UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-4718
VALERO ENERGY CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 74-1244795
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
530 McCullough Avenue
San Antonio, Texas
(Address of principal executive offices)
78215
(Zip Code)
(210) 246-2000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days.
Yes X No
Indicated below is the number of shares outstanding of the
registrant's only class of common stock, as of May 1, 1997.
Number of
Shares
Title of Class Outstanding
Common Stock, $1 Par Value 48,402,149
<PAGE>
VALERO ENERGY CORPORATION AND SUBSIDIARIES
INDEX
Page
PART I. FINANCIAL INFORMATION
Consolidated Balance Sheets - March 31, 1997 and
December 31, 1996. . . . . . . . . . . . . . . . . . .
Consolidated Statements of Income - For the Three
Months Ended March 31, 1997 and 1996 . . . . . . . . .
Consolidated Statements of Cash Flows - For the
Three Months Ended March 31, 1997 and 1996 . . . . . .
Notes to Consolidated Financial Statements . . . . . . .
Management's Discussion and Analysis of Financial
Condition and Results of Operations. . . . . . . . . .
PART II. OTHER INFORMATION. . . . . . . . . . . . . . . .
SIGNATURE. . . . . . . . . . . . . . . . . . . . . . . . .
<PAGE>
<TABLE>
PART I - FINANCIAL INFORMATION
VALERO ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Thousands of Dollars)
<CAPTION>
March 31,
1997 December 31,
(Unaudited) 1996
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and temporary cash investments. . . . . . . . . . . $ 16,071 $ 19,847
Cash held in debt service escrow . . . . . . . . . . . . - 37,746
Receivables, less allowance for doubtful accounts of
$1,699 (1997) and $1,624 (1996). . . . . . . . . . . . 344,889 566,088
Inventories. . . . . . . . . . . . . . . . . . . . . . . 200,708 212,134
Current deferred income tax assets . . . . . . . . . . . 23,740 22,408
Prepaid expenses and other . . . . . . . . . . . . . . . 22,346 29,946
607,754 888,169
PROPERTY, PLANT AND EQUIPMENT - including
construction in progress of $65,523 (1997)
and $45,824 (1996), at cost. . . . . . . . . . . . . . . 2,825,475 2,787,431
Less: Accumulated depreciation. . . . . . . . . . . . 733,127 708,352
2,092,348 2,079,079
INVESTMENT IN AND ADVANCES TO JOINT VENTURES . . . . . . . 30,198 29,192
DEFERRED CHARGES AND OTHER ASSETS. . . . . . . . . . . . . 134,260 138,334
$2,864,560 $3,134,774
<FN>
See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
<TABLE>
PART I - FINANCIAL INFORMATION
VALERO ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Thousands of Dollars)
<CAPTION>
March 31,
1997 December 31,
(Unaudited) 1996
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
CURRENT LIABILITIES:
Short-term debt. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 112,800 $ 82,000
Current maturities of long-term debt . . . . . . . . . . . . . . . . . . 74,929 72,341
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . 418,855 661,273
Accrued interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,060 20,082
Other accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . 27,319 39,458
643,963 875,154
LONG-TERM DEBT, less current maturities. . . . . . . . . . . . . . . . . . 804,427 868,300
DEFERRED INCOME TAXES. . . . . . . . . . . . . . . . . . . . . . . . . . . 282,570 279,938
DEFERRED CREDITS AND OTHER LIABILITIES . . . . . . . . . . . . . . . . . . 34,656 34,407
REDEEMABLE PREFERRED STOCK, SERIES A, issued
1,150,000 shares, outstanding -0- (1997) and 11,500 (1996) shares. . . . - 1,150
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 (1997 and 1996) shares ($172,500 aggregate
involuntary liquidation value) . . . . . . . . . . . . . . . . . . 3,450 3,450
Common stock, $1 par value - 75,000,000 shares authorized;
issued 44,872,062 (1997) and 44,185,513 (1996) shares. . . . . . . . . 44,872 44,186
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . 555,585 540,133
Unearned Valero Employees' Stock Ownership Plan
Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (7,655) (8,783)
Retained earnings. . . . . . . . . . . . . . . . . . . . . . . . . . . . 503,791 496,839
Treasury stock, 31,781 (1997) and -0- (1996)
common shares, at cost . . . . . . . . . . . . . . . . . . . . . . . . (1,099) -
1,098,944 1,075,825
$2,864,560 $3,134,774
<FN>
See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
<TABLE>
VALERO ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Thousands of Dollars, Except Per Share Amounts)
(Unaudited)
<CAPTION>
Three Months Ended
March 31,
1997 1996
<S> <C> <C>
OPERATING REVENUES . . . . . . . . . . . . . . . . . . . . $1,537,098 $1,110,098
COSTS AND EXPENSES:
Cost of sales and operating expenses . . . . . . . . . . 1,446,976 1,013,406
Selling and administrative expenses. . . . . . . . . . . 20,199 19,108
Depreciation expense . . . . . . . . . . . . . . . . . . 26,010 25,346
Total. . . . . . . . . . . . . . . . . . . . . . . . . 1,493,185 1,057,860
OPERATING INCOME . . . . . . . . . . . . . . . . . . . . . 43,913 52,238
EQUITY IN EARNINGS OF JOINT VENTURES . . . . . . . . . . . 1,006 222
OTHER INCOME, NET. . . . . . . . . . . . . . . . . . . . . 1,432 2,444
INTEREST AND DEBT EXPENSE:
Incurred . . . . . . . . . . . . . . . . . . . . . . . . (24,250) (25,753)
Capitalized. . . . . . . . . . . . . . . . . . . . . . . 1,339 563
INCOME BEFORE INCOME TAXES . . . . . . . . . . . . . . . . 23,440 29,714
INCOME TAX EXPENSE . . . . . . . . . . . . . . . . . . . . 8,000 9,800
NET INCOME . . . . . . . . . . . . . . . . . . . . . . . . 15,440 19,914
Less: Preferred stock dividend requirements and
redemption premium. . . . . . . . . . . . . . . . 2,766 2,841
NET INCOME APPLICABLE TO COMMON STOCK. . . . . . . . . . . $ 12,674 $ 17,073
EARNINGS PER SHARE OF COMMON STOCK . . . . . . . . . . . . $ .29 $ .39
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
(in thousands) . . . . . . . . . . . . . . . . . . . . . 44,412 43,749
DIVIDENDS PER SHARE OF COMMON STOCK. . . . . . . . . . . . $ .13 $ .13
<FN>
See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
<TABLE>
VALERO ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands of Dollars)
(Unaudited)
<CAPTION>
Three Months Ended
March 31,
1997 1996
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 15,440 $ 19,914
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation expense . . . . . . . . . . . . . . . . . . . . . . . . 26,010 25,346
Amortization of deferred charges and other, net. . . . . . . . . . . 8,599 8,832
Changes in current assets and current liabilities. . . . . . . . . . (13,126) 20,093
Deferred income tax expense. . . . . . . . . . . . . . . . . . . . . 1,300 4,000
Equity in earnings of joint ventures . . . . . . . . . . . . . . . . (1,006) (222)
Changes in deferred items and other, net . . . . . . . . . . . . . . (2,441) 2,191
Net cash provided by operating activities. . . . . . . . . . . . . 34,776 80,154
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . (39,881) (31,669)
Deferred turnaround and catalyst costs . . . . . . . . . . . . . . . . . (1,409) (947)
Investment in and advances to joint ventures, net. . . . . . . . . . . . - 1,665
Dispositions of property, plant and equipment. . . . . . . . . . . . . . 217 2,667
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 328 242
Net cash used in investing activities. . . . . . . . . . . . . . . . . (40,745) (28,042)
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in short-term debt, net . . . . . . . . . . . . . . . . . . . . 30,800 45,000
Long-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . 25,000 40,000
Long-term debt reduction . . . . . . . . . . . . . . . . . . . . . . . . (85,357) (165,143)
Decrease in cash held in debt service escrow for principal . . . . . . . 26,518 24,643
Common stock dividends . . . . . . . . . . . . . . . . . . . . . . . . . (5,761) (5,687)
Preferred stock dividends. . . . . . . . . . . . . . . . . . . . . . . . (2,727) (2,842)
Issuance of common stock . . . . . . . . . . . . . . . . . . . . . . . . 18,326 2,373
Purchase of treasury stock . . . . . . . . . . . . . . . . . . . . . . . (3,410) (1,657)
Repurchase of Series A Preferred Stock . . . . . . . . . . . . . . . . . (1,196) -
Net cash provided by (used in) financing activities. . . . . . . . . . 2,193 (63,313)
NET DECREASE IN CASH AND TEMPORARY
CASH INVESTMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3,776) (11,201)
CASH AND TEMPORARY CASH INVESTMENTS AT
BEGINNING OF PERIOD. . . . . . . . . . . . . . . . . . . . . . . . . . . 19,847 28,054
CASH AND TEMPORARY CASH INVESTMENTS AT
END OF PERIOD. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 16,071 $ 16,853
<FN>
See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
VALERO ENERGY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The consolidated financial statements included herein have
been prepared by Valero Energy Corporation ("Energy") and
subsidiaries (collectively referred to as the "Company"), without
audit, pursuant to the rules and regulations of the Securities and
Exchange Commission. However, all adjustments have been made to
the accompanying financial statements which are, in the opinion of
the Company's management, necessary for a fair presentation of the
Company's results of operations for the periods covered. Certain
information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to
such rules and regulations, although the Company believes that the
disclosures are adequate to make the information presented herein
not misleading. These consolidated financial statements should be
read in conjunction with the consolidated financial statements and
the notes thereto included in the Company's latest Annual Report on
Form 10-K, as amended. Certain prior period amounts have been
reclassified for comparative purposes.
