FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X]
For the fiscal year ended December 31, 1995
OR
[ ]
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 78215
San Antonio, Texas (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code (210) 246-2000
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
Common Stock, $1 Par Value New York Stock Exchange
$3.125 Convertible Preferred Stock New York Stock Exchange
Preference Share Purchase Rights New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
NONE.
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
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of registrant's knowledge,
in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value on February 1, 1996, of the
registrant's Common Stock, $1.00 par value ("Common Stock"), held
by nonaffiliates of the registrant, based on the average of the
high and low prices as quoted in the New York Stock Exchange
Composite Transactions listing for that date, was approximately
$1 billion. As of February 1, 1996, 43,745,961 shares of the
registrant's Common Stock were issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The Company intends to file with the Securities and Exchange
Commission (the "Commission") in March 1996 a definitive Proxy
Statement (the "1996 Proxy Statement") for the Company's Annual
Meeting of Stockholders scheduled for April 30, 1996, at which
directors of the Company will be elected. Portions of the 1996
Proxy Statement are incorporated by reference in Part III of this
Form 10-K and shall be deemed to be a part hereof.
<PAGE>
CROSS-REFERENCE SHEET
The following table indicates the headings in the 1996 Proxy
Statement where the information required in Part III of Form 10-K
may be found.
<TABLE>
<CAPTION>
Form 10-K Item No. and Caption Heading in 1996 Proxy Statement
<S> <C>
10. "Directors and Executive Officers of the
Registrant". . . . . . . . . . . . . . . . . "Item No. 1 - Election of Directors," and
"Information Concerning Nominees and Other
Directors" and "Section 16(a) Compliance"
11. "Executive Compensation" . . . . . . . . . . . "Executive Compensation," "Stock Option Grants and
Related Information," "Retirement Benefits,"
"Arrangements with Certain Officers and Directors"
and "Executive Severance Program"
12. "Security Ownership of Certain Beneficial
Owners and Management" . . . . . . . . . . . "Beneficial Ownership of Valero Securities"
13. "Certain Relationships and Related
Transactions". . . . . . . . . . . . . . . . "Transactions with Management and Others"
</TABLE>
Copies of all documents incorporated by reference, other
than exhibits to such documents, will be provided without charge
to each person who receives a copy of this Form 10-K upon written
request to Rand C. Schmidt, Corporate Secretary, Valero Energy
Corporation, P.O. Box 500, San Antonio, Texas 78292.
<PAGE>
CONTENTS
PAGE
Cross Reference Sheet. . . . . . . . . . . . . . ii
PART I
Item 1. Business. . . . .. . . . . . . . . . . . . . . .
Refining and Marketing . . . . . . . . . . . . .
Refining Operations . . . . . . . . . . . . .
Sales . . . . . . . . . . . . . . . . . . . .
Feedstock Supply. . . . . . . . . . . . . . .
Factors Affecting Operating Results . . . . .
Proesa MTBE Plant . . . . . . . . . . . . . .
Natural Gas. . . . . . . . . . . . . . . . . . .
Transmission System . . . . . . . . . . . . .
Gas Sales and Marketing . . . . . . . . . . .
Gas Transportation. . . . . . . . . . . . . .
Gas Supply and Storage. . . . . . . . . . . .
Natural Gas Liquids. . . . . . . . . . . . . . .
Governmental Regulations . . . . . . . . . . . .
Federal Regulation. . . . . . . . . . . . . .
Texas Regulation. . . . . . . . . . . . . . .
Competition. . . . . . . . . . . . . . . . . . .
Refining and Marketing. . . . . . . . . . . .
Natural Gas . . . . . . . . . . . . . . . . .
Natural Gas Liquids . . . . . . . . . . . . .
Environmental Matters. . . . . . . . . . . . . .
Employees. . . . . . . . . . . . . . . . . . . .
Executive Officers of the Registrant . . . . . .
Item 2. Properties . . . . . . . . . . . . . . . . . . .
Item 3. Legal Proceedings. . . . . . . . . . . . . . . .
Item 4. Submission of Matters to a Vote of Security
Holders . . . . . . . . . . . . . . . . . . .
PART II
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters . . . . . . . . .
Item 6. Selected Financial Data. . . . . . . . . . . . .
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of
Operations. . . . . . . . . . . . . . . . . .
Item 8. Financial Statements . . . . . . . . . . . . . .
Item 9. Changes in and Disagreements with
Accountants on Accounting and Financial
Disclosure. . . . . . . . . . . . . . . . . .
PART III
PART IV
Item 14. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K . . . . . . . . . . .
<PAGE>
PART I
ITEM 1. BUSINESS
Valero Energy Corporation was incorporated in Delaware in
1955 and became a publicly held corporation in 1979. Its
principal executive offices are located at 530 McCullough Avenue,
San Antonio, Texas 78215. Unless otherwise required by the
context, the term "Energy" as used herein refers to Valero Energy
Corporation, and the term "Company" refers to Energy and its
consolidated subsidiaries. The Company is a diversified energy
company engaged in the production, transportation and marketing
of environmentally clean fuels and products. The Company's three
core businesses are specialized refining, natural gas and natural
gas liquids ("NGL"). The Company owns a specialized petroleum
refinery in Corpus Christi, Texas (the "Refinery"), and refines
high-sulfur atmospheric residual oil into premium products,
primarily reformulated gasoline ("RFG"), and markets those
refined products. See "Refining and Marketing." The Company
also has a network of approximately 8,000 miles of natural gas
transmission and gathering lines throughout Texas. The Company
purchases natural gas for resale to distribution companies,
electric utilities, other pipelines and industrial customers
throughout North America, and provides gas transportation
services to third parties. See "Natural Gas." The Company also
owns eight natural gas processing plants and is a major producer
and marketer of NGLs. See "Natural Gas Liquids."
For financial and statistical information regarding the
Company's operations, see "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and Note 10 of
Notes to Consolidated Financial Statements. For a discussion of
cash flows provided by and used in the Company's operations, see
"Management's Discussion and Analysis of Financial Condition and
Results of Operations - Liquidity and Capital Resources."
REFINING AND MARKETING
Refining Operations
The Refinery processes primarily high-sulfur atmospheric
tower bottoms, a type of residual fuel oil ("resid"), into a
product slate of higher value products, principally RFG and
middle distillates. The Refinery also processes crude oil,
butanes and other feedstocks. The Refinery can produce
approximately 170,000 barrels per day of refined products, with
gasoline and gasoline blendstocks comprising approximately 85% of
the Refinery's throughput, and middle distillates comprising the
remainder. The Refinery can produce all of its gasoline as RFG
and all of its diesel fuel as low-sulfur diesel. The Refinery
has substantial flexibility to vary its mix of gasoline products
to meet changing market conditions. For additional information
regarding refining and marketing operating results for the three
years ended December 31, 1995, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
The Refinery's principal operating units include its
hydrodesulfurization unit ("HDS Unit") and the heavy oil cracking
complex ("HOC"). The HDS Unit removes sulfur and metals from
resid to improve resid's subsequent cracking characteristics.
The HDS Unit has a capacity of approximately 70,000 barrels per
day. The HOC processes feedstock primarily from the HDS Unit,
and has a capacity of approximately 74,000 barrels per day. The
Refinery's other significant units include a 36,000 barrel-per-
day "Hydrocracker" (which produces reformer feed naphtha from the
Refinery's gas oil and distillate streams), a 35,600 barrel-per-
day continuous catalyst regeneration "Reformer" (which produces
reformate, a low vapor pressure high-octane gasoline blendstock,
from the Refinery's naphtha streams), a 31,000 barrel-per-day
reformate splitter (which separates a benzene concentrate stream
from reformate produced at the Reformer), a 30,000 barrel-per-day
crude unit, and a 24,000 barrel-per-day vacuum unit.
Also located at the Refinery is the Company's MTBE Plant
(the "MTBE Plant"). The MTBE Plant can produce 15,500 barrels
per day of methyl tertiary butyl ether ("MTBE") from butane and
methanol feedstocks. MTBE is an oxygen-rich, high-octane
gasoline blendstock produced by reacting methanol and
isobutylene, and is used to manufacture oxygenated and
reformulated gasolines. The Company can blend the MTBE produced
at the Refinery into the Company's own gasoline production or
sell the MTBE separately. The "MTBE/TAME Unit" converts streams
produced by the HOC into about 2,500 barrels per day of MTBE and
3,000 barrels per day of tertiary amyl methyl ether ("TAME").
TAME, like MTBE, is an oxygen-rich, high-octane gasoline
blendstock. The MTBE Plant and MTBE/TAME Unit enable the Company
to produce approximately 21,000 barrels per day of total
oxygenates.
All of the methanol feedstocks presently required for the
production of oxygenates at the Refinery are provided by a
methanol plant in Clear Lake, Texas owned by a joint venture
between the Company and Hoechst Celanese Chemical Group, Inc.
(the "Methanol Plant"). The Methanol Plant, placed in service in
late August 1995, can produce approximately 13,000 barrels per
day of methanol, and provides the MTBE Plant with methanol
feedstocks at production costs below recent methanol market
prices.
Through a wholly owned subsidiary, the Company is a 20%
general partner in Javelina Company ("Javelina"), which owns a
plant in Corpus Christi (the "Javelina Plant") that processes
waste gases from the Refinery and other refineries in the Corpus
Christi area, and extracts hydrogen, ethylene, propylene and NGLs
from the gas stream. The Company's capital investment in
Javelina was approximately $20.2 million as of December 31, 1995.
Javelina maintains a term loan agreement and a working capital
and letter of credit facility that mature on January 31, 1999.
The Company's guarantees of these bank credit agreements were
approximately $8.9 million at December 31, 1995.
The Company also has a marine vapor recovery unit at the
Refinery. The unit enhances air quality by capturing and
recycling vapors that are displaced when gasoline is loaded onto
ships and barges. The retrieved vapors are condensed and blended
back into gasoline. Approximately two gallons of gasoline are
recovered for every 1,000 gallons loaded onto ship or barge. The
Company also operates an environmentally friendly bio-slurry
reactor process at the Refinery which uses microorganisms to
biodegrade and treat solid waste. In 1995, the Company received
the Texas Governor's Award for environmental excellence as well
as the National Petroleum Refiners Association award for
environmental achievements.
In 1995, the Company completed turnarounds on its HDS Unit,
Hydrocracker and Reformer, and performed scheduled maintenance
repairs on the HOC. Improvements made during these downtimes and
during the HOC turnaround in late 1994 enabled the Company to
increase the capacity of the HDS Unit and the HOC by
approximately 5,000 barrels per day. These expansions and other
debottlenecking and upgrading projects completed in 1995 enhanced
the Company's efficiency in converting high-sulfur resid and gas
oils into higher valued gasoline products. The Refinery's other
principal refining units operated during 1995 without significant
unscheduled downtime. The HDS Unit is scheduled for maintenance
and a catalyst change in the third quarter of 1996. This
maintenance and catalyst change is required about every
15 months.
The Company recently announced plans for two additional
expansion projects at the Refinery. In the first, the Company
will construct a facility to fractionate xylenes from the
Reformer's reformate stream. The fractionated xylene may then be
sold into the petrochemical feedstock market to be used as a
feedstock for paraxylene. This project is expected to be
completed near the end of 1996 at a cost of approximately
$27 million. The second project is the proposed expansion of the
MTBE Plant which will allow the Company to increase MTBE
production by approximately 1,500 barrels per day. This project
is expected to be completed in early 1997 at a cost of
approximately $14 million.
Sales
Set forth below is a summary of refining and marketing
throughput volumes per day, average throughput margin per barrel
and sales volumes per day for the three years ended December 31,
1995. Average throughput margin per barrel is computed by
subtracting total direct product cost of sales from product sales
revenues and dividing the result by throughput volumes.
<TABLE>
<CAPTION>
Year Ended December 31,
1995 1994 1993
<S> <C> <C> <C>
Throughput volumes (Mbbls per day) . . . . . 160 146 136
Average throughput margin per barrel . . . . $6.25 $5.36 $5.99 <F1>
Sales volumes (Mbbls per day). . . . . . . . 208 140 133
<FN>
<F1> Throughput margin for 1993 excludes a $.55 per barrel reduction
resulting from the effect of a $27.6 million write-down in the
carrying value of the Company's refinery inventories. See
"Management's Discussion and Analysis of Financial Condition
and Results of Operations - Results of Operations - 1994
Compared to 1993."
</FN>
</TABLE>
The Company sells refined products under term contracts as
well as on a spot and truck rack basis. A truck rack sale is a
sale to a customer that provides trucks to take delivery at
loading facilities. In 1995, term, spot and truck rack sales
volumes accounted for approximately 41%, 49% and 10%,
respectively, of total gasoline and distillate sales. Sales of
refined products under term contracts are made principally to
large oil companies. Spot sales of the Company's refined
products are made to large oil companies and gasoline
distributors. The principal purchasers of the Company's products
from truck racks have been wholesalers and jobbers in the eastern
and midwestern United States. The Company's products are
transported through common-carrier pipelines, barges and tankers.
Interconnects with common-carrier pipelines give the Company the
flexibility to sell products to the northeastern, midwestern or
southeastern United States.
The Company plans to continue to produce a high percentage
of its refined products as RFG and to focus significant marketing
efforts on the RFG and oxygenates markets. Approximately 50% of
the Company's 1996 expected RFG production is under contract to
supply major gasoline marketers in the Houston and Dallas/Fort
Worth areas at market-related prices; another 15% is under
contract to gasoline marketers in the northeast United States,
which is currently the largest RFG market in the United States.
The Company appointed an exclusive agent for a three-year term
for the wholesale truck rack marketing of the Company's refined
products in the Northeast through 1997. In addition, the
Company has entered into a two-year charter expiring in the fall
of 1997 for a tanker to transport RFG from the Refinery to the
Northeast.
Feedstock Supply
The principal feedstock for the Refinery is resid produced
at refineries outside the United States. Most of the large
refineries in the United States are complex, sophisticated
facilities able to convert internally produced resid into higher
value end-products. Many overseas refineries, however, are less
sophisticated, process smaller portions of resid internally, and
therefore produce larger volumes of resid for sale. As a result,
the Company acquires and expects to acquire most of its resid in
international markets. These supplies are loaded aboard double-
hulled chartered vessels and are subject to the usual maritime
hazards. The Company maintains insurance on its feedstock
cargos.
Under a two-year feedstock supply agreement with the
Company renewed in late 1995, Arabian American Oil Company
("Aramco") agreed to provide an average of 36,000 barrels per day
of resid to the Company at market-based prices through 1997.
This contract is subject to price renegotiation at the end of the
first year, with offtake volumes being subject to a 50% reduction
if agreement is not reached. In late 1995, the Company also
entered into a separate one-year supply agreement with Aramco for
an additional 18,000 barrels per day of resid at market-based
prices. The Company's agreement for approximately 12,000 barrels
per day of South Korean resid at market-based prices was extended
in the first quarter of 1996 for an additional six months.
Deliveries under these agreements provide approximately 80% of
the Refinery's daily resid requirements. The Company believes
that if any of its existing feedstock arrangements were
interrupted or terminated, supplies of resid could be obtained
from other sources or on the open market; however, the Company
could be required to incur higher feedstock costs or substitute
other types of resid, thereby producing less favorable operating
results. Over the past few years, demand for the type of resid
feedstock now processed at the Refinery has increased in relation
to the availability of supply. See "Refining and Marketing -
Factors Affecting Operating Results." At the end of 1995, the
Company contracted for approximately 5,000 barrels per day of
domestic crude for use as a feedstock in the Refinery's crude
unit in 1996. The remainder of the Refinery's resid and crude
feedstocks are purchased at market-based prices under short-term
contracts.
All of the butane and methanol feedstocks required to
operate the MTBE Plant are available through the Company's
operations. The Company also supplies at least one-half of the
Methanol Plant's natural gas feedstock requirements.
The Company owns feedstock and product storage facilities
with a capacity of approximately 6.4 million barrels.
Approximately 4.1 million barrels of storage capacity are heated
tanks for heavy feedstocks. The Company has approximately
850,000 barrels of fuel oil storage available under lease in
Malta, and leases refined product storage facilities in various
locations. Approximately 600,000 barrels of gasoline storage in
the Houston area became available to the Company in 1995 pursuant
to a seven-year terminaling agreement. See Note 13 of Notes to
Consolidated Financial Statements. The Company also owns dock
facilities at the Refinery that can unload simultaneously two
150,000 dead-weight ton capacity ships and can dock larger crude
carriers after partial unloading.
Factors Affecting Operating Results
The Company's refining and marketing operating results are
significantly affected by the relationship between refined
product prices and resid prices, which in turn are largely
determined by market forces. The crude oil and refined product
markets typically experience periods of extreme price volatility.
During such periods, disproportionate changes in the prices of
refined products and resid usually occur. The potential impact
of changing crude oil and refined product prices on the Company's
results of operations is further affected by the fact that the
Company generally buys its resid feedstock approximately 45 to
50 days prior to processing it in the Refinery. The Company uses
options and futures to hedge refinery feedstock purchases and
refined product inventories to reduce the impact of potential
adverse price changes on these inventories prior to conversion of
the feedstock into finished products and the ultimate sale of the
finished products. The Company also hedges anticipated
transactions including fuel gas purchases and components of
refining margins. See Note 5 of Notes to Consolidated Financial
Statements.
Because the Refinery is technically more sophisticated and
complex than many conventional refineries, and is designed
principally to process resid rather than crude oil, its operating
costs per barrel are necessarily higher than those of most
conventional refineries. But because resid usually sells at a
large enough discount to crude oil ("resid discount"), the
Company is generally able to recover its higher operating costs
and generate higher margins in its refining operations than
conventional refiners that use crude oil as the principal
feedstock. The price of resid is affected by the relationship
between the growth in the demand for fuel oil and other products
(which increases crude oil demand, thereby increasing the supply
of resid when more crude oil is processed) and worldwide
additions to resid conversion capacity (which has the effect of
reducing the available supply of resid). Recent press reports
indicate that Iraq may soon resume sales of crude oil into world
markets. While the export of heavier Iraqi crudes could lead to
increased resid production, such exports could also depress crude
oil prices which in turn could adversely affect inventory values
and lead to volatile changes in the resid discount and other
price relationships important to the Company's results of
operations.
The resid discount has narrowed considerably over the past
two years due to increased worldwide production of light "sweet"
crudes and the addition of new resid conversion capacity.
Several factors contributed to this narrowing of the resid
discount including a shift in Saudi Arabia's production to
lighter grades of crude instead of heavy "sour" types that yield
more resid, and decreased exports of resid from the former Soviet
Union. Refinery upgrades in recent years also have curtailed the
output of resid in favor of the production of lighter end-products
such as gasoline and diesel fuel. Industry publications
report that Aramco plans to begin operation of certain new resid
conversion units in 1998 at the Ras Tanura refining complex in
Saudi Arabia. As a result, the production of resid at Ras Tanura
for export would be significantly reduced. A majority of the
resid feedstock purchased by the Company from Aramco is produced
at Ras Tanura. Accordingly, a reduction in resid production at
Ras Tanura could adversely affect the price or availability of
resid feedstocks in the future. The Company expects resid to
continue to sell at a discount to crude oil, but is unable to
predict future relationships between the supply of and demand for
resid. Installation of additional refinery crude distillation
and upgrading facilities, price volatility, international
political developments and other factors beyond the control of
the Company are likely to continue to play an important role in
refining industry economics.
Two programs implemented by the Environmental Protection
Agency ("EPA") under the Clean Air Act Amendments of 1990 (the
"Clean Air Act") significantly affect the operations of the
Company and the markets in which the Company sells its refined
products: the oxygenated fuel program and the RFG program. The
oxygenated fuel program began in 1992, and requires for certain
winter months that the 39 areas designated nonattainment for
carbon monoxide use gasoline that contains a prescribed amount of
clean burning "oxygenates." Oxygenates are liquid hydrocarbon
compounds containing oxygen, which, when added to conventional
gasoline, reduce the carbon monoxide emissions of gasoline.
Oxygenated gasoline must have a minimum oxygen content of 2.7%
by weight. The EPA's RFG program, which began on January 1, 1995,
is required in the nine areas designated nonattainment for ozone.
In addition, approximately 43 of the 87 areas that have failed to
attain other ozone air-quality standards have also "opted in" to
the RFG program to decrease their emissions of hydrocarbons and toxic
pollutants. Use of RFG reduces ozone-forming compounds and total
air toxics such as carbon monoxide. The RFG program requires the
use of RFG on a year-round basis. RFG is manufactured by
substantially reducing the amount of aromatics and benzene from
regular gasoline and adding an oxygenate, primarily MTBE or
ethanol. The oxygen content of RFG must equal or exceed 2.0% by
weight. The California Air Resources Board ("CARB") is
scheduled to implement its "CARB 2" gasoline program
beginning March 1, 1996. The CARB 2 program is a state-wide,
year-round program requiring the use of gasoline which
meets more restrictive air quality specifications than the
federally mandated RFG but which may generally have a lesser
oxygen content.
Market uncertainties as a result of certain areas
"opting out" of the RFG program as well as continued debate
regarding the health effects of MTBE kept RFG and oxygenated
gasoline prices depressed in early 1995. However, low product
inventories, lower imports and an increase in gasoline demand
contributed to improving market conditions throughout the
remainder of the year. The market also responded favorably to a
report from the White House Office of Science and Technology
Policy to the EPA stating that no "evidence of hazards" was found
that would cause the office to recommend the cessation of the use
of MTBE. Hot weather during 1995 contributed to many areas in
the country exceeding their permitted ozone emission levels. The
Company expects that some of these areas may choose to "opt in"
to the RFG program to reduce emissions and thereby increase the
demand for RFG. California's CARB 2 program should also increase
the demand for oxygenated gasoline.
MTBE margins are affected by the price of methanol, an MTBE
feedstock, and the demand for RFG and oxygenated gasoline. MTBE
prices were depressed in early 1995 because of the market
uncertainties associated with certain areas "opting out" of the
RFG program. In addition, some areas announced their intent to
shorten the period for required oxygenated gasoline use during
the winter. Growing acceptance of RFG and the increased value of
MTBE as an octane component, however, helped to bolster MTBE
prices during the remainder of the year. The worldwide movement
to reduce lead in gasoline is expected to increase worldwide
demand for oxygenates to replace the octane provided by lead-
based compounds. Growing demand for RFG and CARB 2 gasoline in
the United States is also expected to sustain stronger MTBE
margins on average in 1996.
Proesa MTBE Plant
The Company currently owns a 35% interest in Productos
Ecologicos, S.A. de C.V., a Mexican corporation ("Proesa"), which
is involved in a project (the "Project") to design, construct and
operate a plant (the "Plant") in Mexico to produce MTBE. Proesa
is also owned 10% by Dragados y Construcciones, S.A., a Spanish
construction company ("Dragados"), and 55% by a corporation
formed by a subsidiary of Banamex, Mexico's largest bank
("Banamex"), and Infomin, S.A. de C.V., a privately owned Mexican
corporation ("Infomin"). The Company, Infomin, Banamex and
Dragados have entered into a letter of understanding under which
the interest of Banamex in Proesa would be acquired by the
Company and Infomin at Banamex's investment cost, plus accrued
interest, with the Company and Infomin each then owning a 45%
interest in Proesa. This arrangement was not formally documented
and is subject to successfully obtaining financing for Infomin's
interest in the Project. However, since August 1994, the Company
has funded 45% of the Project's costs. The Plant, to be
constructed at a site near the Bay of Campeche, has been
estimated to cost approximately $400 million (exclusive of working
capital, capitalized interest and financing costs), and to produce
approximately 17,000 barrels of MTBE per stream day.
Under an existing MTBE sales agreement between Proesa and a
subsidiary of Petroleos Mexicanos, S.A., the Mexican state-owned
oil company ("Pemex"), Proesa has furnished a surety bond in
connection with the Plant's first year of operations. The surety
bond has an insurable value of 41.3 million New Pesos which,
based on the exchange rate at January 31, 1996, was approximately
$5.6 million. Proesa currently has no independent source of
funding. Therefore, in the event of any cash requirements to
fund payments under the surety bond or other obligations, Proesa
necessarily would request additional funding from its owners.
Beginning in December 1994, the Mexican peso experienced
substantial devaluation, interest rates in Mexico increased
significantly and Mexican economic conditions deteriorated.
Because of these factors, in January 1995 the Board of Directors
of Energy determined that the Company would suspend further
investment in the Project pending resolution of key issues related
to the Project. During 1995 and continuing in 1996, the Company
engaged in discussions with Pemex and the Project participants in
order to renegotiate the purchase and sales agreements between
Proesa and Pemex and to reach definitive agreement regarding the
participants' ownership interests in Proesa and their funding
commitments to the Project, including procedures for funding any
possible cost overruns. Despite some indications that Mexican
economic conditions are beginning to improve, there can be no
assurance that mutually satisfactory agreements can be reached
between Proesa and Pemex and among the Project participants, 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
December 31, 1995, the Company had invested approximately $16.5
million in the Project, and Proesa had incurred approximately
$10 million of additional obligations that have not yet been
funded by its owners.
NATURAL GAS
The natural gas division of the Company has been evolving
from a Texas intrastate pipeline company to a more diversified,
midstream gas company offering value-added services and products
to producers and end-users, not only in Texas, but throughout
North America as well. The Company owns and operates natural gas
pipeline systems serving Texas intrastate markets, and the
Company markets natural gas throughout North America through
interconnections with interstate pipelines. The Company's
natural gas pipeline and marketing operations<F2> consist
principally of purchasing, gathering, processing, storing,
transporting and selling natural gas to gas distribution
companies, electric utilities, other pipeline companies and
industrial customers, and transporting natural gas for producers,
other pipelines and end users. The Company is also engaged in
price-risk management activities to complement and enhance its
merchant business.
[FN]
<F2> The Company's natural gas operations are conducted
primarily through Valero Natural Gas Partners, L.P.
("VNGP, L.P.") and its subsidiaries (the "Partnership").
These operations were acquired in connection with the
merger described in Note 2 of Notes to Consolidated
Financial Statements. For a discussion of the Company's
method of accounting for its investment in the Partnership,
see Note 1 of Notes to Consolidated Financial Statements.
In addition, the Company's natural gas operations also
include certain minor natural gas pipeline operations, and
prior to September 30, 1993, certain minor natural gas
distribution operations, not conducted through the
Partnership. For comparability purposes, the information
and statistics presented in this Part I reflect the
combination of all such natural gas operations for all of
1995, 1994 and 1993.
Transmission System
The Company's principal natural gas pipeline system is its
Texas intrastate gas system ("Transmission System"). The
Transmission System generally consists of large diameter
transmission lines that receive gas at central gathering points
and move the gas to delivery points. The Transmission System
also includes numerous small diameter lines connecting individual
wells and common receiving points to the Transmission System's
larger diameter lines. The Company's wholly owned, jointly owned
and leased natural gas pipeline systems include approximately
8,000 miles of mainlines, lateral lines and gathering lines.
These pipeline systems are located along the Texas Gulf Coast and
throughout South Texas and extend westerly to near Pecos, Texas;
northerly to near the Dallas-Fort Worth area; easterly to
Carthage, Texas, near the Louisiana border; and southerly into
Mexico near Reynosa. These integrated systems include
39 mainline compressor stations with a total of approximately
178,000 horsepower, together with gas processing plants,
dehydration and gas treating plants and numerous measuring and
regulating stations. The Company's pipeline systems have
considerable flexibility in providing connections between many
producing and consuming areas, and are able to handle widely
varying loads caused by changing supply and demand patterns.
Annual average throughput was approximately 3.1 Bcf<F3> per day
in 1995, and was in excess of 2.8 Bcf per day in 1994 and 1993.
The Company's owned and leased pipeline systems have
73 interconnects with 21 intrastate pipelines, 40 interconnects
with 13 interstate pipelines, and two international interconnects
with Pemex in South Texas.
[FN]
<F3> Mcf (thousand cubic feet) is a standard unit for measuring
natural gas volumes at a pressure base of 14.65 pounds per
square inch absolute and at 60 degrees Fahrenheit. The term
"MMcf" means million cubic feet, and the term "Bcf" means
billion cubic feet. The term "Btu" means British Thermal
Unit, a standard measure of heating value. The number of
MMBtu's of total natural gas deliveries is approximately
equal to the number of Mcf's of such deliveries. The terms
MMBtu, BBtu and TBtu mean million Btu's, billion Btu's, and
trillion Btu's, respectively.
Gas Sales and Marketing
The following table sets forth the Company's gas sales
volumes and average gas sales prices for the three years ended
December 31, 1995.
<TABLE>
<CAPTION>
Year Ended December 31,
1995 1994 1993
<S> <C> <C> <C>
Intrastate sales (MMcf per day). . . . . 661 638 699
Interstate sales (MMcf per day). . . . . 773 506 452
Total. . . . . . . . . . . . . . . 1,434 1,144 1,151
Average gas sales price per Mcf. . . . . $1.74 $2.07 $2.32
</TABLE>
Sales of natural gas accounted for approximately 46%, 40%
and 41% of the Company's total daily gas volumes for 1995, 1994
and 1993, respectively. The Company supplies both intrastate and
interstate markets with gas supplies acquired from producers,
marketers and pipelines. Gas sales are made on both a long-term
basis and a short-term interruptible basis. The Company also
engages in off-system sales. During 1995, the Company sold
natural gas under hundreds of separate short- and long-term gas
sales contracts. Total gas sales volumes made by the Company
increased 45% over a three-year period from approximately
987 MMcf per day in 1992 to 1,434 MMcf per day in 1995. The
Company's off-system marketing business, which increased from
70 MMcf per day of sales in 1992 to 340 MMcf per day in 1995, was
a large contributor to this increase.
The Company's gas sales are made primarily to gas
distribution companies, electric utilities, gas marketers
(resellers), other pipeline companies and industrial users. The
Company's gas sales contracts with its intrastate customers
generally require the Company to provide a fixed and determinable
quantity of gas rather than total customer requirements; however,
certain gas sales contracts with intrastate customers provide for
either maximum volumes or total requirements, subject to
priorities and allocations established by the Railroad Commission
of Texas. See "Governmental Regulations - Texas Regulation."
The gas sold to distribution companies is resold to consumers in
a number of cities including San Antonio, Dallas, Austin, Corpus
Christi and Chicago. Nationally, the demand for natural gas has
increased at a rate of approximately 3.3% per year since 1986.
The Company expects that long-term demand will continue to grow
about 2% to 3% per year, especially in the industrial and power
generation sectors.
Federal Energy Regulatory Commission ("FERC") Order No. 636
("Order 636") has effectively transformed the interstate gas
industry into a service-oriented business with natural gas and
transportation trading as separate commodities. Because of
Order 636, local distribution companies ("LDCs") and power
generation companies are responsible for acquiring their own gas
supplies, including managing their needs for swing,
transportation and storage services. See "Governmental
Regulations - Federal Regulation." The Company is continuing to
emphasize diversification of its customer base through interstate
sales. By the end of 1995, the Company had secured contracts to
provide gas supply and swing services to certain LDCs, electric
utilities and industrial customers primarily in the midwest,
northeast and western United States providing for deliveries of
up to approximately 400 MMcf per day with terms ranging from one
to ten years. Order 636 has created new market opportunities for
the Company, requiring that the Company efficiently provide an
array of value-added services to the customer base. In response,
the Company offers a broad range of marketing services. The
Company has marketing offices located throughout Texas as well as
in Los Angeles, Chicago, Louisville, Mexico City and Calgary.
The Company's Market Center Services Program, established
in 1992, provides pricing and price-risk management services to
both gas producers and end users. This program uses financial
instruments, such as futures, swaps and options to manage the
price-risk exposure within the Company, and to offer customized
pricing arrangements with both the Company's suppliers and its
customers. Activities of the Market Center have improved the
Company's ability to capture and optimize gas transportation,
storage and sales margins, as well as managing gas price
volatility for the Company's gas processing and refining
businesses. See Note 5 of Notes to Consolidated Financial
Statements.
The Company capitalized on the strategic west-to-east
position of its pipeline system when its Waha hub, located in
West Texas, was chosen to serve as the delivery point for the
Western Natural Gas Futures and Options Contracts traded on the
Kansas City Board of Trade ("KCBT"). These futures and options
contracts began trading on August 1, 1995. Approximately 13 Bcf
of gas was delivered through the hub during the last four months
of 1995. In addition, the Waha hub serves as the delivery
location for "Streamline," an electronic trading system operated
by Williams Pipeline to trade physical gas at various hubs across
the United States. The Company actively utilizes these new
methods not only to buy and sell gas, but also to better manage
its price-risk exposure in the Western part of the United States.
In November 1995, the Company introduced to a test-group of
customers "Velocity," its intrastate electronic bulletin board
("EBB") designed to improve communications between the Company
and its customers and to enable customers to monitor and control
their natural gas volumes in a more timely manner. Through the
EBB, the Company offers natural gas producers, shippers and end-users
real-time access to measurement and operational data
relating to the Company's network of natural gas pipelines and
gas processing plants. Velocity receives data on a daily basis
from electronic flow measurement ("EFM") points as well as weekly
updates of other measurement data from the Company's Transmission
System. Once connected to Velocity, customers can access a
variety of information including monthly measurement data for the
last 24 months, final measurement delivery statements for the
previous month, current month measurement data from existing EFM
stations, and general notices relating to the Company's
operations.
Valero Field Services Company, a wholly owned subsidiary,
was established in 1995 to build and diversify the Company's gas
supply portfolio and to create synergistic opportunities with the
Company's other gas businesses by providing gas gathering,
compression, dehydration and treating services in and around the
Transmission System and in those regions that are complementary
to the Company's anticipated growth. The field services unit
will also evaluate for potential acquisition third-party
gathering systems that are near active drilling areas
complementary to the Company's pipeline and processing
operations. The unit will also pursue additional long-term
dedications of "rich" gas from producers.
Deregulation of the electric utility and power industry
also offers new opportunities for natural gas companies. In
response, the Company in 1995 formed a wholly owned subsidiary,
Valero Power Services Company, to provide risk management and
marketing services to the electric power industry. The Company
plans to offer to wholesale customers hourly, daily and monthly
energy trading services; transmission services; emissions
allowances; generation capacity transactions including fuel-to-
energy conversions; and fuel-to-energy swaps. In addition,
wholesale customers are offered an array of risk management tools
for managing their costs and reliability associated with power
procurement. The Company's initial power marketing efforts are
concentrated in the central United States. Valero Power Services
Company is a member of the Western Systems Power Pool, the
Southwest Power Pool, the Electric Reliability Council of Texas
and the Mid-Continent Area Power Pool. The Company began trading
power in January 1996 with the initiation of 24-hour operations.
Gas Transportation
The following table sets forth the Company's gas
transportation volumes and average transportation fees for the
three years ended December 31, 1995.
<TABLE>
<CAPTION>
Year Ended December 31,
1995 1994 1993
<S> <C> <C> <C>
Transportation volumes (MMcf per day) . . . . . . . . 1,704 1,682 1,672
Average transportation fee per Mcf. . . . . . . . . . $.093 $.102 $.107
</TABLE>
Gas transportation and exchange transactions (collectively
referred to as "gas transportation" or "transportation")
constitute the largest portion of the Company's natural gas
volumes, representing 54%, 60% and 59% of total daily gas volumes
for 1995, 1994 and 1993, respectively. The Company's natural gas
operations have been affected by an emerging trend of west-to-east
movement of gas across the United States caused by increased
production in western supply basins, the pipeline expansions from
Canada and the Rocky Mountains and increasing demand for power
generation in the East and Southeast. Transportation rates are
often higher on eastbound transmission than on east-to-west
transmission. To capitalize on the west-to-east trend, the
Company in 1994 completed a capacity expansion project on its
joint venture North Texas pipeline which added incremental
capacity of approximately 90 MMcf of gas per day to the pipeline.
The Company transports gas for third parties under hundreds
of separate short- and long-term transportation contracts. The
Company's transportation contracts generally limit the Company's
maximum transportation obligation (subject to available capacity)
but generally do not provide for any minimum transportation
requirement. The Company's transportation customers include
major oil and natural gas producers and pipeline companies.
Gas Supply and Storage
Gas supplies available to the Company for purchase and
resale or transportation include supplies of gas committed under
both short- and long-term contracts with independent producers as
well as additional gas supplies contracted for purchase from
pipeline companies, gas processors and other suppliers that own
or control reserves. There are no reserves of natural gas
dedicated to the Company and the Company does not own any gas
reserves other than gas in underground storage which comprises an
insignificant portion of the Company's gas supplies. Because of
recent changes in the natural gas industry, gas supplies have
become increasingly subject to shorter term contracts, rather
than long-term dedications.
During 1995, the Company purchased natural gas under
hundreds of separate contracts. Surplus gas supplies, if
available, may be purchased to supplement the Company's delivery
capability during peak use periods. A majority of the Company's
gas supplies are obtained from sources with multiple connections.
In such instances, the Company frequently competes on a monthly
basis for available gas supplies. The Company's ability to
process natural gas attracts significant gas supplies to the
Transmission System. In 1995, the Company secured approximately
750 MMcf per day of natural gas supplies from natural gas
producers under agreements to process, transport or purchase
their natural gas for terms ranging generally from one to ten
years. Of these supplies, approximately 325 MMcf per day
represent new natural gas supplies dedicated to the Company's
pipeline system and 425 MMcf were extensions of existing
agreements that otherwise would have expired. Because of the
extensive coverage within the State of Texas by the Company's
pipeline systems, the Company can access a number of supply
areas. While there can be no assurance that the Company will be
able to acquire new gas supplies in the future as it has in the
past, the Company believes that Texas will remain a major
producing state, and that for the foreseeable future the Company
will be able to compete effectively for sufficient new gas
supplies to meet customer demand.
The Company operates an underground gas storage facility in
Wharton County, Texas. The current storage capacity of this
facility is approximately 7.2 Bcf of gas available for
withdrawal. Natural gas can be continuously withdrawn from the
facility at initial rates of up to approximately 800 MMcf of gas
per day and at declining delivery rates thereafter until the
inventory is depleted. The Company supplemented its own natural
gas storage capacity by leasing during 1995 an additional 8.0 Bcf
of third-party storage capacity for the 1995-96 winter heating
season.
NATURAL GAS LIQUIDS
The Company owns and operates eight<F4> gas processing
plants and is a major producer and marketer of NGLs. The
Company's NGL operations<F5> provide strong integration among
the Company's three core businesses. The Company's ability to
process natural gas is a value-added service offered to producers
and attracts additional quantities of gas to the Company's
pipeline system. Production from the Company's NGL plants also
provides butane feedstocks for the production of oxygenates
(primarily MTBE) at the Refinery.
[FN]
<F4> The Company also owns a ninth gas processing plant, but this
plant ceased operations in 1995 and the gas streams formerly
processed at this plant were diverted to another of the
Company's gas processing plants.
<F5> The Company's NGL operations are conducted primarily through
the Partnership, and through certain non-Partnership NGL
assets acquired by the Company in May 1992. For a
discussion of the Company's method of accounting for its
investment in the Partnership, see Note 1 of Notes to
Consolidated Financial Statements. For comparability
purposes, the information and statistics presented in this
Part I reflect the combination of all such NGL operations
for all of 1995, 1994 and 1993.
Recent expansions and improvements at the Company's gas
processing plants increased 1995 NGL production to approximately
29.3 million barrels for the year, equal to an average daily
production of 80,300 barrels per day. The 1995 NGL production
represents the Company's sixth consecutive year for record
production volumes. The Company sold two of its gas processing
plants in West Texas effective August 1, 1995. Processing
capacity lost by the sale of these plants was partially offset,
however, by significant expansions and upgrading projects
completed at certain of the Company's other plants during the
second half of the year. The table below sets forth NGL
production volumes, average NGL market prices, and average gas
costs for the three years ended December 31, 1995.
<TABLE>
<CAPTION>
Year Ended December 31,
1995 1994 1993
<S> <C> <C> <C>
NGL plant production (Mbbls per day) . . . . . 80.3 79.5 77.4
Average market price per gallon<F1>. . . . . . $.261 $.271 $.287
Average gas cost per Mcf . . . . . . . . . . . $1.40 $1.75 $1.96
<FN>
<F1> Represents the average Houston area market prices for individual NGL products
weighted by relative volumes of each product produced.
</FN>
</TABLE>
The Company's NGL operations include the extraction of
NGLs, the separation ("fractionation") of mixed NGLs into
component products (e.g., ethane, propane, butane, natural
gasoline), and the transportation and marketing of NGLs.
Extraction is the process of removing NGLs from the gas stream,
thereby reducing the Btu content and volume of incoming gas
(referred to as "shrinkage"). In addition, some gas from the gas
stream is consumed as fuel during processing. The principal
source of gas for processing is from the Transmission System.
The Company receives revenues from the extraction of NGLs
principally through the sale of NGLs extracted in its gas
processing plants and the collection of processing fees charged
for the extraction of NGLs owned by others. The Company
compensates gas suppliers for shrinkage and fuel usage in various
ways, including sharing NGL profits, returning extracted NGLs to
the supplier or replacing an equivalent amount of gas. Extracted
NGLs are transported to downstream fractionation facilities and
end-use markets through the Company's NGL pipelines, certain
common-carrier NGL pipelines and trucks. The primary markets for
NGLs are petrochemical plants (all NGLs), refineries (butanes and
natural gasoline), and domestic fuel distributors (propane). The
Company's NGL production is sold primarily in the Corpus Christi
and Mont Belvieu (Houston) markets. NGL prices are generally set
by or in competition with prices for refined products in the
petrochemical, fuel and motor gasoline markets. During 1995,
approximately 72% of the Company's butane production was used as
a feedstock for the Refinery's MTBE Plant.
The Company's gas processing plants are located primarily
in South Texas and process approximately 1.3 Bcf of gas per day.
Each of the Company's plants is situated along the Transmission
System. The Company also owns approximately 385 miles of NGL
pipelines, 460 miles of gathering lines, and fractionation
facilities at five locations. The Company fractionated an
average of 81,500 barrels per day in 1995, approximately 5% of
which represented NGLs fractionated for third parties. The
Company's NGL pipelines, located primarily in South Texas,
transport NGLs from gas processing plants to fractionation
facilities. The NGL pipelines also connect with end users and
major common-carrier NGL pipelines, which ultimately deliver NGLs
to the principal NGL markets. In South Texas, the Company owns
228 miles of NGL pipelines that directly or indirectly connect
five of the Company's processing plants and three processing
plants owned by third parties to the Company's fractionation
facilities near Corpus Christi.
The Company sells NGLs that have been extracted,
transported and fractionated in the Company's facilities and NGLs
purchased in the open market from numerous suppliers (including
major refiners and natural gas processors) under long-term,
short-term and spot contracts. The Company's contracts for the
purchase, sale, transportation and fractionation of NGLs are
generally with longstanding customers and suppliers of the
Company. The petrochemical industry represents an expanding
principal market for NGLs due to increasing market demand for
ethylene-derived products. Petrochemical demand for NGLs is
projected to remain strong through 1996 with the announcement of
several expansions to existing petrochemical facilities. In
addition, the start-up of five new ethylene plants along the
Texas Gulf Coast from 1998 through 1999 has been announced. A
majority of this incremental capacity is projected to be built by
independent petrochemical companies with little affiliated NGL
production, which may improve market liquidity for NGLs and
create market opportunities for major NGL producers. However,
planned facilities additions frequently are delayed or canceled,
and no assurances can be given that the proposed petrochemical
facilities will be completed.
GOVERNMENTAL REGULATIONS
Federal Regulation
The Company's refining operations are primarily subject to
various federal and state environmental statutes and regulations.
See "Environmental Matters." The Company's pipeline system is an
intrastate business not subject to direct regulation by the FERC.
Although the Company's interstate gas sales and transportation
activities are subject to specific FERC regulations, these
regulations do not change the Company's overall regulatory
status. The Company's natural gas operations are more
significantly affected by the implementation of Order 636,
related to restructuring of the interstate natural gas pipeline
industry. Order 636 requires pipelines subject to FERC
jurisdiction to provide unbundled marketing, transportation,
storage and load balancing services on a nondiscriminatory basis
to producers and end users instead of offering only combined
packages of services. This allows the Company to compete with
interstate pipelines and other companies to provide these
component services separately from the transportation provided by
the interstate pipelines. The "unbundling" of services under
Order 636 allows LDCs and other customers to choose the
combination of services that best meet their needs at the lowest
total cost, thus increasing competition in the interstate natural
gas industry. As a result of Order 636, the Company can more
effectively compete for sales of natural gas to LDCs and other
natural gas customers located outside Texas.
Texas Regulation
The Railroad Commission of Texas ("RRC") regulates the
intrastate transportation, sale, delivery and pricing of natural
gas in Texas by intrastate pipeline and distribution systems,
including those of the Company. The RRC's gas proration rule
prohibits the production of gas in excess of market demand, and
permits producers to tender and deliver, and gas purchasers to
take, only volumes of gas equal to their market demand. The gas
proration rule requires purchasers to take gas by priority
categories, ratably among producers without undue discrimination,
with high-priority gas (gas from wells primarily producing oil
and certain special allowable gas) having higher priority than
gas well gas (gas from wells primarily producing gas),
notwithstanding any contractual commitments. The RRC rules are
intended to bring production allowables in line with estimated
market demand.
For pipelines, the RRC approves intrastate sales and
transportation rates and all proposed changes to such rates.
Changes in the price of gas sold to gas distribution companies
are subject to rate determination in a rate case before the RRC.
Under applicable statutes and current RRC practice, larger volume
industrial sales and transportation charges may be changed
without a rate case if the parties to the transactions agree to
the rate changes and make certain representations. Since
December 31, 1979, a portion of the Company's gas sales have been
made at rates established by an order (the "Rate Order") of the
RRC. However, the proportion of these sales to the Company's
total gas sales has been decreasing because of various factors.
See "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Results of Operations - 1995 Compared
to 1994 - Segment Results - Natural Gas." Currently, the price
of natural gas sold under a majority of the Company's gas sales
contracts is not regulated by the RRC, and the Company may
generally enter into any sales contract that it is able to
negotiate with customers.
NGL pipeline transportation is also subject to regulation
by the RRC through the filing of tariffs and compliance with
safety standards. To date, the impact of this regulation on the
Company's operations has not been significant. The RRC also has
regulatory authority over gas processing operations, but has not
exercised such authority.
COMPETITION
Refining and Marketing
The refining industry is highly competitive with respect to
both supply and markets. The Company competes with numerous
other companies for available supplies of resid and other
feedstocks and for outlets for its refined products. The Company
has no crude reserves and is not engaged in production. It
obtains all of its resid feedstock from unaffiliated sources.
Many of the companies with which the Company competes obtain a
significant portion of their feedstocks from company-owned
production and are able to dispose of refined products at their
own retail outlets. The Company does not have retail gasoline
operations. Competitors that have their own production or retail
outlets may be able to offset losses from refining operations
with profits from producing or retailing operations and may be
better positioned than the Company to withstand periods of
depressed refining margins.
Because the Refinery was completed in 1984, it was built
under more stringent environmental requirements than many
existing refineries. The Refinery currently meets EPA emissions
standards requiring the use of "best available control
technology," and is located in an area currently designated
"attainment" for air quality. Accordingly, the Company expects
to be able to comply with the Clean Air Act and future
environmental legislation more easily than older, conventional
refineries, and will not be required to spend significant
additional capital for environmental compliance. Recently,
however, the Corpus Christi area has experienced increased ozone
levels and there can be no assurance that the area will remain a
designated "attainment" area for air quality.
The Company produces enough oxygenates to blend all of its
gasoline as RFG and to sell additional quantities of oxygenates
to third parties who require oxygenates for blending. RFG
generally sells at a premium over conventional gasoline. Most of
the refining industry traditionally uses the conventional "3-2-1
crack spread" (which assumes the input of three parts of West
Texas Intermediate crude oil and the output of two parts gasoline
and one part diesel); however, the Company produces premium
products such as RFG and low-sulfur diesel and also produces a
higher percentage of its refined products as gasoline. Thus, the
Company's "85-15 clean fuels crack spread" (85% RFG, 15% low-
sulfur diesel) has provided a wider margin than the typical crack
spread experienced by a conventional refiner. However, many of
the Company's competitors are large, integrated oil companies
which, because of their diverse operations, stronger
capitalization and brand-name recognition, may be better able
than the Company to withstand volatile industry conditions such
as shortages of feedstocks or intense price competition.
Natural Gas
The natural gas industry is and is expected to remain
highly competitive with respect to both gas supply and markets.
Changes in the gas markets during the recent period of
deregulation under Order 636 have resulted in significantly
increased competition. However, the Company has not only
maintained but has increased its throughput volumes since
implementation of Order 636. Under Order 636, the Company can
more effectively compete for sales of natural gas to LDCs and
other customers located outside Texas. See "Governmental
Regulations - Federal Regulation." Because of Order 636, the
Company now can guarantee long-term supplies of natural gas to be
delivered to buyers at interstate locations. The Company can
charge a fee for this guarantee, which together with
transportation charges, can exceed the amount that the Company
could receive for merely transporting natural gas. Because of
Order 636 and the location of the Transmission System, the
Company believes that the Company is able to compete for new gas
supplies and new gas sales and transportation customers.
In recent years, certain intrastate pipelines with which
the Company had traditionally competed have acquired or have been
acquired by interstate pipelines. These combined entities
generally have capital resources substantially greater than those
of the Company and, notwithstanding Order 636's "open access"
regulations, may realize economies of scale and other economic
advantages in acquiring, selling and transporting natural gas.
Additionally, the combination of intrastate and interstate
pipelines within one organization may in some instances enable
competitors to lower gas prices and transportation fees, and
thereby increase price competition in the Company's intrastate
and interstate markets. Consequently, the Company's competitors
in the near future are likely to be a smaller number of larger
energy service firms that can offer "one-stop shopping" for the
customer's energy needs, whether the needs are physical,
managerial, or financial for the respective energy commodity.
Accordingly, the Company has recently undertaken three
initiatives to strengthen the Company's ability to compete as an
energy service firm: (i) the formation of Valero Field Services
Company (see "Natural Gas - Gas Sales and Marketing"), (ii) the
expansion of the Company's NGL marketing activities and
infrastructure, and (iii) the formation of Valero Power Services
Company (see "Natural Gas - Gas Sales and Marketing").
Natural Gas Liquids
The economics of natural gas processing depends principally
on the relationship between natural gas costs and NGL prices.
When this relationship has been favorable, the NGL processing
business has been highly competitive. The Company believes that
competitive barriers to entering the business are generally low.
Moreover, improvements in NGL-recovery technology have improved
the economics of NGL processing and have increased the
attractiveness of many processing opportunities. In recent
years, NGL margins have been subject to the extreme volatility of
energy prices in general. The Company believes that the level of
competition in NGL processing has increased over the past year
and generally will become more competitive in the longer term as
the demand for NGLs increases. The Company's South Texas gas
processing plants, however, have direct access to many of the
large petrochemical markets along the Texas Gulf Coast, which
gives the Company a competitive advantage over many other NGL
producers.
ENVIRONMENTAL MATTERS
The Company's refining, natural gas and NGL operations are
subject to environmental regulation by federal, state and local
authorities, including the EPA, the Texas Natural Resources
Conservation Commission ("TNRCC"), the Texas General Land Office
and the RRC. The regulatory requirements relate to water and
storm water discharges, waste management and air pollution
control measures. In 1995, capital expenditures for the
Company's refining operations attributable to compliance with
environmental regulations were approximately $5 million and are
currently estimated to be $9 million for 1996. These amounts are
exclusive of any amounts related to constructed facilities for
which the portion of expenditures relating to compliance with
environmental regulations is not determinable. For a discussion
of the effects of the Clean Air Act's oxygenated gasoline and RFG
programs on the Company's refining operations, see "Refining and
Marketing - Factors Affecting Operating Results."
The Company's capital expenditures for environmental
control facilities related to its natural gas and NGL operations
were not material in 1995 and are not expected to be material in
1996. Currently, expenditures are made to comply with
regulations for air emissions, solid waste management and waste
water applicable to various facilities. In 1991, environmental
legislation was passed in Texas that conformed Texas law with the
Clean Air Act to allow Texas to administer the federal programs.
Upon interim approval by the EPA of the Texas Title V operating
permit program, many of the Company's gas processing plants and
gas pipeline facilities will be among the first facilities
required to submit applications to the TNRCC for new operating
permits, and may be subject to increased requirements for
monitoring air emissions. Although new requirements may increase
operating costs, they are not expected to have a material adverse
effect on the Company's operations or financial condition.
The Oil Pollution Act of 1990 ("OPA 90") and regulations
thereunder impose a variety of regulations on "responsible
parties" related to the prevention of oil spills and the
assessment of liability for damages resulting from oil spills in
U.S. territorial waters. Shipments of crude oil and resid within
U.S. territorial waters are subject to the regulations
promulgated under OPA 90. These regulations require tankers to
comply with certain Certificate of Financial Responsibility
("COFR") requirements in order to ship within U.S. territorial
waters. The Company's shippers have complied with the COFR
requirements and the Company has not experienced any difficulty
in obtaining tonnage to move its supplies to the Refinery. The
OPA 90 regulations are not expected to have a material impact on
operating results from the Company's refining and marketing
operations.
EMPLOYEES
As of January 31, 1996, the Company had 1,658 employees.
<PAGE>
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information as of
December 31, 1995 regarding the executive officers of Energy.
Each officer named in the following table has been elected to
serve until his successor is duly appointed and elected or his
earlier removal or resignation from office. No family
relationship exists among any of the executive officers,
directors or nominees for director of Energy. There is no
arrangement or understanding between any executive officer and
any other person pursuant to which he was or is to be selected as
an officer.
<TABLE>
<CAPTION>
_________________________________________________________________________________________
Energy Year First Elected Age as of
Position and or Appointed as December 31,
Name Office Held Officer or Director 1995
_________________________________________________________________________________________
<S> <C> <C> <C>
William E. Greehey Director, Chairman of 1979 59
the Board and Chief
Executive Officer
F. Joseph Becraft Director, President and 1995 52
Chief Operating Officer
Edward C. Benninger Director and Executive 1979 53
Vice President
Stan L. McLelland Executive Vice President 1981 50
and General Counsel
Don M. Heep Senior Vice President and 1990 46
Chief Financial Officer
*E. Baines Manning Executive Vice President of 1992* 55
Valero Refining and
Marketing Company
_________________________________________________________________________________________
* Mr. Manning has been designated by the Energy Board of Directors as an "executive
officer" of the Registrant in accordance with Rule 3b-7 under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and will be eligible for
inclusion in the Summary Compensation Table in the Proxy Statement.
</TABLE>
Mr. Greehey has served as Chief Executive Officer and as a
director of Energy since 1979 and as Chairman of the Board since
1983. Mr. Greehey is also a director of Weatherford
International Incorporated and Santa Fe Energy Resources, Inc.,
neither of which are affiliated with the Company. Mr. Greehey
has announced that he will retire as Chief Executive
Officer of Energy effective June 30, 1996.
Mr. Becraft was elected as a director in 1995 and was
elected as President and Chief Operating Officer of Energy
effective January 1, 1996. Effective June 30, 1996, he will
succeed Mr. Greehey as Chief Executive Officer of Energy.
From 1984 to 1989 Mr. Becraft served as Senior Vice President
in the Company's natural gas division. Prior to rejoining the
Company in May 1995, he had served as President and Chief
Executive Officer of Transok, Inc. since 1989. Transok, Inc.
is not an affiliate of the Company.
Mr. Benninger has served as a director of Energy since
1990. He was elected Executive Vice President in 1989 and served
as Chief Operating Officer of Valero Natural Gas Company from
1992 to 1995, and in various other capacities with the Company
since 1975.
Mr. McLelland was elected Executive Vice President and
General Counsel in 1989 and had served as Senior Vice President
and General Counsel of Energy since 1981.
Mr. Heep was elected Senior Vice President and Chief
Financial Officer of Energy in 1994, prior to which he served as
Vice President Finance since 1990.
Mr. Manning has served as Executive Vice President of
Valero Refining and Marketing Company since 1995 and in various
other capacities within the Company's refining division since
1986.
ITEM 2. PROPERTIES
The Company's properties include a petroleum refinery and
related facilities, eight natural gas processing plants, and
various natural gas and NGL pipelines, gathering lines,
fractionation facilities, compressor stations, treating plants
and related facilities, all located in Texas. Substantially all
of the Company's refining fixed assets are pledged as security
under deeds of trust securing industrial revenue bonds issued on
behalf of Valero Refining and Marketing Company. Substantially
all of the gas systems and processing facilities acquired by the
Company in connection with the Merger are pledged as collateral
for the First Mortgage Notes of Valero Management Partnership,
L.P. See Note 4 of Notes to Consolidated Financial Statements.
Reference is made to "Item 1. Business" which includes detailed
information regarding properties of the Company. The Company
believes that its facilities are generally adequate for their
respective operations, and that the facilities of the Company are
maintained in a good state of repair. The Company is the lessee
under a number of cancelable and noncancelable leases for certain
real properties. See Note 13 of Notes to Consolidated Financial
Statements.
ITEM 3. LEGAL PROCEEDINGS
The Company is party to the following proceedings:
Adams, et al. v. Colonial Pipeline Company; Valero
Transmission, L.P.; et al., 157th State District Court, Harris
County, Texas (filed August 31, 1995).
American Plant Food Corporation, et al., v. Colonial
Pipeline Company; Texaco, Inc.; Valero Energy Corporation;
et al., 80th State District Court, Harris County, Texas (filed
June 1, 1995).
Benavides, et al. v. Colonial Pipeline Company; Valero
Transmission, L.P.; et al., 93rd State District Court, Hidalgo
County, Texas (filed August 31, 1995).
