FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X]
For the fiscal year ended December 31, 1996
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. [X]
The aggregate market value on January 31, 1997, 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 $1.3 billion. As of January 31, 1997, 44,273,350 shares of
the registrant's Common Stock were issued and outstanding.
<PAGE>
CONTENTS
PAGE
PART I
Item 1. Business. . . . .. . . . . . . . . . . . . . . . .
Proposed Restructuring . . . . . . . . . . . . . .
Refining and Marketing . . . . . . . . . . . . . .
Refining Operations . . . . . . . . . . . . . .
Sales . . . . . . . . . . . . . . . . . . . . .
Feedstock Supply . . . . . . . . . . . . .. . .
Factors Affecting Operating Results . . . . . .
Natural Gas Related Services . . . . . . . . . . .
Transmission System . . . . . . . . . . . . . .
Sales and Marketing . . . . . . . . . . . . . .
Transportation. . . . . . . . . . . . . . . . .
Supply and Storage. . . . . . . . . . . . . . .
Natural Gas Liquids . . . . . . . . . . . . . .
Electric Power. . . . . . . . . . . . . . . . .
Governmental Regulations . . . . . . . . . . . . .
Federal Regulation. . . . . . . . . . . . . . .
Texas Regulation. . . . . . . . . . . . . . . .
Competition. . . . . . . . . . . . . . . . . . . .
Refining and Marketing. . . . . . . . . . . . .
Natural Gas Related Services. . . . . . . . . .
Environmental Matters. . . . . . . . . . . . . . .
Employees. . . . . . . . . . . . . . . . . . . . .
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
Item 10. Directors and Executive Officers of the
Registrant. . . . . . . . . . . . . . . . . . .
Directors of the Registrant. . . . . . . . . . . .
Executive Officers of the Registrant . . . . . . .
Section 16(a) Beneficial Ownership Reporting
Compliance. . . . . . . . . . . . . . . . . . .
Item 11. Executive Compensation . . . . . . . . . . . . . .
Summary Compensation . . . . . . . . . . . . . . .
Stock Option Grants and Related Information. . . .
Retirement Benefits. . . . . . . . . . . . . . . .
Compensation of Directors. . . . . . . . . . . . .
Arrangements with Certain Officers and Directors .
Item 12. Security Ownership of Certain Beneficial Owners
and Management. . . . . . . . . . . . . . . . .
Item 13. Certain Relationships and Related Transactions . .
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 core businesses are specialized
refining and natural gas related services. 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. The
Company also has a network of approximately 7,500 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 and price risk management services to third parties. The
Company also owns and operates eight natural gas processing plants and is a
major producer and marketer of natural gas liquids ("NGLs"). The Company is
also a marketer of electric power.
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 11 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."
PROPOSED RESTRUCTURING
On January 31, 1997, the Company announced that its Board of
Director's 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 certain outstanding 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 name and will
apply to be listed on the New York Stock Exchange. The refining and
marketing company expects to aggressively pursue acquisitions and strategic
alliances in the refining and marketing industry. 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, may 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. Even though this
legislation has not yet been introduced in Congress, the proposal would be
effective for distributions after the date of first committee action. It is
uncertain whether any such legislation ultimately will be enacted, whether
its effective date provision may be modified, or when committee action in
Congress may first occur. 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 introduction of the President's budget; 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. The Restructuring
transactions are subject to approval by the Company's shareholders, the
Securities and Exchange Commission, and certain regulatory agencies as well
as receipt of favorable tax opinions. The Company expects to hold a
special meeting of stockholders (in lieu of an annual meeting) to consider
the Restructuring transactions in June 1997. The Restructuring
transactions are expected to be completed by mid-1997. However, there can
be no assurance that the various approvals and opinions will be given or
that the conditions to consummating the transactions will be met.
REFINING AND MARKETING
Refining Operations
The Refinery processes high-sulfur atmospheric tower bottoms, a type
of residual fuel oil ("resid"), and other feedstocks into a product slate of
higher value products, principally RFG and middle distillates. The Refinery
can produce approximately 171,500 barrels per day of refined products, with
gasoline and gasoline-related products comprising approximately 85% of the
Refinery's production, 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, 1996, 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 the
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 36,000 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 are the Company's MTBE Plant (the
"MTBE Plant") and "MTBE/TAME Unit." The MTBE Plant can produce approxi-
mately 17,000 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 Refinery's "MTBE/TAME Unit"
converts certain streams produced by the HOC into MTBE and 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 22,500 barrels per day of total oxygenates.
Substantially all of the methanol feedstocks required for the production of
oxygenates at the Refinery can be provided by a methanol plant owned by a
joint venture between the Company and Hoechst Celanese Chemical Group, Inc.
(the "Methanol Plant"). The Methanol Plant can produce approximately 13,000
barrels per day of methanol.
In January 1997, the Company placed into service a "Xylene
Fractionation Unit" which recovers xylenes from the Reformer's reformate
stream. The fractionated xylene may be sold into the petrochemical
feedstock market for use in the production of paraxylene. The Xylene
Fractionation Unit can recover a mixed xylene stream of approximately 6,500
barrels per day. The MTBE Plant, MTBE/TAME Unit, Xylene Fractionation Unit
and related facilities diversify the Company's product mix and enable the
Company to pursue the higher margin product markets.
In 1996, the Company completed scheduled turnarounds on its HDS Unit,
Hydrocracker, Reformer, and MTBE Plant. The capacity of the MTBE Plant was
increased by approximately 1,500 barrels per day. During the second quarter
of 1996, the Company experienced unscheduled down time at the Refinery
because of two power outages. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Results of Operations." The
Refinery's other principal refining units operated during 1996 without
significant unscheduled down time. However, the Methanol Plant in Clear
Lake suffered an explosion in early December. There were no injuries, but
the Company's share of repair costs is estimated to be $2.5 million. The
plant is expected to resume operations in late February 1997. The MTBE
Plant was down for nine days in January 1997 to replace a portion of
catalyst in the unit. During 1997, the HDS Unit is scheduled to be down
for approximately 18 days in the fourth quarter to replace the catalyst
in the unit. The crude unit is scheduled to be down for approximately
14 days in the second quarter of 1997 for a maintenance turnaround
designed to increase the unit's capacity.
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, 1996. 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.
Year Ended December 31,
1996 1995 1994
Throughput volumes (Mbbls per day). . . . 170 160 146
Average throughput margin per barrel. . . $5.29 $6.25 $5.36
Sales volumes (Mbbls per day) . . . . . . 291 231<F1> 140
[FN]
<F1> Revised for 1995 to include sales volumes related to certain refining
and marketing trading activities previously classified as a reduction
of cost of sales.
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 1996, term, spot
and truck rack sales volumes accounted for approximately 35%, 49% and 16%,
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 focus marketing efforts on the RFG and oxygenate
markets. Approximately 50% of the Company's RFG production is under
contract to supply wholesale gasoline marketers in Texas at market-related
prices; another 17% is under contract to gasoline marketers in the northeast
United States, which is currently the largest RFG market in the United
States. In 1996, the Company also supplied approximately 1.5 million
barrels of "CARB II" gasoline in the West Coast markets in connection with
the commencement of the California Air Resources Board's gasoline program.
See "Refining and Marketing - Factors Affecting Operating Results."
Feedstock Supply
The predominant feedstock for the Refinery is resid produced at
refineries outside the United States. Most of the large refineries in the
United States are 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 chartered vessels and are subject to the usual
maritime hazards. The Company maintains insurance on its feedstock cargos.
The Company has entered into several term agreements for the supply
of approximately 58,000 barrels per day of resid feedstocks at market-
related prices which provide for approximately 70% of the Company's
estimated resid feedstock requirements for 1997. These supply agreements
include an agreement with the Saudi Arabian Oil Company to provide an
average of 36,000 barrels per day of A960 resid from its Ras Tanura refinery
to the Company through mid-1998. 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."
The Company also recently entered into term contracts for the supply of
crude oil feedstocks for the Refinery's crude unit, including a contract for
approximately 22,000 barrels per day of Daqing sweet crude oil for the first
six months of 1997, and a contract for approximately 8,000 barrels per day
of domestically produced crude extending through 1997. 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 refining feedstock and product storage facilities
with a capacity of approximately 6.9 million barrels. Approximately
4.4 million barrels of storage capacity are heated tanks for heavy
feedstocks. The Company also leases fuel oil and refined product storage
facilities in various locations, including approximately 600,000 barrels
of gasoline storage in the Houston area. See Note 14 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 affected
by the relationship between refined product prices and resid prices, which
in turn are largely determined by market forces. 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). The crude oil and refined products 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.
Because the Refinery is more complex than many conventional
refineries, and is designed principally to process resid rather than crude
oil, its operating costs per barrel are generally higher than those of most
conventional refineries. But because resid usually sells at a large enough
discount to crude oil, the Company is generally able to recover its higher
operating costs and generate higher margins than many conventional refiners
that use crude oil as their principal feedstock. Moreover, through recent
technology improvements, the Refinery has improved its ability to process
different types of feedstocks, including synthetic domestic heavy oil blends
that have been successfully processed in the HDS Unit.
Saudi Arabian Oil Company has advised the Company that it 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 is expected to be significantly reduced. The
resid feedstock purchased by the Company from Saudi Arabian Oil Company 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.
Because the Refinery is able to manufacture all of its gasoline as
RFG and can produce approximately 22,500 barrels per day of total
oxygenates, certain federal and state clean-fuels programs significantly
affect the operations of the Company and the markets in which the Company
sells its refined products. First, the EPA's oxygenated fuel program under
the Clean Air Act Amendments of 1990 (the "Clean Air Act") requires for
certain winter months that areas designated nonattainment for carbon
monoxide use gasoline that contains a prescribed amount of clean burning
oxygenates.<F2> Second, the EPA's RFG program under the Clean Air Act is
required in areas designated "extreme" or "severe" nonattainment for ozone.
In addition to these nonattainment areas, approximately 43 of the 87 areas
that were designated as "serious," "moderate," or "marginal" nonattainment
for ozone also "opted in" to the RFG program to decrease their emissions of
hydrocarbons and toxic pollutants.<F3> In 1996, California adopted a
state-wide, year-round program requiring the use of gasoline that meets more
restrictive emissions specifications than the federally mandated RFG. Under
the California gasoline program, areas not subject to either the federal
oxygenated fuels program or the federal RFG program may use between zero and
2.7 percent oxygen by weight in their gasoline (sometimes known as "CARB II"
gasoline) so long as the gasoline meets the California emissions standards.
[FN]
<F2> Oxygenates are liquid hydrocarbon compounds containing oxygen.
Gasoline that contains oxygenates usually has lower carbon monoxide
emissions than conventional gasoline. The Clean Air Act and certain
state laws require oxygenated gasoline to have a minimum oxygen
content of 2.7 percent by weight. As of September 1996, only 31 of
the original 42 areas designated as nonattainment for carbon monoxide
remain designated as nonattainment. As areas have come into
"attainment," they generally have left the oxygenated fuels program.
However, Minnesota elected to use oxygenated gasoline statewide and
year-round beginning in 1997, and other states are considering
similar requirements.
<F3> The use of RFG reduces the emissions of ozone-forming compounds,
carbon monoxide and air toxics such as benzene. RFG is manufactured
in compliance with the EPA's "simple model" (i) by substantially
reducing the amount of aromatics and benzene from gasoline, (ii) by
adding an oxygenate (primarily MTBE or ethanol), and (iii) by
reducing the vapor pressure of the gasoline during summer months.
The oxygen content of RFG must average at least 2.1 percent by
weight over the yearly reporting period. The benzene content must
average less than 0.95 percent by volume over the yearly reporting
period. The governor of Arizona recently petitioned the EPA to
"opt-in" the Phoenix area into the RFG program. In 1998, RFG will
be certified using the EPA's "complex model" which will evaluate a
gasoline based on its overall quality and emissions performance
rather than solely on discrete parameters.
MTBE margins are affected by the price of the MTBE and its
feedstocks, methanol and butane, as well as the demand for RFG, oxygenated
gasoline, and premium gasoline. 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. The general United States
growth in gasoline demand as well as additional "opt-ins" by certain areas
into the EPA clean fuels programs are expected to continue to grow the
demand for MTBE.
NATURAL GAS RELATED SERVICES
The Company's natural gas related services business<F4> is a
midstream natural gas business offering value-added services and products to
producers and end-users throughout North America. 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 consist principally of gathering,
processing, storage and transportation of natural gas, and the marketing of
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 also owns and
operates eight gas processing plants and is a major producer and marketer of
NGLs. The Company's NGL operations include the gathering of natural gas,
the extraction of NGLs from natural gas, the fractionation of mixed NGLs
into component products (e.g., ethane, propane, butane, natural gasoline),
and the transportation and marketing of NGLs. Through its natural gas
related services business, the Company also markets electric power and
engages in price-risk management activities to complement and enhance its
merchant business.
[FN]
<F4> These 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 1994 merger described in Note 3 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. For comparability purposes,
the information and statistics presented in this Part I for 1994
reflect the consolidation of the Partnership with Energy for all of
such year on a pro forma basis.
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 7,500 miles of mainlines,
lateral lines and gathering lines. The Transmission System is located
primarily along the Texas Gulf Coast and throughout South Texas and is
positioned to access most of the major producing and consuming regions in
the United States. The Transmission System extends 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.
The Transmission System includes 39 mainline compressor stations with a
total of approximately 181,000 horsepower, together with gas processing
plants, dehydration and gas treating plants and numerous measuring and
regulating stations. The Transmission System is able to handle widely
varying loads caused by changing supply and demand patterns. The Trans-
mission System also supports the power generation grid in Texas, providing
opportunities to trade these markets using gas and power interchangeably.
The Transmission System's average annual throughput<F5> was approximately
2.8 Bcf<F6> per day in 1996. The Company's owned and leased pipeline systems
have 74 interconnects with 21 intrastate pipelines, 43 interconnects with
14 interstate pipelines, and one interconnect with Pemex in South Texas.
[FN]
<F5> This amount includes gas sales and transportation volumes through the
Transmission System in 1996, and does not include off-system sales of
approximately 0.6 Bcf per day.
<F6> 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.
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, 1996.
Year Ended December 31,
1996 1995 1994
Intrastate sales (MMcf per day) . . 700 656 633
Interstate sales (MMcf per day) . . 993 773 506
Total . . . . . . . . . . . . 1,693 1,429 1,139
Average gas sales price per Mcf . . $2.55 $1.74 $2.07
Sales of natural gas accounted for approximately 50%, 50% and 45% of
the Company's total daily gas volumes for 1996, 1995 and 1994, 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 1996, 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 77% over a
four-year period from approximately 957 MMcf per day in 1992 to 1,693 MMcf
per day in 1996. The Company's off-system marketing business, which
increased from 70 MMcf per day of sales in 1992 to 599 MMcf per day in 1996,
was a large contributor to this increase.
The Company's gas sales are made primarily to gas distribution
companies, electric utilities, gas marketers, 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; however, certain gas sales contracts with intrastate
customers provide for either maximum volumes or total customer requirements.
The gas sold to local distribution companies ("LDCs") is resold to consumers
in a number of cities including San Antonio, Dallas, Austin, Corpus Christi
and Chicago. The Company continues to emphasize diversification of its
customer base through interstate sales. By the end of 1996, the Company had
secured contracts to provide gas supply and swing services to certain LDCs,
electric utilities and industrial customers primarily in the midwest,
northwest and western United States providing for deliveries of up to
approximately 815 MMcf per day with terms ranging from one to three years.
The Company has marketing offices located throughout Texas as well as
in Los Angeles, Chicago, Louisville and Calgary, and offers a broad range of
marketing and gas related services.
- The Company's Market Center Services Program ("Market
Center"), provides pricing and price-risk management services to both
gas producers and end users. The Market Center 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 manage gas price volatility for the Company's gas
processing business. See Note 6 of Notes to Consolidated Financial
Statements.
- In 1996, the Company formed its Midwest Retail Natural Gas
Marketing Group to provide natural gas and related services to
industrial and commercial customers in the greater Chicago area.
This retail marketing group expands and complements the Company's
wholesale gas marketing and power marketing businesses.
- The Company operates the Waha Hub in West Texas. The Waha Hub
serves as the designated delivery point for the Streamline electronic
trading system and the futures contracts offered by the Kansas City
Board of Trade.
- "Velocity," the Company's intrastate electronic bulletin
board, was introduced to customers in November 1995. Velocity is
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.
- Valero Field Services Company was established in 1995 to
provide gas gathering, compression, dehydration and treating services
around the Transmission System and in those areas that are complemen-
tary to the Company's anticipated growth. The field services unit
seeks to build and diversify the Company's gas supply portfolio and
create synergistic opportunities with the Company's other gas
businesses.
- In 1995, the Company expanded its marketing business into the
electricity market. See "Natural Gas Related Services - Electric
Power."
Transportation
The following table sets forth the Company's gas transportation
volumes and average transportation fees for the three years ended
December 31, 1996.
Year Ended December 31,
1996 1995 1994
Transportation volumes (MMcf per day). . 1,665 1,430 1,398
Average transportation fee per Mcf . . . $.089 $.094 $.102
Gas transportation and exchange transactions (collectively referred
to as "transportation") accounted for approximately 50%, 50% and 55% of the
Company's total daily gas volumes for 1996, 1995 and 1994, respectively.
The Company's natural gas operations have been positively 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. The
Company transports gas for third parties under hundreds of long-term,
short-term and spot 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.
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.
During 1996, the Company purchased natural gas under hundreds of
separate contracts. A majority of the Company's gas supplies are obtained
from sources with multiple connections, and 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 1996, the Company secured approximately 480 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 seven years. Because of the extensive coverage of the Transmission
System, 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 approxi-
mately 7.2 Bcf of gas available for withdrawal. Natural gas can be
continuously withdrawn from the facility at initial rates of up to approxi-
mately 850 MMcf per day. The facility has the ability to inject gas at
initial rates of approximately 360 MMcf per day. The Company supplemented
its own natural gas storage capacity by leasing during 1996 an additional
6.8 Bcf of third-party storage capacity for the 1996-97 winter heating
season.
Natural Gas Liquids
The Company's NGL operations provide strong integration among the
Company's core businesses. The Company's ability to process natural gas is
a value-added service offered to producers and attracts additional
quantities of gas throughput to the Transmission System. The principal
source of gas for processing is from the Transmission System. Production
from the Company's NGL plants provides butane feedstocks for the production
of oxygenates (primarily MTBE) at the Refinery.
The Company's NGL production for 1996 was approximately 29.6 million
barrels, averaging 80,900 barrels per day. The 1996 NGL production
represents the Company's seventh 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 more than offset, however, by significant expansions and
upgrading projects completed at certain of the Company's other plants. The
table below sets forth production volumes, average NGL market prices, and
average gas costs related to the Company's NGL plant production for the
three years ended December 31, 1996.
Year Ended December 31,
1996 1995 1994
NGL plant production (Mbbls per day) . 80.9 80.3 79.5
Average market price per gallon<F7>. . $.354 $.258 $.265
Average gas cost per Mcf . . . . . . . $1.93 $1.40 $1.75
[FN]
<F7> Represents the average Houston area market prices, net of certain
location differentials, for individual NGL products weighted by
relative volumes of each product produced.
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. The Company's
primary markets for NGLs are petrochemical plants and refineries. 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 1996, approximately 83% 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 1.4 Bcf of gas per day. Each of the
Company's plants is situated along the Transmission System. The Company
also owns and operates approximately 510 miles (350 miles of which are
located in South Texas) of NGL pipelines and fractionation facilities at
three locations including a facility in the Corpus Christi area. The
Company fractionated an average of 83,000 barrels per day in 1996, including
all of the NGL output from its processing plants, except for one.
Approximately 9% of these volumes represented NGLs fractionated for third
parties. In South Texas, the Company gathers NGLs from five of its
processing plants and transports these NGLs through its own pipelines to its
fractionation facilities in the Corpus Christi area. The Company's
remaining NGL pipelines are used to deliver NGLs to end-users and major
common-carrier NGL pipelines, which ultimately deliver NGLs to their
principal markets.
The Company sells NGLs that have been extracted, transported and
fractionated in the Company's facilities as well as 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
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 1997 with the
announcement of several expansions to existing petrochemical facilities
and the start-up of new ethylene plants along the Texas Gulf Coast in the
next few years. A majority of this incremental capacity is projected to be
built by independent petro-chemical 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 may be delayed or canceled, and no assurances can be given that
the proposed petrochemical facilities will be completed.
Electric Power
Deregulation of the electric utility and power industry also offers
new opportunities for natural gas companies. In 1995, the Company formed
Valero Power Services Company to provide risk management and marketing
services to the electric power industry. The Company offers 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, the Mid-Continent Area Power Pool, the Southeastern
Electric Reliability Council and the Mid-America Interconnected Network.
The Company began trading power in January 1996, and marketed approximately
2 million megawatt hours during 1996.
GOVERNMENTAL REGULATIONS
Federal Regulation
The Company's operations are subject to numerous 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 Federal Energy Regulatory Commission ("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. FERC Order No. 636 ("Order 636") 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. 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. 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,
the Company can more effectively compete for sales of natural gas to LDCs
and other customers 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 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. Under
applicable statutes and current RRC practice, however, larger volume
industrial sales and transportation charges may be changed without a rate
case before the RRC if the parties to the transactions agree to the rate
changes. 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.
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. It obtains all of its resid feedstock from unaffiliated
sources. Many of the Company's competitors 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 (and brand-name recognition) 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 or feedstock shortages.
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 should be
able to comply with the Clean Air Act and future environmental legislation
more easily than older refineries, and will not be required to spend
significant additional capital for environmental compliance. In 1996, the
Corpus Christi area was approved as a "flexible attainment region" ("FAR")
by the EPA and the Texas Natural Resource Conservation Commission ("TNRCC").
Under the Clean Air Act, the FAR designation will allow local officials to
design and implement an ozone prevention strategy customized for the
community. This designation also prevents the EPA from designating the
Corpus Christi area as "nonattainment" for a five-year period while
agreed-upon control strategies are being initiated to reduce
ozone formation. The FAR designation should provide greater flexibility
to the Company with respect to future expansion projects at the Refinery.
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 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) as an approximation for gross margins; 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.
Natural Gas Related Services
The natural gas industry is expected to remain highly competitive
with respect to both gas supply and markets. Changes in the gas markets
during recent periods of deregulation have significantly increased
competition. However, the Company has not only maintained but has increased
its throughput volumes since implementation of Order 636. Because of
Order 636, the Company now can guarantee long-term supplies of natural gas
to be delivered to buyers at interstate locations. See "Governmental
Regulations - Federal Regulation." The Transmission System has considerable
flexibility in providing connections between many producing and consuming
areas and is able to handle widely varying loads caused by changing supply
and demand patterns. The Transmission System is well positioned to provide
swing services both in and outside Texas because of its proximity to supply
and its numerous interconnections with other pipeline systems. See "Natural
Gas Related Services - Transmission System."
In recent years, certain of the Company's intrastate pipeline
competitors 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.
The economics of natural gas processing depends principally on the
relationship between natural gas costs and NGL prices. When this
relationship is favorable, the NGL processing business is 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. The Company believes
that the level of competition in NGL processing has increased over the past
years 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. Moreover, the Company's NGL production and
marketing operations complement its natural gas related services, enabling
the Company to provide integrated processing, transportation, and marketing
solutions to its producer clients, giving the Company a competitive
advantage over NGL marketers and transporters that lack such capability.
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 TNRCC and the RRC. The regulatory requirements relate
primarily to water and storm water discharges, waste management and air
pollution control measures. In 1996, capital expenditures for the Company's
refining operations attributable to compliance with environmental
regulations were approximately $5 million and are currently estimated to be
$7 million for 1997. 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 related services operations were not
material in 1996 and are not expected to be material in 1997. 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. The
EPA granted interim approval of the Texas Title V operating permit program
in mid-1996, and many of the Company's gas processing plants and gas
pipeline facilities became subject to requirements for submitting
applications to the TNRCC for new operating permits. As required by
applicable regulations, permit applications for 10% of the Company's gas
processing plants and gas pipeline facilities that are subject to the
regulations were filed in January 1997, with the balance to be filed in July
1997. Although proposed monitoring requirements may increase operating
costs, they are not expected to have a material adverse effect on the
Company's operations or financial condition.
EMPLOYEES
As of January 31, 1997, the Company had 1,673 employees.
<PAGE>
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
Company's gas systems and processing facilities are pledged as collateral
for the First Mortgage Notes of Valero Management Partnership, L.P. See
Note 5 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 14 of Notes to Consolidated Financial Statements.
ITEM 3. LEGAL PROCEEDINGS
Franchise Fee Litigation. City of Edinburg v. Rio Grande Valley Gas
Company, Valero Energy Corporation, Southern Union Company, et al., 92nd
State District Court, Hidalgo County, Texas (filed August 31, 1995). 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") and its predecessors allowing RGV to sell and distribute
natural gas within the City. On September 30, 1993, Energy sold the common
stock of RGV to Southern Union. 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 (now
Southern Union) 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 $50 million and unspecified punitive damages related to amounts allegedly
due under the RGV franchise, City ordinances and state law. In addition,
the City of Pharr, Texas, filed an intervention seeking certification of a
class, with itself as class representative, consisting of all cities served
by franchise by Southern Union. The court certified the class and severed
the claims of the City of Pharr and the class from the original City of
Edinburg lawsuit. The City of Pharr subsequently amended its petition
deleting all Valero entities as defendants. The original trial judge was
disqualified upon motion of the defendants (such disqualification was upheld
on appeal), and a new trial judge has been assigned to preside over both the
City of Edinburg and City of Pharr litigation. The City of Edinburg lawsuit
is scheduled for trial on August 11, 1997. In 1996, the South Texas cities
of Alton and Donna also independently intervened as plaintiffs in the
Edinburg lawsuit filed in the 92nd State District Court in Hidalgo County.
These lawsuits subsequently were severed from the Edinburg lawsuit. The
claims asserted by the cities of Alton and Donna are substantially similar
to the Edinburg litigation claims. Damages are not quantified.
Southern Union Cross-Claim. 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 misrepre-
sentation and fraud.
Newly Filed Franchise Fee Litigation. City of La Joya v. Rio
Grande Valley Gas Company, Valero Energy Corporation, Southern Union
Company, et al., 92nd State District Court, Hidalgo County, Texas (filed
December 27, 1996). City of San Benito, City of Primera, and City of Port
Isabel v. Rio Grande Valley Gas Company, Valero Energy Corporation, Southern
Union Company, et al., 107th State District Court, Cameron County, Texas
(filed December 31, 1996). City of San Juan, City of La Villa, City of
Penitas, City of Edcouch, and City of Palmview v. Rio Grande Valley Gas
Company, Valero Energy Corporation, Southern Union Company, et al., 93rd
State District Court, Hidalgo County, Texas (filed December 27, 1996).
Three additional lawsuits were filed in South Texas during December 1996
making allegations substantially similar to those in the City of Edinburg
litigation. The City of La Joya lawsuit was brought as a class action on
behalf of the City of La Joya and all similarly situated cities having
ordinances or agreements with the defendants. In these three lawsuits, the
defendants are alleged to have excluded certain revenues from their
calculations of franchise taxes and are alleged to have provided
unauthorized gas transportation services to third parties. Plaintiffs seek
actual and exemplary, but as yet unspecified, damages.
J.M. Davidson, Inc. v. Valero Energy Corporation; Valero
Hydrocarbons, L.P.; et al., transferred to the 49th State District Court,
Webb County, Texas (originally filed January 21, 1993 in Duval County).
This 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 breach of contract, quantum
meruit, and numerous other contract and tort claims. The plaintiff seeks
actual damages, on each of its causes of action, of approximately
$1.25 million and punitive damages of at least four times the amount of
actual damages. No trial date 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 certain
subsidiaries of the Company as additional defendants (the "Valero
Defendants") to a lawsuit filed in 1989 by the Long Trusts against Tejas Gas
Corporation ("Tejas"), a supplier with whom the Valero Defendants have
contractual relationships under gas purchase contracts. 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
nonappealable final judgment rendered against Tejas. In January 1993, the
District Court ruled in favor of the Long Trusts' motion for summary
judgment against Tejas. Damages, if any, were not determined. The Long
Trusts seek $50 million in damages from the Company as a result of the
Valero Defendants' alleged interference between the Long Trusts and Tejas,
plus punitive damages in excess of treble the amount of actual damages
proven at trial. The Long Trusts also seek approximately $56 million in
take-or-pay damages from Tejas, and $70 million as damages for Tejas's
failure to take the Long Trusts' gas ratably. The Company believes that the
claims brought by the Long Trusts have been significantly overstated, and
that Tejas and the Valero Defendants have a number of meritorious defenses
to the claims. No trial date has been set.
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 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 the Company contained fraudulent misrepresen-
tations. 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.
Pending in the district court is the memorandum issued by the magistrate
assigned to the case which recommends approval of the defendants' motion for
summary judgment.
Teco Pipeline Company v. Valero Energy Corporation, et al., 215th
State District Court, Harris County, Texas (filed April 24, 1996). Energy
and certain of its subsidiaries have been sued by Teco Pipeline Company
("Teco") regarding the operation of the Company's 340-mile West Texas
pipeline. 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.
Sinco Pipeline Rupture Litigation. Adams, et al. v. Colonial
Pipeline Company; Valero Transmission, L.P.; et al., 157th State District
Court, Harris County, Texas (filed August 31, 1995). Aldridge, et al. v.
Colonial Pipeline Company, Valero Management Company, et al., 295th State
District Court, Harris County, Texas (filed October 18, 1996). 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). Anderson, et al. v. Colonial Pipeline Company,
Valero Management Company, et al., 113th State District Court, Harris
County, Texas (filed October 17, 1996). Barr, et al. v. Colonial Pipeline
Company, Valero Transmission, L.P., et al., 334th State District Court,
Harris County, Texas (filed October 18, 1996). Benavides, et al. v.
Colonial Pipeline Company; Valero Transmission, L.P.; et al., 93rd State
District Court, Hidalgo County, Texas (filed August 31, 1995). Brackett, et
al. v. Colonial Pipeline Company, Valero Transmission, L.P., et al., 11th
State District Court, Harris County, Texas (filed October 18, 1996).
Brewer, et al. v. Colonial Pipeline Company, Valero Transmission, L.P.,
et al., 133rd State District Court, Harris County, Texas (filed October 18,
1996). Hayward, et al. v. Colonial Pipeline Company, Valero Trans-
mission, L.P., et al., 129th State District Court, Harris County, Texas
(filed October 18, 1996). Hornbeck, et al. v. Colonial Pipeline Company,
Valero Transmission, L.P., et al., 56th State District Court, Galveston
County, Texas (filed October 18, 1996). Johnson, et al. v. Colonial
Pipeline Company, Valero Transmission, L.P., et al., 333rd State District
Court, Harris County, Texas (filed October 18, 1996). Layton, et al. v.
Colonial Pipeline Company, Valero Transmission, L.P., et al., 131st State
District Court, Harris County, Texas (filed October 18, 1996). Navarro,
et al. v. Colonial Pipeline Company, et al., 281st State District Court,
Harris County, Texas (filed November 7, 1994). Durst, et al.
(Intervenors) v. Colonial Pipeline Company, Valero Transmission, L.P.,
et al., 281st State District Court, Harris County, Texas. Flores
(Intervenor) v. Colonial Pipeline Company, Valero Transmission, L.P.,
et al., 281st State District Court, Harris County, Texas. Approximately
15 lawsuits have been filed against various pipeline owners and other
parties, including the Company, in connection with 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.
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. Javelina Company has been named as a
defendant in ten lawsuits filed since 1993 in state district courts in
Nueces County, and Duval County, Texas. Eight 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 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.
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 1996.
<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 January 31, 1997, there were approximately 6,240 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
1996 1995 Per Common Share
Quarter Ended High Low High Low 1996 1995
<S> <C> <C> <C> <C> <C> <C>
March 31 . . . . . . . $26 1/2 $22 1/8 $18 5/8 $16 $.13 $.13
June 30. . . . . . . . 29 24 1/2 22 7/8 17 3/4 .13 .13
September 30 . . . . . 25 1/2 20 1/4 25 5/8 19 5/8 .13 .13
December 31. . . . . . 30 21 7/8 25 7/8 22 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, 1997 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, 1996 is derived from the Company's Consolidated Financial
Statements contained elsewhere herein. The selected financial data for the
years ended prior to December 31, 1996 is derived from the selected
financial data contained in the Company's Annual Report on Form 10-K for the
year ended December 31, 1995 except as noted below.
The following summaries are in thousands of dollars except for per
share amounts:
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1995 1994<F1> 1993 1992
<S> <C> <C> <C> <C> <C>
OPERATING REVENUES . . . . . . . . . . . . . $4,990,681 $3,197,872<F2> $1,837,440 $1,222,239 $1,234,618
OPERATING INCOME . . . . . . . . . . . . . . $ 200,909 $ 188,791 $ 125,925 $ 75,504 $ 134,030
EQUITY IN EARNINGS (LOSSES) OF AND
INCOME FROM VALERO NATURAL
GAS PARTNERS, L.P. . . . . . . . . . . . . $ - $ - $ (10,698) $ 23,693 $ 26,360
NET INCOME . . . . . . . . . . . . . . . . . $ 72,701 $ 59,838 $ 26,882 $ 36,424 $ 83,919
Less: Preferred stock dividend
requirements. . . . . . . . . . . . 11,327 11,818 9,490 1,262 1,475
NET INCOME APPLICABLE TO
COMMON STOCK . . . . . . . . . . . . . . . $ 61,374 $ 48,020 $ 17,392 $ 35,162 $ 82,444
EARNINGS PER SHARE OF
COMMON STOCK . . . . . . . . . . . . . . . $ 1.40 $ 1.10 $ .40 $ .82 $ 1.94
TOTAL ASSETS . . . . . . . . . . . . . . . . $3,149,574 $2,876,680 $2,831,358 $1,764,437 $1,759,100
LONG-TERM OBLIGATIONS AND
REDEEMABLE PREFERRED STOCK . . . . . . . . $ 869,450 $1,042,541 $1,034,470 $ 499,421 $ 497,308
DIVIDENDS PER SHARE OF COMMON
STOCK. . . . . . . . . . . . . . . . . . . $ .52 $ .52 $ .52 $ .46 $ .42
<FN>
<F1> Reflects the consolidation of the Partnership as of May 31, 1994.
<F2> Revised to include revenues from certain refining and marketing trading activities previously classified
as a reduction of cost of sales.
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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 (see
"Segment Reporting" below) with PG&E following the spin-off of the Company's
refining and marketing business to the Company's shareholders (the
"Restructuring"). The Restructuring was the result of a management
recommendation announced in November 1996 to pursue strategic alternatives
involving the Company's principal business activities. See "Liquidity and
Capital Resources" below and Note 2 of Notes to Consolidated Financial
Statements for additional information about the Restructuring.
SEGMENT REPORTING
Effective January 1, 1996, the Company's natural gas and natural gas
liquids ("NGL") businesses were reported as one industry segment for
financial reporting purposes (described herein as "natural gas related
services") in recognition of the Company's increasing integration of these
business activities due to the restructuring of the interstate natural gas
pipeline industry in 1993 through FERC Order 636 and the resulting
transformation of the U.S. natural gas industry into a more market and
customer-oriented environment. The Company's ability to gather, transport,
market and process natural gas, among other things, are value-added services
offered to producers and attract additional quantities of gas to the
Company's pipeline system and processing plants through integrated business
arrangements. Prior to 1996, the Company's natural gas and NGL businesses
were reported as separate industry segments. The primary effect of this
change on the Company's segment disclosures was the elimination of volume,
revenue and income amounts related to natural gas fuel and shrinkage volumes
sold to and transported for the natural gas liquids segment by the natural
gas segment. The Company's 1995 and 1994 financial and operating highlights
which follow under "Results of Operations," and the discussion of the
Company's natural gas and NGL businesses which follows under "Results of
Operations - 1995 Compared to 1994 - Segment Results," have been revised
from that contained in the Company's Annual Report on Form 10-K for the year
ended December 31, 1995 to reflect this change in segment reporting.
ACQUISITION OF VNGP, L.P.
As described in Note 3 of Notes to Consolidated Financial Statements,
the merger of VNGP, L.P. with Energy was consummated on May 31, 1994. As a
result of such merger, VNGP, L.P. became a subsidiary of Energy. The
accompanying consolidated statements of income of the Company for the years
ended December 31, 1996, 1995 and 1994 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
related services segment are not comparable to subsequent and prior periods
due to the VNGP, L.P. merger, the discussion of this segment which follows
under "Results of Operations - 1995 Compared to 1994 - Segment Results" is
based on pro forma operating results for 1994 that reflect the consolidation
of the Partnership with Energy for all of such year.
The following 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 residual oil ("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;
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; adverse 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 adverse changes in the credit ratings
assigned to the Company's debt securities and trade credit. 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>
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, 1996. For 1995
and 1994, operating revenues and operating income (loss) by segment and
certain natural gas related services operating statistics have been restated
to conform to the 1996 presentation. The amounts in the following table are
in thousands of dollars, unless otherwise noted:
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1995 1994
<S> <C> <C> <C>
OPERATING REVENUES:
Refining and marketing <F1>. . . . . . . . . . . . . . . . . . . . . . . $2,757,801 $1,950,657 $1,090,368
Natural gas related services <F2>. . . . . . . . . . . . . . . . . . . . 2,445,504 1,396,468 784,287
Other <F2> . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 123 126 42,639
Intersegment eliminations <F2> . . . . . . . . . . . . . . . . . . . . . (212,747) (149,379) (79,854)
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $4,990,681 $3,197,872 $1,837,440
OPERATING INCOME (LOSS):
Refining and marketing . . . . . . . . . . . . . . . . . . . . . . . . . $ 110,046 $ 141,512 $ 78,660
Natural gas related services <F2>. . . . . . . . . . . . . . . . . . . . 132,178 83,180 61,944
Corporate general and administrative expenses and other, net <F2>. . . . (41,315) (35,901) (14,679)
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 200,909 $ 188,791 $ 125,925
Equity in earnings (losses) of and income from:
Valero Natural Gas Partners, L.P. <F3> . . . . . . . . . . . . . . . . . $ - $ - $ (10,698)
Joint ventures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,899 $ 4,827 $ 2,437
Other income, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,070 $ 2,742 $ 2,039
Interest and debt expense, net . . . . . . . . . . . . . . . . . . . . . . $ (95,177) $ (101,222) $ (76,921)
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 72,701 $ 59,838 $ 26,882
Net income applicable to common stock. . . . . . . . . . . . . . . . . . . $ 61,374 $ 48,020 $ 17,392
Earnings per share of common stock . . . . . . . . . . . . . . . . . . . . $ 1.40 $ 1.10 $ .40
PRO FORMA OPERATING INCOME (LOSS) <F4>:
Refining and marketing . . . . . . . . . . . . . . . . . . . . . . . . . $ 110,046 $ 141,512 $ 78,660
Natural gas related services . . . . . . . . . . . . . . . . . . . . . . 132,178 83,180 69,769
Corporate general and administrative expenses and other, net . . . . . . (41,315) (35,901) (22,486)
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 200,909 $ 188,791 $ 125,943
OPERATING STATISTICS:
Refining and marketing:
Throughput volumes (Mbbls per day) . . . . . . . . . . . . . . . . . . 170 160 146
Average throughput margin per barrel . . . . . . . . . . . . . . . . . $ 5.29 $ 6.25 $ 5.36
Sales volumes (Mbbls per day) <F1> . . . . . . . . . . . . . . . . . . 291 231 140
Natural gas related services <F4>:
Gas volumes (MMcf per day):
Sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,693 1,429 1,139
Transportation . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,665 1,430 1,398
Total gas volumes. . . . . . . . . . . . . . . . . . . . . . . . . 3,358 2,859 2,537
Average gas sales margin per Mcf . . . . . . . . . . . . . . . . . . . $ .146 $ .162 $ .184
Average gas transportation fee per Mcf . . . . . . . . . . . . . . . . $ .089 $ .094 $ .102
NGL plant production:
Production volumes (Mbbls per day) . . . . . . . . . . . . . . . . . 80.9 80.3 79.5
Average NGL market price per gallon. . . . . . . . . . . . . . . . . $ .354 $ .258 $ .265
Average gas cost per Mcf . . . . . . . . . . . . . . . . . . . . . . $ 1.93 $ 1.40 $ 1.75
Average NGL margin per gallon. . . . . . . . . . . . . . . . . . . . $ .103 $ .080 $ .076
<FN>
<F1> Revised for 1995 to include revenues and associated volumes related to certain refining and marketing
trading activities previously classified as a reduction of cost of sales.
<F2> Reflects the consolidation of the Partnership commencing June 1, 1994.
<F3> 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 period prior
to June 1, 1994.
<F4> Operating income (loss) presented herein for 1994 represents pro forma amounts that reflect the
consolidation of the Partnership with Energy for all of such year. Operating statistics for the natural
gas related services segment for 1994 represent pro forma statistics that reflect such consolidation.
</TABLE>
<PAGE>
1996 COMPARED TO 1995
Consolidated Results
The Company reported net income of $72.7 million, or $1.40 per share,
for the year ended December 31, 1996 compared to $59.8 million, or $1.10 per
share, for the year ended December 31, 1995. For the fourth quarter of
1996, net income was $18.8 million, or $.37 per share, compared to $12.9
million, or $.23 per share, for the fourth quarter of 1995. Net income and
earnings per share increased during the 1996 fourth quarter and total year
compared to the same periods in 1995 due primarily to a significant increase
in operating income from the Company's natural gas related services
business, partially offset by a decrease in refining and marketing operating
income and an increase in corporate expenses. Lower net interest expense
also contributed to the increase in net income and earnings per share,
partially offset by higher income taxes.
Operating revenues increased $1.8 billion, or 56%, to $5 billion
during 1996 compared to 1995 due to an approximate $1 billion, or 75%
increase in natural gas related services revenues and an approximate
$800 million, or 41% increase in refining and marketing revenues. Operating
income increased $12.1 million, or 6%, to $200.9 million during 1996
compared to 1995 due to a $49 million, or 59% increase in natural gas
related services operating income, partially offset by a $31.5 million, or
22% decrease in refining and marketing operating income and a $5.4 million
increase in corporate expenses resulting primarily from higher employee-
related and other costs. Changes in operating revenues and operating income
by business segment are explained below under "Segment Results."
During the fourth quarter of 1996, the Company wrote off its
investment in its joint venture project to design, construct and operate a
plant in Mexico to produce methyl tertiary butyl ether ("MTBE") and accrued
an estimate of additional liabilities associated with such investment
resulting in a loss of $19.5 million (see Note 7 of Notes to Consolidated
Financial Statements). Substantially offsetting this loss was the reversal
in the fourth quarter of 1996 of the excess portion of an accrual
established in May 1994 to cover expected costs related to the Company's
acquisition of the publicly held units of VNGP, L.P. Net interest and debt
expense decreased $6 million to $95.2 million during 1996 compared to 1995
due primarily to a decrease in bank borrowings and paydowns of certain
outstanding nonbank debt, partially offset by the issuance of medium-term
notes ("Medium-Term Notes") in the first half of 1995 (see "Liquidity and
Capital Resources"). Income tax expense increased $5.7 million in 1996
compared to 1995 due primarily to higher pre-tax income.
Segment Results
Refining and Marketing
Operating revenues from the Company's refining and marketing
operations increased $807.1 million, or 41%, to $2.8 billion during 1996
compared to 1995 due primarily to a 26% increase in sales volumes and a 12%
increase in the average sales price per barrel. The increase in sales
volumes was due primarily to increased volumes from trading and rack
marketing activities, and a 6% increase in average daily throughput volumes
resulting from various unit improvements and enhancements made during 1995
and a reduced impact on production due to unit turnarounds which occurred in
1996 compared to 1995, partially offset by the effects of two second quarter
1996 power outages at the Refinery. The average sales price per barrel
increased due primarily to higher gasoline and distillate prices which
generally followed an increase in crude oil prices during 1996.
Operating income from the Company's refining and marketing operations
decreased $31.5 million, or 22%, to $110 million during 1996 compared to
1995 due primarily to a decrease in total throughput margins and higher
operating expenses. The decrease in total throughput margins was due
primarily to lower oxygenate margins resulting from higher butane feedstock
costs, particularly in the fourth quarter, lower margins on sales of
petrochemical feedstocks, and decreased results from price risk management
activities. These decreases in throughput margins were partially offset by
the increase in throughput volumes noted above, higher distillate margins,
and an improvement in discounts on purchases of resid feedstocks. Operating
expenses increased due primarily to costs associated with the methanol plant
which was placed in service in late August 1995 and higher variable costs
resulting from increased throughput at the Refinery.
The Company has entered into various term feedstock supply agreements
for approximately 58,000 barrels per day of resid which are based on market
prices and extend through 1997, including an agreement with the Saudi
Arabian Oil Company for approximately 36,000 barrels per day which extends
through mid-1998. These agreements provide approximately 70% of the
Refinery's estimated daily resid feedstock requirements for 1997. The
Company believes that if any of its existing resid feedstock arrangements
were interrupted or terminated, supplies of resid 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 few years, if any such
interruptions or terminations did occur, the Company could be required to
incur higher resid feedstock costs or substitute other types of resid,
thereby producing less favorable operating results. The Company also has
two agreements to supply feedstock for the Refinery's crude unit; one with
the Chinese state-owned oil company for approximately 22,000 barrels per day
of sweet crude oil extending through June 1997, and one with a domestic
refiner for approximately 8,000 barrels per day of crude oil extending
through the end of 1997. The remainder of the Refinery's resid and crude
feedstocks are purchased at market-based prices under short-term contracts.
Production from the Company's joint venture methanol plant normally provides
all of the methanol feedstock presently required for the Refinery's
production of oxygenates used in reformulated gasoline ("RFG").
In 1996, a maintenance turnaround and a catalyst change for the
Refinery's hydrodesulfurization unit (the "HDS Unit") were completed in
July, a turnaround of the Refinery's MTBE Plant was completed in September
during which its capacity was increased by approximately 1,500 barrels per
day, and turnarounds of the Refinery's hydrocracker and naphtha reformer
units were completed in December. In early December, an explosion occurred
at the methanol plant as it was being shut down for repairs. The Company's
share of repair costs is estimated to be $2.5 million, and the plant is
expected to resume operations in late February 1997. In 1995, a
maintenance turnaround and a catalyst change for the HDS Unit and
turnarounds of the hydrocracker and naphtha reformer units were all
completed in April of that year. During 1997, the crude unit is
scheduled for a maintenance turnaround in the second quarter designed
to increase the unit's capacity, and the HDS Unit is scheduled for a
maintenance turnaround and a catalyst change in the fourth quarter.
The Company enters into various exchange-traded and over-the-counter
financial instrument contracts with third parties to manage price risk
associated with refining feedstock and fuel 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 1996, refining throughput margins were reduced by $1.2
million as a result of hedging activities compared to a $12.8 million
benefit in 1995. The 1995 benefit resulted primarily from favorable price
swap contracts on methanol, as methanol prices dropped by over 70% during
that year. In 1996 and 1995, the Company was also able to reduce its
operating costs by $2.8 million and $1 million, respectively, as a result of
hedges on refining natural gas fuel requirements. See Note 1 under "Price
Risk Management Activities" and Note 6 of Notes to Consolidated Financial
Statements.
Natural Gas Related Services
Operating revenues from the Company's natural gas related services
operations increased $1 billion, or 75%, to $2.4 billion during 1996
compared to 1995 due primarily to a 47% increase in average natural gas
sales prices, an 18% increase in natural gas sales volumes, primarily
off-system sales, a 37% increase in average NGL market prices, and a 28%
increase in NGL sales volumes. Natural gas sales prices and volumes were
higher due to increased demand for natural gas to replenish low industry-
wide natural gas storage inventories drawn down by extreme cold winter
weather during the 1996 first quarter and which remained below 1995 levels
during all of 1996. Natural gas demand also increased due to early cold
weather during the 1996 fourth quarter. NGL market prices increased as a
result of historically low NGL inventory levels, firm petrochemical and
refining demand, and strong crude oil and refined product prices. NGL sales
volumes were higher due primarily to an increase in NGL marketing
activities.
Operating income from the Company's natural gas related services
operations increased $49 million, or 59%, to $132.2 million during 1996
compared to 1995 due primarily to higher margins on NGL production and to a
lesser extent to increases in total gas sales margins, natural gas
transportation revenues and income from NGL trading activities. Total
margins on NGL production were higher due to the substantial increase in
average NGL market prices noted above and to an approximate $16 million
increase in benefits from price risk management activities which limited the
increase in natural gas fuel and shrinkage costs. Total gas sales margins
increased due primarily to the increase in off-system sales volumes noted
above and increased benefits from price risk management activities,
partially offset by an increase in fuel costs. Natural gas transportation
revenues were higher due to a 16% increase in transportation volumes
resulting from increased marketing activities, partially offset by a 5%
decrease in average transportation fees. NGL trading income increased due
primarily to the increase in NGL marketing activities noted above. NGL
production volumes increased slightly in 1996 compared to 1995 as production
increases at various plants resulting from the completion in 1995 and 1996
of certain operational improvements and production enhancements generally
offset the effects of the sale of two West Texas processing plants in August
1995.
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 sales and transportation 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 adjust to deregulation and the customer-driven market
that has developed since FERC Order 636 was enacted.
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 provide for the sale of gas at
its weighted average cost, as defined ("WACOG"), plus a margin. 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. As a result of
contracts expiring in 1998, the majority of storage costs previously
included in WACOG (see Note 14 of Notes to Consolidated Financial
Statements), will no longer be recovered through these gas sales rates.
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 93% of the Company's NGL
production comes from plants in South Texas and the Texas Gulf Coast. 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 MTBE. 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.
The Company enters into various exchange-traded and over-the-counter
financial instrument contracts with third parties to manage price risk
associated with its natural gas storage, natural gas marketing and NGL
operations. Such activities are intended to manage price risk but may
result in gas, fuel and shrinkage costs either higher or lower than those
that would have been incurred absent such activities. In 1996 and 1995,
total gas sales margins benefitted from gas cost reductions of $23.4 million
and $12 million, respectively, resulting from price risk management
activities. Of these amounts, $12.6 million and $5.6 million, respectively,
were recognized in each year's fourth quarter. In addition, in 1996 and
1995, total margins on NGL production benefitted from fuel and shrinkage
cost reductions of $19.7 million and $4.1 million, respectively, resulting
from price risk management activities. For all such activities, an
additional $16.6 million and $3.8 million was deferred at December 31, 1996
and 1995, respectively, which is recognized as a reduction to cost of sales
in the subsequent year. See Note 1 under "Price Risk Management Activities"
and Note 6 of Notes to Consolidated Financial Statements.
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 related services business, including the effect of the
May 31, 1994 merger of VNGP, L.P. with Energy. 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 VNGP, L.P. 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 9 of Notes
to Consolidated Financial Statements.
Operating revenues increased $1.4 billion, or 74%, to $3.2 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 VNGP, L.P. 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 VNGP, L.P. merger, the allocation of corporate expenses
to the Partnership in 1994 for the periods prior to the VNGP, L.P. merger
and an increase in compensation expense.
As a result of the VNGP, L.P. 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 related services 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 in December 1994 and the first half of 1995. 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 $860.3 million, or 79%, to $2 billion during 1995
compared to 1994 due primarily to a 65% increase in sales volumes and a 9%
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 RFG beginning in the fourth
quarter of 1994, a 10% increase in throughput volumes resulting from various
unit improvements completed during the latter part of 1994 and first half of
1995, and additional sales volumes in 1995 related to increased fuel oil
trading activities. 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. Total throughput
margins increased due to higher margins on sales of RFG, oxygenates and
petrochemical feedstocks, the effects of the 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. The increase in
total throughput margins resulting from these factors was partially offset
by a 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 resid feedstocks increased in 1995
compared to 1994 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 increase in benefits from price risk management activities,
approximately $7 million of which was attributable to fourth quarter
operations. Although operating expenses increased approximately 4% due
primarily to higher costs resulting from increased throughput, operating
expenses per barrel decreased by approximately 5%. Selling and
administrative expenses increased due to higher compensation and other
expenses, while depreciation expense increased approximately 4% due to
capital expenditures incurred during the latter part of 1994 and in 1995.
In 1995 and 1994, refining feedstock costs were reduced by $12.8
million and $5.3 million, respectively, as a result of price risk management
activities. In addition, in 1995 the Company was able to reduce its
operating costs by $1 million as a result of such activities. In 1994, the
effect of such activities on operating costs was not significant.
Natural Gas Related Services
Operating income from the Company's natural gas related services
operations was $83.2 million for 1995 compared to pro forma operating income
of $69.8 million for 1994. The $13.4 million, or 19%, increase was due
primarily to an increase in total gas sales margins and other operating
revenues, higher margins on NGL production, a decrease in NGL transportation
and fractionation costs, and a decrease in operating, selling and
administrative expenses. The increase in operating income resulting from
these factors was partially offset by decreases in natural gas
transportation revenues and NGL revenues from transportation and
fractionation of third party plant production. 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 gas sales
margins resulting from these factors was partially offset by reduced
volumetric gains and lower unit margins due primarily to an increase in
lower-margin spot and off-system sales. Total margins on NGL production were
higher 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 3%
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. 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, partially offset by higher ad valorem tax,
maintenance and compensation expenses. The decrease in transportation
revenues was due primarily to an 8% decrease in average transportation fees.
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 two West Texas processing plants in August 1995.
In 1995, total gas sales margins benefitted from gas cost reductions
of $12 million resulting 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. In addition, in 1995 total margins on
NGL production benefitted from fuel and shrinkage cost reductions of
$4.1 million resulting from price risk management activities. In 1994, the
effect of such activities on fuel and shrinkage costs was not significant.
For all such activities, an additional $3.8 million and $6.8 million was
deferred at December 31, 1995 and 1994, respectively, which is recognized as
a reduction to cost of sales in the subsequent year.
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.
OUTLOOK
Refining and Marketing
Over the next few years, light product demand is expected to grow
moderately and refining capacity in the U.S. is expected to remain tight.
However, the ongoing restructuring of the refining industry to improve
performance as a result of poor margins experienced in recent years will
create an extremely competitive business environment. The Company entered
into several new feedstock arrangements in 1996 and will continue to explore
various opportunities, both domestically and abroad, to diversify its
sources of feedstock supply. The Company expects resid to continue to sell
at a discount to crude oil, but is unable to predict the amount of such
discount or future relationships between the supply of and demand for resid.
Domestic gasoline demand, which increased by 1%, 1.5% and 1.7% in
1996, 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 and an
increasing number of miles driven. The demand for RFG increased in 1996 to
over 30% of the total demand for gasoline in the U.S. following the
implementation of the California Air Resources Board's "CARB II" gasoline
program, and may continue to increase if areas of the country whose ozone
emissions exceed permitted levels are permitted and elect to "opt in" to the
RFG program to reduce their emission levels. The demand for oxygenates,
including MTBE, is expected to increase due to the future need to replace
the octane displaced by the worldwide movement to reduce the use of lead in
gasoline, and to growing demand for oxygenated gasolines. The Company's
Refinery throughput volumes are expected to benefit from the full year
effect of various unit improvements and enhancements made during 1996 and no
significant unit turnarounds being scheduled in 1997.
Natural Gas Related Services
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 and other efforts to reduce regulation, the Company's
natural gas related services business continues to adjust to the
transformation of the U.S. natural gas industry into a more 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, gas transportation, volume and capacity
management, price risk management, power marketing, NGL marketing and
beginning in 1996, retail gas marketing. To capitalize on the continuing
growth of west-to-east movement of gas across the United States, the Company
intends to further increase its capacity to move gas across Texas through
pipeline debottlenecking and other projects. 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. 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 has increased and plans to further increase the
processing capacity at certain of its NGL plants and fractionation
facilities through various expansion projects. As a result of the
development of the above-noted natural gas related services business
opportunities, the Company believes that it should be able to increase its
natural gas, NGL and power marketing volumes in 1997.
Due to rapid consolidation taking place in the natural gas and power
industries in an effort to lower fixed costs per unit and improve profits in
an increasingly competitive environment, competitors to the Company's
natural gas related services business were becoming larger and more
sophisticated. As a result , the Company began exploring the possibility of
its natural gas related services business becoming part of a larger
organization to remain competitive in the future and announced in November
1996 that its Board of Directors had approved a management recommendation to
pursue a strategic alliance for such operations. On January 31, 1997, the
Company announced that its natural gas related services business would be
merged with PG&E Corporation following the spin-off of the Company's
refining and marketing business. See "Proposed Restructuring" above and
Note 2 of Notes to Consolidated Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
PROPOSED RESTRUCTURING
As described above, the Company's refining and marketing business,
which is conducted through Valero Refining and Marketing Company ("VRMC"),
a wholly owned subsidiary of Energy, is expected to be spun-off as a
separate company to the Company's shareholders at the time of the
Restructuring. Such refining and marketing business currently obtains
working capital financing from Energy pursuant to Energy's $300 million
revolving bank credit and letter of credit facility and certain uncommitted
short-term bank credit lines and uncommitted bank letter of credit
facilities obtained by Energy as described below under "Current Structure."
At the time of the spin off, the refining and marketing company expects to
have established a separate unsecured five-year, $600 million revolving
bank credit and letter of credit facility which can be used to fund working
capital needs and other general corporate purposes, including the issuance
of letters of credit and the funding of a dividend payable to Energy
pursuant to the terms of the agreement and plan of merger with PG&E.
Borrowings under this new facility are expected to bear interest at either
LIBOR plus a margin, a base rate defined generally as the federal funds
rate plus a margin, or a money-market rate. In addition, the refining and
marketing company expects to pay various fees and expenses in connection
with this new facility. The interest margins and fees are expected to
fluctuate based upon the levels of certain financial ratios or the credit
ratings assigned from time to time to the refining and marketing company's
long-term debt and are expected to be comparable to those currently paid
by Energy. The credit facility is expected to contain various covenants,
which may include certain financial covenants such as a minimum fixed
charge coverage ratio, a maximum permitted debt to capitalization ratio
and a minimum net worth test. The refining and marketing company may
also obtain short-term uncommitted revolving credit or letter of credit
facilities, the lenders, issuers, amounts, terms and conditions of which
cannot currently be determined.
VRMC currently has outstanding $90 million of 10-1/4% industrial
revenue refunding bonds and $8.5 million of 10-5/8% industrial revenue
bonds issued in 1987. See Note 5 of Notes to Consolidated Financial
Statements. The industrial revenue bonds may be called and redeemed on
June 1, 1997 at 103% of their principal amount. VRMC intends to refund
the existing industrial revenue bonds through issuance, prior to the
June 1, 1997 redemption date, of four new series of refunding revenue
bonds, having the same aggregate principal amount. VRMC expects to
issue the new bonds on a floating rate basis and for the bonds to be
secured by a letter of credit to be issued under the bank credit
facility described above. Based on the currently existing interest
rate environment and because the bonds will be issued as floating
rate debt as opposed to fixed rated debt, the interest rates on the
refunding revenue bonds will be substantially lower than the rates
on the existing industrial revenue bonds. The refunding revenue bonds
are expected to have a weighted average life of approximately 16 years
from their date of issuance and to be subject to a mandatory sinking
fund requirement.
The Company believes that the spun-off refining and marketing company
will have 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.
CURRENT STRUCTURE
Net cash provided by the Company's operating activities increased
$120 million to $275.8 million in 1996 compared to 1995 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 substantial increase in accounts payable in
1996 offset to a large extent by increases in accounts receivable and
inventories. Accounts payable and accounts receivable increased in 1996 due
to higher commodity prices and increased purchase and sales volumes of
refined products, natural gas and NGLs. Refining inventories increased in
1996 due to increased rack and wholesale marketing activities, while
refining inventories decreased in 1995 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. Prepaid expenses and other
decreased in 1996 compared to an increase in 1995 due to lower commodity
deposits and deferrals, while accrued interest decreased in 1996 compared to
an increase in 1995 as a result of timing differences on interest payments
for certain nonbank debt. During 1996, 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
employee benefit plans, and proceeds from dispositions of various
nonessential properties to fund capital expenditures and deferred turnaround
and catalyst costs, reduce bank debt, repay principal on certain outstanding
nonbank debt, pay common and preferred stock dividends, and redeem a portion
of its outstanding Cumulative Preferred Stock, $8.50 Series A ("Series A
Preferred Stock").
Energy currently maintains an 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 this facility bear interest at either LIBOR plus .50% (inclusive of a
facility fee), prime or a competitive money market rate. The Company is
also charged various fees, including various letter of credit fees. As of
December 31, 1996, Energy had approximately $273 million available under
this committed bank credit facility for additional borrowings and letters of
credit. Energy also has $190 million of uncommitted short-term bank credit
lines and $170 million of uncommitted bank letter of credit facilities, of
which $108 million and $129 million, respectively, were available as of
December 31, 1996 for additional borrowings and letters of credit. The
Company was in compliance with all covenants contained in its various debt
facilities as of December 31, 1996. See Notes 4 and 5 of Notes to
Consolidated Financial Statements.
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 were issued in 1995. The net proceeds
were used for general corporate purposes, including the repayment of
existing indebtedness, financing of capital projects and additions to
working capital. See Note 5 of Notes to Consolidated Financial Statements.
No additional Medium-Term Notes have been issued since June 1995 and none
are expected to be issued in the future. The Company's ratio of earnings to
fixed charges, as computed based on rules promulgated by the Commission, was
1.98 for the year ended December 31, 1996.
During 1996, the Company expended approximately $165 million for
capital investments, including capital expenditures and deferred turnaround
and catalyst costs. Of this amount, $93 million related to refining and
marketing operations while $66 million related to natural gas related
services operations. Included in the refining and marketing amount was $36
million for turnarounds of the Refinery's HDS Unit, MTBE Plant, and
hydrocracker and naphtha reformer units. For 1997, the Company currently
expects to incur approximately $175 million for capital expenditures and
deferred turnaround and catalyst costs.
During 1996, the Company entered into a sublease agreement for unused
space in its corporate headquarters office complex. The sublease has a
primary term of 20 years, with the sublessee having an option to terminate
the lease after 10 years. The sublessee is scheduled to occupy the premises
in phases, with full occupancy currently expected in 1997. The sublease
reduced the Company's rent expense in 1996 by $.5 million and is expected to
reduce future rent expense by approximately $2.1 million per year once fully
occupied.
Dividends on Energy's Common Stock are considered quarterly by the
Energy Board of Directors, and may be paid only when approved by the Board.
The current quarterly dividend rate on Energy's Common Stock of $.13 per
share has remained unchanged since the fourth quarter of 1993. 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
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 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 related services operations have a
concentration of customers in the natural gas transmission and distribution,
and 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 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 1996 and are expected to be
approximately $7 million in 1997. 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 related services operations have not been material to
date and are not expected to be material in 1997. 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 federal 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 June 1996, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 125,
"Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities," which establishes new accounting and
reporting standards for transfers and servicing of financial assets and
extinguishments of liabilities. The statement is effective for transactions
occurring after December 31, 1996. Based on information currently known by
the Company, this statement will not have a material effect 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, 1996 and 1995, 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, 1996. 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, 1996 and 1995, and the
results of their operations and their cash flows for each of the three years
in the period ended December 31, 1996, in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
San Antonio, Texas
February 14, 1997
<PAGE>
<TABLE>
VALERO ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Thousands of Dollars)
<CAPTION>
December 31,
A S S E T S 1996 1995
<S> <C> <C>
CURRENT ASSETS:
Cash and temporary cash investments. . . . . . . . . . . . . . . . . . . . . $ 19,847 $ 28,054
Cash held in debt service escrow . . . . . . . . . . . . . . . . . . . . . . 37,746 36,627
Receivables, less allowance for doubtful accounts of $1,624 (1996) and
$1,193 (1995). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 566,088 339,189
Inventories. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 212,134 140,822
Current deferred income tax assets . . . . . . . . . . . . . . . . . . . . . 22,408 29,530
Prepaid expenses and other . . . . . . . . . . . . . . . . . . . . . . . . . 29,946 47,321
888,169 621,543
PROPERTY, PLANT AND EQUIPMENT - including construction in
progress of $45,824 (1996) and $37,472 (1995), at cost . . . . . . . . . . . 2,802,231 2,697,494
Less: Accumulated depreciation. . . . . . . . . . . . . . . . . . . . . . 708,352 622,123
2,093,879 2,075,371
INVESTMENT IN AND ADVANCES TO JOINT VENTURES . . . . . . . . . . . . . . . . . 29,192 41,890
DEFERRED CHARGES AND OTHER ASSETS. . . . . . . . . . . . . . . . . . . . . . . 138,334 137,876
$3,149,574 $2,876,680
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:
Short-term debt. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 82,000 $ -
Current maturities of long-term debt . . . . . . . . . . . . . . . . . . . . 72,341 81,964
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 661,273 312,672
Accrued interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,082 31,104
Other accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . 39,458 42,542
875,154 468,282
LONG-TERM DEBT, less current maturities. . . . . . . . . . . . . . . . . . . . 868,300 1,035,641
DEFERRED INCOME TAXES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 285,138 276,013
DEFERRED CREDITS AND OTHER LIABILITIES . . . . . . . . . . . . . . . . . . . . 34,407 56,031
REDEEMABLE PREFERRED STOCK, SERIES A, issued 1,150,000 shares,
outstanding 11,500 (1996) and 69,000 (1995) shares . . . . . . . . . . . . . 1,150 6,900
COMMON STOCK AND OTHER STOCKHOLDERS' EQUITY:
Preferred stock, $1 par value - 20,000,000 shares authorized including
redeemable preferred shares:
$3.125 Convertible Preferred Stock, issued and outstanding
3,450,000 (1996 and 1995) shares ($172,500 aggregate
involuntary liquidation value) . . . . . . . . . . . . . . . . . . . . 3,450 3,450
Common stock, $1 par value - 75,000,000 shares authorized; issued
44,185,513 (1996) and 43,739,380 (1995) shares . . . . . . . . . . . . . 44,186 43,739
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . 540,133 530,177
Unearned Valero Employees' Stock Ownership Plan Compensation . . . . . . . . (8,783) (11,318)
Retained earnings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 506,439 467,943
Treasury stock, -0- (1996) and 6,904 (1995) common shares, at cost . . . . . - (178)
1,085,425 1,033,813
$3,149,574 $2,876,680
<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)
<CAPTION>
Year Ended December 31,
1996 1995 1994
<S> <C> <C> <C>
OPERATING REVENUES . . . . . . . . . . . . . . . . . . $4,990,681 $3,197,872 $1,837,440
COSTS AND EXPENSES:
Cost of sales and operating expenses. . . . . . . . 4,606,320 2,830,636 1,561,225
Selling and administrative expenses . . . . . . . . 81,665 78,120 66,258
Depreciation expense. . . . . . . . . . . . . . . . 101,787 100,325 84,032
Total . . . . . . . . . . . . . . . . . . . . . . 4,789,772 3,009,081 1,711,515
OPERATING INCOME . . . . . . . . . . . . . . . . . . . 200,909 188,791 125,925
EQUITY IN EARNINGS (LOSSES) OF AND INCOME FROM:
Valero Natural Gas Partners, L.P. . . . . . . . . . - - (10,698)
Joint ventures. . . . . . . . . . . . . . . . . . . 3,899 4,827 2,437
OTHER INCOME, NET. . . . . . . . . . . . . . . . . . . 4,070 2,742 2,039
INTEREST AND DEBT EXPENSE:
Incurred. . . . . . . . . . . . . . . . . . . . . . (99,505) (105,921) (79,286)
Capitalized . . . . . . . . . . . . . . . . . . . . 4,328 4,699 2,365
INCOME BEFORE INCOME TAXES . . . . . . . . . . . . . . 113,701 95,138 42,782
INCOME TAX EXPENSE . . . . . . . . . . . . . . . . . . 41,000 35,300 15,900
NET INCOME . . . . . . . . . . . . . . . . . . . . . . 72,701 59,838 26,882
Less: Preferred stock dividend requirements. . . . 11,327 11,818 9,490
NET INCOME APPLICABLE TO COMMON STOCK. . . . . . . . . $ 61,374 $ 48,020 $ 17,392
EARNINGS PER SHARE OF COMMON STOCK . . . . . . . . . . $ 1.40 $ 1.10 $ .40
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING (in thousands). . . . . . . . . . . . . 43,926 43,652 43,370
DIVIDENDS PER SHARE OF COMMON STOCK. . . . . . . . . . $ .52 $ .52 $ .52
<FN>
See Notes to Consolidated Financial Statements.
</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, 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)
Net income . . . . . . . . . - - - - - 72,701 -
Dividends on Series A
Preferred Stock. . . . . . - - - - - (587) -
Dividends on Convertible
Preferred Stock. . . . . . - - - - - (10,781) -
Dividends on Common Stock. . - - - - - (22,837) -
Unearned Valero Employees'
Stock Ownership Plan
compensation . . . . . . . - - - - 2,535 - -
Shares repurchased and
shares issued pursuant
to employee stock plans
and other. . . . . . . . . - 446,133 447 9,956 - - 178
BALANCE, December 31, 1996 . . $3,450 44,185,513 $44,186 $540,133 $ (8,783) $506,439 $ -
<FN>
See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
<TABLE>
VALERO ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands of Dollars)
<CAPTION>
Year Ended December 31,
1996 1995 1994
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 72,701 $ 59,838 $ 26,882
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation expense . . . . . . . . . . . . . . . . . . . . 101,787 100,325 84,032
Amortization of deferred charges and other, net. . . . . . . 36,628 34,955 20,844
Changes in current assets and current liabilities. . . . . . 50,232 (31,636) (95,597)
Deferred income tax expense . . . . . . . . . . . . . . . . 20,000 4,700 12,200
Equity in (earnings) losses in excess of distributions:
Valero Natural Gas Partners, L.P.. . . . . . . . . . . . . - - 16,179
Joint ventures. . . . . . . . . . . . . . . . . . . . . . (3,899) (4,304) (2,437)
Changes in deferred items and other, net . . . . . . . . . . (1,648) (8,056) 6,008
Net cash provided by operating activities. . . . . . . . . 275,801 155,822 68,111
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures . . . . . . . . . . . . . . . . . . . . . . (128,453) (124,619) (80,738)
Deferred turnaround and catalyst costs . . . . . . . . . . . . . (36,389) (35,590) (21,999)
Investment in and advances to joint ventures, net. . . . . . . . 1,197 (2,018) (9,229)
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. . . . . . . . . . 6,834 13,531 4,504
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . 637 70 898
Net cash used in investing activities. . . . . . . . . . . . . (156,174) (148,626) (229,925)
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in short-term debt. . . . . . . . . . . . . . . . . . . 82,000 - -
Long-term borrowings, net. . . . . . . . . . . . . . . . . . . . - 96,500 92,000
Long-term debt reduction, net. . . . . . . . . . . . . . . . . . (175,229) (61,357) (27,285)
Increase in cash held in debt service escrow for principal . . . (1,875) (1,875) (22,768)
Common stock dividends . . . . . . . . . . . . . . . . . . . . . (22,837) (22,698) (22,554)
Preferred stock dividends. . . . . . . . . . . . . . . . . . . . (11,368) (11,856) (8,600)
Issuance of Convertible Preferred Stock, net . . . . . . . . . . - - 167,878
Issuance of common stock, net. . . . . . . . . . . . . . . . . . 7,225 1,684 3,251
Repurchase of Series A Preferred Stock . . . . . . . . . . . . . (5,750) (5,750) (1,150)
Net cash provided by (used in) financing activities. . . . . . (127,834) (5,352) 180,772
NET INCREASE (DECREASE) IN CASH AND TEMPORARY
CASH INVESTMENTS . . . . . . . . . . . . . . . . . . . . . . . . (8,207) 1,844 18,958
CASH AND TEMPORARY CASH INVESTMENTS AT
BEGINNING OF PERIOD. . . . . . . . . . . . . . . . . . . . . . . 28,054 26,210 7,252
CASH AND TEMPORARY CASH INVESTMENTS AT
END OF PERIOD. . . . . . . . . . . . . . . . . . . . . . . . . . $ 19,847 $ 28,054 $ 26,210
<FN>
See Notes to Consolidated Financial Statements.
</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 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 3).
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 and over-the-counter
financial instrument contracts with third parties to hedge the purchase
costs and sales prices of inventories, operating margins and certain
anticipated transactions. 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 anticipated transactions 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 deferred 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 and over-the-
counter 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 these contracts
are recognized as gains or losses in cost of sales currently and are
recorded in the Consolidated Balance Sheets in "Prepaid expenses and
other" and "Accounts payable" 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 6.
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 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 $51 million at December 31, 1996. Natural gas
in underground storage, natural gas liquids ("NGLs") and materials and
supplies are carried principally at weighted average cost not in excess of
market. Inventories as of December 31, 1996 and 1995 were as follows (in
thousands) (see Note 6):
December 31,
1996 1995
Refinery feedstocks. . . . . . . . . . . $ 42,744 $ 48,295
Refined products and blendstocks . . . . 99,398 41,967
Natural gas in underground storage . . . 40,609 31,156
NGLs . . . . . . . . . . . . . . . . . . 5,190 3,280
Materials and supplies . . . . . . . . . 24,193 16,124
$212,134 $140,822
Refinery feedstock and refined product and blendstock inventory
volumes totalled 7.4 million barrels ("MMbbls") and 6.2 MMbbls as of
December 31, 1996 and 1995, respectively. Natural gas inventory volumes
totalled approximately 10 billion cubic feet ("Bcf") and 11.7 Bcf as of
December 31, 1996 and 1995, respectively.
Prepaid Expenses and Other
Prepaid expenses and other as of December 31, 1996 and 1995 were as
follows (in thousands):
December 31,
1996 1995
Commodity deposits and deferrals (see Note 6). . $18,914 $34,553
Prepaid insurance. . . . . . . . . . . . . . . . 6,737 8,663
Prepaid benefits expense . . . . . . . . . . . . 2,794 2,187
Other. . . . . . . . . . . . . . . . . . . . . . 1,501 1,918
$29,946 $47,321
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 under the composite method of 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. During early 1996, a detailed study of the
Company's fixed asset lives was completed by a third-party consultant for
the majority of the Company's refining and marketing and natural gas related
services assets. As a result of such study, effective January 1, 1996, the
Company adjusted the weighted-average remaining lives of the assets subject
to the study, utilizing the composite method of depreciation, to better
reflect the estimated periods during which such assets are expected to
remain in service. The effect of this change in accounting estimate on
depreciation expense for 1996 was insignificant. A summary of the principal
rates used in computing the annual provision for depreciation, primarily
utilizing the composite method and including estimated salvage values, is as
follows:
Refining and marketing - processing facilities . . . . 3.6% - 4.9%
Natural gas related services - transmission,
gathering, processing and storage facilities. . . . . 4.3% - 5.3%
Other. . . . . . . . . . . . . . . . . . . . . . . . . 6% - 45%
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 included in
noncurrent other assets was $26 million as of December 31, 1996. Such
amount is expected to be recovered over the next five years through natural
gas sales rates charged to certain customers.
Catalyst and Refinery Turnaround Costs
Catalyst costs are 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 as of December 31, 1996 and 1995 were as
follows (in thousands):
<TABLE>
<CAPTION>
December 31,
1996 1995
<S> <C> <C>
Accrued taxes. . . . . . . . . . . . . . . . . . . . . $19,633 $16,433
Other accrued employee benefit costs (see Note 13) . . 8,688 11,047
Current portion of accrued pension cost (see Note 13). 4,265 4,695
Accrued lease expense. . . . . . . . . . . . . . . . . 3,006 4,566
Other. . . . . . . . . . . . . . . . . . . . . . . . . 3,866 5,801
$39,458 $42,542
</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 5 and 6.
Earnings Per Share
Earnings per share of common stock were computed, after recognition
of preferred stock dividend requirements, based on the weighted average
number of common shares outstanding during each year. For the years ended
December 31, 1996, 1995 and 1994, the conversion of the Convertible
Preferred Stock (see Note 9) 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, 1996, 1995 and 1994 was 43,926,026, 43,651,914 and 43,369,836,
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 3). 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>
Year Ended December 31,
1996 1995 1994
<S> <C> <C> <C>
Cash held in debt service escrow for interest. . . $ 756 $ 689 $(12,673)
Receivables, net . . . . . . . . . . . . . . . . . (226,899) (106,916) (64,150)
Inventories. . . . . . . . . . . . . . . . . . . . (71,312) 41,267 (21,785)
Prepaid expenses and other . . . . . . . . . . . . 17,375 (22,304) 142
Accounts payable . . . . . . . . . . . . . . . . . 344,418 38,825 (4,295)
Accrued interest . . . . . . . . . . . . . . . . . (11,022) 11,411 3,901
Other accrued expenses . . . . . . . . . . . . . . (3,084) 5,392 3,263
Total. . . . . . . . . . . . . . . . . . . . . . $ 50,232 $ (31,636) $(95,597)
</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>
Year Ended December 31,
1996 1995 1994
<S> <C> <C> <C>
Interest - net of amount capitalized of $4,328 (1996),
$4,699 (1995) and $2,365 (1994). . . . . . . . . . . . . . $105,519 $86,553 $72,023
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . 19,043 23,935 3,931
</TABLE>
Noncash investing activities for 1995 included 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 included the accrual
of the remaining $60 million payment made in 1995 for the Company's interest
in a methanol plant renovation project.
Accounting Changes
In June 1996, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 125,
"Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities," which establishes new accounting and
reporting standards for transfers and servicing of financial assets and
extinguishments of liabilities. The statement is effective for transactions
occurring after December 31, 1996. Based on information currently known by
the Company, this statement will not have a material effect on the Company's
consolidated financial statements.
SFAS No. 123, "Accounting for Stock-Based Compensation," issued by
the FASB in October 1995, encourages, but does not require companies to
measure and recognize in their financial statements a compensation cost for
stock-based employee compensation plans based on the "fair value" method of
accounting set forth in the statement. The Company has chosen to continue
to account for its employee stock compensation plans using the "intrinsic
value" method of accounting set forth in Accounting Principles Board ("APB")
Opinion No. 25, "Accounting for Stock Issued to Employees," and related
Interpretations. Accordingly, compensation cost for stock options is
measured as the excess, if any, of the quoted market price of the Company's
common stock at the date of the grant over the amount an employee must pay
to acquire the stock. See Note 13 for the pro forma effects on net income
and earnings per share had compensation cost for the Company's stock-based
compensation plans been determined consistent with SFAS No. 123.
Effective January 1, 1996, the Company adopted 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. 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.
Since adoption, no impairment losses have been recognized in the Company's
consolidated financial statements. However, see Note 7 for a discussion of
the Company's write-off in the fourth quarter of 1996 of its equity method
investment in its Mexico joint venture project.
2. PROPOSED RESTRUCTURING
In November 1996, the Company publicly announced that its Board of
Directors had approved a management recommendation to pursue strategic
alternatives involving the Company's principal business activities. Such
alternatives included seeking a strategic alliance for the Company's natural
gas related services business and a spin-off of its petroleum refining and
marketing operations. In response to the Company's solicitation for
indications of interest, a number of companies submitted written proposals
to engage in a strategic alliance with the Company, and the Company invited
a final group of five companies to participate in a more extensive due
diligence review. 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 refining and marketing company expects
to aggressively pursue acquisitions and strategic alliances in the refining
and marketing industry. 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, may 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. Even though this legislation has not yet been introduced in
Congress, the proposal would be effective for distributions after the date
of first committee action. It is uncertain whether any such legislation
ultimately will be enacted, whether its effective date provision may be
modified, or when committee action in Congress may first occur. 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 introduction of the
President's budget; 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. 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 expects to hold a special meeting of
stockholders (in lieu of an annual meeting) in June 1997 to consider the
Restructuring transactions; such transactions are expected to be completed
by mid-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.
3. ACQUISITION OF VALERO NATURAL GAS PARTNERS, L.P.
In March 1994, Energy issued Convertible Preferred Stock (see Note 9)
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 was accounted for as a purchase and the purchase price was
allocated to the 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 reflect the Company's effective equity interest of
approximately 49% in the Partnership's operations for periods prior to and
including May 31, 1994, and reflect 100% of the Partnership's operations for
all periods thereafter.
The following unaudited pro forma financial information of Valero
Energy Corporation and subsidiaries assumes that the above described
transactions occurred for all of 1994. Such pro forma information is not
necessarily indicative of the results of future operations.
<TABLE>
<CAPTION>
Year Ended
December 31,
1994
(Thousands of dollars,
except per share amounts)
<S> <C>
Operating revenues. . . . . . . . . . . . . . . . . . $2,333,982
Operating income. . . . . . . . . . . . . . . . . . . 125,943
Net income. . . . . . . . . . . . . . . . . . . . . . 19,389
Net income applicable to common stock . . . . . . . . 7,442
Earnings per share of common stock. . . . . . . . . . .17
</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 (in thousands):
<TABLE>
<CAPTION>
Five Months
Ended May 31,
1994
<S> <C>
NGL purchases and services from the Partnership . . . . $36,536
Natural gas purchases from the Partnership. . . . . . . 9,672
Sales of NGLs and natural gas, and transportation
and other charges to the Partnership . . . . . . . . 11,385
Management fees billed to the Partnership for
direct and indirect costs. . . . . . . . . . . . . . 34,299
Interest income from capital lease transactions . . . . 5,481
</TABLE>
4. SHORT-TERM DEBT
Energy currently maintains nine separate short-term bank lines of
credit totalling $190 million, $82 million of which was outstanding at
December 31, 1996 at a weighted average interest rate of 6.81%. Five of
these lines are cancellable on demand, and the others expire at various
times in 1997. 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.
5. LONG-TERM DEBT AND BANK CREDIT FACILITIES
Long-term debt balances as of December 31, 1996 and 1995 were as
follows (in thousands):
<TABLE>
<CAPTION>
December 31,
1996 1995
<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, 6% at
December 31, 1996, due November 1, 2000 . . . . . . . . . . . . . . . . . . 25,000 120,000
10.58% Senior Notes, due December 30, 2000 . . . . . . . . . . . . . . . . . . 140,343 187,714
9.14% VESOP Notes, due February 15, 1999 (see Note 13) . . . . . . . . . . . . 5,083 6,819
Medium-Term Notes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 228,500 228,500
Valero Management Partnership, L.P. First Mortgage Notes . . . . . . . . . . . . 443,215 476,072
Total long-term debt. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 940,641 1,117,605
Less current maturities . . . . . . . . . . . . . . . . . . . . . . . . . . . 72,341 81,964
$ 868,300 $1,035,641
</TABLE>
Energy currently maintains an 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 this facility bear interest at either LIBOR plus .50% (inclusive of a
facility fee), prime or a competitive money market rate. The Company is
also charged various fees, including various letter of credit fees. As of
December 31, 1996, Energy had approximately $273 million available under
this committed bank credit facility for additional borrowings and letters of
credit. Energy also has $170 million of uncommitted bank letter of credit
facilities, approximately $129 million of which were available as of
December 31, 1996 for additional 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, $132 million of which
were outstanding at December 31, 1996. 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 were issued and outstanding at December 31, 1996.
As of December 31, 1996, Energy's outstanding Medium-Term Notes had a
remaining weighted average life of approximately 7.5 years and a weighted
average interest rate of approximately 8.3%. No Medium-Term Notes have
been issued since June 1995 and none are expected to be issued in the
future.
The Management Partnership's First Mortgage Notes are currently
comprised of five remaining series due serially from 1997 through 2009, and
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, 1996,
the First Mortgage Notes had a remaining weighted average life of
approximately 5.5 years and a weighted average interest rate of 10.13% 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, 1996, $37.7
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, 1996.
Based on long-term debt outstanding at December 31, 1996, maturities
of long-term debt, including sinking fund requirements and excluding
borrowings under bank credit facilities, for the years ending December 31,
1998 through 2001 are approximately $75 million, $73.2 million, $85.6
million and $94.5 million, respectively. Maturities of long-term debt under
Energy's revolving bank credit and letter of credit facility for the year
ended December 31, 2000 are $25 million.
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
$1,039 million and $1,275 million at December 31, 1996 and 1995,
respectively.
6. PRICE RISK MANAGEMENT ACTIVITIES
Refining and Marketing Hedging Activities
The Company uses over-the-counter price swaps, 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.
Swaps, options and futures contracts at the end of 1996 and 1995 had
remaining terms of less than one year. As of December 31, 1996 and 1995,
13% and 19%, respectively, of the Company's refining inventory position was
hedged. The amount of deferred hedge losses included as an increase to
refinery inventories was $.8 million and $1 million as of December 31, 1996
and 1995, respectively. The following is a summary of the contract amounts
and range of prices of the Company's contracts held or issued to hedge
refining inventories as of December 31, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
Payor Receiver Payor Receiver
<S> <C> <C> <C> <C>
Swaps:
Volumes (Mbbls). . . . 497 497 - -
Price (per bbl). . . . $17.50-$17.57 $17.31-$17.38 - -
Options:
Volumes (Mbbls). . . . - - - 150
Price (per bbl). . . . - - - $24.36-$24.78
Futures:
Volumes (Mbbls). . . . - 981 250 1,327
Price (per bbl). . . . - $24.87-$29.65 $22.71-$23.83 $17.57-$24.55
</TABLE>
The Company also hedges anticipated transactions. Over-the-counter
price swaps, options and futures are used to hedge refining operating
margins for periods up to 12 months by locking in components of the margins,
including the resid discount, the conventional crack spread and the premium
product differentials. As of December 31, 1996 and 1995, less than 2% of
the Company's anticipated 1997 and 1996 refining margin, respectively, were
hedged. There were no significant explicit deferrals of hedging gains or
losses related to these anticipated transactions as of either year end.
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 refining
margins as of December 31, 1996 and 1995. 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>
1996 1995
Payor Receiver Receiver
<S> <C> <C> <C>
Swaps:
Volumes (Mbbls). . . . . 6,000 28,300 525
Price (per bbl). . . . . $.53-$4.90 $.74-$3.55 $34.23-$35.81
Options:
Volumes (Mbbls). . . . . 750 - -
Price (per bbl) . . . . $25.00-$32.76 - -
Futures:
Volumes (Mbbls). . . . . 1,312 1,410 14
Price (per bbl). . . . . $26.46-$30.87 $21.74-$30.39 $18.95-$19.50
</TABLE>
Natural Gas Related Services Hedging Activities
The Company uses futures, price swaps and over-the-counter and
exchange-traded options to hedge gas storage. These financial instrument
contracts run for periods of up to three months. The Company also enters
into basis swaps for location differentials at fixed prices which generally
extend for periods up to three months. As of December 31, 1996 and 1995, 59%
and 26%, respectively, of the Company's natural gas inventory position was
hedged. The amount of deferred hedge gains (losses) included as a reduction
(increase) of natural gas inventories was $(7.8) million and $.9 million as
of December 31, 1996 and 1995, respectively. 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 natural gas inventories as of December 31,
1996 and 1995. 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>
1996 1995
Payor Receiver Payor Receiver
<S> <C> <C> <C> <C>
Swaps:
Volumes (MMcf) . . . . . . . 8,155 9,155 1,000 1,000
Price (per Mcf). . . . . . . $3.20-$4.37 $2.72-$4.25 $1.91 $2.87-$3.45
Options:
Volumes (MMcf) . . . . . . . 33,290 33,850 12,000 23,000
Price (per Mcf). . . . . . . $2.20-$2.60 $2.50-$3.30 $1.90-$2.50 $1.90-$2.50
Futures:
Volumes (MMcf) . . . . . . . 31,710 36,970 17,480 15,430
Price (per Mcf). . . . . . . $2.12-$4.57 $2.08-$4.37 $1.77-$3.45 $1.75-$3.45
Basis Swaps:
Volumes (MMcf) . . . . . . . 2,000 4,096 500 2,120
Price (per Mcf). . . . . . . $(.16)-$.32 $(.60)-$.19 $.63 $.13-$.85
</TABLE>
The Company also uses futures, price swaps and over-the-counter and
exchange-traded options to hedge certain anticipated transactions, including
anticipated natural gas purchase requirements for NGL plant shrinkage and
refining operations, natural gas liquids sales, and commitments to buy and
sell natural gas at fixed prices. These financial instrument contracts
extend through the year 2001. The Company also enters into basis swaps for
location differentials at fixed prices which extend through the year 2001.
