stock . . . . . . . . . . . . $ 17,073 $ 795
Weighted average number of shares of common
stock outstanding. . . . . . . . . . . . . . . . . . . . . 43,748,550 43,573,008
Earnings per share assuming no dilution . . . . . . . . . . . $ .39 $ .02
COMPUTATION OF EARNINGS PER SHARE
ASSUMING FULL DILUTION:
Net income. . . . . . . . . . . . . . . . . . . . . . . . . . $ 19,914 $ 3,759
Less: Preferred stock dividend requirements. . . . . . . . . (2,841) (2,964)
Add: Reduction of preferred stock dividends
applicable to the assumed conversion of
Convertible Preferred Stock. . . . . . . . . . . . . . . . 2,695 2,695
Net income applicable to common stock
assuming full dilution . . . . . . . . . . . . . . . . . . $ 19,768 $ 3,490
Weighted average number of shares of common
stock outstanding. . . . . . . . . . . . . . . . . . . . . 43,748,550 43,573,008
Weighted average common stock equivalents
applicable to stock options. . . . . . . . . . . . . . . . 438,815 55,858
Weighted average shares issuable upon conversion
of Convertible Preferred Stock . . . . . . . . . . . . . . 6,381,798 6,381,798
Weighted average shares used for computation. . . . . . . . . 50,569,163 50,010,664
Earnings per share assuming full dilution . . . . . . . . . . $ .39 $ .07 <F1>
<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>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AS OF MARCH 31, 1996 AND THE CONSOLIDATED
STATEMENT OF INCOME FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 16,853
<SECURITIES> 0
<RECEIVABLES> 309,644
<ALLOWANCES> 1,335
<INVENTORY> 164,427
<CURRENT-ASSETS> 522,200
<PP&E> 2,731,834
<DEPRECIATION> 653,466
<TOTAL-ASSETS> 2,770,269
<CURRENT-LIABILITIES> 468,374
<BONDS> 919,356
6,900
3,450
<COMMON> 43,784
<OTHER-SE> 1,000,073
<TOTAL-LIABILITY-AND-EQUITY> 2,770,269
<SALES> 1,067,122
<TOTAL-REVENUES> 1,067,122
<CGS> 1,014,884
<TOTAL-COSTS> 1,014,884
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 25,190
<INCOME-PRETAX> 29,714
<INCOME-TAX> 9,800
<INCOME-CONTINUING> 19,914
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 19,914
<EPS-PRIMARY> .39
<EPS-DILUTED> 0
</TABLE>