Cook, et al. v. Shell Oil Company; Texaco, Inc.; Valero
Transmission, L.P.; et al., 172nd State District Court, Jefferson
County, Texas (filed November 7, 1994).
Gandy, et al. v. Colonial Pipeline Company; Valero
Management Company; et al., 151st State District Court, Harris
County, Texas (filed August 31, 1995).
Grant v. Colonial Pipeline Company; Valero Transmission,
L.P.; et al., 152nd State District Court, Harris County, Texas
(filed August 31, 1995).
The six lawsuits listed above arise 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 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. Plaintiffs seek an
unspecified amount of actual and punitive damages.
Alonso, et al. v. Fina Oil and Chemical Company, Forest Oil
Corporation, Valero Energy Corporation, Valero Natural Gas
Company, et al., 370th State District Court, Hidalgo County,
Texas (filed May 17, 1995). This lawsuit was filed by certain
mineral interest owners in South Texas against Forest Oil
Corporation ("Forest") and several other defendants, including
the Company, asserting several claims in connection with an
alleged underpayment of royalties. In 1987, certain subsidiaries
of the Company entered into a settlement agreement with Forest, a
natural gas producer, 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 Forest relating to any natural gas produced and
sold to the subsidiaries after the date of the settlement
agreement. 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 Forest to
deprive plaintiffs of royalties that they would have earned but
for the settlement of the gas contract dispute. Plaintiffs seek
unspecified actual and punitive damages.
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 certain of
the Company'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 asserts claims for
breach of contract, quantum meruit, and numerous other contract
and tort claims. The plaintiff alleges actual damages of
approximately $3.7 million and punitive damages of $20.4 million.
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.
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 VTC and 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. In the Long Trusts' sixth amended
petition, the trusts seek $50 million in damages from the Company
as a result of the Valero Defendants' alleged interference
between the Long Trusts and Tejas, and seek $36 million in take-
or-pay damages from Tejas. The Long Trusts also seek punitive
damages in an amount equal to treble the amount of actual damages
proven at trial. 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. Trial is set to begin on May 13, 1996.
Mizel v. Valero Energy Corporation, Valero Natural Gas
Company, and Valero Natural Gas Partners, L.P., removed to the
United States District Court for the Western District of Texas
(originally filed May 1, 1995 in the United States District Court
for the Southern District of California). This is a federal
securities fraud lawsuit filed by a former owner of approximately
19,500 units of limited partnership interests of VNGP, L.P.
Plaintiff alleges that the proxy statement used in connection
with the solicitation of votes for approval of the merger of
VNGP, L.P. with a wholly owned subsidiary of the Company
contained fraudulent misrepresentations. 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 Company believes that
plaintiff's claims have been settled and released by the prior
class action settlement. The lawsuit is scheduled for trial on
December 2, 1996.
Ventura, et al. v. Valero Refining Company, 105th State
District Court, Nueces County, Texas (filed June 17, 1994). This
lawsuit was filed against a subsidiary of the Company 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 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 are before the court with respect to the attempted
termination of this lawsuit.
Javelina Company Litigation. Valero Javelina Company, a
wholly owned subsidiary of Energy, owns a 20 percent general
partner interest in Javelina Company, a general partnership. See
Note 6 of Notes to Consolidated Financial Statements. Javelina
Company has been named as a defendant in eight lawsuits filed
since 1993 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 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders
during the fourth quarter of 1995.
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
Energy's Common Stock is listed under the symbol "VLO" on
the New York Stock Exchange, which is the principal trading
market for this security. As of February 1, 1996, there were
approximately 6,850 holders of record and an estimated 18,000
additional beneficial owners of Energy's Common Stock.
The range of the high and low sales prices of the Common
Stock as quoted in The Wall Street Journal, New York Stock
Exchange-Composite Transactions listing, and the amount of per-
share dividends for each quarter in the preceding two years, are
set forth in the tables shown below:
<TABLE>
<CAPTION>
Common Stock Dividends
1995 1994 Per Common Share
Quarter Ended High Low High Low 1995 1994
<S> <C> <C> <C> <C> <C> <C>
March 31. . . . . . . . $18 5/8 $16 $24 1/8 $19 1/2 $.13 $.13
June 30 . . . . . . . . 22 7/8 17 3/4 22 1/8 16 3/4 .13 .13
September 30. . . . . . 25 5/8 19 5/8 21 1/8 17 1/4 .13 .13
December 31 . . . . . . 25 7/8 22 1/2 22 16 1/2 .13 .13
</TABLE>
The Energy Board of Directors declared a quarterly dividend
of $.13 per share of Common Stock at its January 23, 1996
meeting. Dividends are considered quarterly by the Energy Board
of Directors and may be paid only when approved by the Board.
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data set forth below for the year
ended December 31, 1995 is derived from the Company's
Consolidated Financial Statements contained elsewhere herein.
The selected financial data for the years ended prior to
December 31, 1995 is derived from the selected financial data
contained in the Company's Annual Report on Form 10-K for the
year ended December 31, 1994.
The following summaries are in thousands of dollars except
for per share amounts:
<TABLE>
<CAPTION>
Year Ended December 31,
1995<F1> 1994<F1> 1993 1992 1991
<S> <C> <C> <C> <C> <C>
OPERATING REVENUES . . . . . . . . . . . $3,019,792 $1,837,440 $1,222,239 $1,234,618 $1,011,835
OPERATING INCOME . . . . . . . . . . . . $ 188,791 $ 125,925 $ 75,504 $ 134,030 $ 119,266
EQUITY IN EARNINGS (LOSSES) OF AND
INCOME FROM VALERO NATURAL
GAS PARTNERS, L.P. . . . . . . . . . . $ - $ (10,698) $ 23,693 $ 26,360 $ 32,389
NET INCOME . . . . . . . . . . . . . . . $ 59,838 $ 26,882 $ 36,424 $ 83,919 $ 98,667
Less: Preferred stock dividend
requirements. . . . . . . . . 11,818 9,490 1,262 1,475 6,044
NET INCOME APPLICABLE TO
COMMON STOCK . . . . . . . . . . . . . $ 48,020 $ 17,392 $ 35,162 $ 82,444 $ 92,623
EARNINGS PER SHARE OF
COMMON STOCK . . . . . . . . . . . . . $ 1.10 $ .40 $ .82 $ 1.94 $ 2.28
TOTAL ASSETS . . . . . . . . . . . . . . $2,876,680 $2,831,358 $1,764,437 $1,759,100 $1,502,430
LONG-TERM OBLIGATIONS AND
REDEEMABLE PREFERRED STOCK . . . . . . $1,042,541 $1,034,470 $ 499,421 $ 497,308 $ 395,948
DIVIDENDS PER SHARE OF COMMON
STOCK. . . . . . . . . . . . . . . . . $ .52 $ .52 $ .46 $ .42 $ .34
<FN>
<F1>
Reflects the consolidation of the Partnership as of May 31, 1994.
<F2>
See Notes to Consolidated Financial Statements.
</FN>
</TABLE>
<PAGE>
ITEM 7. 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 Energy was consummated
on May 31, 1994. As a result of the Merger, VNGP, L.P. became a
subsidiary of Energy. The accompanying consolidated statements
of income of the Company for the years ended December 31, 1995,
1994 and 1993 reflect the Company's 100% interest in the
Partnership's operations after May 31, 1994 and its effective
equity interest of approximately 49% for all periods prior to and
including May 31, 1994. Because 1994 results of operations for
the Company's natural gas and natural gas liquids segments are
not comparable to subsequent and prior periods due to the Merger,
the discussion of these segments which follows under "Results of
Operations - 1995 Compared to 1994 - Segment Results" and
"Results of Operations - 1994 Compared to 1993 - Segment Results"
is based on pro forma operating results for 1994 and 1993 that
reflect the consolidation of the Partnership with Energy for all
of such periods.
<PAGE>
RESULTS OF OPERATIONS
The following are the Company's financial and operating
highlights for each of the three years in the period ended
December 31, 1995. Certain 1994 and 1993 amounts have been
reclassified for comparative purposes. The amounts in the
following table are in thousands of dollars, unless otherwise
noted:
<TABLE>
<CAPTION>
Year Ended December 31,
1995 1994 1993
<S> <C> <C> <C>
OPERATING REVENUES:
Refining and marketing . . . . . . . . . . . . . . . . . . . . . . . . $1,772,577 $1,090,368 $1,044,749
Natural gas <F1>:
Sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 915,455 452,381 42,375
Transportation . . . . . . . . . . . . . . . . . . . . . . . . . . . 57,764 35,183 3,646
Natural gas liquids <F1> . . . . . . . . . . . . . . . . . . . . . . . 435,979 307,016 53,252
Other <F1> . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 126 42,639 83,886
Intersegment eliminations <F1> . . . . . . . . . . . . . . . . . . . . (162,109) (90,147) (5,669)
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3,019,792 $1,837,440 $1,222,239
OPERATING INCOME (LOSS):
Refining and marketing . . . . . . . . . . . . . . . . . . . . . . . . $ 141,512 $ 78,660 $ 75,401
Natural gas <F1> . . . . . . . . . . . . . . . . . . . . . . . . . . . 39,496 26,731 2,863
Natural gas liquids <F1> . . . . . . . . . . . . . . . . . . . . . . . 43,684 35,213 10,057
Corporate general and administrative expenses and other, net <F1>. . . (35,901) (14,679) (12,817)
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 188,791 $ 125,925 $ 75,504
Equity in earnings (losses) of and income from:
Valero Natural Gas Partners, L.P. <F2> . . . . . . . . . . . . . . . . $ - $ (10,698) $ 23,693
Joint ventures . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,827 $ 2,437 $ (1,688)
Gain on disposition of assets and other income, net. . . . . . . . . . . $ 2,742 $ 2,039 $ 7,897
Interest and debt expense, net . . . . . . . . . . . . . . . . . . . . . $ (101,222) $ (76,921) $ (37,182)
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 59,838 $ 26,882 $ 36,424
Net income applicable to common stock. . . . . . . . . . . . . . . . . . $ 48,020 $ 17,392 $ 35,162
Earnings per share of common stock . . . . . . . . . . . . . . . . . . . $ 1.10 $ .40 $ .82
PRO FORMA OPERATING INCOME (LOSS) <F3>:
Refining and marketing . . . . . . . . . . . . . . . . . . . . . . . . $ 141,512 $ 78,660 $ 75,401
Natural gas. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39,496 30,829 73,379
Natural gas liquids. . . . . . . . . . . . . . . . . . . . . . . . . . 43,684 38,940 40,309
Corporate general and administrative expenses and other, net . . . . . (35,901) (22,486) (30,151)
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 188,791 $ 125,943 $ 158,938
OPERATING STATISTICS:
Refining and marketing:
Throughput volumes (Mbbls per day) . . . . . . . . . . . . . . . . . 160 146 136
Average throughput margin per barrel <F4>. . . . . . . . . . . . . . $ 6.25 $ 5.36 $ 5.99
Sales volumes (Mbbls per day). . . . . . . . . . . . . . . . . . . . 208 140 133
Natural gas <F3>:
Gas volumes (MMcf per day):
Sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,434 1,144 1,151
Transportation . . . . . . . . . . . . . . . . . . . . . . . . . . 1,704 1,682 1,672
Total gas volumes. . . . . . . . . . . . . . . . . . . . . . . . 3,138 2,826 2,823
Average gas sales price per Mcf. . . . . . . . . . . . . . . . . . . $ 1.74 $ 2.07 $ 2.32
Average gas transportation fee per Mcf . . . . . . . . . . . . . . . $ .093 $ .102 $ .107
Natural gas liquids <F3>:
Plant production (Mbbls per day) . . . . . . . . . . . . . . . . . . 80.3 79.5 77.4
Average market price per gallon. . . . . . . . . . . . . . . . . . . $ .261 $ .271 $ .287
Average gas cost per Mcf . . . . . . . . . . . . . . . . . . . . . . $ 1.40 $ 1.75 $ 1.96
<FN>
<F1>
Reflects the consolidation of the Partnership commencing
June 1, 1994.
<F2>
Represents the Company's approximate 49% effective equity
interest in the operations of the Partnership and interest
income on certain capital lease transactions with the
Partnership for the periods prior to June 1, 1994.
<F3>
Operating income (loss) presented herein for 1994 and 1993
represents pro forma amounts that reflect the consolidation
of the Partnership with Energy for all of such periods.
Operating statistics for the natural gas and natural gas
liquids segments for 1994 and 1993 represent pro forma
statistics that reflect such consolidation.
<F4>
Throughput margin for 1993 excludes a $.55 per barrel
reduction resulting from the effect of a $27.6 million
write-down in the carrying value of the Company's refinery
inventories.
</FN>
</TABLE>
<PAGE>
1995 COMPARED TO 1994
Consolidated Results
The Company reported net income of $59.8 million, or $1.10
per share, for the year ended December 31, 1995 compared to $26.9
million, or $.40 per share, for the year ended December 31, 1994.
For the fourth quarter of 1995, net income was $12.9 million, or
$.23 per share, compared to net income of $3.9 million, or $.02
per share, for the fourth quarter of 1994. Net income and
earnings per share increased during 1995 compared to 1994 due
primarily to a significant increase in operating income from the
Company's refining and marketing operations and improved
operating results from the Company's natural gas and natural gas
liquids operations, including the effect of the Merger. The
increases in net income and earnings per share resulting from
these factors were partially offset by increases in corporate
expenses, net interest expense and income tax expense and the
nonrecurring recognition in income in 1994 of deferred management
fees resulting from the Merger. The increase in earnings per
share was also partially offset by an increase in preferred stock
dividend requirements resulting from the issuance in March 1994
of 3.45 million shares of Energy's $3.125 Convertible Preferred
Stock. See Note 8 of Notes to Consolidated Financial Statements.
Operating revenues increased $1.2 billion to $3 billion
during 1995 compared to 1994 due primarily to an increase in
operating revenues from refining and marketing operations which
is explained below under "Segment Results" and the inclusion of
operating revenues attributable to Partnership operations in all
of 1995 versus only the months of June through December in 1994.
Other operating revenues decreased $42.5 million due to the
elimination of management fee revenues received by the Company
from the Partnership as a result of the Merger.
Operating income increased $62.9 million, or 50%, to $188.8
million during 1995 compared to 1994 due primarily to an increase
in operating income from refining and marketing operations and to
the inclusion of Partnership operating income in all of 1995
versus only the months of June through December in 1994.
Partially offsetting these increases in operating income was an
increase in corporate expenses, net, resulting primarily from the
nonrecurring recognition in income in 1994 of deferred management
fees resulting from the Merger (see "1994 Compared to 1993 -
Consolidated Results"), the allocation of corporate expenses to
the Partnership in 1994 for the periods prior to the Merger and
an increase in compensation expense.
As a result of the Merger and the Company's change in the
method of accounting for its investment in the Partnership from
the equity method to the consolidation method, the Company did
not report equity in earnings (losses) of and income from the
Partnership for 1995 and the months of June through December in
1994. See "Segment Results" below for a discussion of the
Company's natural gas and natural gas liquids operations,
including 100% of the operations of the Partnership on a pro
forma basis for 1994. Equity in earnings of joint ventures
increased $2.4 million to $4.8 million for 1995 compared to 1994
due to an increase in the Company's equity in earnings of
Javelina. Javelina's earnings increased due primarily to higher
product prices as a result of strong product demand from the
petrochemical industry, as well as lower feedstock costs.
Net interest and debt expense increased $24.3 million to
$101.2 million during 1995 compared to 1994 due primarily to the
inclusion of Partnership interest expense in all of 1995 versus
only the months of June through December in 1994, and to a lesser
extent to the issuance of medium-term notes ("Medium-Term Notes")
in December 1994 and the first half of 1995. See "Liquidity and
Capital Resources." Income tax expense increased $19.4 million
to $35.3 million in 1995 compared to 1994 due primarily to higher
pre-tax income.
Segment Results
Refining and Marketing
Operating revenues from the Company's refining and
marketing operations increased $682.2 million, or 63%, to $1.8
billion during 1995 compared to 1994 due to a 49% increase in
sales volumes and a 10% increase in the average sales price per
barrel. The increase in sales volumes was due primarily to
higher purchases for resale of conventional gasoline to supply
rack customers as a result of the Company's conversion of its
Refinery operations to produce primarily reformulated gasoline
("RFG") beginning in the fourth quarter of 1994, and to a 10%
increase in throughput volumes resulting from various unit
improvements completed during the latter part of 1994 and first
half of 1995. The average sales price per barrel increased due
to higher refined product prices, including higher prices
received on sales of RFG and other higher-value products.
Operating income from the Company's refining and marketing
operations increased $62.8 million, or 80%, to $141.5 million
during 1995 compared to 1994 due primarily to an increase in
total throughput margins partially offset by an increase in
operating and other expenses. Throughput margins increased due
to higher margins on sales of RFG and oxygenates of approximately
$46 million, higher margins on sales of petrochemical feedstocks
of approximately $15 million, and an approximate $22 million
increase due to unit improvements noted above and the
nonrecurrence of a turnaround of the Refinery's heavy oil
cracking complex completed during the latter part of 1994, net of
the effect of unit turnarounds which occurred in 1995 as
described below. These increases in throughput margins were
partially offset by an approximate $13 million decrease in
conventional refined product margins ("crack spread") resulting
primarily from depressed gasoline markets in early 1995
attributable to uncertainties pertaining to the general
acceptance of RFG and oxygenates. Costs for the Company's
residual oil ("resid") feedstocks increased in 1995 compared to
1994 as the Company's "resid discount", representing the average
discount at which resid sold to crude oil, decreased from
approximately $3.25 per barrel in 1994 to approximately $2.28 per
barrel in 1995 due to a continuing worldwide decrease in resid
supplies resulting from the addition of new refinery upgrading
capacity and increased production of light sweet crude oil in
relation to heavy crude oil. However, the effect of such
increased resid costs on throughput margins was more than offset
by a decrease in other feedstock costs, including a $7.5 million
benefit from price risk management activities, approximately $7
million of which was attributable to fourth quarter operations.
As a result of the above factors, the Refinery's average
throughput margin per barrel, before operating expenses and
depreciation expense, increased 17%, from $5.36 in 1994 to $6.25
in 1995. Although operating expenses increased approximately $5
million due primarily to higher costs resulting from increased
throughput, operating expenses per barrel decreased by
approximately 5%. Selling and administrative expenses also
increased approximately $5 million due to higher compensation and
other expenses, while depreciation expense increased
approximately $2 million due to capital expenditures incurred
during the latter part of 1994 and in 1995.
During the fourth quarter of 1995, the Company's existing
resid feedstock supply agreement with Arabian American Oil
Company ("Aramco") for approximately 36,000 barrels per day at
market-based prices was extended through the end of 1997. Such
agreement is subject to price renegotiation in the fourth quarter
of 1996 and provides for a reduction in volumes in 1997 to 18,000
barrels per day if a new price cannot be agreed upon. The
Company also entered into a separate one-year resid contract with
Aramco which is effective through the end of 1996 and provides
for deliveries of approximately 18,000 barrels per day at a
market-based pricing formula. The Company also has a contract to
purchase 12,000 barrels per day of resid from South Korea at
market-based prices which was extended during the first quarter
of 1996 for an additional six months. Deliveries under these
agreements provide approximately 80% of the Refinery's daily
resid feedstock requirements. The Company believes that if any
of its existing feedstock arrangements were interrupted or
terminated, adequate supplies of feedstock could be obtained from
other sources or on the open market. However, because the demand
for the type of resid feedstock now processed at the Refinery has
increased in relation to the availability of supply over the past
two years, if any such interruptions did occur, the Company could
be required to incur higher feedstock costs or substitute other
types of resid, thereby producing less favorable operating
results. At the end of 1995, the Company also contracted for
approximately 5,000 barrels per day of domestic crude for use as
a feedstock in the Refinery's crude unit in 1996. The remainder
of the Refinery's resid and crude feedstocks are purchased at
market-based prices under short-term contracts. During the third
quarter of 1995, the renovation of a 13,000-barrel-per-day
methanol plant located in Clear Lake, Texas, jointly owned by the
Company and Hoechst Celanese Chemical Group, Inc. ("Celanese"),
was completed and the plant was placed in service. See
"Liquidity and Capital Resources." In October 1995, the Company
began receiving its full 50% share of the methanol production
capacity from this plant. Such production provides all of the
methanol feedstock presently required for the Refinery's
production of oxygenates used in RFG at a cost which has been
lower than prevailing market prices.
Scheduled maintenance and catalyst changes of the
Refinery's hydrodesulfurization unit (the "HDS Unit") were
completed in December 1993 and April 1995. A turnaround of the
Refinery's heavy oil cracking complex (the "HOC") was completed
in October 1994 and turnarounds of the Refinery's hydrocracker
and naphtha reformer units were completed in April 1995. During
1996, the HDS Unit is scheduled for maintenance and a catalyst
change in the third quarter.
The Company enters into various exchange-traded and
financial instrument contracts with third parties to manage price
risk associated with its refinery feedstock purchases, refined
product inventories and refining operating margins. Although
such activities are intended to limit the Company's exposure to
loss during periods of declining margins, such activities could
tend to reduce the Company's participation in rising margins. In
1995, the Company's refining and marketing segment recognized a
$12.8 million benefit to throughput margins from price risk
management activities compared to a $5.3 million benefit in 1994.
See Note 1 under "Price Risk Management Activities" and Note 5 of
Notes to Consolidated Financial Statements.
Natural Gas
Operating income from the Company's natural gas operations
was $39.5 million for 1995 compared to pro forma operating income
of $30.8 million for 1994. The $8.7 million, or 28%, increase
was due primarily to an approximate $9 million increase in total
gas sales margins and other operating revenues and an approximate
$4 million decrease in operating, selling and administrative
expenses, partially offset by an approximate $5 million decrease
in transportation revenues. Total gas sales margins increased
due to a 25% increase in gas sales volumes, reductions in gas
costs resulting from price risk management activities, and the
nonrecurrence of certain settlements relating to measurement and
customer billing differences which adversely affected 1994. The
increase in total margins resulting from these factors was
partially offset by reduced volumetric gains, discussed below,
and lower unit margins due primarily to an increase in lower-
margin spot and off-system sales. The decrease in operating,
selling and administrative expenses was due primarily to the
nonrecurrence of certain adverse settlements in 1994, including
$6.8 million related to a settlement with the City of Houston
regarding a franchise fee dispute, and lower transportation
expense, partially offset by higher ad valorem tax, maintenance
and compensation expenses. The decrease in transportation
revenues was due primarily to a 9% decrease in average
transportation fees. Both transportation fees and unit sales
margins were adversely affected by surplus industry capacity,
resulting in continued intense competition for market share.
Demand for natural gas continues to be affected by the
operation of various nuclear and coal power plants in the
Company's core service area. At full operation, the South Texas
Project nuclear plant ("STP") in Bay City, Texas and the Comanche
Peak nuclear plant near Ft. Worth, Texas displace approximately
650 MMcf per day and 600 MMcf per day of natural gas demand,
respectively. In addition, coal-fired electrical generation
facilities owned and operated by San Antonio City Public Service
displace a portion of natural gas demand.
The Company's gas sales and transportation businesses are
based primarily on competitive market conditions and contracts
negotiated with individual customers. The Company has been able
to mitigate, to some extent, the effect of competitive industry
conditions by aggressive marketing efforts to increase gas
throughput volumes, particularly in its off-system marketing
business with local distribution and industrial companies
throughout the United States, and by the flexible use of its
strategically located pipeline system. However, gas sales and
transportation margins remain under intense pressure as the
natural gas industry continues to evolve to a customer-oriented,
mature commodity market.
Gas sales are also made, to a significantly lesser extent,
to intrastate customers under contracts which originated in the
1960s and 1970s with 20- to 30-year terms. These contracts were
full requirements, no-notice service contracts governed by a rate
order (the "Rate Order") issued in 1979 by the Railroad
Commission of Texas (the "Railroad Commission"). The Rate Order
provides for the sale of gas under such contracts at its weighted
average cost, as defined ("WACOG"), plus a margin of $.15 per
Mcf. In addition to the cost of gas purchases, WACOG has
included storage, gathering and other fixed costs, including the
amortization of deferred gas costs related to the settlement of
take-or-pay and related claims. The gas sales price for these
contracts is substantially in excess of market clearing levels
and sales volumes under these contracts have been decreasing as
such contracts expire and are not renewed. As a result of
expiring contracts in 1998, the majority of storage costs
previously included in WACOG, including the cost of the Company's
natural gas storage facility (see Note 13 of Notes to
Consolidated Financial Statements), will no longer be recovered
through gas sales rates governed under the Rate Order.
In the course of making gas sales and providing
transportation services to customers, the Company has in the past
experienced overall net volumetric gains due to measurement and
other volumetric differences related to the amounts of gas
received and delivered, which during 1994 resulted in increased
gas sales revenues of approximately $20 million. However, as a
result of the implementation by the Company of changes to
measurement standards promulgated by the American Gas
Association, the expiration of certain gas purchase contracts in
February 1995 and the continuing reduction in WACOG-based gas
sales discussed above, revenues resulting from such net
volumetric gains decreased to approximately $10 million in 1995
and are expected to decline further in 1996.
The Company enters into various exchange-traded and
financial instrument contracts with third parties to manage price
risk associated with its natural gas storage and marketing
operations. Such activities are intended to manage price risk
but may result in gas costs either higher or lower than those
that would have been incurred absent such activities. In 1995,
the Company's natural gas segment recognized $12 million in gas
cost reductions from price risk management activities, $5.6
million of which was recognized in the fourth quarter, compared
to $2.1 million in 1994 on a pro forma basis. An additional $.8
million and $6.8 million was deferred at December 31, 1995 and
1994, respectively, which is recognized as a reduction to the
cost of gas in the subsequent year. See Note 1 under "Price Risk
Management Activities" and Note 5 of Notes to Consolidated
Financial Statements.
Natural Gas Liquids
Operating income from the Company's NGL operations was
$43.7 million for 1995 compared to pro forma operating income of
$38.9 million for 1994. The $4.8 million, or 12%, increase was
due primarily to an increase in NGL margins and a decrease in
transportation and fractionation costs, partially offset by an
approximate $2 million decrease in revenues from transportation
and fractionation of third party plant production. NGL margins
increased due to a decrease in fuel and shrinkage costs resulting
from a 20% decrease in the average cost of natural gas, which
more than offset a 4% decrease in the average NGL market price.
Average natural gas costs decreased due to surplus industry
capacity and benefits from price risk management activities,
while average NGL prices decreased due to weak ethane prices
resulting from above-normal inventory levels. NGL production
volumes increased slightly in 1995 compared to 1994 as volume
increases in 1995 resulting from the addition of new natural gas
supplies under processing agreements with natural gas producers
and operational improvements and production enhancements at
certain of the Company's NGL plants were mostly offset by volume
decreases resulting primarily from the sale of the Company's two
West Texas processing plants in August 1995.
The Company also enters into various exchange-traded and
financial instrument contracts with third parties to manage the
cost of gas consumed in its NGL operations. Such activities are
intended to manage price risk but may result in fuel and
shrinkage costs either higher or lower than those that would have
been incurred absent such activities. In 1995, the Company's NGL
segment recognized $4.1 million in fuel and shrinkage cost
reductions from price risk management activities. In 1994, the
effect of such activities on fuel and shrinkage costs was not
significant. An additional $3 million was deferred at
December 31, 1995 which will be recognized as a reduction to fuel
and shrinkage costs in 1996. See Note 1 under "Price Risk
Management Activities" and Note 5 of Notes to Consolidated
Financial Statements.
The Company's NGL operations benefit from the strategic
location of its facilities in relation to natural gas supplies
and markets, particularly in South Texas which is a core supply
area for the Company's natural gas and NGL operations.
Currently, approximately 92% of the Company's NGL production
comes from plants in South Texas and the Texas Gulf Coast. As
the Company's existing South Texas NGL pipeline and fractionation
facilities are operating at or near capacity, the Company
anticipates incurring additional capital expenditures in the
future in order to develop incremental South Texas NGL production
opportunities. The Company's NGL operations should benefit in
the longer term from the expected continued growth in demand for
NGLs as petrochemical feedstocks and in the production of methyl
tertiary butyl ether ("MTBE"). A substantial portion of the
Company's butane production is processed internally as feedstock
for the Refinery's MTBE Plant. The demand for NGLs, particularly
natural gasoline, will continue to be affected seasonally,
however, by Environmental Protection Agency ("EPA") regulations
limiting gasoline volatility during the summer months.
Other
Pro forma corporate general and administrative expenses and
other, net, increased $13.4 million during 1995 compared to 1994
due primarily to the nonrecurring recognition in income in 1994
of deferred management fees resulting from the Merger, as noted
above, and an increase in compensation expense.
1994 COMPARED TO 1993
Consolidated Results
The Company reported net income of $26.9 million, or $.40
per share, for the year ended December 31, 1994 compared to $36.4
million, or $.82 per share, for the year ended December 31, 1993.
For the fourth quarter of 1994, net income was $3.9 million, or
$.02 per share, compared to a net loss of $15.2 million, or $.36
per share, for the fourth quarter of 1993. The 1993 fourth
quarter and total year results were adversely affected by a
$27.6 million, or $17.9 million after-tax ($.42 per share),
write-down in the carrying value of the Company's refinery
inventories. See "Segment Results - Refining and Marketing"
below. Although operating income increased during 1994 compared
to 1993, a decrease in equity in earnings of and income from the
Partnership, an increase in net interest and debt expense and the
nonrecurring gain on disposition of the Company's natural gas
distribution operations during the third quarter of 1993,
partially offset by a decrease in income tax expense, resulted in
a decrease in net income and earnings per share for the year.
Earnings per share was also reduced by an increase in preferred
stock dividend requirements resulting from the above-noted
issuance in March 1994 of 3.45 million shares of Energy's $3.125
Convertible Preferred Stock.
Operating revenues increased $615.2 million, or 50%, to
$1.8 billion during 1994 compared to 1993 due primarily to the
inclusion in 1994 of operating revenues attributable to the
Partnership beginning June 1, 1994, and to a lesser extent to an
increase in operating revenues from refining and marketing
operations which is explained below under "Segment Results." The
increases attributable to these factors were partially offset by
a decrease in Other operating revenues due to the elimination of
management fee revenues received from the Partnership resulting
from the May 31, 1994 Merger, and a decrease in natural gas sales
and transportation revenues resulting from the 1993 disposition
of the Company's natural gas distribution operations noted above.
Operating income increased $50.4 million, or 67%, to $125.9
million during 1994 compared to 1993 due primarily to the
inclusion of Partnership operating income for the seven months
commencing June 1, 1994. Operating income also benefitted from
the nonrecurring recognition in income at the time of the Merger
of the $6.7 million remaining balance of deferred management
fees. Such deferred management fees arose in connection with the
formation of the Partnership in 1987 at which time the Company
entered into a management agreement with the Partnership whereby
the Company would provide, over a ten-year period, certain
management services to the Partnership. The Company deferred a
portion of the gain generated upon the Partnership formation
which represented the profit element in providing such future
services. At the time of the Merger, the remaining $6.7 million
unamortized portion of such deferred gain was recognized.
The Company's equity in losses of and income from the
Partnership for the five months of 1994 preceding the Merger was
$(10.7) million compared to equity in earnings of and income from
the Partnership of $23.7 million in 1993. Included in the 1994
amount was the Company's $6.8 million equity interest in the cost
of a settlement among the Company, the Partnership and the City
of Houston regarding a franchise fee dispute noted above under
"1995 Compared to 1994 - Segment Results - Natural Gas." For a
discussion of the Company's natural gas and natural gas liquids
operations, including 100% of the operations of the Partnership
on a pro forma basis, see "Segment Results" below.
Net interest and debt expense increased $39.7 million in
1994 compared to 1993 due primarily to the inclusion of the
Partnership's interest expense subsequent to the Merger and to a
decrease in capitalized interest resulting from the placing in
service at the Refinery of the MTBE plant during the second
quarter of 1993 and the MTBE/TAME complex and reformate splitter
unit during the fourth quarter of 1993. Income tax expense
decreased in 1994 compared to 1993 due to lower pre-tax income
and the nonrecurrence of the 1993 third quarter charge to
earnings of $8.2 million resulting from the effect of a one-
percent increase in the corporate income tax rate on the
Company's December 31, 1992 balance of deferred income taxes.
Segment Results
Refining and Marketing
Operating revenues from the Company's refining and
marketing operations increased $45.6 million, or 4%, during 1994
compared to 1993 due primarily to a 5% increase in average daily
sales volumes. Sales and throughput volumes increased as a
result of placing in service various new Refinery units in 1993,
as discussed above. The average sales price per barrel in 1994
was basically unchanged from 1993 as weak refined product prices
during 1994, resulting from an increase in gasoline supply due to
increased refinery upgrading capacity, high refinery utilization
rates and increased gasoline imports, were offset by a change in
product mix resulting from increased sales of MTBE during 1994,
due to a full year's operation of the MTBE plant, and initial
sales of higher-valued RFG during November and December of 1994.
Operating income from the Company's refining and marketing
operations increased $3.3 million, or 4%, during 1994 compared to
1993 due primarily to the nonrecurrence of a write-down in the
carrying value of refinery inventories during the fourth quarter
of 1993 which reduced 1993 operating income by $27.6 million.
Excluding the effect of the 1993 inventory write-down, refining
and marketing operating income decreased $24.3 million, or 24%,
in 1994 compared to 1993 due to a decrease in throughput margins
and an increase in operating costs and depreciation expense.
Throughput margins decreased due to narrower discounts for the
Company's resid feedstocks of approximately $30 million, lower
conventional refined product margins of approximately $12
million, and lower margins on sales of MTBE of approximately $7
million due to higher costs for the Company's methanol
feedstocks, which more than offset higher margins on sales of RFG
and other premium products of approximately $21 million and an
approximate $19 million improvement due to a 7% increase in
average daily throughput volumes. As a result of the above
factors, the Refinery's average throughput margin per barrel,
before operating costs and depreciation expense, decreased from
$5.99 in 1993 (excluding the effect of the inventory write-down)
to $5.36 in 1994. Operating costs and depreciation expense
increased approximately $9 million and $6 million, respectively,
in 1994 compared to 1993 due to placing in service various new
Refinery units in 1993, as discussed above, although operating
costs per barrel were basically unchanged due to increased
throughput volumes.
Natural Gas
Pro forma operating income from the Company's natural gas
operations decreased $42.6 million, or 58%, during 1994 compared
to 1993 due to settlements of certain measurement, fuel usage and
customer billing differences which benefitted 1993 by $11 million
but negatively impacted 1994 by $3.1 million, lower gas sales
margins, a decrease in transportation revenues, and an increase
in operating and general expenses. Gas sales margins were lower
due primarily to a $16.6 million decrease in gas cost reductions
resulting from price risk management activities, reduced demand
for natural gas resulting from unseasonably mild weather during
the 1994 fourth quarter and the return to service of the STP
during the 1994 second quarter, and reduced recoveries of fixed
costs, principally gas gathering costs, as a result of a customer
audit settlement effective July 1, 1993. The decrease in
transportation revenues was due primarily to a 5% decrease in
average transportation fees also resulting from reduced gas
demand. Sales and transportation volumes were flat in 1994
compared to 1993 as volume increases resulting from business
generated in connection with the implementation of FERC Order 636
and the west-to-east shift in natural gas supply patterns were
offset by volume decreases resulting from the above-noted return
to service of the STP in 1994 and unseasonably mild weather
during the 1994 fourth quarter. Operating and general expenses
increased due primarily to the above-noted 1994 franchise fee
settlement with the City of Houston.
Natural Gas Liquids
Pro forma operating income from the Company's NGL
operations decreased $1.4 million, or 3%, during 1994 compared to
1993 due to a decrease in revenues from transporting and
fractionating volumes for third parties and an increase in
transportation and fractionation expense, partially offset by a
slight increase in NGL unit margins, a 3% increase in NGL
production volumes and a decrease in operating and general
expenses, primarily maintenance expense. NGL unit margins
increased due to a decrease in fuel and shrinkage costs resulting
from an 11% decrease in the average cost of natural gas, which
more than offset a 6% decrease in the average NGL market price.
Average natural gas costs decreased as a result of milder weather
experienced during the fourth quarter of 1994, higher industry-
wide natural gas storage inventories and the return to service of
the STP during the 1994 second quarter, while average NGL prices
decreased due to continued weak refined product prices during the
first part of 1994.
Other
Pro forma corporate general and administrative expenses and
other, net, decreased in 1994 compared to 1993 due to the
recognition in income in 1994 of deferred management fees, as
noted above, and a decrease in employee benefit expenses
resulting from various cost containment measures implemented by
the Company in 1994.
OUTLOOK
The following discussion of the outlook for the Company's
three principal business areas contains certain forward-looking
statements reflecting the Company's current expectations of the
manner in which the various factors discussed therein may affect
its business in the near future. The energy business has a history
of volatility and there is no assurance that the Company's
expectations will be realized or that unexpected events will not
have an adverse impact on the Company's business.
Refining and Marketing
Although refining margins are expected to remain volatile,
several key factors look promising for the Company's refining and
marketing operations. With regard to feedstocks, the Company's
resid discount, which narrowed considerably over the last two
years due primarily to a worldwide decrease in resid supplies
resulting from increased production of light sweet crudes and the
addition of new refinery upgrading capacity, is expected to show
gradual improvement as crude quality is now stabilizing and much
of the new upgrading capacity has already come on line. Refinery
upgrading capacity is not expected to keep pace with new crude
distillation capacity over the next several years, which should
further increase resid supplies. However, recent press reports
indicate that Iraq may soon resume sales of crude oil into world
markets. While the export of heavier Iraqi crudes could lead to
increased resid production, such exports could also depress crude
oil prices which in turn could adversely affect inventory values
and lead to volatile changes in the resid discount and other
price relationships important to the Company's results of
operations. Moreover, industry publications report that Aramco
plans to begin operation of certain new resid conversion units in
1998 at the Ras Tanura refining complex in Saudi Arabia. As a
result, the production of resid at Ras Tanura for export would be
significantly reduced. A majority of the resid feedstock
purchased by the Company from Aramco is produced at Ras Tanura.
Accordingly, a reduction in resid production at Ras Tanura could
adversely affect the price or availability of resid feedstocks in
the future. The cost of methanol feedstocks used in the
production of MTBE should benefit from a full year's operation of
the Company's joint venture methanol plant.
On the product side, domestic gasoline demand, which
increased by 1.5% and 1.7% in 1995 and 1994, respectively, is
expected to continue to grow over the next several years due to
slowing gains in fuel efficiency for passenger cars, higher sales
of light trucks and sport-utility vehicles which average fewer
miles per gallon than passenger cars, higher speed limits in
several states and an increasing number of miles driven. The
demand for oxygenates, including MTBE, is expected to increase
due to the implementation of the California Air Resources Board's
"CARB 2" gasoline program in March 1996 and to an expected increase in
worldwide demand for oxygenates to replace the octane displaced
by the worldwide movement to reduce the use of lead in gasoline.
The demand for RFG, which currently represents about 25% of the
total demand for gasoline in the U.S., also may increase if areas
of the country whose ozone emissions exceeded permitted levels in
1995 choose to "opt in" to the RFG program to reduce their
emission levels. With regard to operations, refinery throughput
volumes are expected to increase due to the full year effect of
various unit improvements and enhancements made during 1995 and
no significant unit turnarounds being scheduled in 1996.
Natural Gas
Due to its desirability as a clean-burning fuel, demand for
natural gas has remained strong and is expected to continue to
grow due primarily to increasing demand in utility and non-
utility electric generation applications and in industrial,
particularly cogeneration, applications. Natural gas supplies
should be sufficient to meet the growth in natural gas demand due
to anticipated increases in domestic productive and storage
capacity and in Canadian imports. As a result of the
implementation of FERC Order No. 636 in 1993, the Company's
natural gas operations are continuing to adjust to the
transformation of the U.S. natural gas industry into a more
deregulated, market-oriented environment where increasing
competition and market efficiencies are pressuring margins for
all categories of business. In response to such conditions, the
Company is continuing to emphasize growth of off-system sales by
diversification of its customer base through marketing offices
located throughout the nation and in Canada, and to further
develop and expand its slate of value-added services, such as gas
gathering and related activities, gas processing, volume and
capacity management, price risk management and power marketing.
In addition, to capitalize on the trend of west-to-east movement
of gas across the United States caused by increased production in
western supply basins, pipeline expansions from such basins and
Canada to the West Coast, and growing natural gas demand in the
East and Southeast, the Company intends to further increase its
capacity to move gas across Texas through pipeline
debottlenecking and other projects. As a result of the
development of these and other natural gas business
opportunities, the Company believes that it should be able to
increase its natural gas volumes in 1996.
Natural Gas Liquids
The Company's NGL operations benefit from its strong
integration with the Company's natural gas and refining and
marketing operations. The ability to process natural gas, and
fractionate and market NGLs, are value-added services offered to
producers which attract additional quantities of gas to the
Company's pipeline system, while production from the Company's
NGL plants provides butane feedstock for the production of
oxygenates at the Company's refinery. The demand for NGLs is
expected to remain strong as a result of continued economic
growth, petrochemical plant expansions and the addition of new
independent petrochemical facilities, and increased production of
oxygenated and reformulated gasolines. NGL margins softened
somewhat during the latter half of 1995 due to above-normal
inventory levels and lower product prices and are expected to
continue at such levels in 1996. The Company is continuing to
emphasize the addition of new natural gas supplies under
processing agreements with natural gas producers and the
development and expansion of market alternatives for its NGL
production. In order to accommodate an increase in natural gas
supplies, the Company increased the processing capacity at
certain of its NGL plants in 1995 through various expansion
projects and the addition of compression facilities which
resulted in an increase in NGL production volumes at such plants.
The full year effect of such plant expansions and improvements
should further increase production volumes in 1996.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by the Company's operating activities
increased $87.7 million during 1995 compared to 1994 due
primarily to the increase in income described above under
"Results of Operations" and to the changes in current assets and
current liabilities detailed in Note 1 of Notes to Consolidated
Financial Statements under "Statements of Cash Flows." Included
in such changes was a decrease in inventories, primarily refining
inventories, resulting from a decrease in volumes available under
crude feedstock contracts, above-normal low-sulphur HOC feedstock
inventories at the end of 1994 in anticipation of a turnaround of
the HDS Unit in the first quarter of 1995, and above-normal
refined product inventories at the end of 1994 attributable to
uncertainties related to the implementation of the new RFG
regulations. In addition, the increase in accounts payable in
1995 compared to the decrease in 1994 was due primarily to
payments in 1994 related to capital additions accrued at the end
of 1993. During 1995, the Company utilized the cash provided by
its operating activities, proceeds from the issuance of Medium-
Term Notes, and proceeds from the sale of two NGL processing
plants as noted above under "Results of Operations - 1995
Compared to 1994 - Segment Results - Natural Gas Liquids" to fund
capital expenditures and deferred turnaround and catalyst costs,
to reduce borrowings under its revolving bank credit and letter
of credit facility, to repay principal on various outstanding
nonbank debt, to pay common and preferred stock dividends, and to
redeem a portion of its outstanding Cumulative Preferred Stock,
$8.50 Series A ("Series A Preferred Stock").
In the first quarter of 1995, the Securities and Exchange
Commission declared effective Energy's shelf registration
statement to offer up to $250 million principal amount of
additional debt securities, including Medium-Term Notes, $96.5
million of which had been issued through January 31, 1996. The
net proceeds received from this offering have been used, and will
be used in the future, for general corporate purposes, including
the repayment of existing indebtedness, financing of capital
projects and additions to working capital. See Note 4 of Notes
to Consolidated Financial Statements. The Company's ratio of
earnings to fixed charges, as computed based on rules promulgated
by the Commission, was 1.78 for the year ended December 31,
1995.
Effective November 1, 1995, Energy replaced its $250
million revolving bank credit and letter of credit facility with
a new five-year, unsecured $300 million revolving bank credit and
letter of credit facility that is available for general corporate
purposes including working capital needs and letters of credit.
The new facility has reduced financing rates, commitment fees and
letter of credit pricing, and both fewer and less restrictive
covenants. The new facility has three primary financial
covenants, including a minimum fixed charge coverage ratio of 1.6
to 1.0 for each period of four consecutive nonturnaround
quarters, a maximum debt to capitalization ratio of 57.5% and a
minimum net worth test. In addition, certain events involving an
actual or potential change of control of Energy may result in an
event of default under the new facility and could thereupon
result in a cross-default to other financial obligations of the
Company. As of December 31, 1995, Energy had approximately $178
million available under this committed bank credit facility for
additional borrowings and letters of credit. As defined under
the new bank credit facility, Energy's fixed charge coverage
ratio for the four quarters ended December 31, 1995 was 2.0 to
1.0, while its debt to capitalization ratio at December 31, 1995
was 52.0%. Energy also has three separate uncommitted bank
letter of credit facilities which are being used to support the
Company's Refinery feedstock trading activity. As of December
31, 1995, letters of credit aggregating approximately $34 million
were issued and outstanding under these separate uncommitted
letter of credit facilities. In addition, Energy has
$125 million of unsecured short-term bank credit lines which are
uncommitted and unrestricted as to use. As of December 31, 1995,
no amounts were outstanding under these short-term lines. The
Company's long-term debt includes Valero Management Partnership,
L.P.'s First Mortgage Notes (the "First Mortgage Notes"), $476.1
million of which was outstanding at December 31, 1995. The
indenture of mortgage and deed of trust pursuant to which the
First Mortgage Notes were issued also contains various
restrictive covenants. The Company was in compliance with all
covenants contained in its various debt facilities as of
December 31, 1995. Debt service on the Company's non-bank debt
for both principal and interest, including payments into escrow
for both principal and interest on the First Mortgage Notes, will
be $187.7 million, $160.9 million, $153.5 million, $147.4 million
and $149.1 million for the years 1996 through 2000, respectively.
See Notes 3 and 4 of Notes to Consolidated Financial Statements.
In December 1995, Energy redeemed 57,500 shares of its
Series A Preferred Stock at $100 per share, reducing the amount
of such stock outstanding to 69,000 shares at December 31, 1995.
An additional 57,500 shares will be redeemed in December 1996 at
$100 per share. See Note 7 of Notes to Consolidated Financial
Statements. In June 1992, the Energy Board of Directors approved
a stock repurchase program of up to one million shares of Common
Stock. Through December 31, 1995, Energy had repurchased 505,000
shares at an average price of $23.11 per share, with no shares
being repurchased in 1995. The Company intends to repurchase
additional shares under this authorization if the price of the
Common Stock reaches levels which the management of the Company
considers to be undervalued.
During 1995, the Company expended approximately $165
million for capital investments, including capital expenditures,
deferred turnaround and catalyst costs and investments in and
advances to joint ventures. Of this amount, $125 million related
to refining and marketing operations while $34 million related to
natural gas and NGL operations. Included in the refining and
marketing amount was $36 million for turnarounds of the
Refinery's hydrodesulfurization, hydrocracker and reformer units
and $60 million for renovation of a methanol plant located in
Clear Lake, Texas. For 1996, the Company currently expects to
incur approximately $150 million for capital expenditures,
deferred turnaround and catalyst costs, and investments and
related expenditures. Such amount excludes any expenditures
related to the Company's investment in Proesa which is discussed
separately below.
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. The plant, to be
constructed at a site near the Bay of Campeche, has been
estimated to cost approximately $400 million (exclusive of working
capital, capitalized interest and financing costs), and to produce
approximately 17,000 barrels of MTBE per stream day. The Company
and Proesa's other shareholders have entered into a letter of
understanding under which the Company's ownership interest in
Proesa would increase to 45%. Although this arrangement has not
been formally documented and is subject to certain conditions,
the Company has funded 45% of the Project's costs since August
1994. Because of the substantial devaluation of the Mexican peso
beginning in December 1994 and the resulting increase in Mexican
interest rates and deterioration of Mexican economic conditions,
in January 1995, the Company suspended further investment in the
Project pending the resolution of certain key issues related to
the Project. During 1995 and continuing in 1996, the Company
engaged in discussions with Petroleos Mexicanos, S.A. ("Pemex"),
the Mexican state-owned oil company, and the Project participants
in order to renegotiate the purchase and sales agreements between
Proesa and Pemex and to reach definitive agreement regarding the
participants' ownership interests in Proesa and their funding
commitments to the Project, including procedures for funding any
possible cost overruns. Despite some indications that Mexican
economic conditions are beginning to improve, there can be no
assurance that mutually satisfactory agreements can be reached
between Proesa and Pemex and among the Project participants, 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 December 31, 1995, the Company had a total investment
in the Project of approximately $16.5 million, and Proesa had
incurred additional obligations totalling approximately $10
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 January 31,
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. See Item 1. "Business -
Refining and Marketing - Proesa MTBE Plant" and Note 6 of Notes
to Consolidated Financial Statements.
The Energy Board of Directors increased the quarterly
dividend on its Common Stock from $.11 per share to $.13 per
share effective in the fourth quarter of 1993. Such dividend
rate has remained unchanged throughout 1994 and 1995. Dividends
are considered quarterly by the Energy Board of Directors, and
may be paid only when approved by the Board. Because appropriate
levels of dividends are determined by the Board on the basis of
earnings and cash flows, the Company cannot assure the
continuation of Common Stock dividends at any particular level.
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, including borrowings under bank credit agreements;
however, except for Medium-Term Notes or other debt securities
that may be issued from time to time under the $250 million shelf
registration statement discussed above, the Company has no
specific financing plans as of the date hereof.
The Company's refining and marketing operations have a
concentration of customers in the oil refining industry and spot
and retail gasoline markets. The Company's natural gas
operations have a concentration of customers in the natural gas
transmission and distribution industries while its NGL operations
have a concentration of customers in the refining and
petrochemical industries. These concentrations of customers may
impact the Company's overall exposure to credit risk, either
positively or negatively, in that the customers in each specific
industry segment may be similarly affected by changes in economic
or other conditions. However, the Company believes that its
portfolio of accounts receivable is sufficiently diversified to
the extent necessary to minimize potential credit risk.
Historically, the Company has not had any significant problems
collecting its accounts receivable. The Company's accounts
receivable are generally not collateralized.
The Company is subject to environmental regulation at the
federal, state and local levels. The Company's capital
expenditures for environmental control and protection for its
refining and marketing operations totalled approximately $5
million in 1995 and are expected to be approximately $9 million
in 1996. These amounts are exclusive of any amounts related to
constructed facilities for which the portion of expenditures
relating to environmental requirements is not determinable.
Capital expenditures for environmental control and protection for
the Company's natural gas and NGL operations have not been
material to date and are not expected to be material in 1996.
The Refinery was completed in 1984 under more stringent
environmental requirements than many existing United States
refineries, which are older and were built before such
environmental regulations were enacted. As a result, the Company
believes that it may be able to more easily comply with present
and future environmental legislation. Within the next several
years, all U.S. refineries must obtain operating permits under
provisions of the Clean Air Act Amendments of 1990 (the "Clean
Air Act"). In addition, Clean Air Act provisions will require
many of the Company's gas processing plants and gas pipeline
facilities to obtain new operating permits. However, the Clean
Air Act is not expected to have any significant adverse impact on
the Company's operations and the Company does not anticipate that
it will be necessary to expend any material amounts in addition
to those mentioned above to comply with such legislation. The
Company is not aware of any material environmental remediation
costs related to its operations. Accordingly, no amount has been
accrued for any contingent environmental liability.
In October 1995, the Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standards
("SFAS") No. 123, "Accounting for Stock-Based Compensation."
This statement encourages entities to adopt the fair value method
of accounting for employee stock compensation plans for fiscal
years beginning after December 15, 1995, but allows an entity to
continue to measure compensation cost for those plans using the
intrinsic value based method of accounting prescribed by
Accounting Principles Board ("APB") Opinion No. 25, "Accounting
for Stock Issued to Employees." The Company intends to continue
to measure compensation cost for its employee stock compensation
plans in accordance with APB Opinion No. 25.
In March 1995, the FASB issued SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets
to Be Disposed Of." This statement establishes accounting
standards for the impairment of long-lived assets, certain
identifiable intangibles, and goodwill related to assets to be
held and used, and for long-lived assets and certain identifiable
intangibles to be disposed of, and is effective for fiscal years
beginning after December 15, 1995, although earlier
implementation is permitted. This statement is required to be
applied prospectively for assets to be held and used, while its
initial application to assets held for disposal is required to be
reported as the cumulative effect of a change in accounting
principle. The Company plans to adopt this statement as of
January 1, 1996. Based on information currently known by the
Company, such adoption would not have a significant impact on the
Company's consolidated financial statements.