As of December 31, 1996 and 1995, 12% and 29%, respectively, of the
Company's anticipated annual NGL plant shrinkage requirements, and 11% and
29%, respectively, of Refining's anticipated annual natural gas
requirements, were hedged. Explicitly deferred gains from hedges of these
anticipated transactions of $24.4 million and $3.9 million, as of
December 31, 1996 and 1995, respectively, will be recognized when the
hedged transaction occurs. 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 anticipated natural gas purchase requirements for NGL plant
shrinkage and refining operations, natural gas purchase and sales
commitments, and anticipated NGL production volumes as of December 31,
1996 and 1995. 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 1996 1995
1997 1998-2001 Balance Balance
Payor Receiver Payor Receiver Payor Receiver Payor Receiver
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Swaps:
Volumes (MMcf) . 28,353 13,327 14,422 - 42,775 13,327 55,277 26,111
Price (per Mcf).$1.54-$4.55 $1.65-$4.25 $2.06 - $1.54-$4.55 $1.65-$4.25 $1.31-$3.45 $1.71-$4.34
Volumes (Mbbls). 3,080 980 - - 3,080 980 - -
Price (per bbl).$9.35-$28.77 $10.71-$20.37 - - $9.35-$28.77 $10.71-$20.37 - -
Options:
Volumes (MMcf) . 26,565 21,195 - - 26,565 21,195 10,340 9,073
Price (per Mcf).$1.66-$3.50 $1.61-$4.00 - - $1.66-$3.50 $1.61-$4.00 $1.66-$3.25 $1.50-$2.45
Volumes (Mbbls). 75 975 - - 75 975 - -
Price (per bbl).$17.43 $14.07-$16.80 - - $17.43 $14.07-$16.80 - -
Futures:
Volumes (MMcf) . 90,810 82,200 740 - 91,550 82,200 105,020 52,680
Price (per Mcf).$1.72-$4.57 $1.75-$4.56 $2.35-$2.51 - $1.72-$4.57 $1.75-$4.56 $1.50-$3.45 $1.50-$3.61
Volumes (Mbbls). 1,223 1,803 - - 1,223 1,803 - -
Price (per bbl).$14.99-$28.81 $15.33-$27.62 - - $14.99-$28.81 $15.33-$27.62 - -
Basis Swaps:
Volumes (MMcf) . 32,296 36,961 11,224 40,470 43,520 77,431 16,787 98,541
Price (per Mcf).$(.66)-$.24 $(.32)-$.35 $(.52)-$(.06) $(.30)-$(.26) $(.66)-$.24 $(.32)-$.35 $.06-$1.06 $.03-$.85
</TABLE>
The following table discloses the carrying amount and fair value of
the Company's refining, natural gas and NGL contracts held or issued for
non-trading purposes as of December 31, 1996 and 1995 (dollars in
thousands):
<TABLE>
<CAPTION>
1996 1995
Assets (Liabilities) Assets (Liabilities)
Carrying Fair Carrying Fair
Amount Value Amount Value
<S> <C> <C> <C> <C>
Swaps . . . . . . . . . . . . $ 7,184 $13,853 $ 98 $1,557
Options . . . . . . . . . . . . 1,101 (2,638) (91) 429
Futures . . . . . . . . . . . . 21,116 21,116 217 217
Basis Swaps. . . . . . . . . . . - 2,809 - 5,823
Total . . . . . . . . . . . . $29,401 $35,140 $224 $8,026
</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 12 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 as of December 31,
1996 and 1995 :
<TABLE>
<CAPTION>
Total Total
Expected Maturity Date 1996 1995
1997 1998-2000 Balance Balance
Payor Receiver Payor Receiver Payor Receiver Payor Receiver
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Swaps:
Volumes (MMcf) . 4,520 4,160 - - 4,520 4,160 23,430 24,950
Price (per Mcf).$3.25-$4.25 $3.15 -$4.25 - - $3.25 -$4.25 $3.15-$4.25 $1.79-$3.44 $1.71-$3.44
Volumes (Mbbls). 400 400 - - 400 400 2,925 2,250
Price (per bbl).$4.25-$4.55 $4.20-$4.72 - - $4.25-$4.55 $4.20-$4.72 $1.80-$4.14 $2.40-$4.18
Options:
Volumes (MMcf) . 15,000 15,310 - - 15,000 15,310 36,100 18,000
Price (per Mcf).$2.10-$5.20 $1.65-$5.20 - - $2.10-$5.20 $1.65-$5.20 $1.60-$3.25 $1.60-$2.40
Volumes (Mbbls). - 275 - - - 275 - 150
Price (per bbl). - $25.20 - - - $25.20 - $17.50-$19.00
Futures:
Volumes (MMcf) . 39,420 41,390 - - 39,420 41,390 63,650 59,280
Price (per Mcf).$1.87-$4.50 $2.09-$4.58 - - $1.87-$4.50 $2.09-$4.58 $1.64-$3.44 $1.67-$3.67
Volumes (Mbbls). - - - - - - 100 450
Price (per bbl). - - - - - - $23.42-$23.44 $18.24-$19.00
Basis Swaps:
Volumes (MMcf) . 27,000 30,460 11,850 27,275 38,850 57,735 11,620 42,000
Price (per Mcf).$(.32)-$.38 $(.32)-$.40 $(.10)-$(.10) $(.08)-$(.05) $(.32)-$.38 $(.32)-$.40 $.07-$.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, 1996 and 1995 (dollars in
thousands):
<TABLE>
<CAPTION>
Fair Value of Assets (Liabilities)
Average Ending Net Gains(Losses)
1996 1995 1996 1995 1996 1995
<S> <C> <C> <C> <C> <C> <C>
Swaps. . . . . . . . . . . . . $ (102) $ (329) $ (560) $ 245 $ 613 $(2,143)
Options. . . . . . . . . . . . (93) 1,026 (1,047) 297 8,270 (3,273)
Futures. . . . . . . . . . . . 1,951 2,030 926 6,739 4,016 8,822
Basis Swaps. . . . . . . . . . 1,705 487 1,072 1,266 277 2,706
Total. . . . . . . . . . . . $3,461 $3,214 $ 391 $8,547 $13,176 $ 6,112
</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.
7. INVESTMENTS
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 methyl tertiary butyl ether ("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"). 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 the resolution of certain key issues. During 1995 and continuing in
1996, the Project participants engaged in negotiations among themselves and
with potential additional participants in an attempt to restructure the
participants' ownership interests in Proesa and arrange funding for the
Project. To date, financing on terms satisfactory to the participants has
not been available. During the fourth quarter of 1996, the Company
determined that it is unlikely that the Project can go forward.
Accordingly, the Company wrote off its $16.5 million investment in Proesa
and accrued a provision for additional liabilities associated with such
investment of $3 million.
8. REDEEMABLE PREFERRED STOCK
In December of 1996, 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 of the remaining balance (11,500 shares
or $1,150,000) is expected to occur prior to December 1, 1997.
9. 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.
10. 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>
11. INDUSTRY SEGMENT INFORMATION
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1995 1994
(Thousands of Dollars)
<S> <C> <C> <C>
Operating revenues:
Refining and marketing. . . . . . . . . . . . . . . . . $2,757,801 $1,950,657 $1,090,368
Natural gas related services. . . . . . . . . . . . . . 2,445,504 1,396,468 784,287
Other . . . . . . . . . . . . . . . . . . . . . . . . . 123 126 42,639
Intersegment eliminations . . . . . . . . . . . . . . . (212,747) (149,379) (79,854)
Total . . . . . . . . . . . . . . . . . . . . . . . . $4,990,681 $3,197,872 $1,837,440
Operating income (loss):
Refining and marketing. . . . . . . . . . . . . . . . . $ 110,046 $ 141,512 $ 78,660
Natural gas related services. . . . . . . . . . . . . . 132,178 83,180 61,944
Corporate general and administrative
expenses and other, net . . . . . . . . . . . . . . . (41,315) (35,901) (14,679)
Total . . . . . . . . . . . . . . . . . . . . . . . 200,909 188,791 125,925
Equity in earnings (losses) of and income from:
Valero Natural Gas Partners, L.P. . . . . . . . . . . . - - (10,698)
Joint ventures. . . . . . . . . . . . . . . . . . . . . 3,899 4,827 2,437
Other income, net . . . . . . . . . . . . . . . . . . . . 4,070 2,742 2,039
Interest and debt expense, net. . . . . . . . . . . . . . (95,177) (101,222) (76,921)
Income before income taxes. . . . . . . . . . . . . . . $ 113,701 $ 95,138 $ 42,782
Identifiable assets:
Refining and marketing. . . . . . . . . . . . . . . . . $1,621,998 $1,524,065 $1,528,621
Natural gas related services. . . . . . . . . . . . . . 1,380,850 1,177,524 1,134,147
Other . . . . . . . . . . . . . . . . . . . . . . . . . 145,248 150,141 149,688
Investment in and advances to joint ventures. . . . . . 29,192 41,890 41,162
Intersegment eliminations and reclassifications . . . . (27,714) (16,940) (22,260)
Total . . . . . . . . . . . . . . . . . . . . . . . . $3,149,574 $2,876,680 $2,831,358
Depreciation expense:
Refining and marketing. . . . . . . . . . . . . . . . . $ 52,680 $ 55,032 $ 52,956
Natural gas related services. . . . . . . . . . . . . . 44,211 40,881 26,636
Other . . . . . . . . . . . . . . . . . . . . . . . . . 4,896 4,412 4,440
Total . . . . . . . . . . . . . . . . . . . . . . . . $ 101,787 $ 100,325 $ 84,032
Capital additions:
Refining and marketing. . . . . . . . . . . . . . . . . $ 56,673 $ 29,039 $ 119,748
Natural gas related services. . . . . . . . . . . . . . 65,671 33,489 18,860
Other . . . . . . . . . . . . . . . . . . . . . . . . . 6,109 2,091 2,130
Total . . . . . . . . . . . . . . . . . . . . . . . . $ 128,453 $ 64,619 $ 140,738
</TABLE>
The Company's core businesses are specialized refining and natural
gas related services. Effective January 1, 1996, the Company's natural gas
and NGL businesses were reported as one industry segment for financial
reporting purposes (described herein as "natural gas related services") in
recognition of the Company's increasing integration of these business
activities due to the restructuring of the interstate natural gas pipeline
industry in 1993 through FERC Order 636 and the resulting transformation of
the U.S. natural gas industry into a more market and customer-oriented
environment. The Company's ability to gather, transport, market and process
natural gas, among other things, are value-added services offered to
producers and attract additional quantities of gas to the Company's pipeline
system and processing plants through integrated business arrangements.
Prior to 1996, the Company's natural gas and NGL businesses were reported as
separate industry segments. The primary effect of this change on the
Company's segment disclosures was the elimination of volume, revenue and
income amounts related to natural gas fuel and shrinkage volumes sold to and
transported for the natural gas liquids segment by the natural gas segment.
Amounts for 1995 and 1994 shown above have been restated to conform to the
1996 presentation.
At its refinery in Corpus Christi, Refining converts high-sulfur
atmospheric residual oil into premium products, primarily reformulated
gasoline ("RFG"), 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. In 1996, the
Company also began sales of "CARB" gasoline into the West Coast market in
connection with the startup of the California Air Resources Board's
statewide CARB gasoline program. This program requires the use of gasoline
which meets more restrictive air quality specifications than the federally
mandated RFG. The principal purchasers of Refining's products from truck
racks have been wholesalers and jobbers in the eastern and midwestern United
States. The Company's natural gas related services business consists of:
purchasing, gathering, processing, storing, transporting and selling natural
gas, principally to gas distribution companies, electric utilities, pipeline
companies and industrial customers; transporting natural gas for producers,
other pipelines and end users in North America; extracting natural gas
liquids, principally from natural gas throughput of the Company's pipeline
operations; fractionating, transporting and selling natural gas liquids,
principally to petrochemical plants, refineries and domestic fuel
distributors in the Corpus Christi and Mont Belvieu (Houston) areas; and
marketing electric power throughout the United States. Intersegment revenue
eliminations relate primarily to the refining and marketing segment's
purchases of feedstocks and fuel gas from the natural gas related services
segment. In 1996, the Company had no significant amount of export sales and
no significant foreign operations, and no single customer accounted for more
than 10% of the Company's operating revenues. 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 3). Capital additions in 1994 include the accrual of
the remaining $60 million payment made in 1995 for the Company's interest in
a methanol plant renovation project.
12. INCOME TAXES
Components of income tax expense were as follows (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1995 1994
<S> <C> <C> <C>
Current:
Federal. . . . . . . . . . . . . . . . . . . $20,996 $29,674 $ 3,535
State. . . . . . . . . . . . . . . . . . . . 4 926 165
Total current . . . . . . . . . . . . . . 21,000 30,600 3,700
Deferred:
Federal. . . . . . . . . . . . . . . . . . . 20,000 4,700 12,200
Total income tax expense. . . . . . . . . $41,000 $35,300 $15,900
</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,
1996 1995 1994
<S> <C> <C> <C>
Federal income tax expense at the statutory rate . . . . . . $39,800 $33,300 $15,000
State income taxes, net of federal income tax benefit. . . . - 600 100
Other - net. . . . . . . . . . . . . . . . . . . . . . . . . 1,200 1,400 800
Total income tax expense . . . . . . . . . . . . . . . . . $41,000 $35,300 $15,900
</TABLE>
The tax effects of significant temporary differences representing
deferred income tax assets and liabilities are as follows (in thousands):
<TABLE>
<CAPTION>
December 31,
1996 1995
<S> <C> <C>
Deferred income tax assets:
Tax credit carryforwards . . . . . . . . . . . $ 21,835 $ 33,001
Other. . . . . . . . . . . . . . . . . . . . . 43,214 25,570
Total deferred income tax assets . . . . . . $ 65,049 $ 58,571
Deferred income tax liabilities:
Depreciation . . . . . . . . . . . . . . . . . $(296,515) $(267,900)
Other. . . . . . . . . . . . . . . . . . . . . (31,264) (37,154)
Total deferred income tax liabilities. . . . $(327,779) $(305,054)
</TABLE>
At December 31, 1996, the Company had an alternative minimum tax
("AMT") credit carryforward of approximately $21.3 million which is
available to reduce future federal income tax liabilities. The AMT credit
carryforward has no expiration date. The Company has not recorded any
valuation allowances against deferred income tax assets as of December 31,
1996.
The Company's taxable years through 1992 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.
13. 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, 1996 and 1995 (in thousands):
<TABLE>
<CAPTION>
December 31,
1996 1995
<S> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including vested
benefits of $76,448 (1996) and $65,420 (1995). . . . . . . . $78,441 $66,085
Projected benefit obligation for services rendered to date . . . $99,435 $87,609
Plan assets at fair value. . . . . . . . . . . . . . . . . . . . 92,486 68,619
Projected benefit obligation in excess of plan assets. . . . . . 6,949 18,990
Unrecognized net gain from past experience different
from that assumed. . . . . . . . . . . . . . . . . . . . . . . 5,700 2,335
Prior service cost not yet recognized in net periodic
pension cost . . . . . . . . . . . . . . . . . . . . . . . . . (5,305) (5,033)
Unrecognized net asset at beginning of year. . . . . . . . . . . 1,341 1,483
Additional minimum liability accrual . . . . . . . . . . . . . . - 1,948
Accrued pension cost . . . . . . . . . . . . . . . . . . . . . $ 8,685 $19,723
</TABLE>
Net periodic pension cost for the years ended December 31, 1996, 1995
and 1994 included the following components (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1995 1994
<S> <C> <C> <C>
Service cost - benefits earned during the period . . . . $ 4,622 $ 3,465 $ 3,981
Interest cost on projected benefit obligation. . . . . . 6,309 5,455 4,990
Actual (return) loss on plan assets. . . . . . . . . . . (12,424) (14,376) 1,820
Net amortization and deferral. . . . . . . . . . . . . . 6,651 9,637 (6,135)
Net periodic pension cost. . . . . . . . . . . . . . . $ 5,158 $ 4,181 $ 4,656
</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 the latest 10 years of 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% as of December 31, 1996
and 1995. The rate of increase in future compensation levels used in
determining the projected benefit obligation as of December 31, 1996 and
1995 was 4% for nonexempt personnel and 3% for exempt personnel. The
expected long-term rate of return on plan assets was 9.25% as of
December 31, 1996 and 1995. 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 1996,
1995 and 1994 were approximately $14.2 million, $4.3 million and $5 million,
respectively, and are currently estimated to be $4.3 million in 1997. 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 1996 or 1995, while approximately
$42,000 was contributed during 1994.
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
1996, 1995 and 1994, the Company contributed $3,372,000, $3,170,000 and
$3,160,000, respectively, to the VESOP, comprised of $525,000, $678,000 and
$819,000, respectively, of interest on the VESOP Notes and $3,072,000,
$2,918,000 and $2,777,000, respectively, of compensation expense.
Compensation expense is based on the VESOP debt principal payments for the
portion of the VESOP established in 1989 and 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. Dividends paid on unallocated shares were used to reduce
the Company's contributions to the VESOP during 1996, 1995 and 1994 by
$225,000, $426,000 and $436,000, respectively. VESOP shares of Common Stock
are considered outstanding for earnings per share computations. As of
December 31, 1996 and 1995, the number of allocated shares were 1,052,454
and 940,470, respectively, the number of committed-to-be-released shares
were 62,918 and 62,918, respectively, and the number of suspense shares were
583,301 and 772,055, 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 offered by the Company through a self-insured plan
and a health maintenance organization 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, 1996 and
1995 (in thousands):
<TABLE>
<CAPTION>
December 31,
1996 1995
<S> <C> <C>
Accumulated benefit obligation:
Retirees. . . . . . . . . . . . . . . . . . . . . . $11,930 $10,295
Fully eligible active plan participants . . . . . . 390 331
Other active plan participants. . . . . . . . . . . 17,571 13,504
Total accumulated benefit obligation. . . . . . . 29,891 24,130
Unrecognized loss . . . . . . . . . . . . . . . . . . (4,498) (4,586)
Unrecognized prior service cost . . . . . . . . . . . (3,909) -
Unrecognized transition obligation. . . . . . . . . . (10,334) (10,987)
Accrued postretirement benefit cost . . . . . . . . $11,150 $ 8,557
</TABLE>
Net periodic postretirement benefit cost for the years ended
December 31, 1996, 1995 and 1994 included the following components (in
thousands):
<TABLE>
<CAPTION>
December 31,
1996 1995 1994
<S> <C> <C> <C>
Service cost - benefits attributed to service during the period . . . . $1,091 $ 860 $1,196
Interest cost on accumulated benefit obligation . . . . . . . . . . . . 1,716 1,769 1,686
Amortization of unrecognized transition obligation. . . . . . . . . . . 653 766 948
Amortization of prior service cost. . . . . . . . . . . . . . . . . . . - - (84)
Amortization of unrecognized net loss . . . . . . . . . . . . . . . . . 110 - 75
Net periodic postretirement benefit cost. . . . . . . . . . . . . . . $3,570 $3,395 $3,821
</TABLE>
For measurement purposes, the assumed health care cost trend rate was
7% in 1996, 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, 1996 by $5.2 million and the aggregate of the service and
interest cost components of net periodic postretirement benefit cost for the
year then ended by $.7 million. The weighted-average discount rate used in
determining the accumulated postretirement benefit obligation as of
December 31, 1996 and 1995 was 7.25%.
Stock Option and Bonus Plans
As of December 31, 1996, the Company has various fixed and
performance-based stock compensation plans which are described below. The
Company applies APB Opinion No. 25 and related Interpretations in accounting
for its plans. Accordingly, no compensation cost has been recognized for
its fixed stock option plans. The compensation cost reflected in net income
for its stock-based compensation plans was $2.6 million and $1.7 million for
1996 and 1995, respectively. Had compensation cost for the Company's
stock-based compensation plans been determined based on the fair value at
the grant dates for 1996 and 1995 awards under those plans consistent with
the method of SFAS No. 123, the Company's net income and earnings per share
for the years ended December 31, 1996 and 1995 would have been reduced to the
pro forma amounts indicated below:
<TABLE>
<CAPTION>
December 31,
1996 1995
<S> <C> <C> <C>
Net Income . . . . . . . . . . . . . As Reported $72,701 $59,838
Pro Forma $70,427 $58,373
Earnings per share . . . . . . . . . As Reported $ 1.40 $ 1.10
Pro Forma $ 1.35 $ 1.07
</TABLE>
Because the SFAS No. 123 method of accounting has not been applied to
awards granted prior to January 1, 1995, the resulting pro forma
compensation cost may not be representative of that to be expected in future
years.
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. Under the ESIP, 110,500
options, 97,000 shares of restricted stock and 64,830 shares under
performance awards were granted during 1996, while 1,043,581 awards were
available for grant as of December 31, 1996. 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," and a non-employee director stock option plan. Awards under the
Stock Option Plans are granted to key officers, employees and prospective
employees of the Company. As of December 31, 1996, there were 46,705 and
48,000 shares available for grant under the Stock Option Plans and
non-employee director plan, respectively.
Under the terms of the ESIP, the Stock Option Plans and the
non-employee director plan, the exercise price of the options granted will
not be less than 100%, 75%, or 100%, respectively, of the fair market value
of Common Stock at the date of grant. As of December 31, 1996, 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,
generally 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. A summary of the status of the Company's stock option plans,
including options granted under the ESIP, the Stock Option Plans and the
non-employee director plan, as of December 31, 1996, 1995, and 1994, and
changes during the years then ended is presented in the table below:
<TABLE>
1996 1995 1994
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of year. . . . . . . . . . 3,928,267 $20.69 2,575,902 $21.51 1,261,624 $23.69
Granted . . . . . . . . . . 757,920 27.44 1,599,463 18.99 1,343,919 19.43
Exercised. . . . . . . . . . (418,117) 19.28 (171,604) 17.08 (7,555) 14.53
Forfeited. . . . . . . . . . (38,978) 22.17 (74,428) 21.12 (22,086) 21.90
Expired . . . . . . . . . . - - (1,066) 18.36 - -
Outstanding at end
of year. . . . . . . . . . 4,229,092 22.02 3,928,267 20.69 2,575,902 21.51
Exercisable at end
of year. . . . . . . . . . 2,525,957 21.71 1,531,718 22.30 708,055 23.13
Weighted-average fair
value of options
granted. . . . . . . . . . $6.25 $4.50 N/A
</TABLE>
The following table summarizes information about stock options
outstanding under the ESIP, the Stock Option Plans and the non-employee
director plan as of December 31, 1996:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
Range Number Weighted-Avg. Number
of Outstanding Remaining Weighted-Avg. Exercisable Weighted-Avg.
Exercise Prices at 12/31/96 Contractual Life Exercise Price at 12/31/96 Exercise Price
<S> <C> <C> <C> <C> <C>
$14.52-$21.88 2,460,074 7.5 years $19.02 1,499,074 $19.17
$22.13-$29.75 1,769,018 7.4 26.20 1,026,883 25.41
$14.52-$29.75 4,229,092 7.5 22.02 2,525,957 21.71
</TABLE>
The fair value of each option grant was estimated on the date of
grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions used for grants in 1996 and 1995, respectively:
risk-free interest rates of 6.4 percent and 6.7 percent; expected
dividend yields of 1.9 percent and 2.8 percent; expected lives of 3.1
years and 3.2 years; and expected volatility of 25.5 percent and 29.5
percent.
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. As of December 31, 1996, 89,087 SARs
were outstanding and exercisable, at a weighted-average exercise price of
$14.52 per share. During 1996, 21,316 SARs were exercised at a weighted-
average exercise price of $14.52 per share and 600 SARs were forfeited.
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. As
of December 31, 1996, there were 6,927 shares available for award. No
shares were awarded under this plan in 1996, while 9,000 and 3,000 shares
were awarded under this plan during 1995 and 1994, respectively. 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.
14. 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, transport and
produce refinery feedstocks and/or refined products. The gas storage
facility lease has a remaining primary term of three years, and, subject to
certain conditions, one eight-year optional renewal period during which the
lease payments decrease by one-half and one or more additional optional
renewal periods of five years each at fair market rentals. The corporate
headquarters lease has a remaining primary term of 15 years with five
optional renewal periods of five years each. In 1996, the Company entered
into a sublease agreement for unused space in its corporate headquarters
office complex. The sublease has a primary term of 20 years, with the
sublessee having an option to terminate the lease after 10 years. The
sublessee is occupying the premises in phases, with full occupancy currently
expected in 1997. The Company's long-term refinery feedstock and refined
product storage and transportation leases have remaining primary terms
of up to 5.3 years with optional renewal periods of up to 10 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 of up to 10 years for
significant leases. The related future minimum lease payments as of
December 31, 1996, including amounts to be received under the corporate
headquarters office complex sublease, are as follows (in thousands):
<TABLE>
<CAPTION>
Gas
Storage Office
Facility Complex Refining Other
Primary
Lease Sublease
<S> <C> <C> <C> <C> <C>
1997 . . . . . . . . . . . $ 9,832 $ 4,570 $ (2,088) $ 6,028 $1,502
1998 . . . . . . . . . . . 10,156 4,570 (2,088) 7,886 1,490
1999 . . . . . . . . . . . 10,438 4,570 (2,088) 7,761 966
2000 . . . . . . . . . . . 5,221 4,570 (2,088) 4,977 292
2001 . . . . . . . . . . . - 4,570 (2,088) 4,075 134
Remainder. . . . . . . . . - 40,771 (9,971) 1,359 616
Total minimum lease
payments. . . . . . . . $35,647 $63,621 $(20,411) $32,086 $5,000
</TABLE>
The future minimum lease payments listed above exclude operating leases
having initial or remaining noncancelable lease terms of one year or less.
Consolidated rental expense under operating leases, excluding amounts paid
in connection with the gas storage facility and net of amounts related to
the office complex sublease, amounted to approximately $31,663,000,
$29,313,000, and $14,040,000 for 1996, 1995 and 1994 (including Partnership
rents commencing June 1, 1994), 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 of
VNGP, L.P. with Energy, 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 such merger.
Gas storage facility rentals paid by the Partnership for the period
prior to the VNGP, L.P. merger, and paid by the Company for the period
subsequent to the such merger, totalling $10,438,000 per year for 1996,
1995 and 1994, 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.
15. LITIGATION AND CONTINGENCIES
City of Edinburg and Related Litigation. 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") and
its predecessors allowing RGV to sell and distribute natural gas within the
City. RGV was formerly owned by Energy. On September 30, 1993, Energy sold
the common stock of RGV to Southern Union. 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 (now Southern Union) 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 $50 million and unspecified punitive damages
related to amounts allegedly due under the RGV franchise, City ordinances
and state law. In addition, the City of Pharr, Texas, filed an intervention
seeking certification of a class, with itself as class representative,
consisting of all cities served by franchise by Southern Union. The court
certified the class and severed the claims of the City of Pharr and the
class from the original City of Edinburg lawsuit. The City of Pharr
subsequently amended its petition deleting all Valero entities as
defendants. The original trial judge was disqualified upon motion of the
defendants (such disqualification was upheld on appeal), and a new trial
judge has been assigned to preside over both the City of Edinburg and City
of Pharr litigation. The City of Edinburg lawsuit is scheduled for trial on
August 11, 1997. In 1996, the South Texas cities of Alton and Donna also
independently intervened as plaintiffs in the Edinburg lawsuit filed in the
92nd State District Court in Hidalgo County. These lawsuits subsequently
were severed from the Edinburg lawsuit. The claims asserted by the cities
of Alton and Donna are substantially similar to the Edinburg litigation
claims. Damages are not quantified. 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. Three additional lawsuits were filed during
December 1996 by certain other municipalities in South Texas making
allegations substantially similar to those in the City of Edinburg
litigation. In these three lawsuits, the defendants are alleged to have
excluded certain revenues from their calculations of franchise taxes and are
alleged to have provided unauthorized gas transportation services to third
parties. The plaintiffs seek actual and exemplary, but as yet, unspecified,
damages.
Teco Pipeline Company. Energy and certain of its subsidiaries have
been sued by Teco Pipeline Company ("Teco") regarding the operation of the
Company's 340-mile West Texas pipeline. 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.
Sinco Pipeline Rupture Litigation. 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 10 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.
J.M. Davidson, Inc. 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.
The Long Trusts. On April 15, 1994, certain trusts named 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 the Valero Defendants have contractual relationships under gas
purchase contracts. In order to resolve certain potential disputes with
respect to the gas purchase contracts, the Valero Defendants agreed to bear
a substantial portion of any settlement or any nonappealable final judgment
rendered against the supplier. In January 1993, the District Court ruled in
favor of the trusts' motion for summary judgment against the supplier.
Damages, if any, were not determined. The trusts seek $50 million in
damages from the Valero Defendants as a result of the Valero Defendants'
alleged interference between the trusts and the supplier, plus punitive
damages in excess of treble the amount of actual damages proven at trial.
The trusts also seek approximately $56 million in take-or-pay damages from
the supplier and $70 million as damages for the supplier's failure to take
the trusts' gas ratably. The Company believes that the claims brought by
the trusts have been significantly overstated, and that the supplier and the
Valero Defendants have a number of meritorious defenses to the claims. No
trial date has been set.
Mizel. A federal securities fraud lawsuit was filed against Energy
and certain of its subsidiaries by a former owner 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 of
the Company and VNGP, L.P. contained fraudulent misrepresentations. The
plaintiff also alleges breach of fiduciary duty in connection with the
merger transaction. The subject matter of this lawsuit was the subject
matter of a prior Delaware class action lawsuit which was settled prior to
consummation of the Merger. The Company believes that the plaintiff's
claims have been settled and released by the prior class action settlement.
Pending in the district court is a memorandum issued by the magistrate
assigned to the case which recommends approval of the Company's motion for
summary judgment.
Javelina. Valero Javelina Company, a 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 ten
lawsuits filed since 1993 in state district courts in Nueces County and
Duval County, Texas. Eight 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.
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.
16. QUARTERLY RESULTS OF OPERATIONS (Unaudited)
The results of operations by quarter for the years ended December 31,
1996 and 1995 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>
1996-Quarter Ended:
March 31. . . . . . . . . . . . . $1,110,098<F1> $ 52,238 $19,914 $ .39
June 30 . . . . . . . . . . . . . 1,152,737 54,433 20,841 .41
September 30. . . . . . . . . . . 1,123,527 40,025 13,146 .23
December 31 . . . . . . . . . . . 1,604,319 54,213 18,800 .37
Total . . . . . . . . . . . . . $4,990,681 $200,909 $72,701 $1.40
1995-Quarter Ended:
March 31. . . . . . . . . . . . . $ 690,535 $ 28,667 $ 3,759 $ .02
June 30 . . . . . . . . . . . . . 775,822<F2> 54,953 20,522 .40
September 30. . . . . . . . . . . 803,670<F2> 57,781 22,630 .45
December 31 . . . . . . . . . . . 927,845<F2> 47,390 12,927 .23
Total . . . . . . . . . . . . . $3,197,872<F2> $188,791 $59,838 $1.10
<FN>
<F1> Revised from the amount shown in the Company's Form 10-Q for the three months ended
March 31, 1996 to include revenues from certain NGL trading activities previously
classified as a reduction of cost of sales.
<F2> Revised to include revenues from certain refining and marketing trading activities
previously classified as a reduction of cost of sales.
</TABLE>
<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
DIRECTORS OF THE REGISTRANT
The following table sets forth information concerning the current
directors of Energy. The information contained herein is based partly on
data furnished by the directors and partly on the Company's records.
There is no family relationship among any of the executive officers or
directors of Energy, and, except for the entities bearing the "Valero"
name, none of the organizations or corporations described in the
biographical information in this Item 10 is an affiliate of Energy.
<TABLE>
<CAPTION>
_________________________________________________________________________________________________________
Age
Executive as of
Officer December Present Current
Position(s) Held or Director 31, Term Director
Name with Energy Since 1996 Expires Class
_________________________________________________________________________________________________________
<S> <C> <C> <C> <C> <C>
William E. Greehey Director, Chairman 1979 60 1998 III
of the Board and
Chief Executive
Officer
Edward C. Benninger Director, President 1979 54 1997 II
Ronald K. Calgaard Director 1996 59 1999 I
Robert G. Dettmer Director 1991 65 1998 III
A. Ray Dudley Director 1988 72 1997 II
Ruben M. Escobedo Director 1994 59 1998 III
James L. Johnson Director 1991 69 1997 II
Lowell H. Lebermann Director 1986 57 1998 III
Susan Kaufman Purcell Director 1994 54 1999 I
_________________________________________________________________________________________________________
</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. He retired from
his positions as President and Chief Executive Officer in June 1996. Upon
request of the Board, Mr. Greehey resumed his position as Chief Executive
Officer following the resignation of Mr. Becraft in November 1996. Mr.
Greehey is also a director of Weatherford Enterra, Inc. and Santa Fe Energy
Resources, Inc.
Mr. Benninger has served as a director of Energy since 1990. He was
elected President and Chief Financial Officer of Energy in 1996. He had
served as Executive Vice President of Energy since 1989, and previously
served as Chief Operating Officer of Valero Natural Gas Company from 1992 to
1995. He has served in various other capacities with the Company since
1975.
Dr. Calgaard has been a director of Energy since 1996. He has served
as President of Trinity University, San Antonio, Texas, since 1979.
Dr. Calgaard previously served as a director of Valero Natural Gas Company
from 1987 until 1994.
Mr. Dettmer was elected as a director of Energy in 1991. He retired
from PepsiCo, Inc. in 1996 after serving as Executive Vice President and
Chief Financial Officer since 1986.
Mr. Dudley has served as a director of Energy since 1988 and currently
serves as an independent consultant in the petroleum industry. Mr. Dudley
served in various capacities with Tenneco Oil Company from 1959 until his
retirement in 1987.
Mr. Escobedo was elected as a director of Energy in 1994. He has been
with his own public accounting firm, Ruben Escobedo & Company, CPAs, in San
Antonio, Texas since its formation in 1977. Mr. Escobedo also serves as a
director of Frost National Bank of San Antonio, N.A. ("Frost Bank") and
previously served as a director of Valero Natural Gas Company from 1989
to 1994. In its capacity as Trustee for certain employee benefit plans
of Energy, Frost Bank shares voting and dispositive power with respect to
a number of shares of Energy common stock. See "Item 12. Security
Ownership of Certain Beneficial Owners and Management."
Mr. Johnson has been a director of Energy since 1991. He previously
served as Chairman and Chief Executive Officer of GTE Corporation from 1988
to 1992, and since 1992 has served as Chairman Emeritus. Mr. Johnson also
serves as a director of CellStar Corporation, FINOVA Group, Inc.,
Harte-Hanks Communications, Inc., The Mutual Life Insurance Company of New
York and Walter Industries, Inc.
Mr. Lebermann was elected as a director of Energy in 1986, and
previously served on Energy's Board from 1979 to 1983. Mr. Lebermann has
been President of Centex Beverage, Inc., a beverage distributor, in Austin,
Texas, since 1981. Mr. Lebermann is also a director of Station Casinos, Inc.
and of Franklin Federal Bankcorp, a Federal Savings Bank, Austin, Texas.
Dr. Purcell was elected as a director of Energy in 1994. She has
served as Vice President of the Americas Society in New York, New York since
1989 and is also Vice President of the Council of the Americas. She is a
consultant for several international and national firms and serves on the
boards of several mutual funds, including The Argentina Fund, The Latin
America Dollar Income Fund and Scudder World Income Opportunities Fund.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information as of December 31,
1996 regarding the current 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.
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 1996
_______________________________________________________________________________________________________
<S> <C> <C> <C>
William E. Greehey Director, Chairman of the Board 1979 60
and Chief Executive Officer
Edward C. Benninger Director, President and 1979 54
Chief Financial Officer
Stan L. McLelland Executive Vice President 1981 51
and General Counsel
*E. Baines Manning Executive Vice President of 1992 56
Valero Refining and
Marketing Company
*Terrence E. Ciliske Executive Vice President of 1996 42
Valero Natural Gas Company
Peter A. Fasullo Senior Vice President - 1996 43
Corporate Development
Gregory C. King Vice President 1997 36
______________________________________________________________________________________________________
</TABLE>
[FN]
* Mr. Manning and Mr. Ciliske have been designated by the Energy
Board of Directors as "executive officers" 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.
Biographical information for Mr. Greehey and Mr. Benninger is
contained above under the caption "Directors of the Registrant."
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. McLelland also serves as a director of IGC
Communications, Inc., which is not affiliated with the Company.
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.
Mr. Ciliske was elected Executive Vice President of Valero Natural
Gas Company in 1996, prior to which he served in various other capacities
within the Company's natural gas related services divisions since 1983.
Mr. Fasullo was elected Senior Vice President - Corporate Development
in 1996, prior to which he served in various other capacities within the
Company since 1983.
Mr. King was elected Vice President in 1997, and has served as
Associate General Counsel since joining the Company in 1993. Prior to
joining the Company, Mr. King was a partner at the law firm of Bracewell &
Patterson, L.L.P.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended
("Exchange Act"), requires Energy's executive officers, directors, and
greater than 10 percent to stockholders to file certain reports of ownership
and changes in ownership. Based on a review of the copies of such forms
received and written representations from certain reporting persons, Energy
believes that, during the year ended December 31, 1996, its executive
officers, directors and greater than 10 percent stockholders were in
compliance with applicable requirements of Section 16(a).
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION
The following table provides a summary of compensation paid to the
persons serving as Energy's CEO, and to its four other most highly
compensated executive officers, for services rendered in all capacities to
the Company for the last three years. Benefits under health care,
disability, term life insurance, vacation and other plans available to
employees generally are not included herein.
<TABLE>
<CAPTION>
Summary Compensation Table (1994-1996)
______________________________________________________________________________________________________________________________
Long-Term Compensation
Restricted Securities
Annual Compensation Stock Underlying All Other
Name and Bonus Awards Options/ LTIP Compensation
Position(s) Year Salary($) ($)(1) ($)(2) SARS(#) Payouts(3) ($)(4)
______________________________________________________________________________________________________________________________
<S> <C> <C> <C> <C> <C> C> <C>
William E.
Greehey(5) 1996 $497,337 $670,739 $1,545,362 5,000 $325,000 $928,949
Director, Chairman 1995 684,540 560,000 431,250 0 0 73,007
of the Board and 1994 622,020 0 0 355,300 0 71,664
Chief Executive
Officer of Energy
F. Joseph Becraft(5)
Director, President 1996 $450,030 $ 0 $276,250 40,000 $271,138 $4,252
and Chief Executive 1995 266,680 180,000 421,875 120,000 0 4,252
Officer of Energy
Edward C.
Benninger(5) 1996 $357,180 $335,370 $497,500 25,000 $ 93,698 $28,541
Director and President 1995 342,600 210,000 189,750 0 0 27,016
of Energy 1994 335,040 0 0 125,500 0 27,598
Stan L. McLelland
Executive Vice 1996 $300,930 $111,812 $ 0 25,000 $ 70,200 $25,631
President and General 1995 278,700 162,000 138,000 0 0 23,313
Counsel of Energy 1994 262,380 0 0 82,600 0 23,836
E. Baines Manning(6)
Executive Vice 1996 $253,230 $122,989 $ 0 18,000 $ 58,500 $18,758
President of Valero 1995 231,420 120,000 51,750 0 0 12,468
Refining and 1994 216,420 0 0 63,500 0 15,524
Marketing Company
Terrence E. Ciliske(6)
Executive Vice 1996 $180,156 $167,701 $ 51,000 3,400 $ 36,823 $10,670
President of Valero
Natural Gas Company
______________________________________________________________________________________________________________________________
</TABLE>
[FN]
(1) In 1994, executives received no bonuses. For 1995, executives
received bonuses payable 70% in cash and 30% in Common Stock. For
1996, executives received bonuses payable 25% in cash and 75% in
Common Stock.
(2) For each named executive officer, the number of shares of Restricted
Stock held at December 31, 1996, and the value thereof, based on the
closing market price of the Common Stock at December 31, 1996, was as
follows: Mr. Greehey: 62,073 shares -- $1,776,840; Mr. Benninger:
27,333 shares -- $782,407; Mr. McLelland: 5,333 shares -- $152,667;
Mr. Manning: 2,000 shares -- $57,250; and Mr. Ciliske: 3,400 shares --
$97,325. Dividends are paid on the Restricted Stock at the same rate
as on Energy's unrestricted Common Stock. The grants of Restricted
Stock to Messrs. Greehey and Benninger will vest upon completion of
the Restructuring transaction or, if such transaction is not
consummated, would vest in annual increments of 33 1/3% beginning
on the first anniversary of the grant date. The grant of Restricted
Stock to Mr. Becraft vested upon his resignation; Mr. Becraft did not
hold Restricted Stock at December 31, 1996.
(3) LTIP payouts are the number of performance share awards vested for
1996 multiplied by the market price per share on the vesting date.
For more information see the notes following the table entitled "Long
Term Incentive Plans-Awards in Last Fiscal Year."
(4) Amounts include Company contributions pursuant to the Employee Stock
Plans, and that portion of interest accrued under the Executive
Deferred Compensation Plan which is deemed to be at "above-market"
rates under applicable SEC rules. Messrs. Greehey, Becraft,
Benninger, McLelland, Manning, and Ciliske were allocated $31,460,
$10,975, $25,574, $21,074, $18,758, and $10,670, respectively, as a
result of Company contributions to employee stock plans for 1996, and
$9,066, $0, $2,967, $4,557, $0, and $0, respectively, as a result of
"above-market" allocations to the Executive Deferred Compensation Plan
for 1996. Messrs. Becraft, Manning and Ciliske do not participate in
the Executive Deferred Compensation Plan. Amounts for Mr. Greehey
also include executive insurance policy premiums with respect to cash
value life insurance (not split-dollar life insurance) in the amount
of $13,000 for 1994 and 1995 and $7,583 for 1996; such amounts for
1996 also include (i) consulting fees ($141,667), Board fees
($29,833), SERP payments ($278,862) and the interest component of
deferred compensation plan payments ($27,648) made during the period
following his retirement and prior to his reemployment, and
(ii) payments made following his retirement for Excess Thrift Plan
balances ($339,617) and unused vacation ($63,213). Payments received
during Mr. Greehey's retirement directly from the Pension Plan are
excluded.
(5) Mr. Becraft was employed by the Company beginning May 1, 1995, and was
elected President of Energy on January 1, 1996 and Chief Executive
Officer of Energy on June 30, 1996. Mr. Greehey resigned from his
position as Chief Executive Officer of Energy on June 30, 1996. Mr.
Becraft resigned from his positions as President and Chief Executive
Officer of Energy on November 20, 1996, whereupon Mr. Greehey was
reappointed Chief Executive Officer of Energy. At that time, the
Board also promoted Mr. Benninger from Executive Vice President to
President of Energy.
(6) The Board of Directors of Energy has determined to include Mr.
Ciliske and Mr. Manning in the Summary Compensation Table in
accordance with Rule 3b-7 under the Exchange Act. Mr. Ciliske was not
an executive officer of Energy for any part of 1994 or 1995.
STOCK OPTION GRANTS AND RELATED INFORMATION
The following table provides further information regarding the grants
of stock options to the named executive officers reflected in the Summary
Compensation Table.
<TABLE>
<CAPTION>
Option/SAR Grants in the Last Fiscal Year
______________________________________________________________________________________________________________________
Number of Percent of
Securities Total
Underlying Options/
Options/ SARs Granted Market
SARs to Employees Exercise or Price at Grant Date
Granted in Fiscal Base Price Grant Date Expiration Present Value $
Name (#)(1) Year (/$/Sh) ($/Sh) Date (2)
______________________________________________________________________________________________________________________
<S> <C> <C> <C> <C> <C> <C>
William E. Greehey 5,000 .69% $25.3125 $25.3125 07/01/2006 $ 29,580
F. Joseph Becraft 40,000 5.56% $27.5625 $27.5625 05/30/2006 259,440
Edward C. Benninger 25,000 3.47% $27.5625 $27.5625 05/30/2006 162,150
Stan L. McLelland 25,000 3.47% $27.5625 $27.5625 05/30/2006 162,150
E. Baines Manning 18,000 2.50% $27.5625 $27.5625 05/30/2006 116,748
Terrence E. Ciliske 7,500 1.04% $27.5625 $27.5625 05/30/2006 48,645
2,500 .35% $25.3125 $25.3125 07/01/2006 14,790
______________________________________________________________________________________________________________________
</TABLE>
[FN]
(1) Options granted in 1996 vest (become exercisable and nonforfeitable)
in equal increments over a three year period from the date of grant.
In the event of a change of control of Energy (including stockholder
approval of the Restructuring, such options would also become
immediately exercisable pursuant to provisions of the plan or of an
executive severance agreement. Under the terms of the plan, the
exercise price and tax withholding obligations related to exercise
may be paid by delivery of already owned shares or by offset of the
underlying shares, subject to certain conditions.
(2) A variation of the Black-Scholes option pricing model was used to
determine grant date present value. This model is designed to value
publicly traded options. Options issued under the Company's option
plans are not freely traded, and the exercise of such options is
subject to substantial restrictions. Moreover, the Black-Scholes
model does not give effect to either risk of forfeiture or lack of
transferability. The estimated values under the Black-Scholes model
are based on assumptions as to variables such as interest rates,
stock price volatility and future dividend yield. The estimated
grant date present values presented in this table were calculated
using an expected average option term of 3.32 years, a risk-free rate
of return of 6.41%, an average volatility rate of 25.4% for the
options expiring 5/30/2006 and 25.17% for the options expiring
7/01/2006, and a dividend yield of 1.88% for the options expiring
5/30/2006 and 2.04% for the options expiring 7/01/2006. The
actual value of stock options could be zero; realization of any
positive value depends upon the actual future performance of the
Common Stock, the continued employment of the option holder
throughout the vesting period and the timing of the exercise of
the option. Accordingly, the values set forth in this table may
not be achieved.
The following table provides information regarding securities
underlying options exercisable at December 31, 1996, and options exercised
during 1996, for the executive officers named in the Summary Compensation
Table:
<TABLE>
<CAPTION>
Aggregated Option/SAR Exercises in Last Fiscal Year
and FY-End Option/SAR Values
______________________________________________________________________________________________________________________
Value of Unexercised
Shares Number of Securities In-the-Money
Acquired Value Underlying Unexercised Options/SARs at
on Exercise Realized Options/SARs at FY-End(#) FY-End ($) (1)
Name (#) ($) Exercisable Unexercisable Exercisable Unexercisable
______________________________________________________________________________________________________________________
<S> <C> <C> <C> <C> <C> <C>
William E. Greehey - - 510,184 5,000 $4,522,154 $ 15,625
F. Joseph Becraft - - 160,000 - 1,167,500 -
Edward C. Benninger - - 62,472 133,833 364,587 1,031,800
Stan L. McLelland - - 47,857 96,266 328,157 682,762
E. Baines Manning - - 38,217 72,833 270,792 524,300
Terrence E. Ciliske - - 24,019 25,400 158,628 155,588
______________________________________________________________________________________________________________________
</TABLE>
[FN]
(1) Represents the dollar value obtained by multiplying the number of
unexercised options/SARs by the difference between the stated
exercise price per share of the options/SARs and the average market
price per share of Energy's Common Stock on December 31, 1996.
Long-Term Incentive Awards
The following table provides information regarding long-term incentive
awards made to the named executive officers reflected in the Summary
Compensation Table.
<TABLE>
<CAPTION>
Long-Term Incentive Plans - Awards in Last Fiscal year (1)
______________________________________________________________________________________________________________________________
Estimated Future Payouts
Under Non-Stock Price-Based Plans
Performance
Number of or Other Period
Shares, Units Until Maturation Threshold Target Maximum
Name or Other Rights or Payout (# Shares) (# Shares) (# Shares)
______________________________________________________________________________________________________________________________
<S> <C> <C> <C> <C> <C>
William E. Greehey 10,000 12/31/96 0 10,000 20,000
10,000 12/31/97 0 10,000 20,000
10,000 12/31/98 0 10,000 20,000
F. Joseph Becraft 3,634 12/31/96 0 3,634 7,268
3,633 12/31/97 0 3,633 7,266
3,633 12/31/98 0 3,633 7,266
Edward C. Benninger 2,884 12/31/96 0 2,884 5,768
2,883 12/31/97 0 2,883 5,766
2,883 12/31/98 0 2,883 5,766
Stan L. McLelland 2,160 12/31/96 0 2,160 4,320
2,160 12/31/97 0 2,160 4,320
2,160 12/31/98 0 2,160 4,320
E. Baines Manning 1,800 12/31/96 0 1,800 3,600
1,800 12/31/97 0 1,800 3,600
1,800 12/31/98 0 1,800 3,600
Terrence E. Ciliske 1,134 12/31/96 0 1,134 2,268
1,134 12/31/97 0 1,134 2,268
1,134 12/31/98 0 1,134 2,268
______________________________________________________________________________________________________________________________
</TABLE>
[FN]
(1) Long-term incentive awards are grants of performance shares
("Performance Shares") made under the Executive Stock Incentive Plan.
(2) Total shareholder return ("TSR") during a specified "performance
period" was established as the performance measure for determining
what portion of the 1996 Performance Share awards will vest. For
purposes of the Performance Share awards, TSR is measured by dividing
the sum of (a) the net change in the price of a share of Energy's
Common Stock between the beginning of the performance period and the
end of the performance period, and (b) the total dividends paid on the
Common Stock during the performance period, by (c) the price of a
share of Energy's Common Stock at the beginning of the performance
period. Each 1996 Performance Share award is subject to vesting in
three increments, based upon the Company's TSR during overlapping
three-year periods, with the first such three-year period for the 1996
grants beginning January 1, 1994 and ending December 31, 1996. At the
end of the three-year performance period, the Company's TSR is
compared to the TSR for each company in a target group of
approximately 16 companies. Energy and the companies in the target
group are then ranked by quartile. At the end of each performance
period, participants earn 0%, 50%, 100% or 150% of the initial grant
amount for such period depending upon whether the Company's TSR is in
the last, 3rd, 2nd or 1st quartile of the target group; 200% will be
earned if the Company ranks highest in the group. Amounts not earned
in a given three-year period can be carried forward for one additional
three-year period and up to 100% of the carried amount can still be
earned, depending upon the quartile achieved for such subsequent
period.
RETIREMENT BENEFITS
The following table shows the estimated annual gross benefits payable
under Energy's Pension Plan ("Pension Plan"), Supplemental Pension Plan and
Supplemental Executive Retirement Plan ("SERP") upon retirement at age 65,
based upon the assumed compensation levels and years of service indicated
and assuming an election to have payments continue for the benefit of the
life of the participant only.
<TABLE>
<CAPTION>
Estimated Annual Pension Benefits at Age 65
_________________________________________________________________________________
Years of Service
Covered _____________________________________________________________
Compensation 15 20 25 30 35
_________________________________________________________________________________
<S> <C> <C> <C> <C> <C>
$ 200,000 $ 55,000 $ 73,000 $ 92,000 $110,000 $128,000
300,000 84,000 112,000 141,000 169,000 197,000
400,000 114,000 151,000 189,000 227,000 265,000
500,000 143,000 190,000 238,000 286,000 333,000
600,000 172,000 229,000 287,000 344,000 401,000
700,000 201,000 268,000 336,000 403,000 470,000
800,000 231,000 307,000 384,000 461,000 538,000
900,000 260,000 346,000 433,000 520,000 606,000
1,000,000 289,000 385,000 482,000 578,000 674,000
1,100,000 318,000 424,000 531,000 637,000 743,000
1,200,000 348,000 463,000 579,000 695,000 811,000
1,300,000 377,000 502,000 628,000 754,000 879,000
_________________________________________________________________________________
</TABLE>
Energy maintains a noncontributory defined benefit Pension Plan in
which virtually all employees are eligible to participate and under which
contributions for individual participants are not determinable. Energy also
maintains a noncontributory, nonqualified Supplemental Pension Plan which
provides supplemental pension benefits to certain highly compensated
employees to the extent that the pension benefits otherwise payable to such
employees from the Pension Plan would exceed benefits permitted under
applicable regulations to be paid from a tax-qualified defined benefits
plan. Accrued contributions for the 1996 Pension Plan year were
approximately 5.5% of total covered compensation. No contributions were
made to the Supplemental Pension Plan. The Pension Plan (supplemented, as
necessary, by the Supplemental Pension Plan) provides a monthly pension at
normal retirement equal to 1.6% of the participant's average monthly
compensation (based upon the participant's base earnings during the 60
consecutive months of the participant's credited service affording the
highest such average) times the participant's years of credited service,
plus .35% times the product of the participant's years of credited service
(maximum 35 years) multiplied by the excess of the participant's average
monthly compensation over the lesser of 1.25 times the monthly average
(without indexing) of the social security wage bases for the 35-year period
ending with the year the participant attains social security retirement age,
or the monthly average of the social security wage base in effect for the
year that the participant retires.
Energy also maintains the SERP, a non-qualified plan providing
additional pension benefits to certain executive officers and employees of
the Company. Energy's obligations under the SERP are substantially fully
funded through investments held in a trust established for the SERP under
which Frost National Bank of San Antonio, N.A., serves as trustee. During
1996 contributions aggregating $9.2 million were made to the SERP Trust.
Compensation for purposes of the Pension Plan and Supplemental Pension
Plan includes only salary as reported in the Summary Compensation Table and
excludes cash bonuses. For purposes of the SERP, the participant's most
highly compensated consecutive 36 months of service during the participant's
last 10 years of employment (rather than 60 months) are considered, and
bonuses are included. Accordingly, the amounts reported in the Summary
Compensation Table under the headings "Salary" and "Bonus" constitute
covered compensation for purposes of the SERP. Pension benefits are not
subject to any deduction for social security or other offset amounts.
Credited years of service for the period ended December 31, 1996 for
the executive officers named in the Summary Compensation Table are as
follows: Mr. Greehey -- 33 years; Mr. Becraft -- 6 years; Mr. Benninger --
22 years; Mr. McLelland -- 18 years; Mr. Manning -- 10 years, and
Mr. Ciliske -- 13 years. The credited service for Mr. Becraft and Mr.
McLelland includes five years and two years service, respectively, credited
pursuant to the terms of their employment by the Company and for which
benefits are payable only from the SERP. See also "Arrangements with
Certain Officers and Directors."
COMPENSATION OF DIRECTORS
Non-employee directors receive a retainer fee of $18,000 per year, plus
$1,000 for each Board and committee meeting attended ($500 for telephonic
meetings). Each director is also reimbursed for expenses of meeting
attendance. Directors who are employees of the Company receive no
compensation (other than reimbursement of expenses) for serving as
directors.
Energy maintains the 1990 Restricted Stock Plan for Non-Employee
Directors ("Director Stock Plan") and the Non-Employee Director Stock Option
Plan ("Director Option Plan") to supplement the compensation paid to
non-employee directors and increase their identification with the interests
of Energy's stockholders through ownership of Common Stock ("Director
Stock"). Under the Director Stock Plan, non-employee directors receive
grants of Director Stock that vest (become nonforfeitable) in three equal
annual installments. Upon election to the Board, each non-employee director
receives a grant, the value of which is determined annually based on changes
in the consumer price index and which is expected to be approximately
$54,000 for 1997. Annual installments usually vest on or about
the date of the annual meeting of stockholders. When all of the Director
Stock previously granted to a director is fully vested and the director is
reelected for an additional term, or his term of office otherwise continues
after his Director Stock is fully vested, another similar grant is made.
However, if a director is not eligible for reelection due to Energy's
mandatory retirement policy or if a director does not intend to stand for
reelection, the grant is reduced pro rata based on the number of years
remaining to the end of that director's term.
The Director Option Plan provides non-employee directors of Energy
automatic annual grants of stock options for Energy's Common Stock. To the
extent necessary, the plan is administered by the Compensation Committee of
the Board of Directors. The plan provides that each new non-employee
director elected to the Energy Board automatically receives an initial grant
of 5,000 options. On the date of each subsequent annual meeting of
stockholders of Energy, each non-employee director (other than new
non-employee directors receiving their initial grant of 5,000 options)
automatically receives a grant of 1,000 additional options. Stock options
awarded under the Director Option Plan have an exercise price equal to the
market price of the Common Stock on the date of grant. The initial grant
of options to each non-employee director vests in three equal annual
installments on each anniversary date of the grant. The subsequent annual
grants of 1,000 options vest fully six months following the date of grant.
All options expire ten years following the date of grant. Options vest
and remain exercisable in accordance with their original terms in the case
of a director retiring from the Board. In the event of a "Change of
Control" as defined in the Director Option Plan, all options previously
granted under the plan immediately become vested or exercisable upon the
date of the Change of Control, except as otherwise provided in the plan.
The Director Option Plan also provides for adjustment in the number of
options to prevent dilution or enlargement of the benefits or potential
benefits intended under the plan in the event the Compensation Committee
determines that any dividend or other distribution, recapitalization,
stock split, reverse stock split, reorganization, merger, consolidation,
split-up, spin-off, combination, repurchase, or exchange of shares of
Energy or other similar corporate transaction or event affects the
common stock of Energy.
Under the Retirement Plan for Non-Employee Directors ("Retirement
Plan"), non-employee directors become entitled to a retirement benefit upon
completion of five years of service. The annual benefit at retirement is
equal to 10% of the highest annual cash retainer paid to the director during
his or her service on the Board, multiplied by the number of full and
partial years of service (not to exceed 10 years). Such benefit is then
paid for a period equal to the shorter of the director's number of years of
service or the director's lifetime, but in no event for longer than 10
years. The Retirement Plan provides no survivor benefits and is an unfunded
plan paid from the general assets of the Company.
ARRANGEMENTS WITH CERTAIN OFFICERS AND DIRECTORS
Energy entered into an employment agreement with Mr. Greehey dated
May 16, 1990 which expired June 9, 1995. The agreement provided that
Mr. Greehey would be entitled to receive certain post-retirement benefits,
including office facilities and secretarial support until age 69, transfer
of certain club memberships, the vesting of previously granted stock option
and restricted stock grants, certain medical and life insurance benefits and
the right to certain supplemental amounts under the SERP. In November 1994,
Energy's Board of Directors approved resolutions continuing such
post-retirement benefits, notwithstanding the termination of such agreement.
Effective upon his retirement from his positions as President and Chief
Executive Officer in June 1996, the specified post-retirement benefits were
provided to Mr. Greehey and he was requested to continue to serve as
Chairman of the Board. Energy and Mr. Greehey also entered into a
consulting agreement pursuant to which Mr. Greehey received compensation at
the rate of $340,000 per annum for providing general advice and consulting
services, as well as management services for particular projects.
Mr. Greehey was reemployed by Energy on November 21, 1996, and the
consulting agreement terminated at that time. In order to clarify
Mr. Greehey's continuing benefit arrangements, the Board determined that,
following Mr. Greehey's ultimate retirement from active employment, he
will continue to be eligible to receive substantially the same office and
secretarial support, medical and life insurance benefits and supplemental
SERP benefits as were provided following his earlier retirement.
Effective May 1, 1995, Energy entered into an employment agreement
with Mr. Becraft expiring April 30, 2000. Under the agreement, Mr. Becraft
was entitled to receive a minimum base salary of $400,000 per annum, and to
participate in the Company's executive incentive bonus plan, restricted
stock plans, option plans and SERP; for purposes of determining benefits
payable under the SERP, Mr. Becraft's prior service from 1984-1989 was
credited. Mr. Becraft was elected Chief Executive Officer of Energy
effective July 1, 1996, and his base salary was increased to $500,000 at
that time. Energy subsequently entered into a separation agreement with Mr.
Becraft effective November 20, 1996. The separation agreement provided
that, through April 30, 2000, Mr. Becraft will continue to receive his
then-effective base salary. Additionally, the agreement provided for the
immediate vesting of previously granted stock options, restricted stock and
performance shares; office and secretarial support for a six-month period;
transfer of a club membership; certain health benefits until the original
expiration date of the employment agreement; assignment of a life insurance
policy; and certain tax planning services.
Energy has entered into agreements (the "Severance Agreements") with
Messrs. Greehey, Benninger, McLelland and Manning which provide certain
payments and other benefits in the event of their termination of employment
under certain circumstances. The Severance Agreements provide that if the
executive leaves the Company for any reason (other than death, disability or
normal retirement) within two years after a "change of control," the
executive will receive a lump sum cash payment equal to three times, in the
cases of Messrs. Greehey and McLelland, and two times, in the cases of
Messrs. Benninger and Manning, his highest compensation during any
consecutive 12-month period in the prior three years. The executive will
also be entitled to accelerated exercise of stock options and SARs and
accelerated vesting of restricted stock previously granted. The agreements
also provide for special retirement benefits if the executive would have
qualified for benefits under the Pension Plan had he remained with the
Company for the three-year period following such termination, for
continuance of life and health insurance coverages and other fringe benefits
for such three-year period and for relocation assistance. Messrs. Greehey,
Benninger, McLelland and Manning have each executed waivers providing that
the consummation of the transactions contemplated by the Merger Agreement
will not constitute a "change of control" for purposes of such Severance
Agreements.
In connection with pursuing various strategic alternatives, including
the Restructuring, Energy entered into Management Stability Agreements
("Stability Agreements") and Incentive Bonus Agreements ("Incentive
Agreements") with various key executives, including Mr. Terrence E.
Ciliske, Executive Vice President of Valero Natural Gas Company and
Mr. Peter A. Fasullo, Senior Vice President-Corporate Development.
These agreements are intended to assure the continued availability of
Messrs. Ciliske and Fasullo in the event of certain transactions
culminating in a "change of control" of Energy and/or a divestiture of
one of the Company's principal businesses. Under the Stability Agreements,
in the event either of such executive's employment is terminated within
two years after a change of control or divestiture transaction has occurred,
and termination is not voluntary or the result of death, permanent
disability, retirement or certain other defined circumstances, the
executive would be entitled to receive a lump sum cash payment equal to the
sum of (i) two times the highest annual compensation paid to such executive
during the prior three year period, plus an amount equal to the executive's
average annual incentive bonus over the prior three years; the continuation
of life, disability and health insurance coverages for two years; and
certain relocation assistance. The executives would also be entitled to
accelerated vesting of all previously granted stock options, SARs and
restricted stock. Under the Incentive Agreements, if the executive
continues to be employed by the Company and a merger or another qualifying
transaction is accomplished, the executive will be entitled to receive a
cash incentive bonus payment equal to one times the executive's highest
annual base salary during the prior three year period. In the case of Mr.
Ciliske, all of such payment is payable at the closing of the transaction,
and in the case of Mr. Fasullo, 60% of such payment is payable at closing
and 40% is payable six months following closing or, under certain
circumstances, upon his earlier termination of employment.
In connection with Mr. Greehey's then-pending retirement, in May 1996
the Compensation Committee approved special retirement arrangements that
would be applicable to Messrs. Benninger and McLelland if they deferred
their retirement from the Company to after June 30, 1996. Under these
arrangements, upon their ultimate retirement, Messrs. Benninger and
McLelland would each receive eight supplemental retirement "points," to be
divided between age and credited service in such proportions as each shall
elect at the time of retirement. In addition, for the year in which he
retires each executive will be entitled to a prorated executive incentive
bonus and tax preparation services. Each executive would also be entitled
to accelerated vesting of all previously granted stock options and
Restricted Stock, and Mr. Benninger's existing club membership would be
transferred to him without cost.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information as of December 31, 1996,
with respect to each entity known to Energy to be the beneficial owner of
more than five percent of its Common Stock, based solely upon a statement on
Schedule 13G filed by such entity with the Securities and Exchange
Commission ("SEC"):
<TABLE>
<CAPTION>
______________________________________________________________________________________________
Shares
Name and Address Beneficially Percent
Title of Class of Beneficial Owner Owned of Class
______________________________________________________________________________________________
<S> <C> <C> <C>
Common Stock Franklin Resources, Inc.(1) 6,366,167 14.4%
777 Mariners Island Blvd.
San Mateo, CA 94404
Common Stock Merrill Lynch & Co., Inc.(2) 4,160,610 9.4%
World Financial Center, North Tower
250 Vessey Street
New York, NY 10281
Common Stock Frost National Bank of 4,027,492 9.1%
San Antonio, N.A.(3)
100 West Houston Street
San Antonio, TX 78205
Common Stock The Capital Group Companies, Inc.(4) 3,292,700 7.4%
75 State Street
Boston, MA 02109
Common Stock Wellington Management Company(5) 2,841,946 6.4%
75 State Street
Boston, MA 02109
______________________________________________________________________________________________
</TABLE>
[FN]
(1) Franklin Resources, Inc. has reported that it and certain of its
shareholders and subsidiaries have sole voting power with respect to
5,960,170 shares, shared voting power with respect to 459,997 shares
and shared dispositive power with respect to 6,366,167 shares.
(2) Merrill Lynch & Co., Inc. has reported that it has shared voting power
with respect to 4,160,610 shares while certain of its subsidiaries
have shared voting power and shared dispositive power with respect to
up to 4,160,610 shares.
(3) Frost National Bank of San Antonio, N.A. has reported that it has
shared voting and dispositive power with respect to 4,027,492 shares
in its capacity as Trustee for the Valero Energy Corporation Thrift
Plan, Valero Energy Corporation Employees' Stock Ownership Plan,
Valero Employees' Stock Ownership Plan, Valero Energy Corporation
Benefits Trust and Valero Energy Corporation Supplemental Executive
Retirement Plan.
(4) The Capital Group Companies, Inc. has reported in a Schedule 13G that
it and certain investment management subsidiaries have sole voting
power with respect to 600 shares and sole dispositive power with
respect to 3,292,700 shares. One such subsidiary, Capital Research
and Management Company, has also reported that it has sole
dispositive power with respect to 2,823,180 of such shares.
(5) Wellington Management Company, LLP ("Wellington") has filed a
Schedule 13G reporting shared dispositive power with respect to
2,841,946 shares and shared voting power with respect to 126,099
shares.
In addition, all 11,500 outstanding shares of Series A Preferred Stock
are held by American General Corporation, P.O. Box 3855, Houston,
Texas 77253; no filing of Schedule 13G or 13D is required with respect
thereto.
Except as otherwise indicated, the following table sets forth
information as of February 1, 1997, regarding Common Stock and $3.125
Convertible Preferred Stock beneficially owned (or deemed to be owned)
by each current director, each executive officer named in the Summary
Compensation Table, and all current directors and executive officers of
Energy as a group. Such information has been furnished to Energy by such
persons and cannot be independently verified by Energy. The $3.125
Convertible Preferred Stock has no ordinary voting rights.
<TABLE>
<CAPTION>
_______________________________________________________________________________________________
Common Stock
Shares $3.125 Percent
Name of Beneficially Shares Under Convertible of Class
Beneficial Owner (1) Owned Exercisable Preferred (Common
(2)(3)(4) Options(5) Stock(2) Stock)(2)
________________________________________________________________________________________________
<S> <C> <C> <C> <C>
F. Joseph Becraft(6) 46,012 160,000 0 *
Edward C. Benninger 127,864 70,805 1,000 *
Ronald K. Calgaard 2,142 1,667 0 *
Robert G. Dettmer(7) 5,877 3,000 0 *
A. Ray Dudley 8,141 3,000 0 *
Ruben M. Escobedo(8) 3,094 3,000 0 *
William E. Greehey 383,161 510,184 4,385 2.02%
James L. Johnson 3,852 3,000 0 *
Lowell H. Lebermann 2,244 3,000 0 *
E. Baines Manning 47,959 42,550 1,000 *
Stan L. McLelland 109,120 53,532 0 *
Susan Kaufman Purcell 2,289 3,000 0 *
All executive officers and 803,276 908,092 6,385 3.87%
directors as a group, including
the persons named above
(15 persons)(9)
______________________________________________________________________________________________
</TABLE>
[FN]
* Indicates that the percentage of beneficial ownership does not exceed 1%
of the class.
(1) The business address for all beneficial owners listed above is 530
McCullough Avenue, San Antonio, Texas 78215.
(2) No executive officer or director of Energy owns any class of equity
securities of Energy other than Common Stock and $3.125 Convertible
Preferred Stock. Neither any such person, nor all such persons as
a group, owns 1% or more of the $3.125 Convertible Preferred Stock.
The calculation for Percent of Class includes shares listed under
the captions "Shares Beneficially Owned" and "Shares Under Exercisable
Options."
(3) Includes shares allocated pursuant to various employee stock plans
available to its employees generally (collectively, the "Employee
Stock Plans"), as well as shares granted under Energy's Restricted
Stock Bonus and Incentive Stock Plan (the "Restricted Stock Plan"),
Executive Stock Incentive Plan ("ESIP") and the Director Plan.
Except as otherwise noted, each person named in the table, and each
other executive officer, has sole power to vote or direct the vote of
all such shares beneficially owned by him or her. Except as
otherwise noted, each person named in the table, and each other
executive officer, has sole power to dispose or direct the
disposition of shares beneficially owned by him or her. Common Stock
granted under the Restricted Stock Plan, ESIP and the Director Plan
("Restricted Stock") may not be disposed of until vested.
(4) Does not include shares that could be acquired under options, which
information is set forth in the second column.
(5) Includes shares subject to options that are exercisable within 60
days from February 1, 1997. Such shares may not be voted unless the
options are exercised. Options that may become exercisable within
such 60 day period only in the event of a change of control of Energy
are excluded. None of the current executive officers or directors
of Energy holds any rights to acquire Common Stock except through
exercise of stock options.
(6) Mr. Becraft resigned effective November 20, 1996.
(7) Includes shares held by spouse.
(8) Includes shares held by spouse and shares held in a trust.
(9) Certain officers of Energy not designated as executive officers by
the Board of Directors do not perform the duties of executive
officers and are not classified as "executive officers" for purposes
of this report.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company has invested through a subsidiary approximately $9.7
million in a program to drill coal seam gas wells in New Mexico. In order
to share the drilling and other risks inherent in this project, various
officers and employees of the Company were permitted to invest as general
partners in a partnership to which the subsidiary's interest was assigned.
The Board determined in 1992 that this transaction was fair to the Company.
During 1992 and 1993 Messrs. Greehey, Benninger, McLelland and Manning
invested approximately $207,000, $52,000, $156,000 and $104,000,
respectively, to acquire respective interests of 2.0%, .50%, 1.5% and 1.0%
in the project. No additional investments were made by these executive
officers during 1994 or 1996. During 1995, a company owned by Mr. Manning
purchased an additional .25% interest in the project from another investor.
During 1996, Messrs. Greehey, Benninger, McLelland and Manning (including
such company) received cash distributions of $45,680, $11,420, $34,260 and
$28,550, respectively, attributable to their investments. Additionally,
all investors in the project may be eligible to utilize certain federal
income tax credits applicable to the project.
Except as disclosed herein, no executive officer or director or
director of Energy has been indebted to the Company, or has acquired a
material interest in any transaction to which the Company is a party, during
the last fiscal year.
<PAGE>
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, 1996 and 1995 . . . . . . . . . .
Consolidated statements of income for the
years ended December 31, 1996, 1995 and
1994 . . . . . . . . . . . . . . . . . . . . . .
Consolidated statements of common stock and
other stockholders' equity for the years
ended December 31, 1996, 1995 and 1994 . . . . .
Consolidated statements of cash flows for the
years ended December 31, 1996, 1995 and
1994 . . . . . . . . . . . . . . . . . . . . . .
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 and Plan of Merger, dated as of January 31,
1997, among Valero Energy Corporation, PG&E Corporation,
and PG&E Acquisition Corporation. The Company agrees to
furnish supplementally any omitted schedule or exhibit
to the Commission upon request.
*2.2 -- Form of Agreement and Plan of Distribution to be
executed by Valero Energy Corporation and Valero
Refining and Marketing Company pursuant to the Agreement
and Plan of Merger described in Exhibit 2.1 to this
Form 10-K. The Company agrees to furnish supplementally
any omitted schedule or exhibit to the Commission upon
request.
*2.3 -- Form of Employee Benefits Agreement to be executed by
Valero Energy Corporation and Valero Refining and
Marketing Company pursuant to the Agreement and Plan of
Merger described in Exhibit 2.1 to this Form 10-K. The
Company agrees to furnish supplementally any omitted
schedule or exhibit to the Commission upon request.
*2.4 -- Form of Tax Sharing Agreement to be executed by Valero
Energy Corporation, Valero Refining and Marketing
Company, and PG&E Corporation pursuant to the Agreement
and Plan of Merger described in Exhibit 2.1 to this
Form 10-K. The Company agrees to furnish supplementally
any omitted schedule or exhibit to the Commission upon
request.
2.5 -- 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 Restricted Stock Bonus and
Incentive Stock Plan, as amended and restated
November 21, 1996.
*+10.4 -- Valero Energy Corporation Stock Option Plan No. 3, as
amended and restated August 22, 1996.
*+10.5 -- Valero Energy Corporation Stock Option Plan No. 4, as
amended and restated August 22, 1996.
*+10.6 -- Valero Energy Corporation 1990 Restricted Stock Plan for
Non-Employee Directors, as amended and restated
August 22, 1996.
*+10.7 -- Valero Energy Corporation Supplemental Executive
Retirement Plan, as amended and restated effective
January 1, 1996.
*+10.8 -- Valero Energy Corporation Executive Incentive Bonus
Plan, as amended and restated January 23, 1997.
*+10.9 -- Valero Energy Corporation Executive Stock Incentive
Plan, as amended and restated November 21, 1996.
*+10.10 -- Valero Energy Corporation Non-Employee Director Stock
Option Plan, as amended and restated November 21, 1996.
+10.11 -- 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).
*+10.12 -- Schedule of Executive Severance Agreements.
+10.13 -- 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).
+10.14 -- 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).
+10.15 -- 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.
*+10.17 -- Incentive Bonus Agreement, dated as of November 21,
1996, between Valero Energy Corporation and Terrence E.
Ciliske.
*+10.18 -- Incentive Bonus Agreement, dated as of November 21,
1996, between Valero Energy Corporation and Peter A.
Fasullo.
*+10.19 -- Incentive Bonus Agreement, dated as of November 21,
1996, between Valero Energy Corporation and Gregory C.
King.
*+10.20 -- Management Stability Agreement, dated as of November 1,
1996, between Valero Energy Corporation and Terrence E.
Ciliske.
*+10.21 -- Management Stability Agreement, dated as of November 1,
1996, between Valero Energy Corporation and Peter A.
Fasullo.
*+10.22 -- Management Stability Agreement, dated as of November 1,
1996, between Valero Energy Corporation and Gregory C.
King.
*+10.23 -- Waiver and Agreement, dated as of November 21, 1996,
between Valero Energy Corporation and William E.
Greehey.
*+10.24 -- Schedule of Waiver 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 27,
1997.
*24.1 -- Power of Attorney, dated February 27, 1997 (set forth on
the signatures page of this Form 10-K).
**27.1 -- Financial Data Schedule (reporting financial information
as of and for the year ended December 31, 1996).
**27.2 -- Restated Financial Data Schedule (reporting financial
information as of and for the year ended December 31,
1995).
________________
* 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 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-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 November 21,
1996 was filed electronically on December 31, 1996, reporting Item 5. Other
Events, in connection with the Board's approval to pursue a strategic
transaction relating to the Company's principal business activities.
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. 33-14455 (filed May 21,
1987), No. 33-38045 (filed December 3, 1990), No. 33-53796 (filed October
27, 1992), No. 33-59040 (filed March 3, 1993), No. 33-52533 (filed March 7,
1994), No. 33-59217 (filed May 10, 1995), No. 33-63703 (filed October 26,
1995), and No. 333-02987 (filed April 3, 1996).
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 27, 1997
<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 27, 1997
(William E. Greehey)
Director, President
and Chief Financial Officer
(Principal Financial
/s/ Edward C. Benninger and Accounting Officer) February 27, 1997
(Edward C. Benninger)
/s/ Ronald K. Calgaard Director February 27, 1997
(Ronald K. Calgaard)
/s/ Robert G. Dettmer Director February 27, 1997
(Robert G. Dettmer)
/s/ A. Ray Dudley Director February 27, 1997
(A. Ray Dudley)
Director February , 1997
(Ruben M. Escobedo)
/s/ James L. Johnson Director February 27, 1997
(James L. Johnson)
/s/ Lowell H. Lebermann Director February 27, 1997
(Lowell H. Lebermann)
/s/ Susan Kaufman Purcell Director February 27, 1997
(Susan Kaufman Purcell)
AGREEMENT AND PLAN OF MERGER
dated as of January 31, 1997,
between
VALERO ENERGY CORPORATION,
PG&E CORPORATION
and
PG&E ACQUISITION CORPORATION
<PAGE>
TABLE OF CONTENTS
AGREEMENT AND PLAN OF MERGER
Page
ARTICLE I DEFINITIONS . . . . . . . . . . . . . . . . . . .2
1.1. Definitions . . . . . . . . . . . . . . . . . . .2
ARTICLE II THE MERGER. . . . . . . . . . . . . . . . . . . 10
2.1. The Merger. . . . . . . . . . . . . . . . . . . 10
2.2. Effective Time. . . . . . . . . . . . . . . . . 10
2.3. Closing . . . . . . . . . . . . . . . . . . . . 11
2.4. Certificate of Incorporation of the Surviving
Corporation . . . . . . . . . . . . . . . . .11
2.5. By-laws of the Surviving Corporation. . . . . . 11
2.6. Directors . . . . . . . . . . . . . . . . . . . 11
2.7. Officers. . . . . . . . . . . . . . . . . . . . 11
ARTICLE III MERGER CONSIDERATION; CONVERSION OR
CANCELLATION OF SHARES IN THE MERGER. . . . . . 12
3.1. Merger Consideration; Conversion or
Cancellation of Shares. . . . . . . . . . . 12
3.2. Exchange of Certificates. . . . . . . . . . . . 14
ARTICLE IV CERTAIN PRE-MERGER TRANSACTIONS. . . . . . . . .18
4.1. Reorganization Agreements and Interim
Services Agreement . . . . . . . . . . . . .18
4.2. Intercorporate Reorganization of Company. . . . 18
4.3. Distribution. . . . . . . . . . . . . . . . . . 19
4.4. Senior Notes. . . . . . . . . . . . . . . . . . 19
4.5. VESOP Notes . . . . . . . . . . . . . . . . . . 19
ARTICLE V REPRESENTATIONS AND WARRANTIES. . . . . . . . . 19
5.1. Representations and Warranties of the Company . 19
5.2. Representations and Warranties of Acquiror
and Sub. . . . . . . . . . . . . . . . . . .35
ARTICLE VI COVENANTS. . . . . . . . . . . . . . . . . . . .42
6.1. Covenants of the Company. . . . . . . . . . . . 42
6.2. Covenants of Acquiror . . . . . . . . . . . . . 47
ARTICLE VII ADDITIONAL AGREEMENTS . . . . . . . . . . . . . 49
7.1. Access. . . . . . . . . . . . . . . . . . . . . 49
7.2. Other Actions . . . . . . . . . . . . . . . . . 50
7.3. Acquisition Proposals; Board Recommendation . . 50
7.4. Tax Representation Letters. . . . . . . . . . . 52
7.5. Filings; Other Actions. . . . . . . . . . . . . 52
7.6. Accountants' Letters. . . . . . . . . . . . . . 54
7.7. Distribution Agreement. . . . . . . . . . . . . 54
7.8. Publicity . . . . . . . . . . . . . . . . . . . 54
7.9. Employees and Employee Plans. . . . . . . . . . 55
7.10. Expenses . . . . . . . . . . . . . . . . . 56
7.11. Takeover Statutes. . . . . . . . . . . . . 57
7.12. Securities Act Compliance. . . . . . . . . 57
7.13. Stock Exchange Listing . . . . . . . . . . 57
7.14. 1935 Act . . . . . . . . . . . . . . . . . 57
7.15. Further Assurances . . . . . . . . . . . . 58
ARTICLE VIII CONDITIONS. . . . . . . . . . . . . . . . . . . 58
8.1. Conditions to Each Party's Obligation to
Effect the Merger. . . . . . . . . . . . . .58
8.2. Conditions to Obligation of the Company . . . . 59
8.3. Conditions to Obligations of Acquiror and Sub . 60
ARTICLE IX TERMINATION. . . . .. . . . . . . . . . . . . . 61
9.1. Termination . . . . . . . . . . . . . . . . . . 61
9.2. Effect of Termination and Abandonment . . . . . 62
ARTICLE X MISCELLANEOUS AND GENERAL . . . . . . . . . . . 63
10.1. Survival . . . . . . . . . . . . . . . . . 63
10.2. Modification or Amendment. . . . . . . . . 63
10.3. Waiver; Remedies . . . . . . . . . . . . . 63
10.4. Counterparts . . . . . . . . . . . . . . . 63
10.5. Governing Law. . . . . . . . . . . . . . . 64
10.6. Notices. . . . . . . . . . . . . . . . . . 64
10.7. Entire Agreement . . . . . . . . . . . . . 65
10.8. Certain Obligations. . . . . . . . . . . . 65
10.9. Assignment . . . . . . . . . . . . . . . . 65
10.10. Captions . . . . . . . . . . . . . . . . . 65
10.11. Severability . . . . . . . . . . . . . . . 65
10.12. No Third Party Beneficiaries . . . . . . . 66
10.13. Annexes and Schedules. . . . . . . . . . . 66
10.14. No Representations or Warranties . . . . . 66
10.15. Tax Sharing Agreement. . . . . . . . . . . 67
10.16. Consent to Jurisdiction. . . . . . . . . . 67
Annex A Agreement and Plan of Distribution
Annex B Employee Benefits Agreement
Annex C Tax Sharing Agreement
Annex D Form of Acquiror's Tax Representation Letter
Annex E Form of VRM Tax Representation Letter
Annex F Form of Affiliate Letter
Annex G Annex G Amended and Restated Certificate of Incorporation of the
Surviving Corporation
AGREEMENT AND PLAN OF MERGER dated as of January 31, 1997 (this
"Agreement"), between VALERO ENERGY CORPORATION, a Delaware corporation (the
"Company"), PG&E Corporation, a California corporation ("Acquiror") and PG&E
Acquisition Corporation, a Delaware corporation and a wholly-owned subsidiary
of Acquiror ("Sub") formed for the purpose of participating in the Merger
described herein.
W I T N E S S E T H:
WHEREAS, Acquiror desires to acquire the Retained Business (as
herein defined) but does not wish to acquire the other businesses conducted,
or to be conducted, by the Company;
WHEREAS, the Board of Directors of the Company has approved an
agreement and plan of distribution substantially in the form of Annex A
attached hereto (the "Distribution Agreement"), which will be entered into
prior to the Effective Time (as defined herein), pursuant to which and subject
to the terms of which among other things (a) the Company and Valero Refining
and Marketing Company, a Delaware corporation and wholly owned Subsidiary of
the Company ("VRM"), will consummate the transactions contemplated in Article
II of the Distribution Agreement and (b) all of the issued and outstanding
shares of common stock, par value $0.01 per share (the "VRM Common Stock")
along with the associated rights (the "VRM Rights") issued pursuant to the
Rights Agreement substantially in the form attached to the VRM Registration
Statement (as defined herein) between VRM and the rights agent named therein
(the "VRM Rights Agreement") of VRM will be distributed (the "Distribution")
to the holders of shares of common stock, par value $1.00 per share, of the
Company. Such common stock together with the rights issued pursuant to the
Rights Agreement dated as of October 26, 1995 between the Company and Harris
Trust and Savings Bank, as agent (the "Company Rights Agreement") being
referred to herein as "Company Common Stock";
WHEREAS, the respective Boards of Directors of the Company, Acquiror
and Sub have determined that, following the Distribution, a merger of Sub with
and into the Company (the "Merger"), with the Company as the surviving
corporation, would be in the best interests of their respective corporations
and stockholders; and
WHEREAS, it is the intention of the parties to this Agreement that
for Federal income tax purposes (a) the Distribution shall qualify as a
transaction described in Section 355 of the Internal Revenue Code of 1986, as
amended (the "Code") and a "reorganization" within the meaning of Section
368(a)(1)(D) of the Code, and (b) the Merger shall qualify as a
"reorganization" within the meaning of Section 368(a)(1)(B) of the Code;
NOW, THEREFORE, in consideration of the premises, and of the
representations, warranties, covenants and agreements set forth herein, the
parties hereto hereby agree as follows:
ARTICLE I
DEFINITIONS
1.1. Definitions. (a) As used in this Agreement the following
terms shall have the following respective meanings:
"Acquiror Common Stock" shall have the meaning set forth in Section
3.1(a)(ii).
"Acquiror Form S-4" shall have the meaning set forth in Section
5.1(g)(iii).
"Acquiror Pension Plan" shall mean the Retirement Plan for Employees
of Pacific Gas Transmission Company, as in effect as of the date hereof.
"Acquiror Thrift Plan" shall mean a defined contribution plan with a
cash or deferred arrangement sponsored by the Acquiror or an Affiliate and
intended to qualify under Sections 401(a) and (k) of the Code.
"Acquisition Proposal" shall mean any inquiry, proposal or offer
for, or any indication of interest in, from any person, either (A) a merger,
acquisition, business combination, consolidation or similar transaction
involving, or any purchase of, more than 50% of the voting securities of the
Company or any Subsidiary, or all or substantially all of the assets of the
Company or any Subsidiary (excluding any such transaction relating solely to
the assets or voting securities of VRM or any of its Subsidiaries) or (B) an
acquisition, or similar transaction involving the purchase, of a substantial
portion of the assets of or a substantial equity interest in the Retained
Business, other than, in each case, the transactions contemplated by this
Agreement.
"Affiliate" shall mean, with respect to any specified Person, a
Person that directly, or indirectly through one or more intermediaries,
controls, is controlled by, or is under common control with, such specified
Person; provided, however, that from and after the Time of Distribution, no
member of either Group shall be deemed to be an Affiliate of any member of the
other Group.
"Assignment and Assumption Agreements" shall mean any and all
conveyance and assumption instruments which may be entered into pursuant to
any of the Reorganization Agreements.
"Cash Dividend" shall have the meaning set forth in the Distribution
Agreement.
"Certificate of Merger" shall have the meaning set forth in Section
2.2.
"Closing" shall have the meaning set forth in Section 2.3.
"Closing Date" shall have the meaning set forth in Section 2.3.
"Code" shall mean the Internal Revenue Code of 1986, as amended.
"Certificate" shall have the meaning set forth in Section 3.1(b).
"Company By-laws" shall mean the by-laws of the Company, as amended.
"Company Charter" shall mean the certificate of incorporation of the
Company, as amended.
"Company Common Stock" shall have the meaning set forth in the third
paragraph of this Agreement.
"Company Convertible Preferred Stock" shall have the meaning set
forth in Section 5.1(e).
"Company Disclosure Schedule" shall have the meaning set forth in
Section 5.1.
"Company Meeting" shall have the meaning set forth in Section
5.1(g)(iii).
"Company Options" shall have the meaning set forth in Section
3.1(a)(iii).
"Company Preferred Stock" shall have the meaning set forth in
Section 5.1(e).
"Company Restricted Stock Plans" shall mean the Company's Restricted
Stock Bonus and Incentive Stock Plan, effective as of April 30, 1981 and
amended and restated effective as of November 21, 1996, the Restricted Stock
Plan for Non-employee Directors, effective as of November 14, 1990 and amended
and restated effective as of August 22, 1996 and/or the Executive Stock
Incentive Plan, effective as of July 21, 1994 and amended and restated
effective as of November 21, 1996.
"Company Rights Agreement" shall have the meaning set forth in the
third paragraph of this Agreement.
"Company Series A Preferred Stock" shall have the meaning set forth
in Section 5.1(e).
"Company Stock Plans" shall mean the Company's Stock Option Plan No.
3, Stock Option Plan No. 4, Stock Option Plan No. 5, Company Restricted Stock
Plans, Non-Employee Director Stock Option Plan, Executive Incentive Bonus
Plan, Employee Thrift Plan, Benefits Trust, ESOP and VESOP, each as amended
and/or restated.
"Continuing Employee" shall have the meaning set forth in Section
7.9(b).
"Contract" shall have the meaning set forth in Section 5.1(d)(i).