2. Inventories
Refinery feedstocks and refined products and blendstocks are
carried at the lower of cost or market, with the cost of feedstocks
and produced products determined primarily under the last-in,
first-out ("LIFO") method of inventory pricing and the cost of
products purchased for resale determined under the weighted average
cost method. The excess of the replacement cost of the Company's
LIFO inventories over their LIFO values was approximately
$21 million at March 31, 1997. Natural gas in underground storage,
natural gas liquids ("NGLs") and materials and supplies are carried
principally at weighted average cost not in excess of market.
Inventories as of March 31, 1997 and December 31, 1996 were as
follows (in thousands):
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
<S> <C> <C>
Refinery feedstocks . . . . . . . . . . . . . $114,001 $ 42,744
Refined products and blendstocks. . . . . . . 48,740 99,398
Natural gas in underground storage. . . . . . 11,716 40,609
NGLs. . . . . . . . . . . . . . . . . . . . . 3,212 5,190
Materials and supplies. . . . . . . . . . . . 23,039 24,193
$200,708 $212,134
</TABLE>
3. Statements of Cash Flows
In order to determine net cash provided by operating
activities, net income has been adjusted by, among other things,
changes in current assets and current liabilities, excluding
changes in cash and temporary cash investments, cash held in debt
service escrow for principal, current deferred income tax assets,
short-term debt and current maturities of long-term debt. The
changes in the Company's current assets and current liabilities,
excluding the items noted above, are shown in the following table
as an (increase)/decrease in current assets and an
increase/(decrease) in current liabilities. The Company's
temporary cash investments are highly liquid, low-risk debt
instruments which have a maturity of three months or less when
acquired. (Dollars in thousands.)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1997 1996
<S> <C> <C>
Cash held in debt service escrow for interest . . . $ 11,228 $ 11,984
Receivables, net. . . . . . . . . . . . . . . . . . 221,199 30,880
Inventories . . . . . . . . . . . . . . . . . . . . 11,426 (23,605)
Prepaid expenses and other. . . . . . . . . . . . . 7,600 36,036
Accounts payable. . . . . . . . . . . . . . . . . . (242,418) (3,492)
Accrued interest. . . . . . . . . . . . . . . . . . (10,022) (19,691)
Other accrued expenses. . . . . . . . . . . . . . . (12,139) (12,019)
Total. . . . . . . . . . . . . . . . . . . . . . $ (13,126) $ 20,093
</TABLE>
The following table provides information related to cash
interest and income taxes paid by the Company for the periods
indicated (in thousands):
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1997 1996
<S> <C> <C>
Interest - net of amount capitalized of $1,339 (1997)
and $563 (1996). . . . . . . . . . . . . . . . . . . . $32,749 $44,682
Income taxes. . . . . . . . . . . . . . . . . . . . . . . - -
</TABLE>
4. Proposed Restructuring
On January 31, 1997, the Company announced that its Board of
Directors had approved an agreement and plan of merger with PG&E
Corporation ("PG&E") to combine the Company's natural gas related
services business with PG&E following the spin-off of the Company's
refining and marketing business to the Company's shareholders (the
"Restructuring"). Under the terms of the merger agreement, the
Company's natural gas related services business will be merged with
a wholly owned subsidiary of PG&E. PG&E will acquire the Company's
natural gas related services business for approximately
$1.5 billion, plus adjustments for working capital and other
considerations. PG&E will issue $722.5 million of common stock,
subject to certain closing adjustments, in exchange for outstanding
shares of Energy's common stock, and will assume approximately
$777.5 million of net debt and other liabilities. Each Energy
shareholder will receive a fractional share of PG&E common stock
(trading on the New York Stock Exchange under the symbol "PCG") for
each Energy share; the amount of PG&E stock to be received will be
based on the average price of the PG&E common stock during a period
preceding the closing of the transaction and the number of Energy
shares issued and outstanding at the time of the closing. Energy's
shareholders will also receive one share of the spun-off refining
and marketing company for each share of Energy common stock. The
refining and marketing company will retain the Valero Energy
Corporation name and will apply to be listed on the New York Stock
Exchange. The spin-off of the refining and marketing business and
the merger with PG&E are expected to be tax-free transactions.
However, on February 6, 1997, President Clinton's budget
recommendations to Congress called for new legislation that, if
enacted, would require Energy to pay federal income tax upon the
consummation of the Restructuring on the amount of gain equal to
the excess of the value of the refining and marketing company stock
distributed to Energy's stockholders over Energy's basis in such
stock. The President's proposal, which has not yet been introduced
in Congress, would be effective for distributions after the date of
first committee action. On April 17, 1997, the Chairs of the House
Ways and Means Committee and Senate Finance Committee and the
ranking Democrat on the Finance Committee introduced similar
legislation which, however, would not apply to distributions made
pursuant to a written agreement which was binding on April 16, 1997
and at all times thereafter nor to distributions announced publicly
by that date. It is uncertain whether any such legislation
ultimately will be enacted or what the effective date may be. The
Company believes it is likely that any legislation ultimately
enacted will provide an exemption for transactions like the
Restructuring for which definitive agreements were executed prior
to February 6, 1997. However, if the proposal is enacted or
pending prior to consummation of the Restructuring with an
effective date provision that could cause Energy to be subject to
tax, the tax opinions described below may not be available and as a
result the Restructuring may not be consummated. The Restructuring
transactions are subject to approval by the Company's shareholders,
the Securities and Exchange Commission, and certain regulatory
agencies, and receipt of favorable tax opinions. The Company will
hold its annual meeting of stockholders on June 18, 1997 to
consider, among other things, the Restructuring transactions; such
transactions are expected to be completed in the third quarter of
1997. However, there can be no assurance that the various
approvals or opinions will be given or that the conditions to
consummating the transactions will be met.