<PAGE>
ITEM 8. FINANCIAL STATEMENTS
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders
of Valero Energy Corporation:
We have audited the accompanying consolidated balance
sheets of Valero Energy Corporation (a Delaware corporation) and
subsidiaries as of December 31, 1995 and 1994, and the related
consolidated statements of income, common stock and other
stockholders' equity and cash flows for each of the three years
in the period ended December 31, 1995. These financial
statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally
accepted auditing standards. Those standards require that we
plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position
of Valero Energy Corporation and subsidiaries as of December 31,
1995 and 1994, and the results of their operations and their cash
flows for each of the three years in the period ended December
31, 1995, in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
San Antonio, Texas
February 14, 1996
<PAGE>
<TABLE>
VALERO ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Thousands of Dollars)
<CAPTION>
December 31,
A S S E T S 1995 1994
<S> <C> <C>
CURRENT ASSETS:
Cash and temporary cash investments. . . . . . . . . . . . . . . . . . . . . . . . . . $ 28,054 $ 26,210
Cash held in debt service escrow . . . . . . . . . . . . . . . . . . . . . . . . . . . 36,627 35,441
Receivables, less allowance for doubtful accounts of $1,193 (1995) and
$2,770 (1994). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 339,189 232,273
Inventories. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 140,822 182,089
Current deferred income tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . 29,530 31,842
Prepaid expenses and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47,321 25,017
621,543 532,872
PROPERTY, PLANT AND EQUIPMENT - including construction in
progress of $37,472 (1995) and $115,785 (1994), at cost. . . . . . . . . . . . . . . . 2,697,494 2,672,715
Less: Accumulated depreciation. . . . . . . . . . . . . . . . . . . . . . . . . . . 622,123 531,501
2,075,371 2,141,214
INVESTMENT IN AND ADVANCES TO JOINT VENTURES . . . . . . . . . . . . . . . . . . . . . . 41,890 41,162
DEFERRED CHARGES AND OTHER ASSETS. . . . . . . . . . . . . . . . . . . . . . . . . . . . 137,876 116,110
$2,876,680 $2,831,358
L I A B I L I T I E S A N D S T O C K H O L D E R S' E Q U I T Y
CURRENT LIABILITIES:
Current maturities of long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . $ 81,964 $ 62,230
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 312,672 341,694
Accrued interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31,104 19,693
Other accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42,542 37,150
468,282 460,767
LONG-TERM DEBT, less current maturities. . . . . . . . . . . . . . . . . . . . . . . . . 1,035,641 1,021,820
DEFERRED INCOME TAXES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 276,013 264,236
DEFERRED CREDITS AND OTHER LIABILITIES . . . . . . . . . . . . . . . . . . . . . . . . . 56,031 59,405
REDEEMABLE PREFERRED STOCK, SERIES A, issued 1,150,000 shares,
outstanding 69,000 (1995) and 126,500 (1994) shares. . . . . . . . . . . . . . . . . . 6,900 12,650
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 (1995 and 1994) shares ($172,500 aggregate
involuntary liquidation value) . . . . . . . . . . . . . . . . . . . . . . . . . 3,450 3,450
Common stock, $1 par value - 75,000,000 shares authorized; issued
43,739,380 (1995) and 43,463,869 (1994) shares . . . . . . . . . . . . . . . . . . . 43,739 43,464
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 530,177 536,613
Unearned Valero Employees' Stock Ownership Plan Compensation . . . . . . . . . . . . . (11,318) (13,706)
Retained earnings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 467,943 442,659
Treasury stock, 6,904 (1995) and -0- (1994) common shares, at cost . . . . . . . . . . (178) -
1,033,813 1,012,480
$2,876,680 $2,831,358
<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)
<CAPTION>
Year Ended December 31,
1995 1994 1993
<S> <C> <C> <C>
OPERATING REVENUES . . . . . . . . . . . . . . . . . . . . . . $3,019,792 $1,837,440 $1,222,239
COSTS AND EXPENSES:
Cost of sales and operating expenses. . . . . . . . . . . . 2,652,556 1,561,225 1,021,403
Selling and administrative expenses . . . . . . . . . . . . 78,120 66,258 68,599
Depreciation expense. . . . . . . . . . . . . . . . . . . . 100,325 84,032 56,733
Total . . . . . . . . . . . . . . . . . . . . . . . . . . 2,831,001 1,711,515 1,146,735
OPERATING INCOME . . . . . . . . . . . . . . . . . . . . . . . 188,791 125,925 75,504
EQUITY IN EARNINGS (LOSSES) OF AND INCOME FROM:
Valero Natural Gas Partners, L.P. . . . . . . . . . . . . . - (10,698) 23,693
Joint ventures. . . . . . . . . . . . . . . . . . . . . . . 4,827 2,437 (1,688)
GAIN ON DISPOSITION OF ASSETS AND OTHER INCOME, NET. . . . . . 2,742 2,039 7,897
INTEREST AND DEBT EXPENSE:
Incurred. . . . . . . . . . . . . . . . . . . . . . . . . . (105,921) (79,286) (49,517)
Capitalized . . . . . . . . . . . . . . . . . . . . . . . . 4,699 2,365 12,335
INCOME BEFORE INCOME TAXES . . . . . . . . . . . . . . . . . . 95,138 42,782 68,224
INCOE TAX EXPENSE. . . . . . . . . . . . . . . . . . . . . . . 35,300 15,900 31,800
NET INCOME . . . . . . . . . . . . . . . . . . . . . . . . . . 59,838 26,882 36,424
Less: Preferred stock dividend requirements. . . . . . . . 11,818 9,490 1,262
NET INCOME APPLICABLE TO COMMON STOCK. . . . . . . . . . . . . $ 48,020 $ 17,392 $ 35,162
EARNINGS PER SHARE OF COMMON STOCK . . . . . . . . . . . . . . $ 1.10 $ .40 $ .82
DIVIDENDS PER SHARE OF COMMON STOCK. . . . . . . . . . . . . . $ .52 $ .52 $ .46
<FN>
See Notes to Consolidated Financial Statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
VALERO ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMMON STOCK AND OTHER STOCKHOLDERS' EQUITY
(Thousands of Dollars)
<CAPTION>
Convertible
Preferred Number of Common Additional Unearned
Stock Common Stock Paid-in VESOP Retained Treasury
$1 Par Shares $1 Par Capital Compensation Earnings Stock
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1992 . . . . $ - 43,320,935 $43,321 $371,759 $(18,085) $431,600 $(7,837)
Net income . . . . . . . . . . . - - - - - 36,424 -
Dividends on Series A
Preferred Stock. . . . . . . . - - - - - (1,271) -
Dividends on Common Stock. . . . - - - - - (19,822) -
Unearned Valero Employees'
Stock Ownership Plan
compensation . . . . . . . . . - - - - 2,127 - -
Shares repurchased and
shares issued pursuant
to employee stock plans
and other. . . . . . . . . . . - 70,750 71 (456) - - 4,466
BALANCE, December 31, 1993 . . . . - 43,391,685 43,392 371,303 (15,958) 446,931 (3,371)
Net income . . . . . . . . . . . - - - - - 26,882 -
Dividends on Series A
Preferred Stock. . . . . . . . - - - - - (1,173) -
Dividends on Convertible
Preferred Stock. . . . . . . . - - - - - (7,427) -
Dividends on Common Stock. . . . - - - - - (22,554) -
Issuance of Convertible
Preferred Stock, net . . . . . 3,450 - - 164,428 - - -
Unearned Valero Employees'
Stock Ownership Plan
compensation . . . . . . . . . - - - - 2,252 - -
Shares repurchased and
shares issued pursuant
to employee stock plans
and other. . . . . . . . . . . - 72,184 72 882 - - 3,371
BALANCE, December 31, 1994 . . . . 3,450 43,463,869 43,464 536,613 (13,706) 442,659 -
Net income . . . . . . . . . . . - - - - - 59,838 -
Dividends on Series A
Preferred Stock. . . . . . . . - - - - - (1,075) -
Dividends on Convertible
Preferred Stock. . . . . . . . - - - - - (10,781) -
Dividends on Common Stock. . . . - - - - - (22,698) -
Unearned Valero Employees'
Stock Ownership Plan
compensation . . . . . . . . . - - - - 2,388 - -
Deficiency payment tax
effect . . . . . . . . . . . . - - - (9,106) - - -
Shares repurchased and
shares issued pursuant to
employee stock plans and
other. . . . . . . . . . . . . - 275,511 275 2,670 - - (178)
BALANCE, December 31, 1995 . . . . $3,450 43,739,380 $43,739 $530,177 $(11,318) $467,943 $ (178)
<FN>
See Notes to Consolidated Financial Statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
VALERO ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands of Dollars)
<CAPTION>
Year Ended December 31,
1995 1994 1993
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 59,838 $ 26,882 $ 36,424
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation expense . . . . . . . . . . . . . . . . . . . . . . . . 100,325 84,032 56,733
Amortization of deferred charges and other, net. . . . . . . . . . . 34,955 20,844 21,078
Inventory write-down to market . . . . . . . . . . . . . . . . . . . - - 27,588
Gain on disposition of assets, net of other
nonoperating charges. . . . . . . . . . . . . . . . . . . . . . . . - - (6,878)
Changes in current assets and current liabilities. . . . . . . . . . (31,636) (95,597) 9,805
Deferred income tax expense . . . . . . . . . . . . . . . . . . . . 4,700 12,200 15,300
Equity in (earnings) losses in excess of distributions:
Valero Natural Gas Partners, L.P.. . . . . . . . . . . . . . . . . - 16,179 (4,970)
Joint ventures. . . . . . . . . . . . . . . . . . . . . . . . . . (4,304) (2,437) 1,688
Changes in deferred items and other, net . . . . . . . . . . . . . . (8,056) 6,008 (15,487)
Net cash provided by operating activities. . . . . . . . . . . . . 155,822 68,111 141,281
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . (124,619) (80,738) (136,594)
Deferred turnaround and catalyst costs . . . . . . . . . . . . . . . . . (35,590) (21,999) (23,054)
Investment in and advances to joint ventures, net. . . . . . . . . . . . (2,018) (9,229) (6,167)
Investment in Valero Natural Gas Partners, L.P.. . . . . . . . . . . . . - (124,264) -
Assets leased to Valero Natural Gas Partners, L.P. . . . . . . . . . . . - (1,886) -
Distributions from Valero Natural Gas Partners, L.P. . . . . . . . . . . - 2,789 -
Dispositions of property, plant and equipment. . . . . . . . . . . . . . 13,531 4,504 30,720
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70 898 991
Net cash used in investing activities. . . . . . . . . . . . . . . . . (148,626) (229,925) (134,104)
CASH FLOWS FROM FINANCING ACTIVITIES:
Decrease in short-term debt. . . . . . . . . . . . . . . . . . . . . . . - - (6,700)
Long-term debt reduction, net. . . . . . . . . . . . . . . . . . . . . . (61,357) (27,285) (15,000)
Long-term borrowings, net. . . . . . . . . . . . . . . . . . . . . . . . 96,500 92,000 32,000
Increase in cash held in debt service escrow for principal . . . . . . . (1,875) (22,768) -
Common stock dividends . . . . . . . . . . . . . . . . . . . . . . . . . (22,698) (22,554) (19,822)
Preferred stock dividends. . . . . . . . . . . . . . . . . . . . . . . . (11,856) (8,600) (1,271)
Issuance of Convertible Preferred Stock, net . . . . . . . . . . . . . . - 167,878 -
Issuance of common stock, net. . . . . . . . . . . . . . . . . . . . . . 1,684 3,251 3,844
Repurchase of Series A Preferred Stock . . . . . . . . . . . . . . . . . (5,750) (1,150) (1,150)
Net cash provided by (used in) financing activities. . . . . . . . . . (5,352) 180,772 (8,099)
NET INCREASE (DECREASE) IN CASH AND TEMPORARY
CASH INVESTMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,844 18,958 (922)
CASH AND TEMPORARY CASH INVESTMENTS AT
BEGINNING OF PERIOD. . . . . . . . . . . . . . . . . . . . . . . . . . . 26,210 7,252 8,174
CASH AND TEMPORARY CASH INVESTMENTS AT
END OF PERIOD. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 28,054 $ 26,210 $ 7,252
<FN>
See Notes to Consolidated Financial Statements.
</FN>
</TABLE>
<PAGE>
VALERO ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation and Basis of Presentation
The accompanying consolidated financial statements include
the accounts of Valero Energy Corporation ("Energy") and
subsidiaries (collectively referred to herein as the "Company").
All significant intercompany transactions have been eliminated in
consolidation. Certain prior period amounts have been
reclassified for comparative purposes.
Energy conducts its refining and marketing operations
through its wholly owned subsidiary, Valero Refining and
Marketing Company ("VRMC"), and VRMC's operating subsidiaries
(collectively referred to herein as "Refining"). Prior to and
including May 31, 1994, the Company accounted for its effective
equity interest of approximately 49% in Valero Natural Gas
Partners, L.P. ("VNGP, L.P.") and VNGP, L.P.'s consolidated
subsidiaries, including Valero Management Partnership, L.P. (the
"Management Partnership") and various subsidiary operating
partnerships ("Subsidiary Operating Partnerships") (collectively
referred to herein as the "Partnership") using the equity method
of accounting. Effective May 31, 1994, the Company acquired
through a merger (the "Merger") the remaining effective equity
interest of approximately 51% in the Partnership and changed the
method of accounting for its investment in the Partnership to the
consolidation method (see Note 2).
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Revenue Recognition
Revenues generally are recorded when services have been
provided or products have been delivered. Changes in the fair
value of financial instruments related to trading activities are
recognized in income currently. See "Price Risk Management
Activities" below.
Price Risk Management Activities
The Company enters into various exchange-traded as well as
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. Such contracts are designated at inception as a
hedge where there is a direct relationship to the price risk
associated with the Company's inventories or future purchases and
sales of commodities used in the Company's operations. Hedges of
inventories are accounted for under the deferral method with
gains and losses included in the carrying amounts of inventories
and ultimately recognized in cost of sales as those inventories
are sold. Hedges of anticipatory transactions and purchase and
sales commitments are also accounted for under the deferral
method with gains and losses on these transactions recognized in
cost of sales when the hedged transaction occurs. Gains and
losses on early terminations of financial instrument contracts
designated as hedges are carried forward and included in cost of
sales in the measurement of the hedged transaction. Certain of
the Company's hedging activities could tend to reduce the
Company's participation in rising margins but are intended to
limit the Company's exposure to loss during periods of declining
margins.
The Company also enters into various exchange-traded as well
as financial instrument contracts with third parties for trading
purposes. Contracts entered into for trading purposes are
accounted for under the fair value method. Changes in the fair
value of those contracts are recognized as gains or losses in
cost of sales currently and are recorded in the statement of
financial position in prepaid expenses and other at fair value at
the reporting date. The Company determines the fair value of its
exchange-traded contracts based on the settlement prices for open
contracts, which are established by the exchange on which the
instruments are traded. The fair value of the Company's over-the-
counter contracts is determined based on market-related
indexes or by obtaining quotes from brokers. (See Note 5.)
Inventories
The Company owns a specialized petroleum refinery (the
"Refinery") in Corpus Christi, Texas. 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 $33 million at December 31, 1995. During the
fourth quarter of 1993, Refining incurred a charge to earnings of
$27.6 million to write down the carrying value of its inventories
to reflect then existing market prices. 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 December 31, 1995 and
December 31, 1994 are as follows (in thousands):
<TABLE>
<CAPTION>
December 31,
1995 1994
<S> <C> <C>
Refinery feedstocks . . . . . . . . . . . . . . . . . . . $ 48,295 $ 82,099
Refined products and blendstocks. . . . . . . . . . . . . 41,967 50,499
Natural gas in underground storage. . . . . . . . . . . . 31,156 29,678
Natural gas liquids . . . . . . . . . . . . . . . . . . . 3,280 4,664
Materials and supplies. . . . . . . . . . . . . . . . . . 16,124 15,149
$140,822 $182,089
</TABLE>
Refinery feedstock and refined product and blendstock
inventory volumes totalled 6.2 million barrels ("MMbbls") and
8.9 MMbbls at December 31, 1995 and December 31, 1994,
respectively. Natural gas inventory volumes totalled
approximately 11.7 billion cubic feet ("Bcf") and 9.8 Bcf at
December 31, 1995 and December 31, 1994, respectively.
Prepaid Expenses and Other
Prepaid expenses and other for the periods indicated are
as follows (in thousands):
<TABLE>
<CAPTION>
December 31,
1995 1994
<S> <C> <C>
Commodity deposits and deferrals (see Note 5) . . . . . . $34,553 $ 5,639
Prepaid insurance . . . . . . . . . . . . . . . . . . . . 8,663 11,527
Prepaid benefits expense. . . . . . . . . . . . . . . . . 2,187 5,291
Other . . . . . . . . . . . . . . . . . . . . . . . . . . 1,918 2,560
$47,321 $25,017
</TABLE>
Property, Plant and Equipment
Property additions and betterments include capitalized
interest, and acquisition and administrative costs allocable to
construction and property purchases.
The costs of minor property units (or components of
property units), net of salvage, retired or abandoned are charged
or credited to accumulated depreciation. Gains or losses on
sales or other dispositions of major units of property are
credited or charged to income.
Provision for depreciation of property, plant and equipment
is made primarily on a straight-line basis over the estimated
useful lives of the depreciable facilities. The rates for
depreciation are as follows:
<TABLE>
<S> <C>
Refining and marketing. . . . . . . . . . . 3 3/5%
Natural gas . . . . . . . . . . . . . . . . 2 1/4% - 20%
Natural gas liquids . . . . . . . . . . . . 4 1/2% - 20%
Other . . . . . . . . . . . . . . . . . . . 9% - 20%
</TABLE>
Deferred Charges
Deferred Gas Costs
Payments made or agreed to be made in connection with the
settlement of certain disputed contractual issues with natural
gas suppliers are initially deferred. The balance of deferred
gas costs of $33 million at December 31, 1995 is included in
noncurrent other assets and is expected to be recovered over the
next 6 years through natural gas sales rates charged to certain
customers.
Catalyst and Refinery Turnaround Costs
Catalyst cost is deferred when incurred and amortized over
the estimated useful life of that catalyst, normally one to three
years. Refinery turnaround costs are deferred when incurred and
amortized over that period of time estimated to lapse until the
next turnaround occurs.
Other Deferred Charges
Other deferred charges consist of technological royalties
and licenses, contract costs, debt issuance costs, and certain
other costs. Technological royalties and licenses are amortized
over the estimated useful life of each particular related asset.
Contract costs are amortized over the term of the related
contract. Debt issuance costs are amortized by the effective
interest method over the estimated life of each instrument or
facility.
Other Accrued Expenses
Other accrued expenses for the periods indicated are as
follows (in thousands):
<TABLE>
<CAPTION>
December 31,
1995 1994
<S> <C> <C>
Accrued taxes. . . . . . . . . . . . . . . . . . . . . . . . $16,433 $15,201
Other accrued employee benefit costs (see Note 12) . . . . . 11,047 7,337
Accrued pension cost (see Note 12) . . . . . . . . . . . . . 4,695 4,287
Accrued lease expense. . . . . . . . . . . . . . . . . . . . 4,566 3,955
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,801 6,370
$42,542 $37,150
</TABLE>
Fair Value of Financial Instruments
The carrying amounts of the Company's financial instruments
approximate fair value, except for long-term debt and certain
financial instruments used in price risk management activities.
See Notes 4 and 5.
Earnings Per Share
Earnings per share of common stock were computed, after
recognition of the preferred stock dividend requirements, based
on the weighted average number of common shares outstanding
during each year. For the years ended December 31, 1995 and
1994, the conversion of the Convertible Preferred Stock (see Note
8) is not assumed since its effect would be antidilutive.
Potentially dilutive common stock equivalents were not material
and therefore were also not included in the computation. The
weighted average number of common shares outstanding for the
years ended December 31, 1995, 1994 and 1993 was 43,651,914,
43,369,836 and 43,098,808, respectively.
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. Also
excluded are the Partnership's current assets and liabilities as
of the acquisition date (see Note 2). The changes in 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>
Year Ended December 31,
1995 1994 1993
<S> <C> <C> <C>
Cash held in debt service escrow for interest. . . . . . . $ 689 $(12,673) $ -
Receivables, net . . . . . . . . . . . . . . . . . . . . . (106,916) (64,150) 31,854
Inventories. . . . . . . . . . . . . . . . . . . . . . . . 41,267 (21,785) 3,870
Prepaid expenses and other . . . . . . . . . . . . . . . . (22,304) 142 (392)
Accounts payable . . . . . . . . . . . . . . . . . . . . . 38,825 (4,295) (21,778)
Accrued interest . . . . . . . . . . . . . . . . . . . . . 11,411 3,901 (81)
Other accrued expenses . . . . . . . . . . . . . . . . . . 5,392 3,263 (3,668)
Total . . . . . . . . . . . . . . . . . . . . . . . . . $ (31,636) $(95,597) $ 9,805
</TABLE>
The following provides information related to cash interest
and income taxes paid by the Company for the periods indicated
(in thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
1995 1994 1993
<S> <C> <C> <C>
Interest - net of amount capitalized of $4,699 (1995),
$2,365 (1994) and $12,335 (1993). . . . . . . . . . . . . . . . . . $86,553 $72,023 $36,001
Income taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23,935 3,931 18,324
</TABLE>
Noncash investing activities for 1995 include the
reclassification to deferred charges and other assets of
$12.1 million of contract costs, previously included in property,
plant and equipment on the Consolidated Balance Sheets. Noncash
investing activities for 1994 include the remaining $60 million
payment made in 1995 for the Company's interest in a methanol
plant renovation project.
Accounting Changes
In October 1995, the Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standards
("SFAS") No. 123, "Accounting for Stock-Based Compensation."
This statement encourages entities to adopt the fair value method
of accounting for employee stock compensation plans for fiscal
years beginning after December 15, 1995, but allows an entity to
continue to measure compensation cost for those plans using the
intrinsic value based method of accounting prescribed by
Accounting Principles Board ("APB") Opinion No. 25, "Accounting
for Stock Issued to Employees." The Company intends to continue
to measure compensation cost for its employee stock compensation
plans in accordance with APB Opinion No. 25.
In March 1995, the FASB issued SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets
to Be Disposed Of." This statement establishes accounting
standards for the impairment of long-lived assets, certain
identifiable intangibles, and goodwill related to assets to be
held and used, and for long-lived assets and certain identifiable
intangibles to be disposed of, and is effective for fiscal years
beginning after December 15, 1995, although earlier
implementation is permitted. This statement is required to be
applied prospectively for assets to be held and used, while its
initial application to assets held for disposal is required to be
reported as the cumulative effect of a change in accounting
principle. The Company plans to adopt this statement as of
January 1, 1996. Based on information currently known by the
Company, such adoption would not have a significant impact on the
Company's consolidated financial statements.
Effective January 1, 1993, the Company adopted SFAS No.
106, "Employers' Accounting for Postretirement Benefits Other
Than Pensions." See Note 12.
2. ACQUISITION OF VALERO NATURAL GAS PARTNERS, L.P.
In March 1994, Energy issued Convertible Preferred Stock
(see Note 8) to fund the Merger of 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.
The Merger has been accounted for as a purchase and the
purchase price has been allocated to assets acquired and
liabilities assumed based on estimated fair values resulting in
part from an independent appraisal of the property, plant and
equipment of the Partnership. The consolidated statements of
income of the Company for the years ended December 31, 1995 and
1994, 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 thereafter.
The following unaudited pro forma financial information of
Valero Energy Corporation and subsidiaries assumes that the above
described transactions occurred for all periods presented. Such
pro forma information is not necessarily indicative of the
results of future operations.
<TABLE>
<CAPTION>
Year Ended December 31,
1994 1993
(Thousands of dollars, except
per share amounts)
<S> <C> <C>
Operating revenues. . . . . . . . . . . . . $2,333,982 $2,265,157
Operating income. . . . . . . . . . . . . . 125,943 158,938
Net income. . . . . . . . . . . . . . . . . 19,389 41,898
Net income applicable to common stock . . . 7,442 29,855
Earnings per share of common stock. . . . . .17 .69
</TABLE>
Prior to the Merger, the Company entered into transactions
with the Partnership commensurate with its status as the General
Partner. The Company charged the Partnership a management fee
equal to the direct and indirect costs incurred by it on behalf
of the Partnership. In addition, the Company purchased natural
gas and NGLs from the Partnership and sold NGLs to the
Partnership. The Company paid the Partnership a fee for
operating certain of the Company's assets. Also, the Company and
the Partnership entered into other transactions, including
certain leasing transactions.
The following table summarizes transactions between the
Company and the Partnership for the five months ended May 31,
1994 and for the year ended December 31, 1993 (in thousands):
<TABLE>
<CAPTION>
Five Months Year Ended
Ended May 31, December 31,
1994 1993
<S> <C> <C>
NGL purchases and services from the Partnership . . . . . . $36,536 $98,590
Natural gas purchases from the Partnership. . . . . . . . . 9,672 59,735
Sales of NGLs and natural gas, and transportation
and other charges to the Partnership. . . . . . . . . . . . 11,385 38,868
Management fees billed to the Partnership for
direct and indirect costs. . . . . . . . . . . . . . . . 34,299 80,727
Interest income from capital lease transactions . . . . . . 5,481 13,178
</TABLE>
3. SHORT-TERM DEBT
At December 31, 1995, Energy maintained eight separate
short-term bank lines of credit totalling $125 million, under
which no amounts were outstanding. Five of these lines are
cancellable on demand, and the others expire at various times in
1996. These short-term lines bear interest at each respective
bank's quoted money market rate, have no commitment or other fees
or compensating balance requirements and are unsecured and
unrestricted as to use.
4. LONG-TERM DEBT AND BANK CREDIT FACILITIES
Long-term debt balances were as follows (in thousands):
<TABLE>
<CAPTION>
December 31,
1995 1994
<S> <C> <C>
Valero Refining and Marketing Company:
Industrial revenue bonds:
Marine terminal and pollution control revenue bonds, Series 1987A
bonds, 10 1/4%, due June 1, 2017. . . . . . . . . . . . . . . . . . . . . . . $ 90,000 $ 90,000
Marine terminal revenue bonds, Series 1987B bonds, 10 5/8%,
due June 1, 2008. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,500 8,500
Valero Energy Corporation:
$300 million revolving bank credit and letter of credit facility, 7.55% at
December 31, 1995, due November 1, 2000 . . . . . . . . . . . . . . . . . . . . 120,000 -
$250 million revolving bank credit and letter of credit facility, 7.11% at
December 31, 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 133,000
10.58% Senior Notes, due December 30, 2000 . . . . . . . . . . . . . . . . . . . . 187,714 187,714
9.14% VESOP Notes, due February 15, 1999 (see Note 12) . . . . . . . . . . . . . . 6,819 8,407
Medium-Term Notes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 228,500 150,000
Valero Management Partnership, L.P. First Mortgage Notes . . . . . . . . . . . . . . 476,072 506,429
Total long-term debt. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,117,605 1,084,050
Less current maturities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81,964 62,230
$1,035,641 $1,021,820
</TABLE>
Effective November 1, 1995, Energy replaced its $250
million revolving bank credit and letter of credit facility with
a new, unsecured $300 million revolving bank credit and letter of
credit facility that is available for general corporate purposes
including working capital needs and letters of credit.
Borrowings under the new facility bear interest at either LIBOR
plus .50%, prime or a competitive money market rate. The Company
is charged various fees, including commitment fees on the
unutilized portion, and various letter of credit and facility
fees. The new facility has three primary financial covenants,
including a minimum fixed charge coverage ratio of 1.6 to 1.0 for
each period of four consecutive nonturnaround quarters, a maximum
debt to capitalization ratio of 57.5% and a minimum net worth
test. In addition, certain events involving an actual or
potential change of control of Energy may result in an Event of
Default under the new facility and could thereupon result in a
cross-default to other financial obligations of the Company. As
of December 31, 1995, Energy had approximately $178 million
available under this committed bank credit facility for
additional borrowings and letters of credit.
In 1992, Energy filed with the Securities and Exchange
Commission (the "Commission") a shelf registration statement
which was used to offer $150 million principal amount of Medium-
Term Notes. In 1994, Energy filed another shelf registration
statement with the Commission to offer up to $250 million
principal amount of additional debt securities, including Medium-
Term Notes, $96.5 million of which had been issued through
December 31, 1995. Net proceeds from any debt securities issued
pursuant to this shelf registration statement will be added to
the Company's funds and used for general corporate purposes,
including the repayment of existing indebtedness, financing of
capital projects and additions to working capital. Energy's
outstanding Medium-Term Notes have a weighted average life of
approximately 8.5 years and a weighted average interest rate of
approximately 8.35%.
The Company's long-term debt also includes the Management
Partnership's First Mortgage Notes (the "First Mortgage Notes").
The First Mortgage Notes, which are currently comprised of six
remaining series due serially from 1996 through 2009, are secured
by mortgages on and security interests in substantially all of
the currently existing and after-acquired property, plant and
equipment of the Management Partnership and each Subsidiary
Operating Partnership and by the Management Partnership's limited
partner interest in each Subsidiary Operating Partnership (the
"Mortgaged Property"). As of December 31, 1995, the First
Mortgage Notes have a remaining weighted average life of
approximately 6 years and a weighted average interest rate of
10.19% per annum. Interest on the First Mortgage Notes is
payable semiannually, but one-half of each interest payment and
one-fourth of each annual principal payment are escrowed
quarterly in advance. At December 31, 1995, $36.6 million had
been deposited with the Mortgage Note Indenture trustee
("Trustee") in an escrow account. The amount on deposit is
classified as a current asset (cash held in debt service escrow)
and the liability to be paid off when the cash is released by the
Trustee from escrow is classified as a current liability.
The indenture of mortgage and deed of trust pursuant to
which the First Mortgage Notes were issued (the "Mortgage Note
Indenture") contains covenants prohibiting the Management
Partnership and the Subsidiary Operating Partnerships
(collectively referred to herein as the "Operating Partnerships")
from incurring additional indebtedness, including any additional
First Mortgage Notes, other than (i) up to $50 million of
indebtedness to be incurred for working capital purposes
(provided that for a period of 45 consecutive days during each 16
consecutive calendar month period no such indebtedness will be
permitted to be outstanding) and (ii) up to the amount of any
future capital improvements financed through the issuance of debt
or equity by VNGP, L.P. and the contribution of such amounts as
additional equity to the Management Partnership. The Mortgage
Note Indenture also prohibits the Operating Partnerships from (a)
creating new indebtedness unless certain cash flow to debt
service requirements are met; (b) creating certain liens; or (c)
making cash distributions in any quarter in excess of the cash
generated in the prior quarter, less (i) capital expenditures
during such prior quarter (other than capital expenditures
financed with certain permitted indebtedness), (ii) an amount
equal to one-half of the interest to be paid on the First
Mortgage Notes on the interest payment date occurring in or next
following such prior quarter and (iii) an amount equal to one-
quarter of the principal required to be paid on the First
Mortgage Notes on the principal payment date occurring in or next
following such prior quarter, plus cash which could have been
distributed in any prior quarter but which was not distributed.
The Operating Partnerships are further prohibited from purchasing
or owning any securities of any person or making loans or capital
contributions to any person other than investments in the
Subsidiary Operating Partnerships, advances and contributions of
up to $20 million per year and $100 million in the aggregate to
entities engaged in substantially similar business activities as
the Operating Partnerships, temporary investments in certain
marketable securities and certain other exceptions. The Mortgage
Note Indenture also prohibits the Operating Partnerships from
consolidating with or conveying, selling, leasing or otherwise
disposing of all or any material portion of their property,
assets or business as an entirety to any other person unless the
surviving entity meets certain net worth requirements and certain
other conditions are met, or from selling or otherwise disposing
of any part of the Mortgaged Property, subject to certain
exceptions.
The Company was in compliance with all covenants contained
in its various debt facilities as of December 31, 1995.
Based on long-term debt outstanding at December 31, 1995,
maturities of long-term debt, including sinking fund requirements
and excluding borrowings under bank credit facilities, for the
years ending December 31, 1997 through 2000 are approximately
$72.4 million, $75.1 million, $73.2 million and $85.6 million,
respectively. Maturities of long-term debt under bank credit
facilities for the year ended December 31, 2000 are $120 million;
however, it is expected that prior to such time these bank credit
facilities will be replaced with new bank credit facilities on
similar terms and conditions.
Based on the borrowing rates currently available to the
Company for long-term debt with similar terms and average
maturities, the fair value of the Company's long-term debt,
including current maturities, was $1,275 million and $1,126
million at December 31, 1995 and 1994, respectively.
5. PRICE RISK MANAGEMENT ACTIVITIES
Refinery Feedstock and Refined Products Hedging
The Company uses its price risk management activities to
hedge various portions of the Company's refining operations. The
Company uses options and futures to hedge refinery feedstock
purchases and refined product inventories in order to reduce the
impact of adverse price changes on these inventories before the
conversion of the feedstock to finished products and ultimate
sale. Options and futures contracts at the end of 1995 and 1994
had remaining terms of less than one year. As of December 31,
1995 and 1994, 19% and 8%, respectively, of the Company's
refining inventory position was hedged. The amount of deferred
hedge losses included as an increase to refinery inventory was $1
million and $.4 million at December 31, 1995 and 1994,
respectively. The following is a summary of the contract amounts
and range of prices of the Company's contracts held or issued to
hedge inventory at December 31, 1995 and 1994:
<TABLE>
<CAPTION>
1995 1994
Payor Receiver Receiver
<S> <C> <C> <C>
Options:
Volumes (Mbbls). . . . . . - 150 695
Price (per bbl). . . . . . - $24.36-$24.78 $16.00-$23.10
Futures:
Volumes (Mbbls). . . . . . 250 1,327 365
Price (per bbl). . . . . . $22.71-$23.83 $17.57-$24.55 $17.20-$17.36
</TABLE>
The Company also hedges anticipated transactions. Over-the-
counter price swaps and futures are used to hedge refining
operating margins for periods up to 12 months in order to lock in
components of the margins, including the resid discount, the
conventional crack spread and the premium product differentials.
Through these open price swap positions on components of
refining's operating margin, less than 2% of the Company's
anticipated 1996 refining margin and approximately 10% of the
Company's anticipated 1995 refining margin was hedged as of
December 31, 1995 and 1994, respectively. There were no explicit
deferrals of hedging gains or losses related to these anticipated
transactions as of December 31, 1995 and the amount of deferred
hedging gains was $.1 million as of December 31, 1994. The
following table is a summary of the contract or notional amounts
and range of prices of the Company's futures contracts and price
swaps held or issued to hedge refining margins at December 31,
1995 and 1994. Volumes shown for swaps represent notional
volumes which are used to calculate amounts due under the
agreements and do not represent volumes exchanged.
<TABLE>
<CAPTION>
1995 1994
Receiver Payor Receiver
<S> <C> <C> <C>
Futures:
Volumes (Mbbls). . . . . 14 280 295
Price (per bbl). . . . . $18.95-$19.50 $20.24-$20.84 $16.76-$17.82
Swaps:
Volumes (Mbbls). . . . . 525 - -
Price (per bbl). . . . . $34.23-$35.81 - -
</TABLE>
Natural Gas Hedging
The Company uses its price risk management activities to
hedge various portions of the Company's natural gas and natural
gas liquids operations. In its natural gas operations, the
Company uses futures, price swaps and over-the-counter and
exchange-traded options to hedge gas storage. As of December 31,
1995 and 1994, 26% and 22%, respectively, of the Company's
natural gas inventory position was hedged. These financial
instrument contracts run for periods of up to 12 months. The
amount of deferred hedge gains included as a reduction of natural
gas inventories was $.9 million and $5.7 million at December 31,
1995 and 1994, respectively. The Company also enters into basis
swaps for location differentials at fixed prices which generally
extend for periods up to 2 months. The following is a summary of
the contract or notional amounts and range of prices of the
Company's contracts held or issued to hedge inventory at
December 31, 1995 and 1994. Volumes shown for swaps and basis
swaps represent notional volumes which are used to calculate
amounts due under the agreements and do not represent volumes
exchanged.
<TABLE>
<CAPTION>
1995 1994
Payor Receiver Receiver
<S> <C> <C> <C>
Swaps:
Volumes (MMcf) . . . . . . . . . 1,000 1,000 -
Price (per Mcf). . . . . . . . . $1.91 $2.87-$3.45 -
Options:
Volumes (MMcf) . . . . . . . . . 12,000 23,000 -
Price (per Mcf). . . . . . . . . $1.90-$2.50 $1.90-$2.50 -
Futures:
Volumes (MMcf) . . . . . . . . . 17,480 15,430 2,190
Price (per Mcf). . . . . . . . . $1.77-$3.45 $1.75-$3.45 $1.58-$2.15
Basis Swaps:
Volumes (MMcf) . . . . . . . . . 500 2,120 -
Price (per Mcf). . . . . . . . . $.63 $.13-$.85 -
</TABLE>
The Company also hedges anticipated natural gas purchase
requirements, including plant shrinkage and natural gas used in
refining operations, natural gas liquids sales and commitments to
buy and sell natural gas at fixed prices, using futures and price
swaps and over-the-counter and exchange-traded options extending
through the year 2000. Volumes hedged as of December 31, 1995
and 1994, represent 29% and 23%, respectively, of the expected
annual plant shrinkage and 29% and 36%, respectively, of the
expected natural gas requirements of the refining operations.
Explicitly deferred gains from anticipated hedges of $3.9 million
and $1.1 million, as of December 31, 1995 and 1994,
respectively, will be recognized in the month being hedged. The
Company also enters into basis swaps for location differentials
at fixed prices which extend through the year 2001. The
following table is a summary of the contract or notional amounts
and range of prices of the Company's contracts held or issued to
hedge plant shrinkage, refinery operations and natural gas
purchase and sales commitments at December 31, 1995 and 1994.
Volumes shown for swaps and basis swaps represent notional
volumes which are used to calculate amounts due under the
agreements and do not represent volumes exchanged.
<TABLE>
<CAPTION>
Total Total
Expected Maturity Date 1995 1994
1996 1997-2001 Balance Balance
Payor Receiver Payor Receiver Payor Receiver Payor Receiver
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Swaps:
Volumes (MMcf) . . 36,092 26,111 19,185 - 55,277 26,111 9,525 1,345
Price (per Mcf). . $1.31-$3.45 $1.71-$4.34 $1.91-$2.35 - $1.31-$3.45 $1.71-$4.34 $1.58-$1.73 $3.58-$3.74
Options:
Volumes (MMcf) . . 10,090 8,823 250 250 10,340 9,073 - -
Price (per Mcf). . $1.66-$3.25 $1.50-$2.45 $1.66 $1.60-$1.72 $1.66-$3.25 $1.50-$2.45 - -
Futures:
Volumes (MMcf) . . 104,740 52,620 280 60 105,020 52,680 17,900 6,566
Price (per Mcf). . $1.50-$3.45 $1.50-$3.61 $1.74-$1.95 $1.81-$1.92 $1.50-$3.45 $1.50-$3.61 $1.57-$2.26 $1.54-$3.69
Basis Swaps:
Volumes (MMcf) . . 15,442 58,258 1,345 40,283 16,787 98,541 27,520 16,090
Price (per Mcf). . $.06-$1.06 $.16-$.85 $.21 $.03-$.15 $.06-$1.06 $.03-$.85 $.03-$.25 $.02-$.25
</TABLE>
The following table discloses the carrying amount and fair
value of the Company's refining, natural gas and natural gas
liquids' contracts held or issued for non-trading purposes as of
December 31, 1995 and 1994 (dollars in thousands):
<TABLE>
<CAPTION>
1995 1994
Assets (Liabilities) Assets (Liabilities)
Carrying Fair Carrying Fair
Amount Value Amount Value
<S> <C> <C> <C> <C>
Swaps. . . . . . . . . . . . . . . $ 98 $1,557 $ 86 $8,011
Options. . . . . . . . . . . . . . (91) 429 (613) (613)
Futures. . . . . . . . . . . . . . 217 217 209 209
Basis Swaps. . . . . . . . . . . . - 5,823 - 145
Total. . . . . . . . . . . . . . $224 $8,026 $(318) $7,752
</TABLE>
Trading Activities
The Company enters into transactions for trading purposes
using its fundamental and technical analysis of market conditions
to earn additional revenues. The types of instruments used
include futures, price swaps, basis swaps and over-the-counter
and exchange-traded options. Except in limited circumstances,
these contracts run for periods of up to 13 months, with the
exception of basis swaps which extend through the year 2000. The
following table is a summary of the contract amounts and range
of prices of the Company's contracts held or issued for trading
purposes at December 31, 1995 and 1994:
<TABLE>
<CAPTION>
Total Total
Expected Maturity Date 1995 1994
1996 1997-2000 Balance Balance
Payor Receiver Payor Receiver Payor Receiver Payor Receiver
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Swaps:
Volumes (MMcf). . 22,230 23,750 1,200 1,200 23,430 24,950 - -
Price (per Mcf) . $1.79-$3.44 $1.71-$3.44 $1.85 $1.84 $1.79-$3.44 $1.71-$3.44 - -
Volumes (Mbbls) . 2,925 2,250 - - 2,925 2,250 - -
Price (per bbl) . $1.80-$4.14 $2.40-$4.18 - - $1.80-$4.14 $2.40-$4.18 - -
Options:
Volumes (MMcf). . 36,100 18,000 - - 36,100 18,000 1,100 500
Price (per Mcf) . $1.60-$3.25 $1.60-$2.40 - - $1.60-$3.25 $1.60-$2.40 $1.70-$2.10 $1.70-$1.85
Volumes (Mbbls) . - 150 - - - 150 250 -
Price (per bbl) . - $17.50-$19.00 - - - $17.50-$19.00 $24.36 -
Futures:
Volumes (MMcf). . 62,650 58,280 1,000 1,000 63,650 59,280 380 380
Price (per Mcf) . $1.64-$3.44 $1.67-$3.67 $1.94 $1.96 $1.64-$3.44 $1.67-$3.67 $1.98-$1.99 $1.98-$2.02
Volumes (Mbbls) . 100 450 - - 100 450 - -
Price (per bbl) . $23.42-$23.44 $18.24-$19.00 - - $23.42-$23.44 $18.24-$19.00 - -
Basis Swaps:
Volumes (MMcf). . 11,620 19,180 - 22,820 11,620 42,000 - -
Price (per Mcf) . $.07-$.47 $.13-$.22 - $.03 $.07-$.47 $.03-$.22 - -
</TABLE>
The following table discloses the fair values of contracts
held or issued for trading purposes and net gains (losses) from
trading activities as of or for the periods ended December 31,
1995 and 1994 (dollars in thousands):
<TABLE>
<CAPTION>
Fair Value of Assets (Liabilities)
Average Ending Net Gains(Losses)
1995 1994 1995 1994 1995 1994
<S> <C> <C> <C> <C> <C> <C>
Swaps. . . . . . . . . . . . . . . . $ (329) $ 1 $ 245 $ - $(2,143) $ 285
Options. . . . . . . . . . . . . . . 1,026 (101) 297 33 (3,273) 430
Futures. . . . . . . . . . . . . . . 2,030 486 6,739 806 8,822 (232)
Basis Swaps. . . . . . . . . . . . . 487 - 1,266 - 2,706 -
Total. . . . . . . . . . . . . . . $3,214 $ 386 $8,547 $839 $ 6,112 $ 483
</TABLE>
Market and Credit Risk
The Company's price risk management activities involve the
receipt or payment of fixed price commitments into the future.
These transactions give rise to market risk, the risk that future
changes in market conditions may make an instrument less
valuable. The Company closely monitors and manages its exposure
to market risk on a daily basis in accordance with policies
limiting net open positions. Concentrations of customers in the
refining and natural gas industries may impact the Company's
overall exposure to credit risk, in that the customers in each
specific industry may be similarly affected by changes in
economic or other conditions. The Company believes that its
counterparties will be able to satisfy their obligations under
contracts.
6. INVESTMENTS
Proesa
Productos Ecologicos, S.A. de C.V. ("Proesa"), a Mexican
corporation, is involved in a project (the "Project") to design,
construct and operate a plant (the "Plant") in Mexico to produce
methyl tertiary butyl ether ("MTBE"). The Plant, to be
constructed at a site near the Bay of Campeche, has been
estimated to cost approximately $400 million (exclusive of working
capital, capitalized interest and financing costs) and to produce
approximately 17,000 barrels of MTBE per stream day. Proesa is
currently owned 35% by the Company, 10% by Dragados y
Construcciones, S.A., a Spanish construction company and 55% by a
corporation formed by a subsidiary of Banamex, Mexico's largest
bank, and Infomin, S.A. de C.V., a privately owned Mexican
corporation. At December 31, 1995, the Company had invested
approximately $16.5 million in the Project. The Company has
entered into a letter of understanding with Proesa's other
shareholders under which, subject to certain conditions, the
Company's ownership interest in Proesa would increase to 45%.
Proesa has furnished a surety bond related to an MTBE sales
agreement between Proesa and Petroleos Mexicanos, S.A. ("Pemex"),
the Mexican state-owned oil company. Based on the exchange rate
at January 31, 1996, the insurable value of Proesa's obligation
was approximately $5.6 million. The Company estimates the
outstanding obligations of Proesa to be $10 million.
Javelina Partnership
Valero Javelina Company, a wholly owned subsidiary of
Energy, owns a 20% interest in Javelina Company ("Javelina"), a
general partnership. Javelina maintains a term loan agreement
and a working capital and letter of credit facility which mature
on January 31, 1999. Because the Company accounts for its
interest in Javelina on the equity method of accounting, its
share of the borrowings outstanding under such bank credit
agreements is not recorded on its Consolidated Balance Sheets.
The Company's guarantees of these bank credit agreements were
approximately $8.9 million at December 31, 1995.
At December 31, 1995, the Company's investment in Javelina
included its equity contributions and advances to Javelina of
approximately $20.2 million to cover its proportionate share of
expenditures in excess of the proceeds available under Javelina's
bank credit agreements, and capitalized interest and overhead.
7. REDEEMABLE PREFERRED STOCK
In December of 1995, Energy redeemed 57,500 shares
($5,750,000) of its Cumulative Preferred Stock, $8.50 Series A
("Series A Preferred Stock"), at $100 per share. The redemption
requirements for 1996 are the same with the redemption of the
remaining balance (11,500 shares or $1,150,000) to occur in 1997.
In the event of an involuntary liquidation, the holders of
the outstanding Series A Preferred Stock would be entitled, after
the payment of all debts, to $100 per share, plus any accrued and
unpaid dividends. In the event of a voluntary liquidation, the
holders of the outstanding Series A Preferred Stock would be
entitled to $100 per share, any applicable premium Energy would
have had to pay if it had elected to redeem the Series A
Preferred Stock at that time and any accrued and unpaid
dividends. In the event dividends on the Series A Preferred
Stock are six or more quarters in arrears, holders voting as a
class with holders of any other series of preferred stock also in
arrears may vote to elect two directors. No arrearages currently
exist.
8. CONVERTIBLE PREFERRED STOCK
In March 1994, Energy issued 3,450,000 shares of its $3.125
convertible preferred stock ("Convertible Preferred Stock") with
a stated value of $50 per share and received cash proceeds, net
of underwriting discounts, of approximately $168 million. Each
share of Convertible Preferred Stock is convertible at the option
of the holder into shares of Energy common stock ("Common Stock")
at an initial conversion price of $27.03. The Convertible
Preferred Stock may not be redeemed prior to June 1, 1997.
Thereafter, the Convertible Preferred Stock may be redeemed, in
whole or in part at the option of Energy, at a redemption price
of $52.188 per share through May 31, 1998, and at ratably
declining prices thereafter, plus dividends accrued to the
redemption date.
9. PREFERENCE SHARE PURCHASE RIGHTS
On November 25, 1995, Energy made a dividend distribution of
one Preference Share Purchase Right ("Right") for each
outstanding share of Common Stock, replacing similar expiring
rights distributed on November 25, 1985. Until exercisable, the
Rights are not transferable apart from Common Stock. Each Right
will entitle shareholders to buy one-hundredth (1/100) of a share
of a newly issued series of Junior Participating Serial
Preference Stock, Series III, at an exercise price of $75 per
Right.
<PAGE>
10. INDUSTRY SEGMENT INFORMATION
<TABLE>
<CAPTION>
Year Ended December 31,
1995 1994 1993
(Thousands of Dollars)
<S> <C> <C> <C>
Operating revenues:
Refining and marketing. . . . . . . . . . . . . . . . . . . $1,772,577 $1,090,368 $1,044,749
Natural gas . . . . . . . . . . . . . . . . . . . . . . . . 973,219 487,564 46,021
Natural gas liquids . . . . . . . . . . . . . . . . . . . . 435,979 307,016 53,252
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . 126 42,639 83,886
Intersegment eliminations . . . . . . . . . . . . . . . . . (162,109) (90,147) (5,669)
Total . . . . . . . . . . . . . . . . . . . . . . . . . . $3,019,792 $1,837,440 $1,222,239
Operating income (loss):
Refining and marketing. . . . . . . . . . . . . . . . . . . $ 141,512 $ 78,660 $ 75,401
Natural gas . . . . . . . . . . . . . . . . . . . . . . . . 39,496 26,731 2,863
Natural gas liquids . . . . . . . . . . . . . . . . . . . . 43,684 35,213 10,057
Corporate general and administrative
expenses and other, net . . . . . . . . . . . . . . . . . (35,901) (14,679) (12,817)
Total . . . . . . . . . . . . . . . . . . . . . . . . . 188,791 125,925 75,504
Equity in earnings (losses) of and income from:
Valero Natural Gas Partners, L.P. . . . . . . . . . . . . . - (10,698) 23,693
Joint ventures. . . . . . . . . . . . . . . . . . . . . . . 4,827 2,437 (1,688)
Gain on disposition of assets and other income, net . . . . . 2,742 2,039 7,897
Interest and debt expense, net. . . . . . . . . . . . . . . . (101,222) (76,921) (37,182)
Income before income taxes. . . . . . . . . . . . . . . . . . $ 95,138 $ 42,782 $ 68,224
Identifiable assets:
Refining and marketing. . . . . . . . . . . . . . . . . . . $1,524,065 $1,528,621 $1,407,221
Natural gas . . . . . . . . . . . . . . . . . . . . . . . . 944,616 894,678 18,854
Natural gas liquids . . . . . . . . . . . . . . . . . . . . 243,415 248,430 83,262
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . 150,141 149,688 105,456
Investment in and leases receivable from
Valero Natural Gas Partners, L.P.. . . . . . . . . . . . . - - 130,557
Investment in and advances to joint ventures. . . . . . . . 41,890 41,162 28,343
Intersegment eliminations and reclassifications . . . . . . (27,447) (31,221) (9,256)
Total . . . . . . . . . . . . . . . . . . . . . . . . . . $2,876,680 $2,831,358 $1,764,437
Depreciation expense:
Refining and marketing. . . . . . . . . . . . . . . . . . . $ 55,032 $ 52,956 $ 47,381
Natural gas . . . . . . . . . . . . . . . . . . . . . . . . 28,910 17,633 1,522
Natural gas liquids . . . . . . . . . . . . . . . . . . . . 11,971 9,003 3,648
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,412 4,440 4,182
Total . . . . . . . . . . . . . . . . . . . . . . . . . . $ 100,325 $ 84,032 $ 56,733
Capital additions:
Refining and marketing. . . . . . . . . . . . . . . . . . . $ 29,039 $ 119,748 $ 123,031
Natural gas . . . . . . . . . . . . . . . . . . . . . . . . 16,285 12,010 2,232
Natural gas liquids . . . . . . . . . . . . . . . . . . . . 17,204 6,850 1,458
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,091 2,130 9,873
Total . . . . . . . . . . . . . . . . . . . . . . . . . . $ 64,619 $ 140,738 $ 136,594
</TABLE>
<PAGE>
The Company's three core businesses are specialized
refining, natural gas and natural gas liquids. Refining converts
high-sulfur atmospheric residual oil into premium products,
including reformulated and conventional unleaded gasoline, at its
refinery, and sells those products principally on a spot, truck
rack and term contract basis. Spot and term sales of Refining's
products are made principally to larger oil companies and
gasoline distributors in the northeastern, midwestern and
southeastern United States. The principal purchasers of
Refining's products from truck racks have been wholesalers and
jobbers in the eastern and midwestern United States. Natural gas
operations consist of purchasing, gathering, processing, storage,
transporting and selling natural gas, principally to gas
distribution companies, electric utilities, pipeline companies
and industrial customers and transporting natural gas for
producers, other pipelines and end users in North America. The
natural gas liquids operations include the extraction of natural
gas liquids, principally from natural gas throughput of the
natural gas operations, and the fractionation and transportation
of natural gas liquids. The primary markets for sales of natural
gas liquids are petrochemical plants, refineries and domestic
fuel distributors in the Corpus Christi and Mont Belvieu
(Houston) areas. Intersegment revenue eliminations for 1995 and
1994 relate primarily to the refining and marketing segment's
purchases of feedstocks and fuel gas from the natural gas liquids
and natural gas segments. The Company has no significant foreign
operations other than petroleum storage facilities.
Approximately $300 million or 10% of the Company's operating
revenues were derived from a single customer, substantially all
of which is attributable to the refining and marketing segment.
The foregoing segment information reflects the Company's
effective equity interest of approximately 49% in the
Partnership's operations for periods prior to and including May
31, 1994, and reflects 100% of the Partnership's operations
thereafter (see Note 2). Capital additions in 1994 include the
remaining $60 million payment made in 1995 for the Company's
interest in a methanol plant renovation project.
11. INCOME TAXES
Components of income tax expense attributable to continuing
operations are as follows (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
1995 1994 1993
<S> <C> <C> <C>
Current:
Federal. . . . . . . . . . . . . . . . $29,674 $ 3,535 $16,377
State. . . . . . . . . . . . . . . . . 926 165 123
Total current . . . . . . . . . . . 30,600 3,700 16,500
Deferred:
Federal. . . . . . . . . . . . . . . . 4,700 12,200 17,892
State. . . . . . . . . . . . . . . . . - - (2,592)
Total deferred. . . . . . . . . . . 4,700 12,200 15,300
Total income tax expense . . . . . . . . $35,300 $15,900 $31,800
</TABLE>
Total income tax expense differs from the amount computed
by applying the statutory federal income tax rate to income
before income taxes. The reasons for these differences are as
follows (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
1995 1994 1993
<S> <C> <C> <C>
Federal income tax expense at the statutory rate . . . . . . $33,300 $15,000 $23,900
Additional deferred income taxes due to increase in
federal income tax rate. . . . . . . . . . . . . . . . . . - - 8,200
State income taxes, net of federal income tax benefit. . . . 600 100 (1,600)
Other - net. . . . . . . . . . . . . . . . . . . . . . . . . 1,400 800 1,300
Total income tax expense . . . . . . . . . . . . . . . . . . $35,300 $15,900 $31,800
</TABLE>
The tax effects of significant temporary differences
representing deferred income tax assets and liabilities are as
follows (in thousands):
<TABLE>
<CAPTION>
December 31,
1995 1994
<S> <C> <C>
Deferred income tax assets:
Tax credit carryforwards . . . . . . . . . . . $ 33,001 $ 78,368
Other. . . . . . . . . . . . . . . . . . . . . 25,570 24,482
Total deferred income tax assets . . . . . . $ 58,571 $ 102,850
Deferred income tax liabilities:
Depreciation . . . . . . . . . . . . . . . . . $(267,900) $(302,762)
Other. . . . . . . . . . . . . . . . . . . . . (37,154) (32,482)
Total deferred income tax liabilities. . . . $(305,054) $(335,244)
</TABLE>
At December 31, 1995, the Company had federal net operating
loss carryforwards of approximately $5 million, which are
available to reduce future federal taxable income and will expire
in 1997 if not utilized.
In addition, the Company had investment tax credit ("ITC"),
Employee Stock Ownership Plan ("ESOP") tax credit and alternative
minimum tax ("AMT") credit carryforwards of approximately $36
million which are available to reduce future federal income tax
liabilities. The ITC of approximately $9 million expire in the
years 1996 ($3 million), 1997 ($1 million) and 1999 through 2001
($5 million) if not utilized. The ESOP tax credits of
approximately $6 million expire in the years 1996 ($4 million)
and 1997 ($2 million). The AMT credit of approximately $21
million has no expiration date. The Company has not recorded any
valuation allowances against deferred income tax assets as of
December 31, 1995.
The Company's taxable years through 1991 are closed to
adjustment by the Internal Revenue Service. The Company believes
that adequate provisions for income taxes have been reflected in
its consolidated financial statements.
12. EMPLOYEE BENEFIT PLANS
Pension and Other Employee Benefit Plans
The following table sets forth for the pension plans of the
Company, the funded status and amounts recognized in the
Company's consolidated financial statements at December 31, 1995
and 1994 (in thousands):
<TABLE>
<CAPTION>
December 31,
1995 1994
<S> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including vested
benefits of $65,420 (1995) and $49,197 (1994). . . . . . . . . . . $66,085 $49,642
Projected benefit obligation for services rendered to date . . . . . . $87,609 $63,793
Plan assets at fair value. . . . . . . . . . . . . . . . . . . . . . . 68,619 52,289
Projected benefit obligation in excess of plan assets. . . . . . . . . 18,990 11,504
Unrecognized net gain from past experience different
from that assumed. . . . . . . . . . . . . . . . . . . . . . . . . . 2,335 10,206
Prior service cost not yet recognized in net periodic
pension cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . (5,033) (5,434)
Unrecognized net asset at beginning of year. . . . . . . . . . . . . . 1,483 1,625
Additional minimum liability accrual . . . . . . . . . . . . . . . . . 1,948 1,217
Accrued pension cost . . . . . . . . . . . . . . . . . . . . . . . . $19,723 $19,118
</TABLE>
Net periodic pension cost for the years ended December
31, 1995, 1994 and 1993 included the following components (in
thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
1995 1994 1993
<S> <C> <C> <C>
Service cost - benefits earned during the period . . . . . . . . . $ 3,465 $ 3,981 $ 4,374
Interest cost on projected benefit obligation. . . . . . . . . . . 5,455 4,990 5,258
Actual (return) loss on plan assets. . . . . . . . . . . . . . . . (14,376) 1,820 (3,450)
Net amortization and deferral. . . . . . . . . . . . . . . . . . . 9,637 (6,135) 22
Net periodic pension cost. . . . . . . . . . . . . . . . . . . . 4,181 4,656 6,204
Curtailment gain resulting from RGV disposition. . . . . . . . . . - - (1,650)
Total pension expense. . . . . . . . . . . . . . . . . . . . . $ 4,181 $ 4,656 $ 4,554
</TABLE>
Participation in the pension plan for employees of the
Company commences upon attaining age 21 and the completion of one
year of continuous service. A participant vests in plan benefits
after 5 years of vesting service or upon reaching normal
retirement date. The pension plan provides a monthly pension
payable upon normal retirement of an amount equal to a set
formula which is based on the participant's 60 consecutive
highest months of compensation during credited service under the
plan. The weighted-average discount rate used in determining the
actuarial present value of the projected benefit obligation was
7.25% and 8.7%, respectively, as of December 31, 1995 and 1994.
The rate of increase in future compensation levels used in
determining the projected benefit obligation as of December 31,
1995 and 1994 was 4% for nonexempt personnel and was 3% for
exempt personnel. The expected long-term rate of return on plan
assets was 9.25% as of December 31, 1995 and 1994.
Contributions, when permitted, are actuarially determined in an
amount sufficient to fund the currently accruing benefits and
amortize any prior service cost over the expected life of the
then current work force. The Company also maintains a
nonqualified Supplemental Executive Retirement Plan ("SERP")
which provides additional pension benefits to the executive
officers and certain other employees of the Company. The
Company's contributions to the pension plan and SERP in 1995,
1994 and 1993 were approximately $4.3 million, $5 million and
$7.5 million, respectively, and are currently estimated to be
$4.7 million in 1996. The tables at the beginning of this note
include amounts related to the SERP.
The Company is the sponsor of the Valero Energy Corporation
Thrift Plan ("Thrift Plan") which is an employee profit sharing
plan. Participation in the Thrift Plan is voluntary and is open
to employees of the Company who become eligible to participate
following the completion of three months of continuous
employment. Participating employees may make a base contribution
from 2% up to 8% of their annual base salary, depending upon
months of contributions by a participant. Thrift Plan
participants are automatically enrolled in the VESOP (see below).
The Company makes contributions to the Thrift Plan to the extent
employees' base contributions exceed the amount of the Company's
contribution to the VESOP for debt service. Prior to 1994, the
Company matched 100% of the employee contributions. In 1994, the
Thrift Plan was amended to provide for a total Company match in
both the Thrift Plan and the VESOP aggregating 75% of employee
base contributions, with an additional contribution of up to 25%
subject to certain conditions. Participants may also make a
supplemental contribution to the Thrift Plan of up to an
additional 10% of their annual base salary which is not matched
by the Company. There were no Company contributions to the
Thrift Plan in 1995; however, approximately $42,000 and $660,000
was contributed during 1994 and 1993, respectively.
In 1989, the Company established the Valero Employees'
Stock Ownership Plan ("VESOP") which is a leveraged employee
stock ownership plan. Pursuant to a private placement in 1989,
the VESOP issued notes in the principal amount of $15 million,
maturing February 15, 1999 (the "VESOP Notes"). The net proceeds
from this private placement were used by the VESOP trustee to
fund the purchase of Common Stock. During 1991, the Company made
an additional loan of $8 million to the VESOP which was also used
by the Trustee to purchase Common Stock. This second VESOP loan
matures on August 15, 2001. The number of shares of Common Stock
released at any semi-annual payment date is based on the
proportion of debt service paid during the year to remaining debt
service for that and all subsequent periods times the number of
unreleased shares then outstanding. As explained above, the
Company's annual contribution to the Thrift Plan is reduced by
the Company's contribution to the VESOP for debt service. During
1995, 1994 and 1993, the Company contributed $3,170,000,
$3,160,000 and $3,596,000, respectively, to the VESOP, comprised
of $678,000, $819,000 and $947,000, respectively, of interest on
the VESOP Notes and $2,918,000, $2,777,000 and $2,649,000,
respectively, of compensation expense. Compensation expense is
based on the VESOP debt principal payments for the portion of the
VESOP established in 1989 and is based on the cost of the shares
allocated to participants for the portion of the VESOP
established in 1991. Dividends on VESOP shares of Common Stock
are recorded as a reduction of retained earnings. Dividends on
allocated shares of Common Stock are paid to participants and
dividends on unallocated shares were paid to participants during
1993. However, the Company's contributions to the VESOP during
1995 and 1994 were reduced by $426,000 and $436,000,
respectively, of dividends paid on unallocated shares. VESOP
shares of Common Stock are considered outstanding for earnings
per share computations. As of December 31, 1995 and 1994, the
number of allocated shares were 940,470 and 817,877,
respectively, the number of committed-to-be-released shares were
62,918 and 62,922, respectively, and the number of suspense
shares were 772,055 and 897,893, respectively.