"Credit Facilities" shall mean the $300 million Revolving Credit
Agreement, dated as of November 1, 1995, as amended, among the Company, Morgan
Guaranty Trust Company of New York, as Administrative Agent, Bank of Montreal,
as Syndication Agent, and the banks listed therein, and the Company's
uncommitted short-term bank credit lines and uncommitted bank letter of credit
facilities.
"Deferred Compensation Plans" shall mean the Company's Executive
Deferred Compensation Plan, effective as of November 26, 1984 and amended and
restated effective as of October 21, 1986 and the Company Key Employee
Deferred Compensation Plan, effective as of August 20, 1985, and amended and
restated effective as of October 21, 1986.
"Distribution" shall have the meaning set forth in the third
paragraph of this Agreement.
"Distribution Agreement" shall have the meaning set forth in the
third paragraph of this Agreement.
"DGCL" shall mean the Delaware General Corporation Law.
"Effective Time" shall have the meaning set forth in Section 2.2.
"Employee Benefits Agreement" shall mean an employee benefits
agreement substantially in the form of Annex B attached hereto.
"Employee Plan" shall mean each "employee benefit plan," within the
meaning of Section 3(3) of ERISA, each Company Stock Plan, and each
employment, severance or other similar contract, arrangement or policy and
each plan or arrangement providing for insurance coverage (including any
self-insured arrangements), workers' compensation, disability benefits,
supplemental unemployment benefits, vacation benefits, retirement benefits or
for deferred compensation, profit-sharing, bonuses, or other forms of
incentive compensation or post-retirement insurance, compensation or benefits
which is maintained, administered or contributed to by the Company or any of
its ERISA Affiliates primarily for U.S. citizens or residents and which covers
any employee of the Company.
"Environmental Law" shall have the meaning set forth in the
Distribution Agreement.
"Environmental Permits" shall have the meaning set forth in Section
5.1(o).
"ERISA" means the Employee Retirement Income Security Act of 1974,
as amended.
"ERISA Affiliate" shall mean any entity (excluding any VRM Company)
which,
together with the Company, would be treated as a single employer under Section
414(b) or (c) of the Code.
"ESOP" shall mean the Company's Employee Stock Ownership Plan.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.
"Exchange Agent" shall have the meaning set forth in Section 3.2(a).
"Expenses" shall mean documented out-of-pocket fees and expenses
incurred by the Company and its Subsidiaries in connection with efforts to
consummate any of the transactions contemplated by the Reorganization
Agreements, including, without limitation, financing fees (including, without
limitation, financing fees to refund or repay the IRBs), consent fees,
printing costs and fees, severance (including, without limitation severance
payments to employees of Valero Corporate Services Company or Valero
Management Company incurred prior to or after the Effective Time in connection
with the transactions contemplated by the Reorganization Agreements) and early
retirement payments, and payments pursuant to the Incentive Bonus Agreements,
payments pursuant to the Shareholder Value Bonus Plan, expenses of counsel,
investment banking firms, accountants, experts and consultants and the
expenses incurred in connection with printing and mailing the Proxy
Statement-Prospectus, the Acquiror S-4 and the VRM Registration Statement.
"Filed Acquiror SEC Documents" shall have the meaning set forth in
Section 5.2(g).
"Filed Company SEC Documents" shall have the meaning set forth in
Section 5.1(i).
"GAAP" shall mean United States generally accepted accounting
principles.
"Group" shall have the meaning set forth in the Distribution
Agreement.
"Governmental Entity" shall have the meaning set forth in Section
5.1(d)(ii).
"Hazardous Substance" shall have the meaning set forth in the
Distribution Agreement.
"HSR Act" shall mean the Hart-Scott-Rodino Antitrust Improvement Act
of 1976, as amended.
"Interim Services Agreement" shall mean the interim services
agreement, entered into by the Company and VRM.
"Intellectual Property" shall mean all intellectual property rights,
including domestic
and foreign patents, patent applications, invention disclosures to be filed or
awaiting filing determinations, trademark and service mark applications,
registered trademarks, registered service marks, registered copyrights,
trademarks, servicemarks, tradenames, trade secrets and other proprietary
rights, inventions, know-how, formulae, processes, procedures, research
records, records of inventions, test information, market surveys and marketing
know-how and unregistered copyrights, together with associated goodwill.
"Joint Ventures" shall mean the joint ventures set forth in Schedule
5.1(f)(ii).
"Lien" shall have the meaning set forth in Section 5.1(d)(i).
"Material Adverse Effect" shall mean with respect to any entity, or
group of entities taken as a whole, such state of facts, event, change, or
effect that has had, or would reasonably be expected to have, a material
adverse effect on the assets, business, properties, results of operations, or
financial condition of such entity, or group of entities taken as a whole, or
the ability of such entity, or group of entities, to consummate the
transactions contemplated by this Agreement, including without limitation the
Distribution and the Merger or to perform its obligations under the
Reorganization Agreements to which it is or will be a party.
"Merger" shall have the meaning set forth in the fourth paragraph of
this Agreement.
"New Certificates" shall have the meaning set forth in Section
3.2(a).
"Notice of Superior Proposal" means a written notice advising
Acquiror that the Board of Directors of the Company has received a Superior
Proposal.
"NYSE" shall have the meaning set forth in Section 3.1(a)(ii).
"Per Share Merger Consideration" shall have the meaning set forth in
Section 3.1(a)(ii).
"Permit" shall have the meaning set forth in Section 5.1(d)(i).
"Permitted Liens" shall mean, collectively, those Liens (A) set
forth in Schedule 1.1(a), (B) for Taxes not yet due or payable or being
contested in good faith, (C) that constitute mechanics', carriers', workers'
or like liens or (D) that individually or in the aggregate, would not have a
Material Adverse Effect on the Retained Companies, taken as a whole.
"Person" shall mean an individual, partnership, a joint venture, a
corporation, a limited liability entity, a trust, an unincorporated
organization or other entity or a government or any department or agency
thereof.
"Post-Signing Return" shall have the meaning set forth in Section
6.1(k).
"Proxy Statement-Prospectus" shall have the meaning set forth in
Section 5.1(g)(iii).
"Registration Statements" shall mean, collectively, the Acquiror
Form S-4 and the VRM Registration Statement.
"Regulatory Filings" shall have the meaning set forth in Section
5.1(d)(ii).
"Release" shall have the meaning set forth in the Distribution
Agreement.
"Reorganization Agreements" shall mean, collectively, this
Agreement, the Distribution Agreement, the Tax Sharing Agreement and the
Employee Benefits Agreement.
"Representatives" shall mean directors, officers, employees, agents,
consultants, advisors, accountants, attorneys and representatives.
"Retained Assets" shall have the meaning set forth in the
Distribution Agreement.
"Retained Business" shall have the meaning set forth in the
Distribution Agreement.
"Retained Company" or "Retained Companies" shall have the meaning
set forth in Section 1.1(b).
"SEC" shall mean the Securities and Exchange Commission.
"Securities Act" shall mean the Securities Act of 1933, as amended.
"SERP" shall mean the Company's Supplemental Executive Retirement
Plan, effective as of January 1, 1983 and amended and restated effective as of
January 1, 1996.
"Software" shall include all proprietary software programs, and the
related source code, system documentation, statements of principles of
operation, and schematics for all software programs, as well as any pertinent
commentary or explanation that may be necessary to render such materials
understandable and usable by a trained computer programmer.
"Subsidiary" shall mean any corporation or other organization
(including without limitation partnerships but as used in Section 5.1,
excluding Joint Ventures), whether incorporated or unincorporated, of which,
directly or indirectly, at least a majority of the securities or interests
having by the terms thereof ordinary voting power to elect at least a majority
of the board of directors or others performing similar functions with respect
to such corporation or other organization is directly or indirectly owned or
controlled by such party or by any one or more of its Subsidiaries, or by such
party and one or more of its Subsidiaries.
"Superior Proposal" shall mean any bona fide Acquisition Proposal
made by a third party on terms which the Board of Directors of the Company
determines in its good faith judgment to be more favorable to the Company's
stockholders than the Merger and the other transactions contemplated hereby.
"Surviving Corporation" shall have the meaning set forth in Section
2.1.
"Takeover Statute" shall have the meaning set forth in Section
5.1(p).
"Tax Authority" shall have the meaning set forth in the Tax Sharing
Agreement.
"Taxes" shall have the meaning set forth in the Tax Sharing
Agreement.
"Tax Return" shall have the meaning set forth in the Tax Sharing
Agreement.
"Tax Sharing Agreement" shall mean the tax sharing agreement
substantially in the form of Annex C attached hereto.
"Time of Distribution" shall have the meaning set forth in the
Distribution Agreement.
"VESOP" shall mean the Valero Employees' Stock Ownership Plan.
"VNG" shall mean Valero Natural Gas Company, a Delaware corporation
and a wholly-owned Subsidiary of the Company and, with respect to the period
prior to June 30, 1996, shall be construed to include VNGC Holding Company, a
Delaware corporation and wholly owned subsidiary of the Company.
"VRM Common Stock" shall have the meaning set forth in the third
paragraph of this Agreement.
"VRM Registration Statement" shall have the meaning set forth in
Section 5.1(g)(iii).
"VRM Rights" shall have the meaning set forth in the third paragraph
of this Agreement.
"VRM Rights Agreement" shall have the meaning set forth in the third
paragraph of this Agreement.
(b) As used in this Agreement, (i) any reference to the Company and
its Subsidiaries means the Company and each of its Subsidiaries, (ii) any
reference to the "Retained Company" and its Subsidiaries or the "Retained
Companies" means the Company (solely with respect to the Retained Business)
and those of its direct and indirect Subsidiaries included in the Retained
Business, (iii) any reference to the "Retained Subsidiaries" or "Retained
Subsidiary" means the direct and indirect Subsidiaries or Subsidiary of the
Company included in the Retained Business, (iv) any reference to VRM and its
Subsidiaries or the "VRM Companies" means VRM immediately after the Time of
Distribution and those entities that immediately after the Time of
Distribution will be direct or indirect Subsidiaries of VRM and (v) any
reference to Subsidiaries of VRM means those entities that immediately after
the Time of Distribution will be direct or indirect Subsidiaries of VRM. All
capitalized terms not otherwise defined herein shall have the meaning set
forth in the Distribution Agreement.
ARTICLE II
THE MERGER
2.1. The Merger. Upon the terms and subject to the conditions set
forth in this Agreement, at the Effective Time, Sub will be merged with and
into the Company, the separate cororate existence of Sub will thereupon cease
and the Company will be the surviving corporation (the "Surviving
Corporation"). The Merger will have the effects specified in the DGCL.
Without limiting the generality of the foregoing, and subject thereto, at the
Effective Time, all of the properties, rights, privileges, powers, franchises,
debts, liabilities, obligations and duties of the Company will continue in the
Surviving Corporation as provided for in the DGCL.
2.2. Effective Time. As soon as practicable following the
satisfaction or waiver of the conditions set forth in Article VIII, the
parties will file a certificate of merger (the "Certificate of Merger")
executed in accordance with the relevant provisions of the DGCL and will make
all other filings or recordings required under the DGCL to consummate the
Merger. The Merger will become effective upon the filing of the Certificate
of Merger with the Secretary of State of the State of Delaware or at such
other time as the parties hereto may agree and as may be specified in the
Certificate of Merger in accordance with applicable law. The date and time
when the Merger becomes effective is herein referred to as the "Effective
Time".
2.3. Closing. The closing of the Merger (the "Closing") will take
place (i) at the offices of Wachtell, Lipton, Rosen & Katz, 51 West 52nd
Street, New York, New York 10021 at 9:00 A.M. on the first business day on
which all the conditions set forth in Article VIII (other than those that are
waived by the party or parties for whose benefit such conditions exist) are
fulfilled or (ii) at such other place, date and/or time as the parties hereto
may agree. The date upon which the Closing occurs is herein referred to as
the "Closing Date"; provided that the Closing shall not take place earlier
than 10 business days following the Company Meeting.
2.4. Certificate of Incorporation of the Surviving Corporation. At
the Effective Time, in accordance with the DGCL, the Certificate of
Incorporation of the Company in effect immediately prior to the Effective Time
will be amended as set forth in Annex G hereto and, as so amended, will be the
certificate of incorporation of the Surviving Corporation until amended in
accordance with the terms thereof and applicable law (the "Surviving
Corporation's Certificate of Incorporation").
2.5. By-laws of the Surviving Corporation. The Company By-laws
will be the by-laws of the Surviving Corporation until amended in accordance
with the terms thereof, the Surviving Corporation's Certificate of
Incorporation and applicable law.
2.6. Directors. The directors of Sub at the Effective Time will be
the directors of the Surviving Corporation until the earlier of their
resignation or removal or until their respective successors are duly elected
and qualified, as the case may be.
2.7. Officers. The officers of Sub at the Effective Time will be
the officers of the Surviving Corporation until the earlier of their
resignation or removal or until their respective successors are duly elected
and qualified, as the case may be.
ARTICLE III
MERGER CONSIDERATION; CONVERSION
OR CANCELLATION OF SHARES IN THE MERGER
3.1. Merger Consideration; Conversion or Cancellation of Shares.
(a) At the Effective Time, by virtue of the Merger and without any further
action on the part of the holders of any shares of capital stock of the
Company or any shares of capital stock of Sub:
(i) Each share of Company Common Stock (A) issued and
outstanding immediately prior to the Effective Time and (1) owned by Acquiror
or any of its wholly-owned Subsidiaries (but not by any employee benefit plan
of, or any nuclear decommissioning trust for the benefit of, Acquiror or any
of its Subsidiaries) or (2) owned by any Subsidiary of the Company (but not by
any Employee Plan of the Company or any of its Subsidiaries) or (B) held in
the treasury of the Company immediately prior to the Effective Time will cease
to be outstanding, will be canceled and retired without payment of any
consideration therefor and will cease to exist.
(ii) Subject to Section 3.2(c), each share of Company Common
Stock issued and outstanding immediately prior to the Effective Time (other
than shares to be canceled in accordance with Section 3.1(a)(i)) will be
converted into the right to receive that number (the "Per Share Merger
Consideration") of duly authorized, validly issued, fully paid and
nonassessable shares of common stock, no par value, of Acquiror ("Acquiror
Common Stock"), equal to the quotient, rounded to the nearest thousandth, or
if there shall not be a nearest thousandth, the next higher thousandth, of (x)
the quotient of (A) $722.5 million (increased by the total amount of cash paid
to the Company between the execution of this Agreement and the Closing in
order to exercise the Company Options plus an amount equal to the total
exercise price of any unexercised Company Options, but reduced by the total
cash amount paid by the Retained Companies between December 31, 1996 and the
Closing in settlement of any stock appreciation rights (including limited
rights and, if applicable, decreased in accordance with the last sentence of
this Section 3.1(a)(ii)), Company Options or performance shares, except to the
extent such amounts have been recorded as accrued liabilities on the 1996
balance sheet included in the Retained Companies Financial Statements) divided
by (B) the sum of the number of shares of Company Common Stock issued and
outstanding immediately prior to the Effective Time (including shares issued
pursuant to the conversion of Company Preferred Stock and other than shares to
be canceled in accordance with Section 3.1(a)(i)) plus the number of
performance shares (not otherwise reflected in the number of outstanding
shares of Company Common Stock) and the number of shares subject to
unexercised Company Options at such time, divided by (y) the Market Price (as
defined below) of Acquiror Common Stock on the Closing Date. The "Market
Price" of Acquiror Common Stock on any date means the average of the daily
closing prices per share of Acquiror Common Stock as reported on the New York
Stock Exchange ("NYSE") Composite Tape ("NYSE Tape") on each of the last 15
consecutive full NYSE trading days (the "Averaging Period") ending on and
including the second trading day prior to such date; provided that (A) if the
Board of Directors of Acquiror declares a dividend on the outstanding shares
of Acquiror Common Stock having a record date after the Effective Time but an
ex-dividend date (based on "regular way" trading on the NYSE of shares of
Acquiror Common Stock, the "Ex-Date") that occurs during the Averaging Period,
then for purposes of computing the Market Price, the closing price on the
Ex-Date and any trading day in the Averaging Period after the Ex-Date will be
adjusted by adding thereto the amount of such dividend and (B) if the Board of
Directors of Acquiror declares a dividend on the outstanding shares of
Acquiror Common Stock having a record date before the Effective Time and an
Ex-Date that occurs during the Averaging Period, then for purposes of
computing the Market Price, the closing price on any trading day before the
Ex-Date will be adjusted by subtracting therefrom the amount of such dividend.
Notwithstanding anything to the contrary contained herein, in the event that
the Market Price of Acquiror Common Stock on the Closing Date is less than
$19.125 (the "Minimum Price"), then solely for the purposes of calculating the
Per Share Merger Consideration, the Market Price of Acquiror Common Stock on
the Closing Date will be deemed to be the Minimum Price, and in the event that
the Market Price of Acquiror Common Stock on the Closing Date is greater than
$25.875 (the "Maximum Price"), then solely for the purposes of calculating the
Per Share Merger Consideration, the Market Price of Acquiror Common Stock on
the Closing Date will be deemed to be the Maximum Price. If prior to the
Effective Time Acquiror shall declare a stock dividend or make distributions
upon or subdivide, split up, reclassify or combine Acquiror Common Stock or
declare a dividend or make a distribution on Acquiror Common Stock in any
security convertible into Acquiror Common Stock, appropriate adjustment or
adjustments will be made to the Per Share Merger Consideration; provided,
however, that Acquiror not take any such action that would occur during the
Averaging Period. If the aggregate amount of any adverse impact referred to
in Section 9.1(d)(iii) (calculated as set forth therein) exceeds $50 million,
then the dollar amount set forth in subsection (A) of this Section 3.1(a)(ii)
shall be reduced by an amount equal to the amount by which the amount of such
adverse impact exceeds $50 million provided, however, that in no event shall
such reduction exceed $50 million in the aggregate.
(iii) Each option granted by the Company to purchase shares
of Company Common Stock (the "Company Options") which is outstanding and
unexercised immediately prior to the Effective Time and after the Time of
Distribution shall cease to represent a right to acquire shares of Company
Common Stock and shall be converted automatically into an option (not intended
to qualify under section 422 of the Code) to purchase shares of Acquiror
Common Stock in an amount and at an exercise price determined as provided
below:
(A) the number of shares of Acquiror Common Stock to be subject to
the new option shall be equal to the product of the number of shares of
Company Common Stock subject to the original option and the Per Share Merger
Consideration; provided that any fractional shares of Acquiror Common Stock
resulting from such multiplication shall be rounded up to the nearest share;
and
(B) the exercise price per share of Acquiror Common Stock under the
new option shall be equal to the exercise price per share of Company Common
Stock under the original option divided by the Per Share Merger Consideration;
provided that such exercise price shall be rounded down to the nearest cent.
(b) All shares of Company Common Stock referred to in Section
3.1(a)(ii) will cease to be outstanding, will be canceled and retired and will
cease to exist, and each holder of a certificate (a "Certificate") formerly
representing such shares will thereafter cease to have any rights with respect
to such shares, except the right to receive, without interest, upon exchange
of such Certificate in accordance with Section 3.2, the shares of Acquiror
Common Stock and any payment to which such holder is entitled pursuant to this
Article III.
(c) At and after the Effective Time, by virtue of the Merger, each
share of capital stock of Sub issued and outstanding immediately prior to the
Effective Time will be converted into and become one fully paid and
nonassessable share of common stock, par value $0.01 per share, of the
Surviving Corporation.
3.2. Exchange of Certificates. (a) Appointment of Exchange Agent.
Prior to the Effective Time, Acquiror shall appoint an exchange agent (the
"Exchange Agent") satisfactory to the Company for the purpose of exchanging
all Company Common Stock for Acquiror Common Stock in accordance with the
terms of this Agreement. As of the Effective Time, Acquiror will deposit with
the Exchange Agent, for the benefit of the holders of Certificates, for
exchange in accordance with this Article III, certificates ("New
Certificates") representing Acquiror Common Stock in amounts sufficient to
allow the Exchange Agent to make all deliveries of New Certificates that may
be required in exchange for Certificates pursuant to this Article III.
Acquiror will provide to the Exchange Agent on a timely basis funds necessary
to pay any cash payable in lieu of fractional shares of Acquiror Common Stock
pursuant to Section 3.2(c) and funds and other property necessary to pay or
make any dividends or distributions with respect to shares of Acquiror Common
Stock pursuant to Section 3.2(d).
(b) Exchange Procedures. As soon as reasonably practicable after
the Effective Time, Acquiror will cause the Exchange Agent to mail or deliver
to each Person, who was at the Effective Time a holder of record of a
Certificate, a letter of transmittal (which will specify that delivery will be
effected, and risk of loss and title to the Certificates will pass, only upon
delivery of the Certificates to the Exchange Agent and will be in such form
and contain such other provisions as Acquiror and VRM may reasonably specify)
containing instructions for use in effecting the surrender of Certificates in
exchange for New Certificates and payments pursuant to this Article III. Upon
surrender to the Exchange Agent of a Certificate for cancellation together
with such letter of transmittal, duly executed and completed in accordance
with the instructions thereto, the holder of such Certificate will be entitled
to receive in exchange therefor a New Certificate representing that number of
whole shares of Acquiror Common Stock which such holder has the right to
receive pursuant to the provisions of this Article III, a check in the amount
of any cash which such holder has the right to receive in lieu of fractional
shares of Acquiror Common Stock pursuant to Section 3.2(c) and any cash
dividends with respect to Acquiror Common Stock pursuant to Section 3.2(d) and
any other dividends or distributions with respect to Acquiror Common Stock
pursuant to Section 3.2(d), and the Certificate so surrendered will forthwith
be canceled. No interest will be paid or will accrue on the amount payable
upon surrender of Certificates. Until surrendered as contemplated by this
Section 3.2, each Certificate will be deemed at any time after the Effective
Time to represent only the right to receive, upon surrender of such
Certificate, the applicable New Certificate, cash in lieu of fractional shares
of Acquiror Common Stock and any dividends or distributions with respect to
shares of Acquiror Common Stock as contemplated by this Section 3.2. In the
event of a transfer of ownership of Company Common Stock that is not
registered on the transfer records of the Company, New Certificates
representing the proper number of shares of Acquiror Common Stock and any cash
in lieu of fractional shares of Acquiror Common Stock and any dividends or
distributions as aforesaid may be issued to a Person other than the Person in
whose name the Certificate so surrendered is registered, if such Certificate
is properly endorsed or otherwise in proper form for transfer and the Person
requesting such issuance pays any transfer or other taxes required by reason
of the issuance of shares of Acquiror Common Stock or establishes to the
satisfaction of Acquiror that such tax has been paid or is not applicable.
Six months after the Effective Time, Acquiror will be entitled to cause the
Exchange Agent to deliver to Acquiror any New Certificates, cash or other
property (including any interest thereon) deposited with the Exchange Agent
that is unclaimed by the former holders of Company Common Stock. Any such
former holders of Company Common Stock who have not theretofore exchanged
their Certificates for New Certificates and cash, if applicable, and other
property pursuant to this Article III will thereafter be entitled to look
exclusively to Acquiror and only as general creditors thereof for the
Acquiror Common Stock and cash and other property to which they become
entitled upon exchange of their Certificates pursuant to this Article III
(including cash in lieu of fractional shares of Acquiror Common Stock pursuant
to Section 3.2(c) and any dividends or distributions with respect to Acquiror
Common Stock pursuant to Section 3.2(d)). Notwithstanding the foregoing,
neither the Exchange Agent nor any party hereto will be liable to any former
holder of Company Common Stock for any amount properly delivered to a public
official pursuant to applicable abandoned property, escheat or similar laws.
Acquiror will pay all charges and expenses, including those of the Exchange
Agent, in connection with the exchange of New Certificates and cash for
Certificates as contemplated hereby.
(c) Fractional Shares. Notwithstanding Section 3.1 or any other
provision of this Section 3.2, no fractional shares of Acquiror Common Stock
will be issued hereunder and any holder of Company Common Stock entitled
hereunder to receive a fraction of a share of Acquiror Common Stock but for
this Section 3.2(c) will be entitled hereunder to receive a cash payment in
lieu thereof, without interest, in an amount, less the amount of any
withholding taxes which may be required thereon, equal to the product of (i)
the fraction of a share to which such holder would otherwise have been
entitled multiplied by (ii) the Market Price of Acquiror Common Stock on the
Closing Date determined in accordance with Section 3.1(a)(ii), but without
regard for the Minimum Price or the Maximum Price. For purposes of paying
such cash in lieu of fractional shares, all Certificates representing shares
of Company Common Stock surrendered for exchange by a Company stockholder on
the same letter of transmittal shall be aggregated, and no such Company
stockholder will receive cash in lieu of fractional shares in an amount equal
to or greater than the value of one full share of Acquiror Common Stock with
respect to such Certificates surrendered.
(d) Distributions with Respect to Unexchanged Shares.
Notwithstanding any other provisions of this Agreement, after the Effective
Time no dividends or other distributions with respect to Acquiror Common Stock
with a record date after the Effective Time will be paid to any Person holding
a Certificate until such Certificate is surrendered for exchange as provided
herein. Subject to the effect of applicable laws, following surrender of any
such Certificate by any holder thereof, there will be paid to the holder of
the New Certificate issued in exchange therefor, without interest, (i) at the
time of such surrender, the amount of dividends or other distributions with a
record date after the Effective Time theretofore payable with respect to the
Acquiror Common Stock represented thereby, less the amount of any withholding
taxes which may be required thereon, and (ii) at the appropriate payment date,
the amount of dividends or other distributions with a record date after the
Effective Time but prior to the time of such surrender and a payment date
subsequent to the time of such surrender payable with respect to the Acquiror
Common Stock represented thereby, less the amount of any withholding taxes
which may be required thereon.
(e) No Further Ownership Rights in Company Common Stock. All
shares of Acquiror Common Stock issued upon the surrender for exchange of
Certificates in accordance with the terms of this Article III, any cash in
lieu of fractional shares of Acquiror Common Stock paid pursuant to Section
3.2(c) or any dividend or distribution paid or made with respect to Acquiror
Common Stock pursuant to Section 3.2(d) will be deemed to have been issued,
paid and made in full satisfaction of all rights pertaining to the shares of
Company Common Stock theretofore represented by such Certificates, and there
will be no further registration of transfers on the stock transfer books of
the Surviving Corporation of the shares of Company Common Stock which were
outstanding immediately prior to the Effective Time. If, after the Effective
Time, Certificates are presented to the Surviving Corporation or the Exchange
Agent for any reason, they will be canceled and exchanged as provided in this
Article III.
(f) No Liability. In the event that any Certificate has been lost,
stolen or destroyed, upon the making of an affidavit of that fact by the
Person claiming such Certificate to be lost, stolen or destroyed and, if
required by the Surviving Corporation, the posting by such Person of a bond in
such reasonable amount as the Surviving Corporation may direct as indemnity
against any claim that may be made against it with respect to such
Certificate, the Surviving Corporation will, in exchange for such lost, stolen
or destroyed Certificate, issue or cause to be issued the number of shares of
Acquiror Common Stock and pay or cause to be paid the amounts deliverable in
respect thereof pursuant to this Article III.
(g) Withholding Rights. The Surviving Corporation will be entitled
to deduct and withhold from the consideration otherwise payable pursuant to
this Agreement to any holder of Company Common Stock such amounts as may be
required to be deducted and withheld with respect to the making of such
payment under the Code, or under any provision of state, local or foreign tax
law. To the extent that amounts are so withheld and paid over to the
appropriate taxing authority, such withheld amounts will be treated for all
purposes of this Agreement as having been paid to the holder of Company Common
Stock in respect of which such deduction and withholding was made.
ARTICLE IV
CERTAIN PRE-MERGER TRANSACTIONS
The following transactions shall occur prior to the Effective Time:
4.1. Reorganization Agreements and Interim Services Agreement.
Prior to the Distribution, the Company will (a) execute and deliver the other
Reorganization Agreements and the Interim Services Agreement and (b) cause VRM
to execute and deliver the other Reorganization Agreements and the Interim
Services Agreement, in each case to which it is a party. Prior to the
Distribution, Acquiror will execute the Tax Sharing Agreement and the Interim
Services Agreement. All the Reorganization Agreements and the Interim
Services Agreement shall be executed in substantially the form attached
hereto, which agreements shall not be altered without the consent of Acquiror.
4.2. Intercorporate Reorganization of Company. Prior to the Time
of Distribution and pursuant to the terms of the Distribution Agreement, the
Company and VRM will consummate the intercorporate transactions contemplated
by Article II of the Distribution Agreement.
4.3. Distribution. Prior to the Effective Time, subject to and
pursuant to the terms and conditions of the Distribution Agreement, the
Company will effect the Distribution and the other transactions contemplated
by the Distribution Agreement.
4.4. Senior Notes. Prior to the Time of Distribution, the Retained
Company will either (a) obtain the consents of the note purchasers under the
Note Purchase Agreement dated December 19, 1990 between the Company and the
note purchasers, in order to permit the Distribution and the Merger or (b)
prepay the notes in accordance with their terms.
4.5. VESOP Notes. Prior to the Effective Time, the Company will
cause the VESOP to prepay the VESOP Notes issued under the Note Purchase
Agreement dated as of March 17, 1989 and the VESOP Notes issued under the Note
Purchase Agreement dated as of August 15, 1991 in accordance with their terms
and will terminate the related guarantee of the Company.
ARTICLE V
REPRESENTATIONS AND WARRANTIES
5.1. Representations and Warranties of the Company. Except as set
forth in the disclosure schedule (the "Company Disclosure Schedule") delivered
by the Company to Acquiror simultaneously with the execution and delivery of
this Agreement, the Company hereby represents and warrants to Acquiror as
follows:
(a) Corporate Organization. Each of the Company and VRM is a
corporation duly incorporated, validly existing and in good standing under the
laws of the State of Delaware. Each Retained Subsidiary is, or will be, a
corporation or limited partnership duly organized, validly existing and in
good standing under the laws of the jurisdiction of its incorporation or
formation, as applicable, as set forth in the Company Disclosure Schedule.
Each of the Retained Companies and VRM is duly qualified and in good standing
as a foreign corporation in each jurisdiction in which the properties owned,
leased or operated, or the business conducted, by it require such
qualification, except for any such failure so to qualify or be in good
standing which, individually or in the aggregate, would not have a Material
Adverse Effect on the Retained Companies, taken as a whole, or a material
adverse effect on the ability of the VRM Companies to consummate the
transactions contemplated by, or to satisfy their obligations under, the
Reorganization Agreements. Each of the Retained Companies and VRM has the
requisite corporate or other power and authority to carry on its businesses as
it is now being or will be (immediately after the Time of Distribution)
conducted. The Company has heretofore made available to Acquiror complete and
correct copies of the Company Charter and the Company By-laws and the
certificate of incorporation and by-laws, or the comparable organizational
documents, of each Retained Subsidiary, each as amended to date and
currently in full force and effect.
(b) Corporate Authority. Each of the Company and VRM has the
requisite corporate power and authority to execute, deliver and perform each
Reorganization Agreement and the Interim Services Agreement, in each case, to
which it is a party and to consummate the transactions contemplated thereby
(assuming, (i) with respect to the Merger and the Distribution, the approval
and adoption of this Agreement by the affirmative vote of the holders of a
majority of the outstanding shares of Company Common Stock entitled to vote
thereon and (ii) formal declaration of the Distribution by the Company's Board
of Directors). The execution, delivery and performance by the Company of each
Reorganization Agreement and the Interim Services Agreement, in each case, to
which it is a party and the consummation by the Company of the Distribution
and the Merger and of the other transactions contemplated thereby have been
duly authorized by the Company's Board of Directors, and no other corporate
proceedings on the part of the Company are or will be necessary to authorize
any Reorganization Agreement or the Interim Services Agreement, in each case,
to which it is a party or for the Company to consummate the transactions so
contemplated (other than, (i) with respect to the Merger and the Distribution,
the approval and adoption of this Agreement by the affirmative vote of the
holders of a majority of the outstanding shares of Company Common Stock
entitled to vote thereon and (ii) formal declaration of the Distribution by
the Company's Board of Directors). The execution, delivery and performance by
VRM of each Reorganization Agreement and the Interim Services Agreement to
which it is a party and the consummation by it of the transactions
contemplated thereby have been duly authorized by VRM's Board of Directors and
its stockholder, if required, and no other corporate proceedings on the part
of such entity will be necessary to authorize any Reorganization Agreement or
the Interim Services Agreement to which it is a party or for it to consummate
the transactions so contemplated. Each Reorganization Agreement or the
Interim Services Agreement, in each case, to which the Company or VRM is a
party is, or when executed and delivered will be, a valid and binding
agreement of such party, enforceable against such party in accordance with the
terms thereof.
(c) The Company Charter Takeover Provisions. The Company's Board
of Directors has approved the execution, delivery and performance by the
Company of this Agreement and the other Reorganization Agreements and the
consummation of the transactions contemplated thereby, and, subject to the
representation of Acquiror contained in Section 5.2(o) being true and correct,
such approval is sufficient to render inapplicable to the Merger and the other
transactions contemplated by the Reorganization Agreements the provisions of
Sections 1 and 2 of Article VI of the Company Charter.
(d) No Violations; Consents and Approvals.
(i) None of the execution, delivery or performance by each of
the Company and VRM of any Reorganization Agreement and the Interim Services
Agreement, in each case, to which it is a party or the consummation by each of
the Company and VRM of the transactions contemplated thereby (assuming, (i)
with respect to the Merger and the Distribution, the approval and adoption of
this Agreement by the affirmative vote of the holders of a majority of the
outstanding shares of Company Common Stock entitled to vote thereon and (ii)
formal declaration of the Distribution by the Company's Board of Directors)
(A) will conflict with, or result in a violation or breach of, the Company
Charter or the Company By-laws or the certificate of incorporation or by-laws,
or comparable organizational documents of VRM and the Subsidiaries of the
Company or (B) will conflict with, or result in a violation or breach of, or
constitute a default (with or without due notice or lapse of time or both)
under, or give rise to any right of termination, amendment, cancellation or
acceleration of any material obligation under, or result in the creation of
any adverse claim, restriction on voting or transfer or pledge, lien, charge,
encumbrance or security interest of any kind (a "Lien") upon any of the
properties or assets of the Company or VRM or any Subsidiary of either under
(1) any of the terms, conditions or provisions of any note, bond, mortgage,
indenture, lease, contract, agreement, obligation, understanding, commitment
or other arrangement (a "Contract") to which the Company or any of its
Subsidiaries is a party or by which any of their properties or assets may be
bound or of any license, franchise, permit, concession, certificate of
authority, order, approval, application or registration form, of or with a
Governmental Entity (a "Permit") or (2) to the knowledge of the Company and
subject to the Regulatory Filings, any judgment, order, decree, statute, law,
regulation or rule applicable to the Company or any of its Subsidiaries,
except, in the case of clause (B), as set forth in the Company Disclosure
Schedule and for conflicts, violations, breaches, defaults, rights, losses or
Liens that, individually or in the aggregate, would not have a Material
Adverse Effect on the Retained Companies, taken as a whole, or a material
adverse effect on the ability of the VRM Companies to consummate the
transactions contemplated by, or to satisfy their obligations under, the
Reorganization Agreements. Schedule 5.1(d)(i) of the Company Disclosure
Schedule attached hereto lists all material Contracts and material Permits of
the Company and its Subsidiaries which require consent of, or prior notice to,
a third party in order to consummate the transactions contemplated by this
Agreement or the Distribution Agreement.
(ii) Except for consents, approvals, orders, authorizations,
registrations, declarations or filings as may be required under, and other
applicable requirements of, the Exchange Act, the Securities Act, the HSR Act,
applications or filings with the Federal Energy Regulatory Commission under
Section 203 of the Federal Power Act, filings and/or notifications under the
Investment Canada Act, Competition Act and other applicable Canadian laws,
filings under state securities or "blue sky" laws and the filing of the
Certificate of Merger (collectively, the "Regulatory Filings"), other
consents, approvals, orders, authorizations, registrations, declarations,
filings and agreements expressly provided for in the Reorganization
Agreements, and any notice or other filings to be made following the Effective
Time, no consent, approval, order or authorization of, or registration,
declaration or filing with, any government or any court, arbitral tribunal,
administrative agency or commission or other governmental or other regulatory
authority or agency, Federal, state, local or foreign (a "Governmental
Entity") is required with respect to the Company, VRM or any Subsidiary of
either, in connection with the execution, delivery or performance by the
Company and VRM of any Reorganization Agreement, the Interim Services
Agreement or the Assignment and Assumption Agreements, in each case, to which
it is a party or the consummation by the Company and VRM, as the case may be,
of the transactions contemplated thereby (except where the failure to obtain
such consents, approvals, orders or authorizations, or to make such
registrations, declarations, filings or agreements, individually or in the
aggregate, would not have a Material Adverse Effect on the Retained Companies,
taken as a whole, or a material adverse effect on the ability of the VRM
Companies to consummate the transactions contemplated by, or to satisfy their
obligations under, the Reorganization Agreements).
(e) Capital Stock. The authorized capital stock of the Company
consists of (i) 75,000,000 shares of Company Common Stock, of which 44,185,513
shares of Company Common Stock were issued and outstanding as of the close of
business on December 31, 1996, (ii) 20,000,000 shares of preferred stock, par
value $1.00 per share ("Company Preferred Stock"), of which 11,500 of shares
of redeemable preferred stock, series A ("Company Series A Preferred Stock")
and 3,450,000 shares of $3.125 convertible preferred stock ("Company
Convertible Preferred Stock") were issued and outstanding as of the close of
business on December 31, 1996 and (iii) 10,000,000 shares of serial preference
stock, par value $1.00 per share, none of which is issued and outstanding. As
of the close of business on December 31, 1996 there were outstanding under the
Company Stock Plans options to acquire an aggregate of 4,228,855 shares of
Company Common Stock (subject to adjustment on the terms set forth in the
Company Stock Plans). All of the outstanding shares of Company Common Stock
have been, and all shares of Company Common Stock which may be issued pursuant
to the terms of any options, securities or plans referred to above will be,
when issued, duly authorized and validly issued, and are or will be, when
issued, fully paid and nonassessable. The Company has outstanding no bonds,
debentures, notes or other obligations or securities (other than the Company
Common Stock and Company Preferred Stock) the holders of which have the right
to vote (or are convertible or exchangeable into or exercisable for securities
having the right to vote) with the stockholders of the Company on any matter.
Except as set forth above, as of the date of this Agreement, there are no
securities convertible into or exchangeable for, or options, warrants, calls,
subscriptions, rights or Contracts of any kind to which the Company or any of
its Subsidiaries is a party or by which any of them is bound obligating the
Company or any of its Subsidiaries to issue, deliver or sell, or cause to be
issued, delivered or sold, additional shares of capital stock or other voting
securities of the Company or of any of the Retained Subsidiaries. There are
no outstanding Contracts of the Company or any of its Subsidiaries to
repurchase, redeem or otherwise acquire any shares of Company Common Stock.
(f) Subsidiaries; Investments; Joint Ventures; Partnerships.
(i) The Company Disclosure Schedule lists each Retained
Subsidiary. Except as set forth in the Company Disclosure Schedule each of
the outstanding shares of capital stock or other ownership interests of each
of the Retained Subsidiaries has been duly authorized and validly issued, is
fully paid and nonassessable and, is owned, either directly or indirectly, by
the Company free and clear of all Liens. Except as set forth in the Company
Disclosure Schedule there are no Contracts obligating the Company, or
restricting the Company's rights, to transfer, sell or vote, the capital stock
of the Retained Subsidiaries owned by it, directly or indirectly.
(ii) Except as set forth in the Company Disclosure Schedule,
the Company does not, directly or indirectly, own any capital stock or other
ownership interest in any corporation, partnership, joint venture or other
entity included in the Retained Business or have any Contract relating to the
issuance, sale or purchase of any ownership interest in any such entity.
(g) SEC Filings.
(i) The Company has timely filed all reports, schedules,
forms, statements and other documents required to be filed by it with the SEC
under the Securities Act and the Exchange Act since January 1, 1994 (the
"Company SEC Documents"). As of its filing date, each Company SEC Document
filed, as amended or supplemented, if applicable, (A) complied in all material
respects with the applicable requirements of the Securities Act or the
Exchange Act, as applicable, and the rules and regulations thereunder and (B)
did not, at the time it was filed (and at the effective date thereof, in the
case of a registration statement), contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading.
(ii) The financial statements of the Company included in the
Company SEC Documents comply as to form in all material respects with
applicable accounting requirements and the published rules and regulations of
the SEC with respect thereto and have been prepared in accordance with GAAP
(except, in the case of unaudited statements, as permitted by Form 10-Q of the
SEC) applied on a consistent basis during the periods involved (except as may
be indicated in the notes thereto). Each of the consolidated balance sheets
of the Company and its Subsidiaries included in or incorporated by reference
into the Company SEC Documents (including any related notes and schedules)
fairly presents in all material respects the consolidated financial position
of the Company and its Subsidiaries as of its date and each of the
consolidated statements of income, cash flows and stockholders' equity of the
Company and its Subsidiaries included in or incorporated by reference into the
Company SEC Documents (including any related notes and schedules) fairly
presents in all material respects the consolidated results of operations, cash
flows and retained earnings, as the case may be, of the Company and its
Subsidiaries for the periods set forth therein (subject, in the case of
unaudited statements, to normal year-end adjustments), in each case in
accordance with GAAP.
(iii) None of the information supplied, or to be supplied,
by the Company or its representatives for inclusion or incorporation by
reference in (A) the registration statement on Form S-4 to be filed with the
SEC by Acquiror in connection with the issuance of shares of Acquiror Common
Stock in the Merger (the "Acquiror Form S-4") or the registration statement to
be filed with the SEC by VRM in connection with the distribution of shares of
VRM Common Stock, with the associated VRM Rights, in the Distribution (the
"VRM Registration Statement") will, at the time such Registration Statements
are filed with the SEC, at any time they are amended or supplemented or at the
time they become effective under the Securities Act and at the Effective Time,
in the case of the Acquiror Form S-4, and at the time of the special meeting
of holders of Company Common Stock to be held in connection with the Merger
and the Distribution (the "Company Meeting"), and at the Time of Distribution,
in the case of the VRM Registration Statement, contain any untrue statement of
a material fact or omit to state any material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading and (B) the proxy
statement-prospectus relating to the Company Meeting (the "Proxy
Statement-Prospectus") will, at the date mailed to the Company's stockholders
or at the time of the Company Meeting, contain any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary in order to make the statements therein, in light of the
circumstances under which they are made, not misleading. The VRM Registration
Statement will comply as to form in all material respects with the provisions
of the Securities Act or the Exchange Act, as applicable, and the rules and
regulations thereunder, and the Proxy Statement-Prospectus will comply as to
form in all material respects with the provisions of the Exchange Act and the
rules and regulations thereunder, except that no representation is made by the
Company with respect to statements made therein based on information supplied
by Acquiror or any of its Subsidiaries for inclusion in the VRM Registration
Statement or the Proxy Statement-Prospectus, respectively, or with respect to
information concerning Acquiror or any of its Subsidiaries incorporated by
reference therein.
(h) The Company and VNG Financial Statements.
(i) Included in the Company Disclosure Schedule are (A)
audited consolidated statements of assets and liabilities as of December 31,
1995 and 1994 (the "Year End Balance Sheets") and statements of consolidated
income and consolidated cash flows for the years ended December 31, 1995 and
1994, in each case, for the Company (such financial statements, the "Company
Financial Statements"), and (B) an unaudited consolidated statement of assets
and liabilities as of September 30, 1996 (the "Interim Balance Sheet"), and
unaudited statements of consolidated income and consolidated cash flows for
the nine months ended, September 30, 1996 for the Company (such financial
statements, the "Company Interim Financial Statements"). Each of the Year End
Balance Sheets and the Interim Balance Sheet (including in the case of the
Year End Balance Sheets any related notes and schedules) fairly presents in
all material respects the financial position of the Company as of its date,
and each of the statements of consolidated income and consolidated cash flows
included in the Company Financial Statements and the Company Interim Financial
Statements (including in the case of the Company Financial Statements any
related notes and schedules) fairly presents in all material respects the
consolidated results of operations and consolidated cash flows, as the case
may be, of the Company for the periods set forth therein in each case in
accordance with GAAP (subject in the case of the Company Interim Financial
Statements to normal year-end adjustments).
(ii) Included in the Company Disclosure Schedule are unaudited
consolidated statements of assets and liabilities as of December 31, 1996,
1995 and 1994 (collectively, the "VNG Year End Balance Sheets" and such
statement as of December 31, 1996 being referred to herein as the "VNG
December 31, 1996 Balance Sheet") and statements of consolidated income and
consolidated cash flows for the years ended December 31, 1996, 1995 and 1994,
in each case, for VNG and its Subsidiaries (such financial statements, the
"VNG Financial Statements"). Each of the VNG Year End Balance Sheets fairly
presents in all material respects the financial position of VNG and its
Subsidiaries as of its date, and each of the statements of consolidated income
and consolidated cash flows included in the VNG Financial Statements fairly
presents in all material respects the consolidated results of operations and
consolidated cash flows, as the case may be, of VNG and its Subsidiaries for
the periods set forth therein in each case in accordance with GAAP. Each of
the VNG Year End Balance Sheets has been prepared on a basis substantially
consistent with the preparation of the corresponding Year End Balance Sheets
of the Company (or for the year ended December 31, 1996, the Interim Balance
Sheet of the Company) and each of the statements of consolidated income and
consolidated cash flows included in the VNG Financial Statements has been
prepared on a basis substantially consistent with the preparation of the
corresponding Financial Statements of the Company (or for the year ended
December 31, 1996, the Company Interim Financial Statements).
(iii) Schedule 5.1(h)(iii) set forth in the Company
Disclosure Schedule sets forth a consolidated balance sheet of the Retained
Companies as at December 31, 1996 on an historical basis and as adjusted to
give effect to the Distribution and the transactions contemplated by the
Distribution Agreement and Section 7.10(a) (but not as adjusted for the
Merger); such balance sheet fairly states in all material respects the
consolidated financial position of the Retained Companies in accordance with
GAAP, and has been prepared on a basis substantially consistent with the
preparation of the Interim Balance Sheet of the Company and other Company
Interim Financial Statements.
(i) Absence of Certain Events and Changes. Except as disclosed in
the Company SEC Documents filed with the SEC and publicly available prior to
the date hereof (the "Filed Company SEC Documents") or the Company Disclosure
Schedule or as otherwise contemplated by the Reorganization Agreements, since
December 31, 1996 the Company and its Subsidiaries have conducted the Retained
Business in the ordinary course, consistent with past practices, and there
have not been (i) any events, changes or developments which, individually or
in the aggregate, would have a Material Adverse Effect on the Retained
Companies or Retained Business, taken as a whole, or a material adverse effect
on the ability of the VRM Companies to consummate the transactions
contemplated by, or to satisfy their obligations under, the Reorganization
Agreements to which they are or will be a party, other than events, changes or
developments relating to the economy in general or resulting from
industry-wide developments affecting companies in similar businesses, (ii) any
declaration, setting aside or payment of any dividend or other distribution
with respect to the Company's capital stock (other than the regular quarterly
cash dividends consistent with amounts currently paid and at a rate no higher
than the last quarterly dividend prior to December 31, 1996) or any
redemption, purchase or other acquisition of any of the Company's capital
stock (excluding shares acquired in connection with employee tax withholding
elections, or elections to pay the exercise price of stock options with shares
of stock, under Company Stock Plans) or debt (except scheduled redemptions and
repayments under Credit Facilities), or (iii) (x) any granting by the Company
or any of its Subsidiaries to any officer of any Retained Company of any
increase in compensation, except in the ordinary course of business
(including, but not limited to, in connection with promotions) consistent with
past practice or as was required under employment agreements in effect as of
December 31, 1996, (y) any granting by the Company or any of its Subsidiaries
to any such officer of any increase in severance or termination pay, except as
was required under employment, severance or termination agreements in effect
as of December 31, 1996, or (z) any entry by the Company or any of its
Subsidiaries into any employment, consulting, severance, termination or
indemnification agreement with any officers of any Retained Company.
(j) Compliance with Applicable Laws. Except as disclosed in the
Filed Company SEC Documents, the Company and its Subsidiaries are in
compliance with all statutes, laws, regulations, rules, judgments, orders and
decrees of all Governmental Entities applicable to them that relate to the
Retained Business, except where the failure to be in compliance, individually
or in the aggregate, would not have a Material Adverse Effect on the Retained
Companies, taken as a whole. Except as set forth on the Company Disclosure
Schedule, since December 31, 1995, neither the Company nor any Subsidiary has
received any written notice of any administrative, civil or criminal
investigation or audit (other than tax audits) by any Governmental Entity
relating to the Retained Business that, individually or in the aggregate,
would have a Material Adverse Effect on the Retained Companies, taken as a
whole. Each of the Retained Companies has all Permits that are required in
order to permit it to carry on its business as it is presently conducted,
except as set forth in the Company Disclosure Schedule or where the failure to
have such Permits, individually or in the aggregate, would not have a Material
Adverse Effect on the Retained Companies, taken as a whole. All such Permits
are in full force and effect, and the Retained Companies are in compliance
with the terms of such Permits, except where the failure to be in full force
and effect or in compliance, individually or in the aggregate, would not have
a Material Adverse Effect on the Retained Companies, taken as a whole. This
Section 5.1(j) does not relate to employee benefits matters (for which Section
5.1(n) is applicable), environmental matters (for which Section 5.1(o) is
applicable) or tax matters (for which Section 5.1(m) is applicable).
(k) Title to Assets.
(i) Each of the Retained Companies has good title to its
personal properties and assets reflected on the VNG December 31, 1996 Balance
Sheet, except for properties and assets disposed of in the ordinary course of
business and except for such defects in title which, individually or in the
aggregate, would not have a Material Adverse Effect on the Retained Companies,
taken as a whole, in each case, free and clear of any Liens except for
Permitted Liens.
(ii) The Retained Companies have (A) good, sufficient and legal
title to the real properties reflected on the VNG December 31, 1996 Balance
Sheet and (B) valid and subsisting leasehold interests in the leased
properties reflected on the VNG December 31, 1996 Balance Sheet or otherwise
used in connection with the Retained Business, and except for such defects in
title which, individually or in the aggregate, would not have a Material
Adverse Effect on the Retained Companies, taken as a whole, in each case, free
and clear of any Liens, except for (1) Permitted Liens, (2) easements,
covenants, rights-of-way, other matters of record and other matters subject to
which such leases are granted and (3) such state of facts as an accurate
survey would show.
(iii) Except as set forth in the Company Disclosure
Schedule or contemplated by the other Reorganization Agreements, the Retained
Companies will, at the Effective Time, include all the Company's right, title
and interest in and to (a) all assets of the Company or any of its
Subsidiaries, including the information systems, that are used primarily in or
that are being held primarily for use in or that are otherwise sufficient for
the operation, as currently conducted, of the Retained Business, and (b)
whether or not included within the assets set forth in clause (a) above, all
assets (including, without limitation, capital stock and partnership
interests) reflected on Schedule 5.1(h)(iii), as such assets may have been
added to, sold in the ordinary course of business or otherwise changed since
such date).
(l) Litigation. Except as disclosed in the Filed Company SEC
Documents or as set forth in the Company Disclosure Schedule, there are no
civil, criminal or administrative actions, suits, claims, hearings,
investigations or proceedings pending, or to the knowledge of the Company
threatened, against any of the Retained Companies that, individually or in the
aggregate, would have a Material Adverse Effect on the Retained Companies,
taken as a whole or delay the Distribution or Merger. Except as disclosed in
the Filed Company SEC Documents, there are no outstanding judgments, orders,
decrees, stipulations or awards against any of the Retained Companies or their
respective properties or businesses that, individually or in the aggregate,
would have a Material Adverse Effect on the Retained Companies, taken as a
whole.
(m) Taxes.
(i) All Tax Returns required to be filed by or on behalf of the
Company and any of its Subsidiaries or any consolidated, combined, affiliated
or unitary group of which the Company or any of its Subsidiaries is or has
ever been a member before the date hereof have been timely filed or
appropriately extended, and all Taxes shown as due and payable on such Tax
Returns and all other Taxes for which the Company or any of its Subsidiaries
is or might otherwise be liable that are due and payable (together, "Covered
Taxes") have been timely paid in full or reflected on the balance sheet set
forth in Schedule 5.1(h)(iii), except to the extent that (i) such Taxes are
being contested in good faith by appropriate proceedings promptly instituted
and diligently conducted and such reserve or other appropriate provision, if
any, as shall be required in conformity with GAAP shall have been made
therefor and (ii) the failure to so file such Tax Returns or to pay such Taxes
would not, individually or in the aggregate, have a Material Adverse Effect on
the Retained Companies, taken as a whole; provided, however, that no
representation is made under this Agreement with respect to any Tax or Tax
Return which is (i) a subject of the litigation set forth and described at
Section I, paragraphs 3 through 6, of Schedule 5.1(l) (the "Existing Tax
Claims"), or (ii) heretofore or hereafter made a subject of any claim, demand
or litigation involving claims substantially similar to those asserted in the
Existing Tax Claims. The information contained in such Tax Returns is true,
complete and accurate in all material respects.
(ii) The Tax Returns of the Company and its Subsidiaries have been
audited and settled by the Internal Revenue Service for all periods ended
through December 31, 1992 or the period for assessment of taxes in respect of
such periods has expired.
(iii) Except as set forth in the Company Disclosure Schedule, to
the Company's knowledge, there are no material claims or investigations
pending or threatened against the Company or its Subsidiaries for past Taxes.
(iv) Except as set forth in the Tax Sharing Agreement, there is no
Tax sharing or allocation agreement under which the Company or any of its
Retained Subsidiaries will have any obligations after the Effective Time.
(v) The charges, accruals and reserves for Taxes with respect to
the Company and its Subsidiaries reflected on the Retained Business Financial
Statements are adequate to cover such Taxes relating to periods, or portion
thereof, ending on or prior to the date of such financial statements.
(vi) All material Taxes due with respect to any completed and
settled audit, examination, or deficiency litigation with any taxing authority
have been paid in full.
(vii) No material income or gain would be recognized under
Treasury Regulation Sections 1.1502-13 or 1.1502-19 (or any corresponding
provisions of other applicable Tax laws) as a result of the transactions
contemplated by the Reorganization Agreements, if such transactions were to
occur on the date hereof.
(viii) There is no agreement or other document extending, or
having the effect of extending, the period of assessment or collection of any
material amount of Covered Taxes.
(ix) The Federal consolidated minimum tax credit carryforward
allocated to the Retained Companies as of December 31, 1996 is not less than
$6,000,000.
(x) None of the Retained Companies shall be required to include in
a taxable period ending after the Closing Date, a material amount of taxable
income attributable to income that economically accrued in a prior taxable
period as a result of Section 481 of the Code or any comparable provision of
state or local Tax law.
(xi) No person has made with respect to any of the Retained
Companies, or with respect to any property held by any of the Retained
Companies, any consent under Section 341 of the Code.
(xii) None of the Retained Companies is a party to any lease
made pursuant to Section 168(f)(8) of the Internal Revenue Code of 1954, as
amended and in effect prior to the date of enactment of the Tax Equity and
Fiscal Responsibility Act of 1982.
(xiii) Neither the Company nor any of its Subsidiaries, nor any
member of any controlled group (within the meaning of Section 993(a)(3) of the
Code) that includes the Company or any of its Subsidiaries, nor, to the
knowledge of the Company, any of their respective officers, directors,
employees or independent contractors acting on their behalf, has participated
in or cooperated with an international boycott (within the meaning of Section
999(b)(3) of the Code).
(xiv) No material Liens for Taxes exist with respect to any of
the assets or properties of any of the Retained Companies, except for
statutory liens for Taxes not yet due or payable or that are being contested
in good faith.
(xv) Neither the Company nor any of its Subsidiaries has taken any
action that would disqualify the Distribution from being treated as a
"reorganization" within the meaning of Section 368(a)(1)(D) of the Code and
from being treated as a tax-free distribution within the meaning of Section
355 or 361(c) of the Code, or the Merger from being treated as a
"reorganization" within the meaning of Section 368(a)(1)(B) of the Code.
(n) Employee Benefit Plans.
(i) The Company Disclosure Schedule lists each Employee Plan which
relates to employees of the Retained Business. With respect to each such
Employee Plan, the Company has provided to Acquiror, or will prior to the
Effective Time provide, a true and complete copy of such plan document and
such other documents relating thereto as Acquiror may reasonably request.
(ii) A favorable determination letter has been issued by the
Internal Revenue Service with respect to each such Employee Plan which is
intended to be qualified under Section 401(a) of the Code, and, to the
knowledge of the Company, no event has occurred since the date of such
determination letter to affect adversely the qualified status of such Employee
Plan. Each Employee Plan which relates to employees of the Retained Business
has been maintained in compliance in all material respects with its terms and
with the requirements prescribed by any and all statutes, orders, rules and
regulations, including but not limited to ERISA and the Code, which are
applicable to such Employee Plan, except where the failure to so comply would
not have a negative effect on the tax-qualified status of such Plan, result in
the imposition of any material (to the Plan) fine, penalty or excise tax under
ERISA or the Code, or require any increased employer contributions or
increased benefits in order to avoid any such negative effect, fine, penalty
or excise tax.
(iii) Neither the Company nor any of its ERISA Affiliates has
incurred any liability under Title IV of ERISA arising in connection with the
termination of, or complete or partial withdrawal from, any plan covered or
previously covered by Title IV of ERISA that will become, after the Effective
Time, an obligation of the Company, the Acquiror or any of their ERISA
Affiliates.
(iv) No employee of the Retained Companies will become entitled to
any retirement, severance or similar benefit or enhanced benefit solely as a
result of the transactions contemplated hereby except that (i) all
restrictions on stock issued pursuant to the Company Restricted Stock Plans
shall, pursuant to the terms of the Company Restricted Stock Plans or
individual restricted stock agreements, terminate prior to or as a result of
the Merger, (ii) all awards heretofore granted pursuant to the Company Stock
Plans shall vest, (iii) benefits accrued pursuant to the SERP shall vest, (iv)
the deferral accounts of participants in the Deferred Compensation Plan who
terminate employment with the company within 18 months following the Effective
Time, unless such termination is the result of fraud, defalcation,
misappropriation or other criminal conduct committed by the participant
against the Company, shall be credited as of the date of termination with an
additional three percentage points of imputed annual interest, (v) payments
will be payable under the Shareholder Value Bonus Plan, the Incentive Bonus
Agreements and (vi) accelerated vesting in performance shares will occur.
(o) Environmental Matters. Except as disclosed in the Filed
Company SEC Documents or set forth in the Company Disclosure Schedule and
except for such matters that, individually or in the aggregate, would not have
a Material Adverse Effect on the Retained Companies, taken as a whole, (i) the
Retained Companies are in compliance with all applicable Environmental Laws,
(ii) the Retained Companies have all Permits required under Environmental Laws
for the operation of the Retained Business as presently conducted
("Environmental Permits") and there are no violations, investigations or
proceedings pending with respect to such Environmental Permits, (iii) none of
the Retained Companies has received any written notices or demand letters from
any Governmental Entity or any other Person, or any requests for information
from any Governmental Entity which assert that any of the Retained Companies
may be in violation of, or liable under, any Environmental Law, (iv) no facts
or circumstances exist that impose or could reasonably be expected to impose
Environmental Liabilities on any of the Retained Companies, and (v) the
Retained Companies will not be required under existing Environmental Laws to
install prior to December 31, 1997 additional environmental or pollution
control equipment or make other capital expenditures in order to comply with
Environmental Laws, except to the extent set forth in the 1997 strategic
capital budget for the Company and the Retained Business as adopted by the
Board of Directors of the Company on October 25, 1996 and heretofore furnished
to Acquiror.
(p) Takeover Statutes. Section 203 of the DGCL is inapplicable to
the Merger and the other transactions contemplated by the Reorganization
Agreements. To the knowledge of the Company, no other "fair price",
"moratorium", "control share acquisition" or other similar antitakeover
statute, law, regulation or rule of any Governmental Entity (each a "Takeover
Statute") is applicable to the transactions contemplated by the Reorganization
Agreements.
(q) Brokers and Finders. Neither the Company nor any of its
directors, officers or employees has employed any broker or finder or incurred
any liability for any brokerage fees, commissions or finders' fees in
connection with the transactions contemplated hereby, except as set forth in
the Company Disclosure Schedule, the fees and expenses of which shall be paid
in accordance with Section 7.10(a).
(r) Employees. There is no labor strike or work stoppage pending
or, to the knowledge of the Company, threatened against any of the Retained
Companies which, in any case, individually or in the aggregate, would
reasonably be expected to have a Material Adverse Effect on the Retained
Companies, taken as a whole. None of the Retained Companies is as of the date
hereof a party to any collective bargaining agreement relating to its
employees.
(s) Contracts. Except as set forth in the Company Disclosure
Schedule, as of the date hereof, neither the Company nor any Subsidiary is
(with or without the lapse of time or the giving of notice, or both) in breach
or default in any material respect under any Contract or Contracts that
individually or in the aggregate are material to the operation of the Retained
Business. To the Company's knowledge, as of the date of this Agreement, none
of the other parties to any Contract or Contracts that individually or in the
aggregate are material to the operation of the Retained Business is (with or
without the lapse of time or the giving of notice, or both) in breach or
default in any material respect thereunder.
(t) Opinions of Financial Advisors. The Company has received the
opinion of Lehman Brothers, Inc. to the effect that, as of the date hereof,
the consideration to be received by the Company's stockholders in the
Distribution and the Merger is fair to such stockholders from a financial
point of view.
(u) Rights Agreement. The Company has taken all necessary action
so that entering into this Agreement and the other Reorganization Agreements,
the Merger and the other transactions contemplated by the Reorganization
Agreements will not result in the grant of any rights to any Person under the
Company Rights Agreement or enable or require the rights to be exercised,
distributed or triggered.
(v) Regulation as a Utility. Neither the Company nor any of its
Subsidiaries is a "holding company", a "subsidiary company" of a "holding
company", an "affiliate" of a "holding company" or of a "subsidiary company"
of a "holding company", or a "public utility", as each such term is defined in
the Public Utility Holding Company Act of 1935, as amended, and the rules and
regulations promulgated thereunder.
(w) Intellectual Property and Software. The Retained Company and
its Subsidiaries, after giving effect to the Merger and the Distribution, will
own or have the valid, legal right to use all Intellectual Property and
Software used in connection with the Retained Business as conducted on the
date hereof other than the Intellectual Property, Software, tradenames and
related rights to be distributed solely to VRM as provided in the Distribution
Agreement. The Company and its Subsidiaries have used commercially reasonable
measures to protect the secrecy, confidentiality and value of the Intellectual
Property used in connection with the Retained Business. To the Company's
knowledge, no material Intellectual Property (other than unregistered
copyrights) or material Software used in connection with the Retained Business
has been improperly used, divulged or appropriated for the benefit of any
person other than the Company and its Subsidiaries, except where such use,
divulgence or appropriation would not, individually or in the aggregate, have
a Material Adverse Effect on the Retained Companies, taken as a whole. As of
the date hereof, neither the Company nor any of its Subsidiaries has made any
claim in writing of a violation, infringement, misuse or misappropriation by
others of rights of the Company and its Subsidiaries to or in connection with
any material Intellectual Property used in connection with the Retained
Business. There is no pending or, to the knowledge of the Company, threatened
claim by any third person of a violation, infringement, misuse or
misappropriation by any of the Company or any of its Subsidiaries of any
Intellectual Property or Software owned by any third person, or of the
invalidity of any patent used in connection with the Retained Business, that
would, individually or in the aggregate, have a Material Adverse Effect on the
Retained Companies, taken as a whole.
5.2. Representations and Warranties of Acquiror and Sub. Acquiror
and Sub hereby represent and warrant to the Company as follows:
(a) Corporate Organization and Qualification. Each of Acquiror and
Sub is a corporation duly organized, validly existing and in good standing
under the laws of its jurisdiction of incorporation and is duly qualified and
in good standing as a foreign corporation in each jurisdiction in which the
properties owned, leased or operated, or the business conducted, by it require
such qualification, except for any such failure so to qualify or be in good
standing which, individually or in the aggregate, would not have a Material
Adverse Effect on Acquiror and its Subsidiaries, taken as a whole. Each of
Acquiror and Sub has the requisite corporate power and authority to carry on
its businesses as they are now being conducted. Acquiror has heretofore made
available to the Company complete and correct copies of the charter and bylaws
of Acquiror and Sub, each as amended to date and currently in full force and
effect.
(b) Corporate Authority. Each of Acquiror and Sub has the
requisite corporate power and authority to execute, deliver and perform each
Reorganization Agreement, and the Interim Services Agreement and the
Assignment and Assumption Agreements, in each case, to which it is
a party and to consummate the transactions contemplated thereby. The
execution, delivery and performance by each of Acquiror and Sub of each
Reorganization Agreement, the Interim Services Agreement and the Assignment
and Assumption Agreements, in each case, to which it is a party and the
consummation by it of the transactions contemplated hereby and thereby have
been or will be duly authorized by its Board of Directors, and no other
corporate proceedings on its part are or will be necessary to authorize any
Reorganization Agreement or the Assignment and Assumption Agreements to which
it is a party or for it to consummate the transactions so contemplated. Each
of the Reorganization Agreement, the Interim Services Agreement and the
Assignment and Assumption Agreements to which Acquiror or Sub is a party is,
or when executed and delivered will be, a valid and binding agreement of
Acquiror or Sub, as the case may be, enforceable against Acquiror or Sub, as
the case may be, in accordance with the terms thereof.
(c) No Violations; Consents and Approvals.
(i) None of the execution, delivery or performance by Acquiror
and Sub of any Reorganization Agreement or the Assignment and Assumption
Agreements, in each case, to which it is a party or the consummation by each
of Acquiror and Sub of the transactions contemplated thereby (A) will conflict
with, or result in a violation or breach of, the charter or by-laws of
Acquiror or Sub or (B) will conflict with, or result in a violation or breach
of, or constitute a default (with or without due notice or lapse of time or
both) under, or give rise to any right of termination, amendment, cancellation
or acceleration of any material obligation under, or result in the creation of
any Lien upon any of the properties or assets of Acquiror or Sub under (1) any
of the terms, conditions or provisions of any Contract to which Acquiror or
Sub is a party or by which any of their properties or assets may be bound or
of any Permit, or (2) to the knowledge of the Acquiror subject to the
Regulatory Filings, any judgment, order, decree, statute, law, regulation or
rule applicable to Acquiror or Sub, except, in the case of clause (B), for
conflicts, violations, breaches, defaults, rights, losses or Liens that,
individually or in the aggregate, would not have a Material Adverse Effect on
Acquiror and its Subsidiaries, taken as a whole.
(ii) Except for the Regulatory Filings, and other consents,
approvals, orders, authorizations, registrations, declarations, filings and
agreements expressly provided for in the Reorganization Agreements or set
forth in Section 5.1(d), and any notice or other filings to be made following
the Effective Time, no consent, approval, order or authorization of, or
registration, declaration or filing with, any Governmental Entity is required
with respect to Acquiror or Sub, in connection with the execution, delivery or
performance by each of Acquiror and Sub of any Reorganization Agreement or the
Assignment and Assumption Agreements, in each case, to which it is a party or
the consummation by Acquiror of the transactions contemplated thereby (except
where the failure to obtain such consents, approvals, orders or
authorizations, or to make such registrations, declarations, filings or
agreements, individually or in the aggregate, would not have a Material
Adverse Effect on Acquiror and its Subsidiaries, taken as a whole).
(d) Capital Stock. The authorized capital stock of Acquiror
consists of (i) 800,000,000 shares of Acquiror Common Stock, of which an
aggregate of 409,120,387 shares were issued and outstanding as of the close of
business on January 1, 1997; and (ii) 85,000,000 shares of preferred stock, no
par value, of Acquiror, of which no shares were issued and outstanding as of
the close of business on January 1, 1997. As of the close of business on
January 1, 1997, there were outstanding under Acquiror's option plans options
to purchase an aggregate of 3,461,733 shares of Acquiror Common Stock (subject
to adjustment on the terms set forth in the Acquiror option plans). All of
the outstanding shares of Acquiror Common Stock have been, and all shares of
Acquiror Common Stock which may be issued pursuant to the terms of any options
or plans referred to above will be, when issued, duly authorized and validly
issued, and are, or will be, when issued, fully paid and non-assessable.
Acquiror has outstanding no bonds, debentures, notes or other obligations or
securities (other than Acquiror Common Stock) the holders of which have the
right to vote (or are convertible or exchangeable into or exercisable for
securities having the right to vote) with the stockholders of Acquiror on any
matter. Except as set forth above, as of the date of this Agreement, there
are no securities convertible into or exchangeable for, or options, warrants,
calls, subscriptions, rights or Contracts of any kind to which Acquiror or any
of its Subsidiaries is a party or by which any of them is bound obliging
Acquiror or its Subsidiaries to issue, deliver or sell, or cause to be issued,
delivered or sold, additional shares of capital stock or other voting
securities of Acquiror or of any of its Subsidiaries.
(e) The shares of Acquiror Common Stock to be issued in the Merger
are duly authorized and, when issued in accordance with the terms of this
Agreement, will be duly and validly issued, fully paid, non-assessable and
free of preemptive rights.
(f) SEC Filings.
(i) Acquiror and its wholly-owned subsidiary, Pacific Gas and
Electric Company have timely filed all reports, schedules, forms, statements
and other documents required to be filed with the SEC under the Securities Act
and the Exchange Act since January 1, 1994 (the "Acquiror SEC Documents"). As
of its filing date, each Acquiror SEC Document filed, as amended or
supplemented, if applicable, (A) complied in all material respects with the
applicable requirements of the Securities Act or the Exchange Act, as
applicable, and the rules and regulations thereunder and (B) did not, at the
time it was filed (and at the effective date thereof, in the case of a
registration statement), contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they
were made, not misleading.
(ii) The financial statements of Acquiror included in the
Acquiror SEC Documents comply as to form in all material respects with
applicable accounting requirements and the published rules and regulations of
the SEC with respect thereto and have been prepared in accordance with GAAP
(except, in the case of unaudited statements, as permitted by Form 10-Q of
the SEC) applied on a consistent basis during the periods involved (except as
may be indicated in the notes thereto). Each of the consolidated balance
sheets included in or incorporated by reference into the Acquiror SEC
Documents (including any related notes and schedules) fairly presents in all
material respects the consolidated financial position of Acquiror and its
Subsidiaries as of its date and each of the consolidated statements of income,
cash flows and stockholders' equity included in or incorporated by reference
into the Acquiror SEC Documents (including any related notes and schedules)
fairly presents in all material respects the consolidated results of
operations, retained earnings and cash flows, as the case may be, of Acquiror
and its Subsidiaries for the periods set forth therein (subject, in the case
of unaudited statements, to normal year-end adjustments), in each case in
accordance with GAAP.
(iii) None of the information supplied or to be supplied by
Acquiror or its representatives for inclusion or incorporation by reference in
(A) the Acquiror Form S-4 or the VRM Registration Statement will, at the time
such Registration Statements are filed with the SEC, at any time they are
amended or supplemented, at the time they become effective under the
Securities Act and at the Effective Time, in the case of the Acquiror Form
S-4, and at the time of the Company Meeting and at the Time of Distribution,
in the case of the VRM Registration Statement, contain any untrue statement of
a material fact or omit to state any material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading and (B) the Proxy
Statement-Prospectus will, at the date mailed to the Company's stockholders or
at the time of the Company Meeting, contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary in order to make the statements therein, in light of the
circumstances under which they are made, not misleading. The Acquiror Form
S-4 will comply as to form in all material respects with the provisions of the
Securities Act or the Exchange Act, as applicable, and the rules and
regulations thereunder, and the Proxy Statement-Prospectus will comply as to
form in all material respects with the provisions of the Exchange Act and the
rules and regulations thereunder, except that no representation is made by
Acquiror with respect to statements made therein based on information supplied
by the Company or any of its Subsidiaries for inclusion in the Acquiror Form
S-4 or the Proxy Statement-Prospectus, respectively, or with respect to
information concerning the Company or any of its Subsidiaries incorporated by
reference therein.
(g) Absence of Certain Events and Changes. Except as disclosed in
the Acquiror SEC Documents filed with the SEC and publicly available prior to
the date hereof (the "Filed Acquiror SEC Documents") or as otherwise
contemplated by the Reorganization Agreements, since September 30, 1996
Acquiror and its Subsidiaries have conducted their respective businesses in
the ordinary course, consistent with past practices, and there have not been
any events, changes or developments which, individually or in the aggregate,
would have a Material Adverse Effect on Acquiror and its Subsidiaries, taken
as a whole, other than events, changes or developments relating to the economy
in general or resulting from industry-wide developments affecting companies in
similar businesses.
(h) Compliance with Applicable Laws. Except as disclosed in the
Filed Acquiror SEC Documents, Acquiror and its Subsidiaries are in compliance
with all statutes, laws, regulations, rules, judgments, orders and decrees of
all Governmental Entities applicable to them, except where the failure to be
in compliance, individually or in the aggregate, would not have a Material
Adverse Effect on Acquiror and its Subsidiaries, taken as a whole. Since
December 31, 1995 neither Acquiror nor any of its Subsidiaries has received
any written notice of any administrative, civil or criminal investigation or
audit (other than tax audits) by any Governmental Entity that, individually or
in the aggregate, would have a Material Adverse Effect on Acquiror and its
Subsidiaries, taken as a whole. Each of Acquiror and its Subsidiaries has all
Permits that are required in order to permit it to carry on its business as it
is presently conducted, except where the failure to have such Permits,
individually or in the aggregate, would not have a Material Adverse Effect on
Acquiror and its Subsidiaries, taken as a whole. All Permits are in full
force and effect and Acquiror and its Subsidiaries are in compliance with the
terms of the Permits, except where the failure to be in full force and effect
or in compliance, individually or in the aggregate, would not have a Material
Adverse Effect on Acquiror and its Subsidiaries, taken as a whole.
(i) Litigation. Except as disclosed in the Filed Acquiror SEC
Documents, there are no civil, criminal or administrative actions, suits,
claims, hearings, investigations or proceedings pending or, to the knowledge
of Acquiror, threatened, against Acquiror or any of its Subsidiaries that,
individually or in the aggregate, would have a Material Adverse Effect on
Acquiror and its Subsidiaries, taken as a whole or delay the Distribution or
Merger. Except as disclosed in the Filed Acquiror SEC Documents, there are no
outstanding judgments, orders, decrees, stipulations or awards against
Acquiror or any of its Subsidiaries or their respective properties or
businesses that, individually or in the aggregate, would have a Material
Adverse Effect on Acquiror and its Subsidiaries, taken as a whole.
(j) Takeover Statutes. No California Takeover Statute is
applicable to the transactions contemplated by the Reorganization Agreements,
and to the knowledge of Acquiror, no other Takeover Statute is applicable to
such transactions.
(k) Employee Benefit Plans.
(i) The disclosure schedule delivered to the Company by
Acquiror prior to the date hereof (the "Acquiror Disclosure Schedule") lists
each Employee Plan of Pacific Gas Transmission Company ("PGT") and, if
applicable, each Employee Plan of the Acquiror or a Subsidiary in which one or
more Continuing Employees will be eligible to participate following the
Closing. With respect to each such Employee Plan, Acquiror has provided to
the Company, or will prior to the Effective Time provide, a true and complete
copy of such plan document and such other documents relating thereto as the
Company may reasonably request.
(ii) A favorable determination letter has been issued by the
Internal Revenue Service with respect to each such Employee Plan which is
intended to be qualified under Section 401(a) of the Code, and, to the
knowledge of PGT, no event has occurred since the date of such determination
letter to affect adversely the qualified status of such Employee Plan. Each
Employee Plan has been maintained in compliance in all material respects with
its terms and with the requirements prescribed by any and all statutes,
orders, rules and regulations, including but not limited to ERISA and the
Code, which are applicable to such Plan, except where the failure to so comply
would not have a negative effect on the tax-qualified status of such Plan,
result in the imposition of any material (to the Plan) fine, penalty or excise
tax under ERISA or the Code, or require any increased employer contributions
or increased benefits in order to avoid any such negative effect, fine,
penalty or excise tax.
(iii) Neither Acquiror nor any of its ERISA Affiliates has
incurred any liability under Title IV of ERISA arising in connection with the
termination of, or complete or partial withdrawal from, any plan covered or
previously covered by Title IV of ERISA that will become, after the Effective
Time, an obligation of Acquiror or any of its ERISA Affiliates.
(l) Brokers and Finders. Neither Acquiror nor any of its
directors, officers or employees has employed any broker or finder or incurred
any liability for any brokerage fees, commissions or finders' fees in
connection with the transactions contemplated hereby, except that Acquiror has
retained Merrill Lynch & Co. as its financial advisor, the fees and expenses
of which shall be paid by Acquiror.
(m) Regulation as a Utility. Acquiror is a holding company within
the meaning of the Public Utility Holding Company Act of 1935 (the "1935
Act"), but Acquiror and its Subsidiaries are exempt from the provisions
thereof, except Section 9(a)(2) thereof, by virtue of having filed with the
Securities and Exchange Commission an exemption statement on Form U-3A-2, and
to the Company's knowledge, no proceedings to revoke or modify such exemption
have been instituted or are pending.
(n) Required Vote of Acquiror Stockholders. No vote of the
stockholders of Acquiror is required in connection with this Agreement, the
Merger or any Reorganization Agreements.
(o) Acquiror Ownership of Company Common Stock. Acquiror does not
own, and has not owned, 5% or more of the outstanding shares any class or
series of voting stock of the Company.
ARTICLE VI
COVENANTS
6.1. Covenants of the Company. During the period from December 31,
1996 and continuing until the Effective Time, the Company agrees as to itself
and its Subsidiaries that, except as set forth in the Company Disclosure
Schedule, and except for the Distribution and as required or otherwise
expressly contemplated by the Reorganization Agreements, or to the extent that
Acquiror otherwise consents in writing, which consent shall not be
unreasonably withheld (it being agreed that the following forward looking
statements are deemed to apply to a period prior to the date hereof which
commences on December 31, 1996 and ending at the Effective Time):
(a) Ordinary Course. The Retained Business will be conducted in
the usual, regular and ordinary course, consistent with past practice,
including, without limitation, with respect to the payment and administration
of accounts receivable, inventory management and control policies and
implementation of capital programs for the Retained Business in a timely
manner, and the Company will use reasonable efforts to preserve intact the
present business organization, maintain insurance policies, keep available the
services of present officers and employees engaged primarily in the Retained
Business and to preserve the relationships with key customers, suppliers and
others having business dealings with the Retained Business.
(b) Dividends; Changes in Stock. The Company shall not (i) declare
or pay any dividends (including dividends in Company Common Stock) on or make
other distributions in respect of any of its capital stock (including such a
distribution or dividend made in connection with a recapitalization,
reclassification, merger, consolidation, reorganization or similar
transaction), except for regular quarterly cash dividends consistent with
amounts currently paid and at a rate not higher than the last quarterly
dividend paid prior to the date hereof and the Distribution, (ii) split
(including a reverse stock split), combine or reclassify any of its capital
stock or issue or authorize or propose the issuance of any of its capital
stock or issue or authorize or propose the issuance of any other securities in
respect of, in lieu of or in substitution for shares of its capital stock, or
(iii) except as contemplated by the Reorganization Agreements, repurchase,
redeem or otherwise acquire, or permit any Subsidiary to repurchase, redeem or
otherwise acquire, any shares of capital stock (excluding shares acquired in
connection with employee tax withholding elections, or elections to pay the
exercise price of stock options with shares of stock, under Company Stock
Plans) or debt (except scheduled redemptions and repayments under Credit
Facilities) of the Company or any of its Subsidiaries.
(c) Issuance of Securities. The Company will not, nor will the
Company permit any of the Retained Subsidiaries to issue, transfer, sell or
dispose of, or authorize or agree to the issuance, transfer, sale or
disposition by any of the Retained Companies of (whether through the issuance
or granting of options, warrants, commitments, subscriptions, rights to
purchase or otherwise), any shares of capital stock or any voting securities
of the Company or any of the Retained Subsidiaries, or any options or other
securities convertible into or exchangeable for any such shares of capital
stock or any voting securities of the Company or amend any of the terms of any
such securities or agreements relating to such capital stock outstanding on
the date hereof, other than (i) the issuance, transfer, sale or disposition by
a wholly owned Subsidiary of its capital stock to its parent, and (ii) the
issuance or transfer of shares of Company Common Stock (w) upon the exercise
of stock options or the vesting of performance shares pursuant to any Employee
Plan, (x) to make any payment under any Employee Plan that is required as of
the date of this Agreement or permitted under Section 6.1(h) to be made in the
form of shares of Company Common Stock, and (y) upon any conversion of shares
of Company Convertible Preferred Stock. Any income tax deduction with respect
to the delivery or vesting of shares pursuant to any Employee Plan, contract
or arrangement shall be allocated to the VRM Group or Company Group
corresponding to the business for which the employee (or former employee)
performed services or if the individual performed services for both the
Retained Business and the VRM Business, to such Groups in the same proportion
as the services were performed for such businesses, which determination shall
be made in good faith using a consistent and reasonable method.
(d) Indebtedness. The Company shall not, nor shall it permit any
of its Retained Subsidiaries to, incur any indebtedness for borrowed money or
guarantee any such indebtedness or issue or sell any debt securities or
warrants or rights to acquire any debt securities of the Company or any of its
Retained Subsidiaries or guarantee any obligations of others, other than
pursuant to the existing Credit Facilities; provided, however, that the
Company, VRM and their respective Subsidiaries may enter into guarantees for
money borrowed or for obligations of Affiliates, if (i) such are entered into
in the ordinary course of business and in accordance and at levels consistent
with past practices and (ii) if such guarantees relate to VRM or any of its
Subsidiaries, then (x) any such guarantees entered into on or after 5 business
days following the date of this Agreement terminate on or prior to the Closing
Date or become the sole obligations of VRM or (y) the Retained Company and the
Retained Subsidiaries are expressly released therefrom on or prior to the
Closing Date.
(e) Governing Documents. The Company will not amend in any
material respect the Company Charter or the Company By-laws, nor will the
Company permit any Retained Subsidiary to amend in any material respect the
certificate of incorporation or by-laws or comparable organizational documents
of any Retained Subsidiary.
(f) No Acquisitions, Etc. The Company will not, nor will it permit
any of the Retained Subsidiaries to, (i) acquire or agree to acquire, by
merging or consolidating with, or by purchasing a substantial equity interest
in or substantial portion of the assets of, any business or any corporation,
partnership, association or other business organization or division thereof or
otherwise acquire or agree to acquire any assets (other than immaterial assets
or assets acquired from another Retained Subsidiary) that would be part of the
Retained Business, (ii) make or agree to make any other investment in any
Person (whether by means of loan, capital contribution, purchase of capital
stock or other securities or otherwise) that would be part of the Retained
Business, except for acquisitions or investments by the Company pursuant to
existing contractual obligations or investments in any entity that was a
Retained Subsidiary before giving effect to such investment, or (iii) make or
agree to make any capital expenditure that would be part of the Retained
Business, except, in each case, for acquisitions, investments and capital
expenditures contemplated in the 1997 strategic capital budget for the Company
and the Retained Business as adopted by the Board of Directors of the Company
on October 25, 1996 and heretofore furnished to Acquiror.
(g) No Dispositions. The Company will not, nor will it permit any
of the Retained Subsidiaries to, sell, lease, license, encumber or otherwise
dispose of, or agree to sell, lease, license, encumber or otherwise dispose of
(other than to the Company or to another Retained Subsidiary), any of the
assets of the Retained Business other than in the ordinary course of business
consistent with past practice.
(h) Employee Plans and Compensation. Except as described in the
Company Disclosure Schedule, or except as required by law, or in the ordinary
course of business consistent with past practice, the Company will not, nor
will it permit any of the Retained Subsidiaries to, adopt any plan,
arrangement or policy (including individual arrangements or contracts) which
would become an Employee Plan or amend any Employee Plan to the extent such
adoption or amendment would create a liability or obligation or increase an
existing liability or obligation on the part of the Retained Companies that
will not be assumed by VRM or one of its Subsidiaries pursuant to the Employee
Benefits Agreement. Except for (i) grants of options or performance shares
which, at the Time of Distribution, shall be fully assumed by VRM, (ii) grants
of stock options, performance shares, restricted stock or other stock-based
awards under which, by their terms, all stock issuable pursuant thereto shall
be vested and outstanding prior to the Effective Time, or (iii) grants
described in the Company Disclosure Schedule, the Company shall not grant any
stock option, performance share, stock appreciation right, restricted stock,
unrestricted stock or any other award under any equity-based compensation plan
or individual arrangement. Except as set forth in the Company Disclosure
Schedule or as consistent with past practice, the Company shall not, increase
the compensation payable or to become payable to any officer or employee other
than for increases in the ordinary course of business in accordance with past
practices, or grant any severance or termination pay to, or enter into any
employment or severance agreement with, or amend the terms of any existing
employment or severance agreements with, any officer of employee of the
Company and its Subsidiaries.
(i) Accounting Policies and Procedures. The Company (with respect
to the conduct of the Retained Business) will not, and will not permit any of
the Retained Subsidiaries to, change any of its accounting principles,
policies, practices or procedures, except as may be required by GAAP or
Regulation S-X of the SEC.
(j) Liens. The Company will not, and will not permit any of its
Subsidiaries to, create, incur, suffer to exist or assume any Lien on any
assets of the Retained Companies, except for Liens described in subclauses (A)
through (C) of the defined term Permitted Liens.
(k) Taxes. Except where a failure to do so would not, individually
or in the aggregate, have a Material Adverse Effect on the Retained Companies,
taken as a whole, the Company will, and will cause each Subsidiary to, (i)
prepare and timely file with the relevant Taxing Authority all Tax Returns and
reports ("Post-Signing Returns") required to be filed which include any of the
Retained Companies on a basis consistent with past practice, (ii) timely pay
all Taxes due and payable, or establish reserves therefor in the books and
records of the Company in accordance with GAAP and consistent with past
practice, (iii) promptly notify Acquiror of any action, suit, proceeding,
claim or audit pending against or with respect to the Company or any Retained
Subsidiary in respect of any Taxes where there is a reasonable possibility of
a determination or decision which would materially increase the Tax
liabilities, or materially decrease the Tax attributes, of any of the Retained
Companies (other than Taxes for which VRM will assume liability under the Tax
Sharing Agreement), (iv) not, without the prior written consent of Acquiror,
change any of the Tax elections, Tax accounting methods, Tax conventions or
Tax principles which relate to the Retained Companies, (v) not, without the
prior written consent of Acquiror, take any action (other than an action in
the ordinary course of business or an action contemplated by the
Reorganization Agreements) that would reasonably be expected to materially
increase the Tax liabilities, or materially decrease the Tax attributes, of
any of the Retained Companies, (vi) except as set forth in the Company
Disclosure Schedule, contemplated by the Reorganization Agreements or with the
prior written consent of Acquiror, not take any action that would increase the
amount of deferred tax liabilities, or decrease the amount of deferred tax
assets, of the Company and its Subsidiaries (as determined for financial
accounting purposes), other than an action (A) in the ordinary course of
business consistent with past practice or (B) as required by applicable law,
in each case which is either (x) based on events or circumstances occurring
after the date hereof or (y) a continuation of a course of action initiated
prior to the date of this Agreement, and (vii) except as set forth in the
Company Disclosure Schedule, contemplated by the Reorganization Agreements or
with the prior written consent of Acquiror, not take any action that would
increase the amount of income or gain that will be recognized under Treasury
Regulation Sections 1.1502-13 or 1.1502-19 (or any corresponding provisions of
other applicable Tax laws) as a result of the transactions contemplated by the
Reorganization Agreements.
(l) Maintenance of Properties. The Company will, and will cause
the Retained Subsidiaries to, continue to maintain and repair all property
material to the operation of the Retained Business in a manner consistent in
all material respects with past practice.