5. Acquisition of Basis Petroleum, Inc.
On March 13, 1997, the Company's Board of Directors approved
a letter of intent executed by the Company to acquire the
outstanding common stock of Basis Petroleum, Inc. ("Basis"), a
wholly owned subsidiary of Salomon Inc ("Salomon"). Effective
May 1, 1997, the transaction was completed. The primary assets of
Basis include three refineries in the U.S. Gulf Coast area with
total throughput capacity in excess of 300,000 barrels per day
("BPD") and an extensive wholesale marketing business. The three
refineries are comprised of a 160,000 BPD facility in Texas City,
Texas; an 85,000 BPD facility in Houston, Texas; and a 65,000 BPD
facility in Krotz Springs, Louisiana. The three refineries are
projected to produce approximately 330,000 BPD of refined products,
including about 130,000 BPD of gasoline, about 130,000 BPD of
distillates and jet fuel, and about 20,000 BPD of chemical grade
propylene and liquefied petroleum gases. With the acquisition, the
Company now owns and operates four refineries with total throughput
capacity of about 500,000 BPD. The acquisition is being accounted
for using the purchase method of accounting. Therefore, the
results of operations of Basis will be included in the consolidated
financial statements of the Company commencing on May 1, 1997.
The Company acquired the stock of Basis for $285 million,
plus $200 million representing the estimated value of inventories
and other working capital acquired in the transaction. The final
working capital amount is currently being determined. The purchase
price was paid, in part, with 3,429,796 shares of Energy common
stock having a fair market value of $120 million, with the
remainder paid in cash from borrowings under the Company's bank
credit facilities (see Note 8). In addition, Salomon will be
entitled to receive payments in any of the next 10 years if the
average refining margin during any of such years improves above a
specified level. These annual earn-out payments will be based on
the difference between a stated base refining "crack spread" and
the theoretical spread computed using actual average quoted prices,
and calculated using a nominal average annual throughput of 100
million barrels. Any payments under this earn-out arrangement are
limited to $35 million in any year and $200 million in the
aggregate and will be accounted for by the Company as an additional
cost of the acquisition and depreciated over the remaining lives of
the assets to which the additional cost is allocated.
The acquisition of Basis, to which PG&E consented, is not
expected to affect the timing related to the Restructuring
discussed in Note 4. Basis has become part of the Company's
refining and marketing business which will be spun off to the
Company's shareholders pursuant to the Restructuring.
6. Industrial Revenue Bonds
On April 16, 1997, the Industrial Development Corporation of
the Port of Corpus Christi issued and sold for the benefit of
Valero Refining and Marketing Company ("VRMC"), a wholly owned
subsidiary of Energy, $90 million of tax-exempt Series 1997A, 1997B
and 1997C Revenue Refunding Bonds and $8.5 million of Series 1997D
Revenue Refunding Bonds (the "Refunding Bonds"), with credit
enhancement provided through a letter of credit issued by the Bank
of Montreal (see Note 8). The Series A bonds are due in 2027, the
Series B and C bonds are due in 2018, and the Series D bonds are
due in 2009. The Refunding Bonds will initially bear interest at
floating rates determined weekly, with VRMC having the right to
convert such rates to a daily, weekly or commercial paper rate, or
to a fixed rate. Interest rates on the Series A, B and C bonds
were initially set at 3.85%, while rates on the Series D bonds were
initially set at 3.95%. The Refunding Bonds are being issued to
refinance VRMC's $90 million principal amount of 10.25% Series A bonds
and $8.5 million principal amount of 10.625% Series B bonds which were
originally issued in 1987 and were guaranteed by Energy. In
connection with the refinancing, both the Energy guarantee, as well
as a deed of trust and security agreement covering VRMC's refinery
in Corpus Christi, Texas, were released.
On May 15, 1997, the Gulf Coast Industrial Development Authority
issued and sold for the benefit of VRMC $25 million of tax-exempt bonds
which mature on December 1, 2031. Other terms and conditions of these
bonds are similar to those of the Refunding Bonds described above.
7. Redemption of Preferred Stock
On April 18, 1997, the Company announced that it has called
all of its outstanding $3.125 convertible preferred stock
("Convertible Preferred Stock") for redemption on June 2, 1997.
The total redemption price for the Convertible Preferred Stock is
$52.1966 per share (representing a per-share redemption price of
$52.188, plus accrued dividends in the amount of $.0086 per share
for the one-day period from June 1, 1997 to the June 2, 1997
redemption date). The Convertible Preferred Stock is convertible
into Energy common stock at a conversion price of $27.03 per share
(equivalent to a conversion rate of approximately 1.85 shares of
common stock for each share of Convertible Preferred Stock).
Holders of the Convertible Preferred Stock have until the close of
business on May 23, 1997 to convert their shares to Energy common
stock. Based on the May 1, 1997 closing price of Energy common
stock on the New York Stock Exchange of $35.125 per share, a share
of Convertible Preferred Stock is convertible into Energy common
stock with a market value of approximately $64.98, which exceeds
the total redemption price of the Convertible Preferred Stock of
$52.1966 per share.
On March 30, 1997, the Company redeemed the remaining 11,500
outstanding shares of its Cumulative Preferred Stock, $8.50 Series
A ("Series A Preferred Stock"). The redemption price was $104 per
share, plus dividends accrued to the redemption date of $.685 per
share.
8. New Bank Credit Facility
Effective May 1, 1997, Energy replaced its existing unsecured
$300 million revolving bank credit and letter of credit facility
with a new five-year, unsecured $835 million revolving bank credit
and letter of credit facility. The new credit facility has been
used to finance a portion of the acquisition cost of Basis as
discussed above in Note 5 and to provide credit enhancement for
VRMC's Refunding Bonds as discussed above in Note 6, and will be
used to provide financing for other general corporate purposes,
including, if necessary, up to $175 million for the redemption of
the Company's Convertible Preferred Stock as discussed above in
Note 7. The new facility will also be used to fund a $210 million
dividend payable by VRMC to Energy immediately prior to the
Restructuring pursuant to the terms of a certain Restructuring
agreement. Such dividend may be increased or decreased in
connection with the settlement of any intercompany note balances
between VRMC and Energy arising during the period from January 1,
1997 through the date of the Restructuring from transactions other
than the acquisition of Basis and redemption of the Convertible
Preferred Stock. Energy will be the borrower under the new
facility until the Company's refining and marketing business is
spun off pursuant to the Restructuring, at which time the facility
will be assumed by VRMC.
During the period prior to the Restructuring, the pricing and
covenants under the new facility will be substantially the same as
under the previous facility with total availability limited to
$600 million ($775 million if necessary to fund the redemption of
the Convertible Preferred Stock). Upon assumption by VRMC, total
availability will increase to the full $835 million. The facility
amount reduces by $150 million at the end of each of the third and
fourth years. Availability under the facility is also reduced by
the proceeds from debt issuances and certain asset sales, and by
75% of the proceeds from certain equity issuances. Energy, prior
to the Restructuring, and VRMC, after the Restructuring, will pay
various fees and expenses in connection with the new credit
facility, including a facility fee, a letter of credit issuance fee
and a fee based on letters of credit outstanding.
After the Restructuring, VRMC's borrowings under the new
credit facility will bear interest at either LIBOR plus a margin, a
base rate, or a money market rate, with such interest rate and the
fees noted above subject to adjustment based upon the credit
ratings assigned to VRMC's long-term debt. VRMC's covenants will
include a minimum fixed charge coverage ratio of 1.8 to 1.0, a
maximum debt to capitalization ratio of 45%, a minimum net worth
test, and certain restrictions on, among other things, long-term
leases and subsidiary debt. The new credit facility also limits
VRMC's dividend payments or repurchases of common stock to $22
million for the period from VRMC's assumption of the facility
through April 30, 1998, and for any subsequent years to 25% of net
income for the prior year plus any unused portion of the original
$22 million. The dividend restriction will be eliminated if VRMC
subsequently obtains an investment grade credit rating from either
Standard & Poor's or Moody's Investor Service.
The new credit facility also requires the completion, within
60 days of VRMC's assumption of the facility, of an inventory
purchase agreement whereby VRMC will receive up to $150 million
upon the sale of a portion of its base inventory to a third party.