The Company also provides certain health care and life
insurance benefits for retired employees, referred to herein as
"postretirement benefits other than pensions." Substantially all
of the Company's employees may become eligible for those benefits
if, while still working for the Company, they either reach normal
retirement age or take early retirement. Health care benefits
are provided by the Company through a self-insured plan while
life insurance benefits are provided through an insurance
company.
Effective January 1, 1993, the Company adopted SFAS No.
106, "Employers' Accounting for Postretirement Benefits Other
Than Pensions", which requires a change in the Company's
accounting for postretirement benefits other than pensions from a
pay-as-you-go basis to an accrual basis of accounting. The
Company is amortizing the transition obligation over 20 years,
which is greater than the average remaining service period until
eligibility of active plan participants. The Company continues
to fund its postretirement benefits other than pensions on a pay-
as-you-go basis.
The following table sets forth for the Company's
postretirement benefits other than pensions, the funded status
and amounts recognized in the Company's consolidated financial
statements at December 31, 1995 and 1994 (in thousands):
<TABLE>
<CAPTION>
December 31,
1995 1994
<S> <C> <C>
Accumulated benefit obligation:
Retirees. . . . . . . . . . . . . . . . . . . . . . . . . . . $10,295 $11,319
Fully eligible active plan participants . . . . . . . . . . . 331 244
Other active plan participants . . . . . . . . . . . . . . . 13,504 11,254
Total accumulated benefit obligation. . . . . . . . . . . . 24,130 22,817
Unrecognized loss . . . . . . . . . . . . . . . . . . . . . . . (4,586) (800)
Unrecognized prior service cost . . . . . . . . . . . . . . . . - 1,267
Unrecognized transition obligation. . . . . . . . . . . . . . . (10,987) (17,066)
Accrued postretirement benefit cost . . . . . . . . . . . . . $ 8,557 $ 6,218
</TABLE>
Net periodic postretirement benefit cost for the years
ended December 31, 1995, 1994 and 1993 included the following
components (in thousands):
<TABLE>
<CAPTION>
December 31,
1995 1994 1993
<S> <C> <C> <C>
Service cost - benefits attributed to service during the period . . . . . . . $ 860 $1,196 $1,011
Interest cost on accumulated benefit obligation . . . . . . . . . . . . . . . 1,769 1,686 1,692
Amortization of unrecognized transition obligation. . . . . . . . . . . . . . 766 948 1,029
Amortization of prior service cost. . . . . . . . . . . . . . . . . . . . . . - (84) -
Amortization of unrecognized net loss . . . . . . . . . . . . . . . . . . . . - 75 -
Net periodic postretirement benefit cost. . . . . . . . . . . . . . . . . . 3,395 3,821 3,732
Curtailment loss resulting from RGV disposition . . . . . . . . . . . . . . . - - 616
Total postretirement benefit cost . . . . . . . . . . . . . . . . . . . . . $3,395 $3,821 $4,348
</TABLE>
For measurement purposes, the assumed health care cost
trend rate was 8% in 1995, decreasing gradually to 5.5% in 1998
and remaining level thereafter. The health care cost trend rate
assumption has a significant effect on the amount of the
obligation and periodic cost reported. An increase in the
assumed health care cost trend rate by 1% in each year would
increase the accumulated postretirement benefit obligation as of
December 31, 1995 by $4.2 million and the aggregate of the
service and interest cost components of net periodic
postretirement benefit cost for the year then ended by $.6
million. The weighted-average discount rate used in determining
the accumulated postretirement benefit obligation as of December
31, 1995 and 1994 was 7.25% and 8.7%, respectively.
Stock Option and Bonus Plans
The Company's Executive Stock Incentive Plan (the "ESIP")
authorizes the grant of various stock and stock-related awards to
executive officers and other key employees. Awards available
under the ESIP include options to purchase shares of Common
Stock, stock appreciation rights (SARs), restricted stock,
performance awards and other stock-based awards. A total of
2,100,000 shares may be issued under the ESIP, of which no more
than 750,000 shares may be issued as restricted stock. As of
December 31, 1995, 695,600 options and 127,700 shares of
restricted stock had been granted and 1,277,300 awards were
available for grant under the ESIP. In addition to options
available under the ESIP, the Company also has three non-qualified
stock option plans, Stock Option Plan No. 5, Stock
Option Plan No. 4, and Stock Option Plan No. 3, collectively
referred to herein as the "Stock Option Plans." Awards under the
Stock Option Plans are granted to key officers, employees and
prospective employees of the Company. At December 31, 1995,
there were 52,371 shares available for grant under these Stock
Option Plans.
Under the terms of the ESIP and the Stock Option Plans, the
exercise price of the options granted will not be less than 100%
or less than 75%, respectively, of the fair market value of
Common Stock at the date of grant. As of December 31, 1995, all
outstanding options contain exercise prices not less than fair
market value at date of grant. Stock options become exercisable
pursuant to the individual written agreements between the Company
and the participants either at the end of a three-year period
beginning on the date of grant or in three equal annual
installments beginning one year after the date of grant, with
unexercised options expiring ten years from the date of grant.
At December 31, 1995, 3,928,267 options were outstanding, at a
weighted-average exercise price of $20.69 per share, of which
1,531,718 options were exercisable at a weighted-average exercise
price of $22.30 per share. During 1995, 1,599,463 options were
granted at a weighted-average exercise price of $18.99 per share,
171,604 options were exercised at a weighted-average exercise
price of $17.08 per share and 75,494 options were terminated
and/or forfeited. These amounts include options granted under
the ESIP.
For each share of stock that can be purchased thereunder
pursuant to a stock option, Stock Option Plans No. 3 and 4
provide that a SAR may also be granted. A SAR is a right to
receive a cash payment equal to the difference between the fair
market value of Common Stock on the exercise date and the option
price of the stock to which the SAR is related. SARs under Stock
Option Plans No. 3 and 4 are exercisable only upon the exercise
of the related stock options. At the end of each reporting
period within the exercise period, the Company records an
adjustment to deferred compensation expense based on the
difference between the fair market value of Common Stock at the
end of each reporting period and the option price of the stock to
which the SAR is related. At December 31, 1995, 111,003 SARs
were outstanding and exercisable, at a weighted-average exercise
price of $14.52 per share. During 1995, 22,966 SARs were
exercised at a weighted-average exercise price of $14.52 per
share.
The Company maintains a Restricted Stock Bonus and
Incentive Stock Plan ("Bonus Plan") for certain key executives of
the Company. Under the Bonus Plan, 750,000 shares of Common
Stock were reserved for issuance. At December 31, 1995, there
were 6,927 shares available for award and 9,000 shares were
awarded under this plan during 1995. The amount of Bonus Stock
and terms governing the removal of applicable restrictions, and
the amount of Incentive Stock and terms establishing predefined
performance objectives and periods, are established pursuant to
individual written agreements between Energy and each participant
in the Bonus Plan.
13. LEASE AND OTHER COMMITMENTS
The Company has major long-term operating lease
commitments in connection with a gas storage facility, its
corporate headquarters office complex and various facilities and
equipment used to store and transport refinery feedstocks and
refined products. The gas storage facility lease has a remaining
primary term of four years with one eight-year optional renewal
period during which the lease payments decrease by one-half, and,
subject to certain conditions, one or more additional optional
renewal periods of five years each at fair market rentals. In
February 1995, the Company renegotiated the terms of its
corporate headquarters lease under which the lease payments were
reduced beginning in 1995. The corporate headquarters lease has a
remaining primary term of 16 years with five optional renewal
periods of five years each. The Company's long-term refinery
feedstock and refined product storage and transportation leases
have remaining primary terms ranging from 1.5 to 6.3 years with
optional renewal periods ranging from three to ten years and
provide for various contingent payments based on throughput
volumes in excess of a base amount, among other things. The
Company also has other noncancelable operating leases with
remaining terms ranging generally from one year to 11 years. The
related future minimum lease payments as of December 31, 1995 are
as follows (in thousands):
<TABLE>
<CAPTION>
Gas Refining
Storage Office Storage and
Facility Complex Transportation Other
<S> <C> <C> <C> <C>
1996 . . . . . . . . . . . . . . . . $10,438 $ 4,570 $14,248 $ 1,433
1997 . . . . . . . . . . . . . . . . 9,832 4,570 11,830 1,421
1998 . . . . . . . . . . . . . . . . 10,156 4,570 4,075 1,379
1999 . . . . . . . . . . . . . . . . 10,438 4,570 4,075 842
2000 . . . . . . . . . . . . . . . . 5,221 4,570 4,075 195
Remainder. . . . . . . . . . . . . . - 45,341 5,434 329
Total minimum lease payments . . . . $46,085 $68,191 $43,737 $5,599
</TABLE>
The future minimum lease payments listed above exclude
certain operating lease commitments which are cancelable by the
Company upon notice of one year or less. Consolidated rental
expense under operating leases, excluding amounts paid in
connection with the gas storage facility noted above, amounted to
approximately $29,313,000, $14,040,000, and $12,948,000 for 1995,
1994 (including Partnership rents commencing June 1, 1994) and
1993, respectively, and includes various month-to-month and other
short-term rentals in addition to rents paid and accrued under
long-term lease commitments. For the period prior to the Merger,
a portion of these amounts was charged to and reimbursed by the
Partnership for its proportionate use of the Company's corporate
headquarters office complex and for the use of certain other
properties managed by the Company for the period prior to the
Merger. Gas storage facility rentals paid by the Partnership for
the period prior to the Merger, and paid by the Company for the
period subsequent to the Merger, totalling $10,438,000 per year
for 1995, 1994 and 1993, were included in the cost of gas.
The obligations of the Company under the gas storage
facility lease include its obligation to make scheduled lease
payments and, in the event of a declaration of default and
acceleration of the lease obligation, to make certain lump sum
payments based on a stipulated loss value for the gas storage
facility less the fair market sales price or fair market rental
value of the gas storage facility. Under certain circumstances,
a default by Energy or a subsidiary of Energy under its credit
facilities could result in a cross default under the gas storage
facility lease. The Company believes that it is unlikely that
such a default would result in actual acceleration of the gas
storage facility lease, and further believes that the occurrence
of such event would not have a material adverse effect on the
Company.
14. LITIGATION AND CONTINGENCIES
Several 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 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 certain 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 asserts claims for breach of
contract, quantum meruit, and numerous other contract and tort
claims. The plaintiff alleges actual damages of approximately
$3.7 million and punitive damages of $20.4 million. 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. 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. In the trusts' sixth
amended petition, the trusts seek $50 million in damages from the
Company as a result of the Valero Defendants' alleged
interference between the trusts and the supplier, and seek $36
million in take-or-pay damages from the supplier. The trusts
also seek punitive damages in an amount equal to treble the
amount of actual damages proven at trial. 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. Trial is set to
begin on May 13, 1996.
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
VNGP, L.P. The plaintiff alleges that the proxy statement used
in connection with the solicitation of votes for approval of the
Merger 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 Company
believes that the plaintiff's claims have been settled and
released by the prior class action settlement. 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 Refinery, 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 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.
15. QUARTERLY RESULTS OF OPERATIONS (Unaudited)
The results of operations by quarter for the years ended
December 31, 1995 and 1994 were as follows (in thousands of
dollars, except per share amounts):
<TABLE>
<CAPTION>
Operating Operating Net Earnings Per Share
Revenues Income Income Of Common Stock
<S> <C> <C> <C> <C>
1995-Quarter Ended:
March 31. . . . . . . . . $ 690,535 $ 28,667 $ 3,759 $ .02
June 30 . . . . . . . . . 744,607 54,953 20,522 .40
September 30. . . . . . . 740,327 57,781 22,630 .45
December 31 . . . . . . . 844,323 47,390 12,927 .23
Total . . . . . . . . . $3,019,792 $188,791 $59,838 $1.10
1994-Quarter Ended:
March 31. . . . . . . . . $ 281,277 $ 25,578 $ 6,283 $ .13
June 30 . . . . . . . . . 416,143 30,076 4,222 .03
September 30 . . . . . . 577,429 43,155 12,534 .22
December 31 . . . . . . . 562,591 27,116 3,843 .02
Total . . . . . . . . . $1,837,440 $125,925 $26,882 $ .40
</TABLE>
The Company's results of operations by quarter for 1994
reflect the Company's effective 49% equity interest in the
Partnership for periods prior to and including the May 31, 1994
Merger and by the consolidation of the Partnership's results of
operations thereafter. See Note 2.
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. (DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT),
ITEM 11. (EXECUTIVE COMPENSATION), ITEM 12. (SECURITY OWNERSHIP
OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT) AND ITEM 13.
(CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS) ARE INCORPORATED
BY REFERENCE FROM THE COMPANY'S 1996 PROXY STATEMENT IN
CONNECTION WITH ITS ANNUAL MEETING OF STOCKHOLDERS SCHEDULED TO
BE HELD APRIL 30, 1996. SEE PAGE ii, SUPRA.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K.
(a) 1. Financial Statements-
The following Consolidated Financial Statements of Valero
Energy Corporation and its subsidiaries are included in Part II,
Item 8 of this Form 10-K:
Page
Report of independent public accountants . . . . . . . . .
Consolidated balance sheets as of December 31, 1995
and 1994 . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated statements of income for the years ended
December 31, 1995, 1994 and 1993 . . . . . . . . . . . .
Consolidated statements of common stock and other
stockholders' equity for the years ended
December 31, 1995, 1994 and 1993 . . . . . . . . . . . .
Consolidated statements of cash flows for the years
ended December 31, 1995, 1994 and 1993 . . . . . . . . .
Notes to consolidated financial statements . . . . . . . .
2. Financial Statement Schedules and Other Financial
Information-
No financial statement schedules are submitted because
either they are inapplicable or because the required information
is included in the Consolidated Financial Statements or notes
thereto.
3. Exhibits
Filed as part of this Form 10-K are the following
exhibits:
2.1 -- Agreement of Merger, dated December 20, 1993,
among Valero Energy Corporation, Valero
Natural Gas Partners, L.P., Valero Natural Gas
Company and Valero Merger Partnership, L.P.--
incorporated by reference from Exhibit 2.1 to
Amendment No. 2 to the Valero Energy
Corporation Registration Statement on Form S-3
(Commission File No. 33-70454, filed December
29, 1993).
3.1 -- Restated Certificate of Incorporation of
Valero Energy Corporation--incorporated by
reference from Exhibit 4.1 to the Valero
Energy Corporation Registration Statement on
Form S-8 (Commission File No. 33-53796, filed
October 27, 1992).
3.2 -- By-Laws of Valero Energy Corporation, as
amended and restated October 17,
1991--incorporated by reference from Exhibit
4.2 to the Valero Energy Corporation
Registration Statement on Form S-3 (Commission
File No. 33-45456, filed February 4, 1992).
3.3 -- Amendment to By-Laws of Valero Energy
Corporation, as adopted February 25, 1993--
incorporated by reference from Exhibit 3.3 to
the Valero Energy Corporation Annual Report on
Form 10-K (Commission File No. 1-4718, filed
February 26, 1993).
4.1 -- Rights Agreement, dated as of October 26,
1995, between Valero Energy Corporation and
Harris Trust and Savings Bank, as Rights
Agent--incorporated by reference from
Exhibit 1 to the Valero Energy Corporation
Current Report on Form 8-K (Commission File
No. 1-4718, filed October 27, 1995).
4.2 -- $300,000,000 Credit Agreement, dated as of
November 1, 1995, among Valero Energy
Corporation, Morgan Guaranty and Trust Company
of New York as Administrative Agent, and Bank
of Montreal as Syndication Agent and Issuing
Bank, and the banks and co-agents party
thereto--incorporated by reference from
Exhibit 10.1 to the Valero Energy Corporation
Quarterly Report on Form 10-Q (Commission File
No. 1-4718, filed November 9, 1995).
4.3 -- Form of Indenture of Mortgage and Deed of
Trust and Security Agreement, dated as of
March 25, 1987 (the "Indenture"), from Valero
Management Partnership, L.P. to State Street
Bank and Trust Company (successor to Bank of
New England) and Brian J. Curtis, as Trustees -
incorporated by reference from
Exhibit 4.1 to the Valero Natural Gas
Partners, L.P. Quarterly Report on Form 10-Q
(Commission File No. 1-9433, filed May 15,
1987).
4.4 -- First Supplemental Indenture, dated as of
March 25, 1987, to the Indenture -
incorporated by reference from Exhibit 4.2 to
the Valero Natural Gas Partners, L.P.
Quarterly Report on Form 10-Q (Commission File
No. 1-9433, filed May 15, 1987).
4.5 -- Second Supplemental Indenture, dated as of
March 25, 1987, to the Indenture -
incorporated by reference from Exhibit 4.1 to
the Valero Natural Gas Partners, L.P.
Quarterly Report on Form 10-Q (Commission File
No. 1-9433, filed July 31, 1987).
4.6 -- Fourth Supplemental Indenture, dated as of
June 15, 1988, to the Indenture - incorporated
by reference from Exhibit 4.6 to the Valero
Natural Gas Partners, L.P. Registration
Statement on Form S-8 (Registration No. 33-26554,
filed January 13, 1989).
4.7 -- Fifth Supplemental Indenture, dated as of
December 1, 1988, to the Indenture -
incorporated by reference from Exhibit 4.7 to
the Valero Natural Gas Partners, L.P.
Registration Statement on Form S-8
(Registration No. 33-26554, filed January 13,
1989).
4.8 -- Seventh Supplemental Indenture, dated as of
August 15, 1989, to the Indenture -
incorporated by reference from Exhibit 4.6 to
the Valero Natural Gas Partners, L.P. Annual
Report on Form 10-K (Commission File No. 1-9433,
filed March 1, 1990).
4.9 -- Ninth Supplemental Indenture, dated as of
October 19, 1990, to the Indenture -
incorporated by reference from Exhibit 4.7 to
the Valero Natural Gas Partners, L.P. Annual
Report on Form 10-K (Commission File No. 1-9433,
filed February 25, 1991).
+10.1 -- Valero Energy Corporation Executive Deferred
Compensation Plan, amended and restated as of
October 21, 1986--incorporated by reference
from Exhibit 10.16 to the Valero Energy
Corporation Annual Report on Form 10-K
(Commission File No. 1-4718, filed
February 26, 1988).
+10.2 -- Valero Energy Corporation Key Employee
Deferred Compensation Plan, amended and
restated as of October 21, 1986--incorporated
by reference from Exhibit 10.17 to the Valero
Energy Corporation Annual Report on Form 10-K
(Commission File No. 1-4718, filed February
26, 1988).
*+10.3 -- Valero Energy Corporation Amended and Restated
Restricted Stock Bonus and Incentive Stock
Plan dated as of January 24, 1984 (as amended
through January 1, 1996).
*+10.4 -- Valero Energy Corporation Stock Option Plan
No. 3, as amended and restated January 1,
1996.
*+10.5 -- Valero Energy Corporation Stock Option Plan
No. 4, as amended and restated January 1,
1996.
+10.6 -- Valero Energy Corporation Amended and Restated
1990 Restricted Stock Plan for Non-Employee
Directors--incorporated by reference from
Exhibit 10.23 to the Valero Energy Corporation
Annual Report on Form 10-K (Commission File
No. 1-4718, filed February 26, 1991).
*+10.7 -- Valero Energy Corporation Amended and Restated
Supplemental Executive Retirement Plan (as
amended through January 1, 1996).
+10.8 -- Valero Energy Corporation Executive Incentive
Bonus Plan--incorporated by reference from
Exhibit 10.9 to the Valero Natural Gas
Partners, L.P. Annual Report on Form 10-K
(Commission File No. 1-4718, filed February
20, 1992).
*+10.9 -- Valero Energy Corporation Amended and Restated
Executive Stock Incentive Plan (as amended
through January 1, 1996).
+10.10 -- Executive Severance Agreement between Valero
Energy Corporation and William E. Greehey,
dated December 15, 1982--incorporated by
reference from Exhibit 10.11 to the Valero
Natural Gas Partners, L.P. Annual Report on
Form 10-K (Commission File No. 1-9433, filed
February 25, 1993).
*+10.11 -- Schedule of Executive Severance Agreements.
+10.12 -- Amended and Restated Employment Agreement
between Valero Energy Corporation and
William E. Greehey, dated November 1, 1993--
incorporated by reference from Exhibit 10.1 to
the Valero Energy Corporation Quarterly Report
on Form 10-Q (Commission File No. 1-4718,
filed November 14, 1994).
+10.13 -- Modification of Employment Agreement between
Valero Energy Corporation and William E.
Greehey, dated November 29, 1994--incorporated by
reference from Exhibit 10.12 to the Valero Energy
Corporation Annual Report on Form 10-K
(Commission File No. 1-4718, filed March 1, 1995).
+10.14 -- Employment Agreement between Valero Energy
Corporation and F. Joseph Becraft, dated
May 1, 1995--incorporated by reference from
Exhibit 10.2 to the Valero Energy Corporation
Quarterly Report on Form 10-Q (Commission File
No. 1-4718, filed May 12, 1995).
+10.15 -- Indemnity Agreement, dated as of February 24,
1987, between Valero Energy Corporation and
William E. Greehey--incorporated by reference
from Exhibit 10.16 to the Valero Energy
Corporation Annual Report on Form 10-K
(Commission File No. 1-4718, filed
February 26, 1993).
*+10.16 -- Schedule of Indemnity Agreements.
*11.1 -- Computation of Earnings Per Share.
*12.1 -- Computation of Ratio of Earnings to Fixed
Charges.
*21.1 -- Valero Energy Corporation subsidiaries,
including state or other jurisdiction of
incorporation or organization.
*23.1 -- Consent of Arthur Andersen LLP, dated February
14, 1996.
*24.1 -- Power of Attorney, dated February 16,
1996--set forth at the signatures page of this
Form 10-K.
**27.1 -- Financial Data Schedule.
______________
* Filed herewith
+ Identifies management contracts or compensatory plans or
arrangements required to be filed as an exhibit hereto
pursuant to Item 14(c) of Form 10-K.
** The Financial Data Schedule shall not be deemed "filed" for
purposes of Section 11 of the Securities Act of 1933 or
Section 18 of the Securities Exchange Act of 1934, and is
included as an exhibit only to the electronic filing of
this Form 10-K in accordance with Item 601(c) of Regulation
S-K and Section 401 of Regulation S-T.
Copies of exhibits filed as a part of this Form 10-K may be
obtained by stockholders of record at a charge of $.15 per page,
minimum $5.00 each request. Direct inquiries to Rand C. Schmidt,
Corporate Secretary, Valero Energy Corporation, P.O. Box 500, San
Antonio, Texas 78292.
Pursuant to paragraph 601(b)(4)(iii)(A) of Regulation S-K,
the registrant has omitted from the foregoing listing of
exhibits, and hereby agrees to furnish to the Commission upon its
request, copies of certain instruments, each relating to long-term
debt not exceeding 10% of the total assets of the registrant
and its subsidiaries on a consolidated basis.
(b) Reports on Form 8-K.
A report on Form 8-K dated October 26, 1995 was filed
electronically on October 27, 1995, reporting Item 5. Other
Events and Item 7. Financial Statements and Exhibits, in
connection with the adoption by the Board of Directors of Energy
of the Rights Agreement dated October 26, 1995 between Energy and
Harris Trust and Savings Bank, as Rights Agent, and the
declaration by the Board of Directors of a dividend distribution
of one preference share purchase right for each outstanding share
of Common Stock of Energy. The distribution was payable on
November 25, 1995 to shareholders of record on that date. The
dividend distribution of rights coincided with the expiration
pursuant their terms of a prior series of preference share
purchase rights distributed by the Company on November 25, 1985.
For the purposes of complying with the rules governing Form
S-8 under the Securities Act of 1933, the undersigned registrant
hereby undertakes as follows, which undertaking shall be
incorporated by reference into registrant's Registration
Statements on Form S-8 No. 2-66297 (filed December 21, 1979),
No. 2-82001 (filed February 23, 1983), No. 2-97043 (filed April
15, 1985), No. 33-23103 (filed July 15, 1988), No. 33-14455
(filed May 21, 1987), No. 33-38405 (filed December 3, 1990),
No. 33-53796 (filed October 27, 1992), No. 33-52533 (filed
March 7, 1994), and No. 33-63703 (filed October 26, 1995).
Insofar as indemnification for liabilities arising under
the Securities Act of 1933 may be permitted to directors,
officers and controlling persons of the registrant pursuant to
the foregoing provisions, or otherwise, the registrant has been
advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as
expressed in the Securities Act of 1933 and is, therefore,
unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of
any action, suit or proceeding) is asserted by such director,
officer or controlling person in connection with the securities
being registered, the registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question of
whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final
adjudication of such issue.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
VALERO ENERGY CORPORATION
(Registrant)
By /s/ William E. Greehey
(William E. Greehey)
Chairman of the Board and
Chief Executive Officer
Date: February 16, 1996
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose
signature appears below hereby constitutes and appoints William
E. Greehey, Stan L. McLelland and Rand C. Schmidt, or any of
them, each with power to act without the other, his true and
lawful attorney-in-fact and agent, with full power of
substitution and resubstitution, for him and in his name, place
and stead, in any and all capacities, to sign any or all
subsequent amendments and supplements to this Annual Report on
Form 10-K, and to file the same, or cause to be filed the same,
with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting
unto each said attorney-in-fact and agent full power to do and
perform each and every act and thing requisite and necessary to
be done in and about the premises, as fully to all intents and
purposes as he might or could do in person, hereby qualifying and
confirming all that said attorney-in-fact and agent or his
substitute or substitutes may lawfully do or cause to be done by
virtue hereof.
Pursuant to the requirements of the Securities Exchange
Act of 1934, this report has been signed below by the following
persons on behalf of the registrant and in the capacities and on
the dates indicated.
Signature Title Date
Director, Chairman of the
Board and Chief Executive
Officer (Principal
/s/ William E. Greehey Executive Officer) February 16, 1996
(William E. Greehey)
Senior Vice President
and Chief Financial Officer
(Principal Financial
/s/ Don M. Heep and Accounting Officer) February 16, 1996
(Don M. Heep)
/s/ F. Joseph Becraft Director February 16, 1996
(F. Joseph Becraft)
/s/ Edward C. Benninger Director February 16, 1996
(Edward C. Benninger)
Director February , 1996
(Ronald K. Calgaard)
/s/ Robert G. Dettmer Director February 16, 1996
(Robert G. Dettmer)
/s/ A. Ray Dudley Director February 16, 1996
(A. Ray Dudley)
/s/ Ruben M. Escobedo Director February 16, 1996
(Ruben M. Escobedo)
/s/ James L. Johnson Director February 16, 1996
(James L. Johnson)
/s/ Lowell H. Lebermann Director February 16, 1996
(Lowell H. Lebermann)
/s/ Susan Kaufman Purcell Director February 16, 1996
(Susan Kaufman Purcell)
[As amended through January 1, 1996]
VALERO ENERGY CORPORATION
AMENDED AND RESTATED RESTRICTED STOCK BONUS
AND INCENTIVE PLAN
DATED AS OF JANUARY 24,1984
<PAGE>
1. Definitions.
1.1. For purposes of this Restricted Stock Bonus and Incentive Stock Plan
(hereinafter referred to as the ("Plan"), the following terms shall have the
meanings stated below unless a different meaning is plainly required by the
context.
(a) "Alternate External Performance Objective" means a targeted financial goal
selected by the Committee, other than an External Return on Equity Objective,
which can be used to objectively compare the performance of the Company or a
Division with the performance of a Peer Group specified in an Incentive Stock
Contract and which, if attained by the Company or the Division during the
Performance Period, will result in the Incentive Participant earning all or a
portion of the shares of Incentive Stock specified in such Incentive Stock
Contract.
(b) "Alternate Internal Performance Objective"means a targeted financial goal,
selected by the Committee, other than an Internal Return on Equity Objective,
which can be used to objectively measure the performance of the Company or a
Division and which, if attained by the Company or the Division during the
Performance Period, will result in the Incentive Participant earning all or a
portion of the shares of Incentive Stock specified in such Incentive Stock
Contract.
(c) "Board of Directors" or "Board" means the Board of Directors of Energy.
(d) "Bonus Participant" - see Paragraph 3.1.
(e) "Bonus Stock" - see Paragraph 2.
(f) "Bonus Stock Agreement" - see Paragraph 2.
(g) "Change of Control" shall occur if: (i) a third person, including a
"group" as defined in Section 13(d)(3) of the Securities Exchange Act of 1934,
becomes the beneficial owner of shares of capital stock of Energy having the
power to cast 20% or more of the total number of votes that may be cast for the
election of directors of Energy; or (ii) as the result of, or in connection
with, any cash tender or exchange offer, merger or other business combination,
sale of assets or contested election, or any combination of the foregoing
events, the persons who were directors of Energy immediately prior to such
event shall cease to constitute a majority of the Board of Directors of Energy
or any successor to Energy.
(h) "Committee" - see Paragraph 5.1.
(i) The term "Common Stock" means the Common Stock, $1.00 par value of Valero;
however, prior to the Distribution Date (as such term is defined in the Rights
Agreement, dated as of November 15, 1985, between Valero and MBank Alamo, NA, as
Rights Agent) the terms "Common Stock," "share of Common Stock" or any similar
terms shall be construed to refer to one (1) share of the Common Stock together
with one (1) Preference Share Purchase Right issued pursuant to such Rights
Agreement.
(j) "Company" means Energy, a Delaware corporation, and any Subsidiary of
Energy which now exists or hereafter is organized or acquired by Energy, and
any successor or successors to Energy or any Subsidiary.
(k) "Compensation Committee" means the Compensation Committee of the Board of
Directors, as appointed from time to time by the Board of Directors.
(l) "Division" means a Subsidiary, a group of Subsidiaries or some other
identifiable part of the activities of the Company, as determined by the
Committee and specified in an Incentive Stock Contract.
(m) "Energy" shall mean Valero Energy Corporation, a Delaware corporation, and
its successors.
(n) "Equity" means, for the Company or the Peer Group, as the case may be, the
average unweighted common shareholders' equity (including paid-in capital
attributable to Common Stock, retained earnings and capital attributable to
treasury shares), as reported in the Company's (or in the case of Peer Group
Equity, each Peer Group member's) annual and quarterly reports filed with the
Securities and Exchange Commission, determined by adding together the Company's
(or, in the case of Peer Group Equity, the total of all Peer Group member's)
common shareholders' equity at the beginning of the Performance Period, the end
of the Performance Period and (without duplication) at the end of each fiscal
year during the Performance Period and determining the unweighted arithmetic
average thereof.
(o) "Executive" means a key executive employee, including executive officers
and directors, of the Company, having ultimate responsibility for planning the
Company's operations and controlling its activities and who directly influences
its growth and profits, but shall include directors only if employed by the
Company on a full-time basis. Up to 3% of the total number of employees of the
Company, from to time, may at any one time be designated as key executive
employees for purposes of determining employees eligible to participate in the
Plan.
(p) "External Performance Objective" means an External Return on Equity
Objective or an Alternate External Performance Objective, as the context may
require.
(q) "External Return on Equity" shall mean a percentage determined using the
formula
I 1
- -
E x P = EROE, in which
"I" means Income of the Peer Group,
"O" means Equity of the Peer Group, and
"P" means the number of whole and fractional years, expressed as a
decimal, in the Performance Period (e.g., a Performance Period of 2
years, 3 months, shall be express as 2.25).
(r) "External Return on Equity Objective" means a targeted External Return, on
Equity specified in an Incentive Stock, Contract, the attainment of which by the
Company during the Performance Period will result in the Incentive Participant
earning all or a portion of the shares of Incentive Stock specified in such
Incentive Stock Contract.
(s) "Factor" - see Paragraph 4.5.
(t) "Gross Incentive Shares" - see Paragraph 4.5.
(u) "Incentive Participant" - see Paragraph 3.1.
(v) "Incentive Stock" - see Paragraph 2.
(w) "Incentive Stock Contract" - see Paragraph 3.4.
(x) "Income" means, for the Company or the Peer Group, as the case may be, the
aggregate cumulative net income (or loss) attributable to common stock during
the Performance Period, as reported in the Company's (or, in the case of Peer
Group Income, each Peer Group member's) annual and quarterly reports filed with
the Securities and Exchange Commission.
(y) "Internal Performance Objective" means an Internal Return on Equity
Objective or an Alternate Internal Performance Objective, as the context may
require.
(z) "Internal Return on Equity" or "IROE" means a percentage determined using
the formula
I 1
- -
E x P = IROE, in which
"I" means Income of the Company
"E" means Equity of the Company, and
"P" means the number of whole and fractional years, expressed as a
decimal, in the Performance Period.
(aa) "Internal Return on Equity Objective" means a targeted Internal Return on
Equity specified in an Incentive Stock Contract, the attainment of which by the
Company during the Performance Period will result in the Incentive Participant
earning all or a portion of the shares of Incentive Stock specified in such
Incentive Stock Contract.
(bb) "Net Incentive Shares" - see Paragraph 4.5.
(cc) "Participant" means a Bonus Participant or an Incentive Participant, as the
context may require.
(dd) "Peer Group" means a group of corporations (which may include the Company)
determined by the Committee and specified in an Incentive Stock Contract whose
common capital stock is publicly-held. A corporation designated as a Peer Group
member which ceases to be publicly-held during the Performance Period shall be
deemed to be a member of the Peer Group for each quarterly period during which
the corporation was at all times publicly-held but shall be deleted from the
Peer Group as of the last day of the final such quarterly period. If a
corporation is deleted from a Peer Group as a result of the preceding sentence,
the Committee may (but shall not be required to) designate within six months
thereafter another publicly-held corporation to become a substitute Peer Group
member effective as of the date on which its predecessor was deleted from the
Peer Group, and such successor corporation, if so designated, shall become a
member of said Peer Group for all purposes of the Plan and any Incentive Stock
Contract entered into thereunder in which said Peer Group is specified. In the
event that a Peer Group member shall have a fiscal year other than a calendar
year, then for purposes of determining External Return on Equity or the Peer
Group's performance with respect to any External Performance Objective the
results of such Peer Group member for those quarterly fiscal periods of such
Peer Group member ending during the Performance Period (or shortened Performance
Period, as provided in Paragraph 4.5 of the Plan) shall be included in their
entirety and such results for quarterly fiscal periods of such Peer Group member
ending after the Performance Period (or shortened Period) shall be excluded in
their entirety.
(ee) "Performance Evaluation" - see Paragraph 3.8.
(ff) "Performance Objective" or "Objective" means an Internal Return on Equity
Objective, an External Return on Equity Objective, an Alternate Internal
Performance Objective, an Alternate External Performance Objective or any
objective subject to determination through a Performance Evaluation, as the
context may require.
(gg) "Performance Period" - see Paragraph 3.5.
(hh) "Subsidiary" means a corporation at least 50% of the outstanding common
stock of which is owned directly or indirectly by Energy. 2. Introduction and
Statement of Purpose.
This Plan is established for the purpose of creating additional incentives
for key executive employees of Energy and those of its Subsidiaries adopting the
Plan. The Plan is designed to provide such incentives by providing an
opportunity for meaningful capital accumulation. It is desired that the
benefits available under this Plan, when added to other benefits payable to key
executives, will furnish total compensation to key executives which is
competitive within the Company's industry.
The Plan provides for two types of awards, Bonus Stock grants and Incentive
Stock Contracts. Bonus Stock grants involve the grant of a specified number of
shares of Common Stock ("Bonus Stock"), subject to certain restrictions
specified in the Plan and in a written agreement between Energy and the
Executive ("Bonus Stock Agreement"). Subject to such restrictions, the
recipient of Bonus Stock is treated as the beneficial owner of such stock for
all purposes. Incentive Stock Contracts involve the conditional award of a
specified number of shares of Common Stock ("Incentive Stock"), which will be
issued at the end of a specified period if certain Performance Objectives set
forth in a written agreement between Energy and the Executive ("Incentive Stock
Contracts) are met. With certain limited exceptions, no Incentive Stock is
issued, and the recipient of an Incentive Stock Contract is not treated as the
beneficial owner of the actual Incentive Stock, unless and until the specified
period has elapsed and such goals have been met.
3. Operation of the Plan.
3.1. The Committee may cause Energy to issue, from time to time (subject to
the restrictions provided in Paragraph 4.1), shares of Bonus Stock to and enter
into Bonus Stock Agreements with such Executives as the Committee, in its sole
discretion, may determine and designate ("Bonus Participants), and may cause
Energy to enter into Incentive Stock Contracts with such Executives as the
Committee, in its sole discretion, may determine and designate ("Incentive
Participants). Subject to the final authority of the Committee, the selection
of Bonus Participants and Incentive Participants may be based on the
recommendations of Energy's Chief Executive Officer.
3.2. No person shall have the right to require the Committee to make him or
her, or any other person, a Participant under the *Plan. Decisions by the
Committee as to participation in the Plan shall be final.
3.3. If the Committee shall determine to issue Bonus Stock to a Bonus
Participant, the Committee shall designate the number of shares of Common Stock
to be issued as Bonus Stock to such Bonus Participant and the time or times at
which the restrictions specified in Paragraph 4.1 hereof shall be removed. The
amount of such Bonus Stock and the terms governing the removal of such
restrictions shall be set forth in a Bonus Stock Agreement containing such other
terms and provisions, not inconsistent with the Plan, as the Committee deems
appropriate. The execution and delivery of a Bonus Stock Agreement by both
Energy and the designated Bonus Participant shall be a condition precedent to
the issuance of Bonus Stock to such Bonus Participant.
3.4. If the Committee determines to enter into an Incentive Stock Contract
with an Incentive Participant, the Committee shall designate a maximum number of
shares of Common Stock to be issued as Incentive Stock thereunder, a Performance
Period and one or more Performance Objectives. The amount of Incentive Stock,
Performance Period and Performance Objectives shall be set forth in an Incentive
Stock Contract containing such other terms and conditions, not inconsistent with
the Plan, as the Committee deems appropriate.
3.5. Each Incentive Stock Contract shall designate a period ("Performance
Period") at the end of which all or some portion of the shares of Incentive
Stock specified in the Incentive Stock Contract may be earned. The
commencement date and the length of each Performance Period shall be determined
by the Committee. Except as provided in Paragraph 4.5 hereof, no Performance
Period shall be less than three nor more than five years. No Performance Period
shall commence more than six months prior to or six months after the date on
which the Incentive Stock Contract is executed by the Company and the
Incentive Participant.
3.6. Each Incentive Stock Contract shall specify one or more Internal
Return on Equity Objectives and/or one or more Alternate Internal Performance
Objectives. The most difficult such Objective so specified shall be the
Internal Performance Objective required to be achieved by the Company (or a
Division thereof, as the case may be) during the Performance Period in order to
entitle the Incentive Participant to receive the full number of shares of
Incentive Stock specified in the Incentive Stock Contract which may be earned
through the achievement of an Internal Performance Objective. The remaining
such Objectives (if any) shall be less difficult Internal Performance Objective
targets or ranges which, if achieved by the Company (or the Division, as the
case may be) during the Performance Period, will entitle the Incentive
Participant to receive some specified portion of the full number of shares of
Incentive Stock which may be earned under the Incentive Stock Contract through
the achievement of an Internal Performance Objective. Of the maximum number of
shares of Incentive Stock which may be earned under any Incentive Stock
Contract, not less than 50% of such maximum number of shares shall be earned,
if at all, solely through achievement of an Internal Performance Objective.
3.7. Each Incentive Stock Contract may specify one or more External Return
on Equity Objectives and/or one or more Alternate External Performance
Objectives for the Performance Period. If an External Performance Objective is
specified, then up to (but not greater than) 25% of the total number of shares
of Incentive Stock which may be earned under the Incentive Stock Contract may
be designated to be earned by the Incentive Participant through achievement of
such Objective. The most difficult such External Performance Objective so
specified shall be the External Performance Objective required to be achieved by
the Company (or a Division thereof, as the case may be) during the Performance
Period in order to -entitle the Incentive Participant to receive the full
number of shares of Incentive Stock specified in the Incentive Stock Contract
which may be earned through the achievement on an External Performance
Objective. The remaining such Objectives (if any) shall be less difficult
External Performance Objective targets or ranges which, if achieved by the
Company (or a Division, as the case may be) during the Performance Period, will
entitle the Incentive Participant to receive some specified portion of the full
number of shares of Incentive Stock which may be earned under the Incentive
Stock Contract through the achievement of an External Performance Objective. If
an Incentive Stock Contract specifies an External Performance Objective, such
Objective may be either the exclusive means or an alternate means for
determining whether the shares of Incentive Stock which may be earned through
the achievement of such Objective have been earned. If an External Performance
Objective is specified in an Incentive Stock Contract, the Incentive Stock
Contract shall specify the members of the Peer Group from which the External
Performance Objective shall be measured.
3.8. Each Incentive Stock Contract may specify that up to 25% of the total
number of shares of Incentive Stock specified therein may be awarded to the
Incentive Participant on the basis of an evaluation of the Incentive
Participant's performance during the Performance Period (a "Performance
Evaluation"). Such Performance Evaluation and the award of any shares of
Incentive Stock as the result thereof shall be made by the Committee and shall
be based on such objective or subjective criteria as it, in its sole discretion,
determines to be appropriate. Subject to the final authority of the Committee,
such Performance Evaluation and the award of any shares of Incentive Stock as
the result thereof may be based on the recommendation of the Incentive
Participant's immediate supervisor or another person designated by the
Committee. Performance Evaluations made by the Committee shall be final, and no
Incentive Participant or other person claiming by, through or under an Incentive
Participant shall have the right to require that any Incentive Shares actually
be issued at the end of the Performance Period as the result of a Performance
Evaluation, it being intended that the issuance of any shares of Incentive
Stock as the result thereof be completely at the discretion of the Committee,
which shall not be required to explain or justify its basis for issuing or
determining not to issue any such Incentive Stock.
3.9. An aggregate maximum of 750,000 shares of Common Stock may be issued
as Bonus Stock under the Plan or granted and subsequently issued as Incentive
Stock under the Plan. Within such aggregate maximum number of 750,000 shares,
there is no maximum number of such shares which may be issued as Bonus Stock or
which may be reserved and subsequently issued as Incentive Stock.
3.10. Upon the allocation of Bonus Stock hereunder, the aggregate
number of additional shares of Bonus Stock and Incentive Stock which may be
granted or issued hereunder shall be reduced by the number of shares of Bonus
Stock so allocated, and upon the forfeiture of any Bonus Stock pursuant to the
provisions hereof, or upon the cancellation or surrender to Energy for whatever
reason of any shares of Bonus Stock issued hereunder (including, without implied
limitation, 24,000 shares of Bonus Stock issued on February 22, 1983 and March
15, 1983 and surrendered and canceled as of March 30, 1983), the aggregate
number of additional shares of Bonus Stock and Incentive Stock which may be
granted or issued hereunder shall be increased by such number of shares, and
said shares may again be the subject of allocations hereunder.
Upon the execution of an Incentive Stock Contract, the aggregate number of
additional shares of Bonus Stock and Incentive Stock which may be granted or
issued hereunder shall be reduced by the number of shares of Incentive Stock
specified in such Incentive Stock Contract, and upon the forfeiture of an
Incentive *Participant's right to receive Incentive Stock under an Incentive
Stock Contract pursuant to the provisions hereof or of such Incentive Stock
Contract (including, without implied limitation, any forfeiture resulting from
failure of the Company, a Division or the Participant to attain any Performance
Objective during the Performance Period or from a Participant's death, total and
permanent disability, commencement of leave of absence or retirement or other
termination of employment or a Change of Control of the Company), or upon the
cancellation or surrender to Energy for any reason of a Participant's rights
with respect to Incentive Stock under such Incentive Stock Contract, the
aggregate number of additional shares of Bonus Stock and Incentive Stock which
may be granted or issued hereunder shall be increased by such number of shares,
and said shares may again be subject of allocations hereunder.
3.11. In the event that the issued and outstanding shares of Common
Stock of Energy should, as a result of any stock dividend, stock split or
spin-off, recapitalization, combination or exchange of shares, merger,
consolidation, acquisition of property or stock, separation, reclassification,
reorganization, liquidation, or other similar event, be increased or decreased
or changed into or exchanged for a different number or kind of shares of stock
or other securities of Energy or of another corporation, the number and class of
additional shares or other securities which may be issued under the Plan shall
be appropriately adjusted to reflect such action. If any such adjustment shall
result in a fractional share of Common Stock or other security being issuable
under the Plan, such fractions shall be disregarded.
3.12. If pursuant to applicable provisions of an Incentive Stock
Contract or this Plan, all or any portion of the Incentive Stock which an
Incentive Participant is entitled (but for this Paragraph 3.12) to receive,
would be received by the Incentive Participant subsequent to any stock dividend,
stock split or spin-off, recapitalization, combination or exchange of shares,
merger, consolidation, acquisition of property or stock, separation,
reclassification, reorganization, liquidation or other similar event as a
result of which shares or other securities of any class shall be issued in
respect of outstanding shares of Common Stock or shares of Common Stock shall be
changed into the same or a different number of shares or other securities of
the
same or another class or classes, then, in lieu of the number of shares of
Common Stock determined pursuant to the Incentive Stock Contract, the Incentive
Participant shall receive, at the time specified in the Plan and the applicable
Incentive Stock Contract, the aggregate number and class of shares or other
securities which, if the number of shares of Common Stock (as authorized at the
date of execution of the Incentive Stock Contract) otherwise determined to have
been earned by the Incentive Participant pursuant to applicable provisions of
the Plan and the Participant's Incentive Stock Contract had been issued to the
Incentive Participant at the date of execution of the Incentive Stock Contract
and had not been disposed of, such Participant would, as a result of any such
stock dividend, stock split or spin-off, recapitalization, combination or
exchange of shares, merger, consolidation, acquisition of property or stock,
separation, reclassification, reorganization, liquidation or other similar
event, be holding at the time when Incentive Stock is required to be issued
pursuant to terms of the Incentive Stock Contract, provided, however, that no
fractional share of Common Stock or any other security shall be issued under the
Plan, and a cash payment shall be made to the Participant to reflect the value
of any fractional share of Common Stock or other security not issued.
3.13. The Committee may make Bonus Stock grants and Incentive Stock
awards to any prospective employee of the Company who, upon commencing
employment, would be an Executive of the Company. In any such case, if the
prospective employee for any reason whatsoever, including (without implied
limitation) death, disability, or the termination by the Company of the
employment arrangement with such person, does not actually commence employment
with the Company then, the provisions of Paragraphs 4.4 and 4.5 hereof
notwithstanding, any Bonus Stock granted to such prospective employee, and such
prospective employee's rights under any Incentive Stock Contract or Bonus Stock
Agreement and with respect to any Incentive Stock Contract or Bonus Stock
issuable thereunder, shall be automatically forfeited and surrendered to Energy,
and neither such prospective employee nor any person claiming by, through or
under such prospective employee shall have any right to receive any such Bonus
Stock or Incentive Stock or any damages or other compensation as the result of
such forfeiture. At such time as any such prospective employee commences actual
employment with the Company, he or she shall then be deemed a Participant for
all purposes of the Plan.
3.14. Distributions of Bonus Stock and Incentive Stock may, as the
Committee shall in its sole discretion determine, be made from authorized but
unissued shares or from treasury or reacquired shares. All authorized and
unissued shares issued as Bonus Stock or Incentive Stock in accordance with the
Plan shall be fully paid and non-assessable shares and free from preemptive
rights.
4. Restrictions on Bonus Stock and Incentive Stock Issued Under the Plan.
4.1. Neither any shares of Bonus Stock issued under the Plan nor any right
or interest of any Bonus Participant under any Bonus Stock Agreement may be
sold,
exchanged, pledged, hypothecated, transferred, assigned, garnished or otherwise
disposed of or alienated for a period of five years from the date of issuance of
such Bonus Stock; provided, the Committee may determine that some or an of such
restrictions may earlier terminate, at one time or on more than one occasion,
with respect to all or any portion of such Bonus Stock. However, nothing in
this
Plan shall be construed to preclude the transfer of Bonus Stock, upon the death
of the Bonus Participant, to his or her legal representatives or his or her
estate or preclude such representatives from transferring such shares, or any of
them, to the person or persons entitled thereto by will or by the laws of
descent
and distribution.
4.2. Neither any shares of Incentive Stock granted under the Plan nor any
right or interest of any Incentive Participant under any Incentive Stock
Contract
may be sold, exchanged, pledged, hypothecated, transferred, assigned, garnished
or otherwise disposed of or alienated prior to the time that shares of Incentive
Stock are actually issued to the Incentive Participant pursuant to the Plan and
the applicable Incentive Stock Contract.
4.3. In the event a Participant's employment with the Company is
voluntarily
terminated by the Participant (whether through retirement or otherwise) or is
terminated by the Company for cause, or the Participant commences a leave of
absence from his or her employment with the Company, then (a) all shares of
Bonus
Stock previously issued to a Bonus Participant hereunder which are still subject
to the restrictions set forth in Paragraph 4.1 hereof shall thereupon be
automatically forfeited by the Bonus Participant and surrendered to Energy, and
(b) except as set forth in Paragraph 4.5 hereof, an Incentive Participant's
right
to receive any and all Incentive Stock granted to such Incentive Participant
pursuant to an Incentive Stock Contract shall thereupon be automatically
forfeited by the Incentive Participant; provided, that in the case of an
Incentive Participant, if the Participant's voluntary termination, termination
for cause or commencement of leave of absence shall occur after the end of the
Performance Period specified in the applicable Incentive Stock Contract but
prior
to the actual issuance of Incentive Stock thereunder, such Incentive Participant
shall nonetheless receive any Incentive Stock which he or she would have been
entitled to receive under the applicable Incentive Stock Contract if such
termination or leave of absence had not occurred; and provided further, that in
each instance wherein a Participant retires or otherwise terminates employment,
is terminated for cause or commences a leave of absence, the Committee (or, in
the case of a Participant who at the date such approval is not subject to the
provisions of Section 16 under the Securities Exchange Act of 1934, the Chairman
of the Board and Chief Executive Officer of Energy) shall be entitled (but may
not be required) (x) in the case of a Bonus Participant, to permit the
Participant to receive all or part of the Participant's Bonus Stock which, at
the
date of termination of employment, would otherwise have remained subject to
restrictions, and (y) in the case of an Incentive Participant, to permit the
Participant to receive (i) the number of shares of Incentive Stock, if any,
which
he or she would have been entitled to receive pursuant to Paragraph 4.5 hereof
had the Participant terminated employment as a result of one of the events
specified in the first sentence of Paragraph 4.5 hereof, or (ii) such additional
or different shares of stock or other securities as may in the interim period
have been issued in respect of the shares of Incentive Stock specified in clause
(i) above as the result of any stock dividend, stock split or spin-off,
recapitalization, combination or exchange of shares, merger or consolidation,
acquisition of stock or property, separation, reclassification, reorganization,
liquidation or other similar event affecting such shares. Any action specified
in clause (x) or (y) above shall be taken by the Committee or the Chairman of
the
Board and Chief Executive Officer, if at all, not later than six months
following
the Participant's date of termination or commencement of such leave of absence.
4.4. Should a Bonus Participant's employment be terminated by death or
total
and permanent disability, or by the Company without cause, or if a Change of
Control should occur with respect to the Company, all restrictions to which such
Participant's Bonus Stock remained subject at such time pursuant to Paragraph
4.1
shall thereupon automatically terminate and the certificates for such Bonus
Stock
shall be promptly delivered to the Bonus Participant or his or her
representative.
4.5. Should an Incentive Participant's employment be terminated by death or
total and permanent disability, or by the Company without cause, or if a Change
of Control should occur with respect to the Company, then, notwithstanding that
a longer Performance Period is specified in the Participant's Incentive Stock
Contract, such Performance Period shall be deemed to have ended on the last day
of the quarter preceding the date of such termination or Change of Control (or,
if such event occurs on the last day of a quarter, on the last day of the
preceding quarter), the Performance Objectives specified in the Incentive Stock
Contract shall be deemed to apply to such shortened Performance Period, the
calculation set forth in clauses (1)-(3) below shall be made to determine the
number of shares of Incentive Stock which the Incentive Participant shall be
deemed to have earned under his or her Incentive Stock Contract and such shares
of Incentive Stock shall be promptly issued to the Participant. (1) A
determination shall be made as to the gross number of shares of Incentive Stock
("Gross Incentive Shares) the Incentive Participant would be entitled to receive
on the basis of attainment of Performance Objectives during such shortened
Performance Period. If the Incentive Participant's Incentive Stock Contract
specified, pursuant to Paragraph 3.8 of the Plan, that a portion of the total
number of shares of Incentive Stock specified therein could be awarded to the
Participant on the basis of a Performance Evaluation, the maximum number of
shares which could have been awarded on the basis of such a Performance
Evaluation shall be added (without duplication) to the number of shares
determined to have been earned on the basis of attaining other Performance
Objectives during the shortened Performance Period in order to determine the
Participant's Gross Incentive Shares. (2) The Participant's shortened
Performance Period, determined as provided above, shall be compared with the
original Performance Period specified in his or her Incentive Stock Contract,
and
the relationship that the shortened Performance Period bears to the original
Performance Period, expressed as a percentage, shall be determined. (3) The
appropriate factor ("Factor") shall be selected from the table below and
multiplied by the Participant's Gross Incentive Shares to determine the net
number of Incentive Shares ("Net Incentive Shares") which the Participant shall
be deemed to have earned under the Incentive Stock Contract.
If the shortened
Performance Period of the orifinal Performance
is at leat but less than Period, the Factor shall be
75% 100% 1.00
50 75 .75
25 50 .50
12.5 25 .25
0 12.5 0.00
Certificates for the number of shares of Common Stock constituting the
Participant's Net Incentive Shares shall be promptly delivered to the Incentive
Participant or his or her representative. Any shares of Incentive Stock granted
to the Incentive Participant under the Incentive Stock Contract which are in
excess of the Participant's Net Incentive Shares, determined as set forth above,
shall be deemed automatically forfeited by the Participant.
4.6. The Treasurer of Energy, on behalf of the Committee, shall retain all
stock certificates representing Bonus Stock issued to any Bonus Participant
under
the Plan, together with stock powers executed by the Participant pertaining to
the Bonus Stock, until the restrictions on such Bonus Stock described in
Paragraph 4.1 shall lapse. Should shares of Bonus Stock be forfeited by a Bonus
Participant pursuant to Paragraph 4.3, the Committee shall cause the Treasurer
of Energy to transfer the forfeited shares to Energy. Certificates representing
Bonus Stock still subject to restriction pursuant to Paragraph 4.1 shall be
imprinted with a legend to the effect that the shares represented thereby may
not
be sold, exchanged, transferred, pledged, hypothecated, assigned, garnished or
otherwise disposed of except in accordance with the terms of this Plan, and each
transfer agent for the Common Stock shall be instructed to such effect in
respect
of such shares. In the event that, as the result of any stock dividend, stock
split or spin-split, recapitalization, combination or exchange of shares,
merger,
consolidation, acquisition of stock or property, separation, reclassification,
reorganization, liquidation, or other similar event, the Bonus Participant shalt
as the beneficial owner of Bonus Stock subject to restrictions hereunder, be
entitled to receive new or additional or different shares of stock or other
securities, the certificate or certificates for, or other evidences of, such new
or additional or different shares or other securities, together with a stock
power or other instrument of transfer appropriately endorsed, shall also be
imprinted with a legend and deposited with the Treasurer of Energy as provided
above, and all provisions of the Plan relating to restrictions and lapse of
restrictions herein set forth shall thereupon be applicable to such new or
additional or different shares or other securities to the extent applicable to
the shares with respect to which they were distributed; provided, however, that
if rights, warrants or fractional interests shall be issued in respect of any
Bonus Stock, such rights or warrants may be held, exercised, sold or otherwise
disposed of, and such fractional interests may be settled, by the Participant
free and clear of the restrictions herein set forth. Unless and until such
Bonus
Stock shall be forfeited, a Bonus Participant in whose name shares of Bonus
Stock
are registered shall be entitled to receive any cash dividends declared with
respect to such shares and exercise voting rights with respect to such shares.
4.7. For purposes of the Plan, the Committee shall determine, in the
exercise of its discretion, whether or not a Participant is totally and
permanently disabled for purposes of the Plan and the date such. disability (if
any) commenced. Any such determinations by the Committee shall be conclusive
and
binding on the Participant and any person claiming by, through or under the
Participant. Any determination of total and permanent disability and of the
commencement date thereof will be made on the basis of medical reports and other
evidence satisfactory to the Committee and in accordance with a uniform,
non-discriminatory policy applied by the Committee. However, such
determinations
will not be binding on the Company or any participant with respect to any other
employee benefit or other plan or insurance policy wherein such determinations
may be relevant, and need not be consistent with any determinations made under
any such other plan or insurance policy.
A Participant is deemed to have retired for purposes of the Plan when the
Participant retires under the Pension Plan for Employees of Valero Energy
Corporation or another, similar pension plan of the Company providing benefits
to the Participant.
5. Administration by the Committee.
5.1. The Plan shall be administered by the Compensation Committee of
Energy's Board of Directors, as the same shall be appointed and constituted from
time to time by such Board of Directors, provided, that if the Compensation
Committee shall at any time have as a member any person who is eligible to
participate in the Plan or who within one year prior thereto was eligible to
participate in the Plan, such person shall not serve as an administrator for the
Plan or participate in any discussion, deliberation or decision regarding this
Plan, and, if as a result thereof the Plan would have less than three
administrators, the Board of Directors of Energy shall appoint, from among the
remaining Directors of Energy, one or more persons to serve as an administrator
for the Plan so that the Plan shall at times have not less than three
administrators, none of whom are eligible, or within one year prior to serving
thereon have been eligible, to participate in the Plan.