(m) Tax-Free Distribution and Merger. The Company will not, and
will not permit any of its Subsidiaries, including VRM and any of its
Subsidiaries to, take or cause or permit to be taken any action prior to the
Effective Time that would disqualify the Distribution from being treated as a
"reorganization" within the meaning of Section 368(a)(1)(D) of the Code and
from being treated as a tax-free distribution within the meaning of Section
355 or 361(c) of the Code, or the Merger from being treated as a
"reorganization" within the meaning of Section 368(a)(1)(B) of the Code with
respect to which no gain or loss is recognized by the Company or Acquiror.
The Company shall use reasonable best efforts to do everything reasonably
necessary to have the Distribution and the Merger qualify as aforesaid.
(n) Redemption of Company Preferred Stock. Prior to the Effective
Time the Company will redeem or convert all of the issued and outstanding
shares of Company Preferred Stock pursuant to the terms of the related
certificate of designation.
(o) Termination of the Credit Facilities. The Company shall use
the proceeds of the Cash Dividend to repay the outstanding borrowings under
the Credit Facilities and, if such borrowings are paid in full, terminate the
Credit Facilities.
(p) Operations of Business. The Company shall operate the Retained
Business and VRM Business separately. The Company shall account for all
expenses and liabilities for the Retained Business and VRM Business (including
overhead expenses), separately, and expenses and liabilities relating to
overhead shall be allocated to the VRM Business and Retained Business, based
on services provided, and in accordance with past practices.
6.2. Covenants of Acquiror. During the period from the date of
this Agreement and continuing until the Effective Time, Acquiror agrees as to
itself and its Subsidiaries that except as otherwise expressly contemplated by
the Reorganization Agreements or to the extent that the Company otherwise
consents in writing, which consent shall not be unreasonably withheld:
(a) Tax-Free Distribution and Merger. Acquiror will not, and will
not permit any of its Subsidiaries to, take or cause or permit to be taken any
action prior to the Effective Time that would disqualify the Distribution from
being treated as a "reorganization" within the meaning of Section 368(a)(1)(D)
of the Code and from being treated as a tax-free distribution within the
meaning of Section 355 of the Code, or the Merger from being treated as a
"reorganization" within the meaning of Section 368(a)(1)(B) of the Code.
Prior to the Effective Time, the Acquiror shall use its reasonable best
efforts to do everything reasonably necessary to have the Distribution and the
Merger qualify as aforesaid.
(b) Company Names. Acquiror acknowledges that the trademarks,
trade names and service marks, the federal registrations and applications, the
Internet domain registration and exclusive use of the name "Valero", and any
and all other designs, logos and slogans, related to the names "Valero" and
"Valero Energy Corporation" and the "Walking Flame" service mark, all as more
particularly set forth on Schedule 6.2(b), attached hereto, and all other
rights (whether tangible or intangible, statutory, at common law or otherwise)
in connection therewith, whether alone or in combination with one or more
other words or marks in connection therewith, are assets of the Company being
transferred to VRM or a VRM Subsidiary in connection with the Distribution;
provided that Acquiror shall be permitted to use the "Valero" name and related
marks for six (6) months after the Effective Time as provided below. At or
before the Closing, Company and Acquiror shall execute, acknowledge,
authenticate and deliver all such instruments of assignment or transfer as may
be requested by VRM to effect the complete assignment and transfer of such
trademarks, trade names, service marks, registrations, applications and other
associated rights to VRM or a VRM Subsidiary. As promptly as practicable
after the Effective Time, but in any event no later than six (6) months after
the Effective Time, Acquiror shall cease using the "Valero" name and mark or
service mark and the "Walking Flame" service mark, including without
limitation, on any signs, badges, parking stickers, letterhead, business
cards, invoices and other business forms, telephone directory listings, and
advertising and promotional materials using the "Valero" name or service mark;
provided, however, that nothing herein shall be construed to prohibit either
the Company Group or the VRM Group from using after the Effective Time, the
blue-green color (PMS 315) now utilized by both the Company Group and VRM
Group on their respective facilities.
(c) San Antonio Commitment. Recognizing that the Company's
corporate presence in San Antonio, Texas, is a key factor in maintaining the
Company's important customer relationship with San Antonio-City of Public
Service and other customers in the San Antonio, Texas, area, Acquiror agrees
that, for a period of not less than five years following the Effective Time,
Acquiror will cause one or more of its Subsidiaries (including the Retained
Companies or Retained Business) to have a substantial corporate presence in
San Antonio, Texas, or its metropolitan area by maintaining offices, and
employing not less than 340 employees on average over such five-year period,
in such metropolitan area.
ARTICLE VII
ADDITIONAL AGREEMENTS
7.1. Access. (a) Upon reasonable notice, and except as may
otherwise be required by applicable law, the Company agrees to (and will cause
each of its Subsidiaries to) afford Acquiror's Representatives reasonable
access, during normal business hours throughout the period until the Closing
Date, to all its properties, books, contracts, commitments, Personnel and
records, to the extent related to the Retained Business, including access for
training and education of personnel and for environmental and other testing,
each as may reasonably be requested, and, during such period, will (and will
cause each of its Subsidiaries to) furnish promptly to Acquiror all
information concerning its business, properties and Personnel, to the extent
related to the Retained Business; provided, however, that such access will not
unreasonably interfere with the normal operations of the Company and the
reasonable out-of-pocket expenses of the Company incurred in connection
therewith will be paid by Acquiror. All such information as may be furnished
by or on behalf of the Company or any of its Subsidiaries to Acquiror or its
Representatives, or which is learned by any of Acquiror's Representatives in
the course of any visit to the Company or any of its locations or contacts
with any of its employees, pursuant to this Section 7.1 will be subject to
the terms of the confidentiality agreement dated November 26, 1996 between the
Company and Acquiror (the "Confidentiality Agreement") the terms of which are
incorporated herein by reference. The Confidentiality Agreement shall
terminate as of the Time of Distribution. Acquiror hereby agrees to defend,
indemnify and hold the Company and its Subsidiaries harmless for, from and
against all loss, cost, liability (including death or bodily injury) or
expense due to personal injury or property damage resulting solely from
Acquiror's inspections in connection with this Section 7.1(a).
(b) During the period prior to the Effective Time, the Company and
Acquiror will promptly furnish to the other a copy of each report, schedule,
registration statement and other documents filed by it with the SEC during
such period pursuant to the requirements of Section 13(a) or 15(d) of the
Exchange Act.
7.2. Other Actions. Subject to Section 7.3(a) and the respective
rights of the parties to terminate this Agreement under Article IX, the
Company and Acquiror will use reasonable best efforts not to, and will cause
their respective Subsidiaries to use reasonable best efforts not to, take
any action that would, or that could reasonably be expected to, result
directly or indirectly in any of the conditions to the Merger set forth in
Article VIII not being satisfied or that would, or that reasonably could be
expected to, materially impair the ability of the Company to consummate the
Distribution in accordance with the terms of the Reorganization Agreements or
the ability of the Company, Acquiror and Sub to consummate the Merger in
accordance with the terms hereof or that would, or that reasonably could be
expected to, materially delay such consummation.
7.3. Acquisition Proposals; Board Recommendation. (a) The Company
will, and will direct and use reasonable efforts to cause its directors,
officers, employees, representatives and agents to, immediately cease any
discussions or negotiations with any parties that may be ongoing with respect
to an Acquisition Proposal. The Company will not, nor will it permit any of
its Subsidiaries to, nor will it authorize or permit any of its directors,
officers, or employees or any investment banker, financial advisor, attorney,
accountant or other representative retained by it or any of its Subsidiaries
to, directly or indirectly, (i) solicit, initiate or knowingly encourage
(including by way of furnishing confidential information), or take any other
action knowingly to facilitate, any inquiries or the making of any proposal
which constitutes, or may reasonably be expected to lead to, any Acquisition
Proposal or (ii) participate in any discussions or negotiations regarding any
Acquisition Proposal; provided, however, that if, the Board of Directors of
the Company determines in good faith, after consultation with outside counsel,
that it is necessary to do so in order to comply with its fiduciary duties to
the Company's stockholders under applicable law, the Company may, in response
to an Acquisition Proposal that was not solicited subsequent to the date
hereof, and subject to compliance with Section 7.3(c), (x) furnish information
to any person pursuant to a customary confidentiality agreement (as determined
by the Company after consultation with its outside counsel) and (y)
participate in discussions or negotiations regarding such Acquisition
Proposal.
(b) Except as set forth in this Section 7.3, neither the Board of
Directors of the Company nor any committee thereof will (i) withdraw or
modify, or propose publicly to withdraw or modify, in a manner adverse to
Acquiror, the approval or recommendation by such Board of Directors or such
committee of the Merger or this Agreement, (ii) approve or recommend, or
propose publicly to approve or recommend, any Acquisition Proposal or (iii)
cause the Company to enter into any letter of intent, agreement in principle,
acquisition agreement or other similar agreement (each, an "Acquisition
Agreement") related to any Acquisition Proposal. Notwithstanding the
foregoing, in the event that the Board of Directors of the Company determines
in good faith, after consultation with outside counsel, that it is necessary
to do so in order to comply with its fiduciary duties to the Company
stockholders under applicable law, the Board of Directors of the Company may
(x) withdraw or modify its approval or recommendation of the Merger and this
Agreement or (y) approve or recommend a Superior Proposal or (z) terminate
this Agreement (and concurrently with or after such termination, if it so
chooses, cause the Company to enter into any Acquisition Agreement with
respect to any Superior Proposal), but in each case only at a time that is
following Acquiror's receipt of written notice (a "Notice of Superior
Proposal") advising Acquiror that the Board of Directors of the Company has
received a Superior Proposal, specifying the material terms and conditions of
such Superior Proposal and identifying the person making such Superior
Proposal.
(c) In addition to the obligations of the Company set forth in
paragraphs (a) and (b) of this Section 7.3, the Company will promptly advise
Acquiror orally and in writing of any request for confidential information in
connection with an Acquisition Proposal or of any Acquisition Proposal. The
Company will keep Acquiror reasonably informed of the status of and material
information concerning (including amendments or proposed amendments) any
Acquisition Proposal.
(d) Nothing contained in this Section 7.3 will prohibit the Company
from making any disclosure to the Company stockholders if, in the good faith
judgment of the Board of Directors of the Company, after consultation with
outside counsel, failure so to disclose would be inconsistent with applicable
law; provided, however, neither the Company nor its Board of Directors nor any
committee thereof shall, except as permitted by Section 7.3(b), withdraw or
modify, or propose publicly to withdraw or modify, its position with respect
to this Agreement or the Merger or approve or recommend, or propose publicly
to approve or recommend, an Acquisition Proposal.
7.4. Tax Representation Letters. For purposes of the tax opinions
to be delivered pursuant to Sections 8.2(c) and 8.3(c), respectively, (a)
Acquiror will deliver a representation letter substantially in the form of
Annex D attached hereto dated as of the Closing Date and (b) the Company will
cause VRM to deliver a representation letter substantially in the form of
Annex E attached hereto, dated as of the Closing Date, in each case, to
Wachtell, Lipton, Rosen & Katz, special counsel to the Company, and Orrick,
Herrington & Sutcliffe LLP, special counsel to Acquiror.
7.5. Filings; Other Actions. (a) The Company will use its
reasonable best efforts promptly to prepare and file with the SEC the Proxy
Statement-Prospectus.
(b) The Company will use its reasonable best efforts (i) promptly
to prepare and file with the SEC the VRM Registration Statement in connection
with the distribution of VRM Common Stock and associated VRM Rights in the
Distribution, and (ii) to cause the Proxy Statement-Prospectus to be mailed to
the Company's stockholders as promptly as practicable after the Proxy
Statement-Prospectus has been cleared by the SEC.
(c) Acquiror will use its reasonable best efforts promptly to
prepare and file with the SEC the Acquiror Form S-4.
(d) None of the Registration Statements or the Proxy
Statement-Prospectus shall be filed with the SEC, and, prior to termination of
this Agreement, no amendment or supplement thereto shall be filed with the
SEC, by the Company or Acquiror without giving the other and its counsel a
reasonable opportunity to review and comment on such filings prior to the
filing thereof. Each of the Company and Acquiror agrees to use its reasonable
best efforts, after consultation with the other party, to respond promptly to
any comments made by the SEC with respect to all of its filings referred to in
clauses (a), (b) and (c) above, including the preparation and filing of any
amendments or supplements thereto, and to have all such filings declared
effective under the Securities Act and the Exchange Act, as applicable, or
cleared by the SEC, in each case as promptly as practicable after the filing
thereof. Each of the Company and Acquiror will, and the Company will cause
VRM to, use its reasonable best efforts to obtain all necessary state
securities law or "Blue Sky" permits and approvals required to carry out the
transactions contemplated by the Reorganization Agreements and each of the
Company and Acquiror agrees to furnish all information as may be reasonably
requested in connection with any such action; provided, however, that Acquiror
will not be required to qualify to do business in any jurisdiction in which it
is not now so qualified.
(e) Each of the Company and Acquiror will promptly cooperate with
and furnish information to each other in connection with any such requirements
imposed upon any of them or any of their respective Subsidiaries in connection
with the Distribution or the Merger.
(f) Subject to Section 7.3(a) and its right to terminate this
Agreement pursuant to Section 9.1, the Company agrees to take, in accordance
with the DGCL, the Company Charter and the Company By-laws, all action
necessary to convene the Company Meeting within 45 days after the later of the
date the Acquiror S-4 is declared effective, the VRM Registration Statement is
declared effective, and the Proxy Statement-Prospectus is cleared, by the SEC,
to consider and vote upon the Distribution and the Merger and the Company
shall, through its Board of Directors, recommend to its stockholders approval
of the Distribution and the Merger.
(g) Upon the terms and subject to the conditions set forth in this
Agreement, each of the Company, Acquiror and Sub shall use its reasonable best
efforts to take, or cause to be taken, all actions, and to do, or cause to be
done, and to assist and cooperate with the other parties in doing, all things
necessary, proper or advisable to consummate and make effective, in the most
expeditious manner possible, the transactions contemplated by the
Reorganization Agreements.
(h) Each of the Company and Acquiror will promptly, and in any
event within 15 days after execution and delivery of this Agreement, make all
filings or submissions as are required under the HSR Act. Each of the Company
and Acquiror will promptly furnish to the other such necessary information and
reasonable assistance as the other may request in connection with its
preparation of any filing or submission which is necessary under the HSR Act.
Without limiting the generality of the foregoing, each of the Company and
Acquiror will promptly notify the other of the receipt and content of any
inquiries or requests for additional information made by any Governmental
Entity in connection therewith and will promptly (i) comply with any such
inquiry or request and (ii) provide the other with a description of the
information provided to any Governmental Entity with respect to any such
inquiry or request. In addition, each of the Company and Acquiror will keep
the other apprised of the status of any such inquiry or request. Subject to
Section 7.5(j), each of the Company and Acquiror will take such actions as are
necessary to obtain any clearance required under the HSR Act for the
consummation of the transactions contemplated hereby.
(i) Each of the Company and Acquiror will promptly make all
applications or filings with the Federal Energy Regulatory Commission under
Section 203 of the Federal Power Act and any applications or filings with
appropriate Canadian authorities required in connection with the Merger.
Each of the Company and Acquiror will take such actions as are necessary to
obtain any clearance required under the Federal Power Act or applicable
Canadian law.
(j) Notwithstanding any other provision of this Agreement
(including Sections 7.5(h) and 7.5(i) above), nothing in this Agreement shall
require Acquiror in order to obtain any approval or authorization under any
Regulatory Filing (i) to make any dispositions of any of its assets or any of
the assets of the Retained Business having an aggregate book value in excess
of $100 million or (ii) to incur any other burdens which would impair the
value of its investment in the Company or the Retained Business. In addition,
the Company shall not, in order to obtain any approval or authorization under
any Regulatory Filing, make any such dispositions or incur such burdens,
without the consent of Acquiror.
7.6. Accountants' Letters. Each party hereto agrees to use its
reasonable efforts to cause to be delivered to the other parties hereto and
their respective directors a letter of its independent accountants, dated the
date on which each Registration Statement becomes effective, in form and
substance customary for "comfort" letters delivered by independent accountants
in connection with registration statements similar to the Registration
Statements.
7.7. Distribution Agreement. The Company agrees that prior to the
Effective Time it will not waive or amend the terms of the Distribution
Agreement without the consent of Acquiror.
7.8. Publicity. The initial press release relating hereto shall be
a joint press release and thereafter the Company and Acquiror will consult
with each other prior to issuing any press releases or otherwise making public
statements with respect to the Reorganization Agreements and the transactions
contemplated thereby.
7.9. Employees and Employee Plans. (a) Acquiror and the Company
agree to cooperate in making all appropriate filings and taking all
appropriate actions required to implement the provisions of this Section 7.9.
(b) Acquiror shall for a period of two (2) years after the Merger:
(i) take all action necessary to extend coverage under the Acquiror Pension
Plan to those individuals employed by the Company immediately after the
Distribution and immediately before the Merger (all such individuals,
"Continuing Employees") who were participants in the Company Pension Plan
immediately before the Distribution; (ii) provide Continuing Employees with
welfare benefits (including retiree medical benefits) no less favorable than
those provided by Pacific Gas Transmission ("PGT") prior to the Effective Time
to its other similarly situated employees; (iii) provide Continuing Employees
with severance pay and other employee benefits that are no less favorable in
the aggregate than those provided by the Company prior to the Distribution
(other than any equity-based benefits including, without limitation, stock
options); and (iv) waive any limitations regarding pre-existing conditions
under any welfare or other employee benefit plan maintained by the Acquiror or
PGT.
(c) From and after the Effective Time, with respect to Continuing
Employees who do not elect in connection with the Distribution to receive a
distribution of the balance of their Company Thrift Plan accounts or to
transfer their accounts to the VRM Thrift Plan, Acquiror shall take all
actions necessary to permit such Continuing Employees to transfer their
account balances in the Company Thrift Plan to the Acquiror Thrift Plan. Such
transfers shall be in cash, except that the Acquiror Thrift also will accept
promissory notes evidencing any outstanding participant loans.
(d) For all purposes under all compensation and benefit plans and
policies applicable to employees of Acquiror, including those referred to in
this Section, Acquiror shall treat all service by Continuing Employees with
the Company prior to the Merger as service with Acquiror, except to the extent
such treatment would result in duplication of benefits. For example, but not
by way of limitation, benefits payable to Continuing Employees pursuant to the
Acquiror Pension Plan (and any other qualified or non-qualified plan,
arrangement or contract providing retirement benefits) shall be reduced (on an
actuarially equivalent basis) by benefits paid under the VRM Pension Plan (and
any other qualified or non-qualified plan, arrangement or contract providing
retirement benefits). VRM shall not amend or terminate any such plan,
arrangement or contract so as to reduce the accrued benefit of any Continuing
Employee. For the purpose of avoiding any such benefit duplication, each of
VRM and the Acquiror shall provide to the other all such information in its
possession as the other may reasonably request concerning each other's Pension
Plan (and any other qualified or nonqualified plan, arrangement or contract
providing retirement benefits) to enable VRM and Acquiror to fulfill their
obligations under their respective plans, arrangements and contracts.
(e) VRM and Acquiror shall use their best efforts to permit all
employees of the Company, including but not limited to the Continuing
Employees, to participate in VRM's Flex Plan through December 31, 1997,
provided that the Company shall reimburse VRM for the costs of such
participation.
(f) Prior to the Effective Time, the Company and Acquiror will use
their best efforts to collaborate with respect to the design, implementation
and administration of an early retirement program.
7.10. Expenses. (a) All Expenses incurred in connection with the
Reorganization Agreements and the transactions contemplated thereby, shall be
paid by the Company or the Surviving Corporation; provided that the amount so
paid by the Company or the Surviving Corporation shall not exceed the sum of
the expenses set forth on Schedule 5.1(h)(iii) under the caption Transaction
Costs Payable, plus the amount of any redemption or prepayment penalty to be
paid with respect to the 10.58% Senior Notes due 2000, under the Note Purchase
Agreement, dated as of December 19, 1990, as amended, from the Company to the
Note Purchasers named therein, and any amount in excess of such aggregate
amount shall be paid by VRM.
(b) The Company will pay Acquiror $37.5 million (the "Termination
Fee") if (i) this Agreement is terminated pursuant to Section 9.1(c)(ii) or
Section 9.1(d)(ii), (ii) prior to the termination of this Agreement, a bona
fide Acquisition Proposal was commenced, publicly proposed, publicly disclosed
or, in the case of clause (iii)(x) below, communicated to the Board of
Directors of the Company (or the willingness of any person to make such an
Acquisition Proposal was publicly disclosed or, in the case of clause (iii)(x)
below, communicated to the Board of Directors of the Company), and (iii)(x)
the Board of Directors of the Company, in accordance with Section 7.3,
withdrew or modified its approval or recommendation of this Agreement or the
Merger in a manner materially adverse to Acquiror, approved or recommended
such Acquisition Proposal, caused the Company to enter into an Acquisition
Agreement with respect to an Acquisition Proposal or terminated this Agreement
or (y) the requisite approval of the Company's stockholders for the
Distribution or the Merger was not obtained at the Company Meeting and, within
twelve months following the date of the Company Meeting (or following the date
of termination of this Agreement, if the Company Meeting was not held prior to
such termination), an Acquisition Proposal shall have been consummated or the
Company shall enter into a definitive agreement with respect to any
Acquisition Proposal; provided, however, the Termination Fee will not be
payable if, at the time of any action referred to in clause (iii)(x) above or
the Company Meeting (or on the date of the termination of this Agreement, if
the Company Meeting was not held prior to such termination), Acquiror shall be
in material breach of its covenants or agreements contained in this Agreement.
The Termination Fee will be paid (in same-day funds), in the case of clause
(iii)(x) above, on the second business day following the termination of this
Agreement, or in the case of clause (y) above, on the second business day
following the earlier of execution of such agreement or the consummation of
such Acquisition Proposal.
7.11. Takeover Statutes. If any Takeover Statute is or may become
applicable to the transactions contemplated by the Reorganization Agreements,
each of the Company and Acquiror and their respective Boards of Directors will
grant such approvals and take such actions as are necessary so that the
transactions contemplated by the Reorganization Agreements may be consummated
as promptly as practicable on the terms contemplated thereby and otherwise act
to eliminate or minimize the effects of any Takeover Statute on any of the
transactions contemplated by the Reorganization Agreements.
7.12. Securities Act Compliance. As soon as practicable after the
date of the Company Meeting, the Company will identify to Acquiror all
individuals who were reasonably believed by the Company to be, at the time of
the Company Meeting, an "affiliate" of the Company as that term is used in
paragraphs (c) and (d) of Rule 145 under the Securities Act (the "Rule 145
Affiliates"). The Company will use its reasonable best efforts to obtain a
written agreement in the form of Annex F hereto from each Person who is so
identified as a Rule 145 Affiliate and will deliver such written agreements to
Acquiror as soon as practicable after the Company Meeting.
7.13. Stock Exchange Listing. Acquiror will use its reasonable
best efforts to list on the NYSE prior to the Closing Date, subject to
official notice of issuance, the Acquiror Common Stock to be issued pursuant
to the Merger.
7.14. 1935 Act. (a) The Company shall not, nor shall the Company
permit any of its Subsidiaries to, engage in any activities which reasonably
could cause any of them to become a "holding company" under the 1935 Public
Utility Holding Company Act, as amended.
(b) Acquiror shall not, nor shall Acquiror permit any of its
Subsidiaries to, engage in any activities which reasonably could cause the
Acquiror or any of its Subsidiaries prior to the Effective Time to lose their
exemption from the 1935 Act (except Section 9(a)(2) thereof).
7.15. Further Assurances. At and after the Effective Time, the
officers and directors of the Surviving Corporation will be authorized to
execute and deliver, in the name and on behalf of the Company, any deeds,
bills of sale, assignments or assurance and to take and do, in the name and on
behalf of the Company, any other actions and things reasonably necessary to
vest, perfect or confirm of record or otherwise any and all right, title and
interest in, to and under any of the rights, properties or assets of the
Company acquired or to be acquired by the Surviving Corporation or VRM, as the
case may be, as a result of or in connection with any of the transactions
contemplated by the Reorganization Agreements, including without limitation
the Merger and the Distribution.
ARTICLE VIII
CONDITIONS
8.1. Conditions to Each Party's Obligation to Effect the Merger.
The respective obligations of each party hereto to consummate the Merger are
subject to the satisfaction or waiver, on or prior to the Closing Date, of
each of the following conditions:
(a) Company Stockholder Approval. The Merger shall have been duly
approved by the affirmative vote of the holders of Company Common Stock
representing at least a majority of the outstanding shares thereof entitled to
vote thereon.
(b) Acquiror Stockholder Approval. If required by applicable state
laws or the applicable rules of any securities exchange, the issuance of
Acquiror Common Stock in the Merger shall have been approved by the
stockholders of the Acquiror in accordance with such law or such rule.
(c) NYSE Listing. The shares of Acquiror Common Stock to be issued
pursuant to the Merger shall have been approved for listing on the NYSE prior
to the Closing Date, subject to official notice of issuance.
(d) HSR. The waiting period applicable to the consummation of the
Merger under the HSR Act shall have expired or been terminated.
(e) Litigation. No temporary restraining order, preliminary or
permanent injunction or other order issued by any court of competent
jurisdiction or other legal restraint or prohibition shall be in effect that
prohibits consummation of the transactions contemplated by the Reorganization
Agreements.
(f) Registration Statements. The Registration Statements shall
have become effective under the Securities Act or Exchange Act, as applicable,
no stop order suspending the effectiveness of the Registration Statements
shall have been issued and no proceedings for that purpose shall have been
initiated or threatened by the SEC.
(g) Pre-Merger Transactions. The transactions contemplated by
Article IV shall have been consummated in accordance with the terms of this
Agreement and the Distribution Agreement (which includes additional conditions
to such consummation).
(h) FERC. The Federal Energy Regulatory Commission and any
applicable Canadian authority shall have approved the Merger.
8.2. Conditions to Obligation of the Company. The obligation of
the Company to consummate the Merger is also subject to the satisfaction or
waiver by the Company on or prior to the Closing Date of each of the following
conditions:
(a) Representations and Warranties. The representations and
warranties of Acquiror and Sub set forth in the Reorganization Agreements (x)
that are qualified as to materiality shall be true and correct and (y) that
are not so qualified shall be true and correct in all material respects, in
each case as of the date of this Agreement and as of the Closing Date as
though made on and as of the Closing Date (except (i) that the accuracy of
representations and warranties that by their terms speak as of the date of
this Agreement or some other date will be determined as of such date and (ii)
for the effect of any activities or transactions which are contemplated by the
Reorganization Agreements), and the Company will have received a certificate
signed on behalf of Acquiror by an executive officer of Acquiror to such
effect.
(b) Performance of Obligations of Acquiror and Sub. Acquiror and
Sub shall have performed in all material respects all obligations required to
be performed by them under the Reorganization Agreements at or prior to the
Closing Date, and the Company shall have received a certificate signed on
behalf of Acquiror by an executive officer of Acquiror to such effect.
(c) Tax Opinions. The Company shall have received the opinion of
Wachtell, Lipton, Rosen & Katz, special counsel to the Company, dated the
Closing Date, to the effect that the Distribution qualifies as a transaction
described in Sections 355(a), 355(c)(1) and 368(a)(1)(D) of the Code in which
no gain or loss shall be recognized to the Company and that the Merger
qualifies as a "reorganization" within the meaning of Section 368(a)(1)(B) of
the Code.
(d) Consents. All consents, approvals and authorizations required
to be obtained prior to the Closing Date from any Governmental Entity or third
party in connection with the execution, delivery and performance of the
Reorganization Agreements shall have been made or obtained, except where the
failure to make or obtain the same, individually or in the aggregate, would
not have a Material Averse Effect on the VRM Companies, taken as a whole.
8.3. Conditions to Obligations of Acquiror and Sub. The
obligations of Acquiror and Sub to consummate the Merger are also subject to
the satisfaction or waiver by Acquiror on or prior to the Closing Date of each
of the following conditions:
(a) Representations and Warranties. The representations and
warranties of the Company and VRM set forth in the Reorganization Agreements
(x) that are qualified as to materiality shall be true and correct and (y)
that are not so qualified shall be true and correct in all material respects,
in each case as of the date of this Agreement and as of the Closing Date as
though made on and as of the Closing Date (except (i) that the accuracy of
representations and warranties that by their terms speak as of the date of
this Agreement or some other date will be determined as of such date and (ii)
for the effect of any activities or transactions which are contemplated by the
Reorganization Agreements) and Acquiror will have received a certificate
signed on behalf of the Company by an executive officer of the Company to such
effect.
(b) Performance of Obligations. Each of the Company and VRM shall
have performed in all material respects all obligations required to be
performed by it under the Reorganization Agreements at or prior to the Closing
Date, and Acquiror shall have received a certificate signed on behalf of the
Company by an executive officer of the Company to such effect.
(c) Tax Opinion. Acquiror shall have received an opinion of
Orrick, Herrington & Sutcliffe LLP, special counsel to Acquiror, dated the
Closing Date, to the effect that the Merger qualifies as a "reorganization"
within the meaning of Section 368(a)(1)(B) of the Code and shall have received
an opinion of Wachtell, Lipton, Rosen & Katz, reasonably satisfactory to
Acquiror in form and substance, to the effect that the Distribution qualifies
as a transaction described in Sections 355(a), 355(c)(1) and 368(a)(1)(D) of
the Code in which no gain or loss shall be recognized to the Company.
(d) Consents. All consents, approvals and authorizations required
to be obtained prior to the Closing Date from any Governmental Entity or third
party in connection with the execution, delivery and performance of the
Reorganization Agreements shall have been made or obtained, except where the
failure to make or obtain the same, individually or in the aggregate, would
not reasonably be expected to have a Material Adverse Effect on the Retained
Companies, taken as a whole, or on Acquiror and its Subsidiaries, taken as a
whole.
(e) Redemption of Company Preferred Stock. The Company shall have
redeemed or converted all issued and outstanding shares of Company Preferred
Stock pursuant to the terms of the related certificate of designation.
ARTICLE IX
TERMINATION
9.1. Termination. This Agreement may be terminated and the Merger
may be abandoned at any time prior to the Effective Time, before or after the
approval by the stockholders of the Company:
(a) by the mutual written consent of the Company and Acquiror;
(b) by either the Company or Acquiror if (i) the Merger shall not
have been consummated by July 31, 1997 unless HSR or Federal Energy Regulatory
Commission approval has not been received in which case such date shall be
postponed until 10 business days after receipt of such approval, but in no
event later than December 31, 1997, or (ii) at the Company Meeting or at any
adjournment thereof, the approval of the Company's stockholders referred to in
Section 8.1(a) shall not have been obtained; provided that in the case of a
termination pursuant to clause (i) above, the terminating party and its
Subsidiaries shall not have breached in any material respect their respective
obligations under the Reorganization Agreements in any manner that shall have
caused or resulted in the failure referred to above;
(c) by the Company (i) if Acquiror or Sub shall have breached in
any material respect any of their respective covenants, representations,
warranties or agreements contained in any Reorganization Agreement, which
breach shall not have been cured within 30 days following written notice of
such breach, or (ii) pursuant to Section 7.3(b) of this Agreement; or
(d) by Acquiror:
(i) if the Company or VRM shall have breached in any material
respect any of the covenants, representations, warranties or agreements
contained in any Reorganization Agreement, which breach shall not have been
cured within 30 days following written notice of such breach; or
(ii) if the Board of Directors of the Company shall have
exercised any of its rights set forth in the second sentence of Section 7.3(b)
of this Agreement;
(iii) if (A)(x) there has occurred since the date of this
Agreement any event, change, effect or state of facts (collectively "Events"),
other than Events which result from any action by Acquiror or any of its
Subsidiaries, Affiliates, officers, employees, agents or representatives or
changes in general economic, financial, market or business conditions, or (y)
Acquiror, in its ongoing due diligence investigation, shall uncover
information (collectively "Information") that, as of the date of this
Agreement, has not been previously disclosed in a Filed Company SEC Document
or has not been disclosed by the Company to Acquiror on or prior to the date
of this Agreement (including in the Company Disclosure Schedules) and (B) such
Events and Information in the aggregate would reasonably be expected to result
in an adverse impact on the Retained Business of more than $100 million, which
amount shall be net of income tax effects and shall include the present value
of any reasonably projected costs, expenses or liabilities or losses of
projected business revenue caused by the occurrence of such Events or
attributable to such Information.
9.2. Effect of Termination and Abandonment. In the event of
termination of this Agreement and the abandonment of the Merger pursuant to
this Article IX, no party to the Reorganization Agreements (or any of its
directors or officers) shall have any liability or further obligation to any
other party, except as set forth in Sections 5.1(q), 5.2(l), 7.10 and 9.2, all
of which shall survive such termination, and except that nothing herein shall
relieve any party from liability for any material and willful breach of any of
the Reorganization Agreements.
ARTICLE X
MISCELLANEOUS AND GENERAL
10.1. Survival. Except as set forth below in this Section 10.1,
all representations, warranties and agreements in this Agreement of Acquiror,
Sub and the Company or in any instrument delivered by Acquiror, Sub or the
Company pursuant to or in connection with this Agreement shall expire at the
Effective Time or upon termination of this Agreement in accordance with its
terms or, in the case of any other such instrument, in accordance with the
terms of such instrument. In the event of consummation of the Merger, the
agreements contained in or referred to in Article III, the last sentence of
Section 6.1(c) and Sections 6.2(b), 6.2(d), 7.9, 7.15 and 10.1 shall survive
the Effective Time.
10.2. Modification or Amendment. Subject to the applicable
provisions of the DGCL, at any time prior to the Effective Time, the parties
hereto may modify or amend this Agreement by written agreement executed and
delivered by duly authorized officers of the respective parties.
10.3. Waiver; Remedies. The conditions to each party's obligation
to consummate the Merger are for the sole benefit of such party and may be
waived (in writing) by such party in whole or in part to the extent permitted
by applicable law. No delay on the part of either Acquiror or the Company in
exercising any right, power or privilege hereunder will operate as a waiver
thereof, nor will any waiver on the part of either Acquiror or the Company of
any right, power or privilege hereunder operate as a waiver of any other
right, power or privilege hereunder, nor will any single or partial exercise
of any right, power or privilege hereunder preclude any other or further
exercise thereof or the exercise of any other right, power or privilege
hereunder. Unless otherwise provided, the rights and remedies herein provided
are cumulative and are not exclusive of any rights or remedies which the
parties may otherwise have at law or in equity.
10.4. Counterparts. For the convenience of the parties, this
Agreement may be executed in any number of separate counterparts, each such
counterpart being deemed to be an original instrument, and all such
counterparts shall together constitute the same agreement.
10.5. Governing Law. This Agreement shall be governed by and
construed in accordance with the internal laws of the State of Delaware
applicable to contracts made and to be performed entirely within such State,
without regard to the conflicts of law principles of such State.
10.6. Notices. Any notice, request, instruction or other
communication to be given hereunder by any party to another shall be in
writing and shall be deemed to have been duly given (i) on the date of
delivery if delivered personally, or by telecopy or telefacsimile, upon
confirmation of receipt, (ii) on the first business day following the date of
dispatch if delivered by Federal Express or other nationally reputable
next-day courier service, or (iii) on the third business day following the
date of mailing if delivered by registered or certified mail, return receipt
requested, postage prepaid. All notices hereunder shall be delivered as set
forth below, or pursuant to such other instructions as may be designated in
writing by the party to receive such notice,
(a) If to the Company:
Valero Energy Corporation
530 McCullough Avenue
San Antonio, Texas 78215
Attention: General Counsel
Telecopy: (210) 246-2354
with copies to:
Wachtell, Lipton, Rosen & Katz
51 West 52nd Street
New York, New York 10019
Attention: Edward D. Herlihy, Esq.
Telecopy: (212) 403-2000
(b) if to Acquiror or Sub:
PG&E Corporation
77 Beale Street
San Francisco, California 94105
Attention: General Counsel
Telecopy: (415) 973-8083
with copies to:
Orrick, Herrington & Sutcliffe LLP
400 Sansome Street
San Francisco, California 94111
Attention: Leslie P. Jay, Esq.
Telecopy: (415) 773-5759
10.7. Entire Agreement. The Reorganization Agreements including
the Annexes and Schedules thereto, the Interim Services Agreements including
the Annexes and Schedules thereto and the Confidentiality Agreement constitute
the entire agreement, and supersede all other prior agreements,
understandings, representations and warranties, both written and oral, among
the parties, with respect to the subject matter hereof and thereof. Any
disclosure by the Company, Acquiror or Sub in any portion of their respective
disclosure schedules shall be deemed disclosure in each other portion of such
disclosure schedule.
10.8. Certain Obligations. Whenever any Reorganization Agreement,
the Interim Services Agreement or the Assignment and Assumption Agreements
requires any of the Subsidiaries of any party to take any action, such
Agreement will be deemed to include an undertaking on the part of such party
to cause such Subsidiary to take such action.
10.9. Assignment. No party to this Agreement shall convey, assign
or otherwise transfer any of its rights or obligations under this Agreement
without the express written consent of each other party hereto in its sole and
absolute discretion.
10.10. Captions. The Article, Section and paragraph captions
herein are for convenience of reference only, do not constitute part of this
Agreement and shall not be deemed to limit or otherwise affect any of the
provisions hereof.
10.11. Severability. If any provision of the Reorganization
Agreements or the application thereof to any Person or circumstance is
determined by a court of competent jurisdiction to be invalid, void or
unenforceable, the remaining provisions thereof, or the application of such
provision to Persons or circumstances other than those as to which it has been
held invalid or unenforceable, shall remain in full force and effect and shall
in no way be affected, impaired or invalidated thereby, so long as the
economic or legal substance of the transactions contemplated thereby is not
affected in any manner adverse to any party. Upon any such determination, the
parties shall negotiate in good faith in an effort to agree upon a suitable
and equitable substitute provision to effect the original intent of the
parties.
10.12. No Third Party Beneficiaries. Nothing contained in this
Agreement or any other Reorganization Agreement is intended to confer upon any
Person or entity other than the parties thereto and their respective
successors and permitted assigns, any benefit, right or remedies under or by
reason of the Reorganization Agreement; provided, however, that VRM is an
intended third party beneficiary of the obligations of Acquiror specified in
Section 6.2(b), and is entitled to enforce the same to the same extent as if a
party hereto.
10.13. Annexes and Schedules. All Annexes hereto and the Company
Disclosure Schedule (collectively, the "Schedules") attached hereto or
referred to herein are hereby incorporated in and made a part of this
Agreement as if set forth in full herein. Matters reflected on the Schedules
are not necessarily limited to matters required by this Agreement to be
reflected on such Schedules. Such additional matters are set forth for
informational purposes only and do not necessarily include other matters of a
similar nature. Capitalized terms used in any Schedule but not otherwise
defined therein shall have the respective meanings assigned to such terms in
this Agreement.
10.14. No Representations or Warranties. Acquiror and Sub
acknowledge that none of the Company or any of its Subsidiaries, any of their
affiliates (including the Retained Companies) or any other Person has made any
representation or warranty, expressed or implied, as to the accuracy or
completeness of any information regarding any of the Company, VRM, VRM's
Subsidiaries, the Retained Companies, the Retained Business or the Retained
Assets not included in the Reorganization Agreements, and none of the Company,
any of its Subsidiaries or Affiliates or any other Person will have or be
subject to any liability to Acquiror or any of its Subsidiaries, any of their
affiliates or any other Person resulting from the distribution to Acquiror or
Sub, or Acquiror's or Sub's use of, any such information. Acquiror and Sub
further acknowledge that, except as expressly set forth in the Reorganization
Agreements, the Company and VRM have not made, and hereby expressly disclaim
any representation or warranty, and there are no representations or warranties
of any kind, expressed or implied, with respect to any of the Company, VRM,
VRM's Subsidiaries, the Retained Companies, the Retained Business or the
Retained Assets.
10.15. Tax Sharing Agreement. With respect to Tax matters, if
there is a conflict between this Agreement and the Tax Sharing Agreement the
Tax Sharing Agreement shall control.
10.16. Consent to Jurisdiction. Each of the parties hereto
irrevocably submits to the exclusive jurisdiction of (i) the state courts of
the State of New York, County of New York and (ii) the United States District
Court for the Southern District of New York for the purposes of any suit,
action or other proceeding arising out of this Agreement or any transaction
contemplated hereby (and agrees not to commence any action, suit, or
proceeding relating hereto except in such courts). Each of the parties hereto
further agrees that service of any process, summons, notice or document hand
delivered or sent by registered mail to such party's respective address set
forth in Section 10.6 will be effective service of process for any action,
suit or proceeding in New York, County of New York with respect to any matters
to which it has submitted to jurisdiction as set forth in the immediately
preceding sentence. Nothing in this Section, however, shall affect the right
of any party hereto to serve legal process in any other manner permitted by
law. Each of the parties hereto irrevocably and unconditionally waives any
objection to the laying of venue of any action, suit or proceeding arising out
of this Agreement or the transactions contemplated hereby in (i) the state
courts of the State of New York, New York County or (ii) the United States
District Court for the Southern District of New York, and hereby further
irrevocably and unconditionally waives and agrees not to plead or claim in any
such court that any such action, suit or proceeding brought in any such court
has been brought in an inconvenient forum.
IN WITNESS WHEREOF, this Agreement has been duly executed and
delivered by the duly authorized officers of the parties hereto on the date
first hereinabove written.
VALERO ENERGY CORPORATION
By:
Name:
Title:
PG&E CORPORATION
By:
Name:
Title:
PG&E ACQUISITION CORPORATION
By:
Name:
Title:
[The following schedules or annexes have been omitted from this filing
pursuant to Regulation S-K section 229.601(b)(2). The Company undertakes to
furnish supplementally a copy of any omitted schedule or annex to the
Commission upon request.]
SCHEDULE 1.1(a) --SCHEDULE OF PERMITTED LIENS FOR RETAINED COMPANIES
SCHEDULE 6.2(b) -- TRADEMARKS/SERVICE MARKS
ANNEX A -- Agreement and Plan of Distribution (is filed herewith as Exhibit
2.2)
ANNEX B -- Employee Benefits Agreement (is filed herewith as Exhibit 2.3)
ANNEX C -- Tax Sharing Agreement (is filed herewith as Exhibit 2.4)
ANNEX D -- FORM OF ACQUIROR'S TAX REPRESENTATION LETTER
ANNEX E -- FORM OF VRM TAX REPRESENTATION LETTER
ANNEX F -- FORM OF AFFILIATE LETTER
ANNEX G -- [To be provided after the date of the Merger Agreement]
COMPANY DISCLOSURE SCHEDULES FOR THE AGREEMENT AND PLAN OF MERGER
Schedule 5.1(a) and (f)(i) -- Schedule of Retained Subsidiaries
Schedule 5.1(d)(i) -- Violations, Consents and Approvals
Schedule 5.1(f)(i) -- Schedule of Restrictions on Sale of Retained
Subsidiaries
Schedule 5.1(f)(ii) -- Joint Venture/Lease Agreements
Schedule 5.1(h)(i) -- Company Balance Sheet, Cash Flow and Income Statements
Schedule 5.1(h)(ii) -- VNG Balance Sheet, Cash Flow and Income Statement
Schedule 5.1(h)(iii) -- Retained Company Consolidated Balance Sheet
Schedule 5.1(i) -- Certain Executive Compensation Arrangments since 12/31/96
Schedule 5.1(j) -- Compliance with Laws
Schedule 5.1(k) -- Assets
Schedule 5.1(l) -- Litigation
Schedule 5.1(m)(iii) -- Taxes
Schedule 5.1(n)(i) -- List of Retained Company Plans
Schedule 5.1(o) -- Environmental Matters
Schedule 5.1(q) -- Brokers and Finders
Schedule 5.1(s) -- Contracts
Schedule 6.1 -- Covenants of Company
AGREEMENT AND PLAN OF DISTRIBUTION
dated as of ___________ __, 1997
between
VALERO ENERGY CORPORATION
and
VALERO REFINING AND MARKETING COMPANY
<PAGE>
TABLE OF CONTENTS
Page
ARTICLE I DEFINITIONS. . . . . . . . . . . . . . . . . . . . . .2
1.1. Definitions . . . . . . . . . . . . . . . . . . . . .2
ARTICLE II TRANSACTIONS RELATING TO THE DISTRIBUTION . . . . . .8
2.1. Intercorporate Reorganization . . . . . . . . . . . .8
2.2. Assumption of Liabilities . . . . . . . . . . . . . 12
2.3. Repayment of Intercompany Indebtedness and
Cash Dividend . . . . . . . . . . . . . . . . . . 13
2.4. Resignations. . . . . . . . . . . . . . . . . . . . 13
2.5. VRM Certificate of Incorporation and By-Laws;
Rights Plan; Name Change. . . . . . . . . . . . . 14
2.6. Insurance . . . . . . . . . . . . . . . . . . . . . 14
2.7. Nonassignable Contracts . . . . . . . . . . . . . . 14
2.8. Interim Services Agreement. . . . . . . . . . . . . 15
2.9. Company Guarantees. . . . . . . . . . . . . . . . . 15
2.10. Conduct of Businesses. . . . . . . . . . . . . . . 16
ARTICLE III MECHANICS OF DISTRIBUTION. . . . . . . . . . . . . 16
3.1. Mechanics of Distribution . . . . . . . . . . . . . 16
3.2. Timing of Distribution. . . . . . . . . . . . . . . 16
ARTICLE IV OTHER AGREEMENTS. . . . . . . . . . . . . . . . . . 16
4.1. Use of Names, Trademarks, etc.. . . . . . . . . . . 16
4.2. Intercompany Accounts as of the Time of
Distribution. . . . . . . . . . . . . . . . . . .17
4.3. Hunting Lease . . . . . . . . . . . . . . . . . . . 17
4.4. Airplanes . . . . . . . . . . . . . . . . . . . . . 17
4.5. Intercompany Arrangements . . . . . . . . . . . . . 17
4.6. Further Assurances. . . . . . . . . . . . . . . . . 18
ARTICLE V TAX AND EMPLOYEE MATTERS . . . . . . . . . . . . . . 18
5.1. Tax Sharing; Exclusivity of Tax Sharing Agreement . 18
5.2. Employee Benefits . . . . . . . . . . . . . . . . . 18
5.3. Employees . . . . . . . . . . . . . . . . . . . . . 18
5.4. Non-Competition Covenants . . . . . . . . . . . . . 19
ARTICLE VI ACCESS TO INFORMATION . . . . . . . . . . . . . . . 20
6.1. Provision of Records and Information. . . . . . . . 20
6.2. Access to Information . . . . . . . . . . . . . . . 20
6.3. Production of Witnesses . . . . . . . . . . . . . . 21
6.4. Retention of Records. . . . . . . . . . . . . . . . 21
6.5. Confidentiality . . . . . . . . . . . . . . . . . . 21
ARTICLE VII CONDITIONS . . . . . . . . . . . . . . . . . . . . 22
7.1. Conditions to Obligations of the Company. . . . . . 22
ARTICLE VIII INDEMNIFICATION . . . . . . . . . . . . . . . . . 23
8.1. Indemnification by VRM. . . . . . . . . . . . . . . 23
8.2. Indemnification by Retained Company . . . . . . . . 24
8.3. Procedures Relating to Indemnification. . . . . . . 24
8.4. Certain Limitations . . . . . . . . . . . . . . . . 26
8.5. Express Negligence. . . . . . . . . . . . . . . . . 26
ARTICLE IX MISCELLANEOUS AND GENERAL . . . . . . . . . . . . . 27
9.1. Modification or Amendment . . . . . . . . . . . . . 27
9.2. Waiver; Remedies. . . . . . . . . . . . . . . . . . 27
9.3. Counterparts. . . . . . . . . . . . . . . . . . . . 27
9.4. Governing Law . . . . . . . . . . . . . . . . . . . 27
9.5. Notices . . . . . . . . . . . . . . . . . . . . . . 27
9.6. Entire Agreement. . . . . . . . . . . . . . . . . . 28
9.7. Certain Obligations . . . . . . . . . . . . . . . . 28
9.8. Assignment. . . . . . . . . . . . . . . . . . . . . 29
9.9. Captions. . . . . . . . . . . . . . . . . . . . . . 29
9.10. Specific Performance . . . . . . . . . . . . . . . 29
9.11. Severability . . . . . . . . . . . . . . . . . . . 29
9.12. Third Party Beneficiaries. . . . . . . . . . . . . 29
9.13. Schedules. . . . . . . . . . . . . . . . . . . . . 29
9.14. Tax Sharing Agreement. . . . . . . . . . . . . . . 30
Annex A Interim Services Agreement
AGREEMENT AND PLAN OF DISTRIBUTION, dated as of __________ __, 1997
(this "Agreement"), between VALERO ENERGY CORPORATION, a Delaware corporation
(the "Company") and VALERO REFINING AND MARKETING COMPANY, a Delaware
corporation and as of the date hereof a wholly-owned subsidiary of the Company
("VRM").
W I T N E S S E T H:
WHEREAS, the Company, PG&E Corporation, a California corporation
("Acquiror"), and PG&E Acquisition Corporation, a Delaware corporation
("Sub"), have entered into an Agreement and Plan of Merger dated as of January
31, 1997 (the "Merger Agreement"), providing for the Merger (as defined in the
Merger Agreement) of Sub with and into the Company;
WHEREAS, immediately prior to the Effective Time (as defined in the
Merger Agreement), the Company's Board of Directors, subject to the approval
of the Company's stockholders, expects to distribute to the holders of common
stock, par value $1.00 per share, of the Company ("Company Common Stock"),
other than shares held in the treasury of the Company, on a pro rata basis all
of the issued and outstanding shares of common stock, par value $0.01 per
share, of VRM ("VRM Common Stock"), along with the associated VRM Rights (as
defined in the Merger Agreement) (the "Distribution");
WHEREAS, the purpose of the Distribution is to make possible the
Merger by divesting the Company of the businesses and operations to be
conducted by VRM, which Acquiror is unwilling to acquire;
WHEREAS, it is the intention of the parties to this Agreement that
for federal income tax purposes the Distribution shall qualify as a
transaction described in Section 355 of the Internal Revenue Code of 1986, as
amended (the "Code") and a "reorganization" within the meaning of Section
368(a)(1)(D) of the Code; and
WHEREAS, this Agreement sets forth or provides for certain
agreements by and between the Company and VRM in consideration of the
separation of the ownership of the Company and VRM;
NOW, THEREFORE, in consideration of the premises, and of the
respective covenants and agreements set forth herein, the parties hereto
hereby agree as follows:
ARTICLE I
DEFINITIONS
1.1. Definitions. Capitalized terms used in this Agreement and not
otherwise defined herein shall have the meanings assigned to such terms in the
Merger Agreement. As used in this Agreement, the following terms shall have
the following respective meanings:
"Acts or Omissions" shall mean negligence, gross negligence,
breaches of express or implied warranties, premises liability, violations of
the Texas Deceptive Trade Practices Act, breaches of duties under the law of
strict liability in tort (including defects in design, manufacturing,
marketing, warnings, and distribution), defamation, false imprisonment or
arrest, malicious prosecution, or any other misfeasance, malfeasance,
non-feasance, breaches of legal duties, tortious conduct, intentional torts,
malicious conduct, false or misleading or deceptive or unconscionable conduct,
or any combination thereof.
"Airplanes" shall mean the airplanes to be co-owned by Valero
Corporate Services and Valero Management Company described on Schedule
2.1(b)(ii)(J).
"By-Laws" shall mean VRM's by-laws substantially in the form filed
as an Exhibit to the VRM Registration Statement.
"Cash Dividend" shall have the meaning set forth in Section 2.3(a).
"Certificate of Incorporation" shall mean VRM's amended and restated
certificate of incorporation substantially in the form filed as an Exhibit to
the VRM Registration Statement.
"Company Group" shall mean the Retained Company and the Retained
Subsidiaries, whether now or hereafter existing.
"Company Guarantees" shall mean, collectively, the guarantees of
obligations of the VRM Group by the Company or the Retained Subsidiaries, a
complete and accurate list of which is set forth on Schedule 1.1(a).
"Contract Rights" shall mean, as of any given date, any and all
right, title and interest of the Company and any of its Subsidiaries (other
than VRM and its Subsidiaries) in and to any and all of the Project Contracts
and other rights under, in and to contracts and agreements, written or oral,
express or implied, legal and equitable, of every kind or description,
pertaining or related in any way to the MTBE Project; and all estates, rights,
privileges, claims and causes of action, immunities, and other appurtenances
and rights, and all assets subject to liabilities connected to the above and
which, in any such case, is either (i) in force and effective at the date
hereof, or (ii) arises under or with respect to any document, paper,
instrument or other intangible interest of any of the types specified above,
in force and effect at the date hereof and pursuant to which any reversion,
remainder, contingent or other residual right, title, interest or liability
remains in the Company, and which in each case pertains or relates in any way
to the MTBE Project; together with all tolls, rents, revenues, issues,
earnings, income, products and profits thereof accruing on or after the date
hereof.
"Distribution Date" shall mean the date determined by the Board of
Directors of the Company on which the Distribution is to be effected.
"Environmental Law" shall mean any and all applicable laws,
statutes, ordinances, rules, regulations, orders, or permits of any
Governmental Entity or agency regulating, relating to or pertaining to the
protection of health, or the environment, or the use, storage, treatment,
generation, transportation, handling, Release or disposal of Hazardous
Substances, in effect in any and all jurisdictions in which the Company is
conducting or at any time has conducted the business, including without
limitation, the Oil Pollution Act of 1990, the Clean Air Act, as amended, the
Comprehensive Environmental Response, Compensation and Liability Act, as
amended, the Federal Water Pollution Control Act, as amended, the Occupational
Safety and Health Act of 1976, as amended, the Resource Conservation and
Recovery Act of 1976, as amended, the Safe Drinking Water Act, as amended, the
Toxic Substances Control Act, as amended, the Superfund Amendments and
Reauthorization Act of 1986, as amended, the Emergency Planning and Community
Right-to-Know Act, the Hazardous Liquid Pipeline Safety Act, as amended, and
the Natural Gas Pipeline Safety Act of 1979, as amended, and regulations
adopted thereunder.
"Environmental Liabilities" shall mean all Liabilities relating to
or arising out of any Environmental Law or Environmental Permit or relating to
Hazardous Substances or environmental, health or safety matters (including
without limitation removal, remediation or cleanup costs, investigatory costs,
governmental response costs and administrative oversight costs, environmental
monitoring costs, natural resources damages, property damages, personal injury
damages, costs of compliance with any contractual obligation or settlement,
judgment or other determination of Liability and indemnity, contribution or
similar obligations).
"Filings" shall mean the Registration Statements, the Proxy
Statement-Prospectus, and any other document filed or required to be filed
with the SEC in connection with the transactions contemplated by the
Reorganization Agreements, or any preliminary or final form thereof or any
amendment or supplement thereto.
"Group" shall mean the Company Group or the VRM Group, as
applicable.
"Hazardous Substance" shall mean any waste, substance, material,
pollutant or contaminant presently listed, defined, designated or classified
as hazardous or regulated, under any Environmental Law.
"Hunting Lease" shall mean the hunting lease described on Schedule
2.1(b)(ii)(K) to be assigned to Valero Corporate Services.
"Indemnifiable Losses" shall mean, subject to Section 8.4, all
losses, Liabilities, damages, deficiencies, obligations, fines, expenses,
claims, demands, actions, suits, proceedings, judgments or settlements,
whether or not resulting from Third Party Claims, including interest and
penalties recovered by a third party with respect thereto and out-of-pocket
expenses and reasonable attorneys' experts' and accountants', fees and
expenses incurred in the investigation or defense of any of the same or in
asserting, preserving or enforcing any of the Indemnitee's rights hereunder,
suffered by an Indemnitee.
"Indemnitee" shall mean any of the Retained Company Indemnitees or
the VRM Indemnitees, as applicable, who or which may seek indemnification
under this Agreement.
"Information" shall mean all records, books, subscriptions,
contracts, instruments, computer data and other data and information.
"Intercompany Arrangement" shall have the meaning set forth in
Section 4.5.
"Intercompany Note" shall have the meaning set forth in Section
2.3(b).
"Intercompany Reorganization" shall mean the actions taken prior to
the Distribution to separate the VRM Business and the Retained Business,
including without limitation, the actions set forth in Article II.
"IRBs" shall mean the 10.25% Refunding Revenue Bonds Series 1987A
and the 10.625% Revenue Bonds Series 1987B, issued by the Industrial
Development Corporation of Port Corpus Christi, with VRM as the borrower and
the Company as guarantor.
"Liabilities" shall mean with respect to any Person, any and all
debts, liabilities, commitments and obligations, whether fixed, contingent or
absolute, matured or unmatured, liquidated or unliquidated, accrued or
unaccrued, known or unknown, whenever or however arising, including, without
limitation, all costs and expenses relating thereto, and including, without
limitation, those debts, liabilities and obligations arising under law, rule,
regulation, permits, action or proceeding before any court or regulatory
agency or administrative agency, order or consent decree or any award of any
arbitrator of any kind, and those arising under contract, commitment or
undertaking.
"MTBE Project" shall mean the installation of a plant in Mexico to
produce methyl tertiary butyl ether and transactions related thereto described
on Schedule 1.1(b).
"No-Action Letter" shall mean a letter from the staff of the SEC
indicating, among other things, that the Division of Corporation Finance will
not recommend enforcement action to the SEC if the VRM Common Stock is
distributed pursuant to the Distribution without registration under the
Securities Act.
"Personal Property" shall mean, collectively, as of any given date,
the personal property owned by Valero Management Company including without
limitation computer hardware, communications equipment, auto, trucks, personal
computers, lamps, chairs, desks, artwork, office furniture, books and office
supplies.
"Project Contracts" shall mean, as of any given date, and include
any contract or agreement heretofore entered into for the provision of any
money, guarantee, debt, service, labor, materials or improvements, or any
other good, service, duty, obligation or thing of value pertaining or related
to the MTBE Project, including, without limitation, any and all contracts,
agreements, guarantees, letters, letters of intent, undertakings or
understandings, written or unwritten, in respect thereto, including, without
limitation the Letter of Intent, the Memorandum of Understanding, the
PROESA-BANAMEX Letter, the VEC-PEMEX Letter, the PIBSA Offer Letter, the
GOLDMAN Letter, the Association Agreement, the MTBE Sales Agreement, the
Butane Supply Agreement, the Construction Agreement, the Surety Agreement, the
License Agreement, the Technical Support Agreement, the PEMEX Option, the UOP
Agreements and the Negotiation Services Agreement (in each case, as defined on
Schedule 1.1(b)).
"Record Date" shall have the meaning set forth in Section 3.1.
"Release" shall have the meaning given such term in the
Comprehensive Environmental Response, Compensation and Liability Act 42 U.S.C.
s 9601(22).
"Retained Assets" shall mean, collectively, as of any given date,
any and all of the assets, properties and rights, whether tangible or
intangible, whether real, personal or mixed, whether fixed, contingent or
otherwise, and wherever located, of the Company and its Subsidiaries (other
than the VRM Assets).
"Retained Business" shall mean the business heretofore and currently
engaged in by the Company and its Subsidiaries and their respective
predecessors of purchasing, gathering, processing, storing, transporting,
selling, trading and marketing natural gas, the business of extracting,
processing, fractionating, transporting, selling, trading and marketing
natural gas liquids, and related risk management, and the business of
purchasing, wheeling, selling, marketing and trading electric power and
related risk management, each as currently engaged in by the Company through
VNG and its Subsidiaries.
"Retained Company Assumed Liabilities" shall mean, collectively, all
Liabilities relating to or arising in connection with the Retained Assets or
the Retained Business (other than such Liabilities expressly assumed or
retained by the VRM Group pursuant to this Agreement), whether arising before,
at or after the Time of Distribution, which are to be assumed by the Retained
Company or any Retained Subsidiary pursuant to the transactions contemplated
by this Agreement, including without limitation the Liabilities relating to or
arising out of the items set forth on Schedule 1.1(c), but in the any event,
excluding VRM Assumed Liabilities.
"Retained Company Indemnitees" shall mean the Retained Company
(including after the Effective Time the Acquiror), each Affiliate of the
Retained Company, including any of its direct or indirect Subsidiaries, and
each of their respective Representatives and each of the heirs, executors,
successors and assigns of any of the foregoing.
"Retained Liabilities" shall mean, collectively, all of (i) the
Environmental Liabilities relating to or arising in connection with the
Retained Business, (ii) the Liabilities of any member of the Company Group
under this Agreement, any other Reorganization Agreement or the Interim
Services Agreement, in each case, to which the Company is a party or will be a
party, (iii) the Liabilities relating to or arising in connection with the
businesses, assets or operations of the Company Group (other than the VRM
Assumed Liabilities), as heretofore, currently or hereafter conducted, (iv)
the Retained Company Assumed Liabilities and (v) the Liabilities retained or
assumed by the Company or any member of the Company Group pursuant to the
Employee Benefits Agreement.
"Tax" or "Taxes" shall have the meaning set forth in the Tax Sharing
Agreement.
"Teco Litigation" shall mean Teco Pipeline Company v. Valero Energy
Corporation, Valero Transmission, L.P., Valero Management Company, Valero
Hydrocarbons, L.P., VMGA Company, Valero Marketing, L.P., VNGC Holding
Company, Valero Industrial Gas, L.P., Valero Natural Gas Company, Valero Gas
Marketing, L.P., Valero Eastex Pipeline Company, VLDC, L.P., Valero
Transmission Company, Reata Industrial Gas, L.P., Valero Gas Marketing
Company, Valero Nortex, L.P., Valero Gas Storage Company, Valero Northern
Texas Company, Valero Hydrocarbons Company, West Texas Transmission Co., VT
Company, Valero Natural Gas Partners, L.P., Valero Management Partnership,
L.P., William E. Greehey and Stan L. McLelland; In the 215th Judicial District
Court of Harris County, Texas (Cause No. 96- 020628) and any other action,
claim, lawsuit, arbitration or appeal to obtain or recover damages or any
other economic benefit as a result of any action or omission by any member of
the Company Group or any of its Representatives in connection with the
performance or exercise of duties or obligations, including statutory and
common law fiduciary duties, arising out of or related to the ownership,
operation, management or maintenance of the Valero-Teco West Texas System at
any time from February 28, 1985 to January 27, 1997.
"Third Party Claim" shall have the meaning set forth in Section
8.3(a).
"Time of Distribution" shall mean the time as of which the
Distribution is effective.
"Transfer Agent" shall mean Harris Trust and Savings Bank, the
transfer agent for the Company Common Stock.
"UOP Agreements" shall mean, collectively, (a) the Engineering
Agreement, dated as of July 1, 1993, between UOP and PROESA, (b) the Oleflex
Process License Agreement, dated November 21, 1994, between UOP and PROESA,
(c) the Merox Process Licenses Agreement, dated November 21, 1994, between UOP
and PROESA, (d) the UOP Oxygenate Removal Process License Agreement, dated
November 21, 1994, between UOP and PROESA, (e) the Huels Complete Saturation
Process License Agreement, dated November 21, 1994, between UOP and PROESA,
(f) the Ethermax Process License Agreement, dated November 21, 1994, between
UOP and PROESA, (g) the Butamer Process License Agreement, dated November 21,
1994, between UOP and PROESA, (h) the Guarantee Agreement, dated November 21,
1994, between UOP and PROESA, and (i) the Supply Agreement, dated November 21,
1994, between UOP Equitec Services, Inc. and PROESA, as each of the same may
be from time to time amended, restated, supplemented, superseded or replaced.
"Valero Coal Company" shall mean Valero Coal Company, a Delaware
corporation and, as of the date of this Agreement, a wholly-owned Subsidiary
of the Company.
"Valero Corporate Services" shall mean Valero Corporate Services
Company, a Delaware corporation and, as of the date of this Agreement, a
wholly-owned Subsidiary of the Company.
"Valero Management Company" shall mean Valero Management Company, a
Delaware corporation and, as of the date of this Agreement, a wholly-owned
Subsidiary of the Company.
"Valero Producing Company" shall mean Valero Producing Company, a
Delaware corporation and, as of the date of this Agreement, a wholly-owned
Subsidiary of the Company.
"VMGA Company" shall mean the VMGA Company, a Texas corporation and,
as of the date of this Agreement, a wholly-owned Subsidiary of Valero
Management Company.
"VRM Assets" shall mean, collectively, (i) all assets currently
owned by VRM and any of its Subsidiaries (other than any such assets which
pursuant to, or as a consequence of, this Agreement are to be transferred to,
or retitled in the name of the Company or one of the Retained Subsidiaries)
and which, as of and after the Time of Distribution are to be owned by the VRM
Group and (ii) all assets which are currently owned by the Company or one or
more of the Retained Subsidiaries and which pursuant to, or as a consequence
of, this Agreement are to be transferred to VRM or any of its Subsidiaries and
which as of and after the Time of Distribution are to be owned by a member of
the VRM Group.
"VRM Assumed Liabilities" shall mean, collectively, the Liabilities
set forth in Section 2.2(a).
"VRM Business" shall mean (i) the business of purchasing,
transporting, storing, processing, selling, trading, marketing and refining
crude oils, residual fuel oils and other refinery feedstocks, and of
manufacturing, transporting, storing, selling, trading and marketing
gasolines, gasoline blendstocks, butanes, liquefied petroleum gases, other
refined products and petrochemicals, as currently conducted by the Company
through VRM and its Subsidiaries, and related risk management (ii) certain
insurance-related operations as currently conducted through VMGA Company,
(iii) certain coal-seam gas and other coal-related operations as currently
conducted through Valero Coal Company, (iv) certain oil and gas exploration
and production operations as currently conducted through Valero Producing
Company, (v) certain real estate leasing operations as currently conducted
through Valero Management Company, and (vi) the business conducted with the
Butane Splitter and Debutanizer (but excluding any business conducted with the
assets of the VRM Business transferred or to be transferred to the Company
Group pursuant to this Agreement).
"VRM Common Stock" shall have the meaning set forth in the third
paragraph of this Agreement.
"VRM Group" shall mean VRM, its Subsidiaries, and that portion of
any Person, whether now or hereafter existing, which conduct the VRM Business
(after giving effect to the transfers set forth in Article II).
"VRM Indemnitees" shall mean VRM, each Affiliate of VRM from and
after the Time of Distribution and each of their respective Representatives
and each of the heirs, executors, successors and assigns of any of the
foregoing.
"VRM Liabilities" shall mean, collectively, all of (i) the
Environmental Liabilities relating to or arising in connection with the VRM
Business, (ii) the Liabilities of any member of the VRM Group under this
Agreement, any other Reorganization Agreement, or the Interim Services
Agreement and of VRM under Section 7.10 of the Merger Agreement, in each case,
to which VRM is a party or will be a party, (iii) the Liabilities relating to
or arising in connection with the businesses, assets or operations of the VRM
Group (other than the Retained Company Assumed Liabilities), as heretofore,
currently or hereafter conducted, (iv) the VRM Assumed Liabilities, and (v)
the Liabilities retained or assumed by VRM or any member of the VRM Group
pursuant to the Employee Benefits Agreement.
ARTICLE II
TRANSACTIONS RELATING TO THE DISTRIBUTION
2.1. Intercorporate Reorganization.
(a) Prior to or at the Time of Distribution, the Company and VRM
hereby undertake to complete the actions specified in this Section 2.1, to (i)
transfer, or cause to be transferred, to VRM or one of its Subsidiaries, as
appropriate, effective as of or prior to the Time of Distribution, all of the
right, title and interest of the Company or any Retained Subsidiary (a list of
which is set forth on Schedule 2.1(a)), as appropriate, in any VRM Assets and
have VRM or one of its Subsidiaries, as appropriate, assume and agree to pay,
perform and discharge in due course each of the VRM Assumed Liabilities, and
(ii) transfer, or cause to be transferred, to the Company or a Retained
Subsidiary, as appropriate, effective as of or prior to the Time of
Distribution, all the right, title and interest of VRM or any VRM Subsidiary,
as appropriate, in any Retained Assets and have the Company or a Retained
Subsidiary, as appropriate, assume and agree to pay, perform and discharge in
due course each of the Retained Company Assumed Liabilities.
(b) Prior to the Time of Distribution, the Company and VRM each
agree to take, or cause to be taken, the following actions in connection with
the Distribution:
(i) Transfers of Capital Stock and Partnership Interests
(A) the Company shall transfer all of its right, title and
interest in the outstanding shares of capital stock of Valero Corporate
Services to VRM or one of its Subsidiaries;
(B) the Company shall cause Valero Management Company to
transfer all of its right, title and interest in the outstanding shares of
capital stock of VMGA Company to VRM or one of its Subsidiaries;
(C) the Company shall transfer all of its right, title and
interest in the outstanding shares of capital stock of Valero Coal Company to
VRM or one of its Subsidiaries;
(D) the Company shall transfer all of its right, title and
interest in the outstanding shares of capital stock of Valero Producing
Company to VRM or one of its Subsidiaries;
(ii) Other Transfers
(A) the Company shall transfer all of its right, title and
interest in the name "Valero" and the "Walking Flame" trademark each as
described on Schedule 4.1 to VRM;
(B) Valero Management Company shall transfer all of its right,
title and interest in the real estate set forth on Schedule 2.1(b)(ii)(B) to
Valero Corporate Services;
(C) Valero Management Company shall transfer all of its right,
title and interest in the promissory notes set forth on Schedule 2.1(b)(ii)(C)
to Valero Corporate Services;
(D) Valero Management Company shall transfer all of its right,
title and interest in the leases set forth on Schedule 2.1(b)(ii)(D) to Valero
Corporate Services;
(E) the Company shall transfer all of its right, title and
interest in its limited partnership interest in the San Antonio Spurs
professional basketball team to Valero Corporate Services;
(F) the Company shall transfer all of its right, title and
interest in season tickets to San Antonio Spurs and Houston Rockets
professional basketball games to Valero
Corporate Services;
(G) Valero Management Company and the Company shall transfer
all of their right, title and interest in the computer software set forth in
items A through E on Schedule 2.1(b)(ii)(G) to Valero Corporate Services, and
Valero Corporate Services will also grant to Valero Management a nonexclusive,
freely transferable, fully paid, perpetual license to the software set forth
in item E on Schedule 2.1(b)(ii)(G) which includes, or at the Time of
Distribution such schedule shall be amended to include, all material software
developed by the Company and its Subsidiaries which is used in the Retained
Business;
(H) VNG shall transfer all of its right, title and interest in
the Butane Splitter and Debutanizer set forth on Schedule 2.1(b)(ii)(H) to
Valero Refining Company;
(I) Valero Management Company shall transfer all of its right,
title and interest in the Personal Property as reflected on Schedule
2.1(b)(ii)(I), to Valero Corporate Services;
(J) Valero Management Company shall transfer a 50% interest in
the Airplanes to Valero Corporate Services so that each will be co-owners of
the Airplanes on the terms as set forth on Schedule 2.1(b)(ii)(J);
(K) Valero Management Company shall assign all of its right,
title and interest in the Hunting Lease to Valero Corporate Services;
(L) VNG shall transfer all of its right, title and interest in
the methanol pipeline segments set forth on Schedule 2.1(b)(ii)(L) to Valero
Refining Company;
(M) The Company shall assign all of its right, title and
interest in the Contract Rights to VRM;
(N) The Company will cause Valero Marketing and Supply to
assign all commodity swap contracts and similar contracts entered into by
Valero Marketing and Supply on behalf of the Retained Companies to the
appropriate members of the Company Group;
(O) The Company will cause Valero Marketing and Supply to
transfer to accounts designated by the Retained Company all commodities,
commodity futures, commodity options and other similar commodity contracts
held by Valero Marketing and Supply on behalf of any of the Retained
Companies;
(P) The Company will transfer each of the Valero Charitable
Trust, the Valero Scholarship Trust, the Rulaine Pittman Memorial Scholarship
Trust, and the Valero Political Action Committee (VALPAC) to VRM;
(Q) The Company will take all actions necessary (including,
without limitation, executing such documents as may be necessary to change the
beneficiary thereof) to transfer, and will cause Valero Management Company to
transfer, to VRM or its designated subsidiary, their respective rights in and
to all policies of life insurance covering participants in the Company's
Executive Deferred Compensation Plan and Key Employee Deferred Compensation
Plan; and
(R) The Company shall assign to VRM or its designated
Subsidiary all of its right, title and interest in and to that certain lease
Agreement, dated March 17, 1991, between The Manufacturers Life Insurance
Company, as landlord, and Valero Industrial Gas Company, as lessee, as amended
by that certain Lease Modification and Amendment Agreement, dated January 28,
1994, as the same may heretofore have or hereafter be amended, restated,
modified or supplemented, relating to the lease of office space in Washington,
D.C.
(c) In connection with the transfers of assets other than capital
stock and the assumptions of Liabilities contemplated by subsection (a) and
subsection (b) of this Section, the Company and VRM shall execute or cause to
be executed by the appropriate entities the conveyance and assumption
instruments in such forms as the Company, VRM and the Acquiror shall
reasonably agree; provided that, the transfer of the real property shall be by
warranty deed. The transfer of capital stock shall be effected by means of
delivery of stock certificates duly endorsed or accompanied by duly executed
stock powers and notation on the stock records books of the corporation or
other legal entities involved and, to the extent required by applicable law,
by notation on appropriate registries.
(d) Each of the parties hereto understands and agrees that no party
hereto is, in this Agreement or in any other agreement or document
contemplated by this Agreement or otherwise, representing and warranting in
any way as to the title, value or freedom from encumbrance of, or any other
matter concerning, any assets of such party, it being agreed and understood
that all assets are being transferred "as is, where is", and that the real
estate on Schedule 2.1(b)(ii)(B) shall be transferred by warranty deed.
(e) Prior to the Time of Distribution, the Company and VRM shall
take all steps necessary to increase the outstanding shares of VRM Common
Stock so that immediately prior to the Distribution, the Company will hold a
number of shares of VRM Common Stock equal to the total number of shares of
the Company Common Stock outstanding on the Record Date.
(f) If any assets that are used primarily in the Retained Business
including, without limitation, information systems, intellectual property
(including software licenses), microwave and other communications systems and
trading and risk management operations, would otherwise be held in a
Subsidiary that would not be owned directly or indirectly by the Company after
the Time of Distribution, then, notwithstanding the foregoing allocation, VRM
shall cause each such Subsidiary to contribute such assets to the appropriate
Subsidiary of the Company or as the Company otherwise directs as part of the
Intercompany Reorganization; provided, however, that the Company shall be
responsible for establishing new commodity accounts to accommodate the
Retained Business, risk management activities and/or transferring the assets
described in sections 2.1(b)(ii)(N) and (O) to Acquiror accounts. Neither any
existing commodities account, nor any New York Mercantile Exchange seat held
by Valero Marketing and Supply, shall be transferred so as to be a part of the
Retained Business.
(g) The Retained Companies will, at the Effective Time, include all
the Company's right, title and interest in and to (a) all assets of the
Company or any of its Subsidiaries, including the information systems, that
are used primarily in or that are being held primarily for use in or that are
otherwise sufficient (including for this purpose the services to be provided
pursuant to the Interim Services Agreement) for the operation, as currently
conducted, of the Retained Business.
2.2. Assumption of Liabilities. (a) Subject to Section 2.2(b),
and effective as of the time of the Intercompany Reorganization, VRM and the
VRM Group, in partial consideration for the transfers set forth in Section
2.1, hereby unconditionally assume and undertake to pay, satisfy and discharge
when due in accordance with their terms the VRM Assumed Liabilities, including
without limitation:
(i) all Liabilities relating to or arising from the VRM Assets or
the VRM Business (other than such Liabilities expressly assumed or retained by
the Company Group pursuant to this Agreement), whether arising before, at or
after the Time of Distribution;
(ii) all Liabilities (including, without limitation, indemnification
obligations) relating primarily to or arising primarily from (A) the reports,
registration statements and other documents filed by the Company with the SEC
prior to the Time of Distribution (including the Company's consolidated
financial statements for periods prior to the Time of Distribution included or
incorporated by reference therein) and (B) any breach or alleged breach by any
director or officerof the Company of his fiduciary duties to the Company and
its stockholders occurring at or prior to the Effective Time; and
(iii) any Liabilities to be assumed by VRM or any of its
Subsidiaries pursuant to the transactions contemplated by this Agreement,
including without limitation the Liabilities relating to or arising out of (A)
the MTBE Project, (B) the warranty deeds described in Sections 2.1(c) and
2.1(d) and (C) the VRM Assumed Liabilities set forth on Schedule 2.2(a).
(iv) the obligations of VRM pursuant to Section 2.2(c).
(b) Notwithstanding Section 2.2(a), the Company hereby retains, and
the VRM Group does not assume and will have no liability with respect to, the
Retained Liabilities.
(c) The provisions of Section 2.2(b) notwithstanding, within 45
days following the entry of a final, nonappealable judgment in the TECO
Litigation, or execution of a settlement agreement with respect to the TECO
Litigation approved by VRM (such approval not to be unreasonably withheld or
delayed), VRM shall pay to Acquiror in immediately available funds an amount
equal to (i) 50% of the amount of such judgment or settlement with respect to
that part of any judgment or settlement amount not in excess of $30,000,000,
and (ii) 100% of that part of such judgment or settlement amount which is in
excess of $30,000,000, plus in each case interest thereon at the applicable
statutory rate from the date of such judgment until paid in full.
2.3. Repayment of Intercompany Indebtedness and Cash Dividend.
(a) Dividend Payment. Prior to the Time of Distribution, VRM shall
pay a cash dividend of $210,000,000 (the "Cash Dividend") to the Company.
(b) Intercompany Note. The Company and VRM shall (a) eliminate
without payment the $212,450,000 net amount of the intercompany note (the
"Intercompany Note") owing from the Company to VRM as of December 31, 1996
(which amount reflects payment to VNG for the assets described in Section
2.1(b)(ii)(H); (b) refrain from creating any obligations under the
Intercompany Note after December 31, 1996, except in the ordinary course of
business consistent with past practice or as contemplated by the
Reorganization Agreements and (c) satisfy by cash payment at the Time of
Distribution the full net amount of such note for the period from January 1,
1997 to the Time of Distribution. Prior to the Time of Distribution, the
Company and VRM shall agree on the estimate of the net amount so payable. The
Company and VRM shall use their reasonable efforts within 60 days after the
Time of Distribution to agree on the actual amount so payable. If the actual
amount so payable is different from such estimated amount, the Company or VRM
will promptly pay the difference to the other, plus interest thereon at a
floating rate equal to the prime rate (as in effect from time to time) as
reported in the Wall Street Journal from the Time of Distribution to the date
of payment. If the parties are unable to so agree on the actual amount, any
disputes will be resolved by an independent accounting firm selected by the
Company and VRM, the fees and expenses of which will be borne equally by the
Company and VRM. Once the actual amount is so agreed or resolved, such amount
shall be final and non-appealable.
(c) Cash Management. Prior to the Time of Distribution, the
Company and VRM shall establish and maintain a separate cash management system
with respect to the VRM Businesses in accordance with the terms set forth on
Schedule 2.2(c) so that bank accounts are accurately allocated and distributed
to VRM and the Company at the Time of Distribution.
2.4. Resignations. The Company shall cause all of its, and all the
Company Group entities', employees and directors to resign, not later than the
Time of Distribution, from all boards of directors or similar governing bodies
of VRM or any member of the VRM Group on which they serve, and from all
positions as officers of VRM or any member of the VRM Group in which they
serve. VRM shall cause all of its, and all VRM Group entities', employees and
directors to resign, not later than the Time of Distribution, from all boards
of directors or similar governing bodies of the Company or any member of the
Company Group on which they serve, and from all positions as officers of the
Company or any member of the Company Group in which they serve.
2.5. VRM Certificate of Incorporation and By-Laws; Rights Plan;
Name Change. Prior to the Distribution Date, (a) the VRM Board of Directors
shall (i) approve the Certificate of Incorporation and shall file the same
with the Secretary of State of the State of Delaware and (ii) adopt the
By-Laws, and (b) the Company, as sole stockholder of VRM, shall approve such
Certificate of Incorporation. Prior to the Distribution Date, VRM shall adopt
the VRM Rights Agreement. Prior to the Distribution Date, the Company shall
approve as sole stockholder VRM changing its name to "Valero Energy
Corporation" following the Effective Time and thereafter shall take any and
all other action necessary to be taken by the Company to effect such change.
2.6. Insurance. The Company maintains various forms of insurance
coverages (the "Policies") applicable to both the Retained Business and the
VRM Business and in which VRM and/or other members of the VRM Group are
included as insureds or named insureds. Effective as of the Time of
Distribution, all such Policies (including all prepaid premiums, deposits,
refunds, dividends, accrued claims (excluding claims related solely to the
Retained Business) and other rights therein) shall be assigned or transferred
to VRM and the coverage of the Company and the Retained Subsidiaries under the
Policies shall cease under the Policies as of the Time of Distribution;
provided however the Retained Companies shall receive a cash payment from VRM
equivalent to the prepaid premiums, deposits, refunds and dividends with
respect to such Policies at the Time of Distribution to the extent
attributable to expenses which have been charged to the Retained Business.
From and after the Time of Distribution, the Company and the Retained
Subsidiaries shall be responsible for obtaining and maintaining insurance
coverages for their own account. Insofar as any existing Policies may provide
"claims made" or equivalent coverage, the VRM Group shall, if requested, use
reasonable best efforts to assist or cooperate with the Company in purchasing
(to the extent obtainable, and at the Retained Companies' sole cost and
expense) continuing coverages for claims which are unknown, undiscovered
and/or unreported at the Time of Distribution (i.e. "long tail coverage").
Insofar as any claims made (in the case of "claims made" or equivalent
coverages) or accrued (in the case of "occurrence" or equivalent coverages)
under the Policies prior to the Time of Distribution relate solely to the
Retained Business, VRM shall use its reasonable best efforts to assure that
the Retained Company and the Retained Subsidiaries can continue to make and/or
pursue such claims under the Policies, or that VRM can continue to make and/or
pursue such claims on behalf of the Retained Companies, notwithstanding
assignment or transfer of the Policies to VRM.
2.7. Nonassignable Contracts. Anything contained herein to the
contrary notwithstanding, this Agreement shall not constitute an agreement to
assign any lease, license agreement, contract, agreement, sales order,
purchase order, open bid or other commitment or asset if an assignment or
attempted assignment of the same without the consent or waiver of the other
party or parties thereto would constitute a breach thereof or in any way
impair the rights of the VRM Group or the Company Group thereunder. If any
such consent or waiver is not obtained or if an attempted assignment would be
ineffective or would impair either Group's rights under any such lease,
license agreement, contract, agreement, sales order, purchase order, open bid
or other commitment or asset so that the Company or VRM or a Subsidiary of
either, as applicable, would not receive all such rights, then (x) the Company
or VRM, as applicable, shall use reasonable best efforts to provide or cause
to be provided to the other or its Subsidiary, to the extent permitted by law,
the benefits of any such lease, license agreement, contract, agreement, sales
order, purchase order, open bid or other commitment or asset and the Company
or VRM, as applicable, shall promptly pay or cause to be paid to the other or
its Subsidiary when received all moneys received by the Company Group or VRM
Group, as applicable, with respect to any such lease, license agreement,
contract, agreement, sales order, purchase order, open bid or other commitment
or asset and (y) in consideration thereof the other party or its Subsidiary
shall pay, perform and discharge on behalf of such Group all of such Group's
debts, liabilities, obligations and commitments with respect thereto in a
timely manner and in accordance with the terms thereof. In addition, the
Company or VRM, as applicable, shall take such other actions (at the expense
of the other) as may reasonably be requested by the other in order to place
the other, insofar as reasonably possible, in the same position as if such
lease, license agreement, contract, agreement, sales order, purchase order,
open bid or other commitment or asset had been transferred as contemplated
hereby and so all the benefits and burdens relating thereto, including
possession, use, risk of loss, potential for gain and dominion, control and
command, shall inure to the applicable Group. If and when such consents and
approvals are obtained, the transfer of the applicable lease, license
agreement, contract, agreement, sales order, purchase order, open end or other
commitment or asset shall be effected in accordance with the terms of this
Agreement.
2.8. Interim Services Agreement. In connection with the
Intercompany Reorganiza- tion the Company and VRM shall enter into an Interim
Services Agreement in form and substance substantially the same as the Interim
Services Agreement attached hereto as Annex A.
2.9. Company Guarantees. (a) Neither VRM nor any member of the
VRM Group shall increase its outstanding obligations in excess of the
aggregate amounts of all obligations under the Company Guarantees as of
January 31, 1997, set forth on Schedule 1.1(a), nor shall VRM or any of the
VRM Group renew or enter into any additional obligations for which the Company
would act as guarantor unless such guarantee by its terms expires as to the
Company and its Subsidiaries without further liability at or prior to the Time
of Distribution. VRM agrees to use its reasonable best efforts to obtain any
amendments to, or consents with respect to, the Company Guarantees that are
necessary in order that the Company be released no later than the Time of
Distribution from any liability or obligation under the Company Guarantees;
provided that if any such release has not been obtained by the Time of
Distribution, VRM shall; (i) pursuant to Section 8.1 provide the Company with
a full indemnity with respect thereto; and (ii) continue to use its best
efforts to obtain such release as soon as practicable thereafter.
(b) VRM shall use its reasonable best efforts to refund the IRBs
with replacement industrial revenue bonds prior to the Time of Distribution,
which refunding shall eliminate the guarantee by the Company of the IRBs. In
the event VRM is unable to so refund the IRBs prior to the Time of
Distribution, for a period of up to 120 days following the Time of
Distribution VRM shall use its reasonable best efforts to so refund the IRBs
and shall pursuant to Section 8.1 provide the Company with a full indemnity
with respect to the Company's guarantee of the IRBs. In the event VRM is
unable to so refund the IRBs by the 120th day following the Time of
Distribution, VRM shall prepay the IRBs in full no later than such 120th day.
2.10. Conduct of Businesses. Except as otherwise provided in this
Agreement from and after December 31, 1996, the VRM Group and the Company
Group have carried on and shall carry on their respective businesses and
activities diligently and in substantially the same manner as they previously
have been carried out and neither the VRM Group nor the Company Group shall
make or institute any methods of operation or accounting that vary materially
from the methods used by the VRM Group and the Company Group prior to the date
hereof. Since December 31, 1996 all intercompany transactions, including
without limitation asset transfers and intercompany loans have, and after the
date hereof will until the Time of Distribution be accounted for through the
Intercompany Note.
ARTICLE III
MECHANICS OF DISTRIBUTION
3.1. Mechanics of Distribution. The Distribution shall be effected
by the distribution to each holder of record of Company Common Stock, as of
the record date designated for the Distribution by or pursuant to the
authorization of the Board of Directors of the Company (the "Record Date"), of
certificates representing one share of VRM Common Stock and associated VRM
Right for each share of Company Common Stock held by such holder.
3.2. Timing of Distribution. The Board of Directors of the Company
shall formally declare the Distribution and shall authorize the Company to pay
it immediately prior to the Effective Time, subject to the satisfaction or
waiver of the conditions set forth in Article VII, by delivery of certificates
for VRM Common Stock to the Transfer Agent for delivery to the holders
entitled thereto. The Distribution shall be deemed to be effective upon
notification by the Company to the Transfer Agent that the Distribution has
been declared and that the Transfer Agent is authorized to proceed with the
distribution of VRM Common Stock.
ARTICLE IV
OTHER AGREEMENTS
4.1. Use of Names, Trademarks, etc. (a) From and after the Time
of Distribution, VRM shall have all rights, including all intellectual
property rights in and exclusive use of the trademarks, trade names and
service marks, the U.S. federal and Mexican registrations and applications,
the Internet domain registration and exclusive use of the name "Valero", and
any and all other designs, logos and slogans, related to the names "Valero"
and "Valero Energy Corporation" and the "Walking Flame" service mark, all as
more particularly set forth on Schedule 4.1, attached hereto, and all other
rights (whether tangible or intangible, statutory, at common law or otherwise)
in connection therewith, whether alone or in combination with one or more
other words or marks in connection therewith. During the period from five
business days after January 31, 1997 to the Time of Distribution the VRM group
shall not affix the name "Valero" or any other design, logo, slogan, name
related to the names "Valero", or "Valero Energy Corporation" or the "Walking
Flame" service mark to any new or existing equipment (including without
limitation vehicles), or facilities which are Retained Assets. As promptly as
practicable after the Effective Time, but in any event no later than four
months after the Effective Time, the Company shall cease using the "Valero"
name and mark or service mark and the "Walking Flame" service mark, including
without limitation, on any signs, badges, parking stickers, letterhead,
business cards, invoices and other business forms, telephone directory
listings, and advertising and promotional materials; provided, however, that
nothing herein shall be construed to prohibit, and neither party shall
hereafter take any action which could have the effect of prohibiting, either
the Company Group or the VRM Group from continuing to use, after the Effective
Time of the blue-green color (PMS 315) now utilized by both the Company Group
and the VRM Group on their respective facilities.