In addition, VRMC will be required to have at least 25% of its debt
effectively bear interest at fixed rates either through the terms
of the debt instrument or through interest rate hedging
arrangements.
9. Employee Benefit Plans
In connection with effecting the Restructuring discussed in
Note 4, on April 11, 1997, the Company's Board of Directors
approved the termination of the Company's leveraged employee stock
ownership plan ("VESOP"). Prior to the time of the Restructuring,
the trustee for the VESOP will sell a sufficient amount of Energy
common stock held in the VESOP and not yet allocated to participant
accounts to repay the outstanding amount of notes issued in
connection with the VESOP. Any remaining stock will be allocated
to the VESOP participants.
10. Litigation and Contingencies
The Company and Southern Union Company ("Southern Union") are
defendants in a lawsuit brought by the City of Edinburg, Texas (the
"City") regarding certain ordinances of the City that granted
franchises to Rio Grande Valley Gas Company ("RGV") (a division of
Southern Union) and its predecessors allowing RGV to sell and
distribute natural gas within the City. RGV was formerly owned by
Energy. The City alleges that the defendants used RGV's facilities
to sell or transport natural gas in Edinburg in violation of the
ordinances and franchises granted by the City, and that RGV has not
fully paid all franchise fees due the City. The City also alleges
that the defendants used the public property of the City without
compensating the City for such use, and alleges conspiracy and
alter ego claims involving all defendants. The City seeks alleged
actual damages of $15 million and unspecified punitive damages
related to amounts allegedly due under the RGV franchise, City
ordinances and state law. The City of Edinburg lawsuit is
scheduled for trial on August 11, 1997. In connection with the
City of Edinburg lawsuit, Southern Union filed a cross-claim
against Energy, alleging, among other things, that Southern Union
is entitled to indemnification pursuant to the purchase agreement
under which Energy sold RGV to Southern Union. Southern Union also
asserts claims related to a 1985 settlement among Energy, RGV and
the Railroad Commission of Texas regarding certain gas contract
pricing terms. This pricing claim was recently severed into a
separate lawsuit. Southern Union's claims include, among other
things, damages for indemnification, breach of contract, negligent
misrepresentation and fraud. Seven additional lawsuits have been
filed by other South Texas cities asserting claims substantially
similar to those in the City of Edinburg litigation. Damages in
these lawsuits are not quantified.
Energy and certain of its subsidiaries have been sued by Teco
Pipeline Company ("Teco") regarding the operation of the 340-mile
West Texas pipeline in which the Company holds a 50% undivided
interest. In 1985, a subsidiary of Energy sold a 50% undivided
interest in the pipeline and entered into a joint venture through
an ownership agreement and an operating agreement, each dated
February 28, 1985, with the purchaser of the interest. In 1988,
Teco succeeded to that purchaser's 50% interest. A subsidiary of
Energy has at all times been the operator of the pipeline.
Notwithstanding the written ownership and operating agreements, the
plaintiff alleges that a separate, unwritten partnership agreement
exists, and that the defendants have exercised improper dominion
over such alleged partnership's affairs. The plaintiff also
alleges that the defendants acted in bad faith by negatively
affecting the economics of the joint venture in order to provide
financial advantages to facilities or entities owned by the
defendants and by allegedly usurping for the defendants' own
benefit certain opportunities available to the joint venture. The
plaintiff asserts causes of action for breach of fiduciary duty,
fraud, tortious interference with business relationships, and other
claims, and seeks unquantified actual and punitive damages. The
Company's motion to compel arbitration was denied, but has been
appealed. The Company has filed a counterclaim alleging that the
plaintiff breached its own obligations to the joint venture and
jeopardized the economic and operational viability of the pipeline
by its actions. The Company is seeking unquantified actual and
punitive damages. Pursuant to the distribution agreement by which
the Company's refining and marketing business will be spun off to
the Company's shareholders in connection with the Restructuring,
VRMC has agreed to indemnify and hold harmless Energy with respect
to this lawsuit after the Restructuring to the extent of 50% of the
amount of any final judgment or settlement amount not in excess of
$30 million, and 100% of that part of any final judgment or
settlement amount in excess of $30 million.
Approximately 15 lawsuits have been filed against various
pipeline owners and other parties, including the Company, arising
from the rupture of several pipelines and fire as a result of
severe flooding of the San Jacinto River in Harris County, Texas on
October 20, 1994. The Company is a defendant in 12 of these
lawsuits. The plaintiffs are property owners in surrounding areas
who allege that the defendant pipeline owners were negligent and
grossly negligent in failing to bury the pipelines at a proper
depth to avoid rupture or explosion and in allowing the pipelines
to leak chemicals and hydrocarbons into the flooded area. The
plaintiffs assert claims for property damage, costs for medical
monitoring, personal injury and nuisance, and seek an unspecified
amount of actual and punitive damages.
Energy and certain of its subsidiaries are defendants in a
lawsuit originally filed in January 1993. The lawsuit is based
upon construction work performed by the plaintiff at one 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 fraud, quantum
meruit, and numerous other tort claims. The plaintiff seeks actual
damages, on each of its causes of action, of approximately
$1.25 million, plus retainage, interest and attorneys fees, and
punitive damages of at least four times the amount of actual
damages. No trial date has been set.
Certain trusts have named Energy and certain subsidiaries of
the Company as additional defendants (the "Valero Defendants") to a
lawsuit filed in 1989 by the trusts against a supplier with whom
certain of 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
Company agreed to bear a substantial portion of any settlement or
any nonappealable final judgment rendered against the supplier. In
January 1993, the District Court ruled in favor of the trusts'
motion for summary judgment against the supplier. Damages, if any,
were not determined. The trusts seek $50 million in damages from
the Valero Defendants as a result of the Valero Defendants' alleged
interference between the trusts and the supplier, plus punitive
damages in excess of treble the amount of actual damages proven at
trial. The trusts also seek in excess of $200 million from the
Valero Defendants in claimed lost profits. The trusts seek
approximately $36 million in take-or-pay damages from the supplier
and unspecified damages for the supplier's failure to take the
trusts' gas ratably. The Company believes that the claims brought
by the trusts have been significantly overstated, and that the
supplier and the Valero Defendants have a number of meritorious
defenses to the claims. No trial date has been set.
Valero Javelina Company, an indirect wholly owned subsidiary
of Energy, owns a 20% general partner interest in Javelina Company
("Javelina"), a general partnership that owns a refinery off-gas
processing plant in Corpus Christi. Javelina has been named as a
defendant in 11 lawsuits filed since 1993 in state district courts
in Nueces County and Duval County, Texas. Nine of the suits
include as defendants other companies that own refineries or other
industrial facilities in Nueces County. These suits were brought
by a number of plaintiffs who reside in neighborhoods near the
facilities. The plaintiffs claim injuries relating to an alleged
exposure to toxic chemicals, and generally claim that the
defendants were negligent, grossly negligent and committed
trespass. The plaintiffs claim personal injury and property
damages resulting from soil and ground water contamination and air
pollution allegedly caused by the operations of the defendants.
The plaintiffs seek an unspecified amount of actual and punitive
damages. The remaining two 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.
Basis Litigation
Basis is a defendant in numerous lawsuits brought by present
or former employees of Basis, by employees of Basis' customers or
contractors, or by other persons based on alleged negligence, gross
negligence, products liability, strict liability, breach of
warranty and other theories of recovery and claiming injuries,
including wrongful death, resulting from exposure to asbestos,
benzene and other allegedly toxic or carcinogenic compounds
allegedly processed, used, manufactured, distributed or sold by
Basis or its predecessors. Approximately 10 of the lawsuits
involve class or other actions involving numerous plaintiffs and
defendants, while the remaining actions have individual plaintiffs
and involve only Basis or a limited group of defendants. In most
such cases, discovery is underway and trial dates have not been
set.