5.2. The Committee is empowered to:
(a) Make all determinations and computations concerning the issuance
of Bonus Stock and the reservation and issuance of Incentive Stock under the
Plan
and the number of shares to be reserved for and/or issued to each Participant;
(b) Cause Energy to enter into Bonus Stock Agreements and Incentive
Stock Contracts with Participants for the issuance of Bonus Stock and the
reservation and issuance of Incentive Stock hereunder;
(c) Make rules and regulations for the administration of the Plan
which are not inconsistent with the terms and provisions hereof,
(d) Construe and administer all terms, provisions, conditions and
limitations of the Plan in good faith;
(e) Make equitable adjustments for any mistakes or errors in the
administration of the Plan or deemed by the Committee to be necessary as the
result of any unusual situation or any ambiguity in the Plan,
(f) Select, employ and compensate, from time to time, such
consultants, accountants, attorneys and other agents and employees as the
Committee may deem necessary or advisable for the proper and efficient
administration of the Plan.
5.3. The foregoing list of express powers is not intended to be either
complete or exclusive, but the Committee shall, in addition, have such powers,
whether or not expressly authorized, which it may deem necessary, desirable,
advisable or proper for the supervision and administration of the Plan. Except
as otherwise specifically provided herein, the decision or judgment of the
Committee on any question arising hereunder in connection with the exercise of
any of its powers shall be final, binding and conclusive upon all parties
concerned (including the Participant and any person claiming by, through or
under a Participant) and shall not be subject to review.
6. Miscellaneous Provisions.
6.1. As a condition to the issuance of Bonus Stock or Incentive Stock,
Energy may require the Participant receiving such stock to represent and warrant
at the time of issuance that the shares are being acquired only for investment
and without any present intention to sell or distribute such shares it in the
opinion of counsel for Energy, such representation is required under the
Securities Act of 1933 or any other applicable law, regulation or rule of any
governmental authority.
6.2. During the term of the Plan, Energy will at all times reserve and keep
available, or have authorized but unissued, such number of shares of Common
Stock as shall be sufficient to satisfy the requirements of the Plan. The
inability of Energy to obtain from any regulatory body having jurisdiction
authority deemed by Energy's counsel to be necessary to the lawful issuance of
any of its Common Stock or other security hereunder shall relieve the Company
of any liability in respect of the non-issuance of such Common Stock or other
security as to which such requisite authority shall not have been obtained.
6.3. Until the issuance of the stock certificate(s) for Bonus Shares or
Incentive Shares to a Participant, (as evidenced by the appropriate entry on the
books of Energy or of a duly authorized transfer agent of Energy), no right to
vote or receive cash dividends or other distributions or any other rights as a
stockholder of Energy shall exist with respect to such Bonus Shares or Incentive
Shares, notwithstanding the grant of such Bonus Stock, the execution of a Bonus
Stock Agreement or Incentive Stock Contract, or the occurrence of any event or
the passing of any period of time giving rise to a right in the Participant to
receive Incentive Stock under an Incentive Stock Contract. No adjustment will
be made for any cash dividend or other distribution or other rights for which
the
record date is prior to the date the stock certificates evidencing such shares
of Bonus Stock or Incentive Stock are issued, except as otherwise expressly
provided under Paragraph 3.12 of this Plan. The Company shall endeavor *in-
good
faith to issue stock certificates for shares of Incentive Stock or Bonus Stock
which are authorized to be issued under the Plan as promptly as practicable.
However, neither the Company, Energy, the Committee or any member thereof, any
transfer agent or any other person shall have any liability to any Participant
(or to any person claiming by, through or under any Participant) as the result
of any delay in the issuance of any such certificates, including delays
resulting
from the negligence or willful conduct of any such person or entity.
6.4 Notwithstanding anything to the contrary contained in this Plan or any
Incentive Stock Contract entered into hereunder, except as provided in the last
sentence of this Paragraph 6.4 any Incentive Stock Contract entered into under
this Plan (as amended and restated hereby) and any Bonus Stock grant made under
this Plan shall be entered into or granted, *as the case may be, subject to the
approval of this Plan by the affirmative vote of the holders of a majority of
the
voting securities of Energy present or represented and entitled to vote at a
meeting duly called and held for such purpose in accordance with applicable
Delaware law. No Incentive Stock Contract entered into under this Plan nor any
Bonus Stock grant made under this Plan shall, except as provided in the last
sentence of this Paragraph 6.4, create any obligation in the Company or Energy
prior to such approval. In the event that the holders of a majority of the
voting securities of Energy do not so approve this Plan, any and all Incentive
Stock Contracts theretofore entered into shall thereupon terminate and shall be
void and of no force of effect and no Incentive Stock shall be issued
thereunder.
The foregoing provisions of this Paragraph 6.4 notwithstanding, up to 491
additional shares of Bonus Stock may be granted under this Plan from and after
January 24, 1984, which grants shall not be made subject to the approval of the
Plan by the holders of a majority of the voting securities of Energy, as set
forth above.
6.5. Upon becoming entitled to receive shares of Bonus Stock or Incentive
Stock under the Plan (or, if at the time of receipt the recipient shall not be
subject to taxation with respect to such shares, at such later date as such
recipient becomes subject to taxation with respect to such shares; whichever
such
date is applicable being referred to herein as the "tax date"), the recipient
shall make a cash payment to Energy equal to the amount required by applicable
provisions of law to be withheld by Energy in connection with federal income
tax,
F.I.C.A. and all other federal, state and local taxes in respect of such shares
(or such greater amount as the recipient shall elect to have withheld in respect
of such taxes; whichever such amount is applicable being referred to herein as
the "tax amount"), provided, that subject to the prior approval or disapproval
of the Committee, the recipient may irrevocably elect at any time prior to the
tax date that all or any portion of the tax amount be collected by withholding
from the number of shares otherwise to be delivered to the recipient that number
of shares having a fair market value equal to all or any portion of the amount
otherwise to be collected, provided further, that in the case of a recipient
subject to Section 16(b) under the Securities Exchange Act of 1934, as amended,
(a) the number of shares withheld from the shares otherwise to be delivered
shall
not exceed the number of shares necessary to collect the amount required by
applicable provisions of law to be withheld or collected (provided that, from
and
after the date that the Securities and Exchange Commission shall issue a
"no-action" letter or other ruling concurring with such procedure, the number of
shares to be withheld may be increased to not more than the number necessary to
be withheld in order to collect all applicable taxes required to be withheld or
expected to be incurred, with federal income taxes being calculated at the
maximum statutory tax rate certified by the recipient in a manner satisfactory
to the Committee as being applicable to the recipient's income under then
existing laws for the year in which the tax date occurs), and (b) the
recipients'
exercise of the election to withhold shares shall be made only during an
"election period." As used herein, "election period" shall mean any period of
time which is (a) at least six months following the date of grant of shares of
Bonus Stock or date of award of an Incentive Stock Contract with respect to
Incentive Stock (except that in the event of the death or total and permanent
disability of the grantee, this limitation shall not apply), and (b)(i) during
a period beginning on the third business day following the date of release of
Energy's quarterly or annual summary statement of sales and earnings and ending
on the twelfth business day following such date, or (ii) at least six months
prior to the tax date with respect to the shares received. The Committee shall
establish withholding procedures where the tax date is deferred pursuant to
Section 83(c)(3) of the Internal Revenue Code of 1986. In all cases, only that
number of whole shares the fair market value of which does not exceed the tax
amount shall be withheld or delivered and the recipient shall make a cash
payment
to Energy equal to any excess amount to be withheld or collected. Unless the
context otherwise requires, the term "fair market value" as used herein shall
mean the average of the reported "high" and "low" sales prices of a share of the
Common Stock in the NYSE-Composite Transactions listing on the tax date. In
lieu
of the foregoing withholding procedure, a recipient, subject to the prior
approval or disapproval of the Committee, may satisfy the tax withholding or
collection requirement by delivering to Energy on the tax date certificates for
other shares of Common Stock already owned by the recipient, endorsed in blank
with appropriate signature guarantee, having a fair market value (determined as
set forth above) equal to the tax amount. In the case of a recipient subject to
Section 16(b), the election to deliver already owned shares shall be subject to
compliance with clauses (a) and (b) above. Any and all taxes payable with
respect to income of a Participant or other recipient resulting from the grant
or issuance of any Bonus Stock or Incentive Stock hereunder shall be the sole
responsibility of the Participant or other recipient, not of the Company or
Energy, whether or not Energy or the Company shall have withheld or collected
from the Participant any sums required to be so withheld or collected in respect
of such income, and whether or not any sums so withheld or collected shall be
sufficient to provide for any such taxes.
6.6. Energy shall be entitled but shall have no obligation to cause the
shares of Bonus Stock or Incentive Stock issuable hereunder to be registered
under the Securities Act of 1933.
6.7 Not later than December 31st of each calendar year a Participant, by
filing a written request with the Committee, may elect to defer receipt of all
or any portion of the Bonus Stock or Incentive Stock which, absent such
election,
the Participant would be entitled to receive during the following calendar
year.
The shares, receipt of which is so deferred, shall be delivered to Participant
either (a) in the case of a Participant not subject to clause (b) below, on
January 2nd of the second calendar year following the calendar year in which
such
election is made, or (b) in the case of a Participant subject to liability under
Section 16(b) under the Securities Exchange Act of 1934, on the twelfth business
day following the date in such second calendar year on which the Company first
releases a summary statement of revenues and earnings for the preceding fiscal
quarter and/or fiscal year. Successive elections may be made with respect to
the
same shares so as to defer from year to year the receipt of such shares. Where
the foregoing election is made with respect to Bonus Stock, such shares shall
remain subject to forfeiture in accordance with Section 4.3(a) hereof, with the
same force and effect as if such deferred vesting date were the date originally
specified in the Participant's Bonus Stock Agreement for vesting of such
shares.
When the foregoing election is made with respect to Incentive Stock, the number
of shares of Incentive Stock to be issued to the Participant shall be determined
at the end of the Performance Period in accordance with the provisions of the
Plan, but such shares shall not be issued and the Participant shall not have the
right to vote or receive dividends with respect to such shares until the
deferred
delivery date. Each Participant shall be solely responsible for determining the
effect, if any, for federal income tax purposes of making any such election, and
no representation is made by Energy or the Company that such election shall have
the effect of deferring receipt of any income attributable to such shares for
federal income tax purposes."
7. Amendment and Termination of the Plan.
7.1. The Board of Directors, without approval of or notice to the
Participants, may amend the Plan from time to time in such respect as it
deems advisable, provided, that without stockholder approval, no amendment
may
(i) except as permitted in the case of stock splits and other recapitalizations,
as provided in Paragraph 3.11, materially increase the number of shares which
may
be issued under the Plan; (ii) materially increase the benefits accruing to
Participants under the Plan, or (iii) materially modify the requirements as to
eligibility for participation in the Plan.
7.2. The Board of Directors, without approval of or notice to the
Participants, may at any time terminate the Plan.
7.3. Any amendment or termination of the Plan shall not affect Bonus Stock
already issued or Bonus Stock Agreements or Incentive Stock Contracts already
executed without the consent of the Participant. In each case where the Board
of Directors determines it to be appropriate or is advised by counsel that such
approval is required, an amendment or termination of the Plan shall be submitted
to the stockholders of Energy for approval.
VALERO ENERGY CORPORATION
STOCK OPTION PLAN NO. 3
(as amended and restated effective January 1, 1996)
<PAGE>
VALERO ENERGY CORPORATION
STOCK OPTION PLAN NO. 3
Page
1. Introduction and Statement of Purpose. . . . . . . . . . . .
2. Definitions. . . . . . . . . . . . . . . . . . . . . . . . .
3. Granting of Options, Limited Rights and SARs to Employees. .
3.1. Selection of Participants. . . . . . . . . . . . . .
3.2. Exclusion of Committee Members . . . . . . . . . . .
3.3. No Right to Participate. . . . . . . . . . . . . . .
3.4. Automatic Grant of Limited Rights. . . . . . . . . .
3.5. Determination of Option Provisions . . . . . . . . .
3.6. Option Shares, Limited Rights and SARs
Available for Grant. . . . . . . . . . . . . . . .
3.7. Limitations Regarding Option Price and Strike Price.
3.8. Limitation Regarding Option Period . . . . . . . . .
3.9. Option Agreements. . . . . . . . . . . . . . . . . .
3.10. Provisions Regarding Prospective Employees. . . . .
4. Exercise of Options, Limited Rights and SARs.. . . . . . . .
4.1. Exercise of Options. . . . . . . . . . . . . . . . .
4.2. Exercise of Limited Rights . . . . . . . . . . . . .
4.3. Automatic Exercise of SARs; Settlement Price
for SARs . . . . . . . . . . . . . . . . . . . . .
4.4. Exercise of Limited Rights by Restricted Optionees .
4.5. Forfeiture of Certain SARs . . . . . . . . . . . . .
4.6. Exercise Procedure . . . . . . . . . . . . . . . . .
4.7. Payment for SARs and Limited Rights. . . . . . . . .
4.8. Payment with Common Stock. . . . . . . . . . . . . .
4.9. Rights as Stockholder. . . . . . . . . . . . . . . .
4.10. Effect of Termination and Forfeiture . . . . . . . .
4.11. Effect of Leave of Absence . . . . . . . . . . . . .
4.12 Effect of Disability. . . . . . . . . . . . . . . . .
4.13. Effect of Retirement or Death. . . . . . . . . . . .
4.14. Exercise Following Termination, Retirement,
Disability or Death . . . . . . . . . . . . . . .
4.15 Effect of Change of Control . . . . . . . . . . . . .
5. Adjustments Upon Changes In Capitalization . . . . . . . . .
5.1. Securities Received Upon Exercise. . . . . . . . . .
5.2. Adjustment of Option Shares Available. . . . . . . .
6. Administration.. . . . . . . . . . . . . . . . . . . . . . .
6.1. Plan Administered by Committee . . . . . . . . . . .
6.2. Powers of the Committee. . . . . . . . . . . . . . .
6.3. Express Powers not Exclusive . . . . . . . . . . . .
7. Miscellaneous Provisions . . . . . . . . . . . . . . . . . .
7.1. Nonassignability . . . . . . . . . . . . . . . . . .
7.2. Investment Letter. . . . . . . . . . . . . . . . . .
7.3. [Reserved] . . . . . . . . . . . . . . . . . . . . .
7.4. Responsibility for Taxes . . . . . . . . . . . . . .
7.5. Employment Not Guaranteed. . . . . . . . . . . . . .
7.6. Gender, Singular and Plural. . . . . . . . . . . . .
7.7. Captions . . . . . . . . . . . . . . . . . . . . . .
7.8. Validity . . . . . . . . . . . . . . . . . . . . . .
7.9. Notice . . . . . . . . . . . . . . . . . . . . . . .
7.10. Applicable Law . . . . . . . . . . . . . . . . . . .
7.11. Inconsistency. . . . . . . . . . . . . . . . . . . .
7.12. No Adoption of SEC Rules . . . . . . . . . . . . . .
8. Amendment and Termination of Plan and Option Agreements. . .
8.1. Amendments . . . . . . . . . . . . . . . . . . . . .
8.2. Termination. . . . . . . . . . . . . . . . . . . . .
8.3. Effect of Amendment or Termination . . . . . . . . .
8.4 Cancellation of Options . . . . . . . . . . . . . . .
9. Claims . . . . . . . . . . . . . . . . . . . . . . . . . . .
9.1. Filing of Claims . . . . . . . . . . . . . . . . . .
9.2. Denial of Claims . . . . . . . . . . . . . . . . . .
9.3. Review of Claims . . . . . . . . . . . . . . . . . .
9.4. Decision by Committee. . . . . . . . . . . . . . . .
<PAGE>
1. Introduction and Statement of Purpose.
This Valero Energy Corporation Stock Option Plan No. 3 (the "Plan") is
established for the purpose of giving additional incentive to Key Employees of
the Company by creating an opportunity for capital accumulation by such Key
Employees. It is intended that the benefits available under this Plan, when
added to other benefits payable to these Key Employees, will furnish total
compensation to such Key Employees which is competitive in the industries in
which the Company conducts its business and in which the Company competes for
employees. This Plan sets forth the basis for the eligibility of Employees to
participate in the Plan and the terms and conditions regulating such
participation. The Plan provides for the grant of Options to purchase Common
Stock of Valero, Limited Rights which may be exercised in lieu of Options and
stock appreciation rights which are automatically exercised upon the exercise
of an Option. The Options granted under the Plan are and are intended to be
"non-qualified" options under the Internal Revenue Code of 1986, as amended.
The Plan amendments first included in this amended and restated Stock Option
Plan No. 3 shall be effective as of January 1, 1996.
2. Definitions.
For the purposes of this Plan, the following terms shall have the
meanings stated below unless a different meaning is plainly required by the
context or such term is otherwise defined herein.
(a) "Board of Directors" shall mean the Board of Directors of Valero.
(b) "Change of Control" shall have the meaning specified in Paragraph
4.15.
(c) "Change of Control Period" shall mean a period beginning on any
date that a Change of Control shall occur and ending at the close of business
on the 90th day thereafter, provided however, that if a tender offer or
exchange offer constituting a Change of Control pursuant to clause (ii) of
Paragraph 4.15 shall be canceled, expire or otherwise terminate without Voting
Securities having been acquired pursuant thereto, the Change of Control Period
shall terminate at the close of business on (a) the seventh day following the
date of cancellation, expiration or other termination of such tender offer or
exchange offer, or (b) the 90th day after the commencement of such offer,
whichever shall first occur.
(d) "Committee" shall mean the persons administering this Plan from
time to time pursuant to Paragraph 6.1.
(e) "Common Stock" shall mean the common stock, par value $1.00 per
share, of Valero.
(f) "Company" shall mean Valero and any Parent or Subsidiary of Valero
which now exists or hereafter is organized or acquired by or acquires Valero,
and any successor or successors to such entities. The terms "Parent" and
"Subsidiary" shall have the same meaning as the terms "parent corporation" and
"subsidiary corporation," respectively, as specified in Section 425 of the
Internal Revenue Code of 1986, as amended.
(g) "Compensation Committee" shall mean the Compensation Committee of
the Board of Directors, as constituted from time to time.
(h) "Controlled Subsidiary" shall mean a corporation of which a
majority of the outstanding common stock is directly or indirectly
beneficially owned by Valero.
(i) "Employee" shall mean any person employed by the Company, including
officers and directors of the Company within the meaning of Section 16(a) of
the Exchange Act, but shall include a director only if also employed by the
Company on a full-time basis.
(j) "Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended and in effect from time to time.
(k) "Exercise Date" -- see Paragraph 4.6.
(l) "Expiration Date" -- see Paragraph 3.5.
(m) "Exercise Notice" -- see Paragraph 4.6.
(n) "Group" -- see Paragraph 4.15.
(o) "Installment Option" -- see Paragraph 4.1.
(p) "Key Employee" shall mean any key executive, managerial or
professional Employee or prospective Employee of the Company having
responsibility for planning the Company's operations, controlling or managing
its business activities, or advising the management of the Company with
respect to its operations and business activities. The determination of "Key
Employees" for purposes of determining eligibility for participation in this
Plan, and the determination of "key employees" for purposes of applying any
New York Stock Exchange Rule or determining eligibility for participation in
any other stock option plan of the Company, need not be consistent.
(q) "Limited Right" shall mean the right, following a Change of Control
of Valero and in lieu of purchasing an Option Share pursuant to the exercise
of an Option, to receive a cash payment equal to the difference between the
Strike Price of such Limited Right and the price of one share of Common Stock
at the time specified in Paragraph 4.2.
(r) "Nonaccelerated Person" -- see Paragraph 4.15.
(s) "Nonacceleration Notice" -- see Paragraph 4.15.
(t) "Option" or "Options" shall mean an option or options granted
pursuant to this Plan to purchase shares of Common Stock.
(u) "Option Agreement" shall mean a written agreement entered into
between Valero and a Participant pursuant to Paragraph 3.9.
(v) "Option Price" -- see Paragraph 3.5.
(w) "Option Share" shall mean one share of Common Stock purchased or
which may be purchased pursuant to an Option.
(x) "Parent" -- see subparagraph (f) of this Paragraph 2.
(y) "Participant" shall mean a Key Employee who has entered into an
Option Agreement which is in force and effect.
(z) "Person" -- see Paragraph 4.15.
(aa) "Plan" -- see Paragraph 1.
(bb) "Plan No. 1" shall mean the Valero Energy Corporation Stock Option
Plan No. 1, as amended and in effect from time to time.
(cc) "Plan No. 2" shall mean the Valero Energy Corporation Non-Qualified
Stock Option Plan No. 2, as amended and in effect from time to time.
(dd) "Preference Share Purchase Right" shall mean one of the rights
distributed to holders of record of Valero on November 25, 1985, to purchase
1/100 share of the Junior Participating Serial Preference Stock, Series II, of
Valero.
(ee) "Rights Agreement" shall mean that certain Amended and Restated
Rights Agreement, dated as of October 17, 1991, between Valero and Ameritrust
Texas National Association, successor to MBank Alamo, N.A., as Rights Agent,
as amended and in effect from time to time.
(ff) "Restricted Optionee" shall mean any person who is a "director" or
"officer" of Valero within the meaning of Section 16(a) of the Exchange Act,
together with any person who is the beneficial owner of more than 10 percent
of any class of equity security of Valero registered under Section 12 of the
Exchange Act.
(gg) "SAR" or "stock appreciation right" shall mean the right, subject
to the provisions of this Plan, to receive a payment in cash equal to the
difference between the specified Strike Price of the SAR and the price of one
share of the Common Stock at the time specified in Paragraph 4.3.
(hh) "SEC" shall mean the Securities and Exchange Commission.
(ii) "Settlement Date" -- see Paragraph 4.6.
(jj) "Strike Price" shall mean the price per share of the Common Stock,
determined pursuant to Paragraph 3.7, from which the appreciation (if any)
with respect to a SAR or Limited Right shall be calculated.
(kk) "Subsidiary" -- see subparagraph (f) of this Paragraph 2.
(ll) "Tax Payment" -- see Paragraph 4.6.
(mm) "Valero" shall mean Valero Energy Corporation, a Delaware
corporation.
(nn) "Valero Pension Plan" -- see Paragraph 4.13.
(oo) "Voting Securities" -- see Paragraph 4.15.
(pp) "Window Period" shall mean a period beginning on the third business
day following the date of release for publication of the financial data
specified in paragraph (e)(1)(ii) of Rule 16b-3 under the Exchange Act and
ending on the twelfth business date following such date.
3. Granting of Options, Limited Rights and SARs to Employees.
3.1. Selection of Participants. The Committee shall, from time to
time, grant Options to purchase a specified number of Option Shares to such
Key Employees of the Company as the Committee, in its sole and absolute
discretion, shall select to become Participants. At or subsequent to the time
that an Option is granted to a Key Employee by the Committee, the Committee
may grant such Key Employee a number of SARs not exceeding the number of
Option Shares which may be purchased (whether in installments or otherwise)
pursuant to such Option, provided, that no SARs shall be granted with respect
to Option Shares which have theretofore been purchased by a Participant or to
any Participant who, subsequent to the date of grant of such Option, is no
longer an Employee as such term is defined herein. Subject to the full and
final authority of the Committee to administer the Plan and select
Participants, the granting of Options, Limited Rights and SARs hereunder and
the selection of Participants may be based on recommendations made by the
Chairman of the Board and Chief Executive Officer (or, if such office shall be
vacant, the President) of Valero.
3.2. Exclusion of Committee Members. No member of the Committee, while
so serving, may be granted any Option, Limited Rights or SARs. However, a
Participant who has been granted an Option, Limited Rights or SARs under this
Plan prior to serving on the Committee may, during such term of service,
continue to hold any Options, Limited Rights and SARs previously granted and
may exercise any such Options, Limited Rights and SARs and hold Option Shares
acquired upon the exercise of any such Options, subject to the provisions of
this Plan.
3.3. No Right to Participate. No Employee or prospective Employee of
the Company shall have the right to require the Company or the Committee to
make him a Participant under this Plan.
3.4. Automatic Grant of Limited Rights. Each Option granted pursuant
to this Plan (whether or not the Option Agreement shall so specify) shall be
automatically accompanied by that number of Limited Rights which equals the
number of Option Shares which may be purchased (whether in installments or
otherwise) pursuant to such Option. Limited Rights may not be granted
separate or apart from the grant of an Option to purchase Option Shares.
3.5. Determination of Option Provisions. In determining that a Key
Employee shall be granted an Option, the Committee shall designate the number
of Option Shares the Employee may purchase under the Option, a date upon which
the Option (unless an earlier termination date is established pursuant to
Paragraph 8.4) will automatically expire (the earlier of such dates being
referred to herein as the "Expiration Date"), the price per share at which
such Option Shares may be purchased (the "Option Price") and the remaining
terms and conditions of such Option. If the Committee shall determine to
grant SARs to the grantee or holder of an Option, the Committee shall
designate the number of SARs granted and any terms and conditions pertaining
thereto.
3.6. Option Shares, Limited Rights and SARs Available for Grant. (A)
Subject to the provisions of Paragraphs 4.10 and 5, the maximum number of
shares of Common Stock which may be optioned and sold under this Plan shall be
equal to the sum of (a) 500,000 shares, plus (b) the number of shares
available for grant under Plan No. 1 and Plan No. 2 at the close of business
on the day that the stockholders of Valero approved the adoption of this
Plan, plus (c) a number of shares equal to the number of shares previously
granted under Plan No. 1 and Plan No. 2 pursuant to Options which are
forfeited or surrendered, or which expire, terminate or lapse, after such date
of approval. Shares of Common Stock optioned and sold under this Plan (and
any rights or other securities sold or delivered in accordance with Paragraph
5.1) may be either authorized but unissued securities or reacquired (treasury)
securities.
(B) The maximum number of SARs which may be granted under this Plan
shall (subject to the provisions of Paragraphs 4.10 and 5) be equal to the
maximum number of shares of Common Stock which may be optioned and sold under
this Plan, as determined pursuant to clauses (a), (b) and (c) of subparagraph
(A) above. The number of Limited Rights which shall be granted under this
Plan shall be equal to the number of shares of Common Stock optioned under
this Plan.
(C) During the term of this Plan, Valero will at all times reserve and
keep available, or have authorized but unissued, shares of Common Stock
sufficient to satisfy the requirements of this Plan. The inability of Valero
to obtain, from any regulatory body having jurisdiction, any authority deemed
by Valero's counsel to be necessary to the lawful issuance and sale of Common
Stock hereunder, shall relieve the Company of any liability in respect of the
nonissuance or sale of such Common Stock as to which such requisite authority
shall not have been obtained.
3.7. Limitations Regarding Option Price and Strike Price. The Option
Price for any Option Share shall be as specified by the Committee, but shall
not be less than 75% of the average sales price of a share of Common Stock on
the date such Option is granted. The determination of such average sales
price shall be made in accordance with Paragraph 4.2. The Strike Price at
which an SAR or Limited Right is granted shall be equal to the Option Price of
the Option Shares to which such SAR or Limited Right is related.
3.8. Limitation Regarding Option Period. The Plan shall continue
indefinitely. However, no Option granted under this Plan shall have a stated
Expiration Date which is more than 10 years and thirty days following the date
of grant of such Option. Subject to the provisions of Paragraph 4.14, an
Option, the associated Limited Rights and any associated SARs shall lapse and
shall be automatically forfeited upon the earlier of the Expiration Date (i)
as set forth in the Option Agreement pursuant to which such Option, the
associated Limited Rights and any associated SARs are granted, or (ii) as
established pursuant to Paragraph 8.4, unless an Exercise Notice is delivered
to Valero on or before the Expiration Date.
3.9. Option Agreements. Options, Limited Rights and SARs shall be
evidenced by Option Agreements having such terms and provisions, not
inconsistent with this Plan, as the Committee deems advisable. Option
Agreements need not be uniform. Promptly following each determination by the
Committee to grant an Option or SARs to a Key Employee, the Committee shall
cause Valero to enter into an appropriate Option Agreement (or, in the case of
a grant only of SARs, an amendment to an existing Option Agreement) with such
Key Employee. No Key Employee or other person claiming by, through or under a
Key Employee shall be entitled to exercise any Option, Limited Right or SAR
until an appropriate Option Agreement (or amendment thereto) shall have been
executed by Valero and such Key Employee. In the event a Key Employee of the
Company is granted an Option or SARs by the Committee but for any reason,
including, but not limited to, death or total and permanent disability, does
not actually enter into a fully executed Option Agreement (or appropriate
amendment thereto) with Valero, such Key Employee shall not be deemed a
Participant with respect to such Option or SARs and neither such Key Employee
nor any person claiming by, through or under such Key Employee shall be
entitled under any circumstances to exercise such Option, Limited Rights or
SARs.
3.10. Provisions Regarding Prospective Employees. In the event that a
prospective Key Employee of the Company is granted an Option, Limited Rights
or SARs pursuant to this Plan prior to actually commencing employment with the
Company but for any reason, including, but not limited to, death or total and
permanent disability, does not actually commence employment with the Company,
such person shall not be deemed a Participant for any purpose of this Plan and
neither such person nor any person claiming by, through or under such person
shall be entitled under any circumstances to exercise such Option, Limited
Rights or SARs. Upon actually commencing employment with the Company, such a
prospective Key Employee will then be deemed a Participant for all purposes of
this Plan, and will then, but only then, be deemed for purposes of this Plan
(but not for purposes of the Valero Pension Plan or other employee benefit
plans of the Company unless expressly so provided therein) to have been
continually employed by the Company from the date of grant of the Option to
the date of commencement of employment.
4. Exercise of Options, Limited Rights and SARs.
4.1. Exercise of Options. Any Option and any associated SARs shall be
exercisable at such time and in such amounts, either as to all of the Option
Shares covered thereby or in installments ("Installment Options"), as is
provided in the Participant's Option Agreement or as may otherwise be provided
in this Plan. An Installment Option may allow the purchase of all or any part
of the Option Shares on a specified installment date or dates, and the
subsequent purchase of any unpurchased Option Shares after such installment
date(s) and through the Expiration Date. However, no Option may be exercised
with respect to a fractional share.
4.2. Exercise of Limited Rights. Any Limited Right may be exercised
only following a Change of Control of Valero, and may be exercised only in
lieu of the purchase of the related Option Shares. However, a Participant
may, at his election, either exercise a Limited Right or purchase the related
Option Share upon exercise of the Option. Upon the exercise of a Limited
Right, the Participant's Option to purchase the related Option Share shall
automatically terminate and be forfeited. Upon the exercise of a Limited
Right, the Participant shall be entitled to receive a cash payment in an
amount equal to the difference between the Strike Price of the Limited Right
and (a) if the Limited Right is exercised during a Window Period or Change of
Control Period, the highest of the daily average sales prices for the Common
Stock during such Window Period or Change of Control Period or (b) if the
Limited Right is not exercised during a Window Period or Change of Control
Period, the highest of the daily average sales prices for the Common Stock
within the 30 day period prior to the Exercise Date. The daily average sales
price of the Common Stock on a given date shall be the mean of the reported
"high" and "low" prices for the Common Stock on such date, as reported in the
New York Stock Exchange - Composite Transactions listing in The Wall Street
Journal (or such other listing or quotation medium as the Committee shall
later designate) for such date, corrected, if necessary, to exclude the effect
of typographical errors.
4.3. Automatic Exercise of SARs; Settlement Price for SARs. (A) No
SARs may be exercised except simultaneously with the exercise of an Option or
Limited Right. A Participant or other person exercising an Option or Limited
Right shall be deemed to have automatically exercised on the Exercise Date
that number of related SARs which equals the number of Option Shares purchased
or Limited Rights exercised, not exceeding the lesser of (a) the number of
related SARs held by such Participant, or (b) the number of SARs then
permitted to be exercised under the Participant's Option Agreement. Where a
Participant holds fewer related SARs than the number of Option Shares to which
his Option pertains, the Committee may adopt policies, or include terms in the
Participant's Option Agreement, which permit or require the Participant to
exercise such SARs during or after specified periods, or in conjunction with
the exercise of a certain portion of an Option, or which permit the
Participant to determine, with such restrictions as the Committee may
prescribe, the timing of exercise of such SARs.
(B) Any SAR which is exercised at the same time as a related Limited
Right shall be settled on the basis of the same daily average sales price for
the Common Stock as is such Limited Right. Except as provided in the
foregoing sentence, any SAR which is exercised during a Window Period or
Change of Control Period shall be settled on the basis of the highest daily
average sales prices of the Common Stock during such Window Period or Change
of Control Period. Except as provided in the two foregoing sentences, SARs
shall be settled on the basis of the daily average sales price of the Common
Stock on the Exercise Date.
4.4. Exercise of Limited Rights by Restricted Optionees. A Restricted
Optionee exercising Limited Rights may do so only during a Change of Control
Period or Window Period following a Change of Control and more than six months
following the date of grant of the Option to which such Limited Rights relate.
4.5. Forfeiture of Certain SARs. No SARs may be exercised by a
Restricted Optionee within six months following the date of grant of such SARs
or the date of grant of the Option to which such SARs relate. Any other
provision of this Plan to the contrary notwithstanding, in the event that an
Option or Limited Rights are exercised by a Restricted Optionee within six
months following the date of grant of the Option or within six months
following the date of grant of any related SARs, any SARs related to the
Option Shares purchased upon such exercise or to the Limited Rights exercised
shall thereupon automatically terminate and be forfeited with the same effect
as if such SARs had never been granted.
4.6. Exercise Procedure. Options, Limited Rights and SARs may be
exercised only by written notice of such exercise (the "Exercise Notice"), in
such form as the Committee may prescribe, delivered to Valero's Stock Benefit
Plan Administration department at Valero's principal business office and
signed by the Participant or other person specified herein as being entitled
to exercise the same. The date on which such Exercise Notice is delivered to
Valero shall be the "Exercise Date". The Exercise Notice for Options Shares
shall specify a date (the "Settlement Date"), not less than five business days
nor more than 10 business days following the Exercise Date, upon which the
Option Shares shall be issued to the Participant (or other person entitled to
exercise the Option) and the Option Price shall be paid to Valero. Upon the
exercise of an Option, the Participant's right to exercise the related Limited
Rights shall automatically terminate and be forfeited. Subject to the
provisions of Paragraph 3.6(A), on the Settlement Date the person exercising
an Option shall tender to Valero full payment (in cash, certified check,
cashier's check or bank draft approved by Valero, unless shares of Common
Stock are tendered, as provided in Paragraph 4.8) for the Option Shares with
respect to which the Option is exercised, together with an additional amount,
in cash, certified check, cashier's check or bank draft approved by Valero,
equal to the amount of any and all taxes required to be collected or withheld
by the Company in connection with such exercise of such Option (the "Tax
Payment"); provided, however, that when related SARs are exercised at the same
time an Option is exercised, such Tax Payment shall be reduced by withholding
the amount thereof, to the extent possible, from the cash payment otherwise
payable by the Company to the Participant as the result of the exercise of
such SARs. Subject to the prior approval or disapproval of the Committee, and
to such rules and limitations as it may adopt, if no related SARs are
exercised such Tax Payment may also be made in whole or in part by (a)
withholding from the number of shares otherwise deliverable to the person
exercising the Option a number of shares whose fair market value equals the
Tax Payment or (b) delivering certificates for other shares of Common Stock
owned by the person exercising the Option, endorsed in blank with appropriate
signature guarantee, having a fair market value equal to the amount otherwise
to be collected or withheld. When Limited Rights are exercised, the Tax
Payment shall be withheld, to the extent possible, from any cash amount
otherwise payable by the Company as the result of the exercise of such Limited
Rights (and any related SARs). Any and all calculations with respect to a
Participant's income, required tax withholding or other matters required to be
made by the Company upon the exercise of an Option shall be made using the
average sales price of the Common Stock on the Exercise Date, whether or not
the Exercise Notice is delivered to Valero before or after the close of
trading on such date, unless otherwise specified by the Committee. Any and
all calculations made with respect to a Participant's income, required tax
withholding or other matters made upon exercise of a SAR or Limited Right
shall be made using the price at which such SAR or Limited Right is settled,
unless otherwise specified by the Committee.
4.7. Payment for SARs and Limited Rights. SARS and Limited Rights
shall be paid or settled only in cash. Payment for Limited Rights and SARs
exercised hereunder shall be made on the Settlement Date. In the event the
final amount of such payment cannot be immediately determined (e.g., if
exercise occurs near the beginning of a Change of Control Period), an interim
payment shall be made as soon as practicable following the Exercise Date, and
the final payment shall be made as soon as practicable after the applicable
daily average sales price can be determined.
4.8. Payment with Common Stock. Subject to approval of the Committee,
a person exercising an Option may pay for Option Shares by tendering to Valero
other shares of Common Stock legally and beneficially owned by such person at
the time of the exercise of an Option. Subject to approval of the Committee,
a person exercising an Option may also pay for Option Shares by delivering a
notarized affidavit, in such form as the Committee may prescribe, certifying
as to such person's legal and beneficial ownership of shares of Common Stock
held either in such person's name or in "street name" and, in the case of
shares held in such person's name, providing the certificate number(s) for
such shares; if such method of payment is approved and utilized, the number of
shares issued upon exercise of the Option shall be reduced by the number of
shares represented by such affidavit. If approved by the Committee, either
such method of exercise may include use of a procedure whereby a person
exercising an Option may request that shares received upon exercise of a
portion of an Option be automatically applied to satisfy the exercise price
for additional and increasingly larger portions of the Option. The
certificate(s) representing any shares of Common Stock tendered in payment of
the Option Price must be accompanied by a stock power duly executed with
appropriate signature guarantees. Shares of Common Stock tendered in payment
of the Option Price (including shares represented by an affidavit) shall be
valued at the daily average sales price of the Common Stock on the Exercise
Date, determined as specified in Paragraph 4.2 above. The Committee may, in
its sole and absolute discretion, refuse any tender of shares of Common Stock,
in which case it shall promptly deliver the shares of Common Stock back to the
person exercising the Option and notify such person of such refusal as soon as
practicable. In such event, such person may either (a) tender to Valero on
the Settlement Date the cash amount required to pay for such Option Shares, or
(b) rescind his Exercise Notice. If such person elects to rescind his
Exercise Notice, such person may again (subject to the provisions of this Plan
relating to the termination, forfeiture, lapse or expiration of Options
granted hereunder) deliver an Exercise Notice with respect to such Option
Shares or the associated Limited Rights (and any related SARs) at any time
prior to the Expiration Date of such Options.
4.9. Rights as Stockholder. Until the issuance of the stock
certificate(s) for Option Shares purchased hereunder (as evidenced by the
appropriate entry on the books of Valero or of a duly authorized transfer
agent of Valero), no right to vote or receive dividends or any other rights as
a stockholder of Valero shall exist with respect to such Option Shares,
notwithstanding the exercise of any Option. No adjustment will be made for a
dividend or other rights for which the record date is prior to the date the
stock certificates evidencing such shares of Common Stock are issued, except
as otherwise provided under Paragraph 5 of this Plan.
4.10. Effect of Termination and Forfeiture. Except as provided in
Paragraphs 4.14 and 4.15, an Option (and any associated Limited Rights and
SARs) may be exercised by a Participant only while he is and has continually
been, since the date of the grant of the Option, an Employee of the Company.
In the event a Participant's employment with the Company is voluntarily
terminated by the Participant (other than through retirement) or is terminated
by the Company under circumstances involving willful misconduct or criminal
activity by the Participant, then, except as provided in Paragraph 4.14(D),
all Options (and any associated Limited Rights and SARs) previously awarded to
such Participant hereunder and not theretofore exercised in accordance with
Paragraph 4.6 shall automatically lapse and be forfeited as of the date of the
Participant's termination. Should a Participant's employment be terminated by
retirement, death or total and permanent disability, or by the Company (except
under circumstances involving willful misconduct or criminal activity by the
Participant), the provisions of Paragraph 4.14 shall apply. Except as set
forth in the following sentence, if a Participant shall forfeit, voluntarily
surrender or otherwise permanently lose his right to exercise an Option or
SARs or any associated Limited Rights under any provision of this Plan or
otherwise, or any Option shall terminate or expire pursuant to its terms, the
Option Shares subject to such Option shall once more be available to be
optioned and sold under this Plan pursuant to a new Option granted hereunder,
and any associated Limited Rights and SARs shall again be available for grant
hereunder. However, if a Limited Right has terminated and been forfeited
because an Option has been exercised with respect to the related Option
Shares, or an Option to purchase Option Shares has terminated and been
forfeited because the related Limited Rights have been exercised, the Limited
Rights or Option Shares so forfeited shall not become available for additional
grants hereunder.
4.11. Effect of Leave of Absence. A Participant who commences a leave
of absence (such as a disability leave of absence) shall thereupon be
suspended from participation in this Plan during such leave of absence.
During a period of suspension from this Plan, a Participant cannot exercise
any Option (including any Installment Option) or any associated SARs that, but
for this provision, would otherwise become exercisable during such period of
suspension, provided however, that such Participant shall be entitled to
exercise any Options, Limited Rights or SARs which become exercisable during
such period of suspension pursuant to Paragraph 4.15. A Participant, while
suspended, may exercise an Option (and any related SARs) with respect to any
unpurchased Option Shares which such Participant was eligible to purchase on
the day preceding the first day of such suspension; however, such Option
Shares must be purchased prior to the Expiration Date of the Option.
Notwithstanding the foregoing provisions of this Paragraph 4.11, the
Committee, in its sole and absolute discretion, may determine at any time
before or after the commencement of such leave of absence that the
commencement of such leave of absence will be treated as a termination of
employment for purposes of the Plan. If the Committee so determines, the
Committee shall so notify the Participant and specify a date, not less than 10
days following such notification, by which the Participant must deliver an
Exercise Notice with respect to any Option Shares which the Participant is
then entitled to purchase and exercise any related Limited Rights and SARs
which may then be exercised. Options, Limited Rights and SARs not exercised
by the Participant by such date shall be forfeited. The Committee may, in its
sole and absolute discretion, change or modify the exercise dates or other
terms of any Option or SARs held by a Participant who goes on a leave of
absence and which were not exercisable by such Participant at the commencement
of such leave of absence.
4.12 Effect of Disability. The total and permanent disability of a
Participant shall terminate, effective on the first day of such disability, as
determined by the Committee, the participation of such Participant in this
Plan subject to the conditions set forth in Paragraph 4.14. The Committee
shall determine, in its sole and absolute discretion, whether or not a
Participant is totally and permanently disabled for purposes of this Plan and
when such disability (if any) commenced, and such determinations by the
Committee shall be conclusive and binding on the Participant and all persons
claiming by, through or under such Participant. Such determinations shall be
made on the basis of medical reports and other evidence satisfactory to the
Committee and in accordance with a uniform, nondiscriminatory policy applied
by the Committee, but such determinations shall not be binding on the Company
or any Participant with respect to any other employee benefit or other plan or
insurance policy wherein such determinations may be relevant, and need not be
consistent with any determinations made under any such plan or insurance
policy.
4.13. Effect of Retirement or Death. The retirement or death of a
Participant shall terminate, effective on the date of such retirement or
death, the participation of such Participant in this Plan subject to the
conditions set forth in Paragraph 4.14. For purposes of this Plan, a
Participant shall be deemed to have retired when the Participant retires under
the provisions of the Pension Plan for Employees of Valero Energy Corporation
or any other, similar pension plan of the Company providing benefits to such
Participant ("Valero Pension Plan"). In the case of a Participant who is not
a participant in a Valero Pension Plan, retirement shall be deemed to occur
when the Participant retires from the service of the Company.
4.14. Exercise Following Termination, Retirement, Disability or Death.
(A) Should the Committee determine that a Participant has become totally and
permanently disabled, or should the Participant's employment with the Company
be terminated as the result of death or retirement, the first day of such
disability (as determined by the Committee) or the date of retirement or
death, as the case may be, shall be treated as the date of the Participant's
termination from the Plan, and the Participant (or the Participant's heir,
beneficiary, guardian, legal representative, administrator or executor, as the
case may be) shall be entitled for the period specified in subparagraph (C)
below to (a) purchase any Option Shares (or, if a Change of Control has
occurred, exercise any Limited Rights) that the Participant was eligible to
purchase or exercise on the day prior to such date of retirement, death or
disability and which such Participant (had he not died, retired or become
disabled) would have become eligible to purchase or exercise within the six
month period following such date of retirement, death or disability and (b)
exercise any SARs associated with such Option Shares so purchased or Limited
Rights so exercised.
(B) A Participant who retires, dies, or becomes totally and
permanently disabled while suspended from this Plan will be deemed to have
been reinstated into the Plan on the day prior to the date of retirement,
death or disability, and such Participant (or the Participant's heir,
beneficiary, guardian, legal representative, administrator or executor, as the
case may be), shall be entitled for the period specified in subparagraph (C)
below to (i) purchase any Option Shares (or, if a Change of Control has
occurred, exercise any Limited Rights) which the Participant, had he not
retired, died or become disabled, would have been entitled to purchase or
exercise on the day prior to the date of retirement, death or disability, and
would have become entitled to purchase or exercise within the six month period
following the date of retirement, death or disability, and (ii) exercise any
SARs related to the Option Shares so purchased or Limited Rights so exercised.
(C) A Participant or other person entitled to exercise any Options,
Limited Rights or SARs pursuant to subparagraph (A) or (B) above other than a
Restricted Optionee or other person exercising an Option, Limited Right or SAR
on behalf of a Restricted Optionee shall have until the earlier of (i) the
Option Expiration Date, or (ii) three years from the date of such
Participant's retirement, death or disability, to deliver in accordance with
Paragraph 4.6 an Exercise Notice with respect to such Options, Limited Rights
and SARs. A Restricted Optionee or other person entitled to exercise an
Option, Limited Right or SAR on behalf of a Restricted Optionee pursuant to
subparagraph (A) or (B) above shall have until the earlier of (i) the Option
Expiration Date, or (ii) three years from the date of such Restricted
Optionee's retirement, death or disability, to deliver in accordance with
Paragraph 4.6 an Exercise Notice with respect to such Options, Limited Rights
and SARs granted on or after November 28, 1993. For Options, Limited Rights
and SARs granted to Restricted Optionees under this Plan before November 28,
1993, a Restricted Optionee or other person entitled to exercise an Option,
Limited Right or SAR on behalf of a Restricted Optionee pursuant to
subparagraph (A) or (B) above shall have until the earlier of (i) the Option
Expiration Date, or (ii) 90 days from the date of such Restricted Optionee's
retirement, death or disability to deliver the Exercise Notice prescribed by
Paragraph 4.6 herein. Any Options, Limited Rights or SARs not exercised
within such periods shall be automatically forfeited; provided however, that
the Committee or the Chairman of the Board and Chief Executive Officer (or if
such office shall be vacant, the President) of Valero upon application of any
proper party may in its sole and absolute discretion grant extensions of such
three year or 90 day period upon such terms and subject to such conditions as
it may specify; provided further, however, that in the case of a Restricted
Optionee, any such extension shall be subject to the prior approval of the
Committee, which shall either approve or disapprove the same in its sole
discretion. Neither the Company, its officers, directors, employees, or
agents, nor any member of the Committee shall bear any liability to the estate
of, or to any spouse, beneficiary, legatee or heir of a Participant, or to the
Participant himself, or to any other person, for authorizing an heir,
beneficiary, executor, legatee, administrator, guardian or legal
representative of a Participant, or an individual or entity who is represented
as such, to exercise an Option, Limited Right or SAR granted hereunder or for
issuing the Option Shares purchased pursuant to the exercise of any Option, or
for making any cash payment (or for withholding any Tax Payment from any cash
payment) relating to any Limited Right or SAR, granted under this Plan.
(D) In the case of any retirement and/or termination of employment
(whether voluntary or involuntary termination or otherwise), the Committee or,
except with respect to a Restricted Optionee, the Chairman of the Board and
Chief Executive Officer (or, if such office shall be vacant, the President) of
Valero shall be entitled (but shall not be required) to permit the Participant
to exercise, for a period not to exceed 90 days, all or part of the
Participant's Options (and any associated Limited Rights and SARs) which, at
the date of termination of employment, were exercisable pursuant to the
Participant's Option Agreement(s) and the provisions of the Plan and remained
unexercised. In addition, the Committee or, except with respect to a
Participant who is a Restricted Optionee at the date of such Option Agreement
amendment, the Chairman of the Board and Chief Executive Officer (or, if such
office shall be vacant, the President) of Valero may, in connection with any
Participant's retirement and/or termination of employment with the Company,
(i) authorize any existing Option Agreement of such Participant to remain in
full force and effect under its existing terms and conditions (including its
existing vesting schedule) or such amended terms and conditions as the
Committee or the Chairman of the Board and Chief Executive Officer shall
approve, and/or (ii) authorize amendments to any existing Option Agreement (or
a new Option Agreement superseding any prior Option Agreement) between Valero
and such Participant removing and/or modifying any or all of the then present
or future restrictions, conditions and/or limitations (whether arising under
such Option Agreement or this Plan) on the exercise of the Options (and any
associated Limited Rights and SARs) previously granted to such Participant; no
such authorization or amendment (or new Option Agreement) shall increase the
aggregate number of Options granted to any Participant. Any action referred
to in the preceding two sentences shall be taken by the Committee, Chairman of
the Board and Chief Executive Officer (or, if such office shall be vacant, the
President) of Valero, if at all, not later than six months following the
Participant's effective date of termination.
4.15 Effect of Change of Control. (A) As used herein, the term
"Change of Control" shall mean each occurrence of any one or more of the
following events:
(i) any person (excluding any employee benefit plan of Valero, any
trustee, administrator or other entity administering any such plan, and Valero
or any Controlled Subsidiary) or any partnership, limited partnership,
syndicate or other group formed for the purpose of acquiring, holding or
disposing of Voting Securities within the meaning of Rule 13(d) under the
Exchange Act (a "Group") which theretofore beneficially owns less than 20% of
the Voting Securities of Valero then issued and outstanding shall publicly
announce, or shall file with the SEC a Schedule 13D pursuant to Section 13(d)
of the Exchange Act (or successor form pursuant to such or any successor
provision) indicating, that it has acquired (whether in one or more
transactions) Voting Securities of Valero that result in such person or Group
directly or indirectly beneficially owning 20% or more of the Voting
Securities of Valero; or
(ii) any person (other than Valero, any Controlled Subsidiary, any
employee benefit plan of Valero and any trustee, administrator or other entity
administering any such plan) or Group shall commence a tender offer or
exchange offer for 30% or more of the Voting Securities of Valero, or for any
number or amount of Voting Securities of Valero which, if such offer were to
be fully subscribed and all Voting Securities for which such tender or
exchange offer is made were to be purchased or exchanged pursuant to such
offer, would result in such person or Group directly or indirectly
beneficially owning 50% or more of the Voting Securities of Valero; or
(iii) during any period of 24 consecutive calendar months, there shall
be a change in the composition of the Board of Directors of Valero such that
the persons who at the beginning of any such period constituted a majority of
the directors of Valero shall cease to constitute a majority of the Board of
Directors of Valero, unless the election, or the nomination for election, by
the shareholders of Valero, or the appointment by the Board of Directors, of
each new director during such 24 month period was approved by the vote at a
meeting or the written consent of at least two-thirds of the directors then
still in office who were directors at the beginning of such period; or
(iv) the shareholders of Valero shall approve an agreement providing
either for any merger, consolidation, combination or other transaction in
which Valero will cease to be an independent publicly owned corporation, or
for the liquidation or the sale of all or substantially all of the assets of
Valero.
(v) the occurrence of the Distribution Date, as such term is defined
in the Rights Agreement.
(vi) any other event determined by the Board of Directors or the
Committee to constitute a Change of Control.
(B) As used herein, the term "Voting Securities" shall mean the Common
Stock, any other equity security of Valero ordinarily entitled to vote for
directors at meetings of the stockholders of Valero and any debt or equity
security of Valero convertible into Common Stock or another security so
entitled to vote for the election of directors of Valero. In calculating the
percentage of Voting Securities owned by a person or Group, securities that
are immediately convertible, or by their terms, upon the occurrence of any
event or the lapse of time, or both, will become convertible into or
exchangeable or exercisable for shares of Common Stock (or other Voting
Securities) shall be deemed to represent the number of whole shares of Common
Stock (or other Voting Securities) into which such securities are then or will
become ultimately convertible or for which they are then or will become
ultimately exchangeable or exercisable, and the total number of issued and
outstanding shares of Common Stock (or other Voting Securities) of Valero
shall be determined on a pro forma basis after giving effect to such
conversion. The percentage of Voting Securities held by a person or Group
shall be deemed to be equal to the percentage of the number of the votes that
could be cast for the election of directors of Valero at a meeting of
stockholders that such person or Group would be entitled to so cast after
giving effect to the provisions of the preceding sentence. As used in this
Paragraph 4.15, the term "person" shall include any individual, corporation,
partnership, firm or other entity.
(C) In the event that a Change of Control shall occur, the Chairman of
the Board and Chief Executive Officer (or, if such office shall at such time
be vacant, the President ) of Valero may, on or before the date of such event
constituting a Change of Control, file with the Corporate Secretary of Valero
a written notice (the "Nonacceleration Notice") signed by such officer stating
that such Change of Control shall not result in the acceleration of Options
(or any related Limited Rights and SARs) granted under the Plan to the
Participants identified in such notice (or held by persons claiming by,
through or under such Participants). Such Nonacceleration Notice may be filed
with respect to all Options granted under the Plan or with respect to Options
granted to specified Participants (each such Participant referred to by name
or generically in a Nonacceleration Notice timely filed with the Corporate
Secretary of Valero, together with each person claiming by, through or under
such a Participant, is hereinafter referred to as a "Nonaccelerated Person").
Any other provision of this Plan notwithstanding, each Option (and, subject to
the provisions of Paragraph 4.2, all Limited Rights and SARs) granted under
this Plan, not theretofore forfeited or terminated and held at the date of a
Change of Control by a person who at such date is neither a Nonaccelerated
Person nor a Restricted Optionee shall upon occurrence of such Change of
Control immediately become exercisable with respect to all of the Shares of
Common Stock specified therein (less any such shares previously purchased
under the Option) and any related Limited Rights and SARs. The inclusion of a
Participant or other person as a Nonaccelerated Person in a Nonacceleration
Notice shall not be construed to alter or amend any rights such Participant or
other person may have under this Plan under the provisions of any executive
severance agreement or other contractual relationship with Valero.
(D) Notwithstanding the provisions of Paragraph 4.10, in the event
that a Change of Control shall occur, each Option (and any Limited Rights and
SARs) held by a Participant pursuant to the Plan shall remain exercisable
until the earlier of (i) the Expiration Date of the Option, or (ii) 90 days
following the Participant's date of termination of employment.
5. Adjustments Upon Changes In Capitalization.
5.1. Securities Received Upon Exercise. If all or any portion of an
Option, Limited Right or SAR is exercised subsequent to any stock dividend,
rights distribution, split-up, recapitalization, combination or exchange of
shares, merger, consolidation, acquisition of property or stock, spin-off or
separation, reorganization, or liquidation, as a result of which shares or
other Securities of any class or rights shall be issued in respect of
outstanding shares of Common Stock or shares of Common Stock shall be changed
into the same or a different number of shares of the same or another class or
classes or other securities, the person or persons so exercising such Option,
Limited Right or SAR shall receive, (a) for the aggregate price payable upon
such exercise of such Option, (i) the aggregate number and class of shares,
rights or other securities for which a recognized market exists, and (ii) a
cash amount equal to the fair market value on such date, as reasonably
determined by the Committee, of any other property (other than regular cash
dividend payments) and of any shares, rights or other securities for which no
recognized market exists, which, if shares of Common Stock (as authorized at
the date of the granting of such Option) had been purchased at the date of
granting of the Option for the same aggregate price (on the basis of the price
per share provided in the Option) and had not been disposed of, such person or
persons would be holding at the time of such exercise as a result of such
purchase and any such stock dividend, rights distribution, split-up,
recapitalization, combination or exchange of shares, merger, consolidation,
acquisition of property or stock, spin-off or separation, reorganization, or
liquidation and (b) a cash amount upon the exercise of the Limited Rights or
SARs equal to the difference between the aggregate Strike Price of such
Limited Right or SAR and the aggregate of (i) the average sales price, on the
date provided in Paragraph 4.2 or 4.3 hereof, as the case may be, of any whole
shares or units of Common Stock, rights or other securities for which a
recognized market exists, and (ii) the fair market value on such date, as
reasonably determined by the Committee, of any other property (other than
regular cash dividend payments) which the holder of a number of shares of
Common Stock equal to the number of such Limited Rights or SARs, if such
shares had been purchased at the date of granting of such Limited Rights or
SARs and not otherwise disposed of, would be holding at the time of exercise
of such Limited Rights or SARs as a result of such purchase and any such stock
dividend, rights distribution, split-up, recapitalization, combination or
exchange of shares, merger, consolidation, acquisition of property or stock,
spin-off or separation, reorganization or liquidation; provided however, that
no fractional share of Common Stock, fractional right or other fractional
security shall be issued upon any such exercise, and the aggregate price paid
shall be appropriately reduced to reflect any fractional share of Common
Stock, fractional right or other fractional security not issued; and provided
further, however, that if the exercise of any Option subsequent to any stock
dividend, rights distribution, split-up, recapitalization, combination or
exchange of shares, merger, consolidation, acquisition of property, or stock,
spin-off or separation, reorganization or liquidation would, pursuant to
clause (a) of this Paragraph 5.1, require the delivery of shares, rights or
other securities which Valero is not then authorized to issue or which in the
sole judgment of the Committee cannot be issued without undue effort or
expense, the person exercising such Option shall receive, in lieu of such
shares, rights or other securities, a cash payment equal to the fair market
value on the Exercise Date, as reasonably determined by the Committee, of such
shares, rights or other securities. For purposes of applying the provisions
of this Plan, the Preference Share Purchase Rights distributed to stockholders
of record of Valero on November 25, 1985, shall be deemed not to have been
distributed until the Distribution Date (as defined in the Rights Agreement).