4.2. Intercompany Accounts as of the Time of Distribution. From
and after the Time of Distribution all receivables and payables between VRM
and any of its Subsidiaries, on the one hand, and the Company and any Retained
Subsidiaries, on the other hand, which were intercompany receivables or
payables prior to the Time of Distribution and not subject to the intercompany
note shall be handled pursuant to the terms of the applicable Intercompany
Arrangement.
4.3. Hunting Lease. Subject to any necessary consents, Valero
Corporate Services and Valero Management Company shall assign to VRM its
leasehold interest in the Hunting Leases set forth on Schedule 2.1(b)(ii)(K).
4.4. Airplanes. The terms of ownership of the Airplanes shall be
in accordance with the terms and provisions substantially similar to those set
forth on Schedule 2.1(b)(ii)(J).
4.5. Intercompany Arrangements. All agreements, contracts,
arrangements and commitments, between a member of the VRM Group on the one
hand, and a member of the Company Group on the other hand, entered into prior
to the Closing Date for the purchase or sale of goods or services
("Intercompany Arrangements") set forth on Schedule 4.5, shall remain in
effect as of and after the Time of Distribution. To the knowledge of the
Company, the Intercompany Arrangements set forth on Schedule 4.5, the
Reorganization Agreements and the Interim Services Agreement collectively
comprise all agreements, contracts, arrangements and commitments between a
member of the VRM Group on the one hand, and a member of the Company Group on
the other hand entered into prior to the date hereof for the purchase or sale
of goods or services, except for such agreements, contracts, arrangements or
commitments entered into in the ordinary course in accordance with past
practice which agreements, contracts, arrangements or commitments will
terminate at or before the Time of Distribution. If following the Time of
Distribution any other such agreements, contracts, arrangements or commitments
are identified by either Group, then (i) if any such agreement, contract,
arrangement or commitment is oral, it shall terminate as of the Time of
Distribution and be of no further force and effect, and (ii) if any such
agreement, contract, arrangement or commitment is in writing, either party
thereto may terminate such agreement, contract, arrangement or commitment upon
45 days written notice to the other party thereto. Each of the Intercompany
Arrangements was based on market terms at the date of its inception, other
than any interest rates provided for therein. Complete and correct copies of
each of the Intercompany Arrangements have been delivered to the Acquiror.
4.6. Further Assurances. Each of the parties hereto, at its own
cost and expense, promptly shall execute such documents and other instruments
and take such further actions as may be reasonably required or desirable to
carry out the provisions hereof and to consummate the transactions
contemplated hereby.
ARTICLE V
TAX AND EMPLOYEE MATTERS
5.1. Tax Sharing; Exclusivity of Tax Sharing Agreement. Prior to
the Time of Distribution, VRM and the Company shall enter into a Tax Sharing
Agreement in substantially the form attached as Annex C to the Merger
Agreement which agreement shall, notwithstanding anything in this Agreement to
the contrary, be the exclusive agreement among the parties hereto with respect
to all Tax matters, including without limitation indemnification of Tax
matters.
5.2. Employee Benefits. Prior to the Time of Distribution, VRM and
the Company shall enter into an Employee Benefits Agreement in substantially
the form attached as Annex B to the Merger Agreement.
5.3. Employees. (a) The Company has made available to Acquiror a
list of the employees currently employed exclusively or primarily in the
Retained Business indicating the positions which they now hold, their current
rates of compensation and which employees, if any, are on short or long term
disability, family and medical, military, workers' compensation, or any other
type of leave of absence; and copies of all employee handbooks, and policy and
procedure manuals. The VRM Group shall use its reasonable efforts to see that
the employees on such list shall be transferred to or retained in the Company
Group at the Time of Distribution and such employees as shall be transferred
to or retained in the Company Group at the Time of Distribution shall include
all of the employees necessary to conduct the Retained Business as conducted
in the past. The Company and the Acquiror shall cooperate in good faith to
reach a mutually satisfactory agreement with respect to the employment of
employees whose employment involves both the VRM Group and the Company Group.
(b) With respect to the Retained Business, neither the Company nor
any of its Subsidiaries is a party to, or is bound by, any collective
bargaining agreement, contract, or other agreement or understanding with a
labor union or labor organization, nor is the Company or any of its
Subsidiaries the subject of any proceeding or organizing activity asserting
that it or any such Subsidiary has committed an unfair labor practice or
seeking to compel it or such Subsidiary to bargain with any labor organization
as to wages and conditions of employment, nor is there any strike, labor
dispute, slow down or stoppage involving the Company or any of its
Subsidiaries pending or, to the knowledge of the Company, threatened that,
individually or in the aggregate, are reasonably likely to have a material
adverse effect on the Retained Business taken as a whole.
5.4. Non-Competition Covenants. (a) From and after Distribution
until the second anniversary of the Closing Date, VRM shall not, and shall
cause its Affiliates and Subsidiaries not to, directly or indirectly, within
the geographic area in which such businesses are currently conducted by the
Company Group (i) engage in marketing natural gas, or marketing and trading
electric power (a "Competitive Business") (provided, that nothing herein shall
be construed to preclude VRM from marketing surplus electric power generated
at its refineries), (iii) sell, assign or otherwise transfer the trademarks,
trade names, service marks, the use of the name "Valero" or any and all other
designs, logos and slogans, related to the names "Valero" and "Valero Energy
Corporation" and the "Walking Flame" service mark or any other right set forth
on Schedule 4.1 to a Competitive Business, or (iv) invest in, as principal,
partner or stockholder (otherwise than through the ownership of less than 4%
of the outstanding voting securities of any corporation which are listed on a
national securities exchange or accepted for quotation of The Nasdaq Stock
Market), any person, partnership, firm, corporation or other business entity
which is engaged in a Competitive Business; provided, that nothing herein
shall be construed to preclude VRM from acquiring (or, thereafter, from
operating) a Competitive Business if the operations constituting a Competitive
Business are incidental to a larger acquisition of a business or entity whose
principal operations do not constitute a Competitive Business. From and after
the Distribution, until the second anniversary of the Time of Distribution,
VRM shall not, and shall cause its Affiliates and Subsidiaries not to,
directly or indirectly, solicit (other than through a general solicitation not
directed at a particular individual or group of individuals employed by the
Retained Business) for hire any employee, officer, director, executive or
consultant currently employed primarily in activities related to the Retained
Business or encourage any such employee, officer, director, executive or
consultant to leave such employment. Following the Closing, VRM shall not,
and shall cause its Affiliates and Subsidiaries not to, directly or
indirectly, disclose, divulge, communicate, use to the detriment of Acquiror
or the Retained Business or for the benefit of any other person or persons,
any confidential, proprietary or sensitive information or trade secrets of the
Retained Business, including, without limitation, any and all personnel
information, know-how, customer lists, price lists or other financial and
operating data relating to the Retained Assets and the Retained Business,
unless required to do so by law or legal process. In the event that such
disclosure is required by law or legal process, VRM shall immediately notify
the Company of the existence, terms and circumstances surrounding such
disclosure so that the Company may seek an appropriate protective order prior
to the disclosure of such information.
(b) VRM expressly agrees and understands that the remedy at law for
any breach by it or its Affiliates or Subsidiaries of this Section 5.4 will be
inadequate and that the damages flowing from such breach are not readily
susceptible to being measured in monetary terms. Accordingly, VRM
acknowledges that upon a violation of any provision of this Section 5.4, the
Company shall be entitled to immediate injunctive relief and may obtain a
temporary restraining order restraining any threatened or further breach and
the Company shall be further entitled to require VRM to account for and pay
over to the Company all compensation, profits, monies, accruals, or other
benefits derived or received by VRM during the period of, and resulting from,
the breach of any of the provisions of this Section 5.4. Nothing contained in
this Section 5.4 shall be deemed to limit the Company's remedies at law or in
equity for any breach of the provisions of this Section 5.4 by VRM or its
Affiliates or Subsidiaries. Any covenant on VRM's part contained in this
Section 5.4 which may not be specifically enforceable shall nevertheless, if
breached, give rise to a cause of action for monetary damages.
(c) The parties hereto acknowledge that the covenants contained in
this Section 5.4 are independent covenants and shall not be affected by
performance or nonperformance of any other provision of this Agreement. VRM
has carefully considered the nature and extent of the restrictions upon them
and their Affiliates and Subsidiaries and the rights and remedies conferred
upon the Company under this Section 5.4, and VRM has independently consulted
with their counsel and after such consultation acknowledges and agrees that
the covenants set forth in this Section 5.4 are reasonable in time and
territory, are designed to eliminate competition that would otherwise be
inequitable to the Company and the Retained Business, are fully required to
protect the legitimate interests of the Company and do not confer a benefit
upon the Company disproportionate to the detriment to VRM and its Affiliates
and Subsidiaries. It is the desire and intent of the parties that the
provisions of this Section 5.4 shall be enforced to the fullest extent
permissible under applicable law.
ARTICLE VI
ACCESS TO INFORMATION
6.1. Provision of Records and Information. Prior to the Time of
Distribution: (i) the Company shall transfer to VRM all minute books and
other Information relating to the VRM Business, and (ii) the Company shall
transfer to VRM all Tax Records (as defined in the Tax Sharing Agreement)
exclusively related to the assets and activities of the VRM Group's
Pre-Distribution Periods (as defined in the Tax Sharing Agreement); provided
that the transferor of such documents may retain copies of such documents for
its use. The original minute books, Tax Records and Information shall be the
property of the transferee.
6.2. Access to Information. From and after the Time of
Distribution, each of the Company and VRM shall afford to the other and to the
other's Representatives reasonable access and duplicating rights (at the
requesting party's expense) during normal business hours and upon reasonable
advance notice to each such member all Information within the possession or
control of any member of the Company Group or the VRM Group, as the case may
be, relating to the business, assets or Liabilities as they existed prior to
the Time of Distribution or relating to or arising in connection with the
relationship between the constituent elements of the Groups on or prior to the
Time of Distribution, insofar as such access is reasonably required for a
reasonable business purpose. Without limiting the foregoing, Information may
be requested under this Section 6.2 for audit, accounting, claims, litigation
and tax purposes, as well as for purposes of fulfilling disclosure and
reporting obligations and for performing this Agreement and the other
Reorganization Agreements.
6.3. Production of Witnesses. After the Time of Distribution, each
of the Company and VRM shall, and shall cause each member of the Company Group
and the VRM Group, respectively, to, make available to VRM or any member of
the VRM Group or to the Company or any member of the Company Group, as the
case may be, upon written request and without charge (other than the
reimbursement by the requesting party of reasonable direct expenses incurred
in performance of the obligations described in this Section), such Group's
directors, officers, employees and agents as witnesses to the extent that any
such Person may reasonably be required in connection with any legal,
administrative or other proceedings in which the requesting party may from
time to time be involved and relating to the business of the VRM Group or the
Company Group as it existed prior to the Time of Distribution or relating to
or in connection with the relationship between the constituent elements of the
Groups on or prior to the Time of Distribution, provided that the same shall
not unreasonably interfere with the conduct of business by the Group of which
the request is made.
6.4. Retention of Records. Except as otherwise required by law or
agreed to in writing (including without limitation, in the Tax Sharing
Agreement), if any Information relating to the business, assets or Liabilities
of a member of a Group as they existed prior to the Time of Distribution is
retained by a member of the other Group, each of the Retained Company and VRM
shall, and shall cause the members of the Group of which it is a member to,
retain all such Information in such Group's possession or under its control
until such Information is at least six years old except that if, prior to the
expiration of such period, any member of either Group wishes to destroy or
dispose of any such Information that is at least three years old, prior to
destroying or disposing of any of such Information, (1) VRM or the Retained
Company, on behalf of the member of its Group that is proposing to dispose of
or destroy any such Information, shall provide no less than 30 days' prior
written notice to the other party, specifying the Information proposed to be
destroyed or disposed of, and (2) if, prior to the scheduled date for such
destruction or disposal, the other party requests in writing that any of the
Information proposed to be destroyed or disposed of be delivered to such other
party, the party whose Group is proposing to dispose of or destroy such
Information promptly shall arrange for the delivery of the requested
Information to a location specified by, and at the expense of, the requesting
party.
6.5. Confidentiality. From and after the Time of Distribution,
each of the Company Group and the VRM Group shall hold, and shall cause its
Affiliates and Representatives to hold, in strict confidence all Information
concerning the other party's Group obtained by it prior to the Time of
Distribution or furnished to it by such other party's Group pursuant to the
Reorganization Agreements and shall not release or disclose such Information
to any other Person, except its Affiliates and Representatives, who shall be
bound by the provisions of this Section 6.5, and each party shall be
responsible for a breach of this Section 6.5 by any of its Affiliates or
Representatives; provided, however, that any member of the Company Group or
the VRM Group may disclose such Information to the extent that (a) disclosure
is compelled by judicial or administrative process or, in the opinion of such
Person's counsel, by other requirements of law, or (b) such Person can show
that such Information was (i) available to such Person on a nonconfidential
basis (other than from a member of the other party's Group) prior to its
disclosure by such Person, (ii) in the public domain through no fault of such
Person, (iii) lawfully acquired by such Person from another source after the
time that it was furnished to such Person by the other party's Group, and not
acquired from such source subject to any confidentiality obligation on the
part of such source, or on the part of the acquiror, known to the acquiror, or
(iv) treated by such Person with the same care as such Person takes to
preserve confidentiality for its own similar Information; provided further
that if either Group is requested or required (by oral questions,
interrogatories, requests for information or documents in legal proceedings,
subpoena, civil investigative demand or other similar process) to disclose any
such Information, such Group shall provide the other Group with prompt written
notice of any such request or requirement so that such other Group may seek a
protective order or other appropriate remedy or waive compliance with the
provisions of this Agreement; if, in the absence of a protective order or
other remedy or the receipt of a waiver the Group which received such request
is, in the written opinion of its counsel, legally compelled to disclose
Information to any tribunal or else stand liable for contempt or suffer other
censure or penalty, such Group may, without liability hereunder, disclose to
such tribunal only that portion of the Information which such counsel advises
is legally required to be disclosed, provided that such Group exercises its
best efforts to preserve the confidentiality of the Information, including,
without limitation, by cooperating with the other Group to obtain an
appropriate protective order or other reliable assurance that confidential
treatment will be accorded the Information by such tribunal.
ARTICLE VII
CONDITIONS
7.1. Conditions to Obligations of the Company. The obligations of
the Company to consummate the Distribution hereunder shall be subject to the
fulfillment of each of the following conditions:
(a) Each of the covenants and provisions in this Agreement required
to be performed or complied with on or before the Time of Distribution shall
have been performed and complied with.
(b) Each condition to the Closing of the Merger Agreement set forth
in Article VIII thereof, other than the condition set forth in Sections 8.1(g)
thereof as to the consummation of the Distribution, shall have been fulfilled
or waived by the party for whose benefit such condition exists.
(c) The Board of Directors of the Company and the Acquiror shall be
satisfied that the Company's surplus would be sufficient to permit, without
violation of Section 170 of the DGCL, the Distribution and shall have given
final approval of the Distribution.
(d) The VRM Common Stock shall have been approved for listing, upon
notice of issuance, on the NYSE.
(e) The Distribution shall have been duly approved by the requisite
vote of the holders of Company Common Stock.
[(f) The No-action Letter shall have been issued and shall be in
full force and effect.]
(g) The Intercompany Reorganization shall have been completed as
contemplated by the terms of this Agreement.
ARTICLE VIII
INDEMNIFICATION
8.1. Indemnification by VRM. From and after the Effective Time,
subject to the provisions of this Article VIII, VRM, its successors and
assigns, shall indemnify, defend and hold harmless the Retained Company
Indemnitees from and against, and pay or reimburse the Retained Company
Indemnitees for, all Indemnifiable Losses, as incurred:
(i) relating to or arising from the VRM Assets or the VRM
Liabilities (including the failure by VRM or any VRM Company, as
applicable, to pay, perform or otherwise discharge such Liabilities in
accordance with their terms), whether such Indemnifiable Losses relate to
or arise from events, occurrences, actions, omissions, facts or
circumstances occurring, existing or asserted before, at or after the Time of
Distribution;
(ii) arising from or based upon any untrue statement of a
material fact contained in any of the Filings, or any omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading; but only in each case with respect to information provided by
the Company relating to the VRM Group contained in or omitted from the
Filings;
(iii) relating to the Company Guarantees and the Company's
guarantee of the IRBs
(iv) relating to the warranty deeds described in Sections
2.1(c) and 2.1(d);
(v) relating to any breach or violation of this Agreement by
VRM or, prior to the Time of Distribution, by the Company; any breach by VRM
or, prior to the Time of Distribution; by the Company of any of the
representations, warranties or covenants made in this Agreement, or any
inaccuracy or misrepresentation in the Schedules hereto or in any certificate
or document delivered in accordance with the terms of this Agreement;
(vi) incurred in connection with the enforcement by any
Retained Company Indemnitees of their rights to be indemnified, defended and
held harmless under this Agreement.
8.2. Indemnification by Retained Company. From and after the
Effective Time, subject to the provisions of this Article VIII, the Retained
Company, its successors and assigns, shall indemnify, defend and hold harmless
the VRM Indemnitees from and against, and pay or reimburse the VRM Indemnitees
for, all Indemnifiable Losses, as incurred:
(i) relating to or arising from the Retained Assets or the
Retained Liabilities (including the failure by the Retained Companies to pay,
perform or otherwise discharge such Liabilities in accordance with their
terms), whether such Indemnifiable Losses relate to or arise from events,
occurrences, actions, omissions, facts or circumstances occurring, existing or
asserted before, at or after the Time of Distribution;
(ii) arising from or based upon any untrue statement of a
material fact contained in any Filings, or any omission to state therein a
material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading; but only in each case with respect to information provided by
Acquiror relating to Acquiror or any of its Subsidiaries contained in or
omitted from the Filings;
(iii) incurred in connection with the enforcement by any
VRM Indemnitees of their rights to be indemnified, defended and held harmless
under this Agreement.
8.3. Procedures Relating to Indemnification. (a) In order for an
Indemnitee to be entitled to any indemnification provided for under this
Agreement in respect of, arising out of or involving a claim made by any
Person who is not an Indemnitee against the Indemnitee (a "Third Party
Claim"), such Indemnitee must notify the party who may become obligated to
provide indemnification hereunder (the "indemnifying party") in writing, and
in reasonable detail, of the Third Party Claim reasonably promptly, and in any
event within 20 days after receipt by such Indemnitee of written notice of the
Third Party Claim; provided, however, that failure to give such notification
shall not affect the indemnification provided hereunder except to the extent
the indemnifying party shall have been actually prejudiced as a result of such
failure (except that the indemnifying party shall not be liable for any
expenses incurred during the period in which the Indemnitee failed to give
such notice). After any required notification (if applicable), the Indemnitee
shall deliver to the indemnifying party, promptly after the Indemnitee's
receipt thereof, copies of all notices and documents (including court papers)
received by the Indemnitee relating to the Third Party Claim.
(b) If a Third Party Claim is made against an Indemnitee, the
indemnifying party will be entitled to participate in the defense thereof and,
if it so chooses, to assume the defense thereof (at the expense of the
indemnifying party) with counsel selected by the indemnifying party and
reasonably satisfactory to the Indemnitee. Should the indemnifying party so
elect to assume the defense of a Third Party Claim, the indemnifying party
will not be liable to the Indemnitee for any legal expenses subsequently
incurred by the Indemnitee in connection with the defense thereof; provided,
however, that if the indemnifying party fails to take reasonable steps
necessary to defend diligently such Third Party Claim within 30 calendar days
after receiving written notice from the Indemnitee that the Indemnitee
believes the indemnifying party has failed to take such steps or if the
indemnifying party has not undertaken fully to indemnify the Indemnitee in
respect of all Indemnifiable Losses relating to the matter, the Indemnitee may
assume its own defense, and the Indemnifying Party will be liable for all
reasonable costs or expenses paid or incurred in connection therewith. If the
indemnifying party assumes such defense, the Indemnitee shall have the right
to participate in the defense thereof and to employ counsel, at its own
expense, separate from the counsel employed by the indemnifying party, it
being understood that the indemnifying party shall control such defense. The
indemnifying party shall be liable for the fees and expenses of counsel
employed by the Indemnitee for any period during which the indemnifying party
has not assumed the defense thereof (other than during any period in which the
Indemnitee shall have failed to give notice of the Third Party Claim as
provided above). If the indemnifying party chooses to defend or prosecute a
Third Party Claim, all the parties hereto shall cooperate in the defense or
prosecution thereof, which cooperation shall include the retention in
accordance with this Agreement and (upon the indemnifying party's request) the
provision to the indemnifying party of records and information which are
reasonably relevant to such Third Party Claim, and making employees available
on a mutually convenient basis to provide additional information and
explanation of any material provided hereunder. If the indemnifying party
chooses to defend or prosecute any Third Party Claim, the Indemnitee will
agree to any settlement, compromise or discharge of such Third Party Claim
which the indemnifying party may recommend and which by its terms obligates
the indemnifying party to pay the full amount of liability in connection with
such Third Party Claim; provided, however, that, without the Indemnitee's
consent, the indemnifying party shall not consent to entry of any judgment or
enter into any settlement that provides for injunctive or other nonmonetary
relief affecting the Indemnitee, that does not include as an unconditional
term thereof the giving by each claimant or plaintiff to such Indemnitee of a
release from all liability with respect to such claim. Whether or not the
indemnifying party shall have assumed the defense of a Third Party Claim, the
Indemnitee shall not admit any liability with respect to, or settle,
compromise or discharge, such Third Party Claim without the indemnifying
party's prior written consent (which consent shall not be unreasonably
withheld).
(c) In order for an Indemnitee to be entitled to any
indemnification provided for under this Agreement in respect of a claim that
does not involve a Third Party Claim, the Indemnitee shall deliver notice of
such claim with reasonable promptness to the indemnifying party. The failure
by any Indemnitee so to notify the indemnifying party shall not relieve the
indemnifying party from any liability which it may have to such Indemnitee
under this Agreement, except to the extent that the indemnifying party shall
have been actually prejudiced by such failure. If the indemnifying party has
within 30 business days from the receipt of such notice disputed its liability
with respect to such claim, as provided above, the indemnifying party and the
Indemnitee shall proceed in good faith to negotiate a resolution of such
dispute and, if not resolved through negotiations, such dispute shall be
resolved by litigation in an appropriate court of competent jurisdiction.
8.4. Certain Limitations. (a) The amount of any Indemnifiable
Losses or other liability for which indemnification is provided under this
Agreement shall be net of any amounts actually recovered by the Indemnitee
from third parties (including, without limitation, amounts actually recovered
under insurance policies) with respect to such Indemnifiable Losses or other
liability. Any indemnifying party hereunder shall be subrogated to the rights
of the Indemnitee upon payment in full of the amount of the relevant
Indemnifiable Loss. An insurer who would otherwise be obligated to pay any
claim shall not be relieved of the responsibility with respect thereto or,
solely by virtue of the indemnification provisions hereof, have any
subrogation rights with respect thereto. If any Indemnitee recovers an amount
from a third party in respect of an Indemnifiable Loss for which
indemnification is provided in this Agreement after the full amount of such
Indemnifiable Loss has been paid by an indemnifying party or after an
indemnifying party has made a partial payment of such Indemnifiable Loss and
the amount received from the third party exceeds the remaining unpaid balance
of such Indemnifiable Loss, then the Indemnitee shall promptly remit to the
indemnifying party the excess (if any) of (A) the sum of the amount
theretofore paid by the indemnifying party in respect of such Indemnifiable
Loss plus the amount received from the third party in respect thereof, less
(B) the full amount of such Indemnifiable Loss or other liability.
(b) The amount of any Indemnifiable Losses or other Liability for
which indemnification is provided under this Agreement or any other amounts
payable or reimbursable by one party to another under this Agreement shall be
increased or decreased to take account of any net Tax cost or any net Tax
benefit in a manner analogous to that described in the Tax Sharing Agreement.
8.5. Express Negligence. INSOFAR AS TEXAS LAW MAY APPLY, THE
PARTIES EXPRESSLY INTEND AND AGREE THAT THE INDEMNIFICATION OBLIGATIONS OF
EACH SET FORTH IN SECTIONS 8.1 AND 8.2 SHALL EXTEND TO AND INCLUDE, WITHOUT
LIMITATION, ACTIONS FOR INJURIES OR DAMAGES TO ANY PERSON, PARTY OR PROPERTY
THAT WERE CAUSED IN WHOLE OR IN PART BY THE INDEMNITEE'S OWN ACTS OR OMISSIONS
(SPECIFICALLY INCLUDING, BUT NOT LIMITED TO, NEGLIGENCE AND ACTS OR OMISSIONS
GIVING RISE TO STRICT LIABILITY).
ARTICLE IX
MISCELLANEOUS AND GENERAL
9.1. Modification or Amendment. The parties hereto may modify or
amend this Agreement only by written agreement executed and delivered by duly
authorized officers of the respective parties, and the written consent of the
Acquiror thereto.
9.2. Waiver; Remedies. The conditions to the Company's obligation
to consummate the Distribution are for the benefit of the Company and the
Acquiror and may be waived in whole or in part as may be agreed by the Company
and the Acquiror in writing and to the extent permitted by applicable law. No
delay on the part of any party hereto in exercising any right, power or
privilege hereunder will operate as a waiver thereof, nor will any waiver on
the part of any party hereto of any right, power or privilege hereunder
operate as a waiver of any other right, power or privilege hereunder, nor will
any single or partial exercise of any right, power or privilege hereunder
preclude any other or further exercise thereof or the exercise of any other
right, power or privilege hereunder. Unless otherwise provided, the rights
and remedies herein provided are cumulative and are not exclusive of any
rights or remedies which the parties may otherwise have at law or in equity.
9.3. Counterparts. For the convenience of the parties, this
Agreement may be executed in any number of separate counterparts each such
counterpart being deemed to be an original instrument, and all such
counterparts shall together constitute the same agreement.
9.4. Governing Law. This Agreement shall be governed by and
construed in accordance with the internal laws of the State of Delaware
applicable to contracts made and to be performed entirely within such State,
without regard to the conflicts of law principles of such State.
9.5. Notices. Any notice, request, instruction or other
communication to be given hereunder by any party to any other party shall be
in writing and shall be deemed to have been duly given (i) on the date of
delivery if delivered personally, or by telecopy or telefacsimile, upon
confirmation of receipt, (ii) on the first business day following the date of
dispatch if delivered by Federal Express or other nationally reputable
next-day courier service, or (iii) on the third business day following the
date of mailing if delivered by registered or certified mail, return receipt
requested, postage prepaid. All notices hereunder shall be delivered as set
forth below, or pursuant to such other instructions as may be designated in
writing by the party to receive such notice:
(a) If to VRM:
Valero Refining and Marketing Company
530 McCullough Avenue
San Antonio, Texas 78215
Attention: General Counsel
Telecopy: (210) 246-2354
with copies to:
Wachtell, Lipton, Rosen & Katz
51 West 52nd Street
New York, New York 10019
Attention: Edward D. Herlihy, Esq.
Telecopy: (212) 403-2000
(b) If to the Company:
Valero Energy Corporation
c/o PG&E Corporation
77 Beale Street
San Francisco, California 94105
Attention: General Counsel
Telecopy: (415) 973-8083
with copies to:
Orrick, Herrington & Sutcliffe, LLP
400 Sansome Street
San Francisco, California 94111
Attention: Leslie P. Jay, Esq.
Telecopy: (415) 773-5759
9.6. Entire Agreement. The Reorganization Agreements (including
the Annexes and Schedules thereto) and the Interim Services Agreement
(including the Annexes and Schedules thereto) constitute the entire agreement,
and supersede all other prior agreements, understandings, representations and
warranties, both written and oral, among the parties, with respect to the
subject matter hereof and thereof.
9.7. Certain Obligations. Whenever this Agreement requires any of
the Subsidiaries of any party to take any action, this Agreement will be
deemed to include an undertaking on the part of such party to cause such
Subsidiary to take such action.
9.8. Assignment. No party to this Agreement shall convey, assign
or otherwise transfer any of its rights or obligations under this Agreement
without the express written consent of the other party hereto, which shall not
be unreasonably withheld or delayed, except that the Company may assign its
rights hereunder to an Affiliate or to a successor to all or substantially all
of the business of the Company as conducted at the time of the Intercompany
Reorganization.
9.9. Captions. The Article, Section and paragraph captions herein
are for convenience of reference only, do not constitute part of this
Agreement and shall not be deemed to limit or otherwise affect any of the
provisions hereof.
9.10. Specific Performance. In the event of any actual or
threatened default in, or breach of, any of the terms, conditions and
provisions of this Agreement, the party or parties who are or are to be
thereby aggrieved shall have the right of specific performance and injunctive
relief giving effect to its or their rights under this Agreement, in addition
to any and all other rights and remedies at law or in equity, and all such
rights and remedies shall be cumulative. The parties agree that the remedies
at law for any breach or threatened breach, including monetary damages, are
inadequate compensation for any loss and that any defense in any action for
specific performance that a remedy at law would be adequate is waived.
9.11. Severability. If any provision of this Agreement or the
application thereof to any person or circumstance is determined by a court of
competent jurisdiction to be invalid, void or unenforceable, the remaining
provisions hereof, or the application of such provision to persons or
circumstances other than those as to which it has been held invalid or
unenforceable, shall remain in full force and effect and shall in no way be
affected, impaired or invalidated thereby, so long as the economic or legal
substance of the transactions contemplated hereby is not affected in any
manner adverse to any party. Upon any such determination, the parties shall
negotiate in good faith in an effort to agree upon a suitable and equitable
substitute provision to effect the original intent of the parties.
9.12. Third Party Beneficiaries. Acquiror shall be a third party
beneficiary of this Agreement. Nothing contained in this Agreement is
intended to confer upon any Person or entity other than the parties hereto and
their respective successors and permitted assigns (other than Acquiror), any
benefit, right or remedies under or by reason of this Agreement, except that
the provisions of Article VIII hereof shall inure to the benefit of
Indemnitees.
9.13. Schedules. All Schedules attached hereto or referred to
herein are hereby incorporated in and made a part of this Agreement as if set
forth in full herein. Matters reflected on the Schedules are not necessarily
limited to matters required by this Agreement to be reflected on such
Schedules. Such additional matters are set forth for informational purposes
only and do not necessarily include other matters of a similar nature.
Capitalized terms used in any Schedule but not otherwise defined therein shall
have the respective meanings assigned to such terms in this Agreement.
9.14. Tax Sharing Agreement. With respect to Tax matters, if there
is a conflict between this Agreement and the Tax Sharing Agreement the Tax
Sharing Agreement shall control.
IN WITNESS WHEREOF, this Agreement has been duly executed and
delivered by the duly authorized officers of the parties hereto as of the date
first hereinabove written.
VALERO ENERGY CORPORATION
By:
Name:
Title:
VALERO REFINING AND MARKETING COMPANY
By:
Name:
Title:
<PAGE>
ANNEX A
INTERIM SERVICES AGREEMENT
This Interim Services Agreement is entered into by and among Valero
Refining and Marketing Company, a Delaware corporation, and Valero Energy
Corporation, a Delaware corporation, as of [________, 1997,] and is made
effective as of the Effective Time.
Whereas, VEC, PG&E Corporation and PG&E Acquisition Corporation have
executed the Merger Agreement, pursuant to which PG&E Acquisition Corporation
will merge with and into VEC, and
Whereas, in connection with the Merger, VEC and Valero Refining have
executed the Distribution Agreement, pursuant to which VEC will cause, prior
to the Merger, all of the common stock of Valero Refining to be distributed to
the stockholders of VEC, and Valero Refining will cease to be a subsidiary of
VEC, and
Whereas, for a period of time following the Merger, Valero Refining
desires to continue to procure certain services from VEC that were formerly
performed by or through VEC, and VEC desires to procure certain services from
Valero Refining, and each of VEC and Valero Refining has agreed to provide (or
cause to be provided) the services described in this Agreement according to
the terms and conditions of this Agreement,
Now, Therefore, Valero Refining and VEC, in consideration of the mutual
promises and obligations described in this Agreement, hereby agree as follows:
I. Definitions.
"Aircraft Ownership Agreement" means that certain Ownership Agreement dated
_________, 1997 by and between VMC and VCSC providing the terms and
conditions under which VMC and VCSC will jointly own certain aircraft
formerly owned by or leased to VMC.
"Distribution Agreement" means that certain Agreement and Plan of Distribution
dated as of ________, 1997 between VEC and Valero Refining providing for,
among other things, the distribution prior to the Effective Time of all
of the issued and outstanding shares of common stock of Valero Refining
to the stockholders of VEC.
"Effective Date" and "Effective Time" mean the date and the time,
respectively, upon which the Merger is consummated as prescribed by the
Merger Agreement.
"Houston Sublease" means that certain Sublease dated ________ 1997, between
Valero Refining (as sublessor) and Valero Natural Gas Company (as
sublessee) providing for the rental of office space and common areas at
Two Allen Center for the business needs of Valero Natural Gas Company in
Houston after the Effective Time.
"including," "includes," or "include" when used in this Agreement means
"including but not limited to."
"Merger" means the merger and related transactions contemplated by the Merger
Agreement.
"Merger Agreement" means that certain Agreement and Plan of Merger dated
January [31], 1997 by and between VEC, PG&E Corporation and PG&E Acquisition
Corporation providing for the merger of PG&E Acquisition Corporation with and
into VEC.
"PG&E Acquisition Corporation" means PG&E Acquisition Corporation, a Delaware
corporation and wholly owned subsidiary of PG&E Corporation formed for the
purpose of participating in the Merger.
"PG&E Corporation" means Pacific Gas & Electric Corporation, a California
corporation.
"Performing Party" means that party to this Agreement that is rendering
Services to the Receiving Party.
"Receiving Party" means that party to this Agreement that is receiving, or is
the beneficiary of, Services rendered by the Performing Party.
"Records Agreement" means that certain Records Access and Storage Agreement
dated _________, 1997 between VEC and Valero Refining.
"San Antonio Sublease" means that certain Amended and Restated Sublease
Agreement dated ________ 1997, between VMC (as sublessor) and Valero Marketing
and Supply Company (as sublessee) providing for the rental of office space,
common areas, and parking at 530 McCullough for the business needs of Valero
Refining in San Antonio after the Time of Distribution.
"Services" means, generally and collectively, the set of services to be
provided in accordance with the terms of this Agreement.
"Tax Agreement" means that certain Tax Sharing Agreement dated _______, 1997,
among VEC, Valero Refining and PG&E Corporation.
"Time of Distribution" means the time at which the distribution of the common
stock of Valero Refining to the stockholders of VEC is consummated in
accordance with the Distribution Agreement.
"Valero Refining" means Valero Refining and Marketing Company, a Delaware
corporation, and its subsidiaries.
"VCSC" means Valero Corporate Services Company, a Delaware corporation.
"VEC" means Valero Energy Corporation, a Delaware corporation, and its
subsidiaries.
"VEC System" means the computer data processing systems operated by VEC prior
to the Effective Date whether located in San Antonio, Houston, Corpus Christi,
or any office of VEC as may be modified by VEC after the Effective Date.
"VMC" means Valero Management Company, a Delaware corporation.
II. Terms of General Application
2.1 Performance of Services. Each Performing Party will perform (or
cause to be performed) its Services in a professional manner, with due
diligence and due care. Each Performing Party agrees to perform (or cause to
be performed) its Services as economically as possible with the minimum number
of employees, time, and materials necessary to perform properly the Services.
Each Performing Party agrees to use its best efforts to meet any completion
dates established in this Agreement for the performance of the Services.
Except as otherwise expressly provided in this Agreement, the Services shall
be of the type and extent provided by each Performing Party prior to the
Effective Date. The Performing Party's obligation to provide any particular
Service is limited to its performance of Services using its resources existing
as of the Effective Date. In no event shall the Performing Party be required
to add to its staff, equipment, facilities or other resources in order to
provide any Service.
2.2 Cooperation. Each party to this Agreement will cooperate with each
other and assist each other to facilitate the performance of the Services. To
this end, each party agrees to furnish timely any information in its
possession that is reasonably necessary for the performance of the Services
but which the other party does not possess.
2.3 Severability and Cancellation of Services. The Services described
in the various sections of this Agreement are severable. (The San Antonio
Sublease and the Houston Sublease are not considered "Services" to which the
provisions of this Section 2.3 apply.) A Receiving Party may elect to cancel
any one or more of the Services at any time by providing written notice to the
Performing Party. Unless expressly provided elsewhere in this Agreement, any
election of cancellation received by the Performing Party on or before the
first business day of a given month will be effective as of the last calendar
day of that month (e.g., notice received on July 19, 1997 will be effective as
of August 31, 1997; notice received on August 1, 1997 will be effective as of
August 31, 1997). Each of the Services provided to each Receiving Party
hereunder is to be provided on an interim basis for the period of time
reasonably necessary for such Receiving Party to arrange for the delivery of
such Service by third parties or to develop the ability itself to provide such
Service. Each Receiving Party will use its best efforts to arrange for the
delivery of such Service by third parties or to develop the ability itself to
provide such Service, and will cancel each such Service pursuant to this
Section 2.3 as soon as practicable after the date of this Agreement.
2.4 Term and Termination. The term of this Agreement will commence at
the Effective Time and will end at 5:00 p.m. on December 31, 1998, except for
any particular Service that is earlier canceled pursuant to Section 2.3 or for
which this Agreement specifically provides for an earlier or later termination
of a Performing Party's obligation to provide that Service.
2.5 Payment. The parties agree to the amounts listed in Exhibit A
(attached to this Agreement and incorporated herein for all purposes), as
increased from time to time in accordance with Section 2.5.4, as full and
adequate compensation for the Services rendered under this Agreement.
2.5.1 Billing and Payment for Services Rendered. Each party
will bill the other party monthly (in accordance with the rates listed in
Exhibit A) as of the first day of the month, for Services rendered during the
prior month. VEC will send invoices to Valero Refining to the attention of
the Treasurer. Valero Refining will send invoices to VEC to the attention of
the Treasurer. Invoices may be delivered to either party by facsimile. The
parties agree to pay the stated fees and charges within 30 days from the date
of invoice. The parties may offset amounts owing to one another so that only
one payment is required. In satisfaction of amounts owing under this
Agreement, the parties will remit funds either by wire transfer or ACH
(Automated Clearing House) in accordance with the payment instructions stated
in Exhibit B.
2.5.2 Reimbursements. If either party incurs a reasonable and
necessary out-of-pocket expense directly in connection with the rendering of
Services (e.g., payroll, payables), then the party for whom the payment was
made will reimburse that amount to the payor-party either on the day that the
payment was made or the next business day, in accordance with the payment
instructions stated in Exhibit B, without regard to the billing and payment
schedule described in Section 2.5.1.
2.5.3 Misapplied Cash Receipts. If a cash receipt belonging to
one party is erroneously deposited into the other party's account, then the
party who received the misapplied funds will promptly transfer the funds to
the other party's bank account in accordance with the payment instructions
listed in Exhibit B. The transfer will be made either on the same day that
available funds are received, or on the business day when available funds have
been collected.
2.5.4 Fee Increases. Each Performing Party may increase the fee
for any Service provided by that Performing Party upon 60 days' prior written
notice to the Receiving Party in order to reflect any increase in the cost of
providing that Service.
2.6 Confidentiality. Each party will use due care to protect the
confidentiality of all proprietary information regarding the other party
received or generated pursuant to this Agreement, and will use and copy such
information only as required to perform the Services in accordance with the
terms of this Agreement. Each party will limit disclosure of proprietary
information of the other party to those individuals who have a need to know
such information in order to provide the Services, except for any disclosures
that are required by law or other governmental authority.
2.7 Conflict of Terms. If the terms of this Agreement conflict with the
terms of the Aircraft Ownership Agreement, Distribution Agreement, Houston
Sublease, Merger Agreement, Records Agreement, San Antonio Sublease, or Tax
Agreement (collectively the "Other Agreement(s)") with respect to any matter,
then the terms of the Other Agreement(s) will control.
III. Information Services
3.1 Information Services. In consideration for the fees described on
Exhibit A, VEC will provide the following Information Services to Valero
Refining (the "Information Services").
3.1.1 Processing Services. VEC will provide data processing
services on the VEC System to Valero Refining for all applications supporting
the VRM Business (as defined in the Distribution Agreement) as of the
Effective Date. In all cases, Valero Refining will be responsible for
furnishing to VEC all data necessary to run the applications and achieve the
desired results.
3.1.2 Maintenance and Support. VEC will provide the following
maintenance and support services to Valero Refining.
(a) Maintenance. VEC will provide maintenance required for
the VEC System computer equipment, data communications facilities and
operating system software used in performance of the Information Services.
For the VEC System software used in performing the Information Services, VEC
will provide all maintenance necessary to keep such software performing in
accordance with the specifications in effect as of the Effective Date.
(b) Exclusion of PCs and Servers. VEC will not provide
maintenance for the desktop personal computers, printers, and servers owned by
Valero Refining. Valero Refining will be responsible for procuring any
maintenance required by Valero Refining for these assets.
3.2 Procedures. The following procedures will apply to the rendering of
Information Services.
3.2.1 Access to the VEC System. VEC will provide to Valero
Refining all reasonable access to the VEC System during the same access hours
for which Valero Refining had access immediately prior to the Effective Date.
3.2.2 Delivery. Valero Refining, at its own risk and expense,
will be responsible for transporting or transmitting to and from the VEC
System (i) all data and information necessary for VEC to perform the
Information Services, and (ii) all reports provided by VEC hereunder. VEC
will have no obligation to determine the authenticity, genuineness or accuracy
of items delivered by Valero Refining or the accuracy or correctness of the
reports based thereon.
3.2.3 Computer System Instructions. VEC may from time to time
provide Valero Refining with instructions governing the operation of the VEC
System. Valero Refining will comply with all reasonable policies, procedures
and standards published and provided by VEC relating to the operation of the
VEC System and to the performance of Information Services.
3.2.4 Communications. All costs associated with the
installation and removal of remote terminals, printers, modems, servers,
controllers and related equipment of Valero Refining are the responsibility of
Valero Refining. All interconnected communications configurations are subject
to the approval of VEC before installation, whose approval shall not be
unreasonably withheld or delayed.
3.3 Fees. In addition to the fees described on Exhibit A, the following
terms will apply to Information Services.
3.3.1 Service Fees. For all mainframe-based use of the VEC
System by Valero Refining, Valero Refining agrees to pay to VEC a fee
determined on a "percentage of use" basis. Each month VEC will determine the
percentage of Valero Refining's mainframe-based use of the VEC System, and
will bill Valero Refining an amount equal to the total VEC System
mainframe-based operating, maintenance and data storage costs multiplied by
Valero Refining's percentage of such use.
3.3.2 Programming. VEC will provide all labor required for the
initial setup prior to the Effective Date of programs in connection with the
Information Services. After the Effective Date, Valero Refining agrees to pay
for all subsequent programming performed by VEC on behalf of Valero Refining
at a rate which includes all direct and indirect labor costs of VEC for such
programming. Valero Refining will reimburse all reasonable and direct
out-of-pocket expenses incurred by VEC in connection with such programming
services.
3.4 Data Storage. VEC will apply the same backup, storage, and recovery
procedures to data relating to the Information Services that VEC applies to
its own data. Upon receipt of a written request from Valero Refining, VEC
will tender to Valero Refining all stored data, provided that Valero Refining
shall not be in default with respect to any amounts due for the Information
Services provided hereunder.
IV. Financial and Regulatory Services
4.1 Financial and Regulatory Services. In consideration for the fees
described on Exhibit A of this Agreement, VEC and Valero Refining will provide
the following financial and regulatory services (the "Financial and Regulatory
Services"):
4.1.1 Tax Services. VEC and Valero Refining (or their
affiliates) will perform any tax services in accordance with terms of the
Tax Agreement.
4.1.2 Governmental Compliance. VEC will furnish all accounting,
finance, and legal support requested by Valero Refining to assist Valero
Refining in the preparation, review, and timely filing in 1997 and years
thereafter of all documents (including financial statements) covering periods
prior to the Effective Date, as such filings may be required by the Securities
Exchange Act of 1934, the Securities Act of 1933, or the rules and regulations
promulgated by the Securities and Exchange Commission pursuant to those Acts.
These documents may include registration statements, annual reports, and
quarterly reports of Valero Refining. VEC and Valero Refining each will
assist the other in the preparation and filing of any other documents required
by regulatory authorities, whether federal or state, that are related to the
operations of VEC or Valero Refining prior to the Effective Time. A
Performing Party's obligation to offer the Services described in this
paragraph shall continue until the passage of all regulatory deadlines and
statutes of limitation for the applicable document or filing.
4.1.3 Check Printing. For a period not to exceed four months
after the Effective Date, Valero Refining will make available to VEC check
printing services through the Treasury department of Valero Refining, provided
that VEC will be responsible for the mailing of all checks printed by Valero
Refining on behalf of VEC.
V. Administrative Services
5.1 Administrative Services to be Provided by VEC. In consideration for
the fees described on Exhibit A of this Agreement, VEC will provide the
following administrative services to Valero Refining.
5.1.1 San Antonio Office Space and Parking. VEC will cause VMC
to provide to Valero Refining office space, use of common areas, and parking
for the business needs of Valero Refining in San Antonio in accordance with
terms of the San Antonio Sublease.
5.1.2 Security. VEC will provide security services for the
personnel and property of Valero Refining and the Valero Federal Credit Union
located at 530 McCullough in San Antonio in the same manner as security
services are provided by VEC for its own personnel and property in San
Antonio.
5.1.3 Telecommunications. VEC will provide local and
long-distance telephone, facsimile, teleconference, and other
telecommunications availability and support for the business needs of Valero
Refining in San Antonio.
5.1.4. Mail Room. VEC will provide mail (including U.S. postal
service and commercial expedited courier service) receiving, sorting, and
distribution services for Valero Refining in San Antonio.
5.1.5 Printing and Document Design. VEC will provide printing
and document design services to Valero Refining for a period not to exceed six
months following the Effective Date.
5.1.6 Purchasing. In coordination with the Vice
President-Administration of Valero Refining, VEC will provide purchasing
services to Valero Refining with respect to its San Antonio and Houston
operations. VEC will issue purchase orders on behalf of and in the name of
Valero Refining.
5.1.7 Records. VEC will provide records storage and access services
to Valero Refining in accordance with the Records Agreement.
5.1.8 Travel. VEC will provide travel-related services to Valero
Refining, including the booking and ticketing of airline flights and related
reservation services. Air-carriage services will be provided in accordance
with the Aircraft Ownership Agreement.
5.2 Administrative Services to be Provided by Valero Refining. In
consideration for the fees described on Exhibit A of this Agreement, Valero
Refining will provide the following administrative services to VEC.
5.2.1 Houston Office Space. Valero Refining will provide to VEC
office space and the use of common areas for the business needs of VEC in
Houston in accordance with terms of the Houston Sublease.
5.2.2 Health Care Administration. Valero Refining will provide
claims processing through April 15, 1998 for the medical, dental,
reimbursement, and other health care claims incurred prior to the Effective
Time by VEC employees.
5.2.3 Payroll. For a period not to exceed four months after the
Effective Date, Valero Refining will provide payroll services for VEC with
respect to the employees of VEC, such services to include the preparation and
distribution of semi-monthly payroll checks, administration of employee
federal payroll tax and other withholdings, administration (including
remittance) of employer payroll tax contributions, maintenance of
payroll-related tax returns, and preparation and mailing of Forms W-2 for the
year 1997.
5.2.4 Accounts Payable. For a period not to exceed four months
after the Effective Date, Valero Refining will provide accounts payable
processing for VEC accounts. Valero Refining will process invoices from VEC
creditors, provide data for appropriate bookkeeping, and print checks for the
processed accounts.
VI. Miscellaneous
6.1 Additional Services. Valero Refining and VEC may determine that
services not specifically described in this Agreement may be necessary or
desirable during the term of this Agreement. If the parties through their
appropriate representatives agree upon such other services, then these
services will be incorporated into this Agreement by a written amendment and
will be subject to all provisions of this Agreement unless expressly stated
otherwise in the written amendment. The persons authorized to request
additional services on behalf of Valero Refining are the President, any Vice
President, the Controller and the Treasurer. The persons authorized to
request additional services on behalf of VEC are the President, any Vice
President, the Controller and the Treasurer.
6.2 Independence of Parties.
6.2.1 Independent Contractors. The parties agree that each of VEC
(or its designee) and Valero Refining (or its designee), with respect to one
another, is an independent contractor in the performance of Services under
this Agreement. The parties agree that this Agreement is not intended to
create a joint venture or partnership relationship. The Performing Party's
employees will not be, or be deemed to be, the employees of the Receiving
Party, and these employees shall be subject to the Performing Party's
exclusive supervision, direction, and control. The Receiving Party will have
the right to inspect the performance of the Services to ensure satisfactory
completion of them, but the parties acknowledge that the Receiving Party is
not directly responsible for the actual performance of the Services. It is
further agreed that the Performing Party is solely and individually liable for
all labor and expenses in connection with the Services performed. The parties
agree that neither party will have the right or authority to assume or create
any obligation or responsibility, express or implied, on behalf of, or in the
name of the other party, or to bind the other party in any way.
6.2.2 No Obligation for Compensation or Benefits. Neither federal,
state nor local income or payroll tax will be withheld or paid by the
Receiving Party on behalf of the Performing Party or the Performing Party's
employees. No workers' compensation insurance will be obtained by the
Receiving Party concerning the Performing Party or the Performing Party's
employees. The employees of the Performing Party shall have no claim against
the Receiving Party for any compensation, reimbursement, injury or damages of
any kind.
6.3 Liability and Indemnification. Neither party makes any warranty,
express or implied, with respect to the Services to be provided by such party
under this Agreement. The liability of any Performing Party with respect to
the quality of performance of Services provided under this Agreement is
limited to the total compensation for the Services provided by that party
under this Agreement and shall not include any contingent liability. The sole
remedy (other than the amount of damages described in the foregoing sentence)
for the Performing Party's breach of this Agreement shall be the termination
of this Agreement. The Receiving Party's receipt of any Service performed
hereunder shall be deemed an unqualified acceptance of such Service and a
waiver by the Receiving Party of any and all claims with respect to such
Service, unless the Receiving Party gives notice of such claim within five
days after the date such item of Service was performed. Neither party will be
liable under this Agreement to the other party (or affiliate thereof) for
indirect, incidental, punitive, special or consequential damages, including
lost profits or revenue, even if the liable party has been advised of the
possibility of such damages or any claim against the other party by any third
party. A Performing Party will not be liable for any costs, expenses, losses,
liabilities, claims or damages, including attorneys' fees (hereafter
"Claims") directly or indirectly attributable to the actions of the Performing
Party, whether or not negligent, in performance of its obligations under this
Agreement, except that the same may be attributable to the [gross negligence]
or willful misconduct of the Performing Party.
6.3.1 Indemnification Covenant of Receiving Party. With respect to
any Service performed for the benefit of a Receiving Party, the Receiving
Party shall indemnify, defend and hold the Performing Party harmless from and
against any and all Claims (except for those Claims described in Section 6.3.2
or excluded by Section 6.3.3 of this Agreement) incurred by or assessed
against the Performing Party in connection with: (a) the performance of
Services by the Performing Party under this Agreement, (b) the injury to or
death of any person during the term of this Agreement who is an employee of
the Receiving Party at the time of the occurrence which causes such injury or
death, or (c) loss of or damage to any property of the Receiving Party during
the term of this Agreement.
6.3.2 Indemnification Covenant of Performing Party. With respect to
the Services performed by the Performing Party, the Performing Party shall
indemnify, defend and hold the Receiving Party harmless from and against any
and all Claims incurred by or assessed against the Receiving Party in
connection with the gross negligence, willful misconduct, or fraud of, or the
imposition of punitive or exemplary damages against, the Performing Party in
the performance of Services under the terms of this Agreement.
6.3.3 General Terms Regarding Indemnification. All indemnities set
forth in this Agreement extend to the officers, directors, employees and
affiliates of the party indemnified. Unless this agreement expressly provides
to the contrary, the indemnities set forth herein apply regardless of whether
the indemnified party (or its employees, agents, contractors, successors or
assigns) was a contributing cause of the indemnified Claim, expressly
including indemnified Claims arising out of or resulting, in whole or part,
from the indemnified party's (or its employees', agents', contractors',
successors' or assigns') sole or concurrent negligence. However, the
indemnities set forth in this agreement do not extend to any part of an
indemnified Claim that is the result of the gross negligence, willful
misconduct or fraud of the indemnified party or the result of the imposition
of punitive or exemplary damages on the indemnified party.
6.4 DTPA Waiver. Each Receiving Party hereby waives the provisions of the
Texas Deceptive Trade Practices-Consumer Protection Act, chapter 17,
subchapter E, sections 17.41 through 17.63, inclusive, Texas Business and
Commerce Code. To evidence its ability to grant such waiver, each Receiving
Party hereby represents and warrants to the Performing Party that the
Receiving Party (a) is in the business of seeking or acquiring, by purchase or
lease, goods or services for commercial or business use, (b) has assets of $5
million or more according to its most recent financial statement prepared in
accordance with generally accepted accounting principles, (c) has knowledge
and experience in financial and business matters that enable it to evaluate
the merits and risks of the transactions contemplated by this Agreement, and
(d) is not in a significantly disparate bargaining position.
6.5 Force Majeure. A Performing Party will not be considered in default
in performance of its obligations hereunder if performance is prevented or
delayed by acts of God or government, labor disputes, fires, power failures,
failure or delay of transportation, or by vendors or subcontractors, or any
other similar cause or causes beyond the reasonable control of that party,
whether similar to the causes specified herein or not, provided that the
Performing Party exercises all diligence in response to the force majeure and
uses its best efforts to perform its obligations hereunder as soon as possible
after termination of the force majeure. Neither party will be obligated to
settle a dispute or otherwise take any action that is not commercially
reasonable to terminate an event of force majeure.
6.6 Governing Law, Amendments, Successors and Assigns. This Agreement
will be governed by and construed in accordance with Texas law. This
Agreement may be amended, but only by a written instrument executed by a duly
authorized representative of each of VEC and Valero Refining. No party to
this Agreement may assign its rights or obligations under the Agreement
without the prior written consent of the other. This Agreement is binding
upon the successors and permitted assigns of VEC and Valero Refining.
6.7 Disputes. If a Receiving Party, within 10 days after receipt of an
invoice, disputes any charge set forth therein, the Receiving Party shall
notify the Performing Party in writing. The parties shall promptly attempt to
resolve any such dispute. If either party determines that the dispute cannot
be resolved in a mutually agreeable manner, the dispute shall be submitted,
within five days of notification to the other party, to Arthur Andersen LLP,
or if Arthur Andersen LLP declines the referral, to another independent public
accountant mutually acceptable to the parties (the "Accountant"). The
Accountant shall make an investigation of the disputed charges as it deems
necessary and shall finally determine the amount of the charge. The cost of
the Accountant shall be borne by the Receiving Party if the invoiced amount is
determined to be correct, and shall be borne by the Performing Party if the
invoiced amount is determined to be incorrect. Pending such determination,
the Receiving Party shall pay the invoiced amount, with appropriate
adjustments to be made by the Performing Party following a final
determination.
The parties have executed this Interim Services Agreement to be effective
as of the Effective Date.
VALERO ENERGY CORPORATION
By:
[insert name and title]
VALERO REFINING AND MARKETING COMPANY
By:
[insert name and title]
<PAGE>
[The following schedules or annexes have been omitted from this filing
pursuant to Regulation S-K section 229.601(b)(2). The Company undertakes to
furnish supplementally a copy of any omitted schedule or annex to the
Commission upon request.]
Schedule 1.1(a) -- Company Guarantees
Schedule 1.1(b) -- MTBE Project
Schedule 1.1(c) -- Retained Company Assumed Liabilities
Schedule 2.1(a) -- Retained Subsidiaries
Schedule 2.1(b)(ii)(B) -- Esco Real Estate
Schedule 2.1(b)(ii)(C) -- Promissory Notes
Schedule 2.1(b)(ii)(D) -- Esco Leases
Schedule 2.1(b)(ii)(G) -- Computer Software
Schedule 2.1(b)(ii)(H) -- Butane Splitter and Debutanizer
Schedule 2.1(b)(ii)(I) -- Valero Corporate Services Company, Listing of
Property, Plant and
Equipment as of January 1, 1997
Schedule 2.1(b)(ii)(J) -- Airplanes
Schedule 2.1(b)(ii)(K) -- Hunting Lease
Schedule 2.1(b)(ii)(L) -- Methanol Pipeline Segments
Schedule 2.2(a) -- VRM Assumed Liabilities
Schedule 2.2(c) -- Cash Management Overview
Schedule 4.1 -- Trademarks/Service Marks
Schedule 4.5 -- Intercompany Arrangements
EMPLOYEE BENEFITS AGREEMENT
BETWEEN
VALERO ENERGY CORPORATION
AND
VALERO REFINING AND MARKETING COMPANY
Dated as of ______, 1997
<PAGE>
TABLE OF CONTENTS
Page
ARTICLE I DEFINITIONS. . . . . . . . . . . . . . . . . . . . .2
1.01. Definitions. . . . . . . . . . . . . . . . . . . . .2
1.02. Schedules, etc.. . . . . . . . . . . . . . . . . . .6
ARTICLE II GENERAL . . . . . . . . . . . . . . . . . . . . . .6
2.01. Transfers of Employees . . . . . . . . . . . . . . .6
2.02. Liabilities Under Plans. . . . . . . . . . . . . . .6
ARTICLE III STOCK-BASED PLANS. . . . . . . . . . . . . . . . . .7
3.01. Stock Options. . . . . . . . . . . . . . . . . . . .7
ARTICLE IV RETIREMENT PLANS . . . . . . . . . . . . . . . . . .8
4.01. Pension Plan . . . . . . . . . . . . . . . . . . . .8
4.02. Non-Employee Directors Pension Plan. . . . . . . . .8
4.03. Thrift Plan. . . . . . . . . . . . . . . . . . . . .8
4.04. Excess Thrift Plan . . . . . . . . . . . . . . . . .9
4.05. Supplemental Retirement Plan and Supplemental
Executive Retirement Agreements . . . . . . . . .9
4.06. Other Postemployment Benefits. . . . . . . . . . . 10
ARTICLE V OTHER PLANS AND ARRANGEMENTS .. . . . . . . . .. . 10
5.01. Deferred Compensation. . . . . . . . . . . . . . . 10
5.02. Severance Pay. . . . . . . . . . . . . . . . . . . 11
5.03. VESOP. . . . . . . . . . . . . . . . . . . . . . . 11
5.04. ESOP . . . . . . . . . . . . . . . . . . . . . . . 12
5.05. Reimbursement Account Plan . . . . . . . . . . . . 12
ARTICLE VI OTHER LIABILITIES . . . . . . . . . . . . . . . .. 12
6.01. Other Liabilities and Obligations. . . . . . . . . 12
ARTICLE VII MISCELLANEOUS. . . . . . . . . . . . . . . . . . . 13
7.01. Recognition of Company Employment Service, etc.. . 13
7.02. Indemnification. . . . . . . . . . . . . . . . . . 13
7.03. Guarantee of Subsidiaries' Obligations . . . . . . 13
7.04. Sharing of Information . . . . . . . . . . . . . . 13
7.05. Amendments . . . . . . . . . . . . . . . . . . . . 13
7.06. Successors and Assigns . . . . . . . . . . . . . . 13
7.07. Termination. . . . . . . . . . . . . . . . . . . . 13
7.08. Rights to Amend or Terminate Plans; No Third
Party Beneficiaries. . . . . . . . . . . . . . . 14
7.09. Transfer of Reserves . . . . . . . . . . . . . . . 14
7.10. Further Transfers. . . . . . . . . . . . . . . . . 14
7.11. Payment Under Other Agreements . . . . . . . . . . 14
7.12. Incorporation by Reference . . . . . . . . . . . . 14
SCHEDULE ALIST OF COMPANY PLANS. . . . . . . . . . . . . . . .A-1
SCHEDULE BEMPLOYEES TRANSFERRING TO VRM. . . . . . . . . . . .B-1
<PAGE>
EMPLOYEE BENEFITS AGREEMENT
EMPLOYEE BENEFITS AGREEMENT, dated as of _______, 1997 (this
"Agreement"), by and between Valero Energy Corporation, a Delaware corporation
(the "Company"), and Valero Refining and Marketing Company, a Delaware
corporation and a wholly owned Subsidiary of the Company ("VRM").
RECITALS
A. The Merger Transaction. The Company, PG&E Corporation, a California
corporation ("Acquiror"), and [PG&E SubCo.], a Delaware corporation ("Sub")
have entered into a Plan and Agreement of Merger, dated as of January 31, 1997
(the "Merger Agreement"), providing for the Merger (as defined in the Merger
Agreement) of Sub with and into the Company, with the Company as the surviving
corporation.
B. The Distribution. Immediately prior to the Effective Time (as
defined in the Merger Agreement), the Company intends to distribute (the
"Distribution") to the holders of the Company's common stock, par value $1.00
per share ("Company Common Stock"), on a pro rata basis, all of the then
outstanding shares of common stock, par value $0.01 per share ("VRM Common
Stock"), of VRM.
C. Purpose. The purpose of the Distribution is to facilitate the
reorganization of the Company, wherein the stockholders of the Company will
continue to own and operate VRM, and to make possible the Merger by divesting
the Company of the businesses and operations conducted by VRM in a tax-free
distribution to the Company's stockholders. The Company and VRM have entered
into an Agreement and Plan of Distribution (the "Distribution Agreement"),
which sets forth or provides for certain agreements between the Company and
VRM in consideration of the separation of their ownership.
D. This Agreement. Among other things, the Distribution Agreement
provides that the Company and VRM will enter into this Employee Benefits
Agreement regarding certain liabilities and obligations relating to employees.
NOW, THEREFORE, in consideration of the premises and of the respective
covenants and agreements set forth herein, the parties hereto hereby agree as
follows:
ARTICLE I
DEFINITIONS
1.01. Definitions. As used in this Agreement, the following terms shall
have the following respective meanings (capitalized terms used but not defined
herein (other than the names of Company employee benefit plans) shall have the
respective meanings ascribed thereto in the Distribution Agreement):
"Agreement" shall have the meaning specified in the first paragraph
hereof.
"Code" shall mean the Internal Revenue Code of 1986, as amended.
"Company" shall have the meaning specified in the first paragraph
hereof.
"Company Annual Bonus Plan" shall mean the Company's Executive
Incentive Bonus Plan effective on or about February 27, 1980 and amended and
restated effective as of January 23, 1997.
"Company Common Stock" shall have the meaning specified in paragraph
B of the recitals to this Agreement.
"Company Deferred Compensation Plans" shall mean the Company's
Executive Deferred Compensation Plan, effective as of November 26, 1984 and
amended and restated effective as of October 21, 1986, and the Company's Key
Employee Deferred Compensation Plan, effective as of August 20, 198_, and
amended and restated effective as of October 21, 1986.
"Company Employee" shall mean any individual who is employed by any
member of the Company Group immediately before the Time of Distribution and
who is not a VRM Employee.
"Company ESIP" shall mean the Executive Stock Incentive Plan,
effective as of July 21, 1994 and amended and restated effective as of
November 21, 1996.
"Company Excess Thrift Plan" shall mean the Company Excess Thrift
Plan, effective as of January 1, 1990.
"Company Former Employee" shall mean any individual who is,
immediately before the Time of Distribution, a former employee of any member
of the Company Group who has not been an employee of any member of the VRM
Group since his or her most recent active employment with any member of the
Company Group.
"Company Group" shall have the meaning set forth in the Distribution
Agreement.
"Company Non-Employee Director Retirement Plan" shall mean the
Non-Employee Director Retirement Plan, effective as of January 1, 1991.
"Company Participants" shall mean Company Employees, Company Former
Employees and their respective beneficiaries and dependents.
"Company Pension Plan" shall mean the Company's Pension Plan,
effective as of March 1, 1985 and amended and restated effective as of January
1, 1994.
"Company Performance Shares" shall have the meaning set forth in the
Company ESIP for "Performance Shares."
"Company Plan" shall mean any plan, policy, program, payroll
practice, on-going arrangement, trust, insurance policy or other agreement or
funding vehicle maintained by, contributed to or sponsored by any member of
the Company Group providing benefits to employees, former employees or
non-employee directors of any member of the Company Group, including without
limitation the plans listed on Schedule A hereto; provided, however, that the
term "Company Plans" shall not include any VRM Plans.
"Company Reimbursement Account Plan" shall mean the Company's
Reimbursement Account Plan, effective as of November 29, 1983.
"Company Restricted Stock" shall mean restricted shares of Company
Common Stock granted pursuant to, and subject to forfeiture under, the
Company's Restricted Stock Bonus and Incentive Stock Plan, effective as of
April 30, 1981 and amended and restated effective as of November 21, 1996, the
1990 Restricted Stock Plan for Non-employee Directors, effective as of
November 14, 1990 and amended and restated effective as of August 22, 1996, or
the Company ESIP.
"Company SAR" or "stock appreciation right" shall mean the right,
subject to the provisions of the applicable Company plan, to receive a payment
in cash equal to the difference between the specified exercise price of the
SAR and the fair market value (as defined in the applicable plan) of one share
of Company Common Stock.
"Company SERA" shall mean any Supplemental Executive Retirement
Agreement entered into prior to the Time of Distribution between the Company
and either a Company Participant or a VRM Participant.
"Company Stock Option" shall mean an option to purchase shares of
Company Common Stock, granted pursuant to the Company's Stock Option Plan No.
3, effective as of January 21, 1986 and amended and restated effective as of
August 22, 1996; Stock Option Plan No. 4, effective as of January 1, 1990 and
amended and restated effective as of August 22, 1996; Stock Option Plan No. 5,
effective as of September 16, 1992 and amended and restated effective as of
August 22, 1996; the Company ESIP; or the Non-Employee Director Stock Option
Plan, effective as of July 25, 1995 and amended and restated effective as of
November 21, 1996.
"Company Supplemental Retirement Plan" shall mean the Company's
Supplemental Executive Retirement Plan, effective as of January 1, 1983 and
amended and restated effective as of January 1, 1996.
"Company Thrift Plan" shall mean the Company's Thrift Plan,
effective as of December 31, 1979 and amended and restated effective as of
January 1, 1994.
"Distribution" shall have the meaning specified in paragraph B of
the recitals to this Agreement.
"Distribution Agreement" shall have the meaning specified in
paragraph C of the recitals to this Agreement.
"Distribution Year" shall mean the calendar year in which the Time
of Distribution occurs.
"ESOP" shall mean the Company's Employees' Stock Ownership Plan,
effective as of January 1, 1983 and amended and restated effective as of
January 1, 1994.
"ERISA" shall mean the Employee Retirement Income Security Act of
1974, as amended.
"Liabilities" shall have the meaning set forth in the Distribution
Agreement.
"Merger Agreement" shall have the meaning specified in paragraph A
of the recitals to this Agreement.
"Merger Partner Common Stock" shall mean the common stock, 0 par
value, of PG&E Corporation.
"Merger Partner Thrift Plan" shall mean the [name] Plan, a defined
contribution plan intended to qualify under Section 401(a) of the Code.
"Notes" shall mean the 9.14% Senior ESOP Notes Due 1999 and the
9.85% VESOP Note Due 2001, together with any amendments thereto, issued by
Frost National Bank of San Antonio, N.A., in its capacity as trustee for the
VESOP Trust forming part of the VESOP.
"Pre-Distribution Year" shall mean the calendar year immediately
preceding the Distribution Year.
"Rabbi Trust" shall mean a grantor trust subject to s 671 et seq.
of the Code.
"Ratio" shall mean the amount obtained by dividing the average of
the daily high and low trading prices on the New York Stock Exchange for the
Company Common Stock on each of the fifteen trading days prior to the
ex-dividend date for the Distribution by the average of the daily high and low
trading prices on the New York Stock Exchange for the VRM Common Stock on each
of the fifteen trading days beginning with either (a) in the event the VRM
Common Stock trades on a "when-issued" basis prior to the Time of the
Distribution, the ex-dividend date for the Distribution or (b) in the event
the VRM Common Stock does not trade on a "when-issued" basis prior to the Time
of the Distribution, the Time of Distribution.
"Subsidiary" shall have the meaning set forth in the Merger
Agreement.
"Thrift Plan Transfer" shall have the meaning set forth in Section
4.03(b) of this Agreement.
"VESOP" shall mean the Valero Employees' Stock Ownership Plan of
Valero Energy Corporation, effective as of February 15, 1989.
"VESOP Stock Sale" shall have the meaning set forth in Section
5.03(a) of this Agreement.
"VRM" shall have the meaning set forth in the first paragraph of
this Agreement.
"VRM Assumed Plans" shall have the meaning set forth in Section
2.02.
"VRM Common Stock" shall have the meaning specified in paragraph B
of the recitals to this Agreement.
"VRM Employee" shall mean any individual who, immediately before the
Time of Distribution, is employed by any member of the VRM Group.
"VRM Former Employee" shall mean any individual who is, immediately
before the Time of Distribution, a former employee of any member of the VRM
Group who has not been an employee of any member of the Company Group since
his or her most recent active employment with any member of the VRM Group.
"VRM Group" shall have the meaning set forth in the Distribution
Agreement.
"VRM Stock Option" shall mean an option to purchase from VRM shares
of VRM Common Stock provided to a VRM Participant pursuant to Section 3.01.
"VRM Participants" shall mean VRM Employees, VRM Former Employees,
and their respective beneficiaries and dependents.
"VRM Plans" shall mean any plan, policy, program, payroll practice,
on-going arrangement, trust, insurance policy or other agreement or funding
vehicle maintained by, contributed to or sponsored by any member of the VRM
Group providing benefits to employees, former employees or non-employee
directors of any member of the VRM Group, but excluding any Company Plan.
"VRM Thrift Plan" shall have the meaning set forth in Section
4.03(a) of this Agreement.
1.02. Schedules, etc. References to a "Schedule" are, unless otherwise
specified, to one of the Schedules attached to this Agreement, and references
to a "Section" are, unless otherwise specified, to one of the Sections of this
Agreement.
ARTICLE II
GENERAL
2.01. Transfers of Employees. Within thirty days of the effective date
of the Merger Agreement, the Company, VRM and Acquiror will mutually consent
to a decision-making procedure for the purpose of determining the identity of
individuals who shall be transferred from the employ of members of the Company
Group to the employ of VRM or any of its affiliated companies designated by
VRM, which individuals shall be listed on Schedule B hereto; provided,
however, that the consent of the Company, VRM or the Acquiror to any proposal
for such decision-making procedure shall not be unreasonably withheld.
Schedule B hereto may be amended by VRM or the Company at any time or from
time to time before the Time of Distribution with the consent of the other
party and the Acquiror, which consent shall not be unreasonably withheld.
2.02. Liabilities Under Plans. From and after the Time of Distribution,
except as otherwise specifically set forth in this Agreement, VRM shall (a)
sponsor and (b) assume or retain, as the case may be, and be solely
responsible for all Liabilities arising under, resulting from or relating to,
the VRM Plans and the Company Plans marked with an asterisk on Schedule A (the
"VRM Assumed Plans") (whether to Company Participants or to VRM Participants),
whether incurred before, on or after the Time of Distribution, and the Company
shall assume or retain, as the case may be, and shall be solely responsible
for, all Liabilities arising under the other Company Plans to Company
Participants incurred before, on or after the Time of Distribution; provided,
however, that VRM shall be under no obligation (except with respect to any
obligation specifically described in this Agreement or the Merger Agreement)
to permit Continuing Employees (as such term is defined in the Merger
Agreement) to continue to participate in the VRM Assumed Plans after the Time
of Distribution.
ARTICLE III
STOCK-BASED PLANS
3.01. Stock Options. (a) The Company and VRM shall take all action
necessary or appropriate (including amending appropriate Company Plans, if
required) so that each Company Stock Option held by a VRM Participant that is
outstanding as of the Time of Distribution shall be replaced as of the Time of
Distribution with a VRM Stock Option with respect to a number of shares of VRM
Common Stock equal to the number of shares of Company Common Stock subject to
such Company Stock Option immediately before such replacement, multiplied by
the Ratio (rounded up to the nearest whole share if necessary), and with a
pershare exercise price equal to the pershare exercise price of such Company
Stock Option immediately before such replacement, divided by the Ratio
(rounded down to the nearest cent). Such VRM Stock Option shall otherwise
have the same terms and conditions as the corresponding Company Stock Option,
except that references to the Company shall be changed to refer to VRM.
(b) Effective as of the Time of Distribution, VRM shall assume and be
solely responsible for all Liabilities of the Company to or with respect to
VRM Employees and VRM Former Employees arising out of or relating to Company
Stock Options that are outstanding as of the Time of Distribution. VRM shall
be solely responsible for all Liabilities arising out of or relating to VRM
Stock Options.
(c) The Company shall take all action necessary or appropriate
(including amending appropriate Company Plans, if required) so that the terms
of each Company Stock Option held by a Company Participant that is outstanding
immediately after the Time of Distribution shall be adjusted, either
immediately prior to or in connection with the Merger, to take into account
the impact of the Distribution upon the capitalization of the Company.
(d) Any adjustments to Company Stock Options (other than those provided
by, or necessary to implement, this Section 3.01 and Section 3.1(a)(iii) of
the Merger Agreement) shall be subject to the approval of the Acquiror. VRM
shall indemnify, defend and hold harmless the Retained Companies (as defined
in the Distribution Agreement) from any and all claims by any holder of any
Company Stock Option (or replacement option thereto) that such holder is
entitled to any securities (or other property, including without limitation,
cash) other than the securities expressly provided by the adjustments
specified by this Section 3.01 and Section 3.1(a)(iii) of the Merger
Agreement.
ARTICLE IV
RETIREMENT PLANS
4.01. Pension Plan. (a) The Company and VRM shall take all action
necessary or appropriate (including amending appropriate Company Plans,
including, without limitation, the Company Pension Plan) so that, effective as
of the Time of Distribution, VRM shall become the Sponsor (as defined in the
Company Pension Plan) of the Company Pension Plan and in such capacity assume
responsibility for maintaining the Company Pension Plan. Except as
specifically set forth in this Section, from and after the Time of
Distribution the VRM Group shall assume, and shall be solely responsible for
all Liabilities existing under the Company Pension Plan as of the Time of
Distribution to or with respect to Company and VRM Participants. Each Company
Participant in the Company Pension Plan shall become entitled to all benefits
accrued and vested under the Company Pension Plan as of the Time of
Distribution pursuant to the terms and conditions of the Company Pension Plan
upon termination of his or her employment with the Company, but (except in the
case of the death of the Participant) no earlier than the date of the
Participant's attainment of the Early Retirement Age (as defined in Section
1.16 of the Company Pension Plan).
4.02. Non-Employee Directors Pension Plan. The Company and VRM shall
take all action necessary or appropriate (including amending appropriate
Company Plans, including, without limitation, the Non-Employee Directors
Pension Plan) so that, effective as of the Time of Distribution, VRM shall
assume and be solely responsible for all Liabilities existing under the
Non-Employee Directors Pension Plan as of the Time of Distribution. VRM and
the Company shall cooperate in taking all actions necessary or appropriate to
accomplish the foregoing.
4.03. Thrift Plan. (a) The Company and VRM shall take all action
necessary or appropriate (including amending appropriate Company Plans,
including, without limitation, the Company Thrift Plan) so that (i) effective
as of the Time of Distribution, VRM shall become the Sponsor (as defined in
the Company Thrift Plan) of the Company Thrift Plan (such plan, following such
event, is hereinafter referred to as the "VRM Thrift Plan"), and in such
capacity assume responsibility for maintaining the VRM Thrift Plan, and (ii)
immediately following the Time of Distribution, each Company Employee in the
VRM Thrift Plan shall be entitled, in connection with the transactions
contemplated by the Merger Agreement and to the extent permissible by
applicable law and the Plan, to direct the trustee of the VRM Thrift Plan to
take any of the following actions with respect to the Company Employee's
account (including all Company contributions thereto, whether previously
vested or nonvested, and the earnings thereon) in the VRM Thrift Plan: (A)
maintain the account in the VRM Thrift Plan; (B) transfer the account to a
qualified Individual Retirement Account held in the name of such Participant;
(C) transfer the account to the Merger Partner Thrift Plan; or (D) receive a
distribution of the account. The transfers described in clauses (ii)(B) and
(C) of this paragraph (each a "Thrift Plan Transfer") shall be effected in
cash, except that the Merger Partner Thrift Plan may accept promissory notes
evidencing any outstanding participant loans. As a condition to the Merger
Partner Thrift Plan accepting any transfer under this Section 4.03, VRM shall
provide Acquiror with an IRS letter ruling addressed to VRM, an IRS
Determination Letter or an opinion of counsel satisfactory to Acquiror
confirming the permissibility of the transfers under applicable law.
(b) VRM and the Company shall cooperate in making all appropriate
filings required under the Code or ERISA, and the regulations thereunder and
any applicable securities laws, implementing all appropriate communications
with Company Thrift Plan participants, transferring appropriate records, and
taking all such other actions as may be necessary and appropriate to implement
the provisions of this Section and to permit the timely effectuation of Thrift
Plan Transfers.
(c) From and after the time when VRM becomes Sponsor of the Company
Thrift Plan, VRM and the VRM Thrift Plan shall be solely responsible for all
Liabilities of the Company under the Company Thrift Plan arising after the
Time of Distribution to or with respect to VRM Participants, Company Former
Employees, and Company Employees who have elected to maintain their account
balances in the VRM Thrift Plan, except that the Company shall be responsible
for any Liabilities arising under Section 5.2 of the Company Thrift Plan with
respect to any Participant Basic Contribution (as such term is defined in the
Company Thrift Plan) for any Company Employee made with respect to any period
of employment prior to the Time of Distribution. The VRM Group and the VRM
Thrift Plan shall be solely responsible for all Liabilities arising out of or
relating to the VRM Thrift Plan.
4.04. Excess Thrift Plan. (a) The Company and VRM shall take all action
necessary or appropriate (including amending appropriate Company Plans,
including, without limitation, the Company Excess Thrift Plan) so that,
effective as of the Time of Distribution, VRM shall become the Sponsor (as
defined in the Company Excess Thrift Plan) of the Company Excess Thrift Plan
(such plan, following such event, is hereinafter referred to as the "VRM
Excess Thrift Plan"), and in such capacity assume responsibility for
maintaining the VRM Excess Thrift Plan and for all Liabilities of the Company
under the Company Excess Thrift Plan arising after the Time of Distribution to
or with respect to VRM Participants and Company Participants, except that the
Company shall be responsible for any Liabilities arising under the Company
Excess Thrift Plan with respect to any Participant Basic Contribution (as such
term is defined in the Company Thrift Plan) for any Company Employee made with
respect to any period of employment prior to the Time of Distribution. The
VRM Group and the VRM Excess Thrift Plan shall be solely responsible for all
Liabilities arising out of or relating to the VRM Excess Thrift Plan.
4.05. Supplemental Retirement Plan and Supplemental Executive Retirement
Agreements. (a) Effective as of the Time of Distribution, the Company shall
amend the Company Supplemental Retirement Plan, if necessary, so that (i) no
VRM Employee who is a participant therein shall be deemed to have terminated
employment as a result of the Distribution or as a result of becoming a VRM
Employee in connection with the Distribution and (ii) from and after the Time
of Distribution, VRM shall become the sponsor of the Company Supplemental
Retirement Plan and assume and remain solely responsible for all Liabilities
of the Company arising under the Company Supplemental Retirement Plan to or
relating to both Company Participants and VRM Participants.
(b) Effective as of the Time of Distribution, the Company shall amend
such Company SERAs as may be necessary so that (i) no VRM Employee who is a
signatory to a SERA shall be deemed to have terminated employment as a result
of the Distribution or as a result of becoming a VRM Employee in connection
with the Distribution, and (ii) from and after the Time of Distribution, VRM
shall assume and remain solely responsible for all Liabilities of the Company
arising under Company SERAs to or relating to both Company Participants and
VRM Participants.
(c) VRM and the Company shall cooperate in taking all actions necessary
or appropriate to accomplish the foregoing and to ensure that as of the Time
of Distribution, the Company ceases to have any Liabilities to or relating to
Company Participants and VRM Participants under the Company Supplemental
Retirement Plan and any Company SERA, including, but not limited to, the
following: (i) amending the Company Supplemental Retirement Plan or any grant
thereunder; (ii) obtaining any necessary consents of affected Company or VRM
Employees; and (iii) effective as of the Time of Distribution, transferring to
VRM control of the Rabbi Trust formed by that certain Trust Agreement, dated
as of September 1, 1996, between the Company and Frost National Bank of San
Antonio, N.A., as trustee.
4.06. Other Postemployment Benefits. The Company and VRM shall take all
action necessary or appropriate so that effective at the Time of Distribution,
VRM shall assume and be solely responsible for all Liabilities to Company
Former Employees and VRM Former Employees and (except with respect to any
period after such persons subsequently recommence active employment with the
Company) all Company and VRM Employees who at the Time of Distribution are not
actively at work (excluding Company Employees who are on vacation at such
time) under the Company's health care and life insurance programs.
ARTICLE V
OTHER PLANS AND ARRANGEMENTS
5.01. Deferred Compensation. Effective as of the Time of Distribution,
the Company shall amend the Company Deferred Compensation Plans, if necessary,
so that (a) no VRM Employee who is a participant therein shall be deemed to
have terminated employment as a result of the Distribution or as a result of
becoming a VRM Employee in connection with the Distribution and (b) from and
after the Time of Distribution, VRM shall become the sponsor of the Deferred
Compensation Plans and assume and remain solely responsible for all
Liabilities of the Company arising under the Company Deferred Compensation
Plans to or relating to both Company Participants and VRM Participants. VRM
and the Company shall cooperate in taking all actions necessary or appropriate
to accomplish the foregoing and to ensure that, as of the Time of
Distribution, the Company ceases to have any Liabilities to or relating to
Company Participants or VRM Participants under the Company Deferred
Compensation Plans, including, but not limited to, the following: (i) amending
the Company Deferred Compensation Plans or any grant thereunder and (ii)
obtaining any necessary consents of affected participants, and (iii) causing
the insurance policies referred to in Section 2.1(b)(ii)(Q) of the
Distribution Agreement to be assigned to VRM.
5.02. Severance Pay. (a) VRM and the Company agree that individuals
who, on or prior to the Time of Distribution, in connection with the
Distribution, cease to be Company Employees and become VRM Employees shall not
be deemed to have experienced a termination or severance of employment from
the Company and its Subsidiaries for purposes of any policy, plan, program or
agreement of the Company or any of its Subsidiaries that provides for the
payment of severance, salary continuation or similar benefits.
(b) VRM shall assume and be solely responsible for all Liabilities of
the Company in connection with claims made by or on behalf of VRM Employees in
respect of severance pay, salary continuation and similar obligations relating
to the termination or alleged termination of any such person's employment on
or after the Time of Distribution.
5.03. VESOP. (a) At a date sufficiently in advance of the Time of
Distribution to permit the requirements of paragraph (b) of this Section to be
met, the Company shall direct the trustee of the Company's VESOP to sell an
amount of the Company's Common Stock maintained in the Exempt Loan Suspense
Account (as described in Section 5.4(a)(1) of the VESOP) such that the
proceeds from such sale (the "VESOP Stock Sale") are sufficient to prepay the
Notes in whole; provided, however, that the VESOP Stock Sale shall occur via
transactions on a national exchange or in the over-the-counter market, to
parties other than a "party in interest," as defined in ERISA Section 3(14),
and for "adequate consideration," as defined in ERISA Section 3(18).
(b) After the VESOP Stock Sale, but prior to the Thrift Plan Transfer,
the Company shall (i) direct the trustee of the VESOP to release the stock
remaining in the Exempt Loan Suspense Account, if any, and allocate such stock
to Company Participants and VRM Participants in the VESOP in the manner
prescribed by Section 5.5 of the VESOP, as amended, and (ii) following such
release and allocation, the Company shall cause the VESOP to be merged into
the Company Thrift Plan, in a transaction consistent with the requirements of
Section 414(1) of the Code.
(c) Immediately after receipt from the VESOP of the accounts of Company
and VRM Participants in the VESOP, the trustee of the Company Thrift Plan
shall allocate the stock thus transferred to the Participants' respective
Thrift Plan accounts; provided that, in the case of any VESOP Participant who,
as of the date of such allocation, is not participating in the Company Thrift
Plan, the Company and the trustee of the Company Thrift Plan shall take all
action necessary to establish a Company Thrift Plan account for such
Participant, to which the stock transferred from the VESOP shall be allocated.
(d) VRM and the Company shall cooperate in making all appropriate
filings required under the Code or ERISA and the regulations thereunder and
any applicable securities laws, implementing all appropriate communications
with VESOP participants, transferring records, and taking all such other
actions as may be necessary and appropriate to implement the provisions of
this Section.
5.04. ESOP. (a) Prior to the Thrift Plan Transfer, the Company shall
cause the ESOP to be merged into the Company Thrift Plan, in a transaction
consistent with the requirements of Section 414(1) of the Code.
(b) Immediately after receipt from the ESOP of the accounts of Company
and VRM Participants in the ESOP, the trustee of the Company Thrift Plan shall
allocate the stock thus transferred to the Participants' respective Thrift
Plan accounts; provided that, in the case of any ESOP Participant who, as of
the date of such allocation, is not participating in the Company Thrift Plan,
the Company and the trustee of the Company Thrift Plan shall take all action
necessary to establish a Company Thrift Plan account for such Participant, to
which the stock transferred from the ESOP shall be allocated.
(c) VRM and the Company shall cooperate in making all appropriate
filings required under the Code or ERISA and the regulations thereunder and
any applicable securities laws, implementing all appropriate communications
with ESOP participants, transferring records, and taking all such other
actions as may be necessary and appropriate to implement the provisions of
this Section.
5.05. Reimbursement Account Plan. Effective as of the Time of
Distribution, the Company shall amend the Company Reimbursement Account Plan,
if necessary, so that: (a) effective as of the Time of Distribution, VRM shall
have responsibility for administering and maintaining such plan and thereby
assume, and be solely responsible for, all Liabilities existing under the
Reimbursement Account Plan to or with respect to Company Participants and VRM
Participants; and (b) any Company Employee shall be entitled to continue to
receive reimbursements for the 1997 plan year pursuant to the terms of the
Company Reimbursement Account Plan and such transaction rules as VRM may adopt
until [April 30, 1998].
ARTICLE VI
OTHER LIABILITIES
6.01. Other Liabilities and Obligations. As of the Time of
Distribution: (i) VRM shall assume and be solely responsible for all
Liabilities of the Company not otherwise provided for in this Agreement to or
relating to VRM Employees and VRM Former Employees arising out of or relating
to employment by any of the Company or VRM, or any predecessors thereof; and
(ii) the Company shall assume and be solely responsible for all Liabilities of
VRM not otherwise provided for in this Agreement to or relating to Company
Participants arising out of or relating to employment by any of the Company or
VRM, or any predecessors thereof.
ARTICLE VII
MISCELLANEOUS
7.01. Recognition of Company Employment Service, etc. To the extent
applicable, the VRM Plans shall recognize service by a VRM Employee before the
Distribution with the Company as service with VRM. The foregoing provision
shall not, however, be construed to require VRM or any member of the VRM Group
to adopt or continue any specific employee benefit plans or arrangements.