In addition to the foregoing matters, Basis is a defendant in
a lawsuit filed in June 1994 in the United States District Court for
the Southern District of Texas, alleging, among other things, that
Basis has violated the terms of its National Pollutant Discharge
Elimination System permit for wastewater discharge at its Houston,
Texas refinery. Although the District Court granted Basis a
summary judgment, the United States Court of Appeals for the Fifth
Circuit reversed the summary judgment and remanded the case to the
trial court for further discovery. The case is currently stayed by
mutual agreement pending the decision of the United States Court of
Appeals for the Fifth Circuit in a similar case in which the lower
court granted summary judgment dismissing the case for lack of
standing by the plaintiffs.
Basis is also a defendant in a lawsuit pending in the United
States District Court for the Southern District of Texas (served
May 1996), which is a Comprehensive Environmental Response,
Compensation, and Liability Act ("CERCLA") cost recovery action
related to the Tex-Tin "superfund" site. This site is not owned by
Basis, and Basis has advised the Company that Basis has not
disposed of any material at the site. However, Basis has been
identified as a "generator defendant" with respect to the site, as
the successor to the previous refinery owner. Basis potentially
may be named as a defendant or "potentially responsible party" in
other similar pending or threatened superfund-related actions.
Basis is also a defendant in a lawsuit filed December 20,
1995 in the 11th Judicial District Court, Harris County, Texas,
involving alleged Texas Clean Air Act violations related to
allegedly excessive S02 emissions. Agreement among the various
parties has been reached to settle the action on terms and
conditions not material to Basis; however, this settlement is not
yet final.
Basis is also a defendant in a lawsuit filed April 29, 1997 by
the U.S. Department of Justice in the United States District Court
for the Southern District of Texas which alleges violations of the
New Source Performance Standards ("NSPS") under the Clean Air Act
at the Texas City, Texas refinery. The suit alleges that
applicable NSPS requirements for a certain process unit, oil and
water separator and storage tank were not met on certain occasions
or during specified periods from May 1990 to April 1994.
Basis has also received Texas Natural Resources Conservation
Commission ("TNRCC") notices of violation ("NOV") and/or federal
Environmental Protection Agency ("EPA") NOVs or administrative
orders with respect to environmental matters at each of its three
refineries. Certain of such notices and orders may require
operational and capital improvements, and may involve the
assessment of substantial monetary penalties.
Basis is also a plaintiff in a lawsuit originally filed
March 26, 1996 and pending in the 190th Judicial District Court,
Harris County, Texas, alleging generally that through a bribery and
kickback scheme, defendants destroyed plaintiff's independent
bargaining position with respect to construction work performed by
defendants, creating causes of action for fraud, tortious
interference with contract, breach of fiduciary duty, breach of
contract and negligent misrepresentation. The defendant has
asserted counterclaims for breach of contract, tortious
interference with contract, fraud, defamation, negligence and
quantum meruit aggregating in excess of $130 million.
The various lawsuits referred to herein seek actual and
punitive damages which, in most cases, are unspecified but which
may total several hundreds of millions of dollars, together, in
certain cases, with demands for injunctive relief. In certain of
the matters cited above, including cited TNRCC and EPA matters,
Basis could potentially be adversely affected through: required
reductions in emissions or discharges, required additions and
improvements to refinery controls or other equipment, required
reductions in permit limits or refinery throughput, and fines or
penalties.
Additionally, although the Company conducted a due diligence
investigation of Basis prior to the closing of the purchase of the
stock of Basis, the scope of such investigation, particularly in
light of the volume of environmental, litigation and other matters
to be investigated, was necessarily limited. The stock purchase
agreement between the Company, the seller, and Basis ("Stock
Purchase Agreement") provides for indemnification from the seller
with respect to suits, actions, claims and investigations pending
at the time of the acquisition and for additional indemnification,
subject to certain terms, conditions and limitations, with respect
to other matters. However, there can be no assurance that other
material matters, not identified or fully investigated in due
diligence, will not be subsequently identified or that the matters
heretofore identified will not prove to be more significant than
currently expected.
The Company, including Basis, is also a party to additional
claims and legal proceedings arising in the ordinary course of
business. The Company believes it is unlikely that the final
outcome of any of the claims or proceedings to which the Company is
a party, including those described above, would have a material
adverse effect on the Company's financial statements; however, due
to the inherent uncertainty of litigation, the range of possible
loss, if any, cannot be estimated with a reasonable degree of
precision and there can be no assurance that the resolution of any
particular claim or proceeding would not have an adverse effect on
the Company's results of operations for the interim period in which
such resolution occurred.
<PAGE>
VALERO ENERGY CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following are the Company's financial and operating
highlights for the three months ended March 31, 1997 and 1996. The
amounts in the following table are in thousands of dollars, unless
otherwise noted:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1997 1996
<S> <C> <C>
OPERATING REVENUES:
Refining and marketing . . . . . . . . . . . . . . . . . . . . . $ 821,787 $ 574,507
Natural gas related services <F1>. . . . . . . . . . . . . . . . 767,404 577,924
Intersegment eliminations. . . . . . . . . . . . . . . . . . . . (52,093) (42,333)
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,537,098 $1,110,098
OPERATING INCOME (LOSS):
Refining and marketing . . . . . . . . . . . . . . . . . . . . . $ 43,518 $ 15,233
Natural gas related services . . . . . . . . . . . . . . . . . . 10,888 47,466
Corporate general and administrative expenses and other, net . . (10,493) (10,461)
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 43,913 $ 52,238
Equity in earnings of joint ventures . . . . . . . . . . . . . . . $ 1,006 $ 222
Other income, net. . . . . . . . . . . . . . . . . . . . . . . . . $ 1,432 $ 2,444
Interest and debt expense, net . . . . . . . . . . . . . . . . . . $ 22,911 $ 25,190
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 15,440 $ 19,914
Net income applicable to common stock. . . . . . . . . . . . . . . $ 12,674 $ 17,073
Earnings per share of common stock . . . . . . . . . . . . . . . . $ .29 $ .39
OPERATING STATISTICS:
Refining and marketing:
Throughput volumes (Mbbls per day) . . . . . . . . . . . . . . 174 169
Average throughput margin per barrel . . . . . . . . . . . . . $ 6.58 $ 4.55
Sales volumes (Mbbls per day). . . . . . . . . . . . . . . . . 328 289
Natural gas related services:
Gas volumes (MMcf per day):
Sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,924 1,776
Transportation . . . . . . . . . . . . . . . . . . . . . . . 1,559 1,426
Total gas volumes. . . . . . . . . . . . . . . . . . . . . 3,483 3,202
Average gas sales margin per Mcf . . . . . . . . . . . . . . . $ (.015) $ .246
Average gas transportation fee per Mcf . . . . . . . . . . . . $ .082 $ .101
NGL plant production:
Production volumes (Mbbls per day) . . . . . . . . . . . . . 82.2 78.9
Average NGL market price per gallon. . . . . . . . . . . . . $ .361 $ .305
Average gas cost per Mcf . . . . . . . . . . . . . . . . . . $ 2.32 $ 1.60
Average NGL margin per gallon. . . . . . . . . . . . . . . . $ .119 $ .095
<FN>
<F1> The 1996 amount was revised from that included in the Company's Form 10-Q for the
quarterly period ended March 31, 1996 to include revenues related to certain NGL
trading activities previously classified as a reduction of cost of sales. Such
reclassification was made effective with the quarterly period ended June 30, 1996.
</TABLE>
<PAGE>
Consolidated Results
The Company reported net income of $15.4 million, or $.29 per
share, for the first quarter of 1997 compared to $19.9 million, or
$.39 per share, for the same period in 1996. Net income and
earnings per share decreased due primarily to a significant
decrease in operating income from the Company's natural gas related
services business which more than offset a large increase in
refining and marketing operating income and decreases in interest
and income tax expense.