5.2. Adjustment of Option Shares Available. In the event of any change
in the number of shares of Common Stock outstanding resulting from a stock
dividend, rights distribution, split-up, recapitalization, combination or
exchange of shares, merger, consolidation, acquisition of property or stock,
spin-off or separation, reorganization or liquidation, (a) the aggregate
number and class of shares of Common Stock remaining available to be optioned
under this Plan shall be that number and class which a person, to whom an
Option had been granted for all of the available shares of Common Stock under
this Plan on the date preceding such change, would be entitled to receive as
provided in Paragraph 5, and (b) the aggregate number of Limited Rights and
SARs remaining available under this Plan shall be determined pursuant to the
formula b/a (c) wherein:
a = the number of Option Shares available to be optioned under this
Plan immediately prior to such change,
b = the number of Option Shares available to be optioned under this
Plan immediately following such change, and
c = the number of Limited Rights or SARs available for grant under
this Plan immediately prior to such change.
Upon the occurrence of any stock dividend, rights distribution, split-up,
recapitalization, combination or exchange of shares, merger, consolidation,
acquisition of property or stock, spin-off or separation, reorganization or
liquidation, the Committee shall be entitled (but shall not be required) to
determine that new Option Agreements shall be entered into with Participants
reflecting such stock dividend or other event.
6. Administration.
6.1. Plan Administered by Committee. This Plan shall be administered
by a committee of not less than three directors of Valero, which committee
shall, except as hereinafter set forth, be the Compensation Committee, as
appointed and constituted from time to time by the Board of Directors. In the
event the Compensation Committee shall have fewer than three members, or fewer
than three members of the Compensation Committee shall be eligible to act with
respect to this Plan, then additional members of the Board of Directors shall
be appointed by the Board of Directors to act with and as a part of the
Compensation Committee for purposes of administering this Plan so that the
Committee administering this Plan shall consist of at least three members of
the Board of Directors. No person shall serve on or act as a member of the
Committee administering this Plan who has been granted or was eligible for
selection as a person to be granted an Option or SARs pursuant to this Plan,
or was eligible for an award under any other discretionary plan of Valero or
the Company (whether or not similar to the Plan) entitling the participants
therein to acquire SARs, Limited Rights or shares of Common Stock, stock
options or other securities of Valero or the Company, within one year prior to
the date such person would first serve on or act as a member of the Committee.
6.2. Powers of the Committee. In connection with its administration
of this Plan, the Committee is empowered to:
(a) Make all determinations and computations concerning the selection
of Participants, the granting of Options, Limited Rights and SARs, the pricing
thereof and the number of Option Shares to be optioned, and SARs to be
granted, to each Participant;
(b) Cause Valero to enter into Option Agreements with Participants;
(c) With the consent of the Participant, enter into agreements
amending any Option Agreement so as to grant SARs thereunder, change the
Option Price or Expiration Date of any Option, the Strike Price of any Limited
Right or SAR or any other term or condition thereof, or to terminate any such
Option Agreement;
(d) Make rules and regulations for the administration of the Plan
which are not inconsistent with the terms and provisions of this Plan,
including rules providing for the accelerated exercise of Options and SARs in
such circumstances as the Committee may deem appropriate;
(e) Construe all terms, provisions, conditions and limitations of the
Plan in good faith, and adopt amendments to the Plan;
(f) Make equitable adjustments for any mistakes or errors in the
administration of this Plan or deemed by the Committee to be necessary as the
result of any unusual situation or any ambiguity in the Plan;
(g) Select, employ and compensate, from time to time, consultants,
accountants, attorneys and other agents and employees as the Compensation
Committee may deem necessary or advisable for the proper and efficient
administration of this Plan.
6.3. Express Powers not Exclusive. The foregoing list of express powers
granted to the Committee upon the adoption of this Plan is not intended to be
either complete or exclusive, but the Committee shall, in addition to the
specific powers granted by this Plan, have such powers, whether or not
expressly authorized herein, which it may deem necessary, desirable,
advisable, proper, convenient or appropriate for the supervision and
administration of this Plan. Except as otherwise specifically provided
herein, the decisions or judgment of the Committee on any question or claim
arising hereunder shall be final, binding and conclusive upon the Participants
and all persons claiming by, through or under a Participant.
7. Miscellaneous Provisions.
7.1. Nonassignability. No Options, SARs, Limited Rights or any other
security, right or interest heretofore or hereafter granted under this Plan
shall be transferable by the Participant other than pursuant to a will of the
Participant or the laws of descent and distribution, and no Participant or
other person claiming by, through or under a Participant shall have any right
to sell, assign, transfer, pledge, anticipate, mortgage or otherwise encumber,
transfer, hypothecate or convey in advance of actual receipt any Option
Shares, SARs, Limited Rights or any cash amounts or other shares, rights or
securities (if any) payable hereunder, or any part thereof, all of which are,
and all rights in and to which are, hereby expressly declared to be
nonassignable and nontransferable; any such purported sale, assignment,
transfer, pledge, anticipation, mortgage, encumbrance, transfer, hypothecation
or conveyance shall be void and of no force or effect. No Option Shares,
SARs, Limited Rights and no part of any cash amounts or other shares, rights
or securities payable hereunder (if any) shall, prior to actual payment or
delivery, be subject to seizure or sequestration for the payment of any debts,
judgments, alimony or separate maintenance owed by a Participant, or other
person claiming by, through or under a Participant, nor be transferable by
operation of law in the event of bankruptcy or insolvency, except as required
by law. The designation of a beneficiary shall not constitute a transfer
hereunder.
7.2. Investment Letter. As a condition to the exercise of any portion of
an Option, the Committee, the General Counsel or the Corporate Secretary may
require the person exercising such Option to represent and warrant to
Valero at the time of any such exercise that the Option Shares are being
purchased only for investment and without any present intention to sell or
distribute such Option Shares, if, in the opinion of counsel for Valero, such
representation is required or desirable under the Securities Act of 1933 or
any other applicable state, federal or local law, regulation or rule of any
governmental agency. The Committee, the General Counsel or the Corporate
Secretary may require such person to execute and deliver to Valero an
appropriate investment letter containing representations and warranties of the
type generally described above.
7.3. [Reserved]
7.4. Responsibility for Taxes. Any and all taxes payable with respect to
income to a Participant resulting from the exercise of an Option, Limited
Rights or SARs granted hereunder shall be the sole responsibility of the
Participant, not of the Company or Valero, whether or not Valero or the
Company shall have withheld or collected from the Participant any sums
required to be so withheld or collected in respect of such income, and whether
or not any sums so withheld or collected shall be sufficient to provide for
any such taxes.
7.5. Employment Not Guaranteed. Nothing contained in this Plan nor any
action taken hereunder shall be construed to create a contract of employment
or to give any Participant any right to be retained in the employ of the
Company or to serve or continue to serve as an officer or director of Valero
or any Subsidiary.
7.6. Gender, Singular and Plural. All pronouns and any variations
thereof shall be deemed to refer to the masculine, feminine, or neuter, as the
identity of the person or persons may require. As the context may require,
the singular may be read as the plural and the plural as the singular.
7.7. Captions. The captions of the Paragraphs of this Plan are for
convenience only and shall not control or affect the meaning or construction
of any of its provisions.
7.8. Validity. In the event any provision of this Plan is held invalid,
void, or unenforceable, the same shall not affect, in any respect whatsoever,
the validity of any other provision of this Plan.
7.9. Notice. Any notice, statement, decision or communication required
or permitted to be given under this Plan shall be sufficient if in writing and
hand delivered, or sent by registered or certified mail, if to the Company, to
the principal office of Valero, directed to the attention of the Corporate
Secretary of Valero, and if to a Participant or other person, to the address
of the Participant or other person as it shall appear on the books of the
Company. Any such notice shall be deemed given as of the date of delivery or,
if delivery is made by mail, as of the third day following the date shown on
the postmark on receipt for registration or certification.
7.10. Applicable Law. This Plan shall be governed and construed in
accordance with the laws of the State of Texas.
7.11. Inconsistency. In the event of any conflict or inconsistency
between the provisions of this Plan and the provisions of any Option
Agreement, the provisions of this Plan shall control.
7.12. No Adoption of SEC Rules. The adoption by the Committee of
this amended and restated Stock Option Plan No. 3 is not intended to, and
shall not, constitute an election by the Company to adopt the rules
promulgated by the SEC under Section 16 of the Exchange Act pursuant to
Release No. 34-28869.
8. Amendment and Termination of Plan and Option Agreements.
8.1. Amendments. The Board of Directors or the Committee, without
approval of the Participants but subject to Paragraph 8.3, may amend this Plan
from time to time in such respect as it deems advisable.
8.2. Termination. The Board of Directors or the Committee, without
approval of the Participants but subject to Paragraph 8.3, may at any time
terminate this Plan.
8.3. Effect of Amendment or Termination. Any such amendment or
termination of this Plan shall not materially adversely affect Options,
Limited Rights or SARs already granted. In the event of any termination of
this Plan or amendment which materially adversely affects Options, Limited
Rights or SARs, Options, Limited Rights and SARs already granted shall,
subject to Paragraph 8.4, remain in full force and effect as if this Plan had
not been so amended or terminated. In any case where the Board of Directors
or the Committee feels it appropriate or is advised by counsel that such
approval is required, the amendment or termination of this Plan shall be
submitted to the stockholders of Valero for approval.
8.4 Cancellation of Options. Any other provision of this Plan to the
contrary notwithstanding, in the event that either (a) the Option Price of any
Option shall on any NYSE trading day equal or exceed 125% of the closing sales
price per share of the Common Stock (determined as provided in Paragraph 3.7),
or (b) out of any period of 120 consecutive NYSE trading days the Option Price
of any Option shall exceed the closing sales price per share of the Common
Stock (determined as provided in Paragraph 3.7) on any 80 or more of such
days, then the Committee, in its sole discretion, may unilaterally determine
to cancel and terminate such Option, the related Option Agreement and
associated Limited Rights and any associated SARs. Upon such Committee
determination, the Expiration Date of such Option, Option Agreement, Limited
Rights and SARs shall be at the close of business on the date of such
determination. The Committee shall cause notification of such cancellation to
be sent to the Participant (or other person entitled to exercise such Option),
but failure to send or any delay in sending such notice shall not nullify,
delay, or otherwise affect such cancellation. No compensation shall be paid
or payable to any Participant (or other person entitled to exercise such
Option), or other person claiming by, through or under a Participant, in
respect of any such cancellation. If an Option, the related Option Agreement
and associated Limited Rights, and any associated SARs, shall be terminated
and cancelled pursuant to the provisions of this Paragraph 8.4, the Option
Shares and associated Limited Rights, and any associated SARs, subject to such
Option (to the extent not theretofore exercised) shall once more be available
to be optioned and sold under this Plan pursuant to a new Option granted
hereunder. No Participant with respect to whom an Option and associated
Limited Rights, and any associated SARs, has been cancelled pursuant to this
Paragraph 8.4 shall have any right, whether by virtue of such cancellation or
otherwise, to require the Company or the Committee to grant a new Option to
him under this Plan or any other stock option plan of the Company.
9. Claims.
9.1. Filing of Claims. A Participant or other person who believes that
he has been denied any benefit or right provided under this Plan shall have
the right to file a written claim with the Committee. All such claims shall
be submitted on a form provided by the Committee, which shall be signed by the
claimant and shall be considered filed on the date the claim is received by
the Committee. The claim will be reviewed and a decision rendered by a member
of the Committee designated by the Committee for such purpose.
9.2. Denial of Claims. In the event the claim is denied, in whole or in
part, the Committee member reviewing the claim shall, within 90 days following
receipt of the claim, provide the claimant with either (i) a written statement
containing the following:
(1) the specific reason or reasons for the denial of benefits;
(2) a specific reference to the pertinent provisions of the Plan upon
which the denial is based;
(3) a description of any additional material or information which is
necessary for the claimant to perfect the claim and an explanation of why such
material or information is necessary; and
(4) an explanation of the review procedure provided below;
or (ii) a written notice that special circumstances (which shall be specified
in the notice) require an additional specified period (not to exceed 90 days)
for processing of the claim. If a claimant is provided with the notice
specified in clause (ii), he shall thereafter be provided with the statement
required by clause (i) within the period specified in such notice.
9.3. Review of Claims. Within 90 days after receipt of a notice of a
denial of benefits as provided above, the claimant or his authorized
representative may request, in writing, to appear before the full Committee
for a review of his claim. In conducting its review, the Committee shall
consider any oral or written statement or other evidence presented by the
claimant or his authorized representative in support of his claim. The
Committee shall give the claimant and his authorized representative reasonable
access to all pertinent documents necessary for the preparation and
presentation of his claim.
9.4. Decision by Committee. Within 60 days after receipt by the
Committee of the written request for review of his claim (or in the event of
special circumstances which require additional time for review, not later than
120 days after receipt of such request) the Committee shall notify the
claimant of its decision. If an extension of time for review is required
because of special circumstances, written notice of the extension shall be
furnished to the claimant prior to the commencement of the extension. In the
event the Committee shall hold regularly scheduled meetings at least
quarterly, then in lieu of the 60 day period specified above, the decision on
review shall be made by no later than the date of the meeting of the Committee
which immediately follows receipt of the claimant's request for review,
provided, that if the request for review is received within 30 days preceding
the date of such meeting, the decision shall be made by no later than the date
of the second meeting following receipt of such request for review, provided
further, that if special circumstances require a further extension of time for
processing of the report, such decision shall be rendered not later than the
date of the third meeting of the Committee following receipt of the written
request for review. The decision of the Committee shall be in writing and
shall include the specific reasons for the decision and references to relevant
Plan provisions on which the decision is based. The decision of the Committee
shall be final, conclusive and binding upon the Participant or other claimant
and all persons claiming by, through or under such claimant.
VALERO ENERGY CORPORATION
STOCK OPTION PLAN NO. 4
(as amended and restated effective January 1, 1996)
<PAGE>
VALERO ENERGY CORPORATION
STOCK OPTION PLAN NO. 4
Page
1. Introduction and Statement of Purpose . . . . . . . . . . .
2. Definitions . . . . . . . . . . . . . . . . . . . . . . . .
3. Granting of Options, Limited Rights and SARs to Employees .
3.1. Selection of Participants. . . . . . . . . . . . . . .
3.2. Exclusion of Committee Members . . . . . . . . . . . .
3.3. No Right to Participate. . . . . . . . . . . . . . . .
3.4. Automatic Grant of Limited Rights. . . . . . . . . . .
3.5. Determination of Option Provisions . . . . . . . . . .
3.6. Option Shares, Limited Rights and SARs
Available for Grant. . . . . . . . . . . . . . . . .
3.7. Limitations Regarding Option Price and Strike Price. .
3.8. Limitation Regarding Option Period . . . . . . . . . .
3.9. Option Agreements. . . . . . . . . . . . . . . . . . .
3.10 Provisions Regarding Prospective Employees . . . . . .
4. Exercise of Options, Limited Rights and SARs. . . . . . . .
4.1. Exercise of Options. . . . . . . . . . . . . . . . . .
4.2. Exercise of Limited Rights . . . . . . . . . . . . . .
4.3. Automatic Exercise of SARs; Settlement Price for SARs.
4.4. Exercise of Limited Rights by Restricted Optionees . .
4.5. Forfeiture of Certain SARs . . . . . . . . . . . . . .
4.6. Exercise Procedure . . . . . . . . . . . . . . . . . .
4.7. Payment for SARs and Limited Rights. . . . . . . . . .
4.8. Payment with Common Stock. . . . . . . . . . . . . . .
4.9. Rights as Stockholder. . . . . . . . . . . . . . . . .
4.10 Effect of Termination and Forfeiture . . . . . . . . .
4.11 Effect of Leave of Absence . . . . . . . . . . . . . .
4.12 Effect of Disability . . . . . . . . . . . . . . . . .
4.13 Effect of Retirement or Death. . . . . . . . . . . . .
4.14 Exercise Following Termination, Retirement,
Disability or Death. . . . . . . . . . . . . . . . .
4.15 Effect of Change of Control. . . . . . . . . . . . . .
5. Adjustments Upon Changes In Capitalization. . . . . . . . .
5.1. Securities Received Upon Exercise. . . . . . . . . . .
5.2. Adjustment of Option Shares Available. . . . . . . . .
6. Administration. . . . . . . . . . . . . . . . . . . . . . .
6.1. Plan Administered by Committee . . . . . . . . . . . .
6.2. Powers of the Committee. . . . . . . . . . . . . . . .
6.3. Express Powers not Exclusive . . . . . . . . . . . . .
7. Miscellaneous Provisions. . . . . . . . . . . . . . . . . .
7.1. Nonassignability . . . . . . . . . . . . . . . . . . .
7.2. Investment Letter. . . . . . . . . . . . . . . . . . .
7.3. [Reserved] . . . . . . . . . . . . . . . . . . . . . .
7.4. Responsibility for Taxes . . . . . . . . . . . . . . .
7.5. Employment Not Guaranteed. . . . . . . . . . . . . . .
7.6. Gender, Singular and Plural. . . . . . . . . . . . . .
7.7. Captions . . . . . . . . . . . . . . . . . . . . . . .
7.8. Validity . . . . . . . . . . . . . . . . . . . . . . .
7.9. Notice . . . . . . . . . . . . . . . . . . . . . . . .
7.10 Applicable Law . . . . . . . . . . . . . . . . . . . .
7.11 Inconsistency. . . . . . . . . . . . . . . . . . . . .
7.12 No Adoption of SEC Rules . . . . . . . . . . . . . . .
8. Amendment and Termination of Plan and Option Agreements . .
8.1. Amendments . . . . . . . . . . . . . . . . . . . . . .
8.2. Termination. . . . . . . . . . . . . . . . . . . . . .
8.3. Effect of Amendment or Termination . . . . . . . . . .
8.4 Cancellation of Options. . . . . . . . . . . . . . . .
9. Claims. . . . . . . . . . . . . . . . . . . . . . . . . . .
9.1. Filing of Claims . . . . . . . . . . . . . . . . . . .
9.2. Denial of Claims . . . . . . . . . . . . . . . . . . .
9.3. Review of Claims . . . . . . . . . . . . . . . . . . .
9.4. Decision by Committee. . . . . . . . . . . . . . . . .
<PAGE>
1. Introduction and Statement of Purpose.
This Valero Energy Corporation Stock Option Plan No. 4 (the "Plan") is
established for the purpose of giving additional incentive to Key Employees of
the Company by creating an opportunity for capital accumulation by such Key
Employees. It is intended that the benefits available under this Plan, when
added to other benefits payable to these Key Employees, will furnish total
compensation to such Key Employees which is competitive in the industries in
which the Company conducts its business and in which the Company competes for
employees. This Plan sets forth the basis for the eligibility of Employees to
participate in the Plan and the terms and conditions regulating such
participation. The Plan provides for the grant of Options to purchase Common
Stock of Valero, Limited Rights which may be exercised in lieu of Options and
stock appreciation rights which are automatically exercised upon the exercise
of an Option. The Options granted under the Plan are and are intended to be
"non-qualified" options under the Internal Revenue Code of 1986, as amended.
The Plan amendments first included in this amended and restated Stock Option
Plan No. 4 shall be effective as of January 1, 1996.
2. Definitions.
For the purposes of this Plan, the following terms shall have the meanings
stated below unless a different meaning is plainly required by the context or
such term is otherwise defined herein.
(a) "Board of Directors" shall mean the Board of Directors of Valero.
(b) "Change of Control" shall have the meaning specified in Paragraph
4.15.
(c) "Change of Control Period" shall mean a period beginning on any
date that a Change of Control shall occur and ending at the close of business
on the 90th day thereafter, provided however, that if a tender offer or
exchange offer constituting a Change of Control pursuant to clause (ii) of
Paragraph 4.15 shall be canceled, expire or otherwise terminate without Voting
Securities having been acquired pursuant thereto, the Change of Control Period
shall terminate at the close of business on (a) the seventh day following the
date of cancellation, expiration or other termination of such tender offer or
exchange offer, or (b) the 90th day after the commencement of such offer,
whichever shall first occur.
(d) "Committee" shall mean the persons administering this Plan from
time to time pursuant to Paragraph 6.1.
(e) "Common Stock" shall mean the common stock, par value $1.00 per
share, of Valero.
(f) "Company" shall mean Valero and any Parent or Subsidiary of Valero
which now exists or hereafter is organized or acquired by or acquires Valero,
and any successor or successors to such entities. The terms "Parent" and
"Subsidiary" shall have the same meaning as the terms "parent corporation" and
"subsidiary corporation," respectively, as specified in Section 425 of the
Internal Revenue Code of 1986, as amended.
(g) "Compensation Committee" shall mean the Compensation Committee of
the Board of Directors, as constituted from time to time.
(h) "Controlled Subsidiary" shall mean a corporation of which a
majority of the outstanding common stock is directly or indirectly
beneficially owned by Valero.
(i) "Employee" shall mean any person employed by the Company, including
officers and directors of the Company within the meaning of Section 16(a) of
the Exchange Act, but shall include a director only if also employed by the
Company on a full-time basis.
(j) "Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended and in effect from time to time.
(k) "Exercise Date" -- see Paragraph 4.6.
(l) "Expiration Date" -- see Paragraph 3.5.
(m) "Exercise Notice" -- see Paragraph 4.6.
(n) "Group" -- see Paragraph 4.15.
(o) "Installment Option" -- see Paragraph 4.1.
(p) "Key Employee" shall mean any key executive, managerial or
professional Employee or prospective Employee of the Company having
responsibility for planning the Company's operations, controlling or managing
its business activities, or advising the management of the Company with
respect to its operations and business activities. The determination of "Key
Employees" for purposes of determining eligibility for participation in this
Plan, and the determination of "key employees" for purposes of applying any
New York Stock Exchange Rule or determining eligibility for participation in
any other stock option plan of the Company, need not be consistent.
(q) "Limited Right" shall mean the right, following a Change of Control
of Valero and in lieu of purchasing an Option Share pursuant to the exercise
of an Option, to receive a cash payment equal to the difference between the
Strike Price of such Limited Right and the price of one share of Common Stock
at the time specified in Paragraph 4.2.
(r) "Nonaccelerated Person" -- see Paragraph 4.15.
(s) "Nonacceleration Notice" -- see Paragraph 4.15.
(t) "Option" or "Options" shall mean an option or options granted
pursuant to this Plan to purchase shares of Common Stock.
(u) "Option Agreement" shall mean a written agreement entered into
between Valero and a Participant pursuant to Paragraph 3.9.
(v) "Option Price" -- see Paragraph 3.5.
(w) "Option Share" shall mean one share of Common Stock purchased or
which may be purchased pursuant to an Option.
(x) "Parent" -- see subparagraph (f) of this Paragraph 2.
(y) "Participant" shall mean a Key Employee who has entered into an
Option Agreement which is in force and effect.
(z) "Person" -- see Paragraph 4.15.
(aa) "Plan" -- see Paragraph 1.
(bb) "Preference Share Purchase Right" shall mean one of the rights
distributed to holders of record of Valero on November 25, 1985, to purchase
1/100 share of the Junior Participating Serial Preference Stock, Series II, of
Valero.
(cc) "Rights Agreement" shall mean that certain Amended and Restated
Rights Agreement, dated as of October 17, 1991, between Valero and Ameritrust
Texas National Association, successor to MBank Alamo, N.A., as Rights Agent,
as amended and in effect from time to time.
(dd) "Restricted Optionee" shall mean any person who is a "director" or
"officer" of Valero within the meaning of Section 16(a) of the Exchange Act,
together with any person who is the beneficial owner of more than 10 percent
of any class of equity security of Valero registered under Section 12 of the
Exchange Act.
(ee) "SAR" or "stock appreciation right" shall mean the right, subject
to the provisions of this Plan, to receive a payment in cash equal to the
difference between the specified Strike Price of the SAR and the price of one
share of the Common Stock at the time specified in Paragraph 4.3.
(ff) "SEC" shall mean the Securities and Exchange Commission.
(gg) "Settlement Date" -- see Paragraph 4.6.
(hh) "Strike Price" shall mean the price per share of the Common Stock,
determined pursuant to Paragraph 3.7, from which the appreciation (if any)
with respect to a SAR or Limited Right shall be calculated.
(ii) "Subsidiary" -- see subparagraph (f) of this Paragraph 2.
(jj) "Tax Payment" -- see Paragraph 4.6.
(kk) "Valero" shall mean Valero Energy Corporation, a Delaware
corporation.
(ll) "Valero Pension Plan" -- see Paragraph 4.13.
(mm) "Voting Securities" -- see Paragraph 4.15.
(nn) "Window Period" shall mean a period beginning on the third business
day following the date of release for publication of the financial data
specified in paragraph (e)(1)(ii) of Rule 16b-3 under the Exchange Act and
ending on the twelfth business date following such date.
3. Granting of Options, Limited Rights and SARs to Employees.
3.1. Selection of Participants. The Committee shall, from time to time,
grant Options to purchase a specified number of Option Shares to such Key
Employees of the Company as the Committee, in its sole and absolute
discretion, shall select to become Participants. At or subsequent to the time
that an Option is granted to a Key Employee by the Committee, the Committee
may grant such Key Employee a number of SARs not exceeding the number of
Option Shares which may be purchased (whether in installments or otherwise)
pursuant to such Option, provided, that no SARs shall be granted with respect
to Option Shares which have theretofore been purchased by a Participant or to
any Participant who, subsequent to the date of grant of such Option, is no
longer an Employee as such term is defined herein. Subject to the full and
final authority of the Committee to administer the Plan and select
Participants, the granting of Options, Limited Rights and SARs hereunder and
the selection of Participants may be based on recommendations made by the
Chairman of the Board and Chief Executive Officer (or, if such office shall be
vacant, the President) of Valero.
3.2. Exclusion of Committee Members. No member of the Committee, while so
serving, may be granted any Option, Limited Rights or SARs. However, a
Participant who has been granted an Option, Limited Rights or SARs under this
Plan prior to serving on the Committee may, during such term of service,
continue to hold any Options, Limited Rights and SARs previously granted and
may exercise any such Options, Limited Rights and SARs and hold Option Shares
acquired upon the exercise of any such Options, subject to the provisions of
this Plan.
3.3. No Right to Participate. No Employee or prospective Employee of the
Company shall have the right to require the Company or the Committee to make
him a Participant under this Plan.
3.4. Automatic Grant of Limited Rights. Each Option granted pursuant to
this Plan (whether or not the Option Agreement shall so specify) shall be
automatically accompanied by that number of Limited Rights which equals the
number of Option Shares which may be purchased (whether in installments or
otherwise) pursuant to such Option. Limited Rights may not be granted
separate or apart from the grant of an Option to purchase Option Shares.
3.5. Determination of Option Provisions. In determining that a Key
Employee shall be granted an Option, the Committee shall designate the number
of Option Shares the Employee may purchase under the Option, a date upon which
the Option (unless an earlier termination date is established pursuant to
Paragraph 8.4) will automatically expire (the earlier of such dates being
referred to herein as the "Expiration Date"), the price per share at which
such Option Shares may be purchased (the "Option Price") and the remaining
terms and conditions of such Option. If the Committee shall determine to
grant SARs to the grantee or holder of an Option, the Committee shall
designate the number of SARs granted and any terms and conditions pertaining
thereto.
3.6. Option Shares, Limited Rights and SARs Available for Grant. (A)
Subject to the provisions of Paragraphs 4.10 and 5, the maximum number of
shares of Common Stock which may be optioned and sold under this Plan shall be
600,000 shares. Shares of Common Stock optioned and sold under this Plan (and
any rights or other securities sold or delivered in accordance with Paragraph
5.1) may be either authorized but unissued securities or reacquired (treasury)
securities.
(B) The maximum number of SARs which may be granted under this Plan shall
(subject to the provisions of Paragraphs 4.10 and 5) be equal to the maximum
number of shares of Common Stock which may be optioned and sold under this
Plan. The number of Limited Rights which shall be granted under this Plan
shall be equal to the number of shares of Common Stock optioned under this
Plan.
(C) During the term of this Plan, Valero will at all times reserve and
keep available, or have authorized but unissued, shares of Common Stock
sufficient to satisfy the requirements of this Plan. The inability of Valero
to obtain, from any regulatory body having jurisdiction, any authority deemed
by Valero's counsel to be necessary to the lawful issuance and sale of Common
Stock hereunder, shall relieve the Company of any liability in respect of the
nonissuance or sale of such Common Stock as to which such requisite authority
shall not have been obtained.
3.7. Limitations Regarding Option Price and Strike Price. The Option
Price for any Option Share shall be as specified by the Committee in its sole
discretion, but shall not be less than 75% of (a) the closing sales price per
share of Common Stock as reported in the New York Stock Exchange - Composite
Transactions listing in The Wall Street Journal or such other listing or
quotation medium as the Committee may later designate (the "Transactions
Listing") for the New York Stock Exchange (the "NYSE") trading day immediately
preceding such date, or if there are no sales on such date, on the next
preceding day on which there were sales, or (b) in the event that the Common
Stock is not listed for trading on the NYSE, an amount determined in
accordance with standards adopted by the Committee; provided however, that, at
its election, the Committee may specify an option price which is not less than
75% of the average closing sales price per share of the Common Stock as
reported in the Transactions Listing for a period of not less than 10 nor
greater than 60 consecutive trading days as determined by the Committee in its
sole discretion, provided that such period as determined by the Committee
shall not commence on a date more than 60 trading days prior to the date of
grant nor end on a date more than 60 trading days after the date of grant.
The Strike Price at which a SAR or Limited Right is granted shall be equal to
the Option Price of the Option Shares to which such SAR or Limited Right is
related.
3.8. Limitation Regarding Option Period. The Plan shall continue
indefinitely. However, no Option granted under this Plan shall have a stated
Expiration Date which is more than ten years and thirty days following the
date of grant of such Option. Subject to the provisions of Paragraph 4.14, an
Option, the associated Limited Rights and any associated SARs shall lapse and
shall be automatically forfeited upon the earlier of the Expiration Date (i)
as set forth in the Option Agreement pursuant to which such Option, the
associated Limited Rights and any associated SARs are granted, or (ii) as
established pursuant to Paragraph 8.4, unless an Exercise Notice is
delivered to Valero on or before the Expiration Date.
3.9. Option Agreements. Options, Limited Rights and SARs shall be
evidenced by Option Agreements having such terms and provisions, not
inconsistent with this Plan, as the Committee deems advisable. Option
Agreements need not be uniform. Promptly following each determination by the
Committee to grant an Option or SARs to a Key Employee, the Committee shall
cause Valero to enter into an appropriate Option Agreement (or, in the case of
a grant only of SARs, an amendment to an existing Option Agreement) with such
Key Employee. No Key Employee or other person claiming by, through or under a
Key Employee shall be entitled to exercise any Option, Limited Right or SAR
until an appropriate Option Agreement (or amendment thereto) shall have been
executed by Valero and such Key Employee. In the event a Key Employee of the
Company is granted an Option or SARs by the Committee but for any reason,
including, but not limited to, death or total and permanent disability, does
not actually enter into a fully executed Option Agreement (or appropriate
amendment thereto) with Valero, such Key Employee shall not be deemed a
Participant with respect to such Option or SARs and neither such Key Employee
nor any person claiming by, through or under such Key Employee shall be
entitled under any circumstances to exercise such Option, Limited Rights or
SARs.
3.10 Provisions Regarding Prospective Employees. In the event that a
prospective Key Employee of the Company is granted an Option, Limited Rights
or SARs pursuant to this Plan prior to actually commencing employment with the
Company but for any reason, including, but not limited to, death or total and
permanent disability, does not actually commence employment with the Company,
such person shall not be deemed a Participant for any purpose of this Plan and
neither such person nor any person claiming by, through or under such person
shall be entitled under any circumstances to exercise such Option, Limited
Rights or SARs. Upon actually commencing employment with the Company, such a
prospective Key Employee will then be deemed a Participant for all purposes of
this Plan, and will then, but only then, be deemed for purposes of this Plan
(but not for purposes of the Valero Pension Plan or other employee benefit
plans of the Company unless expressly so provided therein) to have been
continually employed by the Company from the date of grant of the Option to
the date of commencement of employment.
4. Exercise of Options, Limited Rights and SARs.
4.1. Exercise of Options. Any Option and any associated SARs shall be
exercisable at such time and in such amounts, either as to all of the Option
Shares covered thereby or in installments ("Installment Options"), as is
provided in the Participant's Option Agreement or as may otherwise be provided
in this Plan. An Installment Option may allow the purchase of all or any part
of the Option Shares on a specified installment date or dates, and the
subsequent purchase of any unpurchased Option Shares after such installment
date(s) and through the Expiration Date. However, no Option may be exercised
with respect to a fractional share.
4.2. Exercise of Limited Rights. Any Limited Right may be exercised only
following a Change of Control of Valero, and may be exercised only in lieu of
the purchase of the related Option Shares. However, a Participant may, at his
election, either exercise a Limited Right or purchase the related Option Share
upon exercise of the Option. Upon the exercise of a Limited Right, the
Participant's Option to purchase the related Option Share shall automatically
terminate and be forfeited. Upon the exercise of a Limited Right, the
Participant shall be entitled to receive a cash payment in an amount equal to
the difference between the Strike Price of the Limited Right and (a) if the
Limited Right is exercised during a Window Period or Change of Control Period,
the highest of the daily average sales prices for the Common Stock during such
Window Period or Change of Control Period or (b) if the Limited Right is not
exercised during a Window Period or Change of Control Period, the highest of
the daily average sales prices for the Common Stock within the 30 day period
prior to the Exercise Date. The daily average sales price of the Common Stock
on a given date shall be the mean of the reported "high" and "low" prices for
the Common Stock on such date, as reported in the Transactions Listing (as
defined in Paragraph 3.7) for such date, corrected, if necessary, to exclude
the effect of typographical errors.
4.3. Automatic Exercise of SARs; Settlement Price for SARs. (A) No SARs
may be exercised except simultaneously with the exercise of an Option or
Limited Right. A Participant or other person exercising an Option or Limited
Right shall be deemed to have automatically exercised on the Exercise Date
that number of related SARs which equals the number of Option Shares purchased
or Limited Rights exercised, not exceeding the lesser of (a) the number of
related SARs held by such Participant, or (b) the number of SARs then
permitted to be exercised under the Participant's Option Agreement. Where a
Participant holds fewer related SARs than the number of Option Shares to which
his Option pertains, the Committee may adopt policies, or include terms in the
Participant's Option Agreement, which permit or require the Participant to
exercise such SARs during or after specified periods, or in conjunction with
the exercise of a certain portion of an Option, or which permit the
Participant to determine, with such restrictions as the Committee may
prescribe, the timing of exercise of such SARs.
(B) Any SAR which is exercised at the same time as a related Limited
Right shall be settled on the basis of the same daily average sales price for
the Common Stock as is such Limited Right. Except as provided in the
foregoing sentence, any SAR which is exercised during a Window Period or
Change of Control Period shall be settled on the basis of the highest daily
average sales prices of the Common Stock during such Window Period or Change
of Control Period. Except as provided in the two foregoing sentences, SARs
shall be settled on the basis of the daily average sales price of the Common
Stock on the Exercise Date.
4.4. Exercise of Limited Rights by Restricted Optionees. A Restricted
Optionee exercising Limited Rights may do so only during a Change of Control
Period or Window Period following a Change of Control and more than six months
following the date of grant of the Option to which such Limited Rights relate.
4.5. Forfeiture of Certain SARs. No SARs may be exercised by a Restricted
Optionee within six (6) months following the date of grant of such SARs or the
date of grant of the Option to which such SARs relate. Any other provision of
this Plan to the contrary notwithstanding, in the event that an Option or
Limited Rights are exercised by a Restricted Optionee within six (6) months
following the date of grant of the Option or within six (6) months following
the date of grant of any related SARs, any SARs related to the Option Shares
purchased upon such exercise or to the Limited Rights exercised shall
thereupon automatically terminate and be forfeited with the same effect as if
such SARs had never been granted.
4.6. Exercise Procedure. Options, Limited Rights and SARs may be
exercised only by written notice of such exercise (the "Exercise Notice"), in
such form as the Committee may prescribe, delivered to Valero's Stock Benefit
Plan Administration department at Valero's principal business office and
signed by the Participant or other person specified herein as being entitled
to exercise the same. The date on which such Exercise Notice is delivered to
Valero shall be the "Exercise Date." The Exercise Notice for Options Shares
shall specify a date (the "Settlement Date"), not less than five business days
nor more than ten business days following the Exercise Date, upon which the
Option Shares shall be issued to the Participant (or other person entitled to
exercise the Option) and the Option Price shall be paid to Valero. Upon the
exercise of an Option, the Participant's right to exercise the related Limited
Rights shall automatically terminate and be forfeited. Subject to the
provisions of Paragraph 3.6(A), on the Settlement Date the person exercising
an Option shall tender to Valero full payment (in cash, certified check,
cashier's check or bank draft approved by Valero, unless shares of Common
Stock are tendered, as provided in Paragraph 4.8) for the Option Shares with
respect to which the Option is exercised, together with an additional amount,
in cash, certified check, cashier's check or bank draft approved by Valero,
equal to the amount of any and all taxes required to be collected or withheld
by the Company in connection with such exercise of such Option (the "Tax
Payment"); provided, however, that when related SARs are exercised at the same
time an Option is exercised, such Tax Payment shall be reduced by withholding
the amount thereof, to the extent possible, from the cash payment otherwise
payable by the Company to the Participant as the result of the exercise of
such SARs. Subject to the prior approval or disapproval of the Committee, and
to such rules and limitations as it may adopt, if no related SARs are
exercised such Tax Payment may also be made in whole or in part by (a)
withholding from the number of shares otherwise deliverable to the person
exercising the Option a number of shares whose fair market value equals the
Tax Payment or (b) delivering certificates for other shares of Common Stock
owned by the person exercising the Option, endorsed in blank with appropriate
signature guarantee, having a fair market value equal to the amount otherwise
to be collected or withheld. When Limited Rights are exercised, the Tax
Payment shall be withheld, to the extent possible, from any cash amount
otherwise payable by the Company as the result of the exercise of such Limited
Rights (and any related SARs). Any and all calculations with respect to a
Participant's income, required tax withholding or other matters required to be
made by the Company upon the exercise of an Option shall be made using the
average sales price of the Common Stock on the Exercise Date, whether or not
the Exercise Notice is delivered to Valero before or after the close of
trading on such date, unless otherwise specified by the Committee. Any and
all calculations made with respect to a Participant's income, required tax
withholding or other matters made upon exercise of a SAR or Limited Right
shall be made using the price at which such SAR or Limited Right is settled,
unless otherwise specified by the Committee.
4.7. Payment for SARs and Limited Rights. SARS and Limited Rights shall
be paid or settled only in cash. Payment for Limited Rights and SARs
exercised hereunder shall be made on the Settlement Date. In the event the
final amount of such payment cannot be immediately determined (e.g., if
exercise occurs near the beginning of a Change of Control Period), an interim
payment shall be made as soon as practicable following the Exercise Date, and
the final payment shall be made as soon as practicable after the applicable
daily average sales price can be determined.
4.8. Payment with Common Stock. Subject to approval of the Committee, a
person exercising an Option may pay for Option Shares by tendering to Valero
other shares of Common Stock legally and beneficially owned by such person at
the time of the exercise of an Option. Subject to approval of the Committee,
a person exercising an Option may also pay for Option Shares by delivering a
notarized affidavit, in such form as the Committee may prescribe, certifying
as to such person's legal and beneficial ownership of shares of Common Stock
held either in such person's name or in "street name" and, in the case of
shares held in such person's name, providing the certificate number(s) for
such shares; if such method of payment is approved and utilized, the number of
shares issued upon exercise of the Option shall be reduced by the number of
shares represented by such affidavit. If approved by the Committee, either
such method of exercise may include use of a procedure whereby a person
exercising an Option may request that shares received upon exercise of a
portion of an Option be automatically applied to satisfy the exercise price
for additional and increasingly larger portions of the Option. The
certificate(s) representing any shares of Common Stock tendered in payment of
the Option Price must be accompanied by a stock power duly executed with
appropriate signature guarantees. Shares of Common Stock tendered in payment
of the Option Price (including shares represented by an affidavit) shall be
valued at the daily average sales price of the Common Stock on the Exercise
Date, determined as specified in Paragraph 4.2 above. The Committee may, in
its sole and absolute discretion, refuse any tender of shares of Common Stock,
in which case it shall promptly deliver the shares of Common Stock back to the
person exercising the Option and notify such person of such refusal as soon as
practicable. In such event, such person may either (a) tender to Valero on
the Settlement Date the cash amount required to pay for such Option Shares, or
(b) rescind his Exercise Notice. If such person elects to rescind his
Exercise Notice, such person may again (subject to the provisions of this Plan
relating to the termination, forfeiture, lapse or expiration of Options
granted hereunder) deliver an Exercise Notice with respect to such Option
Shares or the associated Limited Rights (and any related SARs) at any time
prior to the Expiration Date of such Options.
4.9. Rights as Stockholder. Until the issuance of the stock
certificate(s) for Option Shares purchased hereunder (as evidenced by the
appropriate entry on the books of Valero or of a duly authorized transfer
agent of Valero), no right to vote or receive dividends or any other rights as
a stockholder of Valero shall exist with respect to such Option Shares,
notwithstanding the exercise of any Option. No adjustment will be made for a
dividend or other rights for which the record date is prior to the date the
stock certificates evidencing such shares of Common Stock are issued, except
as otherwise provided under Paragraph 5 of this Plan.
4.10 Effect of Termination and Forfeiture. Except as provided in
Paragraphs 4.14 and 4.15, an Option (and any associated Limited Rights and
SARs) may be exercised by a Participant only while he is and has continually
been, since the date of the grant of the Option, an Employee of the Company.
In the event a Participant's employment with the Company is voluntarily
terminated by the Participant (other than through retirement) or is terminated
by the Company under circumstances involving willful misconduct or criminal
activity by the Participant, then, except as provided in Paragraph 4.14(D),
all Options (and any associated Limited Rights and SARs) previously awarded to
such Participant hereunder and not theretofore exercised in accordance with
Paragraph 4.6 shall automatically lapse and be forfeited as of the date of the
Participant's termination. Should a Participant's employment be terminated by
retirement, death or total and permanent disability, or by the Company (except
under circumstances involving willful misconduct or criminal activity by the
Participant), the provisions of Paragraph 4.14 shall apply. Except as set
forth in the following sentence, if a Participant shall forfeit, voluntarily
surrender or otherwise permanently lose his right to exercise an Option or
SARs or any associated Limited Rights under any provision of this Plan or
otherwise, or any Option shall terminate or expire pursuant to its terms, the
Option Shares subject to such Option shall once more be available to be
optioned and sold under this Plan pursuant to a new Option granted hereunder,
and any associated Limited Rights and SARs shall again be available for grant
hereunder. However, if a Limited Right has terminated and been forfeited
because an Option has been exercised with respect to the related Option
Shares, or an Option to purchase Option Shares has terminated and been
forfeited because the related Limited Rights have been exercised, the Limited
Rights or Option Shares so forfeited shall not become available for additional
grants hereunder.
4.11 Effect of Leave of Absence. A Participant who commences a leave of
absence (such as a disability leave of absence) shall thereupon be suspended
from participation in this Plan during such leave of absence. During a period
of suspension from this Plan, a Participant cannot exercise any Option
(including any Installment Option) or any associated SARs that, but for this
provision, would otherwise become exercisable during such period of
suspension, provided however, that such Participant shall be entitled to
exercise any Options, Limited Rights or SARs which become exercisable during
such period of suspension pursuant to Paragraph 4.15. A Participant, while
suspended, may exercise an Option (and any related SARs) with respect to any
unpurchased Option Shares which such Participant was eligible to purchase on
the day preceding the first day of such suspension; however, such Option
Shares must be purchased prior to the Expiration Date of the Option.
Notwithstanding the foregoing provisions of this Paragraph 4.11, the
Committee, in its sole and absolute discretion, may determine at any time
before or after the commencement of such leave of absence that the
commencement of such leave of absence will be treated as a termination of
employment for purposes of the Plan. If the Committee so determines, the
Committee shall so notify the Participant and specify a date, not less than 10
days following such notification, by which the Participant must deliver an
Exercise Notice with respect to any Option Shares which the Participant is
then entitled to purchase and exercise any related Limited Rights and SARs
which may then be exercised. Options, Limited Rights and SARs not exercised
by the Participant by such date shall be forfeited. The Committee may, in its
sole and absolute discretion, change or modify the exercise dates or other
terms of any Option or SARs held by a Participant who goes on a leave of
absence and which were not exercisable by such Participant at the commencement
of such leave of absence.
4.12 Effect of Disability. The total and permanent disability of a
Participant shall terminate, effective on the first day of such disability, as
determined by the Committee, the participation of such Participant in this
Plan subject to the conditions set forth in Paragraph 4.14. The Committee
shall determine, in its sole and absolute discretion, whether or not a
Participant is totally and permanently disabled for purposes of this Plan and
when such disability (if any) commenced, and such determinations by the
Committee shall be conclusive and binding on the Participant and all persons
claiming by, through or under such Participant. Such determinations shall be
made on the basis of medical reports and other evidence satisfactory to the
Committee and in accordance with a uniform, nondiscriminatory policy applied
by the Committee, but such determinations shall not be binding on the Company
or any Participant with respect to any other employee benefit or other plan or
insurance policy wherein such determinations may be relevant, and need not be
consistent with any determinations made under any such plan or insurance
policy.
4.13 Effect of Retirement or Death. The retirement or death of a
Participant shall terminate, effective on the date of such retirement or
death, the participation of such Participant in this Plan subject to the
conditions set forth in Paragraph 4.14. For purposes of this Plan, a
Participant shall be deemed to have retired when the Participant retires under
the provisions of the Pension Plan for Employees of Valero Energy Corporation
or any other, similar pension plan of the Company providing benefits to such
Participant ("Valero Pension Plan"). In the case of a Participant who is not
a participant in a Valero Pension Plan, retirement shall be deemed to occur
when the Participant retires from the service of the Company.
4.14 Exercise Following Termination, Retirement, Disability or Death. (A)
Should the Committee determine that a Participant has become totally and
permanently disabled, or should the Participant's employment with the Company
be terminated as the result of death or retirement, the first day of such
disability (as determined by the Committee) or the date of retirement or
death, as the case may be, shall be treated as the date of the Participant's
termination from the Plan, and the Participant (or the Participant's heir,
beneficiary, guardian, legal representative, administrator or executor, as the
case may be) shall be entitled for the period specified in subparagraph (C)
below to (a) purchase any Option Shares (or, if a Change of Control has
occurred, exercise any Limited Rights) that the Participant was eligible to
purchase or exercise on the day prior to such date of retirement, death or
disability and which such Participant (had he not died, retired or become
disabled) would have become eligible to purchase or exercise within the six
month period following such date of retirement, death or disability and (b)
exercise any SARs associated with such Option Shares so purchased or Limited
Rights so exercised.
(B) A Participant who retires, dies or becomes totally and permanently
disabled while suspended from this Plan will be deemed to have been reinstated
into the Plan on the day prior to the date of retirement, death or disability,
and such Participant (or the Participant's heir, beneficiary, guardian, legal
representative, administrator or executor, as the case may be), shall be
entitled for the period specified in subparagraph (C) below to (i) purchase
any Option Shares (or, if a Change of Control has occurred, exercise any
Limited Rights) which the Participant, had he not retired, died or become
disabled, would have been entitled to purchase or exercise on the day prior to
the date of retirement, death or disability, and would have become entitled to
purchase or exercise within the six month period following the date of
retirement, death or disability, and (ii) exercise any SARs related to the
Option Shares so purchased or Limited Rights so exercised.
(C) A Participant or other person entitled to exercise any Options,
Limited Rights or SARs pursuant to subparagraph (A) or (B) above other than
a Restricted Optionee or other person exercising an Option, Limited Right or
SAR on behalf of a Restricted Optionee shall have until the earlier of (i)
the Option Expiration Date, or (ii) three years from the date of such
Participant's retirement, death or disability, to deliver in accordance with
Paragraph 4.6 an Exercise Notice with respect to such Options, Limited Rights
and SARs. A Restricted Optionee or other person entitled to exercise an
Option, Limited Right or SAR on behalf of a Restricted Optionee pursuant to
subparagraph (A) or (B) above shall have until the earlier of (i) the Option
Expiration Date, or (ii) three years from the date of such Restricted
Optionee's retirement, death or disability, to deliver in accordance with
Paragraph 4.6 an Exercise Notice with respect to such Options, Limited Rights
and SARs granted on or after November 28, 1993. For Options, Limited Rights
and SARs granted to Restricted Optionees under this Plan before November 28,
1993, a Restricted Optionee or other person entitled to exercise an Option,
Limited Right or SAR on behalf of a Restricted Optionee pursuant to
subparagraph (A) or (B) above shall have until the earlier of (i) the Option
Expiration Date, or (ii) 90 days from the date of such Restricted Optionee's
retirement, death or disability to deliver the Exercise Notice prescribed by
Paragraph 4.6 herein. Any Options, Limited Rights or SARs not exercised
within such periods shall be automatically forfeited; provided, however, that
the Committee or the Chairman of the Board and Chief Executive Officer (or if
such office shall be vacant, the President) of Valero upon application of any
proper party may in its sole and absolute discretion grant extensions of such
three year or 90 day period upon such terms and subject to such conditions as
it may specify; provided further, however, that in the case of a Restricted
Optionee, any such extension shall be subject to the prior approval of the
Committee, which shall either approve or disapprove the same in its sole
discretion. Neither the Company, its officers, directors, employees, or
agents, nor any member of the Committee shall bear any liability to the estate
of, or to any spouse, beneficiary, legatee or heir of a Participant, or to the
Participant himself, or to any other person, for authorizing an heir,
beneficiary, executor, legatee, administrator, guardian or legal
representative of a Participant, or an individual or entity who is represented
as such, to exercise an Option, Limited Right or SAR granted hereunder or for
issuing the Option Shares purchased pursuant to the exercise of any Option, or
for making any cash payment (or for withholding any Tax Payment from any cash
payment) relating to any Limited Right or SAR, granted under this Plan.
(D) In the case of any retirement and/or termination of employment
(whether voluntary or involuntary termination or otherwise), the Committee or,
except with respect to a Restricted Optionee, the Chairman of the Board and
Chief Executive Officer (or, if such office shall be vacant, the President) of
Valero shall be entitled (but shall not be required) to permit the Participant
to exercise, for a period not to exceed 90 days, all or part of the
Participant's Options (and any associated Limited Rights and SARs) which, at
the date of termination of employment, were exercisable pursuant to the
Participant's Option Agreement(s) and the provisions of the Plan and remained
unexercised. In addition, the Committee or, except with respect to a
Participant who is a Restricted Optionee at the date of such Option Agreement
amendment, the Chairman of the Board and Chief Executive Officer (or, if such
office shall be vacant, the President) of Valero may, in connection with any
Participant's retirement and/or termination of employment with the Company,
(i) authorize any existing Option Agreement of such Participant to remain in
full force and effect under its existing terms and conditions (including its
existing vesting schedule) or such amended terms and conditions as the
Committee or the Chairman of the Board and Chief Executive Officer shall
approve, and/or (ii) authorize amendments to any existing Option Agreement (or
a new Option Agreement superseding any prior Option Agreement) between Valero
and such Participant removing and/or modifying any or all of the then present
or future restrictions, conditions and/or limitations (whether arising under
such Option Agreement or this Plan) on the exercise of the Options (and any
associated Limited Rights and SARs) previously granted to such Participant; no
such authorization or amendment (or new Option Agreement) shall increase the
aggregate number of Options granted to any Participant. Any action referred
to in the preceding two sentences shall be taken by the Committee, Chairman of
the Board and Chief Executive Officer (or, if such office shall be vacant, the
President) of Valero, if at all, not later than six months following the
Participant's effective date of termination.
4.15 Effect of Change of Control. (A) As used herein, the term "Change of
Control" shall mean each occurrence of any one or more of the following
events:
(i) any person (excluding any employee benefit plan of Valero, any
trustee, administrator or other entity administering any such plan, and Valero
or any Controlled Subsidiary) or any partnership, limited partnership,
syndicate or other group formed for the purpose of acquiring, holding or
disposing of Voting Securities within the meaning of Rule 13(d) under the
Exchange Act (a "Group") which theretofore beneficially owns less than 20% of
the Voting Securities of Valero then issued and outstanding shall publicly
announce, or shall file with the SEC a Schedule 13D pursuant to Section 13(d)
of the Exchange Act (or successor form pursuant to such or any successor
provision) indicating, that it has acquired (whether in one or more
transactions) Voting Securities of Valero that result in such person or Group
directly or indirectly beneficially owning 20% or more of the Voting
Securities of Valero; or
(ii) any person (other than Valero, any Controlled Subsidiary, any
employee benefit plan of Valero and any trustee, administrator or other entity
administering any such plan) or Group shall commence a tender offer or
exchange offer for 30% or more of the Voting Securities of Valero, or for any
number or amount of Voting Securities of Valero which, if such offer were to
be fully subscribed and all Voting Securities for which such tender or
exchange offer is made were to be purchased or exchanged pursuant to such
offer, would result in such person or Group directly or indirectly
beneficially owning 50% or more of the Voting Securities of Valero; or
(iii) during any period of 24 consecutive calendar months, there shall be
a change in the composition of the Board of Directors of Valero such that the
persons who at the beginning of any such period constituted a majority of the
directors of Valero shall cease to constitute a majority of the Board of
Directors of Valero, unless the election, or the nomination for election, by
the shareholders of Valero, or the appointment by the Board of Directors, of
each new director during such 24 month period was approved by the vote at a
meeting or the written consent of at least two-thirds of the directors then
still in office who were directors at the beginning of such period; or
(iv) the shareholders of Valero shall approve an agreement providing
either for any merger, consolidation, combination or other transaction in
which Valero will cease to be an independent publicly owned corporation, or
for the liquidation or the sale of all or substantially all of the assets of
Valero.
(v) the occurrence of the Distribution Date, as such term is defined in
the Rights Agreement.
(vi) any other event determined by the Board of Directors or the Committee
to constitute a Change of Control.
(B) As used herein, the term "Voting Securities" shall mean the Common
Stock, any other equity security of Valero ordinarily entitled to vote for
directors at meetings of the stockholders of Valero and any debt or equity
security of Valero convertible into Common Stock or another security so
entitled to vote for the election of directors of Valero. In calculating the
percentage of Voting Securities owned by a person or Group, securities that
are immediately convertible, or by their terms, upon the occurrence of any
event or the lapse of time, or both, will become convertible into or
exchangeable or exercisable for shares of Common Stock (or other Voting
Securities) shall be deemed to represent the number of whole shares of Common
Stock (or other Voting Securities) into which such securities are then or will
become ultimately convertible or for which they are then or will become
ultimately exchangeable or exercisable, and the total number of issued and
outstanding shares of Common Stock (or other Voting Securities) of Valero
shall be determined on a pro forma basis after giving effect to such
conversion. The percentage of Voting Securities held by a person or Group
shall be deemed to be equal to the percentage of the number of the votes that
could be cast for the election of directors of Valero at a meeting of
stockholders that such person or Group would be entitled to so cast after
giving effect to the provisions of the preceding sentence. As used in this
Paragraph 4.15, the term "person" shall include any individual, corporation,
partnership, firm or other entity.
(C) In the event that a Change of Control shall occur, the Chairman of
the Board and Chief Executive Officer (or, if such office shall at such time
be vacant, the President ) of Valero may, on or before the date of such event
constituting a Change of Control, file with the Corporate Secretary of Valero
a written notice (the "Nonacceleration Notice") signed by such officer stating
that such Change of Control shall not result in the acceleration of Options
(or any related Limited Rights and SARs) granted under the Plan to the
Participants identified in such notice (or held by persons claiming by,
through or under such Participants). Such Nonacceleration Notice may be filed
with respect to all Options granted under the Plan or with respect to Options
granted to specified Participants (each such Participant referred to by name
or generically in a Nonacceleration Notice timely filed with the Corporate
Secretary of Valero, together with each person claiming by, through or under
such a Participant, is hereinafter referred to as a "Nonaccelerated Person").
Any other provision of this Plan notwithstanding, each Option (and, subject to
the provisions of Paragraph 4.2, all Limited Rights and SARs) granted under
this Plan, not theretofore forfeited or terminated and held at the date of a
Change of Control by a person who at such date is neither a Nonaccelerated
Person nor a Restricted Optionee shall upon occurrence of such Change of
Control immediately become exercisable with respect to all of the Shares of
Common Stock specified therein (less any such shares previously purchased
under the Option) and any related Limited Rights and SARs. The inclusion of a
Participant or other person as a Nonaccelerated Person in a Nonacceleration
Notice shall not be construed to alter or amend any rights such Participant or
other person may have under this Plan under the provisions of any executive
severance agreement or other contractual relationship with Valero.
(D) Notwithstanding the provisions of Paragraph 4.10, in the event that a
Change of Control shall occur, each Option (and any Limited Rights and SARs)
held by a Participant pursuant to the Plan shall remain exercisable until the
earlier of (i) the Expiration Date of the Option, or (ii) 90 days following
the Participant's date of termination of employment.