7.02. Indemnification. All Liabilities retained or assumed by or
allocated to VRM pursuant to this Agreement shall be deemed to be
Indemnifiable Losses arising out of the VRM Business, as defined in the
Distribution Agreement, and all Liabilities retained or assumed by or
allocated to the Company pursuant to this Agreement shall be deemed to be
Indemnifiable Losses arising out of the Company Business, as defined in the
Distribution Agreement and, in each case, shall be subject to the
indemnification provisions set forth in Article VIII thereof.
7.03. Guarantee of Subsidiaries' Obligations. Each of the parties
hereto shall cause to be performed, and hereby guarantees the performance and
payment of, all actions, agreements, obligations and liabilities set forth
herein to be performed or paid by any Subsidiary of such party which is
contemplated by the Distribution Agreement to be a Subsidiary of such party on
or after the Time of Distribution.
7.04. Sharing of Information. Each of the Company and VRM shall provide
to the other all such information in its possession as the other may
reasonably request to enable it to administer its employee benefit plans and
programs, and to determine the scope of, and fulfill, its obligations under
this Agreement. Such information shall, to the extent reasonably practicable,
be provided in the format and at the times and places requested, but in no
event shall the party providing such information be obligated to incur any
direct expense not reimbursed by the party making such request, nor to make
such information available outside its normal business hours and premises.
7.05. Amendments. This Agreement may be amended, modified or
supplemented only by a written agreement signed by the parties hereto and the
Acquiror.
7.06. Successors and Assigns. This Agreement and all of the provisions
hereof shall be binding upon and inure to the benefit of the parties and their
respective successors and permitted assigns.
7.07. Termination. This Agreement shall be terminated in the event that
the Distribution Agreement is terminated and the Distribution abandoned prior
to the Time of Distribution. In the event of such termination, neither party
shall have any liability of any kind to the other party.
7.08. Rights to Amend or Terminate Plans; No Third Party Beneficiaries.
No provision of this Agreement shall be construed (a) to limit the right of
any member of the Company Group or any member of the VRM Group to amend any
plan or terminate any plan, or (b) to create any right or entitlement
whatsoever in any employee or beneficiary including, without limitation, a
right to continued employment or to any benefit under a plan or any other
benefit or compensation (it being understood that this Agreement will also not
be construed to limit any right or entitlement of any employee or beneficiary
existing without reference to this Agreement). This Agreement is solely for
the benefit of the parties hereto and their respective Subsidiaries and should
not be deemed to confer upon third parties any remedy, claim, liability,
reimbursement, claim of action or other right in excess of those existing
without reference to this Agreement.
7.09. Transfer of Reserves. To the extent that any Liability assumed by
VRM hereunder is secured by a reserve on the books of the Company, such
reserve shall be transferred from the Company to the books of VRM as soon as
practicable on or following the Time of Distribution.
7.10. Further Transfers. The Company and VRM recognize that there may
be VRM Employees who will, after the Time of Distribution, become employed by
the Company and there may be Company Employees who become employed, after the
Time of Distribution, by VRM. If the Company and VRM (each in their sole
discretion) so agree with respect to any such individuals, the assets and
liabilities with respect to such employees which are associated with the plans
and programs described in this Agreement may be transferred and assumed in a
manner consistent with this Agreement and such employees will be treated as
Company Employees or VRM Employees, as the case may be. Any such transfers or
assumptions will be considered to be governed by the terms of this Agreement
and shall not require the agreement of the Company and VRM if they occur
within 3 months of the Time of Distribution.
7.11. Payment Under Other Agreements. No payment made by one party to
the other pursuant to this Agreement will affect in any manner any payments
required to be made under the Distribution Agreement or any other agreement
between the parties hereto, including, without limitation, the settlement of
intercompany payables and receivables provided for in the Distribution
Agreement.
7.12. Incorporation by Reference. The following provisions of the
Distribution Agreement are hereby incorporated into this Agreement by
reference (except that references therein to the Distribution Agreement shall
be deemed to be references to this Agreement): Section 6.5 (Confidentiality);
Section 9.4 (Governing Law); Section 9.5 (Notices); Section 9.3
(Counterparts); Section 9.10 (Severability); and Section 9.9 (Captions).
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the date first above written.
VALERO ENERGY CORPORATION
By:
Name:
Title:
VALERO REFINING AND MARKETING COMPANY
By:
Name:
Title:
<PAGE>
[The following schedules or annexes have been omitted from this filing
pursuant to Regulation S-K section 229.601(b)(2). The Company undertakes to
furnish supplementally a copy of any omitted schedule or annex to the
Commission upon request.]
SCHEDULE A -- LIST OF COMPANY PLANS
SCHEDULE B -- EMPLOYEES TRANSFERRING TO VRM
TAX SHARING AGREEMENT
among
Valero Energy Corporation
Valero Refining and Marketing Company
and
PG&E Corporation
<PAGE>
TABLE OF CONTENTS
Page
Section 1. Definition of Terms. . . . . . . . . . . . . . . . .1
Section 2. Allocation of Tax Liabilities. . . . . . . . . . . ..6
2.01 General Rule. . . . . . . . . . . . . . . . . . . . .6
2.02 Allocation of Federal Income Tax. . . . . . . . . . .6
2.03 Allocation of State Income Taxes. . . . . . . . . . .7
2.04 Allocation of Other Taxes . . . . . . . . . . . . . .8
2.05 Transaction Taxes . . . . . . . . . . . . . . . . . .8
Section 3. Allocation of Tax Credit Carryforwards . . . . . . . 9
3.01 Allocation of Alternative Minimum Tax Credit
Carryforwards. . . . . . . . . . . . . . . . . . . 9
3.02 Allocation of Other Credit Carryforwards. . . . . . 10
Section 4. Preparation and Filing of Tax Returns. . . . . . . .10
4.01 General . . . . . . . . . . . . . . . . . . . . . . 10
4.02 Refining's Responsibility . . . . . . . . . . . . . 10
4.03 Valero's Responsibility . . . . . . . . . . . . . . 11
4.04 Consistent Tax Accounting Practices . . . . . . . . 11
4.05 Consolidated or Combined Return . . . . . . . . . . 11
4.06 Right to Review Tax Returns . . . . . . . . . . . . 11
4.07 Claims for Refund, Carrybacks, and
Self-Audit Adjustments. . . . . . . . . . . . . . 13
Section 5. Tax Payments and Intercompany Billings . . . . . . .14
5.01 Payment of Taxes with Respect to Valero Federal
Consolidated Income Tax Returns Filed After
the Time of Distribution . . . . . . . . . . . . .14
5.02 Payment of Federal Income Tax Related to Adjustments15
5.03 Payment of Consolidated or Combined State Income
Tax With Respect to Returns Filed After the
Time of Distribution. . . . . . . . . . . . . . . .15
5.04 Payment of State Income Taxes Related to Adjustments16
5.05 Payment of Separate Company Taxes . . . . . . . . . 16
5.06 Indemnification Payments. . . . . . . . . . . . . . 16
Section 6. Tax Benefits for Account of Other Party. . . . . . .16
Section 7. Assistance and Cooperation . . . . . . . . . . . . .17
7.01 General . . . . . . . . . . . . . . . . . . . . . . 17
7.02 Income Tax Return Information . . . . . . . . . . . 17
Section 8. Tax Records. . . . . . . . . . . . . . . . . . . . .17
Section 9. Tax Contests . . . . . . . . . . . . . . . . . . . .18
9.01 Notices . . . . . . . . . . . . . . . . . . . . . . 18
9.02 Control of Tax Contest. . . . . . . . . . . . . . . 18
Section 10. Effective Date; Termination of Prior
Intercompany Tax Allocation Agreements . . . . . 19
Section 11. No Inconsistent Actions . . . . . . . . . . . . . .19
Section 12. Survival of Obligations . . . . . . . . . . . . . .20
Section 13. Employee Matters. . . . . . . . . . . . . . . . . .20
Section 14. Treatment of Payments; Tax Gross Up . . . . . . . .20
Section 15. Disagreements . . . . . . . . . . . . . . . . . . .21
Section 16. Late Payments . . . . . . . . . . . . . . . . . . .21
Section 17. Expenses. . . . . . . . . . . . . . . . . . . . . .21
Section 18. General Provisions. . . . . . . . . . . . . . . . .22
<PAGE>
TAX SHARING AGREEMENT
This Agreement is made and entered into as of ______________, 1997
by and between Valero Energy Corporation, a Delaware corporation ("Valero"),
Valero Refining and Marketing Company, a Delaware corporation ("Refining") and
PG&E Corporation, a California corporation ("Acquiror"). Valero and Refining
are sometimes collectively referred to herein as the "Companies." Capitalized
terms used in this Agreement are defined in Section 1 below. Unless otherwise
indicated, all "Section" references in this Agreement are to sections of this
Agreement.
RECITALS
WHEREAS, as of the date hereof, Valero is the common parent of an
affiliated group of corporations, including Refining, which has elected to
file consolidated federal income tax returns; and
WHEREAS, the Companies have entered into a Distribution Agreement
setting forth the corporate transaction pursuant to which Valero will
distribute Refining's common stock to Valero shareholders in a transaction
intended to qualify as a tax-free distribution under Section 355 of the Code;
and
WHEREAS, as a result of the Distribution, Refining and its
respective subsidiaries, will cease to be members of the affiliated group of
which Valero is the common parent, effective as of the Time of Distribution;
and
WHEREAS, the Companies desire to provide for and agree upon the
allocation between the parties of liabilities for Taxes arising prior to, as a
result of, and subsequent to the transaction contemplated by the Distribution
Agreement, and to provide for and agree upon other matters relating to Taxes;
NOW THEREFORE, in consideration of the mutual promises, covenants
and conditions contained herein, the Companies and Acquiror hereby agree as
follows:
Section 1. Definition of Terms. For purposes of this Agreement
(including the recitals hereof), the following terms have the following
meanings.
"Accounting Firm" shall have the meaning provided in Section 15.
"Acquiror" means PG&E Corporation, a California corporation.
"Adjustment Request" means any formal or informal claim or request
filed with any Tax Authority or with any administrative agency or court, for
the adjustment, refund, or credit of Taxes, including (a) any amended Tax
Return claiming adjustment to the Taxes as reported on the Tax Return or, if
applicable, as previously adjusted, or (b) any claim for refund or credit of
Taxes previously paid.
"Agreement" shall mean this Tax Sharing Agreement.
"Allocated Federal Tax Liability" shall have the meaning provided in
Section 5.01(b)(i).
"Carryback" means any net operating loss, net capital loss, excess
tax credit or other similar Tax Item which may or must be carried from one Tax
Period to another Tax Period under the Code or other applicable Tax Law.
"Code" means the United States Internal Revenue Code of 1986, as
amended, or any successor law.
"Companies" means Valero and Refining, collectively, and "Company"
means any one of Valero or Refining.
"Consolidated or Combined Income Tax" means any Income Tax computed
by reference to the assets and activities of members of more than one Group.
"Consolidated Tax Liability" means, with respect to any Valero
Federal Consolidated Income Tax Return, the "tax liability of the group" as
that term is used in Treasury Regulation Section 1.1552-1(a) and any interest,
penalties, additions to tax, or additional amounts in respect thereto;
provided that such tax liability shall be treated as including any alternative
minimum tax liability under Code Section 55; and provided further that in the
case of the Tax Period which includes the Time of Distribution, the
Consolidated Tax Liability shall be computed as if the Time of Distribution
were the last day of the Tax Period.
"Cumulative Federal Tax Payment" shall have the meaning provided in
Section 5.01(b)(ii).
"Distribution Agreement" means the agreement setting forth the
corporate transaction required to effect the distribution to Valero
shareholders of all the outstanding common stock of Refining, and to which
this Agreement is attached as an exhibit.
"Distribution" means the distribution to Valero shareholders at the
Time of Distribution of all of the outstanding common stock of Refining owned
by Valero.
"Effective Time" shall have the meaning provided in the Merger
Agreement.
"Federal Income Tax" means any Tax imposed by Subtitle A of the
Code.
"Group" means the Valero Group or the Refining Group, as the context
requires.
"Income Tax" means any Federal Income Tax or State Income Tax.
"Merger" means the merger of [PG&E SubCo] with and into Valero as
described in the Merger Agreement.
"Merger Agreement" means the Agreement and Plan of Merger between
Valero and Acquiror and [PG&E SubCo] dated as of ____________ 1997.
"Payment Date" means (i) with respect to any Valero Federal
Consolidated Income Tax Return, the due date for any required installment of
estimated taxes determined under Code Section 6655, the due date (determined
without regard to extensions) for filing the return determined under Code
Section 6072, and the date the return is filed, and (ii) with respect to any
Tax Return for any Consolidated or Combined State Income Tax, the
corresponding dates determined under the applicable Tax Law.
"Post-Distribution Period" means any Tax Period beginning after the
Time of Distribution.
"Pre-Distribution Period" means any Tax Period ending on or before
the Time of Distribution.
"Prime Rate" means the base rate on corporate loans charged by
Citibank, N.A., New York, New York from time to time, compounded daily on the
basis of a year of 365 or 366 (as applicable) days and actual days elapsed.
"Prior Intercompany Tax Allocation Agreements" means any written or
oral agreement or any other arrangements relating to allocation of Taxes
existing between or among the Valero Group, and the Refining Group as of the
Time of Distribution (other than this Agreement and other than any such
agreement or arrangement between or among persons who are members of a single
Group).
"Prohibited Action" shall have the meaning provided in Section 11.
"Refining" means Valero Refining and Marketing Company, a Delaware
corporation, and any successor.
"Refining Adjustment" means any proposed adjustment by a Tax
Authority or any claim for a Tax refund to the extent the Refining Group would
be exclusively liable for any resulting Tax under this Agreement and
exclusively entitled to receive any resulting Tax Benefit under this
Agreement.
"Refining Group" means the VRM Group as that term is defined in the
Distribution Agreement.
"Refining Group Prior Federal Tax Liability" shall have the meaning
provided in Section 2.02(b)(ii).
"Refining Group Prior State Tax Liability" shall have the meaning
provided in Section 2.03(b)(ii)(B).
"Refining Group Recomputed Federal Tax Liability" shall have the
meaning provided in Section 2.02(b)(i).
"Refining Group Recomputed State Tax Liability" shall have the
meaning provided in Section 2.03(b)(ii)(A).
"Responsible Company" means, with respect to any Tax Return, the
Company having responsibility for preparing and filing such Tax Return under
this Agreement.
"Separate Company Tax" means any Tax computed by reference to the
assets and activities of a member or members of a single Group.
"State Income Tax" means any Tax imposed by any State of the United
States or by any political subdivision of any such State which is imposed on
or measured by net income, including state and local franchise or similar
Taxes measured by net income.
"Subsidiary" shall have the meaning set forth in the Merger
Agreement.
"Tax" or "Taxes" means any income, gross income, gross receipts,
profits, capital stock, franchise, withholding, payroll, social security,
workers compensation, unemployment, disability, property, ad valorem, stamp,
excise, occupation, service, sales, use, license, lease, transfer, import,
export, value added, alternative minimum, estimated or other similar tax
(including any fee, assessment, or other charge in the nature of or in lieu of
any tax) imposed by any governmental entity or political subdivision thereof,
and any interest, penalties, additions to tax, or additional amounts in
respect of the foregoing.
"Tax Authority" means, with respect to any Tax, the governmental
entity or political subdivision thereof that imposes such Tax and the agency
(if any) charged with the collection of such Tax for such entity or
subdivision.
"Tax Benefit" means any refund, credit, or other reduction in
otherwise required Tax payments (including any reduction in estimated tax
payments).
"Tax Contest" means an audit, review, examination, or any other
administrative or judicial proceeding with the purpose or effect of
redetermining Taxes of any of the Companies or their Subsidiaries (including
any administrative or judicial review of any claim for refund) for any Tax
Period ending on or before the Time of Distribution.
"Tax Item" means, with respect to any Income Tax, any item of
income, gain, loss, expense, or credit.
"Tax Law" means the law of any governmental entity or political
subdivision thereof relating to any Tax.
"Tax Opinion" means the opinion letter to be issued by Valero's tax
counsel as required by the Merger Agreement.
"Tax Period" means, with respect to any Tax, the period for which
the Tax is reported as provided under the Code or other applicable Tax Law.
"Tax Records" means Tax Returns, Tax Return work-papers,
documentation relating to any Tax Contests, and any other books of account or
records required to be maintained, or that have been maintained, under the
Code or other applicable Tax Laws or under any record retention agreement with
any Tax Authority.
"Tax Return" means any report of Taxes due, any claims for refund of
Taxes paid, any information return with respect to Taxes, or any other similar
report, statement, declaration, or document required to be filed under the
Code or other Tax Law, including any attachments, exhibits, or other materials
submitted with any of the foregoing and including any amendments or
supplements to any of the foregoing.
"Time of Distribution" means the Time of Distribution as that term
is defined in the Distribution Agreement.
"Transaction" means the events contemplated by the Distribution
Agreement and by the Merger Agreement.
"Treasury Regulations" means the regulations promulgated from time
to time under the Code as in effect for the relevant Tax Period.
"Valero" means Valero Energy Corporation, a Delaware corporation,
and any successor.
"Valero Adjustment" means any proposed adjustment by a Tax Authority
or any claim for a Tax refund to the extent the Valero Group would be
exclusively liable for any resulting Tax under this agreement and exclusively
entitled to receive any resulting Tax Benefit under this Agreement.
"Valero Federal Consolidated Income Tax Return" means any United
States federal Tax Return for the affiliated group (as that term is defined in
Code Section 1504) that includes Valero as the common parent and includes any
member of the Refining Group.
"Valero Group" means the Company Group as that term is defined in
the Distribution Agreement.
"VNG December 31, 1996 Balance Sheet" means the VNG December 31 1996
Balance Sheet as that term is defined in the Merger Agreement.
Section 2. Allocation of Tax Liabilities. The provisions of this
Section 2 are intended to determine each Company's liability for Taxes with
respect to Pre-Distribution Periods. Once the liability has been determined
under this Section 2, Section 5 determines the time when payment of the
liability is to be made, and whether the payment is to be made to the Tax
Authority directly or to another Company.
2.01 General Rule.
(a) Valero Liability. The Valero Group shall be liable for all
Taxes not specifically allocated to the Refining Group under this Section 2.
Valero shall indemnify and hold harmless the Refining Group from and against
any liability for Taxes for which the Valero Group is liable under this
Section 2.01(a).
(b) Refining Liability. Refining shall be liable for, and shall
indemnify and hold harmless the Valero Group from and against any liability
for Taxes which are allocated to the Refining Group under this Section 2.
2.02 Allocation of Federal Income Tax. Except as provided in
Sections 2.04 and 2.05, Federal Income Tax shall be allocated as follows:
(a) Allocation of Tax Reported on Valero Federal Consolidated
Income Tax Returns Filed After the Time of Distribution. With respect to any
Valero Federal Consolidated Income Tax Return filed after the Time of
Distribution, the Consolidated Tax Liability shall be allocated among the
Valero and Refining Groups in accordance with the method prescribed in
Treasury Regulation Sections 1.1502-33(d)(3) and 1.1552-1(a)(2) (as in effect
on the date hereof) determined by treating each Group as a single member of
the consolidated group. For purposes of such allocation the fixed percentage
of additional amounts to be allocated under Treasury Regulation Section
1.1502-33(d)(3)(i) shall be 100%. Any amount so allocated to the Refining
Group shall be a liability of Refining to Valero under this Section 2.
Amounts described in Code Section 1561 (relating to limitations on certain
multiple benefits) shall be divided equally among the Valero Group and the
Refining Group to the extent permitted by the Code.
(b) Allocation of Valero Federal Consolidated Income Tax Return Tax
Adjustments. If there is any adjustment to the reported Consolidated Tax
Liability with respect to any Valero Federal Consolidated Income Tax Return,
or to such Consolidated Tax Liability as previously adjusted, Refining shall
be liable to Valero for the excess (if any) of:
(i) the Consolidated Tax Liability that would have been allocated
to the Refining Group in accordance with Section 2.02(a), taking into account
any adjustments to the reported Consolidated Tax Liability, or to such
Consolidated Tax Liability as previously adjusted (the "Refining Group
Recomputed Federal Tax Liability"); over
(ii) the Consolidated Tax Liability allocated to the Refining Group
in accordance with Section 2.02(a) based on the return as filed (or if
applicable, as previously adjusted) (the "Refining Group Prior Federal Tax
Liability").
If the Refining Group Prior Federal Tax Liability exceeds the Refining Group
Recomputed Federal Tax Liability, Valero shall be liable to Refining for such
excess.
2.03 Allocation of State Income Taxes. Except as provided in
Sections 2.04 and 2.05, State Income Taxes shall be allocated as follows:
(a) Separate Company Taxes. In the case of any State Income Tax
which is a Separate Company Tax, Refining shall be liable for such Tax imposed
on any members of the Refining Group, and Valero shall be liable for such Tax
imposed on any members of the Valero Group.
(b) Consolidated or Combined State Income Taxes. In the case of
any Consolidated or Combined State Income Tax, the liability of Refining with
respect to such Tax for any Tax Period shall be computed as follows:
(i) Allocation of Tax Reported on Tax Returns Filed after the Time
of Distribution. In the case of any Consolidated or Combined State
Income Tax reported on any Tax Return filed after the Time of Distribution,
Refining shall be liable to Valero for the excess (if any) of:
(A) the State Income Tax liability computed by including
all members of the Valero and Refining Groups in the filing of a Consolidated
or Combined Tax Return based on the income, apportionment factors, and other
items of such members; over
(B) the State Income Tax liability computed as if only
the Valero Group members had filed a Consolidated or Combined Tax Return based
upon the income, apportionment factors, and other items of such members.
(ii) Allocation of Consolidated or Combined State Income Tax
Adjustments. If there is any adjustment to the amount of Consolidated or
Combined State Income Tax reported on any Tax Return (or as previously
adjusted), Refining shall be liable to Valero for the excess (if any) of:
(A) the State Income Tax liability computed as if all
members of the Refining Group included in the Tax Return had filed a
Consolidated or Combined Tax Return based upon the income, apportionment
factors, and other items of such members as so adjusted (the "Refining Group
Recomputed State Tax Liability"); over
(B) the State Income Tax liability computed as if all
members of the Refining Group included in the Tax Return had filed a
Consolidated or Combined Tax Return based upon the income, apportionment
factors, and other items of such members as previously reported (or, if
applicable, as previously adjusted) (the "Refining Group Prior State Tax
Liability").
If the Refining Group Prior State Tax Liability exceeds the Refining Group
Recomputed State Tax Liability, Valero shall be liable to Refining for such
excess.
2.04 Allocation of Other Taxes. Except as provided in this Section
2.04 or Section 2.05, all Taxes other than those specifically allocated
pursuant to Section 2.02 or 2.03 shall be allocated based on the legal entity
on which the legal incidence of the Tax is imposed. Refining shall be liable
for all Taxes imposed on any member of the Refining Group and Valero shall be
liable for all Taxes imposed on any member of the Valero Group, except that
Refining shall be liable for all Taxes (other than Income Taxes) with respect
to Tax Periods ending on or before December 31, 1996 (or, with respect to
Taxes that are not assessed with respect to periods, such Taxes due and
payable on or before December 31, 1996), except for such Taxes provided for in
the VNG December 31, 1996 Balance Sheet, but only to the extent such Taxes
exceed $5,000,000 in the aggregate, and except that Refining shall not be
liable with respect to any Tax or Tax Return which is (i) the subject of the
litigation set forth and described in Section I, paragraphs 3 through 6, of
Schedule 5.1(l) of the Merger Agreement (the "Existing Tax Claims"), or (ii)
heretofore or hereafter made a subject of any claim, demand or litigation
involving claims substantially similar to those asserted in the Existing Tax
Claims. The Companies believe that there is no Tax not specifically allocated
pursuant to Section 2.02 or 2.03 which is legally imposed on more than one
legal entity (e.g., joint and several liability); however, if there is any
such Tax, it shall be allocated in accordance with past practices as
reasonably determined by the affected Companies, or in the absence of such
practices, in accordance with any allocation method agreed upon by the
affected Companies.
2.05 Transaction Taxes.
(a) Refining Liability. Except with respect to any liability with
respect to any Tax that is reflected on the VNG December 31, 1996 Balance
Sheet, and except to the extent of Valero's liability pursuant to Section
2.05(b) below, Refining shall be liable for all Taxes resulting from the
Transaction including:
(i) Any sales and use, gross receipts, or other transfer Taxes
resulting from the Transaction;
(ii) any Tax resulting from any income or gain recognized under
Treasury Regulation Sections 1.1502-13 or 1.1502-19 (or any comparable
provisions of other applicable Tax Laws) as a result of the Transaction;
(iii) any Tax resulting from any income or gain recognized
as a result of the Transaction contemplated by the Distribution Agreement
failing to qualify for tax-free treatment under Code Section 355 or 361(c), or
other provisions of the Code or other applicable Tax Laws, or as a result of
the Merger failing to constitute a "reorganization" under Code Section 368 or
any comparable provisions of other applicable Tax Laws (as contemplated in the
Merger Agreement);
provided, however, that Refining shall be liable for Taxes described in
Section 2.05(a)(i) and Section 2.05(a)(ii) only to the extent that the
aggregate amount of such Taxes exceeds $3,000,000. For purposes of this
Section 2.05(a),any increase in Tax resulting from any disallowance of
deductions pursuant to Section 162(m) of the Code or Section 280G of the Code
shall be treated as a Tax resulting from the Transaction and described in
Section 2.05(a)(ii); provided, however, that this sentence shall not apply to
any such Tax reflected on the VNG December 31, 1996 Balance Sheet.
(b) Indemnity for Inconsistent Acts and Misrepresentations. Valero
shall be liable for, and shall indemnify and hold harmless the Refining Group
from and against any liability for, any Tax (described in subparagraph
(a)(iii)) above but only to the extent resulting solely from any breach of
Valero's covenants under Section 11 of this Agreement. Acquiror shall be
liable for, and shall indemnify and hold harmless the Refining Group from and
against any liability for, any Tax described in subparagraph (a)(iii) above
but only to the extent resulting either (x) from any breach of Acquiror's
representations or covenants under Section 11 of this Agreement or (y) from
the inaccuracy of any factual statements or representations made by Acquiror
and relating to Acquiror or its Subsidiaries (other than the Valero Group) in
connection with the Tax Opinion.
Section 3. Allocation of Tax Credit Carryforwards.
3.01 Allocation of Alternative Minimum Tax Credit Carryforwards.
With respect to the Valero Federal Consolidated Income Tax Return filed for
calendar year 1995, the consolidated minimum tax credit carryforward
("Consolidated MTC") reported therein is allocated among the Valero and
Refining Groups as follows:
Valero Group $ 6,049,232
Refining Group 15,266,111
Total $ 21,315,343
Valero and Refining mutually represent that no additional amount of
Consolidated MTC is expected to be generated nor is any Consolidated MTC
expected to be utilized on the Valero Federal Consolidated Income Tax Return
for calendar year 1996. Any adjustments to the above amounts for Tax Periods
ending after 1995 and on or before the Time of Distribution shall be allocated
among the Valero and Refining Groups in accordance with the principles of Code
Section 53 and Proposed Treasury Regulation 1.1502-55(h)(6)(ii).
3.02 Allocation of Other Credit Carryforwards. With respect to the
Valero Federal Consolidated Income Tax Return filed for calendar year 1995,
the consolidated general business credit carryforward ("Consolidated GBC")
reported therein is allocated among the Valero and Refining Groups as follows:
Valero Group $ 4,920,738
Refining Group 11,119,818
Total $16,040,556
Any adjustments to the above amounts of Consolidated GBC or any other credits
allowable against any Tax for Tax Periods ending after 1995 and on or before
the Time of Distribution shall be allocated among the Valero and Refining
Groups in accordance with past tax accounting practices used with respect to
such credits (unless such past practices are no longer permissible under the
Code or other applicable Tax Law). Based upon the Companies' latest estimate
of 1996 taxable income, the Consolidated GBC at the end of calendar year 1996
is as follows:
Valero Group $ 245,621
Refining Group 274,349
Total $519,970
Section 4. Preparation and Filing of Tax Returns.
4.01 General. Except as otherwise provided in this Section 4, Tax
Returns shall be prepared and filed when due (including extensions) by the
person obligated to file such Tax Return under the Code or applicable Tax Law.
The Companies shall provide, and shall cause their Subsidiaries to provide,
assistance and cooperate with one another in accordance with Section 7 with
respect to the preparation and filing of Tax Returns, including providing
information required to be provided in Section 7.
4.02 Refining's Responsibility. Refining shall have the exclusive
obligation and right to properly prepare and timely file, or to cause to be
properly prepared and timely filed:
(a) Valero Federal Consolidated Income Tax Returns for Tax Periods
ending on or before the end of the day on which the Time of Distribution
occurs.
(b) Tax Returns for State Income Taxes (excluding any amended
returns, but including Tax Returns with respect to State Income Taxes that are
Separate Company Taxes) which the Companies reasonably determine are required
to be filed by the Companies or any of their Subsidiaries for Tax Periods
ending on or before the end of the day on which the Time of Distribution
occurs.
Nothing in this Section 4.02 shall impose on Refining any liability for any
failure to file any Tax Return, or for failure to file any Tax Return when
due, with respect to any Pre-Distribution Period if the due date for such
return (including extensions) was prior to the Time of Distribution.
4.03 Valero's Responsibility. Valero shall prepare and file, or
shall cause to be prepared and filed, Tax Returns required to be filed by or
with respect to members of the Valero Group other than those Tax Returns which
Refining is required to prepare and file under Section 4.02. The Tax Returns
required to be prepared and filed by Valero under this Section shall include
Tax Returns for Federal or State Income Taxes (excluding any amended returns,
but including Tax Returns with respect to State Income Taxes that are Separate
Company Taxes) which the Companies reasonably determine, in accordance with
Valero's past practices, are required to be filed by any member of the Valero
Group for Tax Periods ending after the end of the day on which the Time of
Distribution occurs.
4.04 Consistent Tax Accounting Practices. Any Tax Return for any
Pre-Distribution Period and any Tax Return for any Post-Distribution Period to
the extent items reported on such Tax Return might reasonably be expected to
affect Tax Items reported on any Tax Return for any Pre-Distribution Period,
shall be prepared in accordance with past Tax accounting practices used with
respect to the Tax Returns in question (unless such past practices are no
longer permissible under the Code or other applicable Tax Law), and to the
extent any items are not covered by past practices (or in the event such past
practices are no longer permissible under the Code or other applicable Tax
Law), in accordance with reasonable Tax accounting practices selected by the
Company whose Tax liability for such Tax Period will be most affected by such
selection.
4.05 Consolidated or Combined Return. The Companies will elect and
join, and will cause their respective Subsidiaries to elect and join, in
filing consolidated, unitary, combined, or other similar Tax Returns with
respect to any Tax Period ending on or before the end of the day on which the
Time of Distribution occurs, to the extent each entity is eligible to join in
such Tax Returns, if the Companies reasonably determine that the filing of
such Tax Returns is consistent with past reporting practices, or in the
absence of applicable past practices, will result in the minimization of the
net present value of the aggregate Tax to the entities eligible to join in
such Tax Returns.
4.06 Right to Review Tax Returns.
(a) General. The Responsible Company with respect to any Tax
Return shall make such Tax Return and related work-papers available for review
by the other Companies during regular business hours, if requested, in the
event (i) such Tax Return relates to Taxes for which the requesting party may
be liable, (ii) such Tax Return relates to Taxes for which the requesting
party may be liable in whole or in part for any additional Taxes owing as a
result of adjustments to the amount of Taxes reported on such Tax Return,
(iii) such Tax Return relates to Taxes for which the requesting party may have
a claim for Tax Benefits under this Agreement, or (iv) the requesting party
reasonably determines that it must inspect such Tax Return to confirm
compliance with the terms of this Agreement. The Responsible Company shall
use its reasonable best efforts to make such Tax Return available for review
as required under this paragraph sufficiently in advance of, but in any event
no later than thirty calendar days prior to, the due date for filing such Tax
Returns to provide the requesting party with a meaningful opportunity to
analyze and comment on such Tax Returns and have such Tax Returns modified
before filing, taking into account the person responsible for payment of the
Tax (if any) reported on such Tax Return and the materiality of the amount of
Tax liability with respect to such Tax Return. The Companies shall attempt in
good faith to resolve any issues arising out of the review of such Tax
Returns.
(b) Reporting of Transaction Tax Items. The Companies agree that
the tax treatment reported on any Tax Return of Tax Items relating to the
Transaction shall be consistent with the treatment of such item in the Tax
Opinion. To the extent there is a Tax Item relating to the Transaction which
is not covered by the Tax Opinion, the Companies shall agree on the tax
treatment of any such Tax Item reported on any Tax Return. For this purpose,
the tax treatment of such Tax Items on a Tax Return by the Responsible Company
with respect to such Tax Return shall be agreed to by the other Company unless
either (i) such other Company reasonably believes that such tax treatment may
result in a penalty or addition to Tax under applicable Tax Law, or (ii) such
tax treatment is inconsistent with the tax treatment contemplated in the Tax
Opinion. Such Tax Return shall be submitted for review pursuant to Section
4.06(a), and any dispute regarding such proper tax treatment shall be referred
for resolution pursuant to Section 15, sufficiently in advance of the filing
date of such Tax Return (including extensions) to permit timely filing of the
return.
(c) Execution of Returns Prepared by Other Party. In the case of
any Tax Return which is required to be prepared and filed by one Company under
this Agreement and which is required by law to be signed by another Company
(or by its authorized representative), the Company which is legally required
to sign such Tax Return (the "Signatory Company") shall not be required to
sign such Tax Return under this Agreement if the Signatory Company reasonably
believes that the tax treatment of the items reported on the Tax Return may
result in a penalty or addition to Tax under applicable Tax Law.
4.07 Claims for Refund, Carrybacks, and Self-Audit Adjustments.
(a) Consent Required for Adjustment Requests Related to
Consolidated or Combined Income Taxes. Except as provided in paragraph (b)
below, each of the Companies hereby agrees that, unless the other Company
consents in writing, which consent shall not be unreasonably withheld, (i) no
Adjustment Request with respect to any Consolidated or Combined Income Tax for
a Pre-Distribution Period shall be filed, and (ii) any available elections to
waive the right to claim, in any Pre-Distribution Period with respect to any
Consolidated or Combined Income Tax, any Carryback arising in a
Post-Distribution Period shall be made, and no affirmative election shall be
made to claim any such Carryback. Any Adjustment Request which Valero
consents to make under this Section 4.07 shall be prepared and filed by
Refining under Section 4.02. Valero shall provide to Refining all information
required for the preparation and filing of such Adjustment Request in such
form and detail as reasonably requested by Refining.
(b) Exception for Adjustment Requests Related to Audit Adjustments.
Each of the Companies shall be entitled, without the consent of the other
Company, to require Refining to file an Adjustment Request to take into
account any net operating loss, net capital loss, deduction, credit, or other
adjustment attributable to such Company or any member of its Group
corresponding to any adjustment resulting from any audit by the Internal
Revenue Service or other Tax Authority with respect to Consolidated or
Combined Income Taxes for any Pre-Distribution Period. For example, if the
Internal Revenue Service requires either Company to capitalize an item
deducted for the taxable year 1993, the Company shall be entitled, without the
consent of the other Company, to require Refining to file an Adjustment
Request for the taxable year 1994 (and later years) to take into account any
depreciation or amortization deductions in such years directly related to the
item capitalized in 1993.
(c) Other Adjustment Requests Permitted. Nothing in this Section
4.07 shall prevent either Company or its Subsidiaries from filing any
Adjustment Request with respect to Income Taxes which are not Consolidated or
Combined Income Taxes or with respect to any Taxes other than Income Taxes.
Any refund or credit obtained as a result of any such Adjustment Request (or
otherwise) shall be for the account of the person liable for the Tax under
this Agreement.
(d) Payment of Refunds. Any refunds or other Tax Benefits received
by either Company (or any of its Subsidiaries) as a result of any Adjustment
Request which are for the account of the other Company (or member of such
other Company's Group) shall be paid by the Company receiving (or whose
Subsidiary received) such refund or Tax Benefit to such other Company in
accordance with Section 6.
Section 5. Tax Payments and Intercompany Billings.
5.01 Payment of Taxes with Respect to Valero Federal Consolidated
Income Tax Returns Filed After the Time of Distribution. In the case of any
Valero Federal Consolidated Income Tax Return the due date for which
(including extensions) is after the Time of Distribution,
(a) Computation and Payment of Tax Due. At least thirty calendar
days prior to any Payment Date, Refining shall compute the amount of Tax
required to be paid to the Internal Revenue Service (taking into account the
requirements of Section 4.04 relating to consistent accounting practices) with
respect to such Tax Return and shall notify Valero in writing of the amount of
Tax required to be paid on or before such due date. Valero will pay such
amount to the Internal Revenue Service on or before the due date.
(b) Computation and Payment of Refining Liability With Respect to
Tax Due. At least three business days before any Payment Date, Refining will
pay to Valero the excess (if any) of --
(i) the Consolidated Tax Liability determined as of such
Payment Date with respect to the applicable Tax Period allocable to the
members of the Refining Group as determined by Refining in a manner consistent
with the provisions of Section 2.02(a) (relating to allocation of the
Consolidated Tax Liability --) (the "Allocated Federal Tax Liability"), over
(ii) the cumulative net payments with respect to such Tax
Return prior to such Payment Date by the members of Refining Group (the
"Cumulative Federal Tax Payment").
If the Refining Group Cumulative Federal Tax Payment is greater than the
Refining Group Allocated Federal Tax Liability, then Valero shall pay such
excess to Refining within 10 business days following such Payment Date.
(c) Deemed Cumulative Federal Tax Payment for First Payment Date
After the Time of Distribution. For purposes of Section 5.01(b)(ii), the
Refining Group's Cumulative Federal Tax Payment as of the first Payment Date
after the Time of Distribution shall be deemed equal to the portion of the
total payments of Tax by the affiliated group with respect to the Tax Return
allocated to the Refining Group in accordance with Section 2.02(a) determined
by substituting for the "tax liability of the group" as such term is used in
Treasury Regulation Section 1.1552-1(a)(2) the amount of such total payments
of Tax. For example, if the Time of Distribution is March 1, 1997, and prior
to April 15, 1997 (i.e., the first Payment Date after the Time of
Distribution) the total payments of Tax by the affiliated group with respect
to Valero's Federal Consolidated Income Tax Return for the year ended December
31, 1996 is $100x, the portion of such $100x deemed paid by the Refining Group
as of April 15, 1997 (excluding the payment to be made on that date) would be
determined under Section 2.02(a).
(d) Interest on Intergroup Tax Allocation Payments. In the case of
any payments required under paragraph (b) of this subsection 5.01, the payor
shall also pay to the payee an amount of interest computed at the Prime Rate
on the amount of the payment required under paragraph (b), as applicable,
based on the number of days from the applicable Payment Date to the date of
payment of the amount determined under such paragraph (b).
5.02 Payment of Federal Income Tax Related to Adjustments.
(a) Adjustments Resulting in Underpayments. Valero shall pay to
the Internal Revenue Service when due any additional Federal Income Tax
required to be paid as a result of any adjustment to the Consolidated Federal
Income Tax Liability with respect to any Valero Federal Consolidated Income
Tax Return for any Pre-Distribution Period. Refining shall pay to Valero the
Refining Group's share of any such additional Tax payment determined in
accordance with Section 2.02(a) within 30 days from the later of (i) the date
the additional Tax was paid by Valero or (ii) the date of receipt by Refining
of a written notice and demand from Valero for payment of the amount due,
accompanied by evidence of payment and a statement detailing the Taxes paid
and describing in reasonable detail the particulars relating thereto.
Refining shall also pay to Valero interest on the Refining Group's respective
share of such Tax computed at the Prime Rate based on the number of days from
the date the additional Tax was paid by Valero to the date of its payment to
Valero under this Section 5.02(a).
(b) Adjustments Resulting in Overpayments. Within 30 days of
receipt by Valero of any Tax Benefit resulting from any adjustment to the
Consolidated Federal Income Tax Liability with respect to any Valero Federal
Consolidated Income Tax Return for any Pre-Distribution Period, Valero shall
pay to Refining the Refining Group's respective share of any such Tax Benefit
determined in accordance with Section 2.02(a). Valero shall also pay to
Refining interest on Refining Group's respective share of such Tax Benefit
computed at the Prime Rate based on the number of days from the date the Tax
Benefit was received by Valero to the date of payment to Refining under this
Section 5.02(b).
5.03 Payment of Consolidated or Combined State Income Tax With
Respect to Returns Filed After the Time of Distribution. In the case of any
Tax Return for any Consolidated or Combined State Income Tax the due date for
filing of which (including extensions) is after the Time of Distribution, at
least thirty calendar days prior to any Payment Date with respect to such Tax
Return, Refining shall compute the amount of Tax required to be paid to the
applicable Tax Authority (taking into account the requirements of Section 4.04
relating to consistent accounting practices) and shall notify Valero in
writing of the amount of Tax required to be paid on or before such due date.
Valero will pay such amount to such Tax Authority on or before the due date.
At least three business days before such Payment Date, Refining shall pay to
Valero the Tax liability allocable to the Refining Group as determined under
the provisions of Section 2.03(b)(i).
5.04 Payment of State Income Taxes Related to Adjustments.
(a) Adjustments Resulting in Underpayments. Valero shall pay to
the applicable Tax Authority when due any additional State Income Tax required
to be paid as a result of any adjustment to the Tax liability with respect to
any Tax Return for any Consolidated or Combined State Income Tax for any
Pre-Distribution Period. Refining shall pay to Valero the Refining Group's
share of any such additional Tax payment determined in accordance with Section
2.03(b)(ii) within 30 days from the later of (i) the date the additional Tax
was paid by Valero or (ii) the date of receipt by Refining of a written notice
and demand from Valero for payment of the amount due, accompanied by evidence
of payment and a statement detailing the Taxes paid and describing in
reasonable detail the particulars relating thereto. Refining shall also pay
to Valero interest on the Refining Group's respective share of such Tax
computed at the Prime Rate based on the number of days from the date the
additional Tax was paid by Valero to the date of its payment to Valero under
this Section 5.04(a).
(b) Adjustments Resulting in Overpayments. Within 30 days of
receipt by Valero of any Tax Benefit resulting from any adjustment to the Tax
liability with respect to any Tax Return for any Consolidated or Combined
State Income Tax for any Pre-Distribution Period, Valero shall pay to Refining
the Refining Group's share of any such Tax Benefit determined in accordance
with Section 2.03(b)(ii). Valero shall also pay to Refining interest on the
Refining Group's share of such Tax Benefit computed at the Prime Rate based on
the number of days from the date the Tax Benefit was received by Valero to the
date of payment to Refining under this Section 5.04(b).
5.05 Payment of Separate Company Taxes. Each Company shall pay, or
shall cause to be paid, to the applicable Tax Authority when due all Separate
Company Taxes owed by such Company or a member of such Company's Group.
5.06 Indemnification Payments. If any Company (the "payor") is
required to pay to such Tax Authority a Tax that another Company (the
"responsible party") is required to pay to such Tax Authority under this
Agreement, the responsible party shall reimburse the payor within 30 days of
delivery by the payor to the responsible party of an invoice for the amount
due, accompanied by evidence of payment and a statement detailing the Taxes
paid and describing in reasonable detail the particulars relating thereto.
The reimbursement shall include interest on the Tax payment computed at the
Prime Rate based on the number of days from the date of the payment to the Tax
Authority to the date or reimbursement under this Section 5.06.
Section 6. Tax Benefits for Account of Other Party. If a member of
one Group receives any Tax Benefit with respect to any Taxes for which a
member of another Group is liable hereunder, the Company receiving such Tax
Benefit shall make a payment to the Company who is liable for such Taxes
hereunder within 30 days following receipt of the Tax Benefit in an amount
equal to the Tax Benefit (including any Tax Benefit realized as a result of
the payment) plus interest on such amount computed at the Prime Rate based on
the number of days from the date of receipt of the Tax Benefit to the date of
payment of such amount under this Section 6.
Section 7. Assistance and Cooperation.
7.01 General. After the Time of Distribution, each of the
Companies shall cooperate (and cause their respective Subsidiaries to
cooperate) with each other and with each other's agents, including accounting
firms and legal counsel, in connection with Tax matters relating to the
Companies and their Subsidiaries including (i) preparation and filing of Tax
Returns (including, where necessary, preparation of Tax Returns by one Company
for signature by the other Company), (ii) determining the liability for and
amount of any Taxes due (including estimated Taxes) or the right to and amount
of any refund of Taxes, (iii) examinations of Tax Returns, and (iv) any
administrative or judicial proceeding in respect of Taxes assessed or proposed
to be assessed. Such cooperation shall include making all information and
documents in their possession relating to the Companies and their Subsidiaries
available to such other Companies as provided in Section 8. Each of the
Companies shall also make available to each other, as reasonably requested and
available, personnel (including officers, directors, employees and agents of
the Companies or their respective Subsidiaries) responsible for preparing,
maintaining, and interpreting information and documents relevant to Taxes, and
personnel reasonably required as witnesses or for purposes of providing
information or documents in connection with any administrative or judicial
proceedings relating to Taxes. Any information or documents provided under
this Section 7 shall be kept confidential by the Company receiving the
information or documents, except as may otherwise be necessary in connection
with the filing of Tax Returns or in connection with any administrative or
judicial proceedings relating to Taxes.
7.02 Income Tax Return Information. Each Company will provide to
each other Company information and documents relating to their respective
Groups required by the other Companies to prepare Tax Returns. The
Responsible Company shall determine a reasonable compliance schedule for such
purpose in accordance with Valero's past practices. Any additional
information or documents the Responsible Company requires to prepare such Tax
Returns will be provided in accordance with past practices, if any, or as the
Responsible Company reasonably requests and in sufficient time for the
Responsible Company to file such Tax Returns timely.
Section 8. Tax Records.
(a) Retention of Tax Records. Except as provided in paragraph (b),
Refining shall preserve and keep all Tax Records exclusively relating to the
assets and activities of the Refining Group's Pre-Distribution Periods, and
Valero shall preserve and keep all other Tax Records relating to Taxes for so
long as the contents thereof may become material in the administration of any
matter under the Code or other applicable Tax Law, but in any event until the
later of (i) the expiration of any applicable statutes of limitation, and (ii)
seven years after the Time of Distribution. If prior to the expiration of the
applicable statute of limitation and such seven-year period Refining or Valero
reasonably determines that any Tax Records which it is required to preserve
and keep under this Section 8 are no longer material in the administration of
any matter under the Code or other applicable Tax Law, such Company may
dispose of such records upon 90 days prior written notice to the other
Company. Such notice shall include a list of the records to be disposed of
describing in reasonable detail each file, book or other record accumulation
being disposed. The notified Company shall have the opportunity, at its cost
and expense, to copy or remove, within such 90-day period, all or any part of
such Tax Records.
(b) State Income Tax Returns. Tax Returns with respect to State
Income Taxes and workpapers prepared in connection with preparing such Tax
Returns shall be preserved and kept, in accordance with the guidelines of
paragraph (a), by the Company responsible for preparing and filing the
applicable Tax Return.
(c) Access to Tax Records. The Companies and their respective
Subsidiaries shall make available to each other for inspection and copying
during normal business hours upon reasonable notice all Tax Records in their
possession to the extent reasonably required by the other Company in
connection with the preparation of Tax Returns, audits, litigation, or the
resolution of items under this Agreement.
Section 9. Tax Contests.
9.01 Notices. Each of the parties shall provide prompt notice to
the other parties of any pending or threatened Tax audit, assessment or
proceeding or other Tax Contest of which it becomes aware related to Taxes for
Tax Periods for which it is indemnified by one or more other parties
hereunder. Such notice shall contain factual information (to the extent
known) describing any asserted Tax liability in reasonable detail and shall be
accompanied by copies of the relevant portions of any notice and other
documents received from any Tax Authority in respect of any such matters. If
an indemnified party has knowledge of an asserted Tax liability with respect
to a matter for which it is to be indemnified hereunder and such party fails
to give the indemnifying party prompt notice of such asserted Tax liability,
then if the indemnifying party is precluded from contesting the asserted Tax
liability in any forum as a result of the failure to give prompt notice, the
indemnifying party shall have no obligation to indemnify the indemnified party
for any Taxes arising out of such asserted Tax liability.
9.02 Control of Tax Contest.
(a) Separate Company Taxes. In the case of any Tax Contest with
respect to any Separate Company Tax, the Company having liability for the Tax
shall have exclusive control over the Tax Contest, including exclusive
authority with respect to any settlement of such Tax liability.
(b) Consolidated or Combined Income Taxes. In the case of any Tax
Contest with respect to any Consolidated or Combined Income Tax, Refining
shall control the defense or prosecution of the portion of the Tax Contest
directly and exclusively related to any Refining Adjustment, including
settlement of any such Refining Adjustment, and Valero shall control the
defense or prosecution of all other portions of the Tax Contest, including
settlement of any Valero Adjustment. A Company shall not agree to any Tax
liability for which the other Company may be liable under this Agreement, or
compromise any claim for any Tax Benefit which the other Company may be
entitled under this Agreement, without such other Company's written consent
(which consent may be given or withheld at the sole discretion of the Company
from which the consent would be required). Notwithstanding any other
provision contained in this Section 9, the indemnified party may settle any
claim otherwise indemnifiable hereunder for any Tax Period (x) if the
indemnified party waives the indemnification payment that might otherwise be
payable under this Agreement in respect of such claim for such Tax Period and
any other claim the contest of which is precluded by such settlement or (y)
the party responsible for payment hereunder consents in writing to such
settlement, such consent not to be unreasonably withheld based solely on the
merits of the items indemnifiable hereunder.
Section 10. Effective Date; Termination of Prior Intercompany Tax
Allocation Agreements. This Agreement shall be effective at the Time of
Distribution. Immediately prior to the close of business at the Time of
Distribution (i) all Prior Intercompany Tax Allocation Agreements shall be
terminated, and (ii) amounts due under such agreements as of the Time of
Distribution shall be settled as of the Time of Distribution (including
capitation or distribution of amounts due or receivable under such
agreements). Upon such termination and settlement, no further payments by or
to Valero, or by or to the Refining Group with respect to such agreements
shall be made, and all other rights and obligations resulting from such
agreements between the Companies and their Subsidiaries shall cease at such
time. Any payments pursuant to such agreements shall be ignored for purposes
of computing amounts due under this Agreement.
Section 11. No Inconsistent Actions. Each of the Companies and the
Acquiror covenants and agrees that it will not take any action, and it will
cause its Subsidiaries to refrain from taking any action, which is
inconsistent with the Tax treatment of the Transaction contemplated in the Tax
Opinion (any such act or failure to act is referred to in this Section 11 as a
"Prohibited Action"), unless such Prohibited Action is required by law, or the
person acting has obtained the prior written consent of each of the other
parties (which consent shall not be unreasonably withheld). With respect to
any Prohibited Action proposed by a Company or the Acquiror (the "Requesting
Party"), each of the other parties (the "Requested Parties") shall grant its
consent to such Prohibited Action if the Requesting Party either obtains a
ruling from the Internal Revenue Service or other applicable Tax Authority or
an opinion of independent tax counsel with respect to the Prohibited Action
that is reasonably satisfactory to each of the Requested Parties (except that
the Requesting Party shall not submit any such ruling request if a Requested
Party determines in good faith that filing such request might have a
materially adverse affect upon such Requested Party). Without limiting the
foregoing:
(i) Refining represents and warrants that neither it nor any
of its Subsidiaries nor, to the best knowledge of Refining, any other person
or entity, has any plan or intent to take any action which is inconsistent
with any factual statements or representations made in connection with the Tax
Opinion. Regardless of any change in circumstances, Refining covenants and
agrees that it will not take, and it will cause its Subsidiaries to refrain
from taking, any such inconsistent action on or before the last day of the
calendar year ending after the second anniversary of the Time of Distribution
other than as permitted in this Section 11. For purposes of applying this
Section 11 to any such inconsistent action prior to the Effective Time, the
members of the Valero Group shall be treated as Subsidiaries of Refining.
(ii) Acquiror represents and warrants that neither it nor any
of its Subsidiaries has any plan or intent to take any action which is
inconsistent with any factual statements or representations made in connection
with the Tax Opinion. Regardless of any change in circumstances, Acquiror
covenants and agrees that it will not take, and it will cause Valero and the
other Subsidiaries of Acquiror to refrain from taking, any such inconsistent
action on or before the last day of the calendar year ending after the second
anniversary of the Time of Distribution other than as permitted in this
Section 11.
Section 12. Survival of Obligations. The obligations and
liabilities of the parties, as well as the representations, warranties,
covenants and agreements, set forth in this Agreement shall be unconditional
and absolute and shall remain in effect without limitation as to time.
Section 13. Employee Matters. Each of the Companies agrees to
utilize, or cause its Subsidiaries to utilize, the alternative procedure set
forth in Revenue Procedure 84-77, 1984-2 C.B. 753, with respect to wage
reporting.
Section 14. Treatment of Payments; Tax Gross Up.
(a) Treatment of Tax Indemnity and Tax Benefit Payments. In the
absence of any change in tax treatment under the Code or other applicable Tax
Law:
(i) any Tax indemnity payments made by a Company under Section
5 shall be reported for Tax purposes by the payor and the recipient as
distributions or capital contribution, as appropriate, occurring immediately
before the Distribution but only to the extent the payment does not relate to
a Tax allocated to the payor in accordance with Treasury Regulation Section
1.1502-33(d) (or under corresponding principles of other applicable Tax Laws),
and
(ii) any Tax Benefit payments made by a Company under Section
6, shall be reported for Tax purposes by the payor and the recipient as
distributions or capital contributions, as appropriate, occurring immediately
before the Distribution but only to the extent payment does not relate to a
Tax allocated to the payor in accordance with Treasury Regulation Section
1.1502-33(d) (or under corresponding principles of other applicable Tax Laws).
(b) Tax Gross Up. If, notwithstanding the manner in which Tax
indemnity payments and Tax Benefit payments were reported, there is an
adjustment to the Tax liability of a Company as a result of its receipt of a
payment or its payment pursuant to this Agreement, such payment shall be
appropriately adjusted so that the amount of such payment, reduced by the
amount of all Income Taxes payable with respect to the receipt thereof (but
taking into account all correlative Tax Benefits resulting from the payment of
such Income Taxes), shall equal the amount of the payment which the Company
receiving such payment would otherwise be entitled to receive pursuant to this
Agreement.
Section 15. Disagreements. If after good faith negotiations the
parties cannot agree on the application of this Agreement to any matter, then
the matter will be referred to a nationally recognized accounting firm
acceptable to each of the parties (the "Accounting Firm"). The Accounting
Firm shall furnish written notice to the parties of its resolution of any such
disagreement as soon as practical, but in any event no later than 45 days
after its acceptance of the matter for resolution. Any such resolution by the
Accounting Firm will be conclusive and binding on all parties to this
Agreement. In accordance with Section 17, each party shall pay its own fees
and expenses (including the fees and expenses of its representatives) incurred
in connection with the referral of the matter to the Accounting Firm. All
fees and expenses of the Accounting Firm in connection with such referral
shall be shared equally by the parties affected by the matters.
Section 16. Late Payments. Any amount owed by one party to another
party under this Agreement which is not paid when due shall bear interest at
the Prime Rate plus three percent, compounded semiannually, from the due date
of the payment to the date paid. To the extent interest required to be paid
under this Section 16 duplicates interest required to be paid under any other
provision of this Agreement, interest shall be computed at the higher of the
interest rate provided under this Section or the interest rate provided under
such other provision.
Section 17. Expenses. Except as otherwise provided in this
Agreement, each party and its Subsidiaries shall bear its own expenses
incurred in connection with preparation of Tax Returns and other matters
related to Taxes under the provisions of this Agreement.
Section 18. General Provisions.
(a) Addresses and Notices. Any notice, demand, request or report
required or permitted to be given or made to any party under this Agreement
shall be in writing and shall be deemed given or made when delivered in part
or when sent by first class mail or by other commercially reasonable means of
written communication (including delivery by an internationally recognized
courier service or by facsimile transmission) to the party at the party's
address as follows:
If to Refining: ________________________
________________________
________________________
________________________
If to Valero: ________________________
________________________
________________________
________________________
If to Acquiror: ________________________
________________________
________________________
________________________
A party may change the address for receiving notices under this Agreement by
providing written notice of the change of address to the other parties.
(b) Binding Effect. This Agreement shall be binding upon and inure
to the benefit of the parties hereto and their successors and assigns.
(c) Waiver. No failure by any party to insist upon the strict
performance of any obligation under this Agreement or to exercise any right or
remedy under this Agreement shall constitute waiver of such obligation, right,
or remedy or any other obligation, rights, or remedies under this Agreement.
(d) Invalidity of Provisions. If any provision of this Agreement
is or becomes invalid, illegal or unenforceable in any respect, the validity,
legality, and enforceability of the remaining provisions contained herein
shall not be affected thereby.
(e) Further Action. The parties shall execute and deliver all
documents, provide all information, and take or refrain from taking action as
may be necessary or appropriate to achieve the purposes of this Agreement,
including the execution and delivery to the other parties and their
Subsidiaries and representatives of such powers of attorney or other
authorizing documentation as is reasonably necessary or appropriate in
connection with Tax Contests (or portions thereof) under the control of such
other parties in accordance with Section 9.
(f) Integration. This Agreement constitutes the entire agreement
among the parties pertaining to the subject matter of this Agreement and
supersedes all prior agreements and understandings pertaining thereto. In the
event of any inconsistency between this Agreement and the Distribution
Agreement or any other agreements relating to the transactions contemplated by
the Distribution Agreement, the provisions of this Agreement shall control.
(g) Construction. The language in all parts of this Agreement
shall in all cases be construed according to its fair meaning and shall not be
strictly construed for or against any party.
(h) No Double Recovery; Subrogation. No provision of this
Agreement shall be construed to provide an indemnity or other recovery for any
costs, damages, or other amounts for which the damaged party has been fully
compensated under any other provision of this Agreement or under any other
agreement or action at law or equity. Unless expressly required in this
Agreement, a party shall not be required to exhaust all remedies available
under other agreements or at law or equity before recovering under the
remedies provided in this Agreement. Subject to any limitations provided in
this Agreement (for example, the limitation on filing claims for refund in
Section 4.08), the indemnifying party shall be subrogated to all rights of the
indemnified party for recovery from any third party.
(i) Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, and all of which
taken together shall constitute one and the same instrument.
(j) Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of Delaware applicable to
contracts executed in and to be performed in that State.
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed by the respective officers as of the date set forth above.
VALERO ENERGY CORPORATION
By:
Its:
VALERO REFINING AND MARKETING
COMPANY
By:
Its:
PG&E CORPORATION
By:
Its:
VALERO ENERGY CORPORATION
AMENDED AND RESTATED RESTRICTED STOCK BONUS
AND INCENTIVE STOCK PLAN
Amended and restated as of November 21, 1996
<PAGE>
Note: This Plan was amended on January 27, 1988 to eliminate all references
to the incentive stock portion of the Plan. Accordingly, all references to
incentive stock in this Plan apply only to incentive stock awards granted
prior to January 27, 1988.
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) A "Change of Control" shall be deemed to occur when: (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; (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, or (iii) the shareholders of
Energy approve any agreement or transaction pursuant to which (A) Energy will
merge or consolidate with any other Person (other than a wholly owned
subsidiary of Energy) and will not be the surviving entity (or survives only
as the subsidiary of another entity), (B) Energy will sell all or
substantially all of its assets to any other Person (other than a wholly owned
subsidiary of Energy), or (C) Energy will be liquidated or dissolved.
(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 October 26, 1995, between Energy and Harris
Trust and Savings Bank, as Rights Agent) the terms "Common Stock," "share of
Common Stock" or any similar terms shall be construed to refer to one share of
the Common Stock together with one 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 expressed 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 (i) the number of shares of Common
Stock to be issued as Bonus Stock to such Bonus Participant, (ii) the time or
times at which the restrictions specified in Paragraph 4.1 hereof shall be
removed, and (iii) whether the Participant shall be entitled to satisfy any
tax obligation either by the withholding of shares of Common Stock from the
issue of Bonus Stock or by the tender of other shares already owned by the
Participant. These terms 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 of Common Stock;
provided however, that shares of Bonus Stock or Incentive Stock granted
pursuant to Paragraph 3.13 shall be treasury or reaquired shares. In the
absence of specific action by the Committee to the contrary, each grant of
Bonus Stock or Incentive Stock (excluding grants pursuant to Paragraph 3.13)
shall be in consideration of past services of the Participant and each such
grant shall be deemed to constitute a conclusive finding by the Committee that
such services have a value equal to or in excess of the value of such Bonus
Stock or Incentive Stock, as the case may be, and constitute payment in full
therefor. All authorized and unissued shares issued as Bonus Stock or
Incentive Stock in accordance with the Plan shall be fully paid and
nonassessable shares and free from preemptive rights. No Bonus Stock or
Incentive Stock shall be issued for consideration having a value less than the
par value of the Common Stock.
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 all of such restrictions may terminate earlier, 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. If a Participant's employment with the Company is voluntarily
terminated by the Participant (other than through retirement) 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 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 Chief Executive Officer of Energy) shall be entitled (but is not
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 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. If a Bonus Participant's employment is terminated by retirement,
death or total and permanent disability (with the determination of disability
to be made within the sole discretion of the Committee), or by the Company
without cause, then any shares of Bonus Stock previously issued to the
Participant shall remain outstanding without forfeiture and any restrictions
remaining on such shares shall continue to lapse in accordance with the terms
of the original award to the Participant unless the Committee or the Chief
Executive Officer of the Company prescribes new or additional terms for the
vesting, exercise or realization of such Bonus Stock shares (provided that
only the Committee may prescribe new or additional terms with respect to Bonus
Stock shares previously issued to any person subject to Section 16 of the
Exchange Act). If a Change of Control occurs 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. If an Incentive Participant's employment is terminated by
retirement, 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 or the original
Performance Performance Period,
Period is at least but less than 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, Corporate Secretary, Stock Plan Administrator or
Transfer Agent 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
custodian of such shares 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, Corporate Secretary, Stock Plan Administrator or Transfer Agent 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 so long as the Compensation
Committee shall be composed solely of two or more Non-Employee Directors" (as
defined in Rule 16b-3 under the Securities Exchange Act of 1934). If the
Compensation Committee does not meet the foregoing criteria, then the Board of
Directors of Energy shall appoint one or more persons to serve as an
administrator for the Plan so that the Plan shall be administered solely by
two or more Non-Employee Directors."
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 of the Committee, the recipient may 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.
Subject to any limitations prescribed by applicable law, 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 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. 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 on January 2nd of the second calendar year following
the calendar year in which such election is made. 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 respects 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 August 22, 1996)
<PAGE>
VALERO ENERGY CORPORATION
STOCK OPTION PLAN NO. 3
Page
1. Introduction and Statement of Purpose..............................1
2. Definitions........................................................1
3. Granting of Options, Limited Rights and SARs to Employees..........3
3.1. Selection of Participants...................................3
3.2. Exclusion of Committee Members..............................3
3.3. No Right to Participate.....................................3
3.4. Automatic Grant of Limited Rights...........................3
3.5. Determination of Option Provisions..........................3
3.6. Option Shares, Limited Rights and SARs Available for Grant..4
3.7. Limitations Regarding Option Price and Strike Price.........4
3.8. Limitation Regarding Option Period..........................4
3.9. Option Agreements...........................................4
3.10. Provisions Regarding Prospective Employees..................5
4. Exercise of Options, Limited Rights and SARs.......................5
4.1. Exercise of Options.........................................5
4.2. Exercise of Limited Rights..................................5
4.3. Automatic Exercise of SARs; Settlement Price for SARs.......5
4.4. [reserved]..................................................6
4.5. [reserved]..................................................6
4.6. Exercise Procedure..........................................6
4.7. Payment for SARs and Limited Rights.........................7
4.8. Payment with Common Stock...................................7
4.9. Rights as Stockholder.......................................7
4.10. Effect of Termination and Forfeiture........................7
4.11. Effect of Leave of Absence..................................8
4.12 Effect of Disability........................................8
4.13. Effect of Retirement or Death...............................9
4.14. Exercise Following Termination, Retirement, Disability
or Death..................................................9
4.15 Effect of Change of Control................................10
5. Adjustments Upon Changes In Capitalization........................12
5.1. Securities Received Upon Exercise..........................12
5.2. Adjustment of Option Shares Available......................13
6. Administration....................................................13
6.1. Plan Administered by Committee.............................13
6.2. Powers of the Committee....................................13
6.3. Express Powers not Exclusive...............................14
7. Miscellaneous Provisions..........................................14
7.1. Nonassignability...........................................14
7.2. Investment Letter..........................................15
7.3. [Reserved].................................................15
7.4. Responsibility for Taxes...................................15
7.5. Employment Not Guaranteed..................................15
7.6. Gender, Singular and Plural................................15
7.7. Captions...................................................15
7.8. Validity...................................................15
7.9. Notice.....................................................15
7.10. Applicable Law.............................................15
7.11. Inconsistency..............................................16
8. Amendment and Termination of Plan and Option Agreements...........16
8.1. Amendments.................................................16
8.2. Termination................................................16
8.3. Effect of Amendment or Termination.........................16
8.4 Cancellation of Options....................................16
9. Claims............................................................16
9.1. Filing of Claims...........................................16
9.2. Denial of Claims...........................................17
9.3. Review of Claims...........................................17
9.4. Decision by Committee......................................17
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 August 22, 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 Rights Agreement, dated
as of October 26, 1995, between Valero and Harris Trust and Savings Bank, 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.
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
Chief Executive Officer 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 30 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 Change of Control Period, the highest of
the daily average sales prices for the Common Stock during such Change of
Control Period or (b) if the Limited Right is not exercised during a 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. When a
Participant holds fewer related SARs than the number of Option Shares to which
his or her 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 that 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 that is exercised during a Change of Control
Period shall be settled on the basis of the highest daily average sales prices
of the Common Stock during such 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. [reserved].
4.5. [reserved].
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 Chief Executive Officer 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 Chief Executive Officer 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 Chief Executive Officer 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 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 or Chief
Executive Officer 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 Chief
Executive Officer 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 composed solely of two or more Non-Employee Directors" (as
defined in Rule 16b-3 under the Exchange Act) 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 that the membership of the Compensation Committee shall fail to meet the
foregoing criteria, then additional or different members of the Board of
Directors shall be appointed by the Board of Directors to act for purposes of
administering this Plan so that the Committee administering this Plan shall
consist solely of two or more Non-Employee Directors."
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 . Without prior written approval from the
Committee, 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
without the Committee's prior approval 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.
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 claiming to have
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), the claimant 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 August 22, 1996)
<PAGE>
VALERO ENERGY CORPORATION
STOCK OPTION PLAN NO. 4
Page
1. Introduction and Statement of Purpose............................1
2. Definitions........................................................1
3. Granting of Options, Limited Rights and SARs to Employees..........3
3.1. Selection of Participants.....................................3
3.2. Exclusion of Committee Members................................3
3.3. No Right to Participate.......................................3
3.4. Automatic Grant of Limited Rights.............................3
3.5. Determination of Option Provisions............................3
3.6. Option Shares, Limited Rights and SARs Available for Grant....4
3.7. Limitations Regarding Option Price and Strike Price...........4
3.8. Limitation Regarding Option Period............................4
3.9. Option Agreements.............................................4
3.10 Provisions Regarding Prospective Employees....................5
4. Exercise of Options, Limited Rights and SARs.......................5
4.1. Exercise of Options...........................................5
4.2. Exercise of Limited Rights....................................5
4.3. Automatic Exercise of SARs; Settlement Price for SARs.........5
4.4. [reserved]....................................................6
4.5. [reserved]....................................................6
4.6. Exercise Procedure............................................6
4.7. Payment for SARs and Limited Rights...........................7
4.8. Payment with Common Stock.....................................7
4.9. Rights as Stockholder.........................................7
4.10 Effect of Termination and Forfeiture..........................7
4.11 Effect of Leave of Absence....................................8
4.12 Effect of Disability..........................................8
4.13 Effect of Retirement or Death.................................9
4.14 Exercise Following Termination, Retirement, Disability
or Death....................................................9
4.15 Effect of Change of Control..................................10
5. Adjustments Upon Changes In Capitalization........................12
5.1. Securities Received Upon Exercise............................12
5.2. Adjustment of Option Shares Available........................13
6. Administration....................................................13
6.1. Plan Administered by Committee...............................13
6.2. Powers of the Committee......................................13
6.3. Express Powers not Exclusive.................................14
7. Miscellaneous Provisions..........................................14
7.1. Nonassignability.............................................14
7.2. Investment Letter............................................15
7.3. [Reserved]...................................................15
7.4. Responsibility for Taxes.....................................15
7.5. Employment Not Guaranteed....................................15
7.6. Gender, Singular and Plural..................................15
7.7. Captions.....................................................15
7.8. Validity.....................................................15
7.9. Notice.......................................................15
7.10 Applicable Law...............................................15
7.11 Inconsistency................................................15
8. Amendment and Termination of Plan and Option Agreements...........16
8.1. Amendments...................................................16
8.2. Termination..................................................16
8.3. Effect of Amendment or Termination...........................16
8.4 Cancellation of Options......................................16
9. Claims............................................................16
9.1. Filing of Claims.............................................16
9.2. Denial of Claims.............................................17
9.3. Review of Claims.............................................17
9.4. Decision by Committee........................................17
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 August 22, 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 Rights Agreement, dated
as of October 26, 1995, between Valero and Harris Trust and Savings Bank, 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.
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
Chief Executive Officer 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 10 years and 30 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 Change of Control Period, the highest of
the daily average sales prices for the Common Stock during such Change of
Control Period or (b) if the Limited Right is not exercised during a 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. When a
Participant holds fewer related SARs than the number of Option Shares to which
his or her 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 that 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 Change of Control Period shall
be settled on the basis of the highest daily average sales prices of the
Common Stock during such 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. [reserved].
4.5. [reserved].
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 Partici- pant 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 Chief Executive Officer 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 Chief Executive Officer 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 Chief Executive Officer 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 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 or Chief
Executive Officer 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 Chief
Executive Officer 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 composed solely of two or more "Non-Employee Directors" (as defined
in Rule 16b-3 under the Exchange Act) 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 that
the membership of the Compensation Committee shall fail to meet the foregoing
criteria, then additional or different members of the Board of Directors shall
be appointed by the Board of Directors to act for purposes of administering
this Plan so that the Committee administering this Plan shall consist solely
of two or more "Non-Employee Directors."
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. Without prior written approval from the Committee,
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 without the Committee's
prior approval 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.
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 claiming to have
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), the claimant 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
1990
RESTRICTED STOCK PLAN
for
NON-EMPLOYEE DIRECTORS
Amended and Restated as of August 22, 1996
<PAGE>
1990 RESTRICTED STOCK PLAN FOR NON-EMPLOYEE DIRECTORS
TABLE OF CONTENTS
Page
1. Purpose and Effective Date of Plan.................................1
2. Certain Definitions................................................1
3. Shares Subject to the Plan.........................................2
4. Eligibility........................................................2
5. Automatic Grants to Outside Directors..............................2
6. Administration of the Plan.........................................4
7. Restrictions Applicable to Restricted Shares.......................5
8. Forfeiture; Completion of Restriction Period.......................8
9. Adjustment in Event of Changes in Common Stock.....................9
10. Non-alienation of Benefits.........................................9
11. Appointment of Attorney-in-fact....................................9
12. Withholding Taxes..................................................9
13. Amendment and Termination of Plan.................................10
14. Execution of Agreement............................................10
15. Government and Other Regulations..................................10
16. No Right to Renomination..........................................11
17. Non-exclusivity of Plan...........................................11
18. Governing Law.....................................................11
19. Miscellaneous Provisions..........................................11
1. PURPOSE AND EFFECTIVE DATE OF PLAN.
The purpose of this Plan is to supplement the compensation paid to
Outside Directors, to increase their proprietary interest in the Company, to
attract and retain persons of outstanding caliber to serve as Directors of the
Company and to enhance their identification with the interests of the
Company's stockholders by grants of Common Stock. The Plan was adopted and
shall be effective on November 14, 1990 (the "Effective Date"). Bonus Shares
awarded under the Plan shall be in addition to, and shall not replace, any
cash or other compensation arrangement available to Outside Directors.
2. CERTAIN DEFINITIONS.
(a) "Annual Meeting" shall mean the annual meeting of stockholders
for election of directors of the Company. In the event of any adjournment of
any such meeting, the date on which the inspectors appointed for such meeting
declare directors to have been elected shall be deemed the meeting date for
purposes of the Plan.
(b) "Board" shall mean the Board of Directors of the Company.
(c) "Common Stock" shall mean the Common Stock, par value $1.00 per
share, of the Company, including a Preference Share Purchase Right.
(d) "Company" shall mean Valero Energy Corporation, a Delaware
corporation.
(e) "Compensation Committee" shall mean the Compensation Committee
of the Board of Directors of the Company.
(f) "Employee Director" shall mean a member of the Board who is an
employee of the Company or any subsidiary of the Company.
(g) "Exchange Act" shall mean the Securities Exchange Act of 1934,
as amended.
(h) "Fair Market Value" shall mean the average of the highest and
lowest sales prices of the Company's Common Stock on a Grant Date (or if
Common Stock was not traded on such day, the first day following the Grant
Date on which Common Stock was traded) as reported in the Wall Street Journal
under the heading "New York Stock Exchange Composite Transactions" or any
successor heading.
(i) "Grant Date" shall mean the date on which Shares are awarded to
an Outside Director pursuant to Paragraph 5.
(j) "Mandatory Retirement Policy" shall mean the policy set forth
in Article II, Section 1, of the By-laws of the Company, or any successor
policy.
(k) "Outside Director" shall mean a member of the Board who is not
an employee of the Company or any subsidiary of the Company.
(l) "Plan" shall mean this Valero Energy Corporation 1990
Restricted Stock Plan for Non-Employee Directors.
(m) "Preference Share Purchase Rights" shall have the meaning
specified in Paragraph 7(f)(v).
(n) "Restriction Period" shall mean the period of time, as
specified in Paragraph 8, applicable to Restricted Shares granted under the
Plan.
(o) "Restricted Shares" or "Shares" shall mean shares of Common
Stock granted to an Outside Director pursuant to Paragraph 5.
(p) "Restricted Shares Agreement" shall mean the agreement
described in Paragraph 5.
(q) "Retained Distributions" shall mean distributions which are
retained by the Company pursuant to Paragraph 7(e)(ii).
(r) "Subsidiary of the Company" shall mean any corporation,
partnership or other entity in which the Company owns, directly or indirectly,
a controlling interest.
3. SHARES SUBJECT TO THE PLAN.
(a) Subject to the provisions of Paragraphs 9 and 19(d) below, the
maximum aggregate number of shares of Common Stock that may be granted under
the Plan shall be 100,000 Shares; provided however, that any Shares granted
under the Plan which are forfeited pursuant to the terms of the Plan or
otherwise surrendered shall again become available for grant under the Plan.
Shares withheld by the Company, or delivered to the Company, to pay taxes
pursuant to Paragraph 12 shall not be available for additional grants under
the Plan.
(b) The Shares may be, in whole or in part, authorized but unissued
shares of Common Stock or shares of Common Stock previously issued and
outstanding and reacquired by the Company.
(c) The Company shall not be required to issue fractional Shares, and in
lieu thereof any fractional Shares shall be rounded to the next higher number
of whole Shares.
(d) The Company shall have no obligation to register the Shares with the
Securities and Exchange Commission, either prior to or after being granted to
an Outside Director.
4. ELIGIBILITY.
The only persons eligible to participate in the Plan shall be Outside
Directors. An Employee Director who retires from employment with the Company
or any Subsidiary of the Company shall be (without further action by the
Committee) eligible to participate in the Plan and shall be entitled to
receive a grant of Restricted Stock immediately upon the commencement of his
or her service as an Outside Director.
5. AUTOMATIC GRANTS TO OUTSIDE DIRECTORS.
(a) Each person who is an Outside Director at the Effective Date shall
be automatically granted that number of Restricted Shares which is determined
by dividing $31,000 by the Fair Market Value of a share of the Common Stock on
the Effective Date; provided however, that any Outside Director whose current
term of office shall be scheduled to end prior to the third Annual Meeting
following the Effective Date and who will not be eligible at the end of his
current term to stand for reelection to an additional term as a Director of
the Company due to the Mandatory Retirement Policy, or who has advised the
Board that he does not intend to seek reelection as a Director at the end of
his current term, shall in lieu of such amount be automatically granted the
number of Restricted Shares determined by dividing the appropriate sum set
forth below by the Fair Market Value of a share of the Common Stock on the
Effective Date:
Years Remaining Value of
to End of Term Restricted Shares Granted
less than 1 year -0-
at least 1 year but less than 2 years $8,000
at least 2 years but less than 3 years $16,000
For purposes of applying the foregoing provision, the term of each
Class I Director shall be deemed to end April 30, 1993, the term of each Class
II Director and of each Director who is without classification shall be deemed
to end April 30, 1991 and the term of each Class III Director shall be deemed
to end April 30, 1992.
(b) Each person who is first elected or appointed an Outside Director
after the Effective Date (or who is eligible for an additional grant of
Restricted Shares pursuant to Paragraph 5(c) below) shall be automatically
granted on the date so elected or appointed the number of Restricted Shares
determined by dividing the sum of $45,000 by the Fair Market Value of a share
of the Common Stock on such Grant Date; provided however, that if any such
Outside Director would not be eligible for reelection to an additional term as
a Director of the Company at the end of his term due to the Mandatory
Retirement Policy (or shall have advised the Board that he does not intend to
seek reelection at the end of such term), such Outside Director shall, in lieu
of such amount, be automatically granted the number of Restricted Shares
determined by dividing the sum set forth below by the Fair Market Value of a
share of the Common Stock on such Grant Date:
Number of Annual Meetings Scheduled
to Occur Prior to the Annual Meeting
at Which Such Outside Director's Value of
Term of Office Ends Restricted Shares Granted
None $15,000
One $30,000
Two $45,000
For purposes of applying the foregoing provision, the Annual Meeting
at which a Director is elected or appointed shall be excluded in determining
the appropriate number of Annual Meetings.
(c) Each Outside Director who has previously received a grant of
Restricted Shares under the Plan and who is reelected for an additional term
as an Outside Director at, or whose term of office otherwise continues
following the date of, any Annual Meeting on which all such Restricted Shares
have become fully vested pursuant to Paragraph 7 shall thereupon receive an
additional automatic grant of Restricted Shares in accordance with Paragraph
5(b); provided however, that if the Restriction Period with respect to such
Restricted Shares has ended due solely to a Change of Control of the Company,
such Outside Director shall not be eligible to receive an additional grant of
Restricted Shares until the date of the Annual Meeting upon which, had such
Change of Control not occurred, such Outside Director would otherwise have
become eligible to receive such an additional grant.
(d) The value of any Restricted Shares granted pursuant to Paragraphs
5(b) or 5(c) above shall be adjusted for grants made in calendar years
subsequent to 1991 as follows: the dollar amount of each grant during any
calendar year after 1991 will be adjusted using the prior year's applicable
grant amount (e.g., either $15,000, $30,000 or $45,000 for 1991) as a base
amount and adjusting such preceding year's applicable base amount for
projected inflation by multiplying such base amount by a fraction in which the
numerator is the annual average Consumer Price Index-U ("CPI-U") in the Survey
of Current Business published by the United States Department of Commerce,
Bureau of Economic Analysis, for such preceding year and the denominator is
the CPI-U for the second immediately preceding year. In the event that CPI-U
is not available at the date a grant is required to be made pursuant to the
foregoing provisions, such grant shall be made as soon as such information is
available, but the dates of which such Restricted Stock shall vest pursuant to
Paragraph 8 shall be determined as if such grant were made on the date
otherwise required hereunder.
(e) The Corporate Secretary of the Company shall promptly cause the
Company to enter into an agreement ("Restricted Share Agreement") with each
Outside Director granted Restricted Shares pursuant to this Paragraph 5, and
shall cause the Company to issue such Restricted Shares, all without further
action by the Company, the Board, the Compensation Committee or the Special
Committee. Each Outside Director receiving an automatic grant of Restricted
Shares pursuant to this Paragraph 5 is referred to herein as a "Participant."
The execution and delivery of a Restricted Shares Agreement shall be a
condition precedent to the issuance of Restricted Shares to a Participant.
6. ADMINISTRATION OF THE PLAN.
(a) Except as otherwise set forth herein, the Plan shall be administered
by the Compensation Committee, as appointed and constituted from time to time
by the Board so long as the Compensation Committee is composed solely of two
or more Non-Employee Directors" (as defined in Rule 16b-3 under the Exchange
Act). In the event the Compensation Committee shall fail to meet the
foregoing criteria, then additional or different persons shall be appointed by
the Board of Directors for purposes of administering this Plan so that the
committee administering this Plan shall be composed solely of two or more
Non-Employee Directors.
(b) In connection with its administration of this Plan, the Compensation
Committee is empowered to:
(i) Make rules and regulations for the administration of the Plan
that are not inconsistent with the terms and provisions of this Plan;
(ii) Construe all terms, provisions, conditions and limitations of
the Plan in good faith, and adopt amendments to the Plan;
(iii) Make equitable adjustments for any mistakes or errors in
the administration of this Plan or deemed to be necessary as the result of any
unusual situation or any ambiguity in the Plan;
(iv) 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.
(c) The foregoing list of express powers granted to the Compensation
Committee upon the adoption of this Plan is not necessarily intended to be
either complete or exclusive, and the Compensation Committee shall, in
addition to the specific powers granted by this Plan, have such powers not
inconsistent with the Plan or Rule 16b-3, 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 and judgment of the
Compensation 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.
(d) Notwithstanding the foregoing, the Compensation Committee shall have
no authority to exercise discretion with respect to the selection of any
Outside Director as a Participant in the Plan, the determination of the number
of Restricted Shares that are allocated to any such Outside Director or the
terms or conditions of any such allocation, and shall have no authority to
amend any provision of the Plan relating to eligibility for participation in
the Plan, the amount or timing of grants under the Plan or the imposition or
removal of restrictions on the vesting of Restricted Shares.
(e) Distributions of Shares may, as the Compensation Committee shall in
its sole discretion determine, be made from authorized but unissued shares or
from treasury or reacquired shares.
7. RESTRICTIONS APPLICABLE TO RESTRICTED SHARES.
(a) All Restricted Shares granted pursuant to Paragraph 5 of the Plan
shall be subject to the risk of forfeiture and the certificates representing
such Restricted Shares shall contain the restrictive legend set forth in
Paragraph 7(c) below during the applicable Restriction Period. The
Restriction Period for each grant of Restricted Shares shall commence as of
the Grant Date.
(b) The Restriction Period for any Restricted Shares previously issued
to an Outside Director shall end and the Restricted Shares and any related
Retained Distributions shall become nonforfeitable on the earlier of any of
the following events:
(i) The date an Outside Director ceases to be a Director of the
Company by reason of the Mandatory Retirement Policy;
(ii) The date an Outside Director completes his tenure as a Director
of the Company as provided in the By-laws of the Company and declines to stand
for reelection;
(iii) The date an Outside Director, having been nominated for
and agreed to stand for reelection, is not reelected by the stockholders of
the Company to serve as a member of the Board;
(iv) The date of the death of an Outside Director;
(v) The date an Outside Director certifies in writing to the
Company that he is resigning as a member of the Board due to medical or health
reasons which render such Outside Director unable to continue to serve as a
member of the Board;
(vi) Subject to the provisions of and definitions contained in
Paragraph 7(f), the occurrence of a Change of Control of the Company; or
(vii) The date specified in Paragraph 7(g).
(c) Restricted Shares, when issued, will be represented by a stock
certificate or certificates registered in the name of the Outside Director to
whom such Restricted Shares shall have been granted. Each such certificate
and any securities constituting Retained Distributions shall bear a legend in
substantially the following form:
"The shares represented by this certificate are subject
to the terms and conditions (including forfeiture and
restrictions against transfer) contained in the Valero Energy
Corporation 1990 Restricted Stock Plan for Non-Employee Directors.
A copy of such Plan is on file in the Office of the Corporate
Secretary of Valero Energy Corporation."
(d) Each certificate shall be deposited by the Outside Director with the
Treasurer, Corporate Secretary, Stock Plan Administrator or Transfer Agent of
the Company, together with stock powers or other instruments of assignment,
each endorsed in blank, which will permit transfer to the Company of all or
any portion of the Restricted Shares and any securities constituting Retained
Distributions that shall be forfeited or that shall not become nonforfeitable
in accordance with the Plan.
(e) Restricted Shares shall constitute issued and outstanding shares of
Common Stock for all corporate purposes. The Outside Director will have the
right to vote such Restricted Shares, to receive and retain all regular cash
dividends paid on such Restricted Shares and to exercise all other rights,
power and privileges of a holder of Common Stock with respect to such
Restricted Shares, with the exception that:
(i) the Outside Director will not be entitled to delivery of the
stock certificate or certificates representing such Restricted Shares until
the Restriction Period applicable to such shares or a portion thereof shall
have expired and unless all other vesting requirements with respect thereto
shall have been fulfilled;
(ii) other than cash dividends and rights to purchase stock which
might be distributed to shareholders of the Company, the Company will retain
custody of all distributions ("Retained Distributions") made or declared with
respect to Restricted Shares (and such Retained Distributions will be subject
to the same restrictions, terms and conditions as are applicable to the
Restricted Shares with respect to which they were made, paid or declared)
until such time, if ever, as the Restriction Period applicable to the
Restricted Shares with respect to which such Retained Distributions shall have
been made, paid or declared shall have expired, and such Retained
Distributions shall not bear interest or be segregated in separate accounts;
(iii) upon the breach of any restrictions, terms or conditions
provided in the Plan with respect to any Restricted Shares or Retained
Distributions, such Restricted Shares and any related Retained Distributions
shall thereupon be automatically forfeited.
(f) A "Change of Control" as used herein, shall mean each occurrence of
any one or more of the following events:
(i) any person (excluding any employee benefit plan of the Company
or of a Subsidiary of the Company, any trustee, administrator or other entity
administering any such plan, and the Company or any Subsidiary of the Company)
or any partnership, entity, syndicate or other group (a "Group") formed for
the purpose of acquiring, holding or disposing of Voting Securities of the
Company within the meaning of Rule 13(d) under the Exchange Act which
theretofore beneficially owns less than 20% of the Voting Securities of the
Company then issued and outstanding shall publicly announce, or shall file
with the Securities and Exchange Commission 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 the Company that result in such person or
Group directly or indirectly beneficially owning 20% or more of the Voting
Securities of the Company;
(ii) any person (other than the Company, any Subsidiary of the
Company, any employee benefit plan of the Company or a of Subsidiary of the
Company 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 the Company, or for any number or amount of Voting
Securities of the Company which, if such offer were to be fully subscribed and
all Voting Securities of the Company 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 the Company;
(iii) during any period of 24 consecutive months, there shall be
a change in the composition of the Board of Directors of the Company such that
the persons who at the beginning of any such period constituted a majority of
the Directors of the Company shall cease to constitute a majority of the Board
of Directors of the Company, unless the election, or the nomination for
election, by the shareholders of the Company, 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;
(iv) the shareholders of the Company shall approve an agreement
providing either for any merger, consolidation, combination or other
transaction in which the Company 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 the Company; or
(v) the occurrence of the "Distribution Date" with respect to the
Company's Preference Share Purchase Rights (the "Preference Share Purchase
Rights"), as such term is defined in that certain Rights Agreement, dated as
of October 26, 1995, as amended, by and between the Company and Harris Trust &
Savings Bank, as Rights Agent.
As used in this Paragraph 7(f), the term "Voting Securities" shall mean
the Common Stock, any other equity security of the Company ordinarily entitled
to vote for Directors at meetings of the stockholders of the Company and any
debt or equity security of the Company convertible into Common Stock or
another security so entitled to vote for the election of Directors of the
Company. 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) of the Company shall be deemed to represent the
number of whole shares of Common Stock (or other Voting Securities) of the
Company 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 the Company 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 the Company 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 7(f), the term "person"
shall include any individual, corporation, partnership, firm or other entity.