Operating revenues increased $427 million, or 38%, to $1.5
billion during the first quarter of 1997 compared to the same
period in 1996 due primarily to a $247.3 million increase in
refining and marketing revenues and a $189.5 million increase in
natural gas related services revenues. Operating income decreased
$8.3 million, or 16%, to $43.9 million during the first quarter of
1997 compared to the 1996 period due to a $36.6 million decrease in
natural gas related services operating income, partially offset by
a $28.3 million increase in refining and marketing operating
income. Changes in operating revenues and operating income by
business segment are explained below under "Segment Results."
Net interest and debt expense decreased $2.3 million to $22.9
million during the first quarter of 1997 compared to the first
quarter of 1996 due primarily to paydowns of certain outstanding
nonbank debt, while income tax expense decreased $1.8 million to $8
million during the same periods due primarily to lower pre-tax
income.
Segment Results
Refining and Marketing
Operating revenues from the Company's refining and marketing
operations increased $247.3 million, or 43%, to $821.8 million
during the first quarter of 1997 compared to the same period in
1996 due primarily to a 28% increase in the average sales price per
barrel and, to a lesser extent, to a 13% increase in sales volumes.
The average sales price per barrel increased due to higher gasoline
and other refined product prices which followed higher crude oil
prices. Sales volumes increased due primarily to higher gasoline
sales volumes resulting from increased rack and wholesale marketing
activities and sales of "CARB II" gasoline into the West Coast
market in the 1997 period in connection with the March 1, 1996
startup of the California Air Resources Board's statewide CARB
gasoline program.
Operating income from the Company's refining and marketing
operations increased $28.3 million to $43.5 million during the
first quarter of 1997 compared to the same period in 1996 due
primarily to an approximate $33 million, or 48%, increase in total
throughput margins partially offset by an approximate $5 million
increase in operating expenses. The throughput margin per barrel
averaged $6.58 for the first quarter of 1997, an improvement of
$2.03 per barrel from the first quarter of 1996. Total throughput
margins increased due primarily to a significant improvement in
discounts on purchases of residual oil ("resid") feedstocks due to
an increase in resid supplies resulting from greater worldwide
production of heavier crude oils and a decrease in worldwide demand
for resid as a result of milder weather during the 1997 period.
Throughput margins also benefitted from the differential between
conventional gasoline and crude oil, higher premiums on sales of
mixed xylenes over their value as a gasoline blendstock, and
increased benefits from price risk management activities. These
increases in throughput margins were partially offset by lower
oxygenate margins resulting from higher methanol and butane
feedstock costs. Operating expenses increased due primarily to
higher fuel and electrical power costs resulting from an increase
in natural gas prices, and to costs associated with a xylene
fractionation unit which was placed in service in January 1997 at
the Company's refinery in Corpus Christi, Texas.
Natural Gas Related Services
Operating revenues from the Company's natural gas related
services business increased $189.5 million, or 33%, during the
first quarter of 1997 compared to the same period in 1996 due
primarily to a 15% increase in average natural gas sales prices, an
8% increase in daily natural gas sales volumes, a 29% increase in
NGL sales volumes, and an 18% increase in average NGL market
prices. Natural gas sales prices were higher due to higher demand,
primarily in the western part of the United States, while natural
gas sales volumes increased due primarily to a significant increase
in off-system marketing activities which more than offset a
decrease in volumes in the Company's core market. NGL sales
volumes were higher due primarily to a significant increase in NGL
marketing activities while NGL market prices increased as a result
of strong crude oil and refined product prices and continued low
NGL inventory levels. Natural gas related services revenues also
benefited from an approximate $35 million increase in revenues from
power marketing activities resulting from a substantial increase in
megawatt hours marketed.
Operating income from the Company's natural gas related
services business decreased $36.6 million to $10.9 million during
the first quarter of 1997 compared to the same period in 1996 due
primarily to significantly lower gas sales margins partially offset
by higher margins on NGL production and increased income from NGL
trading activities. Total gas sales margins decreased
substantially, resulting in a negative amount in the 1997 period,
due to unusually warm winter weather in the Eastern United States
in February and March of 1997, an approximate $11 million decrease
in benefits from price risk management activities, reduced
volumetric gains and an increase in fuel costs resulting from
higher natural gas prices as noted above. Total margins on NGL
production were higher due to the increase in average NGL market
prices as noted above and a 4% increase in NGL production volumes,
partially offset by an increase in natural gas fuel and shrinkage
costs, net of increased benefits from price risk management activities
which reduced such costs to below-market levels. NGL trading income
increased due primarily to the increase in NGL marketing activities
noted above. NGL production volumes increased in the first quarter
of 1997 compared to the same period in 1996 due to the completion
in 1996 of certain operational improvements and production
enhancements at various plants.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by the Company's operating activities
decreased $45.4 million to $34.8 million during the first quarter
of 1997 compared to the same period in 1996 due primarily to the
changes in current assets and current liabilities detailed in Note
3 of Notes to Consolidated Financial Statements and to the decrease
in income described above under "Results of Operations." Included
in the changes in current assets and current liabilities was a
substantial decrease in accounts payable in the 1997 period offset
to a large extent by decreases in accounts receivable and
inventories. Accounts payable and accounts receivable decreased in
the 1997 period due primarily to a substantial decrease in natural
gas and NGL prices from December 1996 to March 1997. Inventories
decreased in the 1997 period due primarily to higher refining and
marketing gasoline sales compared to an increase in inventories in
the 1996 period due primarily to weather-related shipment delays of
refined products at the end of the quarter. Prepaid expenses and
other decreased to a greater extent in the 1996 period due
primarily to higher commodity deposits and deferrals at the end of
1995 compared to the end of 1996. During the 1997 period, the
Company utilized the cash provided by its operating activities, a
portion of its existing cash balances, proceeds from issuances of
common stock related to the Company's benefit plans, and bank
borrowings to fund capital expenditures and deferred turnaround and
catalyst costs, repay principal on certain outstanding nonbank
debt, pay common and preferred stock dividends, purchase treasury
stock, and redeem the remaining 11,500 outstanding shares of its
Series A Preferred Stock as described in Note 7 of Notes to
Consolidated Financial Statements.
As described in Note 8 of Notes to Consolidated Financial
Statements, effective May 1, 1997, the Company significantly
increased its financial flexibility and liquidity through the
replacement of its existing $300 million revolving bank credit and
letter of credit facility with a new $835 million revolving bank
credit and letter of credit facility. As of May 1, 1997, Energy
had approximately $159 million available under this committed bank
credit facility for additional borrowings and letters of credit
based on a total availability of $600 million during the period
prior to the Restructuring. Energy also has numerous uncommitted
short-term bank credit lines and bank letter of credit facilities.
As of May 1, 1997, no amounts were available for additional
borrowings under short-term bank lines totaling $150 million, and
approximately $114 million was available for additional letters of
credit under uncommitted letter of credit facilities totaling
$195 million. The above-noted remaining amounts available under
the Company's revolving bank credit facility and short-term bank
lines as of May 1 reflect the effect of borrowing $365 million to
fund the acquisition of Basis as discussed below and the use of the
revolving bank credit facility to provide credit enhancement for
the Refunding Bonds as discussed in Note 8. The Company was in
compliance with all covenants contained in its various debt
facilities as of May 1, 1997.
As described in Note 5 of Notes to Consolidated Financial
Statements, the Company acquired the outstanding common stock of
Basis on May 1, 1997 for $365 million in cash, funded with
borrowings under the Company's bank credit facilities, and $120
million in Energy common stock. Although Basis incurred significant
operating losses during 1995 and 1996, the Company believes that
the Basis refineries can be operated profitably due to recently
completed refinery upgrading projects, a reduction in depreciation
and amortization expense due to the acquisition cost of Basis being
less than its net book value, and a projected reduction in
operating and overhead costs expected to be achieved through
various operational and personnel-related changes to be implemented
by the Company. The Company believes that, assuming the
realization of various assumptions including those discussed above,
the Basis refineries will be accretive to the Company's
consolidated cash flow and earnings beginning in 1997.