5. Adjustments Upon Changes In Capitalization.
5.1. Securities Received Upon Exercise. If all or any portion of an
Option, Limited Right or SAR is exercised subsequent to any stock dividend,
rights distribution, split-up, recapitalization, combination or exchange of
shares, merger, consolidation, acquisition of property or stock, spin-off or
separation, reorganization, or liquidation, as a result of which shares or
other Securities of any class or rights shall be issued in respect of
outstanding shares of Common Stock or shares of Common Stock shall be changed
into the same or a different number of shares of the same or another class or
classes or other securities, the person or persons so exercising such Option,
Limited Right or SAR shall receive, (a) for the aggregate price payable upon
such exercise of such Option, (i) the aggregate number and class of shares,
rights or other securities for which a recognized market exists, and (ii) a
cash amount equal to the fair market value on such date, as reasonably
determined by the Committee, of any other property (other than regular cash
dividend payments) and of any shares, rights or other securities for which no
recognized market exists, which, if shares of Common Stock (as authorized at
the date of the granting of such Option) had been purchased at the date of
granting of the Option for the same aggregate price (on the basis of the price
per share provided in the Option) and had not been disposed of, such person or
persons would be holding at the time of such exercise as a result of such
purchase and any such stock dividend, rights distribution, split-up,
recapitalization, combination or exchange of shares, merger, consolidation,
acquisition of property or stock, spin-off or separation, reorganization, or
liquidation and (b) a cash amount upon the exercise of the Limited Rights or
SARs equal to the difference between the aggregate Strike Price of such
Limited Right or SAR and the aggregate of (i) the average sales price, on the
date provided in Paragraph 4.2 or 4.3 hereof, as the case may be, of any whole
shares or units of Common Stock, rights or other securities for which a
recognized market exists, and (ii) the fair market value on such date, as
reasonably determined by the Committee, of any other property (other than
regular cash dividend payments) which the holder of a number of shares of
Common Stock equal to the number of such Limited Rights or SARs, if such
shares had been purchased at the date of granting of such Limited Rights or
SARs and not otherwise disposed of, would be holding at the time of exercise
of such Limited Rights or SARs as a result of such purchase and any such stock
dividend, rights distribution, split-up, recapitalization, combination or
exchange of shares, merger, consolidation, acquisition of property or stock,
spin-off or separation, reorganization or liquidation; provided, however, that
no fractional share of Common Stock, fractional right or other fractional
security shall be issued upon any such exercise, and the aggregate price paid
shall be appropriately reduced to reflect any fractional share of Common
Stock, fractional right or other fractional security not issued; and provided
further, however, that if the exercise of any Option subsequent to any stock
dividend, rights distribution, split-up, recapitalization, combination or
exchange of shares, merger, consolidation, acquisition of property, or stock,
spin-off or separation, reorganization or liquidation would, pursuant to
clause (a) of this Paragraph 5.1, require the delivery of shares, rights or
other securities which Valero is not then authorized to issue or which in the
sole judgment of the Committee cannot be issued without undue effort or
expense, the person exercising such Option shall receive, in lieu of such
shares, rights or other securities, a cash payment equal to the fair market
value on the Exercise Date, as reasonably determined by the Committee, of such
shares, rights or other securities. For purposes of applying the provisions
of this Plan, the Preference Share Purchase Rights distributed to stockholders
of record of Valero on November 25, 1985, shall be deemed not to have been
distributed until the Distribution Date (as defined in the Rights Agreement).
5.2. Adjustment of Option Shares Available. In the event of any change in
the number of shares of Common Stock outstanding resulting from a stock
dividend, rights distribution, split-up, recapitalization, combination or
exchange of shares, merger, consolidation, acquisition of property or stock,
spin-off or separation, reorganization or liquidation, (a) the aggregate
number and class of shares of Common Stock remaining available to be optioned
under this Plan shall be that number and class which a person, to whom an
Option had been granted for all of the available shares of Common Stock under
this Plan on the date preceding such change, would be entitled to receive as
provided in Paragraph 5, and (b) the aggregate number of Limited Rights and
SARs remaining available under this Plan shall be determined pursuant to the
formula b/a (c) wherein:
a = the number of Option Shares available to be optioned under this Plan
immediately prior to such change,
b = the number of Option Shares available to be optioned under this Plan
immediately following such change, and
c = the number of Limited Rights or SARs available for grant under this
Plan immediately prior to such change.
Upon the occurrence of any stock dividend, rights distribution, split-up,
recapitalization, combination or exchange of shares, merger, consolidation,
acquisition of property or stock, spin-off or separation, reorganization or
liquidation, the Committee shall be entitled (but shall not be required) to
determine that new Option Agreements shall be entered into with Participants
reflecting such stock dividend or other event.
6. Administration.
6.1. Plan Administered by Committee. This Plan shall be administered by a
committee of not less than three directors of Valero, which committee shall,
except as hereinafter set forth, be the Compensation Committee, as appointed
and constituted from time to time by the Board of Directors. In the event the
Compensation Committee shall have fewer than three members, or fewer than
three members of the Compensation Committee shall be eligible to act with
respect to this Plan, then additional members of the Board of Directors shall
be appointed by the Board of Directors to act with and as a part of the
Compensation Committee for purposes of administering this Plan so that the
Committee administering this Plan shall consist of at least three members of
the Board of Directors. No person shall serve on or act as a member of the
Committee administering this Plan who has been granted or was eligible for
selection as a person to be granted an Option or SARs pursuant to this Plan,
or was eligible for an award under any other discretionary plan of Valero or
the Company (whether or not similar to the Plan) entitling the participants
therein to acquire SARs, Limited Rights or shares of Common Stock, stock
options or other securities of Valero or the Company, within one year prior to
the date such person would first serve on or act as a member of the Committee.
6.2. Powers of the Committee. In connection with its administration of
this Plan, the Committee is empowered to:
(a) Make all determinations and computations concerning the selection of
Participants, the granting of Options, Limited Rights and SARs, the pricing
thereof and the number of Option Shares to be optioned, and SARs to be
granted, to each Participant;
(b) Cause Valero to enter into Option Agreements with Participants;
(c) With the consent of the Participant, enter into agreements amending
any Option Agreement so as to grant SARs thereunder, change the Option Price
or Expiration Date of any Option, the Strike Price of any Limited Right or SAR
or any other term or condition thereof, or to terminate any such Option
Agreement;
(d) Make rules and regulations for the administration of the Plan which
are not inconsistent with the terms and provisions of this Plan, including
rules providing for the accelerated exercise of Options and SARs in such
circumstances as the Committee may deem appropriate;
(e) Construe all terms, provisions, conditions and limitations of the
Plan in good faith, and adopt amendments to the Plan;
(f) Make equitable adjustments for any mistakes or errors in the
administration of this Plan or deemed by the Committee to be necessary as the
result of any unusual situation or any ambiguity in the Plan;
(g) Select, employ and compensate, from time to time, consultants,
accountants, attorneys and other agents and employees as the Compensation
Committee may deem necessary or advisable for the proper and efficient
administration of this Plan.
6.3. Express Powers not Exclusive. The foregoing list of express powers
granted to the Committee upon the adoption of this Plan is not intended to be
either complete or exclusive, but the Committee shall, in addition to the
specific powers granted by this Plan, have such powers, whether or not
expressly authorized herein, which it may deem necessary, desirable,
advisable, proper, convenient or appropriate for the supervision and
administration of this Plan. Except as otherwise specifically provided
herein, the decisions or judgment of the Committee on any question or claim
arising hereunder shall be final, binding and conclusive upon the Participants
and all persons claiming by, through or under a Participant.
7. Miscellaneous Provisions.
7.1. Nonassignability. No Options, SARs, Limited Rights or any other
security, right or interest heretofore or hereafter granted under this Plan
shall be transferable by the Participant other than pursuant to a will of the
Participant or the laws of descent and distribution, and no Participant or
other person claiming by, through or under a Participant shall have any right
to sell, assign, transfer, pledge, anticipate, mortgage or otherwise encumber,
transfer, hypothecate or convey in advance of actual receipt any Option
Shares, SARs, Limited Rights or any cash amounts or other shares, rights or
securities (if any) payable hereunder, or any part thereof, all of which are,
and all rights in and to which are, hereby expressly declared to be
nonassignable and nontransferable; any such purported sale, assignment,
transfer, pledge, anticipation, mortgage, encumbrance, transfer, hypothecation
or conveyance shall be void and of no force or effect. No Option Shares,
SARs, Limited Rights and no part of any cash amounts or other shares, rights
or securities payable hereunder (if any) shall, prior to actual payment or
delivery, be subject to seizure or sequestration for the payment of any debts,
judgments, alimony or separate maintenance owed by a Participant, or other
person claiming by, through or under a Participant, nor be transferable by
operation of law in the event of bankruptcy or insolvency, except as required
by law. The designation of a beneficiary shall not constitute a transfer
hereunder.
7.2. Investment Letter. As a condition to the exercise of any portion of
an Option, the Committee, the General Counsel or the Corporate Secretary may
require the person exercising such Option to represent and warrant to Valero
at the time of any such exercise that the Option Shares are being purchased
only for investment and without any present intention to sell or distribute
such Option Shares, if, in the opinion of counsel for Valero, such
representation is required or desirable under the Securities Act of 1933 or
any other applicable state, federal or local law, regulation or rule of any
governmental agency. The Committee, the General Counsel or the Corporate
Secretary may require such person to execute and deliver to Valero an
appropriate investment letter containing representations and warranties of the
type generally described above.
7.3. [Reserved]
7.4. Responsibility for Taxes. Any and all taxes payable with respect to
income to a Participant resulting from the exercise of an Option, Limited
Rights or SARs granted hereunder shall be the sole responsibility of the
Participant, not of the Company or Valero, whether or not Valero or the
Company shall have withheld or collected from the Participant any sums
required to be so withheld or collected in respect of such income, and whether
or not any sums so withheld or collected shall be sufficient to provide for
any such taxes.
7.5. Employment Not Guaranteed. Nothing contained in this Plan nor any
action taken hereunder shall be construed to create a contract of employment
or to give any Participant any right to be retained in the employ of the
Company or to serve or continue to serve as an officer or director of Valero
or any Subsidiary.
7.6. Gender, Singular and Plural. All pronouns and any variations thereof
shall be deemed to refer to the masculine, feminine, or neuter, as the
identity of the person or persons may require. As the context may require,
the singular may be read as the plural and the plural as the singular.
7.7. Captions. The captions of the Paragraphs of this Plan are for
convenience only and shall not control or affect the meaning or construction
of any of its provisions.
7.8. Validity. In the event any provision of this Plan is held invalid,
void, or unenforceable, the same shall not affect, in any respect whatsoever,
the validity of any other provision of this Plan.
7.9. Notice. Any notice, statement, decision or communication required or
permitted to be given under this Plan shall be sufficient if in writing and
hand delivered, or sent by registered or certified mail, if to the Company, to
the principal office of Valero, directed to the attention of the Corporate
Secretary of Valero, and if to a Participant or other person, to the address
of the Participant or other person as it shall appear on the books of the
Company. Any such notice shall be deemed given as of the date of delivery or,
if delivery is made by mail, as of the third day following the date shown on
the postmark on receipt for registration or certification.
7.10 Applicable Law. This Plan shall be governed and construed in
accordance with the laws of the State of Texas.
7.11 Inconsistency. In the event of any conflict or inconsistency between
the provisions of this Plan and the provisions of any Option Agreement, the
provisions of this Plan shall control.
7.12 No Adoption of SEC Rules. The adoption by the Committee of this
amended and restated Stock Option Plan No. 4 is not intended to, and shall
not, constitute an election by the Company to adopt the rules promulgated by
the SEC under Section 16 of the Exchange Act pursuant to Release No. 34-28869.
8. Amendment and Termination of Plan and Option Agreements.
8.1. Amendments. The Board of Directors or the Committee, without
approval of the Participants but subject to Paragraph 8.3, may amend this Plan
from time to time in such respect as it deems advisable.
8.2. Termination. The Board of Directors or the Committee, without
approval of the Participants but subject to Paragraph 8.3, may at any time
terminate this Plan.
8.3. Effect of Amendment or Termination. Any such amendment or
termination of this Plan shall not materially adversely affect Options,
Limited Rights or SARs already granted. In the event of any termination of
this Plan or amendment which materially adversely affects Options, Limited
Rights or SARs, Options, Limited Rights and SARs already granted shall,
subject to Paragraph 8.4, remain in full force and effect as if this Plan had
not been so amended or terminated. In any case where the Board of Directors
or the Committee feels it appropriate or is advised by counsel that such
approval is required, the amendment or termination of this Plan shall be
submitted to the stockholders of Valero for approval.
8.4 Cancellation of Options. Any other provision of this Plan to the
contrary notwithstanding, in the event that either (a) the Option Price of any
Option shall on any NYSE trading day equal or exceed 125% of the closing sales
price per share of the Common Stock (determined as provided in Paragraph 3.7),
or (b) out of any period of 120 consecutive NYSE trading days the Option Price
of any Option shall exceed the closing sales price per share of the Common
Stock (determined as provided in Paragraph 3.7) on any 80 or more of such
days, then the Committee, in its sole discretion, may unilaterally determine
to cancel and terminate such Option, the related Option Agreement and
associated Limited Rights and any associated SARs. Upon such Committee
determination, the Expiration Date of such Option, Option Agreement, Limited
Rights and SARs shall be at the close of business on the date of such
determination. The Committee shall cause notification of such cancellation to
be sent to the Participant (or other person entitled to exercise such Option),
but failure to send or any delay in sending such notice shall not nullify,
delay, or otherwise affect such cancellation. No compensation shall be paid
or payable to any Participant (or other person entitled to exercise such
Option), or other person claiming by, through or under a Participant, in
respect of any such cancellation. If an Option, the related Option Agreement
and associated Limited Rights, and any associated SARs, shall be terminated
and cancelled pursuant to the provisions of this Paragraph 8.4, the Option
Shares and associated Limited Rights, and any associated SARs, subject to such
Option (to the extent not theretofore exercised) shall once more be available
to be optioned and sold under this Plan pursuant to a new Option granted
hereunder. No Participant with respect to whom an Option and associated
Limited Rights, and any associated SARs, has been cancelled pursuant to this
Paragraph 8.4 shall have any right, whether by virtue of such cancellation or
otherwise, to require the Company or the Committee to grant a new Option to
him under this Plan or any other stock option plan of the Company.
9. Claims.
9.1. Filing of Claims. A Participant or other person who believes that he
has been denied any benefit or right provided under this Plan shall have the
right to file a written claim with the Committee. All such claims shall be
submitted on a form provided by the Committee, which shall be signed by the
claimant and shall be considered filed on the date the claim is received by
the Committee. The claim will be reviewed and a decision rendered by a member
of the Committee designated by the Committee for such purpose.
9.2. Denial of Claims. In the event the claim is denied, in whole or in
part, the Committee member reviewing the claim shall, within 90 days following
receipt of the claim, provide the claimant with either (i) a written statement
containing the following:
(1) the specific reason or reasons for the denial of benefits;
(2) a specific reference to the pertinent provisions of the Plan upon
which the denial is based;
(3) a description of any additional material or information which is
necessary for the claimant to perfect the claim and an explanation of why such
material or information is necessary; and
(4) an explanation of the review procedure provided below;
or (ii) a written notice that special circumstances (which shall be specified
in the notice) require an additional specified period (not to exceed 90 days)
for processing of the claim. If a claimant is provided with the notice
specified in clause (ii), he shall thereafter be provided with the statement
required by clause (i) within the period specified in such notice.
9.3. Review of Claims. Within 90 days after receipt of a notice of a
denial of benefits as provided above, the claimant or his authorized
representative may request, in writing, to appear before the full Committee
for a review of his claim. In conducting its review, the Committee shall
consider any oral or written statement or other evidence presented by the
claimant or his authorized representative in support of his claim. The
Committee shall give the claimant and his authorized representative reasonable
access to all pertinent documents necessary for the preparation and
presentation of his claim.
9.4. Decision by Committee. Within 60 days after receipt by the Committee
of the written request for review of his claim (or in the event of special
circumstances which require additional time for review, not later than 120
days after receipt of such request) the Committee shall notify the claimant of
its decision. If an extension of time for review is required because of
special circumstances, written notice of the extension shall be furnished to
the claimant prior to the commencement of the extension. In the event the
Committee shall hold regularly scheduled meetings at least quarterly, then in
lieu of the 60-day period specified above, the decision on review shall be
made by no later than the date of the meeting of the Committee which
immediately follows receipt of the claimant's request for review, provided,
that if the request for review is received within 30 days preceding the date
of such meeting, the decision shall be made by no later than the date of the
second meeting following receipt of such request for review, provided further,
that if special circumstances require a further extension of time for
processing of the report, such decision shall be rendered not later than the
date of the third meeting of the Committee following receipt of the written
request for review. The decision of the Committee shall be in writing and
shall include the specific reasons for the decision and references to relevant
Plan provisions on which the decision is based. The decision of the Committee
shall be final, conclusive and binding upon the Participant or other claimant
and all persons claiming by, through or under such claimant.
AMENDED AND RESTATED
VALERO ENERGY CORPORATION
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
(AS AMENDED AND RESTATED EFFECTIVE JANUARY 1, 1996)
<PAGE>
AMENDED AND RESTATED
VALERO ENERGY CORPORATION
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
TABLE OF CONTENTS
Section
ARTICLE I -- DEFINITIONS
Accrued Benefit. . . . . . . . . . . . . . . . . . . . . . . . . .
Actuarial Equivalent or Actuarially Equivalent Basis . . . . . . .
Board of Directors . . . . . . . . . . . . . . . . . . . . . . . .
Change of Control. . . . . . . . . . . . . . . . . . . . . . . . .
Code . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Company. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Committee. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Covered Compensation . . . . . . . . . . . . . . . . . . . . . . .
Credited Service . . . . . . . . . . . . . . . . . . . . . . . . .
Eligible Earnings. . . . . . . . . . . . . . . . . . . . . . . . .
Final Average Compensation . . . . . . . . . . . . . . . . . . . .
Monthly Covered Compensation . . . . . . . . . . . . . . . . . . .
Monthly FICA Amount. . . . . . . . . . . . . . . . . . . . . . . .
Normal Retirement Date . . . . . . . . . . . . . . . . . . . . . .
Participant. . . . . . . . . . . . . . . . . . . . . . . . . . . .
Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Plan of Deferred Compensation. . . . . . . . . . . . . . . . . . .
Plan Year. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retirement . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Rules . . . . .
Securities Act . . . . . . . . . . . . . . . . . . . . . . . . . .
Subsidiary . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Surviving Spouse . . . . . . . . . . . . . . . . . . . . . . . . .
Trust . . . . .
Trustee. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Valero . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Valero Pension Plan. . . . . . . . . . . . . . . . . . . . . . . .
Valero Pension Plan Benefit. . . . . . . . . . . . . . . . . . . .
Voting Securities. . . . . . . . . . . . . . . . . . . . . . . . .
ARTICLE II - ELIGIBILITY
Initial Eligibility. . . . . . . . . . . . . . . . . . . . . . . .
Frozen Participation . . . . . . . . . . . . . . . . . . . . . . .
Renewed Eligibility. . . . . . . . . . . . . . . . . . . . . . . .
ARTICLE III - VESTING
ARTICLE IV - RETIREMENT BENEFIT
Calculation of Retirement Benefit. . . . . . . . . . . . . . . . .
Form and Time of Payment . . . . . . . . . . . . . . . . . . . . .
Modification of Pension. . . . . . . . . . . . . . . . . . . . . .
ARTICLE V - PRERETIREMENT SPOUSAL DEATH BENEFIT
Death Prior to Retirement. . . . . . . . . . . . . . . . . . . . .
Death After Participant Retires. . . . . . . . . . . . . . . . . .
Beneficiary Designation Prohibited . . . . . . . . . . . . . . . .
ARTICLE VI - PROVISIONS RELATING TO ALL BENEFITS
Effect of this Article . . . . . . . . . . . . . . . . . . . . . .
Termination of Employment. . . . . . . . . . . . . . . . . . . . .
No Duplication of Benefits . . . . . . . . . . . . . . . . . . . .
Forfeiture For Cause . . . . . . . . . . . . . . . . . . . . . . .
Forfeiture For Competition . . . . . . . . . . . . . . . . . . . .
Expenses Incurred in Enforcing the Plan. . . . . . . . . . . . . .
No Restrictions on any Portion of Total Payments
Determined to be Excess Parachute Payments. . . . . . . . . . .
Benefits Upon Re-employment. . . . . . . . . . . . . . . . . . . .
ARTICLE VII - ADMINISTRATION
Committee Appointment. . . . . . . . . . . . . . . . . . . . . . .
Committee Organization and Voting. . . . . . . . . . . . . . . . .
Powers of the Committee. . . . . . . . . . . . . . . . . . . . . .
Committee Discretion . . . . . . . . . . . . . . . . . . . . . . .
Reimbursement of Expenses. . . . . . . . . . . . . . . . . . . . .
Reliance Upon Information. . . . . . . . . . . . . . . . . . . . .
Approval of Benefit Modifications. . . . . . . . . . . . . . . . .
ARTICLE VIII - ADOPTION BY SUBSIDIARIES
Procedure for and Status After Adoption. . . . . . . . . . . . . .
Termination of Participation By Adopting Subsidiary. . . . . . . .
ARTICLE IX - AMENDMENT AND/OR TERMINATION
Amendment or Termination of the Plan . . . . . . . . . . . . . . .
No Retroactive Effect on Awarded Benefits. . . . . . . . . . . . .
Effect of Change of Control. . . . . . . . . . . . . . . . . . . .
Effect of Termination. . . . . . . . . . . . . . . . . . . . . . .
ARTICLE X - FUNDING
Payments Under This Plan are the Obligation
of the Company . . . . . . . . . . . . . . . . . . . . . . . . .
Plan May Be Funded Through Life Insurance
Owned by the Company or a Rabbi Trust. . . . . . . . . . . . . .
Required Funding of Rabbi Trust. . . . . . . . . . . . . . . . . .
Reversion of Excess Assets . . . . . . . . . . . . . . . . . . . .
Repurchase of Valero Stock . . . . . . . . . . . . . . . . . . . .
Participants Must Reply Only on General
Credit of the Company . . . . . . . . . . . . . . . . . . . . .
ARTICLE XI - MISCELLANEOUS
Responsibility for Distributions and
Withholding of Taxes . . . . . . . . . . . . . . . . . . . . . .
Limitation of Rights . . . . . . . . . . . . . . . . . . . . . . .
Arbitration of Disputes. . . . . . . . . . . . . . . . . . . . . .
Distributions to Incompetents. . . . . . . . . . . . . . . . . . .
Nonalienation of Benefits. . . . . . . . . . . . . . . . . . . . .
Severability . . . . . . . . . . . . . . . . . . . . . . . . . . .
Notice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gender and Number. . . . . . . . . . . . . . . . . . . . . . . . .
Governing Law. . . . . . . . . . . . . . . . . . . . . . . . . . .
Effective Date . . . . . . . . . . . . . . . . . . . . . . . . . .
<PAGE>
AMENDED AND RESTATED
VALERO ENERGY CORPORATION
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
WHEREAS, Valero Energy Corporation and several of its subsidiaries
have established the Valero Energy Corporation Supplemental Executive
Retirement Plan originally effective January 1, 1983 which provides for
certain highly compensated management personnel a supplement to their
Retirement pay so as to retain their loyalty and to offer a further incentive
to them to maintain and increase their standard of performance; and
WHEREAS, Valero Energy Corporation retained the right of the Board of
Directors to amend the Plan at any time by an instrument in writing; and
WHEREAS, the Board of Directors has determined that the Plan should
be amended and restated to further protect the Participants' benefits in the
event of a Change of Control and to clarify its intent concerning amendments
pertaining to the payment of severance benefits;
NOW, THEREFORE, Valero Energy Corporation amends and restates the
Valero Energy Corporation Supplemental Executive Retirement Plan as follows:
<PAGE>
ARTICLE I
DEFINITIONS
All defined terms used in the Valero Pension Plan shall have the same
meaning for this Plan, except as modified below.
1.1 Accrued Benefit. "Accrued Benefit" means, as of any given date
of determination, the Retirement benefit calculated under Section 4.1 with
Final Average Compensation, but with the offsets for benefits provided by the
Valero Pension Plan and Credited Service determined as of that date.
1.2 Actuarial Equivalent or Actuarially Equivalent Basis.
"Actuarial Equivalent" or "Actuarially Equivalent Basis" means an equality in
value of the aggregate amounts expected to be received under different forms
of payment based on the same mortality and interest rate assumptions. For
this purpose, the mortality and interest rate assumptions used in computing
benefits under the Valero Pension Plan will be used. If there is no Valero
Pension Plan or successor qualified defined benefit plan, then the actuarial
assumptions to be used will be those actuarial assumptions deemed appropriate
by the actuarial firm, which last served as independent actuary for the Valero
Pension Plan prior to its termination or merger had the Valero Pension Plan
remained in existence with its last participant census.
1.3 Board of Directors. "Board of Directors" means the Board of
Directors of Valero.
1.4 Change of Control. "Change of Control" means the occurrence of
one or more of the following events:
(a) any person (excluding any employee benefit plan of Valero, any
trustee, administrator or other entity administering any such plan, and Valero
or any Subsidiary) or any partnership, limited partnership, syndicate or other
group formed for the purpose of acquiring, holding or disposing of Voting
Securities within the meaning of Rule 13(d) under the Securities Act (a
"Group") shall acquire (whether in one or more transactions) Voting Securities
of Valero that result in such person or Group directly or indirectly
beneficially owning 50% or more of the Voting Securities of Valero; or
(b) the stockholders of Valero shall approve an agreement providing
for any merger, consolidation, combination or other transaction in which,
immediately following such transaction and after giving effect thereto, either
(i) less than 50% in the aggregate of the outstanding Voting Securities of the
surviving or resulting entity are then beneficially owned by (x) the
stockholders of Valero immediately prior to such transaction, or (y) if a
record date has been set to determine the stockholders of Valero entitled to
vote on such transaction, then the stockholders of Valero as of such record
date, or (ii) a majority of the board of directors or other governing body of
the surviving or resulting entity are not persons specified in clause (c)(i)
and (ii) below; or
(c) if at any time the following do not constitute a majority or the
Board of Directors of Valero or any successor entity referred to in clause (b)
above
(i) persons who are directors of Valero on January 1, 1996; and
(ii) persons who, prior to election as a director, were
nominated, recommended or endorsed by the vote at a meeting or the written
consent of the Board of Directors of Valero (or, following the completion of a
consolidation, merger, combination or other similar transaction which does not
result in a Change of Control as defined herein, the board of directors or
governing body of the surviving or resulting entity); or
(d) the Distribution Date, as such term is defined in the Rights
Agreement, dated as of October 26, 1995, between Valero and Harris Trust and
Savings Bank, as Rights Agent, shall have occurred, and the Rights distributed
thereunder shall have become exercisable, pursuant to Section 11(a)(ii) or
Section 13 of such Rights Agreement, to purchase either shares of Valero
Common Stock or common shares of another Person (as such term is defined in
such Rights Agreement); or
(e) the stockholders of Valero shall approve an agreement providing
either for the liquidation of Valero or for the sale or transfer of assets or
earning power of Valero or one or more of its Subsidiaries, in one or more
transactions, aggregating more than 50% of the assets or earning power of
Valero and its Subsidiaries, taken as a whole , to any other Person (other
than to Valero or one or more Subsidiaries and/or to one or more Persons which
will be Subsidiary after giving effect to such transaction).
In the event the Company employing a Participant ceases to be a
Subsidiary of Valero, or otherwise terminates participation in the Plan, and
such Participant's participation in the Plan is not thereupon promptly
continued through employment by another Company, a "Change of Control" shall
be deemed to have occurred with respect to such Participant (but not with
respect to other Participants not similarly situated) and such Participant
shall be entitled to the rights and benefits under the Plan accruing upon a
Change of Control. The provisions of this paragraph shall not apply to a
Participant who is Retired or otherwise not employed by such Company at such
date of termination.
By resolution of the Committee, the figure "50%" appearing in clauses
(a), (b), and (e) may be changed to not less than 30%.
1.5 Code. "Code" means the Internal Revenue Code of 1986, as
amended from time to time.
1.6 Company. "Company" means Valero and any Subsidiary adopting the
Plan.
1.7 Committee. "Committee" means the committee administering this
Plan as determined pursuant to Section 7.1.
1.8 Covered Compensation. "Covered Compensation" means the average
(without indexing) of the Taxable Wage Base for the 35 calendar years ending
with the calendar year in which a Participant attains social security
retirement age (as defined in Section 415(b)(8) of the Code). A 35-year
period shall be used for all Participants regardless of the year of birth of
such Participant. In determining a Participant's Covered Compensation prior
to the Participant attaining social security retirement age, it shall be
assumed that the Taxable Wage Base in effect at the beginning of the Plan Year
in which such determination is made will remain constant for all future years.
1.9 Credited Service. "Credited Service" means a Participant's
continuing period of employment with a Company (whether or not contiguous),
commencing on the first day for which such Participant is paid, or entitled to
payment, for the performance of duties with a Company and terminating with the
Participant's final cessation of participation in the Plan. With respect to
any full calendar year in which a Participant receives Eligible Earnings in
each payroll period as an active employee, he shall be credited with one year
of Credited Service. With respect to any partial calendar year in which a
Participant receives Eligible Earnings as an active employee (such as the
calendar year in which employment commences or participation ceases) he shall
be credited with a fraction of a year of Credited Service in proportion to the
number of payroll periods during such calendar year that he received Eligible
Earnings as an active employee bears to the total number of payroll periods
during such year. All partial years of Credited Service shall be aggregated
so that a Participant receives credit for all periods of employment regardless
of whether the Credited Service is interrupted. Credited Service shall also
include, and a Participant shall be credited with, such additional periods of
time, if any, as may have been agreed upon by the Participant and a Company in
connection with the Participant's employment, termination or otherwise.
1.10 Eligible Earnings. "Eligible Earnings" means all compensation
paid or payable by a Company to the employee in the form of base salary or
wages and bonuses (whether paid or payable in cash or securities or any
combination thereof), including therein any amounts of such base salary or
wages and bonuses earned which, at the employee's election, in lieu of a cash
payment to him, are contributed to a Plan of Deferred Compensation maintained
by the Company. During a leave of absence from work, with or without pay,
such as disability leave of absence or personal leave of absence, the
Participant's base rate of pay in effect immediately prior to the leave of
absence and his most recent bonus amount earned shall be used in computing his
Eligible Earnings.
1.11 Final Average Compensation. "Final Average Compensation" means
a Participant's average monthly Eligible Earnings from any Company for the
thirty-six consecutive calendar months that give the highest average monthly
rate of Eligible Earnings for the Participant out of all calendar months next
preceding the earliest of: (a) the date upon which a Participant becomes
ineligible for participation in this Plan pursuant to Section 2.2, (b) a
Change of Control, (c) the latest of (i) the Participant's termination for
total disability or (ii) his Retirement, or (d) the termination of the Plan.
1.12 Monthly Covered Compensation. "Monthly Covered Compensation
means the quotient resulting from dividing Covered Compensation by 12.
1.13 Monthly FICA Amount. "Monthly FICA Amount" means the quotient
resulting from dividing by 12 the Taxable Wage Base in effect or assumed to be
in effect at the beginning of the calendar year in which a Participant attains
social security retirement age (as defined in Section 415(b)(8) of the Code).
1.14 Normal Retirement Date. "Normal Retirement Date" means the
first day of the month coincident with or next following the date on which the
Participant attains the age of 65 years.
1.15 Participant. "Participant" means either (a) an employee of a
Company who is eligible for and is participating in the Plan or (b) a former
employee of a Company who is receiving, or is eligible to receive benefits
under the Plan.
1.16 Plan. "Plan" means the Valero Energy Corporation Supplemental
Executive Retirement Plan as set forth in this document, as amended from time
to time.
1.17 Plan of Deferred Compensation. "Plan of Deferred Compensation"
means the Valero Energy Corporation Executive Deferred Compensation Plan, the
Valero Energy Corporation Key Employee Deferred Compensation Plan, and any
contributions made under a salary reduction agreement to a Code Section 125
cafeteria plan or Code Section 401(k) cash or deferral arrangement maintained
by the Company.
1.18 Plan Year. "Plan Year" means the calendar year.
1.19 Retirement. "Retirement", "Retirees, "Retire" or "Retired"
means the Retirement of a Participant from any Company either (a) early, as of
the first day of any month coincident with or next following: (i) with respect
to a Participant in the active employment of the Company who has attained the
age of 55 years and completed five (5) years of Credited Service, the date
such Participant retires from the service of the Company prior to his
attainment of age 65; or (ii) subject to the provisions of Article III, with
respect to a Participant whose service is terminated prior to his attainment
of age 55 and who has completed five (5) years of Credited Service, the date
on which such Participant elects to commence receipt of his Valero Pension
Plan Benefit on or after his attainment of age 55 and prior to his attainment
of age 65; or (b) upon his Normal Retirement Date.
1.20 Rules. "Rules" means the Commercial Arbitration Rules of the
American Arbitration Association.
1.21 Securities Act. "Securities Act" means the Securities Exchange
Act of 1934, as amended from time to time.
1.22 Subsidiary. "Subsidiary" means (i) any corporation 50% or more
of whose stock having ordinary voting power to elect directors (irrespective
of whether or not at the time stock of any class or classes of such
corporation shall have or might have voting power by reason of the happening
of any contingency) is at the time owned, directly or indirectly, by Valero,
and (ii) any partnership, association, joint venture or other entity in which
Valero, directly or indirectly, has a 50% or greater equity interest at the
time.
1.23 Surviving Spouse. "Surviving Spouse" means the spouse of a
Participant who is eligible to receive a Qualified Preretirement Survivor
Annuity benefit under the Valero Pension Plan.
1.24 Trust. "Trust" or "Trust Agreement" shall mean the Valero
Energy Corporation Supplemental Executive Retirement Plan Trust as is created
by the terms and conditions of said Trust and as may be amended from time to
time.
1.25 Trustee. "Trustee" means collectively one or more persons or
corporations with trust power which have been appointed by Valero and have
accepted the duties of Trustee of the Trust and any and all successor or
successors appointed by Valero or its successor(s).
1.26 Valero. "Valero" means the Valero Energy Corporation, the
sponsor of this Plan, and its successors.
1.27 Valero Pension Plan. "Valero Pension Plan" means the Valero
Energy Corporation Pension Plan, a defined benefit plan qualified under
Section 401(a) of the Code, as it may be amended from time to time and any
successor qualified defined benefit plan.
1.28 Valero Pension Plan Benefit. "Valero Pension Plan Benefit"
means the amount of monthly benefit payable from the Valero Pension Plan which
(i) in the case of an unmarried Participant, is based upon a lifetime annuity
payable to such Participant pursuant to the provisions of Article 4 of the
Valero Pension Plan as executed on December 30, 1994, or any successor
provision; or, (ii) in the case of a married Participant, is based upon a
joint and survivor pension of Actuarially Equivalent Value to the pension
otherwise payable to such Participant for life pursuant to the provisions of
Article 4 of the Valero Pension Plan as executed on December 30, 1994, or any
successor provision.
1.29 Voting Securities. "Voting Securities" means with respect to
any corporation or other entity, the common stock or any other security of
such person ordinarily entitled to vote for directors (or other governing
body) of such corporation or entity, and any debt or equity security
convertible into or exchangeable or exercisable for a security so entitled to
vote. In calculating the percentage of Voting Securities owned by a person or
Group, securities that are immediately convertible, or by their terms upon the
occurrence of any event or the lapse of time, or both, will become convertible
into or exchangeable or exercisable for securities so entitled to vote shall
be deemed to represent the number of shares of common stock or other voting
securities into which such securities are then or will become ultimately
convertible or for which they are or will ultimately become exchangeable or
exercisable, and the total number of issued and outstanding shares of common
stock (or other voting securities) shall be determined on a pro forma basis
after giving effect to such conversion, exchange or exercise. The percentage
of Voting Securities held by a person or Group shall be deemed to be equal to
the percentage of the number of votes that could be cast for the election of
directors (or other governing body) that such person or Group would be
entitled to so cast after giving effect to the provisions of the preceding
sentence. As used herein, the term "person" shall include any individual,
corporation, partnership, firm or other entity.
<PAGE>
ARTICLE II
ELIGIBILITY
2.1 Initial Eligibility. An employee shall become a Participant in
the Plan as of the date he is selected and named in the minutes of the
Committee for inclusion as a Participant in the Plan.
2.2 Frozen Participation. If an employee who is a Participant later
becomes ineligible to continue to participate but still is employed by an
adopting Company, his Accrued Benefit will be frozen as of the last day of the
Plan Year prior to the Plan Year during which he initially became ineligible
to participate. He will later be entitled to that frozen Accrued Benefit,
upon Change of Control, Plan termination, Retirement or his earlier
termination of employment with all Companies with a vested interest, subject
to the requirements of Articles III and IV. The frozen Accrued Benefit will
be payable at the time and in the form set out in Article IV. The Surviving
Spouse of a Participant whose Accrued Benefit is frozen at the time of the
Participant's death shall not be entitled to any death benefit under this
Plan. A Participant whose Accrued Benefit is frozen at the time of incurring
a disability shall not accrue any further Credited Service either for accrual
or vesting purposes after the disability occurs so long as the Participant's
Accrued Benefit in this Plan is frozen. If the frozen Accrued Benefit is less
than the benefit which could otherwise be provided without this limitation,
then the benefit will not exceed the Participant's frozen Accrued Benefit.
Additionally, if any of the events described in Article VI should occur, the
Participant whose Accrued Benefit is frozen shall be subject to having his
frozen Accrued Benefit either restricted in amount or forfeited in accordance
with Article VI.
2.3 Renewed Eligibility. If an employee who is a Participant
becomes ineligible to continue to participate but remains employed by an
adopting Company and then later again becomes eligible to participate, the
Participant will be given Credited Service for the intervening period, will
have his Final Average Compensation computed as though the freeze had never
occurred, and will be treated for all purposes as though he had not had his
participation interrupted.
<PAGE>
ARTICLE III
VESTING
Except as otherwise set forth herein, a Participant's Accrued Benefit
attributable to Credited Service prior to January 1, 1996 shall vest pursuant
to the following vesting schedule:
Participant's Years Vested Percentage
of Credited Service
Less than 5 . . . . . . . . . . . . . . . . . . . . . . . 0%
5 or more . . . . . . . . . . . . . . . . . . . . . . . 100%
Except as otherwise set forth herein, a Participant's Accrued Benefit
attributable to Credited Service on or after January 1, 1996 shall vest only
upon the occurrence of the Participant's death, disability or Retirement, and
all benefits under this Plan shall be forfeited if the Participant terminates
employment from all Companies prior to death, disability or Retirement.
The foregoing notwithstanding, a Participant's Accrued Benefit (whether
attributable to Credited Service occurring before, on or after January 1,
1996) shall vest upon the occurrence of a Change of Control, upon termination
of the Plan pursuant to Section 9.1 or if the adopting Subsidiary employing a
Participant terminates its participation in the Plan and such Participant's
participation in the Plan is not promptly continued through employment by
another adopting Subsidiary.
All Credited Service, whether occurring before or after January 1,
1996, shall be counted in determining whether an Accrued Benefit attributable
to pre-January 1, 1996 Credited Service has vested.
In addition to the benefits payable above, other than as a result of a
Change of Control, or on account of death, disability or Retirement, the
Committee may from time to time, in its sole and absolute discretion pay a
benefit greater than the vested Accrued Benefit of a Participant, such
determination to be made on a case by case basis.
<PAGE>
ARTICLE IV
RETIREMENT BENEFIT
4.1 Calculation of Retirement Benefit. Subject to the following
provisions of this Section 4.1, the provisions of Section 4.3 and Article IX,
the monthly pension payable under the Plan shall be an amount equal to the sum
of (i) plus (ii) less (iii) where (i) equals: 1.60% of the Participant's Final
Average Compensation multiplied by his number of years of Credited Service;
and (ii) equals .35% multiplied by the product of his years of Credited
Service (not to exceed 35 years) times the excess of his Final Average
Compensation over the lesser of (a) 1.25 times his Monthly Covered
Compensation, or (b) the Monthly FICA Amount; and (iii) equals the
Participant's Valero Pension Plan Benefit. In the case of an unmarried
Participant the benefit shall be based on a lifetime annuity. In the case of
a married Participant the benefit shall be a fifty percent (50%) Qualified
Joint and Survivor Annuity pension of Actuarially Equivalent Value to the
pension otherwise payable for life hereunder. The monthly pension payable
under the Plan, as determined above, shall be further reduced by the
equivalent amount the Valero Pension Plan Benefit is increased as a result of
increases in the amount of maximum benefits payable from qualified plans in
accordance with Code Section 415 or other applicable law. A Participant who
Retires prior to this Normal Retirement Date may elect to have his monthly
pension commence on the first day of any month coincident with or following
his actual Retirement, but not later than his Normal Retirement Date. If a
Participant elects to have his monthly pension commence prior to his Normal
Retirement Date, the monthly pension payable to such Participant shall be
determined by multiplying the monthly pension otherwise payable to him by the
applicable early retirement reduction factor contained in the schedule of such
factors set forth in Section 4.3(B)(2) (or any successor provision) of the
Valero Pension Plan.
4.2 Form and Time of Payment. Monthly benefits payable under the
Plan shall be made available to the Participant with the same payment
elections as are available to the Participant under the Valero Pension Plan.
In that regard, the Committee shall furnish each Participant, on or about 180
days prior to the date on which he will have both attained age 55 and
completed five years of Credited Service, or, if earlier, the date he will
have attained age 65, a written explanation of (a) the terms and conditions of
payment provided under the form of payments as described in the Valero Pension
Plan and the optional forms of payment which may be elected in lieu thereof;
(b) the terms and conditions of payment provided under the automatic pension
as described in the Valero Pension Plan; and (c) the relative financial effect
on a Participant's total pension of an election not to take the standard and
automatic pension. In addition, the Committee shall also furnish each married
Participant at least 120 days prior to his Normal Retirement Date or as soon
as practicable after the Participant makes application for the earlier
commencement of his benefit under the Plan, a written statement of the amount
of pension which would be payable on his behalf under the standard and
automatic Qualified Joint and Survivor Annuity pension as is described in the
Valero Pension Plan; and the amount of pension otherwise payable under the
available optional forms of benefit.
4.3 Modification of Pension. The Committee shall have the right to
modify the calculation of the benefit payable as to any Participant as it may
desire from time to time; provided, however, that any such modification shall
not result in a reduction of the benefit payable below the amount set forth
above in Section 4.1. In addition, except as expressly provided for herein,
benefits payable under this Plan to any Participant shall not affect any other
right or entitlement a Participant may have by contract or otherwise. In
addition, the benefits payable to a Participant under this Plan may be
modified by written agreement entered into between the Participant and a
Company and approved pursuant to Section 7.7. If so modified, the provisions
of such written agreement shall prevail in determining such Participant's
rights and benefits under this Plan.
<PAGE>
ARTICLE V
PRERETIREMENT SPOUSAL DEATH BENEFIT
5.1 Death Prior to Retirement. In the event that a Participant in
the Plan who has attained age 55 and completed five years of Credited Service
dies while employed by a Company but has not Retired, the Participant's
Surviving Spouse shall receive for life a Surviving Spouse benefit under the
Plan, which shall commence on the first day of the month following the date of
the Participant's death and shall be equal to fifty percent (50%) of the
amount the Participant would have received under Section 4.1 if he had Retired
early on his date of death and elected immediate commencement of his pension
on his earliest Retirement date pursuant to Section 4.2.
5.2 Death After Participant Retires. Upon the death of a
Participant at or after the Participant Retires there is no death benefit and
only the remainder of any benefit payable to the Surviving Spouse, if any,
under Section 4.1 shall be payable.
5.3 Beneficiary Designation Prohibited. Since the only death
benefit payable under the Plan is to a Surviving Spouse, no Participant shall
have the right to designate a beneficiary to receive death benefits hereunder.
<PAGE>
ARTICLE VI
PROVISIONS RELATING TO ALL BENEFITS
6.1 Effect of This Article. The provisions of this Article will
control over all other provisions of this Plan.
6.2 Termination of Employment. Termination of employment for any
reason prior to the Participant's vesting under Article III or Article V, if
applicable, will cause the Participant and any Surviving Spouse to forfeit all
interest in and under this Plan.
6.3 No Duplication of Benefits. It is not intended that there be
any duplication of benefits. Therefore, if a Participant has met the
requirements of Article IV and has Retired, then the Participant and/or his
Surviving Spouse shall only receive a benefit under that Article. If a
Participant dies before actual Retirement, the Participant's Surviving Spouse
shall only receive a benefit, if the Surviving Spouse qualifies for one, under
Article V. But, in no event will a Participant and/or such Participant's
Surviving Spouse qualify for a benefit under both Articles IV and V.
6.4 Forfeiture For Cause. If the Committee finds, after full
consideration of the facts presented on behalf of both the Company and a
Participant, that the Participant was discharged by a Company for fraud,
embezzlement, theft, commission of a felony, proven dishonesty in the course
of his employment by a Company which damaged the Company, or for disclosing
trade secrets of a Company, the entire benefit accrued for the benefit of the
Participant and/or his Surviving Spouse will be forfeited even though it may
have been previously vested under Article III or V. The decision of the
Committee as to the cause of a former Participant's discharge and the
damage done to the Company will be final. No decision of the Committee will
affect the finality of the discharge of the Participant by the Company in any
manner. Notwithstanding the foregoing, no forfeiture should be permitted
pursuant to this Section following Plan termination or a Change of Control
unless pursuant to arbitration consistent with the provisions of Section 11.3.
6.5 Forfeiture for Competition. If at the time a distribution is
being made or is to be made to a Participant, the Committee finds after full
consideration of the facts presented on behalf of the Company and the
Participant, that the Participant at any time within two years following his
termination of employment from all Companies and without written consent of a
Company, directly or indirectly owns, operates, manages, controls or
participates in the ownership, (other than through ownership of less than 5%
of the Voting Securities of a publicly traded entity) management, operation or
control of or is employed by, or is paid as a consultant or other independent
contractor by a business which competes or at any time did compete with the
Company by which he was formerly employed in a trade area served by the
Company at the time distributions are being made or to be made and in which
the Participant had represented the Company while employed by it; and if the
Participant continues to be so engaged 60 days after written notice has been
given to him, the Committee may forfeit all benefits otherwise due the
Participant even though such benefit may have been previously vested under
Article III or V. Notwithstanding the foregoing, no forfeiture shall be
permitted pursuant to this Section following Plan termination or a Change of
Control unless pursuant to arbitration consistent with the provisions of
Section 11.3.
6.6 Expenses Incurred in Enforcing the Plan. The Company will, in
addition, pay a Participant for all legal fees and expenses incurred by him in
contesting or disputing his termination of employment by a Company or in
seeking to obtain or enforce any benefit provided by this Plan if such
termination occurs or a benefit is payable following a Change of Control.
6.7 No Restrictions on any Portion of Total Payments Determined to
be Excess Parachute Payments. Notwithstanding that any payment or benefit
received or to be received by a Participant in connection with a Change of
Control of Valero, or the termination of his employment by a Company, would
not be deductible, whether in whole or in part, by a Company or any affiliated
company, as a result of Section 280G of the Code, the benefits payable under
this Plan shall nevertheless not be reduced.
6.8 Benefits Upon Re-employment. If a former employee who is
receiving benefit payments under this Plan is re-employed by the Company, the
payment of the benefit will continue during his period of re-employment. The
re-employed former employee's benefit will not be changed as a result of his
re-employment.
<PAGE>
ARTICLE VII
ADMINISTRATION
7.1 Committee Appointment. The members of the Compensation
Committee of the Board of Directors shall serve as the Committee; provided,
that the Board of Directors will have the sole discretion to remove any one or
more Committee members and appoint one or more replacement or additional
Committee members from time to time. Each Committee member will serve until
his or her resignation or removal.
7.2 Committee Organization and Voting. The Committee will select
from among its members a chairman who will preside at all of its meetings and
will elect a secretary without regard to whether that person is a member of
the Committee. The secretary will keep all records, documents and data
pertaining to the Committee's supervision and administration of this Plan. A
majority of the members of the Committee will constitute a quorum for the
transaction of business and the vote of a majority of the members present at
any meeting will decide any question brought before the meeting. In addition,
the Committee may decide any question by unanimous consent. A member of the
Committee who is also a Participant will not vote or act on any matter
relating solely to himself.
7.3 Powers of the Committee. The Committee will have the exclusive
responsibility for the general administration of this Plan according to the
terms and provisions of this Plan and will have all powers necessary to
accomplish those purposes, including but not by way of limitation the right,
power and authority:
(a) to make rules and regulations for the administration of this
Plan;
(b) to construe all terms, provisions, conditions and limitations of
this Plan;
(c) to correct any defect, supply any omission or reconcile any
inconsistency that may appear in this Plan;
(d) to determine all controversies relating to the administration of
this Plan, including but not limited to:
(1) differences of opinion arising between a Company and a
Participant except when the difference of opinion relates to the entitlement
to, the amount of or the method or timing of payment of a benefit affected by
a Change of Control, in which event it shall be decided only pursuant to
arbitration as set forth in Section 11.3; and
(2) any question it deems advisable to determine in order to
promote the uniform administration of this Plan for the benefit of all parties
at interest; and
(e) to delegate, without limitation, by written notice to Valero's
Chief Financial Officer, the Trustee or any other designee, powers of
investment and administration as well as those clerical and recordation duties
of the Committee, as it deems necessary or advisable for the proper and
efficient administration of this Plan.
7.4 Committee Discretion. The Committee in exercising any power or
authority granted under this Plan or in making any determination under this
Plan may use its sole discretion and judgment. Any decision made or any act
or omission by the Committee in good faith shall be final and binding on all
parties and, except as otherwise set forth in Sections 6.4, 6.5 and 7.3(d)(1),
shall not be subject to de novo review.
7.5 Reimbursement of Expenses. The Committee will serve without
compensation for their services but will be reimbursed by Valero for all
reasonable expenses properly and actually incurred in the performance of their
duties under this Plan.
7.6 Reliance Upon Information. The Committee will not be liable for
any decision or action taken in good faith in connection with the
administration of this Plan. Without limiting the generality of the
foregoing, any decision or action taken by the Committee when it relies upon
information supplied it by any officer of the Company, the Company's legal
counsel, the Company's actuary, the Company's independent accountants or other
advisors in connection with the administration of this Plan will be deemed to
have been taken in good faith.
7.7 Approval of Benefit Modifications. The Chairman of the Board
and Chief Executive Officer ("CEO") of Valero shall have authority to approve
enhancements to the Credited Service, or other modifications to the benefits,
of any Participant or prospective Participant under the Plan in connection
with the employment, retention, retirement or termination of a Participant;
provided however, that any such modification made with respect to the benefits
of the CEO or President of Valero shall be recommended to and approved by
Valero's Board of Directors.
<PAGE>
ARTICLE VIII
ADOPTION BY SUBSIDIARIES
8.1 Procedure for and Status After Adoption. Any Subsidiary of
Valero at the date of adoption of this Plan, and any entity becoming a
Subsidiary of Valero after such date of adoption, may adopt this Plan by
appropriate action of its board of directors or other governing body. Any
power reserved under this Plan to the Company may be exercised separately by
each such Subsidiary adopting the Plan; provided, however, that powers
reserved under this Plan to the Board of Directors or the Committee shall be
exercised only by the Board of Directors of Valero or Committee thereof. Each
Subsidiary adopting the Plan delegates to Valero administrative responsibility
for the Plan. However, Valero shall allocate the costs of Plan benefits among
the Companies in any reasonable manner such that each company shall bear the
costs of participation by those Participants who are or were employees of such
Company. Each Subsidiary, by adopting this Plan, and in consideration of the
like undertakings of the other adopting Subsidiaries, agrees that the
obligations and liabilities of the Company(ies) for the payment of all
benefits hereunder shall be the joint and several obligations of each Company
adopting the Plan, not solely of the Company employing or previously employing
a Participant. Accordingly, each such adopting Subsidiary agrees that, to the
extent permitted under Section 10.4, each Participant shall have recourse and
a right of action to enforce benefits payable under this Plan against any and
all Companies contemporaneously participating in the Plan during the period of
such Participant's Credited Service.
8.2 Termination of Participation By Adopting Subsidiary. Any
Subsidiary adopting this Plan may, by appropriate action of its board of
directors, terminate its participation in this Plan. The Committee may, in
its discretion, also terminate a Subsidiary's participation in this Plan at
any time. The termination of the participation in this Plan by a Subsidiary
will not, however, affect the rights of any Participant who is working or has
worked for the Subsidiary as to benefits previously vested under Article III
of this Plan.
<PAGE>
ARTICLE IX
AMENDMENT AND/OR TERMINATION
9.1 Amendment or Termination of the Plan. The Board of Directors
may amend or terminate this Plan at any time by an instrument in writing
without the consent of any Company.
9.2 No Retroactive Effect on Annual Benefits. No amendment will
affect the rights of any Participant to the Retirement benefit provided in
Article IV previously accrued by the Participant or will change a
Participant's rights under any provision relating to a Change of Control after
a Change of Control has occurred without his consent. However, the Board of
Directors retains the right at any time to change in any manner the Retirement
benefit provided in Article IV but only as to accruals after the date of the
amendment.
9.3 Effect of Change of Control. In the event of a Change of
Control of the Company, this Plan shall automatically terminate effective as
of the Change of Control. The Accrued Benefit of each Participant shall be
paid out in accordance with the provisions of Section 9.4, as soon as
administratively practicable following the Change of Control.
9.4 Effect of Termination. If this Plan is terminated, whether as a
result of a Change of Control or otherwise, then (i) no Surviving Spouse
benefit will be provided to the Surviving Spouse of a Participant dying on or
after such date of termination, and no further Retirement benefit will accrue,
and (ii) all Plan Participants in active employment of a Company (including
Participants whose Accrued Benefit is frozen pursuant to Section 2.2) as well
as Retired Participants shall become fully vested and the Accrued Benefit
payable to each affected current, frozen or Retired Participant shall be
determined as of such date of termination and shall be paid in an amount
Actuarially Equivalent to the affected current, frozen or Retired
Participant's Accrued Benefit payable in a lump sum payment as soon as
administratively practicable following the Plan's termination.
<PAGE>
ARTICLE X
FUNDING
10.1 Payments Under This Plan are the Obligation of the Company. As
set forth in Section 8.1, the Company(ies) are jointly and severally liable to
pay the benefits due the Participants under this Plan; however should it fail
to do so when a benefit is due, the benefit will be paid by the Trustee of the
Trust. In any event, if the Trust fails to pay for any reason, the
Company(ies) remain jointly and severally liable for the payment of all
benefits provided by this Plan.
10.2 Plan May Be Funded Through Life Insurance Owned by the Company
or a Rabbi Trust. It is specifically recognized that any Company may, but is
not required to, purchase life insurance so as to accumulate assets sufficient
to fund the obligations of any Company under this Plan and that the Company
may, but is not required to contribute any policy or policies it may purchase
and any amount it finds desirable to the Trust or any other trust established
to accumulate assets sufficient to fund the obligations of all of the
Companies adopting this Plan. However, under all circumstances, the
Participants will have no rights to any of those policies; and, likewise,
under all circumstances, the rights of the Participants to the assets held in
the Trust will be no greater than the rights expressed in this agreement or
the Trust Agreement. Nothing contained in the Trust Agreement will constitute
a guarantee by any Company that assets of the Company transferred to the Trust
will be sufficient to pay any benefits under this Plan or would place the
Participant in a secured or priority position with respect to other creditors
should any Company become insolvent or bankrupt. The Trust Agreement as well
as any other agreement prepared to fund the Company's obligations under this
Plan must specifically set out these principles so it is clear in that Trust
Agreement that the Participants in this Plan are only unsecured general
creditors of the Company in relation to their benefits under this Plan.
10.3 Required Funding of Rabbi Trust. Although it is specifically
recognized that Participants have no secure or priority position with respect
to other creditors should any Company become insolvent or bankrupt with regard
to those assets transferred by the Company to the Trust, the Company
nevertheless agrees to fund the Trust on an actuarially sound basis so as to
ensure that at all times assets within the Trust equal or exceed the Actuarial
Equivalent of Accrued Benefits of all Participants under the Plan, assuming
the Accrued Benefits to be fully vested (whether they are or not). As of the
end of each Plan Year, the Company shall cause the actuary who last performed
the annual actuarial evaluation of the Valero Pension Plan, to determine the
Actuarial Equivalent of the Accrued Benefits of all Plan Participants,
assuming the Accrued Benefits to be fully vested (whether they are or not) as
of the end of the preceding Plan Year. This annual determination shall be
performed by the actuary, as soon as practicable following the close of the
Plan Year, and the actuary shall prepare and provide to the Company a written
report detailing the Accrued Benefits of the Plan Participants. The Company,
within 60 days of receipt of the written report from the actuary shall
contribute to the Trust such assets that it may choose in its sole discretion
in an amount necessary to ensure that the sum of (i) the fair market value of
the Trust assets as of the end of such preceding Plan Year, and (ii) the fair
market value of such contribution, equals or exceeds the Actuarial Equivalent
of the Accrued Benefits of all Participants so reported, assuming the Accrued
Benefits to be fully vested (whether they are or not) as of the end of the
prior Plan Year. All Plan Participants shall be entitled to a copy of the
report prepared by the actuary and likewise shall be furnished a schedule of
Trust assets reflecting the Company's satisfaction of its funding obligation
under this Section 10.3, such report to be furnished to each Plan Participant
within 30 days following the due date of the Company's contribution to the
Trust for the Plan Year, if any may be required for the particular Plan Year.