(g) Except as otherwise provided herein, the Restriction Period shall
terminate as follows:
(i) In the case of each Outside Director receiving a grant of
Restricted Shares pursuant to Paragraph 5(a), the Restriction Period shall
terminate on (A) August 31, 1991, with respect to Shares having a Fair Market
Value on the Grant Date of $8,000, (B) the date of the 1992 Annual Meeting
with respect to Shares having a Fair Market Value on the Grant Date of $8,000,
and (C) the date of the 1993 Annual Meeting with respect to Shares having a
Fair Market Value on the Grant Date of $15,000;
(ii) In the case of each Outside Director receiving a grant of
Restricted Shares pursuant to Paragraph 5(b) or 5(c), the Restriction Period
shall terminate on the date of each Annual Meeting to occur following the
Grant Date with respect to Shares having a Fair Market Value on the Grant Date
of $15,000 (such amount to be subject to adjustment in the same manner as set
forth in Paragraph 5(d)).
8. FORFEITURE; COMPLETION OF RESTRICTION PERIOD.
(a) If an Outside Director ceases to be a member of the Board for any
reason other than as set forth in Paragraph 7(b), then all Restricted Shares
and all Retained Distributions with respect thereto issued to such Outside
Director and to which the Restriction Period still applies shall be forfeited
to the Company and the Outside Director shall not have any rights (including
dividend and voting rights) with respect to such forfeited Restricted Shares
and Retained Distributions.
(b) Upon the completion of the Restriction Period with respect to all or
any portion of an Outside Director's Restricted Shares, and the satisfaction
of any other applicable restrictions, terms and conditions, such Restricted
Shares and any Retained Distributions with respect to such Restricted Shares
shall become nonforfeitable. The Company shall promptly thereafter issue and
deliver to the Outside Director new stock certificates or instruments
representing such Restricted Shares and Retained Distributions registered in
the name of the Outside Director or, if deceased, his or her legatee, personal
representative or distributee, which do not contain the legend set forth in
Paragraph 7(c); provided, however, (i) such new stock certificates may be
required to bear a restrictive legend, indicating that such shares have not
been registered under the Securities Act of 1933, if determined to be
appropriate by counsel for the Company, and (ii) the Company may require, as a
condition precedent to the issuance of any such certificates, that the Outside
Director, or other person receiving such certificates, execute and deliver to
the Company a letter, in a form satisfactory to counsel for the Company, to
the general effect that such shares are being acquired by such person for
investment only and not with a view to distribution.
9. ADJUSTMENT IN EVENT OF CHANGES IN COMMON STOCK.
In the event of a recapitalization, stock split, stock dividend,
combination or exchange of shares, merger, consolidation, liquidation or other
similar event, the aggregate number and class of Restricted Shares and other
securities or property available for grant under the Plan shall be
automatically adjusted so that the total number of shares of Common Stock or
other securities or property issuable under the Plan immediately following
such event shall be the number of shares of Common Stock and other securities
or property which, had all remaining shares of Common Stock available under
the Plan been granted to a single holder immediately prior to such event,
would be held or received by such holder immediately following such event.
10. NON-ALIENATION OF BENEFITS.
No Shares, Retained Distributions, or other rights or benefits under the
Plan or any Restricted Shares Agreement shall be subject, prior to the end of
any applicable Restriction Period or other restrictive period, to
anticipation, alienation, sale, assignment, hypothecation, pledge, exchange,
transfer, encumbrance or charge (other than by will or the laws of descent and
distribution), and any such attempt to anticipate, alienate, sell, assign,
hypothecate, pledge, exchange, transfer, encumber or charge the same shall be
void. No Shares, Retained Distributions, or other rights or benefits under
the Plan shall in any manner be liable for or subject to the debts, contracts,
liabilities or torts of the person entitled to such right or benefit. If any
Outside Director or other person claiming by, through or under an Outside
Director hereunder should attempt to anticipate, alienate, sell, assign,
hypothecate, pledge, exchange, transfer, encumber or charge any Shares,
Retained Distributions, or any right or benefit hereunder, prior to the end of
any applicable Restriction Period or other restrictive period, then such
Restricted Shares and related Retained Distributions shall be automatically
forfeited and such rights or benefits shall cease and terminate.
11. APPOINTMENT OF ATTORNEY-IN-FACT.
Upon the issuance of any Restricted Shares and the delivery by an Outside
Director of the stock power referred to in Paragraph 7(d) hereof, such Outside
Director shall be deemed to have appointed the Company, acting through its
Corporate Secretary, its successors and assigns, the attorney-in-fact of the
Outside Director, with full power of substitution, for the purpose of carrying
out the provisions of this Plan and taking any action and executing any
instruments which such attorney-in-fact may deem necessary or advisable to
accomplish the purposes hereof, which appointment as attorney-in-fact shall be
irrevocable and coupled with an interest. The Company as attorney-in-fact for
the Outside Director may, in the name and stead of the Outside Director, make
and execute all conveyances, assignments and transfers of the Restricted
Shares and Retained Distributions deposited with the Company pursuant to the
Plan and the Outside Director hereby ratifies and confirms all that the
Company, as said attorney-in-fact, shall do by virtue thereof. Nevertheless,
the Outside Director shall, if so requested by the Company, execute and
deliver to the Company all such instruments as may, in the judgement of the
Company, be advisable for the purpose.
12. WITHHOLDING TAXES.
(a) At the time any Restricted Shares become nonforfeitable 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 the Company equal to the amount required by applicable
provisions of law to be withheld by the Company 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 of the Committee, the recipient may elect 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 on the tax date equal to all or any portion of the amount otherwise to
be collected subject to any limitations prescribed by applicable law, 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 the Company equal to any excess amount to be
withheld or collected. In lieu of the foregoing withholding procedure, a
recipient, subject to the prior approval of the Committee, may satisfy the tax
withholding or collection requirement by delivering to the Company 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 on the tax date equal to the tax amount. Any and all taxes
payable with respect to income of a Participant or other recipient resulting
from the grant or issuance of any Shares hereunder shall be the sole
responsibility of the Participant or other recipient, not of the Company,
whether or not 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. The determination of any tax
resulting from the award or vesting of Shares or from cash or other
distributions with respect to Shares or Retained Distributions shall be the
sole responsibility of the Participant.
(b) To the extent permitted under the Internal Revenue Code of 1986, as
amended, an Outside Director granted Restricted Shares may elect (which, apart
from any other notice required by law, shall require that the Outside Director
notify the Company of such election at the time it is made) within 30 days
after the Grant Date to include in gross income for Federal income tax
purposes an amount equal to the Fair Market Value of such Shares at the Grant
Date.
13. AMENDMENT AND TERMINATION OF PLAN.
Subject to the provisions of Paragraph 6(d), the Compensation Committee
may at any time terminate, modify or amend the Plan as it shall deem
advisable. Notwithstanding the foregoing, shareholder approval shall be
obtained for any action with respect to the Plan to the extent required by
applicable state or federal rules, regulations or laws. No termination or
amendment of the Plan shall adversely affect the rights of any Outside
Director under any grant previously made.
14. EXECUTION OF AGREEMENT.
Each grant hereunder shall be contingent upon the execution by the
Outside Director of a Restricted Shares Agreement pursuant to which such
Outside Director shall agree in writing to the terms and conditions set forth
in this Plan or by counsel to the Company in order to comply with the federal
or state securities laws or other legal requirements.
15. GOVERNMENT AND OTHER REGULATIONS.
Notwithstanding any other provisions of the Plan, the obligations of the
Company with respect to Restricted Shares or Retained Distributions shall be
subject to all applicable laws, rules and regulations, and such approvals by
any governmental agencies as may be required or deemed appropriate by the
Company. The Company reserves the right to delay or restrict, in whole or in
part, the issuance or delivery of Common Stock pursuant to any grants of
Restricted Shares or Retained Distributions under the Plan until such time as:
(a) any legal requirements or regulations shall have been met
relating to the issuance of such Restricted Shares or Retained Distributions
or to their registration, qualification or exemption from registration or
qualification under the Securities Act of 1933 or any applicable state
securities law; and,
(b) satisfactory assurances shall have been received that such
Restricted Shares, when delivered, will be duly listed on the New York Stock
Exchange.
16. NO RIGHT TO RENOMINATION.
Nothing in the Plan or in any grant shall confer upon any Director the
right be nominated for reelection to the Board.
17. NON-EXCLUSIVITY OF PLAN.
Neither the adoption of the Plan by the Compensation Committee nor the
submission of the Plan to the stockholders of the Company for approval shall
be construed as creating any limitations on the power of the Compensation
Committee or the Board to adopt such other incentive arrangements as it may
deem desirable, including, without limitation, the awarding of Common Stock
otherwise than under the Plan, and such arrangements as may be either
generally acceptable or applicable in specific cases.
18. GOVERNING LAW.
The Plan shall be governed by, and construed in accordance with, the laws
of the State of Texas.
19. MISCELLANEOUS PROVISIONS.
(a) Except as to automatic grants to Outside Directors pursuant to
Paragraph 5 hereof, no employee or other person shall have any claim or right
to be granted Shares under this Plan.
(b) The expenses of the Plan shall be born by the Company.
(c) By accepting any grant under the Plan, each Outside Director and
each personal representative or beneficiary and each other person claiming by,
through or under such Outside Director shall be conclusively deemed to have
indicated his acceptance and ratification of, and consent to, any action taken
under the Plan by the Company, the Board or the Compensation Committee.
(d) Notwithstanding anything to the contrary contained in this Plan or
any agreement entered into hereunder, any Restricted Shares Agreement or other
agreement entered into under this Plan and any Restricted Shares grant made
under this Plan shall be conditional and 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 the Company present
or represented and entitled to vote at the first Annual Meeting held following
the Effective Date. No such agreement entered into under this Plan or any
Restricted Shares grant made under this Plan shall create any obligation in
the Company prior to such approval. In the event that the stockholders of the
Company do not so approve this Plan, any and all such agreements theretofore
entered into shall thereupon terminate and shall be void and of no force or
effect, no Restricted Shares shall be required to be issued thereunder and any
Restricted Shares theretofore issued shall be immediately surrendered by each
Participant or other holder thereof to the Company for cancellation.
(e) Each grant of Restricted Shares to any person serving at the Grant
Date as a Director shall be in consideration of past services of the
Participant. Each grant of Restricted Shares to a person who was not serving
as a Director prior to the Grant Date shall be in consideration of such
person's agreement to stand for election as or be considered for appointment
as a director and to serve as such if so elected or appointed. Each such
grant shall be deemed to constitute a conclusive finding by the Board that
such services or agreement, as applicable, have a value equal to or in excess
of the value of such Restricted Shares, and constitute payment in full
therefor. All authorized and unissued shares issued as Restricted Shares in
accordance with the Plan shall be fully paid and nonassessable shares and free
from preemptive rights. No Restricted Shares shall be issued for
consideration having a value less than the par value of the Common Stock.
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
Page
ARTICLE I DEFINITIONS. . . . . . . . . . . . . . . . . . . . . .1
1.1 Accrued Benefit. . . . . . . . . . . . . . . . . . . .1
1.2 Actuarial Equivalent or Actuarially Equivalent Basis .1
1.3 Board of Directors . . . . . . . . . . . . . . . . . .2
1.4 Change of Control. . . . . . . . . . . . . . . . . . .2
1.5 Code . . . . . . . . . . . . . . . . . . . . . . . . .3
1.6 Company. . . . . . . . . . . . . . . . . . . . . . . .3
1.7 Committee. . . . . . . . . . . . . . . . . . . . . . .3
1.8 Covered Compensation . . . . . . . . . . . . . . . . .3
1.9 Credited Service . . . . . . . . . . . . . . . . . . .3
1.10 Eligible Earnings. . . . . . . . . . . . . . . . . . .4
1.11 Final Average Compensation . . . . . . . . . . . . . .4
1.12 Monthly Covered Compensation . . . . . . . . . . . . .4
1.13 Monthly FICA Amount. . . . . . . . . . . . . . . . . .4
1.14 Normal Retirement Date . . . . . . . . . . . . . . . .4
1.15 Participant. . . . . . . . . . . . . . . . . . . . . .4
1.16 Plan . . . . . . . . . . . . . . . . . . . . . . . . .5
1.17 Plan of Deferred Compensation. . . . . . . . . . . . .5
1.18 Plan Year. . . . . . . . . . . . . . . . . . . . . . .5
1.19 Retirement . . . . . . . . . . . . . . . . . . . . . .5
1.20 Rules. . . . . . . . . . . . . . . . . . . . . . . . .5
1.21 Securities Act . . . . . . . . . . . . . . . . . . . .5
1.22 SERP Committee . . . . . . . . . . . . . . . . . . . .5
1.23 Subsidiary . . . . . . . . . . . . . . . . . . . . . .5
1.24 Surviving Spouse . . . . . . . . . . . . . . . . . . .5
1.25 Trust. . . . . . . . . . . . . . . . . . . . . . . . .6
1.26 Trustee. . . . . . . . . . . . . . . . . . . . . . . .6
1.27 Valero . . . . . . . . . . . . . . . . . . . . . . . .6
1.28 Valero Pension Plan. . . . . . . . . . . . . . . . . .6
1.29 Valero Pension Plan Benefit. . . . . . . . . . . . . .6
1.30 Voting Securities. . . . . . . . . . . . . . . . . . .6
ARTICLE II ELIGIBILITY . . . . . . . . . . . . . . . . . . . . .7
2.1 Initial Eligibility. . . . . . . . . . . . . . . . . .7
2.2 Frozen Participation . . . . . . . . . . . . . . . . .7
2.3 Renewed Eligibility. . . . . . . . . . . . . . . . . .7
ARTICLE III VESTING. . . . . . . . . . . . . . . . . . . . . . .7
ARTICLE IV RETIREMENT BENEFIT. . . . . . . . . . . . . . . . . .8
4.1 Calculation of Retirement Benefit. . . . . . . . . . .8
4.2 Form and Time of Payment . . . . . . . . . . . . . . .9
4.3 Modification of Pension. . . . . . . . . . . . . . . .9
ARTICLE V PRERETIREMENT SPOUSAL DEATH BENEFIT. . . . . . . . . .9
5.1 Death Prior to Retirement. . . . . . . . . . . . . . .9
5.2 Death After Participant Retires. . . . . . . . . . . 10
5.3 Beneficiary Designation Prohibited . . . . . . . . . 10
ARTICLE VI PROVISIONS RELATING TO ALL BENEFITS . . . . . . . . 10
6.1 Effect of This Article . . . . . . . . . . . . . . . 10
6.2 Termination of Employment. . . . . . . . . . . . . . 10
6.3 No Duplication of Benefits . . . . . . . . . . . . . 10
6.4 Forfeiture For Cause . . . . . . . . . . . . . . . . 10
6.5 Forfeiture for Competition . . . . . . . . . . . . . 10
6.6 Expenses Incurred in Enforcing the Plan. . . . . . . 11
6.7 No Restrictions on any Portion of Total Payments
Determined to be Excess Parachute Payments . . . . 11
6.8 Benefits Upon Re-employment. . . . . . . . . . . . . 11
ARTICLE VII ADMINISTRATION . . . . . . . . . . . . . . . . . . 11
7.1 Committee Appointment. . . . . . . . . . . . . . . . 11
7.2 Committee Organization and Voting. . . . . . . . . . 11
7.3 Powers of the Committee. . . . . . . . . . . . . . . 12
7.4 Committee Discretion . . . . . . . . . . . . . . . . 12
7.5 Reliance Upon Information. . . . . . . . . . . . . . 12
7.6 Approval of Benefit Modifications. . . . . . . . . . 13
ARTICLE VIII ADOPTION BY SUBSIDIARIES. . . . . . . . . . . . . 13
8.1 Procedure for and Status After Adoption. . . . . . . 13
8.2 Termination of Participation By Adopting Subsidiary. 13
ARTICLE IX AMENDMENT AND/OR TERMINATION. . . . . . . . . . . . 14
9.1 Amendment or Termination of the Plan . . . . . . . . 14
9.2 No Retroactive Effect on Annual Benefits . . . . . . 14
9.3 Effect of Termination. . . . . . . . . . . . . . . . 14
9.4 Effect of Change of Control. . . . . . . . . . . . . 14
ARTICLE X FUNDING. . . . . . . . . . . . . . . . . . . . . . . 15
10.1 Payments from Trust. . . . . . . . . . . . . . . . . 15
10.2 Plan May Be Funded Through Life Insurance. . . . . . 15
10.3 Required Funding of Rabbi Trust. . . . . . . . . . . 15
10.4 Ownership of Assets; Release . . . . . . . . . . . . 16
10.5 Reversion of Excess Assets . . . . . . . . . . . . . 17
10.6 Repurchase of Valero Stock . . . . . . . . . . . . . 17
10.7 Participants Must Rely Only on General Credit of
the Companies. . . . . . . . . . . . . . . . . . . 17
ARTICLE XI MISCELLANEOUS . . . . . . . . . . . . . . . . . . . 18
11.1 Responsibility for Distributions and Withholding
of Taxes . . . . . . . . . . . . . . . . . . . . . 18
11.2 Limitation of Rights . . . . . . . . . . . . . . . . 18
11.3 Arbitration of Disputes. . . . . . . . . . . . . . . 18
11.4 Distributions to Incompetents. . . . . . . . . . . . 20
11.5 Nonalienation of Benefits. . . . . . . . . . . . . . 20
11.6 Severability . . . . . . . . . . . . . . . . . . . . 21
11.7 Notice . . . . . . . . . . . . . . . . . . . . . . . 21
11.8 Gender and Number. . . . . . . . . . . . . . . . . . 21
11.9 Governing Law. . . . . . . . . . . . . . . . . . . . 21
11.10 Effective Date. . . . . . . . . . . . . . . . . . . 21
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:
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. For purposes of calculating any
amount payable under Section 9.3(iii) to any person who has not Retired or has
otherwise not commenced receiving monthly pension benefits under the Plan, the
assumption to be used will be that such person elects to have his monthly
pension benefit under the Plan commence on the earliest date on which the
person would otherwise be entitled to commence receiving monthly pension
benefits hereunder, notwithstanding that such benefits may be reduced by
application of the early retirement reduction factor pursuant to Section 4.1.
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) the
latest of (i) the Participant's termination for total disability or (ii) his
Retirement, (c) the termination of the Plan or (d) in the case of a
Participant who is not a Continuing Participant pursuant to Section 9.4, a
Change of Control.
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 in effect at the date of commencement of any
arbitration hereunder.
1.21 Securities Act. "Securities Act" means the Securities Exchange Act
of 1934, as amended from time to time.
1.22 SERP Committee. "SERP Committee" means a committee of officers or
employees to which the Committee may delegate authority to perform specified
administrative functions in accordance with paragraph 7.3(e).
1.23 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.
1.24 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.
1.25 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.
1.26 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.
1.27 Valero. "Valero" means the Valero Energy Corporation, the sponsor
of this Plan, and its successors.
1.28 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.
1.29 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.
1.30 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 in this Plan, the term "person" shall include any
individual, corporation, partnership, firm or other entity.
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.
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.
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, Valero 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, Valero 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.
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.
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. Valero will pay a
Participant for all reasonable legal fees and expenses incurred by him in
successfully contesting or disputing his termination of employment by a
Company or in successfully 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, 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.
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 shall be
organized and shall conduct its business in accordance with the By-laws of
Valero, provided however, that a member of the Committee who is also a
Participant will not vote or act on any matter relating to himself or which is
otherwise reasonably likely to enhance the benefits payable to such
Participant hereunder.
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, the SERP Committee 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 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.
7.6 Approval of Benefit Modifications. The 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 the Board of
Directors.
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 (i) 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 and (ii) powers reserved
under this Plan to Valero shall be exercised only by Valero. Each Subsidiary
adopting the Plan delegates to Valero exclusive administrative responsibility
for the Plan. However, Valero may 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 benefits to
any Participants (and to any person claiming through a Participant) hereunder
shall be the joint and several obligation of each Subsidiary 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 (and any person claiming
through a 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 or
other governing body, 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.
ARTICLE IX
AMENDMENT AND/OR TERMINATION
9.1 Amendment or Termination of the Plan. The Committee 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 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,
(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 (iii) the Accrued
Benefit payable to each affected current, frozen or Retired Participant (or
Surviving Spouse) shall be determined as of such date of termination and shall
be paid in a lump sum as soon as administratively practicable following the
Plan's termination, in an amount Actuarially Equivalent to the affected
Participant's (or Surviving Spouse's) Accrued Benefit.
9.4 Effect of Change of Control. Upon the occurrence of a Change of
Control, unless one or more Participants or Surviving Spouses have theretofore
elected to be a Continuing Participant, as specified below, this Plan shall
automatically terminate and the Accrued Benefit of each Participant shall be
paid out in accordance with the provisions of Section 9.3 as soon as
administratively practicable following the Change of Control. However, any
current, frozen or Retired Participant, or any person who is receiving
benefits as a Surviving Spouse at the time of adoption of this amended and
restated Plan (collectively referred to herein as a "Continuing Participant"),
may, by filing a written election with the Committee or with Valero's Human
Resources Department in accordance with the following sentence, elect to
continue in the Plan following any Change of Control, rather than receiving
such lump-sum benefit. Such election may only be made (i) in the case of a
person who is a Participant or Surviving Spouse at the time of the adoption of
this amended and restated Plan, on or before November 29, 1996, or (ii) in the
case of a person who is later selected as a Participant, within the 30 day
period following the date on which the Committee first selects such person as
a Participant. Any such election shall be irrevocable. A Participant or
Surviving Spouse who does not make such election within the required period
shall be deemed for all purposes to have elected not to be a Continuing
Participant. If, at the time a Change of Control occurs, any Participant or
Surviving Spouse has properly elected to be a Continuing Participant, then
the Plan shall not terminate and the following provisions shall apply:
A. Each Participant (or Surviving Spouse) who has not theretofore
elected to be a Continuing Participant shall be treated in all respects as if
the Plan had terminated; such Participant (or Surviving Spouse) shall be
entitled to receive a lump-sum benefit payment calculated in accordance with
Section 9.3(iii), and such Participant (and any Surviving Spouse) shall
otherwise have the same rights (and only such rights) that such Participant
(or Surviving Spouse) would have had had the Plan terminated upon such Change
of Control.
B. The Accrued Benefit of each Continuing Participant attributable to
that portion of the Continuing Participant's Credited Service occurring on or
after January 1, 1996 shall vest immediately upon the occurrence of the Change
of Control in accordance with Article III. The Continuing Participant shall
not be entitled to receive a lump-sum benefit payment pursuant to Section
9.3(iii); instead, such Continuing Participant (other than a Surviving Spouse)
shall be entitled to receive a retirement benefit at the time and in the
amount determined in accordance with Article IV and the Continuing
Participant's Surviving Spouse, if any (as well as any Surviving Spouse making
the election permitted under Paragraph 9.4(i)), shall be entitled to receive a
Surviving Spouse benefit, in each case determined in accordance with and
subject to the remaining terms and conditions of the Plan.
ARTICLE X
FUNDING
10.1 Payments from Trust. As set forth in Section 8.1, the Companies are
jointly and severally liable to pay the benefits due under this Plan; however
should they fail to do so when a benefit is due, the Participant, Surviving
Spouse or other person entitled to payment of a benefit hereunder may apply
for payment of such benefit to the Trustee of the Trust, which shall pay such
benefit in accordance with the provisions of the Trust Agreement. In any
event, if the Trust fails to pay for any reason, the Companies shall remain
jointly and severally liable for the payment of all benefits provided by this
Plan.
10.2 Plan May Be Funded Through Life Insurance. It is specifically
recognized that Valero may, but is not required to, purchase life insurance so
as to accumulate assets sufficient to fund obligations under this Plan and
that Valero 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 to fund obligations under this Plan.
However, under all circumstances, the Participants will have no rights in or
to any such policies.
10.3 Required Funding of Rabbi Trust. Valero will make contributions of
cash or other assets sufficient 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, Valero 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 Valero a written report detailing the Accrued Benefits of the
Participants. If such report shows that the Plan assets are less than the
Actuarial Equivalent of the Accrued Benefits, then Valero, commencing within
60 days of receipt of the written report from the actuary, shall contribute to
the Trust (which contribution may be made, at Valero's sole discretion, in up
to four quarterly installments, the last such installment to be made not later
than December 31 of the Plan Year during which such report is received) 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
contributions as of the date each such contribution is made, 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 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 Valero'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 Valero's final
contribution to the Trust for the Plan Year, if any may be required for the
particular Plan Year.
10.4 Ownership of Assets; Release. All policies of insurance or other
assets contributed to the Trust (or to any other trust established for the
purpose of funding benefits hereunder) pursuant to Sections 10.2, 10.3 or
otherwise shall be contributed by Valero, and all such policies or other
assets shall be owned solely by Valero immediately prior to such contribution.
No Company, other than Valero, shall contribute policies or assets to the
Trust. As an internal accounting matter, as between Valero and the other
Companies, Valero may charge or allocate all or any part of such contributions
to other Companies in any reasonable manner determined by Valero in accordance
with generally accepted accounting principles, and may record the amounts so
allocated as obligations owing among Valero and such Companies. Valero may
also allocate or distribute assets received by it from the Trust pursuant to
Section 10.5 hereof to other Companies in any reasonable manner determined by
Valero in accordance with generally accepted accounting principles. However,
notwithstanding the fact that a Company may be deemed to have a claim against
Valero with respect to such contributions or distributions, no Company (other
than Valero) shall at any time own or be deemed to own or have any contingent,
reversionary or other beneficial interest in any portion of the policies and
other assets held in the Trust or any claim, against the Trustee or otherwise,
with respect thereto. Each Company (other than Valero), by its adoption of
this Plan, and in consideration of the mutual covenants herein contained, for
itself, its successors, assigns, representatives, administrators, trustees and
other persons claiming by, through or under such Company, hereby irrevocably
and forever releases and relinquishes (i) any and all rights, claims and
interests (beneficial, reversionary, actual, contingent or otherwise), known
or unknown, asserted or unasserted, which it has or may have, or may hereafter
have, in or with respect to the Trust, the Trust Fund (as such term is defined
in the Trust Agreement) and the policies and assets now or hereafter from
time to time contributed or contributable thereto, held therein or thereby, or
distributable therefrom or thereby, and (ii) any claim, demand, action or
cause of action whatsoever which it has or may have, or may hereafter have,
against the Trustee, its successors or assigns, with respect thereto.
10.5 Reversion of Excess Assets. Assets held pursuant to the Trust shall
not be loaned to any Company. However, Valero 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
Valero is 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 such Participants and Surviving Spouses by not less than 25%, then Valero
may direct the Trustee to return to Valero that part of the assets which is in
excess of 125% of the Actuarial Equivalent of the Accrued Benefits. If the
Plan has terminated, all assets held in the Trust following the distribution
required pursuant to Section 9.3(iii) shall revert to Valero.
10.6 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.
10.7 Participants Must Rely Only on General Credit of the Companies. The
provisions of Sections 10.2 and 10.3 notwithstanding, it is specifically
recognized by the Companies and the Participants that this Plan is an
unsecured corporate commitment and that each Participant (and any Surviving
Spouse or other person claiming through a Participant) must rely upon the
general credit of the Companies for the fulfillment of their obligations under
this Plan. Nothing contained in this Plan or in the Trust Agreement will
constitute a representation, covenant or guarantee by any Company that the
policies and assets transferred to the Trust (or any other trust established
for the purpose of funding benefits hereunder) or the general assets of such
Company (or Companies) will be sufficient to pay any or all benefits under
this Plan Neither this Plan nor the Trust creates any secured or priority
position, preferential right, lien, claim, encumbrance, right, title or other
interest of any kind in any Participant in any policy or other asset held by
any Company, contributed to the Trust (or any other trust established for the
purpose of funding benefits hereunder) or otherwise designated to be used for
payment of any obligations created in this Plan. No policy or other specific
asset of any Company has otherwise been or will be set aside, or has been or
will be pledged in any way for the performance of obligations under this Plan,
which would remove the policy or asset from being subject to the claims of the
general creditors of the respective Company. The Trust Agreement (and any
other agreement entered into to fund obligations under this Plan) shall
specify that, with respect to their benefits under this Plan, the Participants
(and any Surviving Spouse or other person claiming through a Participant) are
only unsecured general creditors.
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. Without
limitation of the foregoing, and except as may otherwise be provided in any
separate employment, severance or other agreement between the Participant and
any Company, the individual Participant or Surviving Spouse, as the case may
be, shall be solely responsible for payment of any excise, income or other tax
imposed (i) upon any payment hereunder which may be deemed to constitute an
"excess parachute payment" pursuant to Section 4999 of the Code, or (ii) based
upon any theory of "constructive receipt" of any lump-sum or other amount
hereunder.
11.2 Limitation of Rights. Nothing in this Plan will be construed:
(a) to give a Participant or other person claiming through him 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.
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 Valero or the Committee, 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 a 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
be governed by the Federal Arbitration Act, 9 U.S.C. s 1-14. Except to the
extent herein modified, 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 (or other person claiming through him) 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
the provisions of this Section 11.3.
G. Should one or more provisions of this Section 11.3 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.
H. Any arbitration proceeding commenced under this Section 11.3 shall,
to the extent practicable, be consolidated with any arbitration proceeding
relating to the same or similar facts and circumstances between the Trustee
and Valero pursuant to the Trust Agreement.
11.4 Distributions to Incompetents. Should a Participant or a Surviving
Spouse become incompetent, Valero 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 Valero 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 a
Company, 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 Valero, acting
on behalf of the Company or Committee, 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 November, 1996, amending and restating the Plan effective as of January
1, 1996.
VALERO ENERGY CORPORATION
By /s/ F. Joseph Becraft
F. Joseph Becraft
President and Chief Executive Officer
Valero Energy Corporation
Executive Incentive Bonus Plan
As Amended and Restated effective January 23, 1997
<PAGE>
EXECUTIVE INCENTIVE BONUS PLAN
Table of Contents
Section Page
I Definitions........................................................1
II Participation......................................................2
III Bonus Determination................................................2
IV Bonus Amounts......................................................2
V Bonus Payouts......................................................3
VI Administration.....................................................3
INTRODUCTION
The Valero Energy Corporation Executive Incentive Bonus Plan (hereinafter
referred to as the "Plan") was established for the purpose of providing bonus
compensation to key employees of Valero Energy Corporation and its
subsidiaries (hereinafter collectively referred to as the "Company"). The
Company intends and desires to create individual performance incentive by
providing bonus compensation awards based upon individual contributions to
Company profitability by key employees. Such bonus compensation is intended
to encourage levels of individual performance that will assure continued
Company profitability. It is further intended that when added to other forms
of compensation the bonus compensation awards will result in total
compensation to key employees in amounts seen as competitive when Company
performance is compared to peer organizations.
SECTION I - Definitions
The masculine gender, where appearing in the Plan will be deemed to
include the feminine gender and the singular may include the plural, unless
the context clearly indicates the contrary.
1.1 "Bonus Targets" shall mean the dollar value of an award established
to represent a normal or average bonus payment determined through survey
analysis.
1.2 "Committee" shall mean the Compensation Committee who shall
administer the Plan.
1.3 "Company" shall include Valero Energy Corporation and any Affiliated
Company.
1.4 "Compensation Committee" shall mean the Compensation Committee of
the Board of Directors of Valero Energy Corporation.
1.5 "Fair Market Value" shall mean the average of the "high" and "low"
reported sales price per share of the Company's common stock 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.
1.6 "Key Employee(s)" shall mean any person employed by the Company
having responsibilities that impact Company operations and activities.
1.7. "Participant" means an employee who is designated pursuant to
Section 2.1 as a participant in the Plan.
1.8 "Peer Organizations" shall mean those entities, designated from time
to time, with which the Company competes for employee talent and/or business
markets.
1.9 "Performance Measures" shall mean financial or operational
statistical indicators, designated from time to time, with which the level of
success of Company operations can be identified.
1.10 "Salary Range Midpoints" shall mean the established dollar value,
adjusted from time to time, that represents the median of a range of dollar
values assigned to separately identifiable jobs within the Company through the
Company's adopted system of job evaluation and pricing.
SECTION II - Participation
2.1 The Compensation Committee shall determine from recommendations
submitted by the Chief Executive Officer, from time to time, those key
employees of the company who are to be participants (Participants) in the
Plan. Participants shall be restricted to key employees of the Company having
major responsibility for directing Company operations and activities.
2.2 The Designation of employees of the Company as Participants under
the Plan shall be in the sole discretion of the Compensation Committee, and no
employee of the Company will have the right to require the Committee to make
him or her a Participant or to allow him or her to remain a Participant under
the Plan.
SECTION III - Bonus Determination
3.1 The Compensation Committee shall determine, based upon a review of
various Company financial, operational or other performance measures, the
suitability of the payment of bonuses.
3.11 Company performance measures used by the Committee to determine
appropriateness of bonus payments will be selected by the Committee and may
vary from time to time.
3.12 Selected Company performance measures may be compared to
similar measures of peer organizations or compared to past Company results.
3.13 The Committee may approve the payment of bonuses when the
review of performance measures indicates Company operating results are at
levels that demonstrate improved or continued outstanding investment return to
stakeholders of the Company.
3.2 Annual reviews of Company performance measures and a determination
of bonus payments shall be conducted by the Committee.
3.21 The Committee may, from time to time, consider bonus payments
more frequently than annually in instances whereby outstanding individual
performance by key employee(s) warrant recognition.
3.3 The Compensation Committee may declare and allocate, and the Company
may pay, bonuses prior to the end of the plan year based on the estimated or
expected financial performance of the Company for such plan year.
SECTION IV - Bonus Amounts
4.1 The Compensation Committee shall establish bonus targets for various
positions within the Company relative to position accountability, job
knowledge, problem solving requirements, and reporting relationship.
4.11 Each bonus target shall be calculated using a percent of the
established salary range midpoints of the positions occupied by participants.
4.12 Percents used in calculating bonus targets shall be determined
through comparative analyses of bonuses paid to employees of peer
organizations who utilize similar compensation methodologies and through
analysis of the position hierarchy of the Company, so as to establish bonus
targets competitive with industry practice by job size.
4.2 Established bonus targets will be used as guidelines by the Chief
Executive Officer of the Company to recommend, from time to time, incentive
bonus awards for key employees to the Committee.
4.21 The established bonus target shall act as the norm for a range
of possible bonus awards.
4.22 Based upon an evaluation of Company financial performance and
individual contribution to Company performance, the Chief Executive Officer of
the Company will determine if recommended bonus awards shall be less than,
equal to or greater than the established bonus target.
4.3 Based upon recommendations furnished the Committee by the Chief
Executive Officer of the Company and results of Company performance measure
comparisons the Committee shall approve, delete or adjust recommended bonus
awards.
SECTION V - Bonus Payouts
5.1 Payment of bonuses shall occur as soon as practicable after
Committee approval or on a date as directed by the Committee.
5.2 Bonuses payable under the Plan shall be in the form of cash to be
paid in a single lump-sum or in part or in whole in common stock of the
Company.
5.3 With respect to Plan bonuses payable in part or in whole in shares
of common stock of the Company ("Shares"), a Participant may pay all or part
of the amount of any taxes required to be collected or withheld by the Company
upon payment of the Participant's bonus (the "Tax Payment") by electing,
before the time of payment of the bonus, to have the Company withhold from the
number of Shares otherwise deliverable under the bonus a number of Shares
having a Fair Market Value on the date of the bonus not exceeding the amount
of the Tax Payment.
5.4 The Committee may approve the payment of bonuses to be deferred and
paid in whole at a later date or in installments over a period of time. The
length of time of deferral or installment period will be determined at the
discretion of the Committee.
SECTION VI - Administration
6.1 This Plan shall be administered by the Compensation Committee, as
appointed and constituted from time to time, by the Board of Directors of
Valero Energy Corporation, its successors or assigns, so long as the
Compensation Committee is composed solely of two or more "Non-Employee
Directors" (as defined in Rule 16b-3 under the Exchange Act). In the event
the Compensation Committee shall fail to meet the foregoing criteria, then
additional or different persons shall be appointed by the Board of Directors
for purposes of administering this Plan so that the committee administering
this Plan shall be composed solely of two or more Non-Employee Directors.
6.2 The Compensation Committee is empowered to:
6.21 Make all determinations and computations concerning the amounts
to which any Participant or his beneficiary is entitled under the Plan;
6.22 Determine all questions relating to the eligibility of
Participants;
6.23 Make rules and regulations for the administration of the Plan
which are not inconsistent with the terms and provisions hereof;
6.24 Construe all terms, provisions, conditions and limitations of
the Plan in good faith. All such determinations shall be final and conclusive
on all parties at interest;
6.25 Make equitable adjustments for any mistakes or errors in the
administration of the Plan during the Plan Year or the preceding Plan Year,
and all such actions or determinations made by the Compensation Committee in
good faith shall not be subject to review;
6.26 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 the Plan.
6.3 The foregoing list of express powers is not intended to be either
complete or exclusive, but the Compensation 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 Compensation 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.
6.4 The Compensation Committee shall have the responsibility of
authorizing payment to each eligible Participant and directing that such
payment be disbursed by the Company.
6.5 The Board of Directors may, at any time, amend or terminate the
Plan. Such amendments or terminations may be made without the consent of the
Participants.
VALERO ENERGY CORPORATION
EXECUTIVE STOCK INCENTIVE PLAN
Amended and Restated as of November 21, 1996
<PAGE>
Table of Contents
SECTION 1. Purpose. . . . . . . . . . . . . . . . . . . . . . .1
SECTION 2. Definitions. . . . . . . . . . . . . . . . . . . . .1
SECTION 3. Administration.. . . . . . . . . . . . . . . . . . .2
SECTION 4. Shares and Other Property Available For Awards.. . .3
Shares Available. . . . . . . . . . . . . . . . . . . . . .3
Sources of Shares Deliverable Under Awards. . . . . . . . .3
Adjustments . . . . . . . . . . . . . . . . . . . . . . . .4
Share Counting. . . . . . . . . . . . . . . . . . . . . . .5
SECTION 5. Eligibility. . . . . . . . . . . . . . . . . . . . .5
SECTION 6. Awards.. . . . . . . . . . . . . . . . . . . . . . .5
Options . . . . . . . . . . . . . . . . . . . . . . . . . .5
Exercise Price . . . . . . . . . . . . . . . . . . . .5
Incentive Stock Options. . . . . . . . . . . . . . . .5
Stock Appreciation Rights . . . . . . . . . . . . . . . . .6
Grant Price. . . . . . . . . . . . . . . . . . . . . .6
Other Terms and Conditions . . . . . . . . . . . . . .6
Restricted Stock. . . . . . . . . . . . . . . . . . . . . .6
Dividends. . . . . . . . . . . . . . . . . . . . . . .6
Registration . . . . . . . . . . . . . . . . . . . . .6
Forfeiture . . . . . . . . . . . . . . . . . . . . . .6
Performance Awards. . . . . . . . . . . . . . . . . . . . .6
Terms and Conditions . . . . . . . . . . . . . . . . .7
Payment of Performance Awards. . . . . . . . . . . . .7
Stock Compensation. . . . . . . . . . . . . . . . . . . . .7
Other Stock-Based Awards. . . . . . . . . . . . . . . . . .7
General . . . . . . . . . . . . . . . . . . . . . . . . . .7
Grants . . . . . . . . . . . . . . . . . . . . . . . .7
Forms of Payment by Company. . . . . . . . . . . . . .7
Limits on Transfer . . . . . . . . . . . . . . . . . .8
Term of Awards . . . . . . . . . . . . . . . . . . . .8
Share Certificates . . . . . . . . . . . . . . . . . .8
Delivery of Shares or other Securities and Payment
by Participant of Consideration. . . . . . . . . . .8
Termination of Employment. . . . . . . . . . . . . . .8
Award Agreements . . . . . . . . . . . . . . . . . . .9
Deferral of Receipt. . . . . . . . . . . . . . . . . .9
Exercise of Option or SAR Awards. . . . . . . . . . . . . .9
Notice . . . . . . . . . . . . . . . . . . . . . . . .9
Payment. . . . . . . . . . . . . . . . . . . . . . . 10
Tax Payment Election . . . . . . . . . . . . . . . . 10
Payment with Stock . . . . . . . . . . . . . . . . . 10
Valuation. . . . . . . . . . . . . . . . . . . . . . 10
Rights as Stockholder. . . . . . . . . . . . . . . . 11
SECTION 7. Amendment and Termination. . . . . . . . . . . . . 11
Amendments to the Plan. . . . . . . . . . . . . . . . . . 11
Amendments to Awards. . . . . . . . . . . . . . . . . . . 11
Unusual or Nonrecurring Events. . . . . . . . . . . . . . 11
SECTION 8. Change Of Control. . . . . . . . . . . . . . . . . 12
Nonacceleration . . . . . . . . . . . . . . . . . . . . . 12
Effect. . . . . . . . . . . . . . . . . . . . . . . . . . 12
Defined . . . . . . . . . . . . . . . . . . . . . . . . . 13
SECTION 9. General Provisions.. . . . . . . . . . . . . . . . 13
No Rights to Awards . . . . . . . . . . . . . . . . . . . 13
Delegation. . . . . . . . . . . . . . . . . . . . . . . . 13
Withholding . . . . . . . . . . . . . . . . . . . . . . . 13
No Limit on Other Compensation Arrangements . . . . . . . 14
No Right to Employment. . . . . . . . . . . . . . . . . . 14
Governing Law . . . . . . . . . . . . . . . . . . . . . . 14
Severability. . . . . . . . . . . . . . . . . . . . . . . 14
Other Laws. . . . . . . . . . . . . . . . . . . . . . . . 14
No Trust or Fund Created. . . . . . . . . . . . . . . . . 14
No Fractional Shares. . . . . . . . . . . . . . . . . . . 14
Headings. . . . . . . . . . . . . . . . . . . . . . . . . 14
Construction. . . . . . . . . . . . . . . . . . . . . . . 14
SECTION 10. Effective Date of the Plan. . . . . . . . . . . . 15
SECTION 11. Term of the Plan. . . . . . . . . . . . . . . . . 15
<PAGE>
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 composed solely of two or more
Non-Employee Directors" (as defined in Rule 16b-3 under the Exchange Act) of
the Company, which Committee shall be, except as hereinafter set forth, the
Compensation Committee. In the event that the membership of the Compensation
Committee shall fail to meet the foregoing criteria, then additional or
different members of the Board of Directors shall be appointed by the Board to
act for purposes of administering this Plan so that the committee
administering this Plan shall consist solely of two or more Non-Employee
Directors." 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 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 and Other Property 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 12-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. (i) If all or any portion of an Award vests or 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 (any one of which being hereafter referred to as a "Reorganization
Event"), as a result of which shares or other securities of any class or
rights shall be issued in respect of outstanding Shares, or Shares 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 exercising or otherwise
entitled to such Award shall receive,
(A) for the aggregate price payable upon such exercise of an Option, or
upon vesting of an Award (other than an Option) denominated in Shares (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 (as reasonably determined by the Committee) on such exercise or vesting
date 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 (as authorized at the date of the granting of such Award) had
been acquired at the date of granting of the Award for the same aggregate
price (on the basis of the price per share, if any, provided in the Award) and
had not been disposed of, such person or persons would be holding at the time
of such exercise or vesting as a result of such acquisition and any such
Reorganization Event, and
(B) a cash amount upon the exercise of any SARs equal to the difference
between the aggregate Grant Price of such SARs and the aggregate of (i) the
fair market value, on the exercise date of any whole shares, rights or other
securities for which a recognized market exists, and (ii) the fair market
value (as reasonably determined by the Committee) on such date of any other
property (other than regular cash dividend payments) which the holder of a
number of Shares equal to the number of such SARs, if such Shares had been
purchased at the date of granting of such SARs and not otherwise disposed of,
would be holding at the time of exercise of such SARs as a result of such
purchase and any such Reorganization Event;
provided, however, that no fractional Share, fractional right or other
fractional security shall be issued upon any such exercise or vesting, and the
aggregate price paid shall be appropriately reduced to reflect any fractional
Share, fractional right or other fractional security not issued; and provided
further, however, that if the exercise or vesting of any Award subsequent to
any Reorganization Event would, pursuant to clause (a) of this Section
4(c)(i), require the delivery of shares, rights or other securities which the
Company 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 or vesting in such Award shall receive, in lieu of such shares,
rights or other securities, a cash payment equal to the Fair Market Value on
the exercise or vesting date, as the case may be, 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 the Company pursuant to the Rights Agreement
(dated as of October 25, 1995, between the Company and Harris Trust and
Savings Bank, the "Rights Agreement"), shall be deemed not to have been
distributed until the Distribution Date (as defined in the Rights Agreement).
(ii) In the event of any change in the number of Shares outstanding
resulting from a Reorganization Event, the aggregate number and class of
Shares remaining available to be awarded under this Plan shall be that number
and class which a person, to whom an Award had been granted for all of the
available Shares under this Plan on the date preceding such change, would be
entitled to receive as provided in Section 4(c)(i).
(iii) Upon the occurrence of any Reorganization Event, the Committee
shall be entitled (but shall not be required) to determine that new Award
Agreements shall be entered into with Participants reflecting such event.
(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.
(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, (i) by the Participant's beneficiary, (ii)
by an immediate family member as a transferee receiving the Award pursuant to
a gift, or (iii) by any transferee authorized by the Committee below.
(B) Without prior written approval from the Committee, 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 10 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 (i) all stop transfer orders and
other restrictions as the Committee may deem advisable under the Plan, (ii)
the rules, regulations, and other requirements of the SEC and any stock
exchange upon which the Shares or other securities are then listed, (iii) 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; alternatively, the Committee or, except with
respect to a Participant subject to Section 16 under the Exchange Act, the
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 or the Chief Executive Officer 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 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.
(ix) Deferral of Receipt. By filing a written request with the Committee
not later than December 31st of any calendar year, a Participant may elect to
defer receipt of all or any portion of any stock to be awarded pursuant to a
Restricted Stock award, Performance Award or Other Stock-Based Award which,
absent such election, the Participant would be entitled to receive during the
calendar year following the Participant's request (hereafter referred to as
the "Deferred Award"). The Deferred Award will be delivered to the
Participant on January 2nd of the second calendar year following the calendar
year in which the deferral election is made. Successive elections may be made
with respect to the same Deferred Award to defer from year to year the receipt
of such Deferred Award. Each Participant shall be solely responsible for
determining the personal income tax effect of making any deferral election;
the Company makes no representation that such election shall have the effect
of deferring receipt of any income attributable to the Deferred Award for
federal income tax purposes.
(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 Chief
Executive Officer 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 when:
(i) the shareholders of the Company approve any agreement or transaction
pursuant to which: (A) the Company will merge or consolidate with any other
Person (other than a wholly owned subsidiary of the Company) and will not be
the surviving entity (or survives only as the subsidiary of another entity);
(B) the Company will sell all or substantially all of its assets to any other
Person (other than a wholly owned subsidiary of the Company); or (C) the
Company will be liquidated or dissolved;
(ii) any "person" or "group" (as these 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 26, 1995, between the Company and
Harris Trust and Savings Bank, as Rights Agent (or any successor Rights
Agreement).
(iii) 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
(iv) 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 10 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.
_________________
VALERO ENERGY CORPORATION
NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN
Amended and Restated as of November 21, 1996
________________
<PAGE>
NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN
1. Purpose. The Non-Employee Director Stock Option Plan (the "Plan") of
Valero Energy Corporation, a Delaware corporation (the "Company"), is for the
benefit of members of the board of directors of the Company who, at the time
of their service, are not employees of the Company or any of its subsidiaries
("Non-Employee Directors"), but are persons who have made or are expected to
make a significant contribution to the continued growth of the Company by
providing them with an additional incentive through an increase in their
proprietary interest in the success of the Company-thereby encouraging them to
continue in their present capacity.
2. Administration. (a) Except as otherwise set forth herein, the Plan
shall be administered by the Compensation Committee ( "Committee ") as
appointed and constituted from time to time by the Board. If the Committee is
not composed solely of two or more Non-Employee Directors " (as defined in
Rule 16b-3 under the Exchange Act) of the Company, then such additional or
different persons shall be appointed by the Board of Directors to act for
purposes of administering this Plan so that the committee administering this
Plan shall be composed solely of two or more Non-Employee Directors. "
(b) In connection with its administration of this Plan, the Committee is
empowered to:
(i) Make rules and regulations for the administration of the Plan which
are not inconsistent with the terms and provisions of this Plan;
(ii) Construe all terms, provisions, conditions and limitations of the
Plan in good faith, and adopt amendments to the Plan;
(iii) Make equitable adjustments for any mistakes or errors in the
administration of this Plan or deemed to be necessary as the result of any
unusual situation or any ambiguity in the Plan;
(iv) Select, employ and compensate, from time to time, 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.
(c) The foregoing list of express powers granted to the Committee upon
the adoption of this Plan is not necessarily intended to be either complete or
exclusive, and the Committee shall, in addition to the specific powers granted
by this Plan, have such powers not inconsistent with the Plan or Rule 16b-3,
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 and 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.
(d) Notwithstanding the foregoing, the Committee shall have no authority
to exercise discretion with respect to the selection of any Non-Employee
Director as a Participant in the Plan, the determination of the number of
options ( "Options ") that are allocated to any such Non-Employee Director or
the terms or conditions of any such allocation, and shall have no authority to
amend any provision of the Plan relating to eligibility for participation in
the Plan, the amount or timing of grants under the Plan or the imposition or
removal of restrictions on the vesting of Options.
3. Option Shares. The stock subject to the Options and other provisions
of the Plan shall be shares of the Company's Common Stock, $1.00 par value
(the "Common Stock"). The total amount of the Common Stock with respect to
which Options may be granted shall not exceed in the aggregate 100,000 shares.
The class and aggregate number of shares which may be subject to the Options
granted under this Plan shall be subject to adjustment under Section 15. The
shares issued upon the exercise of Options may be treasury shares or
authorized but unissued shares. If an outstanding Option expires or is
terminated for any reason, the shares of Common Stock allocable to the
unexercised portion of that Option may again be subject to an Option under the
Plan.
4. Grant of Options.
(a) Directors on the Effective Date of this Plan.
(i) Subject to the provisions of Section 19 hereof, there shall be granted
to each person who is a Non-Employee Director upon the effective date of this
Plan an Option to purchase 6,000 shares of Common Stock at a per share Option
Price equal to the fair market value (as defined in section 6 below) of a
share of Common Stock on such date.
(ii) For so long as this Plan is in effect and shares are available for the
grant of Options hereunder, on the date of the annual meeting of directors
each year beginning in 1996 (the "Annual Meeting"), there shall be granted to
each person who is a Non-Employee Director on the effective date of this Plan
and on the date of such Annual Meeting, an Option to purchase 1,000 shares of
Common Stock at a per share Option Price equal to the fair market value of a
share of the Company's Common Stock on such date (such number of shares being
subject to the adjustments provided in Section 15 of this Plan).
(b) Directors Elected after the Effective Date of this Plan.
(i) Subject to the provisions of Section 19, for so long as this Plan is in
effect and shares are available for the grant of Options hereunder, each
person who shall first become a Non-Employee Director after the effective date
of this Plan shall be granted, on the date of his or her election, an Option
to purchase 5,000 shares of Common Stock at a per share Option Price equal to
the fair market value of a share of Common Stock on such date (such number of
shares being subject to the adjustments provided in Section 15 of this Plan).
(ii) For so long as this Plan is in effect and shares are available for the
grant of Options hereunder, at the Annual Meeting each year beginning in the
year after the year of his or her first election as a Non-Employee Director,
there shall be granted to each person who shall become a Non-Employee Director
after the effective date of this Plan, and is a Non-Employee Director on the
date of such Annual Meeting, an Option to purchase 1,000 shares of Common
Stock at a per share Option Price equal to the fair market value of a share of
Common Stock on such date (such number of shares being subject to the
adjustments provided in Section 15 of this Plan).
5. Eligibility. The individuals who shall be eligible to participate in
the Plan shall be those individuals who are members of the Board of Directors
of the Company who, at the time of a grant hereunder, are not employees of the
Company or an Affiliate (as defined in Section 11 below). An
employee-director who retires from employment with the Company or an Affiliate
shall be (without further action by the Committee) eligible to participate in
the Plan and shall be entitled to receive the Option grants described in
Section 4(b) immediately upon commencement of his or her service as a
Non-Employee Director.
6. Option Price. The price at which a share subject to an Option may be
purchased pursuant to an Option granted under this Plan (the "Option Price")
shall be its Fair Market Value on the date the Option is granted. The Fair
Market Value of a share of Common Stock shall be the average of the "high "
and "low " sales prices of a share of Common Stock on that date as reported
by the principal national securities exchange on which the Common Stock is
listed if the Common Stock is listed on a national securities exchange, or the
average of the bid and asked price of a share of Common Stock on that date as
reported in the NASDAQ listing if the Common Stock is not listed on a national
securities exchange. If no closing price or quotes are reported on that date
or if, in the discretion of the Committee, another means of determining the
Fair Market Value of a share of stock on that date is necessary or advisable,
the Committee may provide for another means for determining the Fair Market
Value.
7. Duration of Options. No Option shall be exercisable after the
expiration of 10 years from the date the Option is granted.
8. Amount Exercisable.
8A. All initial Options granted pursuant to Sections 4(a)(i) and 4(b)(i)
shall vest and become exercisable as follows:
(a) On the first anniversary of the date the Option was granted (the
"Date of Grant"), the Option may be exercised with respect to up to one-third
of the shares subject to the Option;
(b) After each succeeding anniversary of the Date of Grant, the Option
may be exercised with respect to up to an additional one-third of the shares
subject to the Option, so that after the expiration of the third anniversary
of the Date of Grant the Option shall be exercisable in full; and
(c) The provisions of clauses (a) and (b) notwithstanding, no Options
shall be exercisable prior to six months following the date on which this Plan
is approved by the stockholders of the Company.
8B. Each subsequent Option granted pursuant to Sections 4(a)(ii) and
4(b)(ii) may be exercised, so long as it is valid and outstanding, from time
to time in part or as a whole, after the expiration of six months following
the date of grant.
8C. Notwithstanding the preceding provisions of this Section 8, if a
Non-Employee Director shall be retired in good standing from the Board of
Directors for reason of age or disability under the then established rules of
the Company, all Options not already vested shall become fully vested and
immediately exercisable by the retiring Non-Employee Director.
8D. (a) In the event of any Change of Control, the Chief Executive
Officer 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 Options 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 Options granted under the Plan or with
respect to Options 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 Option granted under this Plan, not
theretofore forfeited or terminated and held as of the date of a Change of
Control by a Director 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 shares granted thereunder and will
remain exercisable for the remainder of the original term of the Option.
(b) A "Change of Control" shall be deemed to occur when:
(i) the shareholders of the Company approve any agreement or transaction
pursuant to which: (A) the Company will merge or consolidate with any other
Person (other than a wholly owned subsidiary of the Company) and will not be
the surviving entity (or survives only as the subsidiary of another entity);
(B) the Company will sell all or substantially all of its assets to any other
person (other than a wholly owned subsidiary of the Company); (C) the Company
will be liquidated or dissolved;
(ii) 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 benefits
plans, is or becomes an "Acquiring Person " as defined in that certain Rights
Agreement, dated October 26, 1995 ( "Rights Agreement "), between the Company
and Harris Trust and Savings Bank (or any successor Rights Agreement).
(iii) any "person " or "group " (as such terms are used 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
(iv) 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.
9. Exercise of Options.
(a) Unless otherwise prescribed by the Committee, Options 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 Stock Option
Plan administrator, and signed by the Participant or other person acting on
behalf of the Participant. 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 Option) and the Option 's exercise price shall
be paid to the Company.
(b) Unless otherwise prescribed by the Committee, on the Settlement Date,
the person exercising an Option 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 the Company, equal to the amount of any taxes
required to be collected or withheld by the Company in connection with the
exercise of the Option (the "Tax Payment ").
(c) Subject to any rules and limitations as the Committee may adopt, a
person exercising an Option may make the Tax Payment in whole or in part by
electing, at or before this time of exercise of the Option, either (i) 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 (ii) to deliver
certificates for other shares 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. If the
Committee shall fail to disapprove the election prior to the Settlement Date,
the election will be deemed approved.
(d) Subject to any rules and limitations as the Committee may adopt, a
person exercising an Option for the receipt of shares may pay for the shares
by tendering to the Company other shares of Company Common Stock legally and
beneficially owned by that person at the time of the exercise of the Options.
This 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 tendered in payment of an Option '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 Option and notify the person of the
refusal as soon as practicable. In this event, the person may either (i)
tender to the Company on the Settlement Date the cash amount required to pay
for the Option shares, or (ii) 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
Option at any time prior to its expiration date.
(e) 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 Option 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.
10. Transferability of Options. Without prior written approval from the
Committee, Options shall not be transferable by the optionee except by will or
under the laws of descent and distribution, and shall be exercisable, during
the optionee's lifetime, only by the optionee.
11. Forfeitures. Notwithstanding any other provision of this Plan, if
the Committee finds by a majority vote, that the optionee, before or after
termination of his capacity as a Non-Employee Director of the Company or any
subsidiary corporation, limited partnership or other entity controlling, or
controlled by, or under common control with the Company (an "Affiliate "),
committed fraud, embezzlement, theft, commission of felony, or proven
dishonesty in the course of his relationship to the Company and/or its
Affiliates which conduct damaged the Company or its Affiliates, or disclosed
trade secrets of the Company or its Affiliates, then any outstanding Options
which have not been exercised by optionee shall be forfeited. The decision of
the Committee will be final.
12. Requirements of Law. The Company shall not be required to sell or
issue any shares under any Option if issuing the shares shall constitute a
violation by the optionee or the Company of any provisions of any law or
regulation of any governmental authority. Each Option granted under this Plan
shall be subject to the requirements that, if at any time the Company or the
Committee shall determine that the listing, registration or qualification of
the shares upon any securities exchange or under any state or federal law of
the United states or of any other country or governmental subdivision, or the
consent or approval of any governmental regulatory body, or investment or
other representations, are necessary or desirable in connection with the issue
or purchase of shares subject to an Option, that Option shall not be exercised
in whole or in part unless the listing, registration, qualification, consent,
approval or representations shall have been effected or obtained free of any
conditions not acceptable to the Company. Any determination in this
connection by the Committee shall be final. If the shares issuable on
exercise of an Option are not registered under the Securities Act of 1933, the
Company may imprint on the certificate for those shares the following legend
or any other legend which counsel for the Company considers necessary or
advisable to comply with the Securities Act of 1933 or other applicable state
or federal securities laws or regulations:
"The shares of stock represented by this certificate have not been
registered under the Securities Act of 1933 or under the securities laws of
any state and may not be sold or transferred except upon registration or upon
receipt by the Company of an opinion of counsel satisfactory to the Company,
in form and substance satisfactory to the Company, that registration is not
required for a sale or transfer."
The Company shall endeavor to register any securities covered by this Plan
under the Securities Act of 1933 (as now in effect or as later amended) and,
if any shares are registered, the Company may remove any legend on
certificates representing those shares. The Company shall not be obligated to
take any other affirmative action in order to cause the exercise of an Option
or the issuance of shares under the Option to comply with any law or
regulation or any governmental authority.
13. No Rights as Stockholder. No optionee shall have rights as a
stockholder with respect to shares covered by his Option until the date a
stock certificate is issued for the shares. Except as provided in Section 15,
no adjustment for dividends, or other matters shall be made if the record date
is prior to the date the certificate is issued.
14. No Obligation to Retain Optionee. The granting of any Option shall
not impose upon the Company or any of its subsidiaries any obligation to
retain or continue to retain any optionee in his capacity as a Non-Employee
Director. The right of the Company, the directors or the stockholders of the
Company or of any subsidiary of the Company to terminate any optionee shall
not be diminished or affected by reason of the fact that one or more Options
have been or will be granted to him.
15. Changes in the Company's Capital Structure. The existence of
outstanding Options shall not affect in any way the right or power of the
Company or its stockholders to make or authorize any or all adjustments,
recapitalization, reorganization or other changes in the Company's capital
structure or its business, or any merger or consolidation of the Company, or
any issue of bonds, debentures, preferred or prior preference stock ahead of
or affecting the Common Stock or the rights of the Common Stock, or the
dissolution or liquidation of the Company, or any sale or transfer of all or
any part of its assets or business, or any other corporate act or proceeding,
whether of a similar character or otherwise.
If all or any portion of an Option is exercised subsequent to any stock
dividend, rights distribution, split-up, recapitalization, exchange of shares,
merger, spin-off, reorganization or liquidation ("Reorganization Event"), as a
result of which 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 of other securities, the person so exercising such Option shall receive,
for the aggregate price payable upon the 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 Reorganization Event;
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 Reorganization Event would, pursuant to this Section 15,
require the delivery of shares, rights or other securities which the Company
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 the
Company on November 25, 1995, or any successor rights, shall be deemed not to
have been distributed until the Distribution Date (as defined in the Rights
Agreement or any successor agreement).
In the event of any change in the number of shares of Common Stock
outstanding resulting from a Reorganization Event, 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 as provided in Section 3 would be entitled to
receive upon exercise of such Option following such change. Upon the
occurrence of any Reorganization Event, the Committee shall be entitled (but
shall not be required) to determine that new Option Agreements (or amendments
to the existing Option Agreements) shall be entered into with Participants
reflecting such stock dividend or other event.
Except as expressly provided before in this Plan, the issue by the Company
of shares of stock of any class, or securities convertible into shares of
stock of any class, for cash or property, or for labor or services either upon
direct sale or upon the exercise of rights or warrants to subscribe for
shares, or upon conversion of shares or obligations of the Company convertible
into shares or other securities, shall not affect, and no adjustment by reason
of it shall be made with respect to, the number or price of shares of Common
Stock then subject to outstanding Options.
16. Amendment or Termination of Plan. The Board of Directors may modify,
revise or terminate this Plan at any time. However, without the further
approval of the holders of at least a majority of the outstanding shares of
voting stock, or if the provisions of the corporate charter, by-laws or
applicable state law prescribe a greater degree of stockholder approval for
this action, without the degree of stockholder approval thus required, the
Board of Directors may not (a) change the aggregate number of shares which may
be issued under Options pursuant to the provisions of this Plan; (b) reduce
the Option Price permitted for options; (c) change the class of persons
eligible to receive options; (d) extend the term during which an Option may be
exercised or the termination date of the Plan; or (e) materially increase any
other benefits accruing to the Non-Employee Directors under the Plan or
materially modify the requirements as to eligibility for participation in the
Plan unless the Board of Directors shall have obtained an opinion of legal
counsel to the effect that stockholder approval of the amendment is not
required by law or the applicable rules and regulations of, or any agreement
with, any national security exchange on which the Common Stock is listed or if
the Common Stock is not listed, the rules and regulations of, or any agreement
with, the National Association of Securities Dealers, Inc., or in order to
make available to the optionee with respect to any Option granted under the
Plan, the benefits of Rule 16b-3 of the Rules and Regulations under the
Securities Exchange Act of 1934 or any similar or successor rule. In
addition, the terms of the Plan relating to the number of shares that may be
subject to an Option, the times at which Options are to be granted, and the
means by which the Option Price for the Options granted is to be determined
shall not be amended more than once every six months, other than to comport
with the changes in the Internal Revenue Code of 1986, the Employee Retirement
Security Act or the rules under either of those laws. All Options granted
under this Plan shall be subject to the terms and provisions of this Plan and
any amendment, modification or revision of this Plan shall be deemed to amend,
modify or revise all Options outstanding under this Plan at the time of the
amendment, modification or revision.
17. Written Agreement. Each Option granted under this Plan shall be
embodied in a written option agreement, which shall be subject to the terms
and conditions prescribed above, and shall be signed by the optionee and by
the appropriate officer of the Company for and in the name and on behalf of
the Company. Each option agreement shall contain any other provisions that
the Committee in its discretion shall deem advisable if they do not conflict
with the terms of this Plan.
18. Effective Date of Plan. The Plan shall become effective and shall be
deemed to have been adopted on July 25, 1995. No Options shall be granted
pursuant to the Plan after July 25, 2005.
EXHIBIT 10.12
SCHEDULE OF EXECUTIVE SEVERANCE AGREEMENTS
Employee Date of Agreement
Edward C. Benninger December 15, 1982
Stan L. McLelland December 15, 1982
E. Baines Manning July 16, 1988
Each of these agreements is in substantially the same form as the
agreement described in Exhibit 10.11 to the Valero Energy Corporation Annual
Report on Form 10-K for the year ended December 31, 1996.
EXHIBIT 10.16
SCHEDULE OF INDEMNITY AGREEMENTS
Employee Date of Agreement
Edward C. Benninger February 24, 1987
Ronald K. Calgaard February 16, 1996
Terrence E. Ciliske July 18, 1996
Robert G. Dettmer October 17, 1991
A. Ray Dudley July 21, 1988
Ruben M. Escobedo October 1, 1994
Peter A. Fasullo July 18, 1996
Gregory C. King January 23, 1997
James L. Johnson April 25, 1991
Lowell H. Lebermann February 24, 1987
E. Baines Manning July 16, 1986
Stan L. McLelland February 24, 1987
Susan Kaufman Purcell October 1, 1994
Each of these agreements is in substantially the same form as the
agreement described in Exhibit 10.15 to the Valero Energy Corporation Annual
Report on Form 10-K for the year ended December 31, 1996.
INCENTIVE BONUS AGREEMENT
AGREEMENT dated as of November 21, 1996 ("Agreement") between Valero
Energy Corporation, a Delaware corporation (the "Corporation"), and Terrence
E. Ciliske (the "Executive"),
WITNESSETH:
WHEREAS, for the reasons more fully set forth in the minutes of the
Compensation Committee (the "Committee") of the Board of Directors of the
Corporation, the Committee has approved the execution, delivery and
performance by the Corporation of incentive bonus agreements, substantially in
the form of this Agreement, between the Corporation and certain officers and
other key executives of the Corporation and its subsidiaries, including the
Executive;
WHEREAS, should the Corporation become involved in any situation leading
to a Transaction (as hereinafter defined), the management of the Corporation
has determined that Executive is a key employee who would be essential to the
completion of such Trasnaction and that, in addition to Executive's regular
duties, Executive may be called upon to assist in the assessment of any
third-party or internal proposals, advise management and the Board as to
whether such proposals would be in the best interests of the Corporation and
its shareholders and participate in successfully completing any Transaction;
NOW, THEREFORE, to assure that the Corporation will have the continued
dedication of the Executive, and the availability of Executive's advice and
counsel as to the best interests of the Corporation and its stockholders in
connection with the completion of any Transaction, and to induce the Executive
to remain in the employ of the Corporation and/or its designated subsidiaries,
and for other good and valuable consideration, Corporation and Executive agree
as follows:
1. Services During Certain Events.
A. In the event that the Corporation publicly announces (or privately
advises Executive that the Board has so determined) that the Corporation will
solicit or consider proposals leading to a Transaction, Executive agrees that
he or she will not voluntarily leave the employ of the Corporation or its
subsidiaries, and will render the services contemplated in the recitals to
this Agreement and in any employment agreement between the Corporation and
Executive, until the earlier of (i) such date as the Corporation has abandoned
or terminated efforts to effect a Transaction, or (ii) 30 days following
written notice to the Corporation of such termination of employment.
B. The provisions of Paragraph 1.A notwithstanding, Executive may
terminate employment for any reason prior to the occurrence of such
announcement (or advice) and, following such announcment (or advice), may
terminate employment prior to the date specified in Paragraph 1.A through
retirement, total and permanent disability, or for Good Reason. For purposes
of this Agreement, "Good Reason" means (i) the occurrence of any event or
circumstance which, if occurring following a Transaction, would render
Executive's termination of employment "involuntary" (as defined in Paragraph
2.H), or (ii) a breach (other than an insubstantial failure which is remedied
by the Corporation promptly after receipt of notice thereof from the
Executive) by the Corporation of any provision of this Agreement.
2. Incentive Bonus Payment.
A. In the event that, within two years following the date of this
Agreement, a Transaction occurs, then, except as set forth in Paragraph 2.C.,
the Corporation will pay to Executive or to Executive's estate (in addition to
any base salary, bonuses, incentive compensation, severance payments,
expenses, vacation, benefits, benefit plan distributions and other amounts
which would otherwise be payable to Executive, to the extent not theretofore
paid), as compensation for services rendered to the Corporation, a cash amount
(subject to any applicable payroll or other taxes required to be withheld)
equal to one (1) times Executive's highest annual rate of compensation in
effect at any time during the 36-month period ending on the date of such
Transaction, such payment to be made in accordance with Paragraph 2.B. As
used herein, "annual rate of compensation" shall mean the aggregate regular
base salary paid or payable to Executive by the Corporation with respect to
any period of 12 consecutive months.
B. The cash amount payable to Executive pursuant to Section 2.A. shall
be due and payable on the date on which a Transaction is consummated.
C. The foregoing provisions of this Paragraph 2 notwithstanding,
Executive shall not be entitled to receive, and the Corporation and, if
applicable, the Divested Entity shall not be obligated to make, the payments
specified in Paragraphs 2.A and 2.B if either:
(i) Executive's employment terminates prior to the occurrence of
the Transaction, unless such termination of employment results from
Executive's death or total and permanent disability; or
(ii) in connection with a Divestiture, Executive is offered but
declines to accept Qualifying Employment with the Divested Entity or its
subsidiaries. As used herein, "Qualifying Employment" shall mean any
position, with a principal place of employment in the United States, as a
full-time, regular employee of the Divested Entity or one of its subsidiaries,
wherein (a) Executive's base salary is at least equal to Executive's base
salary immediately prior to the Divestiture, (a) Executive's benefits (to
include, without limitation, medical, prescription, dental, disability,
employee life, group life, accidental death and travel accident insurance
plans and programs, vacation benefits, retirement benefits, participation in
stock option, restricted stock and other employee stock plans, and
participation in executive incentive bonus programs) are substantially
comparable with the benefits to which Executive was entitled prior to the
Divestiture, and (c) if Executive is required to relocate to a new principal
place of employment, Executive is reimbursed for all expenses reasonably
incurred in such relocation (including taxes payable on such reimbursement and
on such gross-up payment; costs of packing, moving and unpacking household
goods; reasonable expenses of travel, meals and lodging in moving to the new
location; reasonable costs of temporary living expenses at the new location;
and assistance in selling Executive's home commensurate with the assistance
customarily provided by the Corporation to transferred executives prior to the
Divestiture, including acquisition of such home by the Corporation at an
appraised fair market value).
D. Definition of Termination Date. For the purpose of this Agreement,
"Termination Date" shall mean Executive's last day of employment with any of
the Corporation or any of its subsidiaries, or with a Divested Entity or any
of its subsidiaries, as the case may be.
E. Definition of Transaction. For the purpose of this Agreement, a
"Transaction" shall mean and include any one of more of the following events;
provided that, prior thereto, such event has been recommended or approved by a
majority of the Board of Directors of the Corporation or of a duly authorized
committee thereof:
(i) consummation of a reorganization, merger or consolidation
involving the Corporation (other than a transaction solely involving one or
more subsidiaries of the Corporation), or the sale, transfer, or other
disposition of all or substantially all of the assets of the Corporation; or
(ii) Acquisition by any individual, entity or group of beneficial
ownership of sufficient shares of common stock or other securities of the
Corporation such that, but for such prior approval and any concurrent
redemption of the Corporation's Preference Share Purchase Rights or other
actions which may be taken to cause such person or group not to become an
Acquiring Person, would cause such individual, entity or group to become an
"Acquiring Person" within the meaning of that certain Rights Agreement, dated
as of October 26, 1995 between the Corporation and Harris Trust and Savings
Bank, as Rights Agent; or
(iii) Consummation of a Divestiture; or
(iv) any other event determined by the Board of Directors of the
Corporation or a duly authorized committee thereof to constitute a
"Transaction" hereunder.
F. Definitions of Divestiture and Divested Entity. For purposes of
this Agreement, the term "Divestiture" shall mean and include any transaction
or series of transactions (including, without limitation, any spin-off,
split-off, merger or other business combination, or sale, lease, capital
contribution, contractual dedication or other transfer or disposition of
securities or assets) pursuant to which all or a majority of either (i) the
assets ("Natural Gas Assets") constituting the natural gas and natural gas
liquids business as now conducted by Valero Natural Gas Company and its
subsidiary corporations and partnerships, or (ii) the assets ("Refining
Assets") constituting the refining and marketing business as now conducted by
Valero Refining and Marketing Company and its subsidiary corporations, are
directly or indirectly owned or controlled by one or more corporations,
partnerships, limited liability companies, joint ventures or other persons or
entities which are not wholly owned subsidiaries of the Corporation (referred
to herein as a "Divested Entity"). As used herein, the term "control" (and
with correlative meaning, the terms "controlled," "controlling" and
"controlled by") shall mean the possession, directly or indirectly, of the
power to direct, cause the direction of or influence the management and
policies of a person or entity, whether through the ownership of voting
securities, by contract or otherwise.
3. Excess Amounts.
A. Excise Taxes. Anything in this Agreement to the contrary
notwithstanding, in the event any payment or distribution by the Corporation
to or for the benefit of Executive (whether paid or payable or distributed or
distributable pursuant to the terms of this Agreement or otherwise) (a
"Payment") would be subject to the excise tax imposed by Section 4999 of the
Internal Revenue Code of 1986, as amended (the "Code") (such excise tax,
including any interest or penalties incurred with respect thereto, being
referred to herein as the "Excise Tax"), then the amount payable to the
Executive pursuant to Paragraphs 2.A and 2.B hereof shall be reduced to such
amount (the "Reduced Payment") but not below zero, such that the receipt of
the Executive of the Reduced Payment and all other payments and distributions
pursuant to this Agreement would not give rise to any Excise Tax.
B. No Duplication. Subject to the terms and conditions hereof, if
Executive has received the payments specified in Paragraph 2 for one
Transaction, Executive shall not be entitled to receive a payment under this
Agreement from the Corporation or a Divested Entity for any subsequent
Transaction. This limitation shall not be construed to prevent Executive from
receiving any payment from the Corporation or a Divested Entity under any
separate agreement, contract or arrangement.
C. Overpayments and Underpayments. All determinations required to be
made under Paragraph 3.A shall be made by the Corporation, which shall provide
detailed supporting calculations to the Executive no later than the date on
which such payment is due. As a result of uncertainty in the application of
Section 280G of the Code at the time of the initial determination hereunder,
it is possible that payments will have been made by the Corporation which
should not have been made ("Overpayment") or that additional payments, which
will not have been made by the Corporation could have been made
("Underpayment"), in each case, consistent with the calculations required to
be made hereunder. In the event that an Overpayment has been made, any such
Overpayment shall be treated for all purposes as a loan to the Executive which
the Executive shall repay to the Corporation together with interest at the
applicable Federal rate provided for in Section 7872(f)(2) of the Code;
provided, however, that no amount shall be payable by the Executive to the
Corporation (or if paid by the Executive to the Corporation shall be returned
to the Executive) if and to the extent such payment would not reduce the
amount which is subject to taxation under Section 4999 of the Code. In the
event that an Underpayment has occurred, any such Underpayment shall be
promptly paid by the Corporation to or for the benefit of the Executive
together with interest at the applicable Federal rate provided for in Section
7872(f)(2) of the Code.
4. General.
A. Indemnification. If litigation shall be brought to enforce or
interpret any provision contained herein, the Corporation, to the fullest
extent permitted by applicable law, hereby agrees to indemnify Executive for
reasonable attorneys' fees and disbursements incurred by Executive in such
litigation (including any appellate proceedings, and regardless of whether or
not such litigation is ultimately resolved in favor of Executive), and hereby
agrees to pay pre-judgement interest on any money judgement obtained by
Executive, calculated at the "prime rate" of interest announced by Morgan
Guaranty Trust Company of New York, New York as being in effect from time to
time, from the date that payment(s) to Executive should have been made in
accordance with the provisions of this Agreement.
B. Payment Obligations Absolute. The Corporation's obligation to pay
Executive the compensation and other amounts specified herein and to make the
arrangements provided herein shall be absolute and unconditional and shall not
be affected by any circumstances, including, without limitation, any set-off,
counterclaim, recoupment, defense or other right which the Corporation may
have against Executive or anyone else. All amounts payable by the Corporation
hereunder shall be paid without notice or demand. Each and every payment made
hereunder by the Corporation shall be final and the Corporation will not seek
to recover all or any part of such payment from Executive or from whoever may
be entitled thereto, for any reason whatsoever, excluding manifest error.
Executive shall not be required to mitigate the amount of any payment provided
for in this Agreement by seeking other employment or otherwise, nor shall the
amount of any payment provided for in this Agreement be reduced by any
compensation earned by Executive as a result of employment by another
employer, by retirement benefits, by offset against any amount claimed to be
owing by Executive to the Corporation, or otherwise.
C. Successors. This Agreement shall be binding upon and inure to the
benefit of Executive and Executive's estate, and the Corporation and any
successor of the Corporation, but neither this Agreement nor any rights
arising hereunder may be assigned or pledged by Executive. In the event of a
Divestiture, the Corporation shall cause each Divested Entity to execute and
deliver to Executive a written instrument, in form reasonably satisfactory to
Executive, whereby such Divested Entity shall assume, jointly and severally
with the Corporation, the obligations of the Corporation hereunder, provided
that no such assumption shall operate to release the Corporation from any
liability hereunder.
D. Severability. Any provision in this Agreement which is prohibited
or unenforceable in any jurisdiction shall, as to such jurisdiction, be
ineffective only to the extent of such prohibition or unenforceability without
invalidating or affecting the remaining provisions hereof, and any such
prohibition or unenforceability in any jurisdiction shall not invalidate or
render unenforceable such provision in any other jurisdiction.
E. Controlling Law and Interpretation. This Agreement shall in all
respects be governed by, and construed in accordance with, the laws of the
State of Texas. In the event that the interpretation or application of any
provision of this Agreement is determined in any proceeding to be ambiguous or
uncertain, the parties expressly intend and agree that such ambiguity or
uncertainty shall be resolved in favor of Executive.
IN WITNESS WHEREOF, the parties have executed this Agreement effective as
of the date set forth above.
/s/ Terrence E. Ciliske
Terrence E. Ciliske
VALERO ENERGY CORPORATION
By: /s/ E. C. Benninger
Edward C. Benninger
President
INCENTIVE BONUS AGREEMENT
AGREEMENT dated as of November 21, 1996 ("Agreement") between Valero
Energy Corporation, a Delaware corporation (the "Corporation"), and Peter A.
Fasullo (the "Executive"),
WITNESSETH:
WHEREAS, for the reasons more fully set forth in the minutes of the
Compensation Committee (the "Committee") of the Board of Directors of the
Corporation, the Committee has approved the execution, delivery and
performance by the Corporation of incentive bonus agreements, substantially in
the form of this Agreement, between the Corporation and certain officers and
other key executives of the Corporation and its subsidiaries, including the
Executive;
WHEREAS, should the Corporation become involved in any situation leading
to a Transaction (as hereinafter defined), the management of the Corporation
has determined that Executive is a key employee who would be essential to the
completion of such Trasnaction and that, in addition to Executive's regular
duties, Executive may be called upon to assist in the assessment of any
third-party or internal proposals, advise management and the Board as to
whether such proposals would be in the best interests of the Corporation and
its shareholders and participate in successfully completing any Transaction;
NOW, THEREFORE, to assure that the Corporation will have the continued
dedication of the Executive, and the availability of Executive's advice and
counsel as to the best interests of the Corporation and its stockholders in
connection with the completion of any Transaction, and to induce the Executive
to remain in the employ of the Corporation and/or its designated subsidiaries,
and for other good and valuable consideration, Corporation and Executive agree
as follows:
1. Services During Certain Events.
A. In the event that the Corporation publicly announces (or privately
advises Executive that the Board has so determined) that the Corporation will
solicit or consider proposals leading to a Transaction, Executive agrees that
he or she will not voluntarily leave the employ of the Corporation or its
subsidiaries, and will render the services contemplated in the recitals to
this Agreement and in any employment agreement between the Corporation and
Executive, until the earlier of (i) such date as the Corporation has abandoned
or terminated efforts to effect a Transaction, or (ii) 30 days following
written notice to the Corporation of such termination of employment.
B. The provisions of Paragraph 1.A notwithstanding, Executive may
terminate employment for any reason prior to the occurrence of such
announcement (or advice) and, following such announcment (or advice), may
terminate employment prior to the date specified in Paragraph 1.A through
retirement, total and permanent disability, or for Good Reason. For purposes
of this Agreement, "Good Reason" means (i) the occurrence of any event or
circumstance which, if occurring following a Transaction, would render
Executive's termination of employment "involuntary" (as defined in Paragraph
2.H), or (ii) a breach (other than an insubstantial failure which is remedied
by the Corporation promptly after receipt of notice thereof from the
Executive) by the Corporation of any provision of this Agreement.
2. Incentive Bonus Payment.
A. In the event that, within two years following the date of this
Agreement, a Transaction occurs, then, except as set forth in Paragraph 2.C.,
the Corporation will pay to Executive or to Executive's estate (in addition to
any base salary, bonuses, incentive compensation, severance payments,
expenses, vacation, benefits, benefit plan distributions and other amounts
which would otherwise be payable to Executive, to the extent not theretofore
paid), as compensation for services rendered to the Corporation, a cash amount
(subject to any applicable payroll or other taxes required to be withheld)
equal to one (1) times Executive's highest annual rate of compensation in
effect at any time during the 36-month period ending on the date of such
Transaction, such payment to be made in accordance with Paragraph 2.B. As
used herein, "annual rate of compensation" shall mean the aggregate regular
base salary paid or payable to Executive by the Corporation with respect to
any period of 12 consecutive months.
B. The cash amount payable to Executive pursuant to Section 2.A. shall
be due and payable in the following increments:
(i) 60% on the date on which a Transaction is consummated; and
(ii) 40% on the date which is six months following the date
specified in Paragraph 2.B(i) above.
In the event that Executive's employment with the Corporation or its
subsidiaries (or, if Executive accepts employment with a Divested Entity, then
with such Divested Entity or its subsidiaries) is terminated prior to any of
the dates specified above, and payment to Executive is not otherwise excused
pursuant to Paragraph 2.C. below, then on Executive's Termination Date, the
Corporation shall pay to Executive the remaining amounts which Executive would
have been entitled to receive had he remained in the employ of the Corporation
or a Divested Entity until such dates and which have not theretofore been
paid.
C. The foregoing provisions of this Paragraph 2 notwithstanding,
Executive shall not be entitled to receive, and the Corporation and, if
applicable, the Divested Entity shall not be obligated to make, the payments
specified in Paragraphs 2.A and 2.B if either:
(i) Executive's employment terminates prior to the occurrence of
the Transaction, unless such termination of employment results from
Executive's death or total and permanent disability; or
(ii) The payment is to be made under Paragraph 2.B(ii) and
Executive's termination of employment occurs following the occurrence of the
Transaction under any one of more of the following circumstances:
(a) Executive's termination of employment is "voluntary;"
(b) Executive is terminated by his or her employer company for
"cause"; or
(c) Executive retires under the Corporation's Pension Plan
(or, if Executive is then an employee of a Divested Entity or its
subsidiaries, under such entity's similar tax-qualified pension plan); or
(iii) in connection with a Divestiture, Executive is offered but
declines to accept Qualifying Employment with the Divested Entity or its
subsidiaries. As used herein, "Qualifying Employment" shall mean any
position, with a principal place of employment in the United States, as a
full-time, regular employee of the Divested Entity or one of its subsidiaries,
wherein (a) Executive's base salary is at least equal to Executive's base
salary immediately prior to the Divestiture, (a) Executive's benefits (to
include, without limitation, medical, prescription, dental, disability,
employee life, group life, accidental death and travel accident insurance
plans and programs, vacation benefits, retirement benefits, participation in
stock option, restricted stock and other employee stock plans, and
participation in executive incentive bonus programs) are substantially
comparable with the benefits to which Executive was entitled prior to the
Divestiture, and (c) if Executive is required to relocate to a new principal
place of employment, Executive is reimbursed for all expenses reasonably
incurred in such relocation (including taxes payable on such reimbursement and
on such gross-up payment; costs of packing, moving and unpacking household
goods; reasonable expenses of travel, meals and lodging in moving to the new
location; reasonable costs of temporary living expenses at the new location;
and assistance in selling Executive's home commensurate with the assistance
customarily provided by the Corporation to transferred executives prior to the
Divestiture, including acquisition of such home by the Corporation at an
appraised fair market value).
D. Definition of Termination Date. For the purpose of this Agreement,
"Termination Date" shall mean Executive's last day of employment with any of
the Corporation or any of its subsidiaries, or with a Divested Entity or any
of its subsidiaries, as the case may be.
E. Definition of Transaction. For the purpose of this Agreement, a
"Transaction" shall mean and include any one of more of the following events;
provided that, prior thereto, such event has been recommended or approved by a
majority of the Board of Directors of the Corporation or of a duly authorized
committee thereof:
(i) consummation of a reorganization, merger or consolidation
involving the Corporation (other than a transaction solely involving one or
more subsidiaries of the Corporation), or the sale, transfer, or other
disposition of all or substantially all of the assets of the Corporation; or
(ii) Acquisition by any individual, entity or group of beneficial
ownership of sufficient shares of common stock or other securities of the
Corporation such that, but for such prior approval and any concurrent
redemption of the Corporation's Preference Share Purchase Rights or other
actions which may be taken to cause such person or group not to become an
Acquiring Person, would cause such individual, entity or group to become an
"Acquiring Person" within the meaning of that certain Rights Agreement, dated
as of October 26, 1995 between the Corporation and Harris Trust and Savings
Bank, as Rights Agent; or
(iii) Consummation of a Divestiture; or
(iv) any other event determined by the Board of Directors of the
Corporation or a duly authorized committee thereof to constitute a
"Transaction" hereunder.
F. Definitions of Divestiture and Divested Entity. For purposes of
this Agreement, the term "Divestiture" shall mean and include any transaction
or series of transactions (including, without limitation, any spin-off,
split-off, merger or other business combination, or sale, lease, capital
contribution, contractual dedication or other transfer or disposition of
securities or assets) pursuant to which all or a majority of either (i) the
assets ("Natural Gas Assets") constituting the natural gas and natural gas
liquids business as now conducted by Valero Natural Gas Company and its
subsidiary corporations and partnerships, or (ii) the assets ("Refining
Assets") constituting the refining and marketing business as now conducted by
Valero Refining and Marketing Company and its subsidiary corporations, are
directly or indirectly owned or controlled by one or more corporations,
partnerships, limited liability companies, joint ventures or other persons or
entities which are not wholly owned subsidiaries of the Corporation (referred
to herein as a "Divested Entity"). As used herein, the term "control" (and
with correlative meaning, the terms "controlled," "controlling" and
"controlled by") shall mean the possession, directly or indirectly, of the
power to direct, cause the direction of or influence the management and
policies of a person or entity, whether through the ownership of voting
securities, by contract or otherwise.
G. Definition of "cause". As used herein, "cause" shall mean (i)
Executive's conviction of a crime under federal or state law (excluding a
misdemeanor offense not involving moral turpitude), or (ii) Executive's gross
and deliberate disregard of Executive's duties and responsibilities, as
reasonably determined by the Board of Directors of the Corporation (or, if
Executive becomes an employee of a Divested Entity, the Board of Directors of
such Divested Entity) after written notice of such failure and the failure or
refusal by Executive to correct such failure within 10 days from the date
notice is given, or (iii) the continued material impairment of Executive's
ability to fulfill his responsibilities as a result of alcoholism or drug
dependency after written notice of such material impairment and the failure to
correct such impairment with 45 days from the date notice is given or such
longer period as may be required under applicable law.