During the first quarter of 1997, the Company expended
approximately $41 million for capital investments, primarily
capital expenditures, $9 million of which related to refining and
marketing operations while $32 million related to natural gas
related services operations. For total year 1997, the Company
currently expects to incur approximately $240 million for capital
expenditures and deferred turnaround and catalyst costs. Such
estimate includes approximately $150 million related to the
Company's refining and marketing operations, of which approximately
$50 million is related to the operations of Basis for the eight
months beginning May 1, and approximately $85 million related to
the Company's natural gas related services operations for the full
year of 1997.
As described in Note 6 of Notes to Consolidated Financial
Statements, VRMC refinanced its outstanding $98.5 million principal
amount of industrial revenue bonds in April 1997 at substantially
lower interest rates. Based on the floating rates in effect as of
May 1, 1997, the Company expects the reduction in interest expense
resulting from such refinancing to be in excess of $5 million per
year.
The Company believes it has sufficient funds from operations,
and to the extent necessary, from the public and private capital
markets and bank markets, to fund its ongoing operating
requirements. The Company expects that to the extent necessary, it
can raise additional funds from time to time through equity or debt
financings; however, except for borrowings under bank credit
agreements, the Company has no specific financing plans as of the
date hereof.
The foregoing discussion contains certain estimates,
predictions, projections and other "forward-looking statements"
(within the meaning of Section 27A of the Securities Act of 1933
and Section 21E of the Securities Exchange Act of 1934) that
involve various risks and uncertainties. While these forward-looking
statements, and any assumptions upon which they are based,
are made in good faith and reflect the Company's current judgment
regarding the direction of its business, actual results will almost
always vary, sometimes materially, from any estimates, predictions,
projections, assumptions, or other future performance suggested
herein. Some important factors (but not necessarily all factors)
that could affect the Company's sales volumes, growth strategies,
future profitability and operating results, or that otherwise could
cause actual results to differ materially from those expressed in
any forward-looking statement include the following: renewal or
satisfactory replacement of the Company's resid feedstock
arrangements as well as market, political or other forces generally
affecting the pricing and availability of resid and other refinery
feedstocks, refined products, natural gas supplies or natural gas
liquids; accidents or other unscheduled shutdowns affecting the
Company's, its suppliers' or its customers' pipelines, plants,
machinery or equipment; excess industry capacity; competition from
products and services offered by other energy enterprises; changes
in the cost or availability of third-party vessels, pipelines and
other means of transporting feedstocks and products; ability to
implement the cost reductions and operational changes related to,
and realize the various assumptions and efficiencies projected for,
the operation of the Basis refineries; state and federal
environmental, economic, safety and other policies and regulations,
any changes therein, and any legal or regulatory delays or other
factors beyond the Company's control; execution of planned capital
projects; weather conditions affecting the Company's operations or
the areas in which the Company's products are marketed; rulings,
judgments, or settlements in litigation or other legal matters,
including unexpected environmental remediation costs in excess of
any reserves; the introduction or enactment of legislation,
including tax legislation affecting the proposed merger with PG&E;
and changes in the credit ratings assigned to the Company's debt
securities and trade credit. Certain of these risk factors are
more fully discussed in the Company's Annual Report on Form 10-K,
as amended, for the year ended December 31, 1996. The Company
undertakes no obligation to publicly release the result of any
revisions to any such forward-looking statements that may be made
to reflect events or circumstances after the date hereof or to
reflect the occurrence of unanticipated events.
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Basis Litigation.
Basis is a defendant in numerous lawsuits brought by present
or former employees of Basis, by employees of Basis' customers or
contractors, or by other persons based on alleged negligence, gross
negligence, products liability, strict liability, breach of
warranty and other theories of recovery and claiming injuries,
including wrongful death, resulting from exposure to asbestos,
benzene and other allegedly toxic or carcinogenic compounds
allegedly processed, used, manufactured, distributed or sold by
Basis or its predecessors. Approximately 10 of the lawsuits
involve class or other actions involving numerous plaintiffs and
defendants, while the remaining actions have individual plaintiffs
and involve only Basis or a limited group of defendants. In most
such cases, discovery is underway and trial dates have not been
set.
In addition to the foregoing matters, Basis is a defendant in
a lawsuit, Friends of the Earth, Inc. v. Phibro Energy USA, Inc.,
filed in the United States District Court for the Southern District
of Texas (filed June 1994), alleging, among other things, that
Basis has violated the terms of its National Pollutant Discharge
Elimination System permit for wastewater discharge at its Houston,
Texas refinery. Although the District Court granted Basis a
summary judgment, the United States Court of Appeals for the Fifth
Circuit reversed the summary judgment and remanded the case to the
trial court for further discovery. The case is currently stayed by
mutual agreement pending the decision of the United States Court of
Appeals for the Fifth Circuit in a similar case (Friends of the
Earth v. Chevron Chemical Co., Inc.) in which the lower court
granted summary judgment dismissing the case for lack of standing
by the plaintiffs.
Basis is also a defendant in a lawsuit, Amoco Chemical
Company, et al. v. United States of America, et al. pending in the
United States District Court for the Southern District of Texas
(served May 1996), which is a CERCLA cost recovery action related
to the Tex-Tin "superfund" site. This site is not owned by Basis,
and Basis has advised the Company that Basis has not disposed of
any material at the site. However, Basis has been identified as a
"generator defendant" with respect to the site, as the successor to
the previous refinery owner. Basis potentially may be named as a
defendant or "potentially responsible party" in other similar
pending or threatened superfund-related actions.
Basis is also a defendant in City of Houston v. Phibro Energy
USA, Inc., filed in the 11th Judicial District Court, Harris
County, Texas (filed December 20, 1995) involving alleged Texas
Clean Air Act violations related to allegedly excessive S02
emissions. Agreement among the various parties has been reached to
settle the City of Houston action on terms and conditions not
material to Basis; however, this settlement is not yet final.
Basis is also a defendant in a lawsuit, United States of
America v. Basis Petroleum, Inc., filed on April 29, 1997 by the
U.S. Department of Justice in the United States District Court for
the Southern District of Texas which alleges violations of the New
Source Performance Standards ("NSPS") under the Clear Air Act at the
Texas City, Texas refinery. The suit alleges that applicable NSPS
requirements for a certain process unit, oil and water separator and
storage tank were not met on certain occasions or during specified
periods from May 1990 to April 1994.
Basis has also received Texas Natural Resources Conservation
Commission ("TNRCC") notices of violation ("NOV") and/or federal
Environmental Protection Agency ("EPA") NOVs or administrative
orders with respect to environmental matters at each of its three
refineries. Certain of such notices and orders may require
operational and capital improvements, and may involve the
assessment of substantial monetary penalties.
Basis is also a plaintiff in a lawsuit, Phibro Energy USA,
Inc. v. Belmont Contractors, Inc. et al., pending in the 190th
Judicial District Court, Harris County, Texas (filed March 26,
1996) and alleging generally that through a bribery and kickback
scheme, defendants destroyed plaintiff's independent bargaining
position with respect to construction work performed by defendants,
creating causes of action for fraud, tortious interference with
contract, breach of fiduciary duty, breach of contract and
negligent misrepresentation. Defendant Belmont has asserted
counterclaims against Basis for breach of contract, tortious
interference with contract, fraud, defamation, negligence and
quantum meruit aggregating in excess of $130 million.
Basis is also a party to various other lawsuits arising in the
ordinary course of its business. The various lawsuits referred to
herein seek actual and punitive damages which, in most cases, are
unspecified but which may total several hundreds of millions of
dollars, together, in certain cases, with demands for injunctive
relief. In certain of the matters cited above, including cited
TNRCC and EPA matters, Basis could potentially be adversely
affected through: required reductions in emissions or discharges,
required additions and improvements to refinery controls or other
equipment, required reductions in permit limits or refinery
throughput, and fines or penalties.