10.4 Reversion of Excess Assets. Assets held pursuant to the Trust
shall not be loaned to any Company. However, any adopting Company may, at any
time, request the actuary, who last performed the annual actuarial valuation
of the Valero Pension Plan, to determine the Actuarial Equivalent of the
Accrued Benefits, assuming the Accrued Benefits to be fully vested (whether
they are or not), as of the end of the Plan Year coincident with or last
preceding the request, of all Participants and Surviving Spouses of deceased
Participants for which all Companies are or will be obligated to make payments
under this Plan. If the fair market value of the assets held in the Trust, as
determined by the Trustee as of that same date, exceeds the Actuarial
Equivalent of the Accrued Benefits of all Participants and Beneficiaries by
not less than 25%, then Valero may direct the Trustee to return to Valero, for
the prorata benefit of the appropriate Company(ies) its proportionate part of
the assets which are in excess of 125% of the Actuarial Equivalent of the
Accrued Benefits. Each Company's share of the excess assets will be allocated
among the Companies by Valero in any reasonable manner. If there has been a
Change of Control, all assets held in the Trust following the distribution
required pursuant to Section 9.3 shall revert to the Company(ies).
10.5 Repurchase of Valero Stock. In order to facilitate
diversification of Plan assets, Valero shall be entitled, from time to time,
upon notice to the Trustee, to repurchase shares of Valero equity securities
held in the Trust. Such repurchases shall be made for cash or in exchange for
other assets having a fair market value, as determined by the Trustee, equal
to the fair market value of such Valero securities at such date of purchase.
10.6 Participants Must Rely Only on General Credit of the Companies.
It is also specifically recognized by both the Companies and the Participants
that this Plan is only a general corporate commitment and that each
Participant must rely upon the general credit of the Companies for the
fulfillment of their obligations under this Plan. Under all circumstances the
rights of Participants to any asset held by a Company will be no greater than
the rights expressed in this Plan. Nothing contained in this Plan will
constitute a guarantee by any Company that the assets of such Company (or
Companies) will be sufficient to pay any benefits under this Plan or would
place the Participant in a secured or priority position with respect to other
creditors. Neither this Plan nor the Trust creates any lien, claim,
encumbrance, right, title or other interest of any kind in any Participant in
any asset held by any Company, contributed to any such Trust or otherwise
designated to be used for payment of any of its obligations created in this
Plan. No policy or other specific asset of the Company has been or will be
set aside, or will in any way be transferred to the Trust or will be pledged
in any way for the performance of the Companies' obligations under this Plan
which would remove the policy or asset from being subject to the general
creditors of the Companies.
<PAGE>
ARTICLE XI
MISCELLANEOUS
11.1 Responsibility for Distributions and Withholding of Taxes.
Valero shall calculate the amount of any distribution payable to a Participant
hereunder, and the amounts of any deductions required with respect to federal,
state or local tax withholding, and shall withhold or cause the same to be
withheld. However, any and all taxes payable with respect to any distribution
or benefit hereunder shall be the sole responsibility of the Participant, not
of Valero or any Company, whether or not Valero or any Company shall have
withheld or collected from the Participant any sums required to be so withheld
or collected in respect thereof, and whether or not any sums so withheld or
collected shall be sufficient to provide for any such taxes.
11.2 Limitation of Rights. Nothing in this Plan will be construed:
(a) to give a Participant any right with respect to any benefit
except in accordance with the terms of this Plan or an agreement modifying
rights under this Plan;
(b) to limit in any way the right of the Company to terminate a
Participant's employment with the Company at any time;
(c) to evidence any agreement or understanding, expressed or
implied, that the Company will employ a Participant in any particular position
or for any particular remuneration; or
(d) to give a Participant or any other person claiming through him
any interest or right under this Plan other than that of any unsecured general
creditor of the Company.
11.3 Arbitration of Disputes
A. It is agreed that any and all disputes, claims, (whether tort,
contract, statutory or otherwise) and/or controversies which relate, in any
manner to the Plan shall be submitted to final and binding arbitration. The
claims covered by this agreement to arbitrate include, but are not limited to,
those which relate to the following:
a. The application and interpretation of the Plan.
b. Forfeitures pursuant to Section 6.5 or 6.6 of the Plan.
c. Eligibility for and the calculation of benefits from the Plan.
d. That in interpreting or applying the provisions of the Plan, the
Company has treated the Participant unfairly or discriminated against the
Participant in connection with a work-related injury, disease or death or
claim for benefits under the Plan in violation of the Texas Commission on
Human Rights Act, Title VII of the Civil Rights Act of 1964, as amended, The
Equal Pay Act of 1963, as amended, the Americans with Disabilities Act, the
Age Discrimination in Employment Act of 1967, as amended, the Rehabilitation
Act of 1973, as amended, or any other provision forbidding discrimination in
employment on any basis.
e. That the Company, in interpreting or applying the provisions of
the Plan breached any contract or covenant (express or implied), committed a
tort or act of discrimination (including, but not limited to race, sex,
religion, national origin, age, marital status, or medical condition, handicap
or disability), or violated any federal, state or other governmental law,
statute, regulation, or ordinance.
f. That the Company has discharged or in any manner discriminated
against the Participant because the Participant in good faith filed a claim,
hired a lawyer to represent him or her in a claim, instituted, or caused to be
instituted, in good faith, any proceeding under the Plan or the TWCA, or has
testified in any such proceeding.
B. This Arbitration provision is expressly made pursuant to and shall by
the Federal Arbitration Act, 9 U.S.C. section 1-14. Except to the extent all
arbitration proceedings shall be conducted in accordance with the Rules. The
parties hereto agree that, pursuant to Section 9 of the Federal Arbitration
Act, a judgment of the United States District Court for the Western District
of Texas, San Antonio Division, or of any other court of competent
jurisdiction, may be entered upon an award made pursuant to arbitration.
C. The neutral arbitrator ("Arbitrator") shall be appointed in the
manner prescribed in Rule 13 of the Rules. The decision of the Arbitrator
selected thereunder shall be final and binding on all parties.
D. Except as may be modified by the Arbitrator for good cause shown, the
following procedures shall be followed in addition to those set forth within
the Rules themselves. (1) At least twenty (20) days before the arbitration,
the parties must exchange list of witnesses, including any experts, and copies
of all exhibits intended to be used at the arbitration. Except for good
cause, the Arbitrator may refuse to allow into evidence the testimony of any
witness not timely disclosed. In addition, except for good cause, the
arbitrator may exclude from evidence any exhibit not previously tendered to
the opposing party in a timely fashion. (2) Each party may take the deposition
of one individual and any or all expert witnesses designated by another party.
Additional discovery, including but not limited to interrogatories and request
for production of documents, medical or psychological examinations, may be
had, upon a showing of substantial need, where the Arbitrator so orders. (3)
The Arbitrator shall apply the substantive law (and the law of remedies, if
applicable) of the state of Texas, or federal law or both, as applicable to
the claim(s) asserted. (4) The Arbitrator shall have the authority to
entertain a motion to dismiss and/or a motion for summary judgment by any
party and shall apply the standards governing such motions under the Federal
Rules of Civil Procedure. (5) Rule 31 of the Rules is amended to allow for the
use of sworn depositions taken in conformity with the Federal Rules of Civil
Procedure. (6) The results of the arbitration shall be confidential and shall
not be publicly released or reported by the Arbitrator or by either party.
E. The Participant shall pay one half of the fees and cost of the
Arbitrator. Funds or other appropriate security shall be posted by each party
for its share of the Arbitrator's fee, in an amount and manner determined by
the Arbitrator, ten (10) days before the first day of hearing. Each party
shall pay for its own cost and attorneys fees, if any. However, if any party
prevails on a statutory claim which affords the prevailing party attorney's
fees, or if there is a written agreement providing for fees, the Arbitrator
may award reasonable fees to the prevailing party.
F. This Agreement to arbitrate shall survive the termination of
Participant's employment. It can only be revoked or modified by a writing
signed by the parties which specifically states an intent to revoke or modify
this Agreement.
G. Should one or more provisions of this paragraph 11.3, supra be
rendered or declared invalid by reason of any existing or subsequently enacted
legislation, or by a decree of a court of competent jurisdiction, such
invalidation of such provision or provisions hereof shall not affect the
remaining portions of this agreement to arbitrate.
11.4 Distributions to Incompetents. Should a Participant or a Surviving
Spouse become incompetent, the Committee is authorized to pay the funds due to
the guardian or conservator of the incompetent Participant or Surviving Spouse
or directly to the Participant or Surviving Spouse or to apply those funds for
the benefit of the incompetent Participant or Surviving Spouse in any manner
the Committee determines in its sole discretion.
11.5 Nonalienation of Benefits. No right or benefit provided in this Plan
will be transferable by the Participant except, upon his death, to a Surviving
Spouse as provided in this Plan. No right or benefit under this Plan will be
subject to anticipation, alienation, sale, assignment, pledge, encumbrance or
charge, and any attempt to anticipate, alienate, sell, assign, pledge,
encumber, or charge the same will be void. No right or benefit under this
Plan will in any manner be liable for or subject to any debts, contracts,
liabilities or torts of the person entitled to such benefits. If any
Participant or any Surviving Spouse becomes bankrupt or attempts to
anticipate, alienate, sell, assign, pledge, encumber or charge any right or
benefit under this Plan, that right or benefit will, in the discretion of the
Committee, cease. In that event, the Committee may have the Company hold or
apply the right or benefit or any part of it to the benefit of the Participant
or Surviving Spouse, his or her spouse, children or other dependents or any of
them in any manner and in any proportion the Committee believes to be proper
in its sole and absolute discretion, but is not required to do so.
11.6 Severability. If any term, provision, covenant or condition of this
Plan is held to be invalid, void or otherwise unenforceable, the rest of this
Plan will remain in full force and effect and will in no way be affected,
impaired or invalidated.
11.7 Notice. Any notice or filing required or permitted to be given to
the Committee or a Participant will be sufficient if in writing and hand
delivered or sent by U.S. mail to the principal office of the Company or to
the residential mailing address of the Participant. Notice will be deemed to
be given as of the date of hand delivery or if delivery is by mail, as of the
date shown on the postmark.
11.8 Gender and Number. If the context requires it, words of one gender
when used in this Plan will include the other genders, and words used in the
singular or plural will include the other.
11.9 Governing Law. The Plan will be construed, administered and governed
in all respects by the laws of the State of Texas.
11.10 Effective Date. This amendment and restatement of the Plan will
be operative and effective on January 1, 1996.
IN WITNESS WHEREOF, the Company has executed this document on this ______
day of _____________________________, 1996, amending and restating the Plan
effective January 1, 1996.
VALERO ENERGY CORPORATION
By
VALERO ENERGY CORPORATION
EXECUTIVE STOCK INCENTIVE PLAN
Amended and Restated as of January 1, 1996
<PAGE>
Table of Contents
SECTION 1. Purpose. . . . . . . . . . . . . . . . . . . . . . .
SECTION 2. Definitions. . . . . . . . . . . . . . . . . . . . .
SECTION 3. Administration.. . . . . . . . . . . . . . . . . . .
SECTION 4. Shares Available For Awards. . . . . . . . . . . . .
Shares Available. . . . . . . . . . . . . . . . . . . . . .
Sources of Shares Deliverable Under Awards. . . . . . . . .
Adjustments . . . . . . . . . . . . . . . . . . . . . . . .
Share Counting. . . . . . . . . . . . . . . . . . . . . . .
SECTION 5. Eligibility. . . . . . . . . . . . . . . . . . . . .
SECTION 6. Awards.. . . . . . . . . . . . . . . . . . . . . . .
Options . . . . . . . . . . . . . . . . . . . . . . . . . .
Exercise Price . . . . . . . . . . . . . . . . . . . .
Incentive Stock Options. . . . . . . . . . . . . . . .
Stock Appreciation Rights . . . . . . . . . . . . . . . . .
Grant Price. . . . . . . . . . . . . . . . . . . . . .
Other Terms and Conditions . . . . . . . . . . . . . .
Restricted Stock. . . . . . . . . . . . . . . . . . . . . .
Dividends. . . . . . . . . . . . . . . . . . . . . . .
Registration . . . . . . . . . . . . . . . . . . . . .
Forfeiture . . . . . . . . . . . . . . . . . . . . . .
Performance Awards. . . . . . . . . . . . . . . . . . . . .
Terms and Conditions . . . . . . . . . . . . . . . . .
Payment of Performance Awards. . . . . . . . . . . . .
Stock Compensation. . . . . . . . . . . . . . . . . . . . .
Other Stock-Based Awards. . . . . . . . . . . . . . . . . .
General . . . . . . . . . . . . . . . . . . . . . . . . . .
Grants . . . . . . . . . . . . . . . . . . . . . . . .
Forms of Payment by Company. . . . . . . . . . . . . .
Limits on Transfer . . . . . . . . . . . . . . . . . .
Term of Awards . . . . . . . . . . . . . . . . . . . .
Share Certificates . . . . . . . . . . . . . . . . . .
Delivery of Shares or other Securities and
Payment by Participant of Consideration. . . . . . .
Termination of Employment. . . . . . . . . . . . . . .
Award Agreements . . . . . . . . . . . . . . . . . . .
Exercise of Option or SAR Awards. . . . . . . . . . . . . .
Notice . . . . . . . . . . . . . . . . . . . . . . . .
Payment. . . . . . . . . . . . . . . . . . . . . . . .
Tax Payment Election . . . . . . . . . . . . . . . . .
Payment with Stock . . . . . . . . . . . . . . . . . .
Valuation. . . . . . . . . . . . . . . . . . . . . . .
Rights as Stockholder. . . . . . . . . . . . . . . . .
SECTION 7. Amendment and Termination. . . . . . . . . . . . . .
Amendments to the Plan. . . . . . . . . . . . . . . . . . .
Amendments to Awards. . . . . . . . . . . . . . . . . . . .
Unusual or Nonrecurring Events. . . . . . . . . . . . . . .
SECTION 8. Change Of Control. . . . . . . . . . . . . . . . . .
Nonacceleration . . . . . . . . . . . . . . . . . . . . . .
Effect. . . . . . . . . . . . . . . . . . . . . . . . . . .
Defined . . . . . . . . . . . . . . . . . . . . . . . . . .
SECTION 9. General Provisions.. . . . . . . . . . . . . . . . .
No Rights to Awards . . . . . . . . . . . . . . . . . . . .
Delegation. . . . . . . . . . . . . . . . . . . . . . . . .
Withholding . . . . . . . . . . . . . . . . . . . . . . . .
No Limit on Other Compensation Arrangements . . . . . . . .
No Right to Employment. . . . . . . . . . . . . . . . . . .
Governing Law . . . . . . . . . . . . . . . . . . . . . . .
Severability. . . . . . . . . . . . . . . . . . . . . . . .
Other Laws. . . . . . . . . . . . . . . . . . . . . . . . .
No Trust or Fund Created. . . . . . . . . . . . . . . . . .
No Fractional Shares. . . . . . . . . . . . . . . . . . . .
Headings. . . . . . . . . . . . . . . . . . . . . . . . . .
Construction. . . . . . . . . . . . . . . . . . . . . . . .
SECTION 10. Effective Date of the Plan. . . . . . . . . . . . .
SECTION 11. Term of the Plan. . . . . . . . . . . . . . . . . .
<PAGE>
VALERO ENERGY CORPORATION
EXECUTIVE STOCK INCENTIVE PLAN
SECTION 1. Purpose.
The purposes of the Valero Energy Corporation Executive Stock Incentive Plan
(the "Plan") are to promote the interests of Valero Energy Corporation
(together with any successor thereto, the "Company") and its stockholders by
(i) attracting and retaining executive personnel and other key employees of
the Company and its affiliates; (ii) motivating these employees by using
performance-related incentives to achieve longer range performance goals; and
(iii) enabling these employees to participate in the long-term growth and
financial success of the Company.
SECTION 2. Definitions.
As used in the Plan, the following terms shall have the meanings set forth
below:
(a) "Affiliate" shall mean (i) any entity that, directly or through one or
more intermediaries, is controlled by the Company and (ii) any entity in which
the Company has a significant equity interest, as determined by the Committee.
(b) "Award" shall mean any Option, Stock Appreciation Right, Restricted
Stock, Performance Award, Stock Compensation Award or Other Stock-Based Award.
(c) "Award Agreement" shall mean any written agreement, contract, or other
instrument or document evidencing any Award, which may, but need not, be
executed or acknowledged by a Participant.
(d) "Board" shall mean the Board of Directors of the Company.
(e) "Change of Control" is defined in Section 8(b) of the Plan.
(f) "Code" shall mean the Internal Revenue Code of 1986, as amended from time
to time.
(g) "Committee" or "Compensation Committee" shall mean the Compensation
Committee of the Board as further described in Section 3 of the Plan.
(h) "Employee" shall mean any employee of the Company or of any Affiliate.
(i) "Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.
(j) "Exercise Notice" is defined in Section 6(h) of the Plan.
(k) "Fair Market Value" shall mean the average of the "high" and "low"
reported sales price per Share (as reported in the New York Stock Exchange -
Composite Transactions listing) as of the relevant measuring date, or if there
are no sales on the New York Stock Exchange on that measuring date, then as of
the next following day on which there were sales.
(l) "Incentive Stock Option" shall mean an option granted under Section 6(a)
of the Plan that is intended to meet the requirements of Section 422 of the
Code or any successor provision thereto.
(m) "Non-Qualified Stock Option" shall mean an option granted under Section
6(a) of the Plan that is not intended to be an Incentive Stock Option.
(n) "Notice Date" is defined in Section 6(h) of the Plan.
(o) "Option" shall mean an Incentive Stock Option or a Non-Qualified Stock
Option.
(p) "Other Stock-Based Award" shall mean any right granted under Section 6(f)
of the Plan.
(q) "Participant" shall mean any Employee granted an Award under the Plan.
(r) "Performance Award" shall mean any right granted under Section 6(d) of
the Plan.
(s) "Person" shall mean any individual, corporation, partnership,
association, joint-stock company, trust, unincorporated organization,
government or political subdivision thereof or other entity.
(t) "Restricted Stock" shall mean any Share, prior to the lapse of
restrictions thereon, granted under Section 6(c) of the Plan.
(u) "Rule 16b-3" shall mean Rule 16b-3 promulgated by the SEC under the
Exchange Act, or any successor rule or regulation thereto as in effect from
time to time.
(v) "SAR" or "stock appreciation right" shall mean the right, subject to the
provisions of this Plan, to receive a payment in cash equal to the difference
between the specified exercise price of the SAR and the Fair Market Value of
one share of the Common Stock.
(w) "SEC" shall mean the Securities and Exchange Commission, or any successor
thereto.
(x) "Settlement Date" is defined in Section 6(h) of the Plan.
(y) "Share" or "Shares" shall mean the common stock of the Company, $1.00 par
value, and other securities or property that may become the subject of Awards
or become subject to Awards pursuant to an adjustment made under Section 4(b)
of the Plan.
(z) "Stock Compensation" shall mean any right granted under Section 6(e) of
the Plan.
(aa) "Tax Payment" is defined in Section 6(h) of the Plan.
SECTION 3. Administration.
The Plan shall be administered by a committee of not less than three directors
of the Company, which Committee shall be, except as hereinafter set forth, the
Compensation Committee. In the event the Compensation Committee shall have
fewer than three members, or if fewer than three members of the Compensation
Committee shall be eligible to act with respect to this Plan, then additional
members of the Board of Directors shall be appointed by the Board to act with
and as a part of the Compensation Committee for purposes of administering this
Plan so that the committee administering this Plan shall consist of at least
three members of the Board of Directors. No person shall serve on or act as a
member of the committee administering this Plan who would be ineligible to
serve on the Committee under Rule 16b-3. Subject to the terms of the Plan and
applicable law, and in addition to other express powers and authorizations
conferred on the Committee by the Plan, the Committee shall have full power
and authority to:
(a) designate Participants;
(b) determine the type or types of Awards to be granted to an eligible
Employee;
(c) determine the number of Shares to be covered by, or with respect to which
payments, rights, or other matters are to be calculated in connection with,
Awards;
(d) determine the terms and conditions of any Award and any subsequent
amendments thereto;
(e) determine to what extent and under what circumstances Awards may be
settled or exercised in cash, Shares, other securities, other Awards or other
property, or cancelled, forfeited, or suspended, and the method or methods by
which Awards may be settled, exercised, cancelled, forfeited, or suspended;
(f) determine to what extent and under what circumstances any amount payable
(in whatever form) with respect to an Award may be deferred either
automatically or at the election of the holder thereof or the Committee;
(g) provide for the acceleration of any time period relating to the vesting,
exercise or realization of any Award so that the Award may be exercised or
realized in full on or before a date fixed by the Committee; the Committee
may, in its discretion, include other provisions and limitations in any Award
Agreement as the Committee may deem equitable and in the best interests of the
Company;
(h) interpret and administer the Plan and any instrument or agreement
relating to the Plan, including Award Agreements.
(i) establish, amend, suspend, or waive any rules or regulations regarding
the Plan, and appoint any agent the Committee shall deem appropriate for the
proper administration of the Plan; and
(j) make any other determination and take any other action that the Committee
deems necessary or desirable for the administration of the Plan. Unless
otherwise expressly provided in the Plan, all designations, determinations,
interpretations, and other decisions with respect to the Plan or any Award
shall be within the sole discretion of the Committee, may be made at any time,
and shall be final, conclusive, and binding upon all Persons, including the
Company, any Affiliate, any Participant, any holder or beneficiary of any
Award, any stockholder of the Company and any Employee.
SECTION 4. Shares Available For Awards.
(a) Shares Available. Subject to adjustment as provided in Section 4(c), the
number of Shares with respect to which Awards may be granted under the Plan
shall be 2,100,000. No more than 750,000 of the Shares available for Awards
shall be issued as Restricted Stock. The maximum aggregate number of Shares
available for Options and SARs to any one Participant during any twelve-month
period is equal to 500,000 or any lesser amount that will enable the Company
to comply with the deductibility requirements of Section 162(m) of the Code
and the rules promulgated thereunder as determined by the Committee.
(b) Sources of Shares Deliverable Under Awards. Any Shares delivered
pursuant to an Award may consist, in whole or in part, of authorized and
unissued Shares or treasury Shares.
(c) Adjustments. In the event that the Committee determines that any
dividend or distribution (whether in the form of cash, Shares, other
securities, or other property), recapitalization, stock split, reverse stock
split, reorganization, merger, consolidation, split-up, spin-off, combination,
repurchase, exchange of Shares or other securities of the Company, issuance of
warrants or other rights to purchase Shares or other securities of the
Company, or other similar corporate transaction or event affects the Shares so
that an adjustment is determined by the Committee to be appropriate in order
to prevent dilution or enlargement of the benefits or potential benefits
intended to be made available under the Plan, then the Committee shall adjust,
in such manner as it may deem equitable (i) any or all of the number and type
of Shares (or other securities or property) with respect to which Awards may
be granted, (ii) any or all of the number and type of Shares (or other
securities or property) subject to outstanding Awards, and/or (iii) the grant
or exercise price with respect to any Award or, if deemed appropriate, make
provision for a cash payment to the holder of an outstanding Award; provided
in each case that with respect to Awards of Incentive Stock Options and Awards
intended to qualify as performance-based compensation under Section
162(m)(4)(C) of the Code, no adjustment shall be authorized to the extent that
the adjustment would cause the Plan to violate Section 422(b)(1) of the Code
or would cause any part of the Award to fail to qualify under Section 162(m)
of the Code, as the case may be, or any successor provisions thereto; and
provided further, that the number of Shares subject to any Award denominated
in Shares shall always be a whole number.
(d) Share Counting. For purposes of determining at any time the number of
Shares that remain available for grant under this Plan, the number of Shares
then authorized pursuant to Section 4 of the Plan shall be (i) decreased by
the "gross" number of Shares issued pursuant to exercised Awards, (ii)
decreased by the "gross" number of Shares issuable pursuant to outstanding
unexercised Awards, and (iii) increased by the difference between the "gross"
number of Shares and the "net" number of Shares issued pursuant to exercised
Awards. As used herein, the "gross" number of Shares refers to the maximum
number of Shares that may be issued upon the exercise of an Award. The "net"
number of Shares refers to the net number of Shares actually issued to an
Award holder upon exercise of an Award, after reducing the "gross" number of
Shares by the number of Shares tendered back to the Company in payment of the
Award's exercise price or for the satisfaction of any Tax Payment obligation.
If a Participant shall forfeit, voluntarily surrender or otherwise permanently
lose his or her right to exercise an Award under any provision of this Plan or
otherwise, or if any Award shall terminate or expire pursuant to its terms,
the Shares subject to the Award shall once again be available to be awarded
and sold under this Plan pursuant to a new Award granted hereunder.
SECTION 5. Eligibility.
Any Employee who is not a member of the Committee, including any officer or
employee-director of the Company or any affiliate, shall be eligible to be
designated a Participant.
SECTION 6. Awards.
(a) Options. In determining that an eligible Employee shall be granted an
Option, the Committee shall determine, subject to the provisions of the Plan,
the number of Shares to be covered by each Option, the purchase price therefor
and the conditions and limitations applicable to the exercise of the Option,
including the following terms and conditions and any additional terms and
conditions not inconsistent with the provisions of the Plan as the Committee
shall determine.
(i) Exercise Price. The purchase price per Share purchasable under an
Option shall be determined by the Committee at the time each Option is
granted; provided, that the purchase price per Share shall not be less than
100% of Fair Market Value on the date of grant.
(ii) Incentive Stock Options. The terms of any Incentive Stock Option
granted under the Plan shall comply in all respects with the provisions of
Section 422 of the Code, or any successor provision, and any regulations
promulgated thereunder.
(b) Stock Appreciation Rights. Subject to the provisions of the Plan, in
determining the Employees to whom SARs shall be granted, the Committee shall
determine the number of Shares to be covered by each SAR Award, the grant
price thereof and the conditions and limitations applicable to the exercise
thereof. SAR Awards shall be payable in cash only and may be granted in
tandem with another Award, in addition to another Award, or freestanding and
unrelated to another Award. SARs granted in tandem with or in addition to
another Award may be granted either at the same time as the other Award or at
a later time.
(i) Grant Price. The grant price of an SAR shall be determined by the
Committee.
(ii) Other Terms and Conditions. Subject to the terms of the Plan and
any applicable Award Agreement, the Committee shall determine, at or after the
grant of an SAR, the term, methods of exercise, and any other terms and
conditions of any SAR; provided that the Committee may not grant an SAR to any
Participant subject to Section 16 of the Exchange Act that is exercisable
earlier than six months from the date of its grant.
(c) Restricted Stock. Subject to the provisions of the Plan, in determining
the Employees to whom Restricted Stock shall be granted, the Committee shall
determine the number of Shares of Restricted Stock to be granted to each
Participant, the duration of the restriction period during which, and the
conditions under which, the Restricted Stock may be forfeited to the Company,
and the other terms and conditions of the Awards.
(i) Dividends. Unless otherwise determined by the Committee, a
Restricted Stock Award shall provide for the payment of dividends during its
restriction period. Dividends paid on Restricted Stock may be paid directly
to the Participant, may be subject to risk of forfeiture, and may be subject
to transfer restrictions during any period established by the Committee, all
as determined by the Committee in its discretion.
(ii) Registration. Any Restricted Stock may be evidenced in any manner
deemed appropriate by the Committee, including book-entry registration or the
issuance of stock certificates. If any stock certificate is issued with
respect to Restricted Stock, the certificate shall be registered in the name
of the Participant and may bear an appropriate legend referring to the terms,
conditions, and restrictions applicable to the Restricted Stock.
(iii) Forfeiture. Except as otherwise determined by the Committee, upon
termination of a Participant's employment (as determined under criteria
established by the Committee) for any reason during the applicable restriction
period, all Restricted Stock shall be forfeited by the Participant to the
Company without compensation therefor. However, when the Committee finds that
a waiver would be in the best interests of the Company, the Committee may
waive in whole or in part any or all remaining restrictions with respect to
the Restricted Stock held by the Participant whose employment is terminating.
Unrestricted Shares, evidenced in any manner as the Committee shall deem
appropriate, shall be issued to the holder of Restricted Stock promptly after
the applicable restrictions have lapsed or otherwise have been satisfied.
(d) Performance Awards. The Committee shall have authority to determine the
Employees who may receive a Performance Award, which shall consist of a right,
(A) denominated or payable in cash, Shares, other securities or other property
(including Restricted Stock), and (B) that shall confer on the holder thereof,
rights valued at an amount determined by the Committee and payable to or
exercisable by the holder thereof, in whole or in part, upon the achievement
of prescribed performance goals during prescribed performance periods as the
Committee shall establish.
(i) Terms and Conditions. Subject to the terms of the Plan and any
applicable Award Agreement, the Committee shall determine the performance
goals to be achieved during any performance period, the length of any
performance period, the amount of any Performance Award and the amount of any
payment or transfer to be made pursuant to any Performance Award.
(ii) Payment of Performance Awards. Performance Awards may be paid in a
lump sum or in installments following the close of the performance period or,
in accordance with procedures established by the Committee, on a deferred
basis.
(e) Stock Compensation. The Committee shall have authority to pay in Shares
all or any portion of the amounts payable under any compensation program of
the Company. The number and type of Shares to be distributed in lieu of the
cash compensation applicable to any Award, as well as the terms and conditions
of any bonus awards, shall be determined by the Committee.
(f) Other Stock-Based Awards. The Committee is hereby authorized to grant to
eligible Employees an "Other Stock-Based Award", which shall consist of a
right
(i) that is not an Award or right described in Section 6(a), (b), (c),
(d), or (e) above and
(ii) that is denominated or payable in, valued in whole or in part by
reference to, or otherwise based on or related to, Shares (including
securities convertible into Shares), as are deemed by the Committee to be
consistent with the purposes of the Plan; provided, that any such rights must
comply, to the extent deemed desirable by the Committee, with Rule 16b-3 and
applicable law. Subject to the terms of the Plan and any applicable Award
Agreement, the Committee shall determine the terms and conditions of any Other
Stock-Based Award.
(g) General.
(i) Grants. Awards may be granted, in the discretion of the Committee,
either alone or in addition to, in tandem with, or in substitution for any
other Award granted under the Plan or any award granted under any other plan
of the Company or any Affiliate. Awards granted in addition to or in tandem
with other Awards or awards granted under any other plan of the Company or any
Affiliate may be granted either at the same time as or at a different time
from the grant of other Awards or awards. The Committee may authorize the
grant of Awards prior to stockholder approval of the Plan, but any Award
granted by the Committee shall be contingent upon stockholder approval of the
Plan.
(ii) Forms of Payment by Company. Subject to the terms of the Plan and
of any applicable Award Agreement, payments or transfers to be made by the
Company or an Affiliate upon the grant, exercise or payment of an Award may be
made in any form as the Committee shall determine, including cash, Shares,
other securities, other Awards or other property, or any combination thereof,
and may be made in a single payment or transfer, in installments, or on a
deferred basis, in each case in accordance with rules and procedures
established by the Committee. These rules and procedures may include, without
limitation, provisions for the payment or crediting of reasonable interest on
installment or deferred payments.
(iii) Limits on Transfer.
(A) Each Award, and each right under any Award, shall be
exercisable only by the Participant during the Participant's lifetime, or if
permissible under applicable law, by the Participant's beneficiary or by an
immediate family member as a transferee receiving the Award pursuant to a gift
if the transfer is permitted under the terms of the Award Agreement.
(B) No Award and no right under any Award may be assigned,
alienated, pledged, attached, sold or otherwise transferred or encumbered by a
Participant otherwise than as provided in Paragraph (A) above or by will or by
the laws of descent and distribution and any purported assignment, alienation,
pledge, attachment, sale, transfer or encumbrance shall be void and
unenforceable against the Company or any Affiliate.
(iv) Term of Awards. The term of each Award shall be for the period
determined by the Committee; provided, that in no event shall the term of any
Incentive Stock Option exceed a period of ten years from the date of its
grant.
(v) Share Certificates. All certificates for Shares or other securities
of the Company or any Affiliate delivered under the Plan pursuant to any Award
or the exercise thereof shall be subject to all stop transfer orders and other
restrictions as the Committee may deem advisable under the Plan; the rules,
regulations, and other requirements of the SEC, and any stock exchange upon
which the Shares or other securities are then listed; and any applicable
federal or state laws. The Committee may cause a legend or legends to be put
on any stock certificates to make appropriate reference to applicable
restrictions.
(vi) Delivery of Shares or other Securities and Payment by Participant of
Consideration. No Shares or other securities shall be delivered pursuant to
any Award until payment in full of any amount required to be paid pursuant to
the Plan or the applicable Award Agreement is received by the Company.
Payment may be made in any form or method prescribed by the Committee,
including cash, Shares, other securities, other Awards or other property, or
any combination thereof; provided that the combined value, as determined by
the Committee, of all cash and cash equivalents and the Fair Market Value of
any Shares or other property tendered to the Company as of the date of such
tender, is at least equal to the full amount required to be paid.
(vii) Termination of Employment.
(A) Except as otherwise provided in the Plan, or otherwise
determined by the Committee on the date of grant and included in the Award
Agreement, an Award vests to and/or may be exercised by a Participant only
while the Participant is and has continually been since the date of the grant
of the Award an Employee. If a Participant's employment with the Company is
voluntarily terminated by the Participant (other than through retirement,
death or disability), then all unexercised Awards previously granted to that
Participant under the Plan shall lapse automatically and be forfeited 30 days
following the date of the Participant's termination of employment. If a
Participant's employment is terminated by the Company other than for "cause"
(as determined by the Company), then all unexercised Awards previously granted
to the Participant shall lapse and be forfeited by the Participant 90 days
after termination of employment.
(B) If a Participant's employment is terminated because of
retirement, death or total and permanent disability (with the determination of
disability to be made within the sole discretion of the Committee), any
unexercised Award held by the Participant shall remain outstanding according
to the Award's original terms or the Committee or, except with respect to a
Participant subject to Section 16 under the Exchange Act, the Chairman of the
Board and Chief Executive Officer of the Company, may prescribe new or
additional terms for the vesting, exercise or realization of the Award.
Absent any determination by the Committee to the contrary, any unexercised
Award held by a Participant whose employment is terminated because of
retirement, death or disability shall vest or become exercisable according to
the Award's original terms.
(C) In connection with the termination of any Participant from
employment with the Company, the Chairman of the Board and Chief Executive
Officer of the Company is authorized to determine which, if any, of the
foregoing provisions of this clause (vii) shall apply, such determination to
be binding upon the Company."
(viii) Award Agreements. Awards shall be evidenced by Award
Agreements having terms and conditions, not inconsistent with the Plan, as
prescribed by the Committee. Award Agreements need not be uniform.
(h) Exercise of Option or SAR Awards.
(i) Notice. Unless otherwise prescribed by the Committee, Awards may be
exercised only by written notice of exercise (the "Exercise Notice"), in the
form prescribed by the Committee, delivered to the Company to the Financial
Benefit Plan Administration Manager, and signed by the Participant, other
person acting on behalf of the Participant or transferee being entitled to
exercise the same. The date on which the Exercise Notice is delivered to the
Company shall be the "Notice Date." The Exercise Notice shall specify a date
(the "Settlement Date"), not less than five business days nor more than ten
business days following the Notice Date, upon which the Shares or other rights
shall be issued or transferred to the Participant (or other person entitled to
exercise the Award) and the Award's exercise price shall be paid to the
Company.
(ii) Payment. Unless otherwise prescribed by the Committee, on the
Settlement Date, the person exercising an Award shall tender to the Company
full payment for the Shares or other rights with respect to which the Award is
exercised, together with an additional amount, in cash, certified check,
cashier's check or bank draft approved by Valero, equal to the amount of any
taxes required to be collected or withheld by the Company in connection with
the exercise of the Award (the "Tax Payment").
(iii) Tax Payment Election. Subject to the approval of the
Committee, and to any rules and limitations as the Committee may adopt, a
person exercising an Award may make the Tax Payment in whole or in part by
electing, at or before the time of exercise of the Award, either (a) to have
the Company withhold from the number of Shares otherwise deliverable a number
of Shares whose Fair Market Value equals the Tax Payment, or (b) to deliver
certificates for other Shares owned by the person exercising the Award,
endorsed in blank with appropriate signature guarantee, having a Fair Market
Value equal to the amount otherwise to be collected or withheld. Following
any election to withhold Shares or deliver other Shares to make a Tax Payment,
the Committee shall have sole discretion to approve or disapprove the election
at any time prior to the Settlement Date. If the election is disapproved, the
Tax Payment shall be made in cash, or in any combination of cash and Shares as
the Committee may direct. If the Committee shall fail to disapprove the
election prior to the Settlement Date, the election will be deemed approved.
(iv) Payment with Stock. Subject to approval by the Committee, a person
exercising an Award for the receipt of Shares may pay for the Shares by
tendering to the Company other Shares legally and beneficially owned by that
person at the time of the exercise of the Award. If approved by the
Committee, this method of exercise may include use of a procedure whereby a
person exercising an Award may request that Shares received upon exercise of a
portion of an Award be automatically applied to satisfy the exercise price for
additional and increasingly larger portions of the Award. The certificate(s)
representing any Shares tendered in payment of an Award's exercise
price must be accompanied by a stock power duly executed with appropriate
signature guarantees. The Committee may, in its sole discretion, refuse any
tender of Shares in which case the Company shall promptly redeliver the Shares
to the person exercising the Award and notify the person of the refusal as
soon as practicable. In this event, the person may either (a) tender to the
Company on the Settlement Date the cash amount required to pay for the Award's
Shares, or (b) rescind the Exercise Notice. If the person elects to rescind
his or her Exercise Notice, the person may again (subject to the other terms
of this Plan) deliver an Exercise Notice with respect to the Award at any time
prior to its expiration date.
(v) Valuation. Any calculation with respect to a Participant's income,
required tax withholding or other matters required to be made by the Company
upon the exercise of an Award shall be made using the Fair Market Value of the
Shares on the Notice Date, whether or not the Exercise Notice is delivered to
the Company before or after the close of trading on that date, unless
otherwise specified by the Committee.
(vi) Rights as Stockholder. Except as provided in Section 6(c) of this
Plan, until the issuance of the stock certificate(s) for Shares purchased
hereunder (as evidenced by the appropriate entry on the books of the Company
or any authorized transfer agent of the Company), no right to vote or receive
dividends or any other rights as a stockholder of the Company shall exist with
respect to such Shares, notwithstanding the exercise of any Award. No
adjustment will be made for a dividend or other rights for which the record
date is prior to the date the stock certificates evidencing such Shares are
issued, except as otherwise provided in this Plan.
SECTION 7. Amendment and Termination.
Except to the extent prohibited by applicable law and unless otherwise
expressly provided in an Award Agreement or in the Plan:
(a) Amendments to the Plan. The Board may amend, alter, suspend,
discontinue, or terminate the Plan without the consent of any stockholder,
Participant, other holder or beneficiary of an Award, or other Person;
provided that notwithstanding any other provision of the Plan or any Award
Agreement, without the approval of the stockholders of the Company no
amendment, alteration, suspension, discontinuation, or termination may be made
that would:
(i) materially increase the total number of Shares available for Awards
under the Plan (except as provided in Section 4) or materially increase the
benefits accruing to Participants under the Plan;
(ii) permit Awards encompassing rights to purchase Shares to be granted
with a per Share grant, exercise or purchase price of less than the Fair
Market Value of a Share on the grant thereof; or
(iii) otherwise cause the Plan to cease to qualify for or cease to
comply with any tax or regulatory exemption, status or requirement, including
for these purposes any approval or other prerequisite for exemptive relief
from Section 16(b) of the Exchange Act.
(b) Amendments to Awards. The Committee may waive any conditions or rights
under, amend any terms of, or alter any Award theretofore granted, provided
that no change in any Award shall reduce the benefit accruing to any
Participant without the consent of the Participant.
(c) Unusual or Nonrecurring Events. The Committee is hereby authorized to
make adjustments in the terms, conditions, and criteria of Awards in
recognition of unusual or nonrecurring events (including the events described
in Section 4(c) of the Plan) affecting the Company, any Affiliate, or the
financial statements of the Company or any Affiliate, or in recognition of
changes in applicable laws, regulations, or accounting principles, whenever
the Committee determines that such adjustments are appropriate in order to
prevent dilution or enlargement of the benefits or potential benefits intended
to be made available under the Plan. Notwithstanding the foregoing, with
respect to any Award intended to qualify as performance-based compensation
under Section 162(m) of the Code, no adjustment shall be authorized to the
extent the adjustment would cause the Award to fail to qualify.
SECTION 8. Change Of Control.
(a) Nonacceleration. In the event of any Change of Control, the Chairman of
the Board and Chief Executive Officer (or, if the office is vacant, the
President) of the Company may on or before the date of the event constituting
a Change of Control, file with the Corporate Secretary of the Company a
written notice (the "Nonacceleration Notice") signed by the officer stating
that the Change of Control shall not result in the acceleration of Awards
granted under the Plan to the Participants identified in the notice (or held
by persons claiming by, through or under such Participants). The
Nonacceleration Notice may be filed with respect to all Awards granted under
the Plan or with respect to certain Awards granted to Participants specified
in the notice (each Participant referred to by name or generically in a
Nonacceleration Notice, together with each person claiming by, through or
under such Participant, is hereinafter referred to as a "Nonaccelerated
Person"). Notwithstanding any other provision of this Plan, each Award
granted under this Plan, not theretofore forfeited or terminated and held as
of the date of a Change of Control by a person who as of such date is not a
Nonaccelerated Person shall upon occurrence of the Change of Control
immediately become vested or exercisable with respect to all of the rights
specified therein. The inclusion of a Participant or other person as a
Nonaccelerated Person in a Nonacceleration Notice shall not be construed to
alter or amend any rights the Participant or other person may have under this
Plan under the provisions of any executive severance agreement or other
contractual relationship with the Company.
(b) Effect. If a Change of Control shall occur, each Award held by a
Participant pursuant to the Plan shall remain in full force and effect until
the earlier of (i) the expiration date of the Award, or (ii) 90 days following
the Participant's date of termination of employment with the Company.
In addition to the Committee's authority set forth in Section 7(c) of the
Plan, in order to maintain the Participants' rights in the event of any Change
of Control, the Committee, as constituted before the Change of Control, is
hereby authorized, and has sole discretion, as to any Award, either at the
time the Award is made hereunder or any time thereafter, to take any one or
more of the following actions:
(i) provide for the acceleration of any time periods relating to the
vesting, exercise or realization of the Award so that the Award may be
exercised or realized in full on or before a date fixed by the Committee;
(ii) provide for the purchase of any Award, upon the Participant's
request, for an amount of cash equal to the amount that could have been
attained upon the exercise of the Award or realization of the Participant's
rights in the Award had the Award been currently exercisable or payable;
(iii) adjust any outstanding Award as the Committee deems appropriate
to reflect the Change of Control; or
(iv) cause any outstanding Award to be assumed, or new rights substituted
therefor, by the acquiring or surviving corporation after the Change of
Control. The Committee may in its discretion include other provisions and
limitations in any Award Agreement as it may deem equitable and in the best
interests of the Company.
(c) Defined. A Change of Control shall be deemed to occur if:
(i) the Company merges or consolidates with any other Person (other than
a wholly owned subsidiary of the Company) and is not the surviving entity (or
survives only as the subsidiary of another entity);
(ii) the Company sells all or substantially all of its assets to any
other Person (other than a wholly owned subsidiary of the Company);
(iii) the Company is liquidated or dissolved;
(iv) any "person" or "group" (as such terms are used in Section 13(d) and
14(d) of the Exchange Act) other than the Company, any subsidiary of the
Company, any employee benefit plan of the Company or its subsidiaries, or any
entity holding Shares for or pursuant to the terms of those employee benefit
plans, is or becomes an "Acquiring Person" as defined in that certain Amended
and Restated Rights Agreement dated October 17, 1991, between the Company and
Ameritrust Texas, N.A., successor to MBank Alamo, N.A. (or any successor
Rights Agreement).
(v) any "person" or "group" (as these terms are used in subparagraph
(iv) above) shall commence a tender offer or exchange offer for 30% or more of
the Shares then outstanding, or for any number or amount of Shares which, if
the tender or exchange offer were to be fully subscribed and all Shares for
which the tender or exchange offer is made were to be purchased or exchanged
pursuant to the Offer, would result in the acquiring person or group directly
or indirectly beneficially owning 50% or more of the Shares then outstanding;
or
(vi) as a result of or in connection with a contested election of
directors, a number of directors equal to a majority of the Board before the
election cease to be members of the Board.
SECTION 9. General Provisions.
(a) No Rights to Awards. No Employee, Participant or other Person shall have
any claim to be granted any Award. The Committee is not required to treat
uniformly the Employees, Participants, or holders or beneficiaries of Awards
when making grants of Awards under the Plan. The terms and conditions of
Awards are not required to be the same with respect to each recipient.
(b) Delegation. Subject to the terms of the Plan and applicable law, the
Committee may delegate to one or more officers or managers of the Company or
any Affiliate, or to a committee of such officers or managers, the authority,
subject to the terms and limitations the Committee shall determine, to grant
Awards to, or to cancel, modify or waive rights with respect to, or to alter,
discontinue, suspend, or terminate Awards held by, Employees who are not
deemed "officers" or "directors" of the Company for purposes of Section 16 of
the Exchange Act, or any successor Section thereto, or who are otherwise not
subject to Section 16.
(c) Withholding. The Company or any Affiliate is hereby authorized to
withhold from any Award, from any payment due or transfer made under any Award
or under the Plan or from any compensation or other amount owing to a
Participant the amount (in cash, Shares, other securities, other Awards or
other property) of any applicable withholding taxes with respect to an Award,
its exercise, the lapse of restrictions thereon, payment or transfer under an
Award or under the Plan, and to take any other action necessary in the opinion
of the Company to satisfy all obligations for the payment of the taxes.
(d) No Limit on Other Compensation Arrangements. Nothing contained in the
Plan shall prevent the Company or any Affiliate from adopting or continuing in
effect any other compensation arrangements.
(e) No Right to Employment. The grant of an Award shall not be construed as
giving a Participant the right to be retained in the employ of the Company or
any Affiliate. Further, the Company or an Affiliate may at any time dismiss a
Participant from employment, free from any liability or any claim under the
Plan, unless otherwise expressly provided in the Plan or in any Award
Agreement.
(f) Governing Law. The validity, construction, and effect of the Plan and
any rules and regulations relating to the Plan shall be determined in
accordance with the laws of the State of Texas and applicable federal law.
(g) Severability. If any provision of the Plan or any Award is or becomes or
is deemed to be invalid, illegal, or unenforceable in any jurisdiction as to
any Person or Award, or would disqualify the Plan or any Award under any law
deemed applicable by the Committee, such provision shall be construed or
deemed amended to conform to applicable laws, or if it cannot be construed or
deemed amended without, in the determination of the Committee, materially
altering the intent of the Plan or the Award, such provision shall be stricken
as to such jurisdiction, Person or Award and the remainder of the Plan and any
such Award shall remain in full force and effect.
(h) Other Laws. The Committee may refuse to issue or transfer any Shares or
other consideration under an Award if, acting in its sole discretion, it
determines that the issuance or transfer of the Shares or other consideration
might violate any applicable law or regulation or entitle the Company to
recover the same under Section 16(b) of the Exchange Act, and any payment
tendered to the Company by a Participant, other holder or beneficiary in
connection with the exercise of such Award shall be promptly refunded.
(i) No Trust or Fund Created. Neither the Plan nor any Award shall create or
be construed to create a trust or separate fund of any kind or any fiduciary
relationship between the Company or any Affiliate and a Participant or any
other Person. To the extent that any Person acquires a right to receive
payments from the Company or any Affiliate pursuant to an Award, such right
shall be no greater than the right of any unsecured general creditor of the
Company or any Affiliate.
(j) No Fractional Shares. No fractional Shares shall be issued or delivered
pursuant to the Plan or any Award, and the Committee shall determine whether
cash, other securities, or other property shall be paid or transferred in lieu
of any fractional Shares or whether fractional Shares or any rights thereto
shall be cancelled, terminated, or otherwise eliminated.
(k) Headings. Headings are given to the Sections and subsections of the Plan
solely as a convenience to facilitate reference. The headings shall not be
deemed in any way material or relevant to the construction or interpretation
of the Plan or any provision thereof.
(l) Construction. Use of the term "including" in this Plan shall be
construed to mean "including but not limited to."
SECTION 10. Effective Date of the Plan.
The Plan shall be effective July 21, 1994, subject to approval by the
stockholders of the Company.
SECTION 11. Term of the Plan.
No Award shall be granted under the Plan ten years after approval of the Plan
by the Board. However, unless otherwise expressly provided in the Plan or in
an applicable Award Agreement, any Award theretofore granted may, and the
authority of the Board or the Committee to amend, alter, adjust, suspend,
discontinue, or terminate any such Award or to waive any conditions or rights
under any such Award shall, extend beyond that date.
EXHIBIT 10.11
SCHEDULE OF EXECUTIVE SEVERANCE AGREEMENTS
Employee Date of Agreement
William E. Greehey December 15, 1982
F. Joseph Becraft May 1, 1995
Edward C. Benninger December 15, 1982
Stan L. McLelland December 15, 1982
E. Baines Manning July 16, 1988
EXHIBIT 10.16
SCHEDULE OF INDEMNITY AGREEMENTS
Employee Date of Agreement
William E. Greehey February 24, 1987
F. Joseph Becraft May 1, 1995
Edward C. Benninger February 24, 1987
Ronald K. Calgaard February 16, 1996
Robert G. Dettmer October 17, 1991
A. Ray Dudley July 21, 1988
Ruben M. Escobedo October 1, 1994
Don M. Heep February 22, 1990
James L. Johnson April 25, 1991
Lowell H. Lebermann February 24, 1987
Stan L. McLelland February 24, 1987
E. Baines Manning July 16, 1986
Susan Kaufman Purcell October 1, 1994
<TABLE>
EXHIBIT 11.1
VALERO ENERGY CORPORATION AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE
(Thousands of Dollars, Except Per Share Amounts)
<CAPTION>
Year Ending December 31,
1995 1994 1993
<S> <C> <C> <C>
COMPUTATION OF EARNINGS PER SHARE
ASSUMING NO DILUTION:
Net income. . . . . . . . . . . . . . . . . . . . . . . . . $ 59,838 $ 26,882 $ 36,424
Less: Preferred stock dividend requirements. . . . . . . . (11,818) (9,490) (1,262)
Net income applicable to common stock . . . . . . . . . . . $ 48,020 $ 17,392 $ 35,162
Weighted average number of shares of common
stock outstanding . . . . . . . . . . . . . . . . . . . . 43,651,914 43,369,836 43,098,808
Earnings per share assuming no dilution . . . . . . . . . . $ 1.10 $ .40 $ .82
COMPUTATION OF EARNINGS PER SHARE
ASSUMING FULL DILUTION:
Net income. . . . . . . . . . . . . . . . . . . . . . . . $ 59,838 $ 26,882 $ 36,424
Less: Preferred stock dividend requirements. . . . . . . (11,818) (9,490) (1,262)
Add: Reduction of preferred stock dividends
applicable to the assumed conversion of
Convertible Preferred Stock . . . . . . . . . . . . . . 10,781 8,325 -
Net income applicable to common stock
assuming full dilution. . . . . . . . . . . . . . . . . $ 58,801 $ 25,717 $ 35,162
Weighted average number of shares of common
stock outstanding . . . . . . . . . . . . . . . . . . . 43,651,914 43,369,836 43,098,808
Weighted average common stock equivalents
applicable to stock options . . . . . . . . . . . . . . 413,809 56,926 67,017
Weighted average shares issuable upon
conversion of Convertible Preferred Stock . . . . . . . 6,381,798 4,948,079 -
Weighted average shares used for computation. . . . . . . 50,447,521 48,374,841 43,165,825
Earnings per share assuming full dilution . . . . . . . . $ 1.17 <F1> $ .53 <F1> $ .81 <F2>
<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.
<F2> This calculation is submitted in accordance with paragraph
601(b)(11) of Regulation S-K although it is not required by
APB Opinion No. 15 because it results in dilution of less
than 3%.
</FN>
</TABLE>
<TABLE>
EXHIBIT 12.1
VALERO ENERGY CORPORATION
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(Dollars in Thousands)
<CAPTION>
Year Ended Year Ended Year Ended Year Ended
December 31, December 31, 1994 December 31, 1993 December 31,
1995 Pro Forma<F1> Historical Pro Forma<F1> Historical 1992 1991
<S> <C> <C> <C> <C> <C> <C> <C>
Pretax income from continuing
operations . . . . . . . . . . . $ 95,138 $ 31,289 $ 42,782 $ 76,698 $ 68,224 $131,419 $146,367
Add (Deduct):
Net interest expense <F4> . . . . 101,222 98,695 76,921 89,413 37,182 30,423 12,540
Amortization of previously
capitalized interest. . . . . . 6,820 6,847 6,282 6,300 4,998 4,544 3,457
Interest portion of rental
expense <F2>. . . . . . . . . . 13,251 8,259 6,695 8,003 4,316 4,214 3,913
Distributions (less than)/in
excess of equity in earnings
of VNGP, L.P. <F3>. . . . . . . - - 18,968 - (4,970) (1,067) 1,030
Distributions (less than)
equity in earnings of joint
ventures <F4> . . . . . . . . . (4,304) (2,437) (2,437) - - - -
Earnings as defined . . . . . $212,127 $142,653 $149,211 $180,414 $109,750 $169,533 $167,307
Net interest expense <F4>. . . . . $101,222 $ 98,695 $ 76,921 $ 89,413 $ 37,182 $ 30,423 $ 12,540
Capitalized interest . . . . . . . 4,699 2,558 2,365 14,048 12,335 15,853 25,408
Interest portion of rental
expense <F2> . . . . . . . . . . 13,251 8,259 6,695 8,003 4,316 4,214 3,913
Fixed charges as defined . . . $119,172 $109,512 $ 85,981 $111,464 $ 53,833 $ 50,490 $ 41,861
Ratio of earnings to fixed
charges. . . . . . . . . . . . . 1.78x 1.30x 1.74x 1.62x 2.04x 3.36x 4.00x
<FN>
<F1> The pro forma computations reflect the consolidation of the Partnership with
the Company for all of 1994 and 1993.
<F2> The interest portion of rental expense represents one-third of rents, which
is deemed representative of the interest portion of rental expense.
<F3> Represents the Company's undistributed equity in earnings or distributions
in excess of equity in earnings of the Partnership for the periods prior to
and including May 31, 1994. On May 31, 1994, the Merger of the Partnership
with the Company was consummated and the Partnership became a wholly owned
subsidiary of the Company.
<F4> The Company has guaranteed its pro rata share of the debt of Javelina
Company, an equity method investee in which the Company holds a 20%
interest. The interest expense related to the guaranteed debt is not
included in the computation of the ratio as the Company has not been
required to satisfy the guarantee nor does the Company believe that it is
probable that it would be required to do so.
</FN>
</TABLE>
EXHIBIT 21.1
Valero Energy Corporation
Schedule of Subsidiaries
Valero Coal Company Delaware
Valero Management Company Delaware
VMGA Company Texas
VNGC Holding Company Delaware
Valero Natural Gas Company Delaware
Valero Gas Marketing Company Delaware
Valero Gas Marketing Canada Inc. Alberta, Canada
Valero Gas Storage Company Delaware
Valero Hydrocarbons Company Delaware
Valero Field Services Company Delaware
Valero Power Services Company Delaware
Valero Storage and Transfer Company Delaware
Valero Transmission Company Delaware
VT Company Delaware
Energy Investments Company Delaware
Valero Producing Company Delaware
Valero Refining and Marketing Company Delaware
Valero Javelina Company Delaware
Valero Marketing and Supply Company Delaware
Valero Refining Company Delaware
Valero MTBE Investments Company Delaware
Valero MTBE Operating Company Delaware
Valero Mediterranean Company Delaware
Valero Mexico Company Delaware
Valero Technical Services Company Delaware
Valero Natural Gas Partners, L.P. Delaware
ValeroTex, L.P. Delaware
Energy Investments, L.P. Delaware
Valero Management Partnership, L.P. Delaware
Valero Transmission, L.P. Delaware
Valero Hydrocarbons, L.P. Delaware
Valero Marketing, L.P. Delaware
Valero Industrial Gas, L.P. Delaware
Valero Gas Marketing, L.P. Delaware
VLDC, L.P. Delaware
Reata Industrial Gas, L.P. Delaware
Rivercity Gas, L.P. Delaware
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
of our report included in this Form 10-K into the Company's previously filed
Registration Statements on Form S-8 (File Nos. 2-66297, 2-82001, 2-97043,
33-23103, 33-14455, 33-38405, 33-53796, 33-52533, 33-63703) and on Form S-3
(File No. 33-56441).
/s/ ARTHUR ANDERSEN LLP
San Antonio, Texas
February 14, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1995 AND THE CONSOLIDATED
STATEMENT OF INCOME FOR THE YEAR ENDED DECEMBER 31, 1995 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 64,681
<SECURITIES> 0
<RECEIVABLES> 340,382
<ALLOWANCES> 1,193
<INVENTORY> 140,822
<CURRENT-ASSETS> 621,543
<PP&E> 2,697,494
<DEPRECIATION> 622,123
<TOTAL-ASSETS> 2,876,680
<CURRENT-LIABILITIES> 468,282
<BONDS> 1,035,641
6,900
3,450
<COMMON> 43,739
<OTHER-SE> 986,624
<TOTAL-LIABILITY-AND-EQUITY> 2,876,680
<SALES> 3,019,792
<TOTAL-REVENUES> 3,019,792
<CGS> 2,831,001
<TOTAL-COSTS> 2,831,001
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 101,222
<INCOME-PRETAX> 95,138
<INCOME-TAX> 35,300
<INCOME-CONTINUING> 59,838
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 59,838
<EPS-PRIMARY> 1.10
<EPS-DILUTED> 0
</TABLE>