Additionally, although the Company conducted a due diligence
investigation of Basis prior to the closing of the purchase of the
stock of Basis, the scope of such investigation, particularly in
light of the volume of environmental, litigation and other matters
to be investigated, was necessarily limited. The Stock Purchase
Agreement between the Company, the seller, and Basis ("Stock
Purchase Agreement") provides for indemnification from the seller
with respect to suits, actions, claims and investigations pending
at the time of the acquisition and for additional indemnification,
subject to certain terms, conditions and limitations, with respect
to other matters. However, there can be no assurance that other
material matters, not identified or fully investigated in due
diligence, will not be subsequently identified or that the matters
heretofore identified will not prove to be more significant than
currently expected.
Item 2. Changes in Securities.
By its notice to stockholders dated April 21, 1997, Energy has
called for redemption on June 2, 1997 (the "Redemption Date"), all
of its outstanding $3.125 convertible preferred stock ("Convertible
Preferred Stock") at $52.188 per share, plus dividends accruing
from June 1, 1997 to the Redemption Date in the amount of $0.0086
per share, for a total redemption price per share of $52.1966 (the
"Redemption Price"). In addition, the regular quarterly dividend
of $0.78125 per share of Convertible Preferred Stock will be paid
separately on June 2, 1997, to holders of record of the Convertible
Preferred Stock at the close of business on May 5, 1997.
Until the close of business on May 23, 1997, record holders of
the Convertible Preferred Stock have the right to convert their
shares into shares of Energy's common stock, $1 par value ("Common
Stock"), at a conversion price of $27.03 (equal to a conversion
rate of approximately 1.85 shares of Common Stock for each share of
Convertible Preferred Stock). After May 23, 1997, the Convertible
Preferred Stock will no longer be convertible. Convertible
Preferred Stock not properly surrendered for conversion before the
close of business on May 23, 1997 will be redeemed at the
Redemption Price on June 2, 1997. The Company has appointed Harris
Trust and Savings Bank as its agent for conversion and redemption
of the Convertible Preferred Stock.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
4.1 Credit Agreement dated as of May 1, 1997 among Valero
Energy Corporation, Valero Refining and Marketing
Company, Morgan Guaranty Trust Company of New York,
Bank of Montreal, and the banks and co-agents party
thereto incorporated by reference from Exhibit 4.2 to
the Registration Statement on Form S-1 of Valero
Refining and Marketing Company (Commission File
No. 333-27013, filed May 13, 1997).
11.1 Computation of Earnings Per Share.
27.1* Financial Data Schedule (reporting financial
information as of and for the three months ended March
31, 1997).
27.2* Restated Financial Data Schedule (reporting financial
information as of and for the three months ended March
31, 1996).
__________
* The Financial Data Schedule and Restated 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
are included as exhibits only to the electronic filing
of this Form 10-Q in accordance with Item 601(c) of
Regulation S-K and Section 401 of Regulation S-T.
(b) Reports on Form 8-K. The Company filed the following
Current Reports on Form 8-K during the quarter ended March 31,
1997.
(i) A report on Form 8-K dated January 31, 1997 was
filed on February 7, 1997, reporting Item 5. Other Events, in
connection with the execution of a Plan and Agreement of
Merger dated January 31, 1997, among Valero Energy
Corporation, PG&E Corporation, and PG&E Acquisition
Corporation, providing for the merger of Valero Energy
Corporation with PG&E Acquisition Corporation.
(ii) A report on Form 8-K dated March 13, 1997 was
filed on March 21, 1997, reporting Item 5. Other Events, in
connection with the Company's announcement of its intent to
purchase the common stock of Basis Petroleum, Inc.
Pursuant to subparagraph 601(b)(4)(iii)(A) of Regulation S-K,
the registrant has omitted from the foregoing list of exhibits, and
hereby agrees to furnish to the Commission upon its request, copies
of certain instruments, each relating to long-term debt not
exceeding 10 percent of the total assets of the registrant and its
subsidiaries on a consolidated basis.
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
VALERO ENERGY CORPORATION
(Registrant)
By: /s/ Edward C. Benninger
Edward C. Benninger
President and Chief
Financial Officer
(Duly Authorized Officer and Principal
Financial and Accounting Officer)
Date: May 15, 1997
<TABLE>
EXHIBIT 11.1
VALERO ENERGY CORPORATION AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE
(Thousands of Dollars, Except Per Share Amounts)
<CAPTION>
Three Months Ended
March 31,
1997 1996
<S> <C> <C>
COMPUTATION OF EARNINGS PER SHARE
ASSUMING NO DILUTION:
Net income. . . . . . . . . . . . . . . . . . . . . . $ 15,440 $ 19,914
Less: Preferred stock dividend requirements and
redemption premium . . . . . . . . . . . . . . . . (2,766) (2,841)
Net income applicable to common stock . . . . . . . . $ 12,674 $ 17,073
Weighted average number of shares of common
stock outstanding. . . . . . . . . . . . . . . . . 44,411,705 43,748,550
Earnings per share assuming no dilution . . . . . . . $ .29 $ .39
COMPUTATION OF EARNINGS PER SHARE
ASSUMING FULL DILUTION:
Net income. . . . . . . . . . . . . . . . . . . . . . $ 15,440 $ 19,914
Less: Preferred stock dividend requirements and
redemption premium . . . . . . . . . . . . . . . . (2,766) (2,841)
Add: Reduction of preferred stock dividends
applicable to the assumed conversion of
Convertible Preferred Stock. . . . . . . . . . . . 2,695 2,695
Net income applicable to common stock
assuming full dilution . . . . . . . . . . . . . . $ 15,369 $ 19,768
Weighted average number of shares of common
stock outstanding. . . . . . . . . . . . . . . . . 44,411,705 43,748,550
Weighted average common stock equivalents
applicable to stock options. . . . . . . . . . . . 828,547 438,815
Weighted average shares issuable upon conversion
of Convertible Preferred Stock . . . . . . . . . . 6,381,798 6,381,798
Weighted average shares used for computation. . . . . 51,622,050 50,569,163
Earnings per share assuming full dilution . . . . . . $ .30<F1> $ .39<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%.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AS OF MARCH 31, 1997 AND THE CONSOLIDATED
STATEMENT OF INCOME FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 16,071
<SECURITIES> 0
<RECEIVABLES> 346,588
<ALLOWANCES> 1,699
<INVENTORY> 200,708
<CURRENT-ASSETS> 607,754
<PP&E> 2,825,475
<DEPRECIATION> 733,127
<TOTAL-ASSETS> 2,864,560
<CURRENT-LIABILITIES> 643,963
<BONDS> 804,427
0
3,450
<COMMON> 44,872
<OTHER-SE> 1,050,622
<TOTAL-LIABILITY-AND-EQUITY> 2,864,560
<SALES> 1,537,098
<TOTAL-REVENUES> 1,537,098
<CGS> 1,493,185
<TOTAL-COSTS> 1,493,185
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 22,911
<INCOME-PRETAX> 23,440
<INCOME-TAX> 8,000
<INCOME-CONTINUING> 15,440
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 15,440
<EPS-PRIMARY> .29
<EPS-DILUTED> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> MAR-31-1996
<CASH> 16,853
<SECURITIES> 0
<RECEIVABLES> 309,644
<ALLOWANCES> 1,335
<INVENTORY> 164,427
<CURRENT-ASSETS> 522,200
<PP&E> 2,717,034
<DEPRECIATION> 653,466
<TOTAL-ASSETS> 2,755,469
<CURRENT-LIABILITIES> 468,374
<BONDS> 919,356
6,900
3,450
<COMMON> 43,784
<OTHER-SE> 990,473
<TOTAL-LIABILITY-AND-EQUITY> 2,755,469
<SALES> 1,110,098
<TOTAL-REVENUES> 1,110,098
<CGS> 1,057,860
<TOTAL-COSTS> 1,057,860
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 25,190
<INCOME-PRETAX> 29,714
<INCOME-TAX> 9,800
<INCOME-CONTINUING> 19,914
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 19,914
<EPS-PRIMARY> .39
<EPS-DILUTED> 0
</TABLE>