H. Definitions of "voluntary"/involuntary". In the event that
Executive ceases to be an employee of the Corporation, a Divested Entity or
their respective subsidiaries after (i) Executive's base salary is reduced to
an amount below the base salary pertaining immediately prior to the
Transaction, or (ii) Executive's benefits (to include, without limitation,
medical, prescription, dental, disability, employee life, group life,
accidental death and travel accident insurance plans and programs, vacation
benefits, retirement benefits, participation in stock option, restricted stock
and other employee stock plans, and participation in executive incentive bonus
programs) are reduced so as not to be at least substantially comparable with
the benefits to which Executive was entitled prior to the Transaction, or
(iii) Executive is required to relocate to a new principal place of employment
under circumstances in which Executive would not be reimbursed for all
expenses reasonably incurred in such relocation (including taxes payable on
such reimbursement and on such gross-up payment; costs of packing, moving and
unpacking household goods; reasonable expenses of travel, meals and lodging in
moving to the new location; reasonable costs of temporary living expenses at
the new location; and assistance in selling Executive's home commensurate with
the assistance customarily provided by the Corporation to transferred
executives prior to the Transaction, including acquisition of such home by the
Corporation at an appraised fair market value), then such termination of
employment shall be deemed for all purposes of this Agreement to be
"involuntary." If Executive's termination of employment is not
"involuntary," as defined above, and does not arise from death, total and
permanent disability, retirement or from the circumstances described in
Paragraph 2.C(ii)(b), then such termination of employment is deemed to be
"voluntary" for all purposes of this Agreement. In addition, if the Executive
is offered, but declines to accept, Qualifying Employment with a Divested
Entity or its subsidiaries, and Executive is subsequently terminated (other
than as a result of death, total and permanent disability or retirement) from
employment with the Corporation and its subsidiaries, then Executive's
termination of employment will be deemed to be "voluntary" for all purposes of
this Agreement.
3. Excess Amounts.
A. Excise Taxes. Anything in this Agreement to the contrary
notwithstanding, in the event any payment or distribution by the Corporation
to or for the benefit of Executive (whether paid or payable or distributed or
distributable pursuant to the terms of this Agreement or otherwise) (a
"Payment") would be subject to the excise tax imposed by Section 4999 of the
Internal Revenue Code of 1986, as amended (the "Code") (such excise tax,
including any interest or penalties incurred with respect thereto, being
referred to herein as the "Excise Tax"), then the amount payable to the
Executive pursuant to Paragraphs 2.A and 2.B hereof shall be reduced to such
amount (the "Reduced Payment") but not below zero, such that the receipt of
the Executive of the Reduced Payment and all other payments and distributions
pursuant to this Agreement would not give rise to any Excise Tax.
B. No Duplication. Subject to the terms and conditions hereof, if
Executive has received the payments specified in Paragraph 2 for one
Transaction, Executive shall not be entitled to receive a payment under this
Agreement from the Corporation or a Divested Entity for any subsequent
Transaction. This limitation shall not be construed to prevent Executive from
receiving any payment from the Corporation or a Divested Entity under any
separate agreement, contract or arrangement.
C. Overpayments and Underpayments. All determinations required to be
made under Paragraph 3.A shall be made by the Corporation, which shall provide
detailed supporting calculations to the Executive no later than the date on
which such payment is due. As a result of uncertainty in the application of
Section 280G of the Code at the time of the initial determination hereunder,
it is possible that payments will have been made by the Corporation which
should not have been made ("Overpayment") or that additional payments, which
will not have been made by the Corporation could have been made
("Underpayment"), in each case, consistent with the calculations required to
be made hereunder. In the event that an Overpayment has been made, any such
Overpayment shall be treated for all purposes as a loan to the Executive which
the Executive shall repay to the Corporation together with interest at the
applicable Federal rate provided for in Section 7872(f)(2) of the Code;
provided, however, that no amount shall be payable by the Executive to the
Corporation (or if paid by the Executive to the Corporation shall be returned
to the Executive) if and to the extent such payment would not reduce the
amount which is subject to taxation under Section 4999 of the Code. In the
event that an Underpayment has occurred, any such Underpayment shall be
promptly paid by the Corporation to or for the benefit of the Executive
together with interest at the applicable Federal rate provided for in Section
7872(f)(2) of the Code.
4. General.
A. Indemnification. If litigation shall be brought to enforce or
interpret any provision contained herein, the Corporation, to the fullest
extent permitted by applicable law, hereby agrees to indemnify Executive for
reasonable attorneys' fees and disbursements incurred by Executive in such
litigation (including any appellate proceedings, and regardless of whether or
not such litigation is ultimately resolved in favor of Executive), and hereby
agrees to pay pre-judgement interest on any money judgement obtained by
Executive, calculated at the "prime rate" of interest announced by Morgan
Guaranty Trust Company of New York, New York as being in effect from time to
time, from the date that payment(s) to Executive should have been made in
accordance with the provisions of this Agreement.
B. Payment Obligations Absolute. The Corporation's obligation to pay
Executive the compensation and other amounts specified herein and to make the
arrangements provided herein shall be absolute and unconditional and shall not
be affected by any circumstances, including, without limitation, any set-off,
counterclaim, recoupment, defense or other right which the Corporation may
have against Executive or anyone else. All amounts payable by the Corporation
hereunder shall be paid without notice or demand. Each and every payment made
hereunder by the Corporation shall be final and the Corporation will not seek
to recover all or any part of such payment from Executive or from whoever may
be entitled thereto, for any reason whatsoever, excluding manifest error.
Executive shall not be required to mitigate the amount of any payment provided
for in this Agreement by seeking other employment or otherwise, nor shall the
amount of any payment provided for in this Agreement be reduced by any
compensation earned by Executive as a result of employment by another
employer, by retirement benefits, by offset against any amount claimed to be
owing by Executive to the Corporation, or otherwise.
C. Successors. This Agreement shall be binding upon and inure to the
benefit of Executive and Executive's estate, and the Corporation and any
successor of the Corporation, but neither this Agreement nor any rights
arising hereunder may be assigned or pledged by Executive. In the event of a
Divestiture, the Corporation shall cause each Divested Entity to execute and
deliver to Executive a written instrument, in form reasonably satisfactory to
Executive, whereby such Divested Entity shall assume, jointly and severally
with the Corporation, the obligations of the Corporation hereunder, provided
that no such assumption shall operate to release the Corporation from any
liability hereunder.
D. Severability. Any provision in this Agreement which is prohibited
or unenforceable in any jurisdiction shall, as to such jurisdiction, be
ineffective only to the extent of such prohibition or unenforceability without
invalidating or affecting the remaining provisions hereof, and any such
prohibition or unenforceability in any jurisdiction shall not invalidate or
render unenforceable such provision in any other jurisdiction.
E. Controlling Law and Interpretation. This Agreement shall in all
respects be governed by, and construed in accordance with, the laws of the
State of Texas. In the event that the interpretation or application of any
provision of this Agreement is determined in any proceeding to be ambiguous or
uncertain, the parties expressly intend and agree that such ambiguity or
uncertainty shall be resolved in favor of Executive.
IN WITNESS WHEREOF, the parties have executed this Agreement effective as
of the date set forth above.
/s/ Peter A. Fasullo
Peter A. Fasullo
VALERO ENERGY CORPORATION
By: /s/ E. C. Benninger
Edward C. Benninger
President
INCENTIVE BONUS AGREEMENT
AGREEMENT dated as of November 21, 1996 ("Agreement") between Valero
Energy Corporation, a Delaware corporation (the "Corporation"), and Gregory C.
King (the "Executive"),
WITNESSETH:
WHEREAS, for the reasons more fully set forth in the minutes of the
Compensation Committee (the "Committee") of the Board of Directors of the
Corporation, the Committee has approved the execution, delivery and
performance by the Corporation of incentive bonus agreements, substantially in
the form of this Agreement, between the Corporation and certain officers and
other key executives of the Corporation and its subsidiaries, including the
Executive;
WHEREAS, should the Corporation become involved in any situation leading
to a Transaction (as hereinafter defined), the management of the Corporation
has determined that Executive is a key employee who would be essential to the
completion of such Trasnaction and that, in addition to Executive's regular
duties, Executive may be called upon to assist in the assessment of any
third-party or internal proposals, advise management and the Board as to
whether such proposals would be in the best interests of the Corporation and
its shareholders and participate in successfully completing any Transaction;
NOW, THEREFORE, to assure that the Corporation will have the continued
dedication of the Executive, and the availability of Executive's advice and
counsel as to the best interests of the Corporation and its stockholders in
connection with the completion of any Transaction, and to induce the Executive
to remain in the employ of the Corporation and/or its designated subsidiaries,
and for other good and valuable consideration, Corporation and Executive agree
as follows:
1. Services During Certain Events.
A. In the event that the Corporation publicly announces (or privately
advises Executive that the Board has so determined) that the Corporation will
solicit or consider proposals leading to a Transaction, Executive agrees that
he or she will not voluntarily leave the employ of the Corporation or its
subsidiaries, and will render the services contemplated in the recitals to
this Agreement and in any employment agreement between the Corporation and
Executive, until the earlier of (i) such date as the Corporation has abandoned
or terminated efforts to effect a Transaction, or (ii) 30 days following
written notice to the Corporation of such termination of employment.
B. The provisions of Paragraph 1.A notwithstanding, Executive may
terminate employment for any reason prior to the occurrence of such
announcement (or advice) and, following such announcment (or advice), may
terminate employment prior to the date specified in Paragraph 1.A through
retirement, total and permanent disability, or for Good Reason. For purposes
of this Agreement, "Good Reason" means (i) the occurrence of any event or
circumstance which, if occurring following a Transaction, would render
Executive's termination of employment "involuntary" (as defined in Paragraph
2.H), or (ii) a breach (other than an insubstantial failure which is remedied
by the Corporation promptly after receipt of notice thereof from the
Executive) by the Corporation of any provision of this Agreement.
2. Incentive Bonus Payment.
A. In the event that, within two years following the date of this
Agreement, a Transaction occurs, then, except as set forth in Paragraph 2.C.,
the Corporation will pay to Executive or to Executive's estate (in addition to
any base salary, bonuses, incentive compensation, severance payments,
expenses, vacation, benefits, benefit plan distributions and other amounts
which would otherwise be payable to Executive, to the extent not theretofore
paid), as compensation for services rendered to the Corporation, a cash amount
(subject to any applicable payroll or other taxes required to be withheld)
equal to one (1) times Executive's highest annual rate of compensation in
effect at any time during the 36-month period ending on the date of such
Transaction, such payment to be made in accordance with Paragraph 2.B. As
used herein, "annual rate of compensation" shall mean the aggregate regular
base salary paid or payable to Executive by the Corporation with respect to
any period of 12 consecutive months.
B. The cash amount payable to Executive pursuant to Section 2.A. shall
be due and payable in the following increments:
(i) 60% on the date on which a Transaction is consummated; and
(ii) 40% on the date which is six months following the date
specified in Paragraph 2.B(i) above.
In the event that Executive's employment with the Corporation or its
subsidiaries (or, if Executive accepts employment with a Divested Entity, then
with such Divested Entity or its subsidiaries) is terminated prior to any of
the dates specified above, and payment to Executive is not otherwise excused
pursuant to Paragraph 2.C. below, then on Executive's Termination Date, the
Corporation shall pay to Executive the remaining amounts which Executive would
have been entitled to receive had he remained in the employ of the Corporation
or a Divested Entity until such dates and which have not theretofore been
paid.
C. The foregoing provisions of this Paragraph 2 notwithstanding,
Executive shall not be entitled to receive, and the Corporation and, if
applicable, the Divested Entity shall not be obligated to make, the payments
specified in Paragraphs 2.A and 2.B if either:
(i) Executive's employment terminates prior to the occurrence of
the Transaction, unless such termination of employment results from
Executive's death or total and permanent disability; or
(ii) The payment is to be made under Paragraph 2.B(ii) and
Executive's termination of employment occurs following the occurrence of the
Transaction under any one of more of the following circumstances:
(a) Executive's termination of employment is "voluntary;"
(b) Executive is terminated by his or her employer company for
"cause"; or
(c) Executive retires under the Corporation's Pension Plan
(or, if Executive is then an employee of a Divested Entity or its
subsidiaries, under such entity's similar tax-qualified pension plan); or
(iii) in connection with a Divestiture, Executive is offered but
declines to accept Qualifying Employment with the Divested Entity or its
subsidiaries. As used herein, "Qualifying Employment" shall mean any
position, with a principal place of employment in the United States, as a
full-time, regular employee of the Divested Entity or one of its subsidiaries,
wherein (a) Executive's base salary is at least equal to Executive's base
salary immediately prior to the Divestiture, (a) Executive's benefits (to
include, without limitation, medical, prescription, dental, disability,
employee life, group life, accidental death and travel accident insurance
plans and programs, vacation benefits, retirement benefits, participation in
stock option, restricted stock and other employee stock plans, and
participation in executive incentive bonus programs) are substantially
comparable with the benefits to which Executive was entitled prior to the
Divestiture, and (c) if Executive is required to relocate to a new principal
place of employment, Executive is reimbursed for all expenses reasonably
incurred in such relocation (including taxes payable on such reimbursement and
on such gross-up payment; costs of packing, moving and unpacking household
goods; reasonable expenses of travel, meals and lodging in moving to the new
location; reasonable costs of temporary living expenses at the new location;
and assistance in selling Executive's home commensurate with the assistance
customarily provided by the Corporation to transferred executives prior to the
Divestiture, including acquisition of such home by the Corporation at an
appraised fair market value).
D. Definition of Termination Date. For the purpose of this Agreement,
"Termination Date" shall mean Executive's last day of employment with any of
the Corporation or any of its subsidiaries, or with a Divested Entity or any
of its subsidiaries, as the case may be.
E. Definition of Transaction. For the purpose of this Agreement, a
"Transaction" shall mean and include any one of more of the following events;
provided that, prior thereto, such event has been recommended or approved by a
majority of the Board of Directors of the Corporation or of a duly authorized
committee thereof:
(i) consummation of a reorganization, merger or consolidation
involving the Corporation (other than a transaction solely involving one or
more subsidiaries of the Corporation), or the sale, transfer, or other
disposition of all or substantially all of the assets of the Corporation; or
(ii) Acquisition by any individual, entity or group of beneficial
ownership of sufficient shares of common stock or other securities of the
Corporation such that, but for such prior approval and any concurrent
redemption of the Corporation's Preference Share Purchase Rights or other
actions which may be taken to cause such person or group not to become an
Acquiring Person, would cause such individual, entity or group to become an
"Acquiring Person" within the meaning of that certain Rights Agreement, dated
as of October 26, 1995 between the Corporation and Harris Trust and Savings
Bank, as Rights Agent; or
(iii) Consummation of a Divestiture; or
(iv) any other event determined by the Board of Directors of the
Corporation or a duly authorized committee thereof to constitute a
"Transaction" hereunder.
F. Definitions of Divestiture and Divested Entity. For purposes of
this Agreement, the term "Divestiture" shall mean and include any transaction
or series of transactions (including, without limitation, any spin-off,
split-off, merger or other business combination, or sale, lease, capital
contribution, contractual dedication or other transfer or disposition of
securities or assets) pursuant to which all or a majority of either (i) the
assets ("Natural Gas Assets") constituting the natural gas and natural gas
liquids business as now conducted by Valero Natural Gas Company and its
subsidiary corporations and partnerships, or (ii) the assets ("Refining
Assets") constituting the refining and marketing business as now conducted by
Valero Refining and Marketing Company and its subsidiary corporations, are
directly or indirectly owned or controlled by one or more corporations,
partnerships, limited liability companies, joint ventures or other persons or
entities which are not wholly owned subsidiaries of the Corporation (referred
to herein as a "Divested Entity"). As used herein, the term "control" (and
with correlative meaning, the terms "controlled," "controlling" and
"controlled by") shall mean the possession, directly or indirectly, of the
power to direct, cause the direction of or influence the management and
policies of a person or entity, whether through the ownership of voting
securities, by contract or otherwise.
G. Definition of "cause". As used herein, "cause" shall mean (i)
Executive's conviction of a crime under federal or state law (excluding a
misdemeanor offense not involving moral turpitude), or (ii) Executive's gross
and deliberate disregard of Executive's duties and responsibilities, as
reasonably determined by the Board of Directors of the Corporation (or, if
Executive becomes an employee of a Divested Entity, the Board of Directors of
such Divested Entity) after written notice of such failure and the failure or
refusal by Executive to correct such failure within 10 days from the date
notice is given, or (iii) the continued material impairment of Executive's
ability to fulfill his responsibilities as a result of alcoholism or drug
dependency after written notice of such material impairment and the failure to
correct such impairment with 45 days from the date notice is given or such
longer period as may be required under applicable law.
H. Definitions of "voluntary"/involuntary". In the event that
Executive ceases to be an employee of the Corporation, a Divested Entity or
their respective subsidiaries after (i) Executive's base salary is reduced to
an amount below the base salary pertaining immediately prior to the
Transaction, or (ii) Executive's benefits (to include, without limitation,
medical, prescription, dental, disability, employee life, group life,
accidental death and travel accident insurance plans and programs, vacation
benefits, retirement benefits, participation in stock option, restricted stock
and other employee stock plans, and participation in executive incentive bonus
programs) are reduced so as not to be at least substantially comparable with
the benefits to which Executive was entitled prior to the Transaction, or
(iii) Executive is required to relocate to a new principal place of employment
under circumstances in which Executive would not be reimbursed for all
expenses reasonably incurred in such relocation (including taxes payable on
such reimbursement and on such gross-up payment; costs of packing, moving and
unpacking household goods; reasonable expenses of travel, meals and lodging in
moving to the new location; reasonable costs of temporary living expenses at
the new location; and assistance in selling Executive's home commensurate with
the assistance customarily provided by the Corporation to transferred
executives prior to the Transaction, including acquisition of such home by the
Corporation at an appraised fair market value), then such termination of
employment shall be deemed for all purposes of this Agreement to be
"involuntary." If Executive's termination of employment is not
"involuntary," as defined above, and does not arise from death, total and
permanent disability, retirement or from the circumstances described in
Paragraph 2.C(ii)(b), then such termination of employment is deemed to be
"voluntary" for all purposes of this Agreement. In addition, if the Executive
is offered, but declines to accept, Qualifying Employment with a Divested
Entity or its subsidiaries, and Executive is subsequently terminated (other
than as a result of death, total and permanent disability or retirement) from
employment with the Corporation and its subsidiaries, then Executive's
termination of employment will be deemed to be "voluntary" for all purposes of
this Agreement.
3. Excess Amounts.
A. Excise Taxes. Anything in this Agreement to the contrary
notwithstanding, in the event any payment or distribution by the Corporation
to or for the benefit of Executive (whether paid or payable or distributed or
distributable pursuant to the terms of this Agreement or otherwise) (a
"Payment") would be subject to the excise tax imposed by Section 4999 of the
Internal Revenue Code of 1986, as amended (the "Code") (such excise tax,
including any interest or penalties incurred with respect thereto, being
referred to herein as the "Excise Tax"), then the amount payable to the
Executive pursuant to Paragraphs 2.A and 2.B hereof shall be reduced to such
amount (the "Reduced Payment") but not below zero, such that the receipt of
the Executive of the Reduced Payment and all other payments and distributions
pursuant to this Agreement would not give rise to any Excise Tax.
B. No Duplication. Subject to the terms and conditions hereof, if
Executive has received the payments specified in Paragraph 2 for one
Transaction, Executive shall not be entitled to receive a payment under this
Agreement from the Corporation or a Divested Entity for any subsequent
Transaction. This limitation shall not be construed to prevent Executive from
receiving any payment from the Corporation or a Divested Entity under any
separate agreement, contract or arrangement.
C. Overpayments and Underpayments. All determinations required to be
made under Paragraph 3.A shall be made by the Corporation, which shall provide
detailed supporting calculations to the Executive no later than the date on
which such payment is due. As a result of uncertainty in the application of
Section 280G of the Code at the time of the initial determination hereunder,
it is possible that payments will have been made by the Corporation which
should not have been made ("Overpayment") or that additional payments, which
will not have been made by the Corporation could have been made
("Underpayment"), in each case, consistent with the calculations required to
be made hereunder. In the event that an Overpayment has been made, any such
Overpayment shall be treated for all purposes as a loan to the Executive which
the Executive shall repay to the Corporation together with interest at the
applicable Federal rate provided for in Section 7872(f)(2) of the Code;
provided, however, that no amount shall be payable by the Executive to the
Corporation (or if paid by the Executive to the Corporation shall be returned
to the Executive) if and to the extent such payment would not reduce the
amount which is subject to taxation under Section 4999 of the Code. In the
event that an Underpayment has occurred, any such Underpayment shall be
promptly paid by the Corporation to or for the benefit of the Executive
together with interest at the applicable Federal rate provided for in Section
7872(f)(2) of the Code.
4. General.
A. Indemnification. If litigation shall be brought to enforce or
interpret any provision contained herein, the Corporation, to the fullest
extent permitted by applicable law, hereby agrees to indemnify Executive for
reasonable attorneys' fees and disbursements incurred by Executive in such
litigation (including any appellate proceedings, and regardless of whether or
not such litigation is ultimately resolved in favor of Executive), and hereby
agrees to pay pre-judgement interest on any money judgement obtained by
Executive, calculated at the "prime rate" of interest announced by Morgan
Guaranty Trust Company of New York, New York as being in effect from time to
time, from the date that payment(s) to Executive should have been made in
accordance with the provisions of this Agreement.
B. Payment Obligations Absolute. The Corporation's obligation to pay
Executive the compensation and other amounts specified herein and to make the
arrangements provided herein shall be absolute and unconditional and shall not
be affected by any circumstances, including, without limitation, any set-off,
counterclaim, recoupment, defense or other right which the Corporation may
have against Executive or anyone else. All amounts payable by the Corporation
hereunder shall be paid without notice or demand. Each and every payment made
hereunder by the Corporation shall be final and the Corporation will not seek
to recover all or any part of such payment from Executive or from whoever may
be entitled thereto, for any reason whatsoever, excluding manifest error.
Executive shall not be required to mitigate the amount of any payment provided
for in this Agreement by seeking other employment or otherwise, nor shall the
amount of any payment provided for in this Agreement be reduced by any
compensation earned by Executive as a result of employment by another
employer, by retirement benefits, by offset against any amount claimed to be
owing by Executive to the Corporation, or otherwise.
C. Successors. This Agreement shall be binding upon and inure to the
benefit of Executive and Executive's estate, and the Corporation and any
successor of the Corporation, but neither this Agreement nor any rights
arising hereunder may be assigned or pledged by Executive. In the event of a
Divestiture, the Corporation shall cause each Divested Entity to execute and
deliver to Executive a written instrument, in form reasonably satisfactory to
Executive, whereby such Divested Entity shall assume, jointly and severally
with the Corporation, the obligations of the Corporation hereunder, provided
that no such assumption shall operate to release the Corporation from any
liability hereunder.
D. Severability. Any provision in this Agreement which is prohibited
or unenforceable in any jurisdiction shall, as to such jurisdiction, be
ineffective only to the extent of such prohibition or unenforceability without
invalidating or affecting the remaining provisions hereof, and any such
prohibition or unenforceability in any jurisdiction shall not invalidate or
render unenforceable such provision in any other jurisdiction.
E. Controlling Law and Interpretation. This Agreement shall in all
respects be governed by, and construed in accordance with, the laws of the
State of Texas. In the event that the interpretation or application of any
provision of this Agreement is determined in any proceeding to be ambiguous or
uncertain, the parties expressly intend and agree that such ambiguity or
uncertainty shall be resolved in favor of Executive.
IN WITNESS WHEREOF, the parties have executed this Agreement effective as
of the date set forth above.
/s/ Gregory C. King
Gregory C. King
VALERO ENERGY CORPORATION
By: /s/ E. C. Benninger
Edward C. Benninger
President
MANAGEMENT STABILITY AGREEMENT
AGREEMENT dated as of November 1, 1996 ("Agreement") between Valero
Energy Corporation, a Delaware corporation (the "Corporation"), and Terrence
E. Ciliske (the "Executive"),
WITNESSETH:
WHEREAS, for the reasons more fully set forth in the minutes of the
Executive Committee (the "Committee") of the Board of Directors of the
Corporation, the Committee has approved the execution, delivery and
performance by the Corporation of management retention agreements,
substantially in the form of this Agreement, between the Corporation and
certain officers and other key executives of the Corporation and its
subsidiaries, including the Executive;
WHEREAS, should the Corporation become involved in any Change of Control
or Divestiture (each as hereinafter defined) situation, in addition to
Executive's regular duties, Executive may be called upon to assist in the
assessment of any third-party or internal proposals, advise management and the
Board as to whether such proposals would be in the best interests of the
Corporation and its shareholders, participate in successfully completing such
transactions and to take such other actions as the Board might determine to be
appropriate;
NOW, THEREFORE, to assure that the Corporation will have the continued
dedication of the Executive, and the availability of Executive's advice and
counsel as to the best interests of the Corporation and its stockholders,
notwithstanding the possibility, threat, or occurrence of a Change of Control
or Divestiture, and to induce the Executive to remain in the employ of the
Corporation and/or its designated subsidiaries, and for other good and
valuable consideration, Corporation and Executive agree as follows:
1. Services During Certain Events.
A. In the event any Person (as defined in Paragraph 2.E) (i)
begins a tender or exchange offer for equity securities of the Company, (ii)
or publicly announces an intention to take or consider taking any actions
which, if consummated, would constitute a Change of Control, (iii) circulates
a stockholder consent or solicits a proxy for the election of directors, (iv)
enters into an agreement with the Corporation, the consummation of which would
result in a Change of Control, (v) becomes an "Acquiring Person" under the
Rights Agreement, dated October 25, 1995, between the Corporation and Harris
Trust and Savings Bank, as Rights Agent, or (vi) publicly takes other steps
which, if consummated, would constitute a Change of Control, Executive agrees
that he or she will not voluntarily leave the employ of the Corporation or its
subsidiaries, and will render the services contemplated in the recitals to
this Agreement and in any employment agreement between the Corporation and
Executive, until the earlier of (u) such date as such Person has abandoned or
terminated efforts to effect a Change of Control, (v) sixty days following the
date on which a Change of Control has occurred or (w) thirty days following
written notice to the Corporation of such termination of employment. In the
event the Corporation determines to undertake any transaction or transactions
which, if consummated, would constitute a Divestiture, Executive agrees that
he or she will not voluntarily leave the employ of the Corporation or its
subsidiaries and will continue to render the services recited in the preambles
to this Agreement and in any employment agreement between the Corporation and
the Executive until the earlier of (x) such date as the Corporation has either
abandoned or terminated its efforts to effect such Divestiture, or (y) sixty
days following the date on which such Divestiture has occurred, or (z) thirty
days following written notice to the Corporation of such termination of
employment.
B. The provisions of Paragraph 1.A notwithstanding, Executive may
terminate employment for any reason prior to the occurrence of an event
specified in Paragraph 1.A(i)-(vi), or a determination by the Corporation to
undertake a Divestiture, as the case may be, and, following the occurrence of
any such event or a determination by the Corporation to undertake a
Divestiture, as the case may be, may terminate employment through retirement,
total and permanent disability, or for Good Reason. For purposes of this
Agreement, "Good Reason" means (i) the occurrence of any event or circumstance
which, if occurring following a Change in Control or Divestiture, would render
Executive's termination of employment "involuntary" (as defined in Paragraph
2.H), or (ii) a breach (other than an insubstantial failure which is remedied
by the Corporation promptly after receipt of notice thereof from the
Executive) by the Corporation of any provision of this Agreement.
2. Termination After Change of Control. In the event that, within two
years following the occurrence of a Change of Control of the Corporation or a
Divestiture, Executive's employment is terminated so that Executive is no
longer employed with any of the Corporation or its then remaining
subsidiaries, or a Divested Entity or its subsidiaries, then, except as is
otherwise provided in Paragraph 2.D below, Executive shall be entitled to
receive the following payments and other benefits:
A. Lump Sum Cash Payment. On or before Executive's Termination
Date, the Corporation will pay to Executive (in addition to any base salary,
bonuses, incentive compensation, expenses, vacation, benefits, benefit plan
distributions and other amounts which would otherwise normally be payable to
Executive, to the extent not theretofore paid), as compensation for services
rendered to the Corporation, a lump sum cash amount (subject to any applicable
payroll or other taxes required to be withheld) equal to two (2) times the sum
of (i) Executive's highest annual rate of compensation in effect at any time
during the 36-month period ending on the Termination Date and (ii) one-third
of the aggregate of all annual incentive bonus amounts, if any, paid or
payable to Executive under the Corporation's Executive Incentive Bonus Plan
with respect to the 36-month period ending on the Termination Date. As used
herein, "annual rate of compensation" shall mean the aggregate regular base
salary paid or payable to Executive by the Corporation with respect to any
period of 12 consecutive months. In the event there are fewer than 24 months
remaining from the Termination Date to Executive's normal retirement date at
age 65, the amount otherwise payable hereunder shall be reduced as follows:
the amount otherwise calculated under this Paragraph 2.A will be multiplied by
a fraction, the numerator of which is the number of days remaining to
Executive's normal retirement date and the denominator of which is 720, and
the resulting product shall be the amount payable to Executive under this
Paragraph 2.A.
B. Other Benefits.
(i) Insurance or Other Special Benefits. For two years (the
"Applicable Period") after the Termination Date, or such longer period as may
be provided by the terms of the appropriate plan, program, practice or policy,
the Corporation shall continue benefits to Executive and/or Executive's family
at least equal to those which would have been provided to them under the
welfare benefit plans, practices, policies and programs provided by the
Corporation (including, without limitation, medical, prescription, dental,
disability, employee life, group life, accidental death and travel accident
insurance plans and programs) immediately prior to such termination, to the
extent applicable generally to other peer executives of the Corporation and
its affiliated companies, if the Executive's employment had not been
terminated; provided, however, that in no event shall the continued benefits
provided hereunder be less favorable, in the aggregate, than those provided
under the most favorable of such plans, practices, policies and programs in
effect for Executive at any time during the 120-day period immediately
preceding the Termination Date or, if more favorable to Executive, those
provided generally at any time after the Termination Date to other peer
executives of the Corporation, its affiliated companies or their successors.
To the extent that, during the Applicable Period, or any portion thereof, the
benefits required to be provided under this Paragraph 2.B are also required to
be provided by the Corporation under applicable provisions of the Consolidated
Omnibus Budget Reconciliation Act of 1985 ("COBRA"), the Corporation may
discharge such portion of its obligation hereunder by providing such
COBRA-mandated benefits, but at the Corporation's sole cost and expense. If
Executive is reemployed by another employer and is eligible to receive medical
or other welfare benefits under another employer-provided plan, the medical
and other welfare benefits described herein shall be secondary to those
provided under such other plan during such applicable period of eligibility.
(ii) Relocation Assistance. Should Executive move his or her
primary residence in order to pursue other business or employment
opportunities within two years following the Termination Date, Executive will
be reimbursed for any expenses incurred in that relocation (including taxes
payable on such reimbursement and on such gross-up payment) which are not
reimbursed by another employer. Such expenses for which Executive shall be
reimbursed shall include, without limitation, costs of packing, moving and
unpacking household goods; reasonable expenses of travel, meals and lodging in
moving to the new location; reasonable costs of temporary living expenses at
the new location for up to 60 days; and any real estate commissions payable by
Executive in selling Executive's existing home or acquiring a new home.
Benefits under this provision will also include the assistance in selling
Executive's home which was customarily provided by the Corporation to
transferred executives prior to the Change of Control, including acquisition
of such home by the Corporation at an appraised fair market value.
(iii) Thrift and Other Plans. The Executive's
participation in the Corporation's Thrift Plan, Employee Stock Ownership
Plans, retirement plan for employees generally ("Pension Plan") or other
applicable plans of the Corporation (or, if applicable, such similar plans as
the Divested Entity may establish) shall not continue after the Termination
Date. Any terminating distributions and/or vested rights under such plans
shall be governed by the terms of the respective plans.
C. The foregoing provisions of this Paragraph 2 notwithstanding,
Executive shall not be entitled to receive, and the Corporation and, if
applicable, the Divested Entity shall not be obligated to make, the payments
and other benefits specified in Paragraphs 2.A and 2.B above if Executive's
termination employment occurs under any one of more of the following
circumstances:
(i) Executive's termination of employment is "voluntary" (as
hereinafter defined);
(ii) Executive is terminated by his employer company for
"cause" (as hereinafter defined);
(iii) Executive's termination is a consequence of death or
total and permanent disability; or
(iv) Executive retires under the Corporation's Pension Plan
(or, if Executive is then an employee of a Divested Entity or its
subsidiaries, under such entity's similar tax-qualified pension plan).
D. Definition of Termination Date. For the purpose of this
Agreement, "Termination Date" shall mean: (i) in the case of a Change of
Control, the Executive's last day of employment with the Corporation or any of
its subsidiaries, and (ii) in the case of a Divestiture, the Executive's last
day of employment with any of the Corporation or any of its subsidiaries, or
with a Divested Entity or any of its subsidiaries, as the case may be.
E. Definition of Change of Control. For the purpose of this
Agreement, a "Change of Control" shall mean:
(i) The acquisition by any individual, entity or group (within
the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of
1934, as amended (the "Exchange Act")) (a "Person") of beneficial ownership
(within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20%
or more of either (a) the then outstanding shares of common stock of the
Corporation (the "Outstanding Corporation Common Stock") or (b) the combined
voting power of the then outstanding voting securities of the Corporation
entitled to vote generally in the election of directors (the "Outstanding
Corporation Voting Securities"); provided, however, that for purposes of this
subparagraph (i), the following acquisitions shall not constitute a Change of
Control: (a) any acquisition directly from the Corporation, (b) any
acquisition by the Corporation, (c) any acquisition by any employee benefit
plan (or related trust) sponsored or maintained by the Corporation or any
corporation or other entity controlled by the Corporation or (d) any
acquisition by any corporation or other entity pursuant to a transaction which
complies with clauses (a), (b) and (c) of subparagraph (iii) of this Paragraph
2.E; or
(ii) Individuals who, as of the date hereof, constitute the
Board of Directors of the Corporation (the "Incumbent Board") cease for any
reason to constitute at least a majority of the Board; provided, however, that
any individual becoming a director subsequent to the date hereof whose
election, or nomination for election by the Corporation's shareholders, was
approved by a vote of at least a majority of the directors then comprising the
Incumbent Board shall be considered as though such individual were a member of
the Incumbent Board, but excluding, for this purpose, any such individual
whose initial assumption of office occurs as a result of an actual or
threatened election contest with respect to the election or removal of
directors or other actual or threatened solicitation of proxies or consents by
or on behalf of a Person other than the Board; or
(iii) Consummation of a reorganization, merger or
consolidation, or sale, transfer, or other disposition of all or substantially
all of the assets of the Corporation (a "Business Combination"), in each case,
unless, following such Business Combination, (a) all or substantially all of
the individuals and entities who were the beneficial owners, respectively, of
the Outstanding Corporation Common Stock and Outstanding Corporation Voting
Securities immediately prior to such Business Combination beneficially own,
directly or indirectly, more than 50% of, respectively, the then outstanding
shares of common stock and the combined voting power of the then outstanding
voting securities entitled to vote generally in the election of directors, as
the case may be, of the corporation or other entity surviving or resulting
from such Business Combination (including, without limitation, a corporation
or other entity which as a result of such transaction owns the Corporation or
all or substantially all of the Corporation's assets either directly or
through one or more subsidiaries) in substantially the same proportions as
their ownership immediately prior to such Business Combination of the
Outstanding Corporation Common Stock and Outstanding Corporation Voting
Securities, as the case may be, (b) no Person (excluding any corporation or
other entity surviving or resulting from such Business Combination or any
employee benefit plan (or related trust) of the Corporation or such
corporation or other entity surviving or resulting from such Business
Combination) beneficially owns, directly or indirectly, 20% or more of,
respectively, the then outstanding shares of common stock of the corporation
or other entity surviving or resulting from such Business Combination or the
combined voting power of the then outstanding voting securities of such
corporation or other entity except to the extent that such ownership existed
prior to the Business Combination and (c) at least a majority of the members
of the board of directors or other governing body of the corporation or other
entity surviving or resulting from such Business Combination were members of
the Incumbent Board at the time of the execution of the initial agreement or
of the action of the Board, providing for such Business Combination; or
(iv) Approval by the shareholders of the Corporation of a
complete liquidation or dissolution of the Corporation; or
(v) any other event determined by the Board of Directors or
the Committee to constitute a "Change of Control" hereunder.
F. Definitions of Divestiture and Divested Entity. For purposes
of this Agreement, the term "Divestiture" shall mean and include any
transaction or series of transactions (including, without limitation, any
spin-off, split-off, merger or other business combination, or sale, lease,
capital contribution, contractual dedication or other transfer or disposition
of securities or assets) pursuant to which all or a majority of either (i) the
assets ("Natural Gas Assets") constituting the natural gas and natural gas
liquids business as now conducted by Valero Natural Gas Company and its
subsidiary corporations and partnerships, or (ii) the assets ("Refining
Assets") constituting the refining and marketing business as now conducted by
Valero Refining and Marketing Company and its subsidiary corporations, are
directly or indirectly owned or controlled by one or more corporations,
partnerships, limited liability companies, joint ventures or other Persons
which are not wholly owned subsidiaries of the Corporation (referred to herein
as a "Divested Entity"). As used herein, the term "control" (and with
correlative meaning, the terms "controlled," "controlling" and "controlled
by") shall mean the possession, directly or indirectly, of the power to
direct, cause the direction of or influence the management and policies of a
Person, whether through the ownership of voting securities, by contract or
otherwise.
G. Definition of "cause". As used herein, "cause" shall mean (i)
Executive's conviction of a crime under federal or state law (excluding a
misdemeanor offense not involving moral turpitude), or (ii) Executive's gross
and deliberate disregard of Executive's duties and responsibilities, as
reasonably determined by the Board of Directors of the Corporation (or, if
Executive becomes an employee of a Divested Entity, the Board of Directors of
such Divested Entity) after written notice of such failure and the failure or
refusal by Executive to correct such failure within 10 days from the date
notice is given, or (iii) the continued material impairment of Executive's
ability to fulfill his responsibilities as a result of alcoholism or drug
dependency after written notice of such material impairment and the failure to
correct such impairment with 45 days from the date notice is given or such
longer period as may be required under applicable law.
H. Definitions of "voluntary"/involuntary". In the event that
Executive ceases to be an employee of the Corporation, a Divested Entity or
their respective subsidiaries after (i) Executive's base salary is reduced to
an amount below the base salary pertaining immediately prior to the Change of
Control or Divestiture, as the case may be, or (ii) Executive's benefits (to
include, without limitation, medical, prescription, dental, disability,
employee life, group life, accidental death and travel accident insurance
plans and programs, vacation benefits, retirement benefits, participation in
stock option, restricted stock and other employee stock plans, and
participation in executive incentive bonus programs) are reduced so as not to
be at least substantially comparable with the benefits to which Executive was
entitled prior to the Change of Control or Divestiture, as the case may be, or
(iii) Executive is required to relocate to a new principal place of employment
under circumstances in which Executive would not be reimbursed for all
expenses reasonably incurred in such relocation (including taxes payable on
such reimbursement and on such gross-up payment; costs of packing, moving and
unpacking household goods; reasonable expenses of travel, meals and lodging in
moving to the new location; reasonable costs of temporary living expenses at
the new location; and assistance in selling Executive's home commensurate with
the assistance customarily provided by the Corporation to transferred
executives prior to the Change of Control or Divestiture, including
acquisition of such home by the Corporation at an appraised fair market
value), then such termination of employment shall be deemed for all purposes
of this Agreement to be "involuntary" and Executive shall be entitled to the
benefits specified in Paragraphs 2.A and 2.B. If the Executive's termination
of employment is not "involuntary," as defined above, and does not arise from
one or more of the circumstances itemized in Paragraph 2.C(ii) through (iv),
then such termination of employment is deemed to be "voluntary" for purposes
of this Agreement.
3. Acceleration of Options and Rights in Certain Events. Stock options
("options") and stock appreciation or similar rights ("rights"), if any,
granted to Executive by the Corporation under the Corporation's Stock Option
Plans No. 3, 4 and 5, and Executive Stock Incentive Plan (collectively the
"Plans") (or any other stock option or stock appreciation rights plan adopted
by the Corporation) and not previously exercised, canceled or otherwise
terminated will be exercisable in full for a period of 90 days, or if longer,
such period as is specified in such plan, such 90 day period to commence on
the earlier of (a) the date of the Change of Control of the Corporation or the
Divestiture or (b) on the date of approval by the Corporation's shareholders
of an agreement providing for a merger or other transaction in which the
Corporation will not remain an independent publicly owned corporation or a
consolidation, a sale, transfer or other disposition of all or substantially
all the assets of the Corporation or another transaction constituting a Change
of Control or Divestiture; provided however, that no such option or right
shall be exercisable after the expiration date of such option or right.
4. Removal of Restrictions on Stock Grants. Stock previously granted
to Executive by the Corporation as restricted stock or performance shares
under the Corporation's Restricted Stock Bonus and Incentive Stock Plan or
Executive Stock Incentive Plan (or any other similar stock plan adopted by the
Corporation) will have all restrictions removed on the earlier of (a) the date
of the Change of Control of the Corporation or the Divestiture, or (b) on the
date of approval by the Corporation's shareholders of an agreement providing
for a merger or other transaction in which the Corporation will not remain an
independent publicly owned corporation or a consolidation, a sale, transfer or
other disposition of all or substantially all the assets of the Corporation,
or another transaction constituting a Change of Control or a Divestiture;
provided, that, in the case of stock previously granted to Executive as
performance shares under the Corporation's Executive Stock Incentive Plan (or
any other similar stock plan adopted by the Corporation), the performance
period shall be deemed to have terminated on the earlier of the dates
specified in clauses (a) or (b) above, and the number of shares to which the
Executive is then entitled shall be determined in accordance with such plan.
5. Excess Amounts.
A. Excise Taxes. Anything in this Agreement to the contrary
notwithstanding, in the event any payment or distribution by the Corporation
to or for the benefit of Executive (whether paid or payable or distributed or
distributable pursuant to the terms of this Agreement or otherwise) (a
"Payment") would be subject to the excise tax imposed by Section 4999 of the
Internal Revenue Code of 1986, as amended (the "Code") (such excise tax,
including any interest or penalties incurred with respect thereto, being
referred to herein as the "Excise Tax"), then the lump-sum amount payable to
the Executive pursuant to Paragraph 2.A hereof shall be reduced to such amount
(the "Reduced Payment") but not below zero, such that the receipt of the
Executive of the Reduced Payment and all other payments and distributions
pursuant to this Agreement would not give rise to any Excise Tax.
B. No Duplication. Subject to the terms and conditions hereof, if
Executive has received the lump-sum payment and other benefits specified in
Paragraph 2 for one Change of Control or Divestiture event, Executive shall
not be entitled to receive a lump-sum payment or other such benefits under
this Agreement from the Corporation or a Divested Entity for any subsequent
Change of Control or Divestiture event. In addition, if Executive receives a
lump-sum payment under this Agreement, then except as may be expressly
provided in an individual agreement between Executive and the Corporation,
Executive shall not be entitled to participate in and receive a severance
benefit under any other severance plan maintained by the Corporation for
executive officers or employees generally. The foregoing limitations shall
not be construed to prevent Executive from receiving a payment from the
Corporation or a Divested Entity under any separate agreement, contract or
arrangement.
C. Overpayments and Underpayments. All determinations required to
be made under Paragraph 6.A shall be made by the Corporation which shall
provide detailed supporting calculations to the Executive no later than the
Termination Date. As a result of uncertainty in the application of Section
280G of the Code at the time of the initial determination hereunder, it is
possible that payments will have been made by the Corporation which should not
have been made ("Overpayment") or that additional payments, which will not
have been made by the Corporation could have been made ("Underpayment"), in
each case, consistent with the calculations required to be made hereunder. In
the event that an Overpayment has been made, any such Overpayment shall be
treated for all purposes as a loan to the Executive which the Executive shall
repay to the Corporation together with interest at the applicable Federal rate
provided for in Section 7872(f)(2) of the Code; provided, however, that no
amount shall be payable by the Executive to the Corporation (or if paid by the
Executive to the Corporation shall be returned to the Executive) if and to the
extent such payment would not reduce the amount which is subject to taxation
under Section 4999 of the Code. In the event that an Underpayment has
occurred, any such Underpayment shall be promptly paid by the Corporation to
or for the benefit of the Executive together with interest at the applicable
Federal rate provided for in Section 7872(f)(2) of the Code.
6. General.
A. Indemnification. If litigation shall be brought to enforce or
interpret any provision contained herein, the Corporation, to the fullest
extent permitted by applicable law, hereby agrees to indemnify Executive for
reasonable attorneys' fees and disbursements incurred by Executive in such
litigation (including any appellate proceedings, and regardless of whether or
not such litigation is ultimately resolved in favor of Executive), and hereby
agrees to pay pre-judgement interest on any money judgement obtained by
Executive, calculated at the "prime rate" of interest announced by Morgan
Guaranty Trust Company of New York, New York as being in effect from time to
time, from the date that payment(s) to Executive should have been made in
accordance with the provisions of this Agreement.
B. Payment Obligations Absolute. The Corporation's obligation to
pay Executive the compensation and other amounts specified herein and to make
the arrangements provided herein shall be absolute and unconditional and shall
not be affected by any circumstances, including, without limitation, any
set-off, counterclaim, recoupment, defense or other right which the
Corporation may have against Executive or anyone else, the completion of any
Change of Control or Divestiture or the employment of Executive by any
Divested Entity. All amounts payable by the Corporation hereunder shall be
paid without notice or demand. Each and every payment made hereunder by the
Corporation shall be final and the Corporation will not seek to recover all or
any part of such payment from Executive or from whoever may be entitled
thereto, for any reason whatsoever, excluding manifest error. Executive shall
not be required to mitigate the amount of any payment provided for in this
Agreement by seeking other employment or otherwise, nor shall the amount of
any payment provided for in this Agreement be reduced by any compensation
earned by Executive as a result of employment by another employer, by
retirement benefits, by offset against any amount claimed to be owing by
Executive to the Corporation, or otherwise.
C. Successors. This Agreement shall be binding upon and inure to
the benefit of Executive and Executive's estate, and the Corporation and any
successor of the Corporation, but neither this Agreement nor any rights
arising hereunder may be assigned or pledged by Executive. In the event of a
Divestiture, the Corporation shall cause each Divested Entity to (i) execute
and deliver to Executive a written instrument, in form reasonably satisfactory
to Executive, whereby such Divested Entity shall assume, jointly and severally
with the Corporation, the obligations of the Corporation hereunder, provided
that no such assumption shall operate to release the Corporation from any
liability hereunder, and (ii) deliver to Executive an executive stability
agreement between the Divested Entity and the Executive, substantially
identical to this Agreement, duly authorized by the Board of Directors or
other governing body of such Divested Entity and executed by a duly authorized
officer thereof, provided that no such executive stability agreement between
the Divested Entity and the Executive shall require the payment of a severance
payment or other benefits (a) in the event of a termination of employment
following a further Divestiture transaction involving the Divested Entity, or
(b) with respect to any termination of employment if Executive has previously
received a severance payment pursuant to this Agreement as a result of such
termination.
D. Severability. Any provision in this Agreement which is
prohibited or unenforceable in any jurisdiction shall, as to such
jurisdiction, be ineffective only to the extent of such prohibition or
unenforceability without invalidating or affecting the remaining provisions
hereof, and any such prohibition or unenforceability in any jurisdiction shall
not invalidate or render unenforceable such provision in any other
jurisdiction.
E. Controlling Law and Interpretation. This Agreement shall in
all respects be governed by, and construed in accordance with, the laws of the
State of Texas. In the event that the interpretation or application of any
provision of this Agreement is determined in any proceeding to be ambiguous or
uncertain, the parties expressly intend and agree that such ambiguity or
uncertainty shall be resolved in favor of Executive.
IN WITNESS WHEREOF, the parties have executed this Agreement effective as
of the date set forth above.
/s/ Terrence E. Ciliske
Terrence E. Ciliske
VALERO ENERGY CORPORATION
By: /s/ E. C. Benninger
Edward C. Benninger
President
MANAGEMENT STABILITY AGREEMENT
AGREEMENT dated as of November 1, 1996 ("Agreement") between Valero
Energy Corporation, a Delaware corporation (the "Corporation"), and Peter A.
Fasullo (the "Executive"),
WITNESSETH:
WHEREAS, for the reasons more fully set forth in the minutes of the
Executive Committee (the "Committee") of the Board of Directors of the
Corporation, the Committee has approved the execution, delivery and
performance by the Corporation of management retention agreements,
substantially in the form of this Agreement, between the Corporation and
certain officers and other key executives of the Corporation and its
subsidiaries, including the Executive;
WHEREAS, should the Corporation become involved in any Change of Control
or Divestiture (each as hereinafter defined) situation, in addition to
Executive's regular duties, Executive may be called upon to assist in the
assessment of any third-party or internal proposals, advise management and the
Board as to whether such proposals would be in the best interests of the
Corporation and its shareholders, participate in successfully completing such
transactions and to take such other actions as the Board might determine to be
appropriate;
NOW, THEREFORE, to assure that the Corporation will have the continued
dedication of the Executive, and the availability of Executive's advice and
counsel as to the best interests of the Corporation and its stockholders,
notwithstanding the possibility, threat, or occurrence of a Change of Control
or Divestiture, and to induce the Executive to remain in the employ of the
Corporation and/or its designated subsidiaries, and for other good and
valuable consideration, Corporation and Executive agree as follows:
1. Services During Certain Events.
A. In the event any Person (as defined in Paragraph 2.E) (i)
begins a tender or exchange offer for equity securities of the Company, (ii)
or publicly announces an intention to take or consider taking any actions
which, if consummated, would constitute a Change of Control, (iii) circulates
a stockholder consent or solicits a proxy for the election of directors, (iv)
enters into an agreement with the Corporation, the consummation of which would
result in a Change of Control, (v) becomes an "Acquiring Person" under the
Rights Agreement, dated October 25, 1995, between the Corporation and Harris
Trust and Savings Bank, as Rights Agent, or (vi) publicly takes other steps
which, if consummated, would constitute a Change of Control, Executive agrees
that he or she will not voluntarily leave the employ of the Corporation or its
subsidiaries, and will render the services contemplated in the recitals to
this Agreement and in any employment agreement between the Corporation and
Executive, until the earlier of (u) such date as such Person has abandoned or
terminated efforts to effect a Change of Control, (v) sixty days following the
date on which a Change of Control has occurred or (w) thirty days following
written notice to the Corporation of such termination of employment. In the
event the Corporation determines to undertake any transaction or transactions
which, if consummated, would constitute a Divestiture, Executive agrees that
he or she will not voluntarily leave the employ of the Corporation or its
subsidiaries and will continue to render the services recited in the preambles
to this Agreement and in any employment agreement between the Corporation and
the Executive until the earlier of (x) such date as the Corporation has either
abandoned or terminated its efforts to effect such Divestiture, or (y) sixty
days following the date on which such Divestiture has occurred, or (z) thirty
days following written notice to the Corporation of such termination of
employment.
B. The provisions of Paragraph 1.A notwithstanding, Executive may
terminate employment for any reason prior to the occurrence of an event
specified in Paragraph 1.A(i)-(vi), or a determination by the Corporation to
undertake a Divestiture, as the case may be, and, following the occurrence of
any such event or a determination by the Corporation to undertake a
Divestiture, as the case may be, may terminate employment through retirement,
total and permanent disability, or for Good Reason. For purposes of this
Agreement, "Good Reason" means (i) the occurrence of any event or circumstance
which, if occurring following a Change in Control or Divestiture, would render
Executive's termination of employment "involuntary" (as defined in Paragraph
2.H), or (ii) a breach (other than an insubstantial failure which is remedied
by the Corporation promptly after receipt of notice thereof from the
Executive) by the Corporation of any provision of this Agreement.
2. Termination After Change of Control. In the event that, within two
years following the occurrence of a Change of Control of the Corporation or a
Divestiture, Executive's employment is terminated so that Executive is no
longer employed with any of the Corporation or its then remaining
subsidiaries, or a Divested Entity or its subsidiaries, then, except as is
otherwise provided in Paragraph 2.D below, Executive shall be entitled to
receive the following payments and other benefits:
A. Lump Sum Cash Payment. On or before Executive's Termination
Date, the Corporation will pay to Executive (in addition to any base salary,
bonuses, incentive compensation, expenses, vacation, benefits, benefit plan
distributions and other amounts which would otherwise normally be payable to
Executive, to the extent not theretofore paid), as compensation for services
rendered to the Corporation, a lump sum cash amount (subject to any applicable
payroll or other taxes required to be withheld) equal to two (2) times the sum
of (i) Executive's highest annual rate of compensation in effect at any time
during the 36-month period ending on the Termination Date and (ii) one-third
of the aggregate of all annual incentive bonus amounts, if any, paid or
payable to Executive under the Corporation's Executive Incentive Bonus Plan
with respect to the 36-month period ending on the Termination Date. As used
herein, "annual rate of compensation" shall mean the aggregate regular base
salary paid or payable to Executive by the Corporation with respect to any
period of 12 consecutive months. In the event there are fewer than 24 months
remaining from the Termination Date to Executive's normal retirement date at
age 65, the amount otherwise payable hereunder shall be reduced as follows:
the amount otherwise calculated under this Paragraph 2.A will be multiplied by
a fraction, the numerator of which is the number of days remaining to
Executive's normal retirement date and the denominator of which is 720, and
the resulting product shall be the amount payable to Executive under this
Paragraph 2.A.
B. Other Benefits.
(i) Insurance or Other Special Benefits. For two years (the
"Applicable Period") after the Termination Date, or such longer period as may
be provided by the terms of the appropriate plan, program, practice or policy,
the Corporation shall continue benefits to Executive and/or Executive's family
at least equal to those which would have been provided to them under the
welfare benefit plans, practices, policies and programs provided by the
Corporation (including, without limitation, medical, prescription, dental,
disability, employee life, group life, accidental death and travel accident
insurance plans and programs) immediately prior to such termination, to the
extent applicable generally to other peer executives of the Corporation and
its affiliated companies, if the Executive's employment had not been
terminated; provided, however, that in no event shall the continued benefits
provided hereunder be less favorable, in the aggregate, than those provided
under the most favorable of such plans, practices, policies and programs in
effect for Executive at any time during the 120-day period immediately
preceding the Termination Date or, if more favorable to Executive, those
provided generally at any time after the Termination Date to other peer
executives of the Corporation, its affiliated companies or their successors.
To the extent that, during the Applicable Period, or any portion thereof, the
benefits required to be provided under this Paragraph 2.B are also required to
be provided by the Corporation under applicable provisions of the Consolidated
Omnibus Budget Reconciliation Act of 1985 ("COBRA"), the Corporation may
discharge such portion of its obligation hereunder by providing such
COBRA-mandated benefits, but at the Corporation's sole cost and expense. If
Executive is reemployed by another employer and is eligible to receive medical
or other welfare benefits under another employer-provided plan, the medical
and other welfare benefits described herein shall be secondary to those
provided under such other plan during such applicable period of eligibility.
(ii) Relocation Assistance. Should Executive move his or her
primary residence in order to pursue other business or employment
opportunities within two years following the Termination Date, Executive will
be reimbursed for any expenses incurred in that relocation (including taxes
payable on such reimbursement and on such gross-up payment) which are not
reimbursed by another employer. Such expenses for which Executive shall be
reimbursed shall include, without limitation, costs of packing, moving and
unpacking household goods; reasonable expenses of travel, meals and lodging in
moving to the new location; reasonable costs of temporary living expenses at
the new location for up to 60 days; and any real estate commissions payable by
Executive in selling Executive's existing home or acquiring a new home.
Benefits under this provision will also include the assistance in selling
Executive's home which was customarily provided by the Corporation to
transferred executives prior to the Change of Control, including acquisition
of such home by the Corporation at an appraised fair market value.
(iii) Thrift and Other Plans. The Executive's
participation in the Corporation's Thrift Plan, Employee Stock Ownership
Plans, retirement plan for employees generally ("Pension Plan") or other
applicable plans of the Corporation (or, if applicable, such similar plans as
the Divested Entity may establish) shall not continue after the Termination
Date. Any terminating distributions and/or vested rights under such plans
shall be governed by the terms of the respective plans.
C. The foregoing provisions of this Paragraph 2 notwithstanding,
Executive shall not be entitled to receive, and the Corporation and, if
applicable, the Divested Entity shall not be obligated to make, the payments
and other benefits specified in Paragraphs 2.A and 2.B above if Executive's
termination employment occurs under any one of more of the following
circumstances:
(i) Executive's termination of employment is "voluntary" (as
hereinafter defined);
(ii) Executive is terminated by his employer company for
"cause" (as hereinafter defined);
(iii) Executive's termination is a consequence of death or
total and permanent disability; or
(iv) Executive retires under the Corporation's Pension Plan
(or, if Executive is then an employee of a Divested Entity or its
subsidiaries, under such entity's similar tax-qualified pension plan).
D. Definition of Termination Date. For the purpose of this
Agreement, "Termination Date" shall mean: (i) in the case of a Change of
Control, the Executive's last day of employment with the Corporation or any of
its subsidiaries, and (ii) in the case of a Divestiture, the Executive's last
day of employment with any of the Corporation or any of its subsidiaries, or
with a Divested Entity or any of its subsidiaries, as the case may be.
E. Definition of Change of Control. For the purpose of this
Agreement, a "Change of Control" shall mean:
(i) The acquisition by any individual, entity or group (within
the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of
1934, as amended (the "Exchange Act")) (a "Person") of beneficial ownership
(within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20%
or more of either (a) the then outstanding shares of common stock of the
Corporation (the "Outstanding Corporation Common Stock") or (b) the combined
voting power of the then outstanding voting securities of the Corporation
entitled to vote generally in the election of directors (the "Outstanding
Corporation Voting Securities"); provided, however, that for purposes of this
subparagraph (i), the following acquisitions shall not constitute a Change of
Control: (a) any acquisition directly from the Corporation, (b) any
acquisition by the Corporation, (c) any acquisition by any employee benefit
plan (or related trust) sponsored or maintained by the Corporation or any
corporation or other entity controlled by the Corporation or (d) any
acquisition by any corporation or other entity pursuant to a transaction which
complies with clauses (a), (b) and (c) of subparagraph (iii) of this Paragraph
2.E; or
(ii) Individuals who, as of the date hereof, constitute the
Board of Directors of the Corporation (the "Incumbent Board") cease for any
reason to constitute at least a majority of the Board; provided, however, that
any individual becoming a director subsequent to the date hereof whose
election, or nomination for election by the Corporation's shareholders, was
approved by a vote of at least a majority of the directors then comprising the
Incumbent Board shall be considered as though such individual were a member of
the Incumbent Board, but excluding, for this purpose, any such individual
whose initial assumption of office occurs as a result of an actual or
threatened election contest with respect to the election or removal of
directors or other actual or threatened solicitation of proxies or consents by
or on behalf of a Person other than the Board; or
(iii) Consummation of a reorganization, merger or
consolidation, or sale, transfer, or other disposition of all or substantially
all of the assets of the Corporation (a "Business Combination"), in each case,
unless, following such Business Combination, (a) all or substantially all of
the individuals and entities who were the beneficial owners, respectively, of
the Outstanding Corporation Common Stock and Outstanding Corporation Voting
Securities immediately prior to such Business Combination beneficially own,
directly or indirectly, more than 50% of, respectively, the then outstanding
shares of common stock and the combined voting power of the then outstanding
voting securities entitled to vote generally in the election of directors, as
the case may be, of the corporation or other entity surviving or resulting
from such Business Combination (including, without limitation, a corporation
or other entity which as a result of such transaction owns the Corporation or
all or substantially all of the Corporation's assets either directly or
through one or more subsidiaries) in substantially the same proportions as
their ownership immediately prior to such Business Combination of the
Outstanding Corporation Common Stock and Outstanding Corporation Voting
Securities, as the case may be, (b) no Person (excluding any corporation or
other entity surviving or resulting from such Business Combination or any
employee benefit plan (or related trust) of the Corporation or such
corporation or other entity surviving or resulting from such Business
Combination) beneficially owns, directly or indirectly, 20% or more of,
respectively, the then outstanding shares of common stock of the corporation
or other entity surviving or resulting from such Business Combination or the
combined voting power of the then outstanding voting securities of such
corporation or other entity except to the extent that such ownership existed
prior to the Business Combination and (c) at least a majority of the members
of the board of directors or other governing body of the corporation or other
entity surviving or resulting from such Business Combination were members of
the Incumbent Board at the time of the execution of the initial agreement or
of the action of the Board, providing for such Business Combination; or
(iv) Approval by the shareholders of the Corporation of a
complete liquidation or dissolution of the Corporation; or
(v) any other event determined by the Board of Directors or
the Committee to constitute a "Change of Control" hereunder.
F. Definitions of Divestiture and Divested Entity. For purposes
of this Agreement, the term "Divestiture" shall mean and include any
transaction or series of transactions (including, without limitation, any
spin-off, split-off, merger or other business combination, or sale, lease,
capital contribution, contractual dedication or other transfer or disposition
of securities or assets) pursuant to which all or a majority of either (i) the
assets ("Natural Gas Assets") constituting the natural gas and natural gas
liquids business as now conducted by Valero Natural Gas Company and its
subsidiary corporations and partnerships, or (ii) the assets ("Refining
Assets") constituting the refining and marketing business as now conducted by
Valero Refining and Marketing Company and its subsidiary corporations, are
directly or indirectly owned or controlled by one or more corporations,
partnerships, limited liability companies, joint ventures or other Persons
which are not wholly owned subsidiaries of the Corporation (referred to herein
as a "Divested Entity"). As used herein, the term "control" (and with
correlative meaning, the terms "controlled," "controlling" and "controlled
by") shall mean the possession, directly or indirectly, of the power to
direct, cause the direction of or influence the management and policies of a
Person, whether through the ownership of voting securities, by contract or
otherwise.
G. Definition of "cause". As used herein, "cause" shall mean (i)
Executive's conviction of a crime under federal or state law (excluding a
misdemeanor offense not involving moral turpitude), or (ii) Executive's gross
and deliberate disregard of Executive's duties and responsibilities, as
reasonably determined by the Board of Directors of the Corporation (or, if
Executive becomes an employee of a Divested Entity, the Board of Directors of
such Divested Entity) after written notice of such failure and the failure or
refusal by Executive to correct such failure within 10 days from the date
notice is given, or (iii) the continued material impairment of Executive's
ability to fulfill his responsibilities as a result of alcoholism or drug
dependency after written notice of such material impairment and the failure to
correct such impairment with 45 days from the date notice is given or such
longer period as may be required under applicable law.
H. Definitions of "voluntary"/involuntary". In the event that
Executive ceases to be an employee of the Corporation, a Divested Entity or
their respective subsidiaries after (i) Executive's base salary is reduced to
an amount below the base salary pertaining immediately prior to the Change of
Control or Divestiture, as the case may be, or (ii) Executive's benefits (to
include, without limitation, medical, prescription, dental, disability,
employee life, group life, accidental death and travel accident insurance
plans and programs, vacation benefits, retirement benefits, participation in
stock option, restricted stock and other employee stock plans, and
participation in executive incentive bonus programs) are reduced so as not to
be at least substantially comparable with the benefits to which Executive was
entitled prior to the Change of Control or Divestiture, as the case may be, or
(iii) Executive is required to relocate to a new principal place of employment
under circumstances in which Executive would not be reimbursed for all
expenses reasonably incurred in such relocation (including taxes payable on
such reimbursement and on such gross-up payment; costs of packing, moving and
unpacking household goods; reasonable expenses of travel, meals and lodging in
moving to the new location; reasonable costs of temporary living expenses at
the new location; and assistance in selling Executive's home commensurate with
the assistance customarily provided by the Corporation to transferred
executives prior to the Change of Control or Divestiture, including
acquisition of such home by the Corporation at an appraised fair market
value), then such termination of employment shall be deemed for all purposes
of this Agreement to be "involuntary" and Executive shall be entitled to the
benefits specified in Paragraphs 2.A and 2.B. If the Executive's termination
of employment is not "involuntary," as defined above, and does not arise from
one or more of the circumstances itemized in Paragraph 2.C(ii) through (iv),
then such termination of employment is deemed to be "voluntary" for purposes
of this Agreement.
3. Acceleration of Options and Rights in Certain Events. Stock options
("options") and stock appreciation or similar rights ("rights"), if any,
granted to Executive by the Corporation under the Corporation's Stock Option
Plans No. 3, 4 and 5, and Executive Stock Incentive Plan (collectively the
"Plans") (or any other stock option or stock appreciation rights plan adopted
by the Corporation) and not previously exercised, canceled or otherwise
terminated will be exercisable in full for a period of 90 days, or if longer,
such period as is specified in such plan, such 90 day period to commence on
the earlier of (a) the date of the Change of Control of the Corporation or the
Divestiture or (b) on the date of approval by the Corporation's shareholders
of an agreement providing for a merger or other transaction in which the
Corporation will not remain an independent publicly owned corporation or a
consolidation, a sale, transfer or other disposition of all or substantially
all the assets of the Corporation or another transaction constituting a Change
of Control or Divestiture; provided however, that no such option or right
shall be exercisable after the expiration date of such option or right.
4. Removal of Restrictions on Stock Grants. Stock previously granted
to Executive by the Corporation as restricted stock or performance shares
under the Corporation's Restricted Stock Bonus and Incentive Stock Plan or
Executive Stock Incentive Plan (or any other similar stock plan adopted by the
Corporation) will have all restrictions removed on the earlier of (a) the date
of the Change of Control of the Corporation or the Divestiture, or (b) on the
date of approval by the Corporation's shareholders of an agreement providing
for a merger or other transaction in which the Corporation will not remain an
independent publicly owned corporation or a consolidation, a sale, transfer or
other disposition of all or substantially all the assets of the Corporation,
or another transaction constituting a Change of Control or a Divestiture;
provided, that, in the case of stock previously granted to Executive as
performance shares under the Corporation's Executive Stock Incentive Plan (or
any other similar stock plan adopted by the Corporation), the performance
period shall be deemed to have terminated on the earlier of the dates
specified in clauses (a) or (b) above, and the number of shares to which the
Executive is then entitled shall be determined in accordance with such plan.
5. Excess Amounts.
A. Excise Taxes. Anything in this Agreement to the contrary
notwithstanding, in the event any payment or distribution by the Corporation
to or for the benefit of Executive (whether paid or payable or distributed or
distributable pursuant to the terms of this Agreement or otherwise) (a
"Payment") would be subject to the excise tax imposed by Section 4999 of the
Internal Revenue Code of 1986, as amended (the "Code") (such excise tax,
including any interest or penalties incurred with respect thereto, being
referred to herein as the "Excise Tax"), then the lump-sum amount payable to
the Executive pursuant to Paragraph 2.A hereof shall be reduced to such amount
(the "Reduced Payment") but not below zero, such that the receipt of the
Executive of the Reduced Payment and all other payments and distributions
pursuant to this Agreement would not give rise to any Excise Tax.
B. No Duplication. Subject to the terms and conditions hereof, if
Executive has received the lump-sum payment and other benefits specified in
Paragraph 2 for one Change of Control or Divestiture event, Executive shall
not be entitled to receive a lump-sum payment or other such benefits under
this Agreement from the Corporation or a Divested Entity for any subsequent
Change of Control or Divestiture event. In addition, if Executive receives a
lump-sum payment under this Agreement, then except as may be expressly
provided in an individual agreement between Executive and the Corporation,
Executive shall not be entitled to participate in and receive a severance
benefit under any other severance plan maintained by the Corporation for
executive officers or employees generally. The foregoing limitations shall
not be construed to prevent Executive from receiving a payment from the
Corporation or a Divested Entity under any separate agreement, contract or
arrangement.
C. Overpayments and Underpayments. All determinations required to
be made under Paragraph 6.A shall be made by the Corporation which shall
provide detailed supporting calculations to the Executive no later than the
Termination Date. As a result of uncertainty in the application of Section
280G of the Code at the time of the initial determination hereunder, it is
possible that payments will have been made by the Corporation which should not
have been made ("Overpayment") or that additional payments, which will not
have been made by the Corporation could have been made ("Underpayment"), in
each case, consistent with the calculations required to be made hereunder. In
the event that an Overpayment has been made, any such Overpayment shall be
treated for all purposes as a loan to the Executive which the Executive shall
repay to the Corporation together with interest at the applicable Federal rate
provided for in Section 7872(f)(2) of the Code; provided, however, that no
amount shall be payable by the Executive to the Corporation (or if paid by the
Executive to the Corporation shall be returned to the Executive) if and to the
extent such payment would not reduce the amount which is subject to taxation
under Section 4999 of the Code. In the event that an Underpayment has
occurred, any such Underpayment shall be promptly paid by the Corporation to
or for the benefit of the Executive together with interest at the applicable
Federal rate provided for in Section 7872(f)(2) of the Code.
6. General.
A. Indemnification. If litigation shall be brought to enforce or
interpret any provision contained herein, the Corporation, to the fullest
extent permitted by applicable law, hereby agrees to indemnify Executive for
reasonable attorneys' fees and disbursements incurred by Executive in such
litigation (including any appellate proceedings, and regardless of whether or
not such litigation is ultimately resolved in favor of Executive), and hereby
agrees to pay pre-judgement interest on any money judgement obtained by
Executive, calculated at the "prime rate" of interest announced by Morgan
Guaranty Trust Company of New York, New York as being in effect from time to
time, from the date that payment(s) to Executive should have been made in
accordance with the provisions of this Agreement.
B. Payment Obligations Absolute. The Corporation's obligation to
pay Executive the compensation and other amounts specified herein and to make
the arrangements provided herein shall be absolute and unconditional and shall
not be affected by any circumstances, including, without limitation, any
set-off, counterclaim, recoupment, defense or other right which the
Corporation may have against Executive or anyone else, the completion of any
Change of Control or Divestiture or the employment of Executive by any
Divested Entity. All amounts payable by the Corporation hereunder shall be
paid without notice or demand. Each and every payment made hereunder by the
Corporation shall be final and the Corporation will not seek to recover all or
any part of such payment from Executive or from whoever may be entitled
thereto, for any reason whatsoever, excluding manifest error. Executive shall
not be required to mitigate the amount of any payment provided for in this
Agreement by seeking other employment or otherwise, nor shall the amount of
any payment provided for in this Agreement be reduced by any compensation
earned by Executive as a result of employment by another employer, by
retirement benefits, by offset against any amount claimed to be owing by
Executive to the Corporation, or otherwise.
C. Successors. This Agreement shall be binding upon and inure to
the benefit of Executive and Executive's estate, and the Corporation and any
successor of the Corporation, but neither this Agreement nor any rights
arising hereunder may be assigned or pledged by Executive. In the event of a
Divestiture, the Corporation shall cause each Divested Entity to (i) execute
and deliver to Executive a written instrument, in form reasonably satisfactory
to Executive, whereby such Divested Entity shall assume, jointly and severally
with the Corporation, the obligations of the Corporation hereunder, provided
that no such assumption shall operate to release the Corporation from any
liability hereunder, and (ii) deliver to Executive an executive stability
agreement between the Divested Entity and the Executive, substantially
identical to this Agreement, duly authorized by the Board of Directors or
other governing body of such Divested Entity and executed by a duly authorized
officer thereof, provided that no such executive stability agreement between
the Divested Entity and the Executive shall require the payment of a severance
payment or other benefits (a) in the event of a termination of employment
following a further Divestiture transaction involving the Divested Entity, or
(b) with respect to any termination of employment if Executive has previously
received a severance payment pursuant to this Agreement as a result of such
termination.
D. Severability. Any provision in this Agreement which is
prohibited or unenforceable in any jurisdiction shall, as to such
jurisdiction, be ineffective only to the extent of such prohibition or
unenforceability without invalidating or affecting the remaining provisions
hereof, and any such prohibition or unenforceability in any jurisdiction shall
not invalidate or render unenforceable such provision in any other
jurisdiction.
E. Controlling Law and Interpretation. This Agreement shall in
all respects be governed by, and construed in accordance with, the laws of the
State of Texas. In the event that the interpretation or application of any
provision of this Agreement is determined in any proceeding to be ambiguous or
uncertain, the parties expressly intend and agree that such ambiguity or
uncertainty shall be resolved in favor of Executive.
IN WITNESS WHEREOF, the parties have executed this Agreement effective as
of the date set forth above.
/s/ Peter A. Fasullo
Peter A. Fasullo
VALERO ENERGY CORPORATION
By: /s/ E. C. Benninger
Edward C. Benninger
President
MANAGEMENT STABILITY AGREEMENT
AGREEMENT dated as of November 1, 1996 ("Agreement") between Valero
Energy Corporation, a Delaware corporation (the "Corporation"), and Gregory C.
King (the "Executive"),
WITNESSETH:
WHEREAS, for the reasons more fully set forth in the minutes of the
Executive Committee (the "Committee") of the Board of Directors of the
Corporation, the Committee has approved the execution, delivery and
performance by the Corporation of management retention agreements,
substantially in the form of this Agreement, between the Corporation and
certain officers and other key executives of the Corporation and its
subsidiaries, including the Executive;
WHEREAS, should the Corporation become involved in any Change of Control
or Divestiture (each as hereinafter defined) situation, in addition to
Executive's regular duties, Executive may be called upon to assist in the
assessment of any third-party or internal proposals, advise management and the
Board as to whether such proposals would be in the best interests of the
Corporation and its shareholders, participate in successfully completing such
transactions and to take such other actions as the Board might determine to be
appropriate;
NOW, THEREFORE, to assure that the Corporation will have the continued
dedication of the Executive, and the availability of Executive's advice and
counsel as to the best interests of the Corporation and its stockholders,
notwithstanding the possibility, threat, or occurrence of a Change of Control
or Divestiture, and to induce the Executive to remain in the employ of the
Corporation and/or its designated subsidiaries, and for other good and
valuable consideration, Corporation and Executive agree as follows:
1. Services During Certain Events.
A. In the event any Person (as defined in Paragraph 2.E) (i)
begins a tender or exchange offer for equity securities of the Company, (ii)
or publicly announces an intention to take or consider taking any actions
which, if consummated, would constitute a Change of Control, (iii) circulates
a stockholder consent or solicits a proxy for the election of directors, (iv)
enters into an agreement with the Corporation, the consummation of which would
result in a Change of Control, (v) becomes an "Acquiring Person" under the
Rights Agreement, dated October 25, 1995, between the Corporation and Harris
Trust and Savings Bank, as Rights Agent, or (vi) publicly takes other steps
which, if consummated, would constitute a Change of Control, Executive agrees
that he or she will not voluntarily leave the employ of the Corporation or its
subsidiaries, and will render the services contemplated in the recitals to
this Agreement and in any employment agreement between the Corporation and
Executive, until the earlier of (u) such date as such Person has abandoned or
terminated efforts to effect a Change of Control, (v) sixty days following the
date on which a Change of Control has occurred or (w) thirty days following
written notice to the Corporation of such termination of employment. In the
event the Corporation determines to undertake any transaction or transactions
which, if consummated, would constitute a Divestiture, Executive agrees that
he or she will not voluntarily leave the employ of the Corporation or its
subsidiaries and will continue to render the services recited in the preambles
to this Agreement and in any employment agreement between the Corporation and
the Executive until the earlier of (x) such date as the Corporation has either
abandoned or terminated its efforts to effect such Divestiture, or (y) sixty
days following the date on which such Divestiture has occurred, or (z) thirty
days following written notice to the Corporation of such termination of
employment.
B. The provisions of Paragraph 1.A notwithstanding, Executive may
terminate employment for any reason prior to the occurrence of an event
specified in Paragraph 1.A(i)-(vi), or a determination by the Corporation to
undertake a Divestiture, as the case may be, and, following the occurrence of
any such event or a determination by the Corporation to undertake a
Divestiture, as the case may be, may terminate employment through retirement,
total and permanent disability, or for Good Reason. For purposes of this
Agreement, "Good Reason" means (i) the occurrence of any event or circumstance
which, if occurring following a Change in Control or Divestiture, would render
Executive's termination of employment "involuntary" (as defined in Paragraph
2.H), or (ii) a breach (other than an insubstantial failure which is remedied
by the Corporation promptly after receipt of notice thereof from the
Executive) by the Corporation of any provision of this Agreement.
2. Termination After Change of Control. In the event that, within two
years following the occurrence of a Change of Control of the Corporation or a
Divestiture, Executive's employment is terminated so that Executive is no
longer employed with any of the Corporation or its then remaining
subsidiaries, or a Divested Entity or its subsidiaries, then, except as is
otherwise provided in Paragraph 2.D below, Executive shall be entitled to
receive the following payment and other benefits:
A. Lump Sum Cash Payment. On or before Executive's Termination
Date, the Corporation will pay to Executive (in addition to any base salary,
bonuses, incentive compensation, expenses, vacation, benefits, benefit plan
distributions and other amounts which would otherwise normally be payable to
Executive, to the extent not theretofore paid), as compensation for services
rendered to the Corporation, a lump sum cash amount (subject to any applicable
payroll or other taxes required to be withheld) equal to two (2) times the
highest annual rate of compensation in effect at any time during the 36-month
period ending on the Termination Date. As used herein, "annual rate of
compensation" shall mean the aggregate regular base salary paid or payable to
Executive by the Corporation with respect to any period of 12 consecutive
months. In the event there are fewer than 24 months remaining from the
Termination Date to Executive's normal retirement date at age 65, the amount
otherwise payable hereunder shall be reduced as follows: the amount otherwise
calculated under this Paragraph 2.A will be multiplied by a fraction, the
numerator of which is the number of days remaining to Executive's normal
retirement date and the denominator of which is 720, and the resulting product
shall be the amount payable to Executive under this Paragraph 2.A.
B. Other Benefits.
(i) Insurance or Other Special Benefits. For two years (the
"Applicable Period") after the Termination Date, or such longer period as may
be provided by the terms of the appropriate plan, program, practice or policy,
the Corporation shall continue benefits to Executive and/or Executive's family
at least equal to those which would have been provided to them under the
welfare benefit plans, practices, policies and programs provided by the
Corporation (including, without limitation, medical, prescription, dental,
disability, employee life, group life, accidental death and travel accident
insurance plans and programs) immediately prior to such termination, to the
extent applicable generally to other peer executives of the Corporation and
its affiliated companies, if the Executive's employment had not been
terminated; provided, however, that in no event shall the continued benefits
provided hereunder be less favorable, in the aggregate, than those provided
under the most favorable of such plans, practices, policies and programs in
effect for Executive at any time during the 120-day period immediately
preceding the Termination Date or, if more favorable to Executive, those
provided generally at any time after the Termination Date to other peer
executives of the Corporation, its affiliated companies or their successors.
To the extent that, during the Applicable Period, or any portion thereof, the
benefits required to be provided under this Paragraph 2.B are also required to
be provided by the Corporation under applicable provisions of the Consolidated
Omnibus Budget Reconciliation Act of 1985 ("COBRA"), the Corporation may
discharge such portion of its obligation hereunder by providing such
COBRA-mandated benefits, but at the Corporation's sole cost and expense. If
Executive is reemployed by another employer and is eligible to receive medical
or other welfare benefits under another employer-provided plan, the medical
and other welfare benefits described herein shall be secondary to those
provided under such other plan during such applicable period of eligibility.
(ii) Thrift and Other Plans. The Executive's participation in
the Corporation's Thrift Plan, Employee Stock Ownership Plans, retirement plan
for employees generally ("Pension Plan") or other applicable plans of the
Corporation (or, if applicable, such similar plans as the Divested Entity may
establish) shall not continue after the Termination Date. Any terminating
distributions and/or vested rights under such plans shall be governed by the
terms of the respective plans.
C. The foregoing provisions of this Paragraph 2 notwithstanding,
Executive shall not be entitled to receive, and the Corporation and, if
applicable, the Divested Entity shall not be obligated to make, the payments
and other benefits specified in Paragraphs 2.A and 2.B above if Executive's
termination employment occurs under any one of more of the following
circumstances:
(i) Executive's termination of employment is "voluntary" (as
hereinafter defined);
(ii) Executive is terminated by his employer company for
"cause" (as hereinafter defined);
(iii) Executive's termination is a consequence of death or
total and permanent disability; or
(iv) Executive retires under the Corporation's Pension Plan
(or, if Executive is then an employee of a Divested Entity or its
subsidiaries, under such entity's similar tax-qualified pension plan).
D. Definition of Termination Date. For the purpose of this
Agreement, "Termination Date" shall mean: (i) in the case of a Change of
Control, the Executive's last day of employment with the Corporation or any of
its subsidiaries, and (ii) in the case of a Divestiture, the Executive's last
day of employment with any of the Corporation or any of its subsidiaries, or
with a Divested Entity or any of its subsidiaries, as the case may be.
E. Definition of Change of Control. For the purpose of this
Agreement, a "Change of Control" shall mean:
(i) The acquisition by any individual, entity or group (within
the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of
1934, as amended (the "Exchange Act")) (a "Person") of beneficial ownership
(within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20%
or more of either (a) the then outstanding shares of common stock of the
Corporation (the "Outstanding Corporation Common Stock") or (b) the combined
voting power of the then outstanding voting securities of the Corporation
entitled to vote generally in the election of directors (the "Outstanding
Corporation Voting Securities"); provided, however, that for purposes of this
subparagraph (i), the following acquisitions shall not constitute a Change of
Control: (a) any acquisition directly from the Corporation, (b) any
acquisition by the Corporation, (c) any acquisition by any employee benefit
plan (or related trust) sponsored or maintained by the Corporation or any
corporation or other entity controlled by the Corporation or (d) any
acquisition by any corporation or other entity pursuant to a transaction which
complies with clauses (a), (b) and (c) of subparagraph (iii) of this Paragraph
2.E; or
(ii) Individuals who, as of the date hereof, constitute the
Board of Directors of the Corporation (the "Incumbent Board") cease for any
reason to constitute at least a majority of the Board; provided, however, that
any individual becoming a director subsequent to the date hereof whose
election, or nomination for election by the Corporation's shareholders, was
approved by a vote of at least a majority of the directors then comprising the
Incumbent Board shall be considered as though such individual were a member of
the Incumbent Board, but excluding, for this purpose, any such individual
whose initial assumption of office occurs as a result of an actual or
threatened election contest with respect to the election or removal of
directors or other actual or threatened solicitation of proxies or consents by
or on behalf of a Person other than the Board; or
(iii) Consummation of a reorganization, merger or
consolidation, or sale, transfer, or other disposition of all or substantially
all of the assets of the Corporation (a "Business Combination"), in each case,
unless, following such Business Combination, (a) all or substantially all of
the individuals and entities who were the beneficial owners, respectively, of
the Outstanding Corporation Common Stock and Outstanding Corporation Voting
Securities immediately prior to such Business Combination beneficially own,
directly or indirectly, more than 50% of, respectively, the then outstanding
shares of common stock and the combined voting power of the then outstanding
voting securities entitled to vote generally in the election of directors, as
the case may be, of the corporation or other entity surviving or resulting
from such Business Combination (including, without limitation, a corporation
or other entity which as a result of such transaction owns the Corporation or
all or substantially all of the Corporation's assets either directly or
through one or more subsidiaries) in substantially the same proportions as
their ownership immediately prior to such Business Combination of the
Outstanding Corporation Common Stock and Outstanding Corporation Voting
Securities, as the case may be, (b) no Person (excluding any corporation or
other entity surviving or resulting from such Business Combination or any
employee benefit plan (or related trust) of the Corporation or such
corporation or other entity surviving or resulting from such Business
Combination) beneficially owns, directly or indirectly, 20% or more of,
respectively, the then outstanding shares of common stock of the corporation
or other entity surviving or resulting from such Business Combination or the
combined voting power of the then outstanding voting securities of such
corporation or other entity except to the extent that such ownership existed
prior to the Business Combination and (c) at least a majority of the members
of the board of directors or other governing body of the corporation or other
entity surviving or resulting from such Business Combination were members of
the Incumbent Board at the time of the execution of the initial agreement or
of the action of the Board, providing for such Business Combination; or
(iv) Approval by the shareholders of the Corporation of a
complete liquidation or dissolution of the Corporation; or
(v) any other event determined by the Board of Directors or
the Committee to constitute a "Change of Control" hereunder.
F. Definitions of Divestiture and Divested Entity. For purposes
of this Agreement, the term "Divestiture" shall mean and include any
transaction or series of transactions (including, without limitation, any
spin-off, split-off, merger or other business combination, or sale, lease,
capital contribution, contractual dedication or other transfer or disposition
of securities or assets) pursuant to which all or a majority of either (i) the
assets ("Natural Gas Assets") constituting the natural gas and natural gas
liquids business as now conducted by Valero Natural Gas Company and its
subsidiary corporations and partnerships, or (ii) the assets ("Refining
Assets") constituting the refining and marketing business as now conducted by
Valero Refining and Marketing Company and its subsidiary corporations, are
directly or indirectly owned or controlled by one or more corporations,
partnerships, limited liability companies, joint ventures or other Persons
which are not wholly owned subsidiaries of the Corporation (referred to herein
as a "Divested Entity"). As used herein, the term "control" (and with
correlative meaning, the terms "controlled," "controlling" and "controlled
by") shall mean the possession, directly or indirectly, of the power to
direct, cause the direction of or influence the management and policies of a
Person, whether through the ownership of voting securities, by contract or
otherwise.
G. Definition of "cause". As used herein, "cause" shall mean (i)
Executive's conviction of a crime under federal or state law (excluding a
misdemeanor offense not involving moral turpitude), or (ii) Executive's gross
and deliberate disregard of Executive's duties and responsibilities, as
reasonably determined by the Board of Directors of the Corporation (or, if
Executive becomes an employee of a Divested Entity, the Board of Directors of
such Divested Entity) after written notice of such failure and the failure or
refusal by Executive to correct such failure within 10 days from the date
notice is given, or (iii) the continued material impairment of Executive's
ability to fulfill his responsibilities as a result of alcoholism or drug
dependency after written notice of such material impairment and the failure to
correct such impairment with 45 days from the date notice is given or such
longer period as may be required under applicable law.
H. Definitions of "voluntary"/involuntary". In the event that
Executive ceases to be an employee of the Corporation, a Divested Entity or
their respective subsidiaries after (i) Executive's base salary is reduced to
an amount below the base salary pertaining immediately prior to the Change of
Control or Divestiture, as the case may be, or (iii) Executive's benefits (to
include, without limitation, medical, prescription, dental, disability,
employee life, group life, accidental death and travel accident insurance
plans and programs, vacation benefits, retirement benefits, participation in
stock option, restricted stock and other employee stock plans, and
participation in executive incentive bonus programs) are reduced so as not to
be at least substantially comparable with the benefits to which Executive was
entitled prior to the Change of Control or Divestiture, as the case may be, or
(iii) Executive is required to relocate to a new principal place of employment
under circumstances in which Executive would not be reimbursed for all
expenses reasonably incurred in such relocation (including taxes payable on
such reimbursement and on such gross-up payment; costs of packing, moving and
unpacking household goods; reasonable expenses of travel, meals and lodging in
moving to the new location; reasonable costs of temporary living expenses at
the new location; and assistance in selling Executive's home commensurate with
the assistance customarily provided by the Corporation to transferred
executives prior to the Change of Control or Divestiture, including
acquisition of such home by the Corporation at an appraised fair market
value), then such termination of employment shall be deemed for all purposes
of this Agreement to be "involuntary" and Executive shall be entitled to the
benefits specified in Paragraphs 2.A and 2.B. If the Executive's termination
of employment is not "involuntary," as defined above, and does not arise from
one or more of the circumstances itemized in Paragraph 2.C(ii) through (iv),
then such termination of employment is deemed to be "voluntary" for purposes
of this Agreement.
3. Acceleration of Options and Rights in Certain Events. Stock options
("options") and stock appreciation or similar rights ("rights"), if any,
granted to Executive by the Corporation under the Corporation's Stock Option
Plans No. 3, 4 and 5, and Executive Stock Incentive Plan (collectively the
"Plans") (or any other stock option or stock appreciation rights plan adopted
by the Corporation) and not previously exercised, canceled or otherwise
terminated will be exercisable in full for a period of 90 days, or if longer,
such period as is specified in such plan, such 90 day period to commence on
the earlier of (a) the date of the Change of Control of the Corporation or the
Divestiture or (b) on the date of approval by the Corporation's shareholders
of an agreement providing for a merger or other transaction in which the
Corporation will not remain an independent publicly owned corporation or a
consolidation, a sale, transfer or other disposition of all or substantially
all the assets of the Corporation or another transaction constituting a Change
of Control or Divestiture; provided however, that no such option or right
shall be exercisable after the expiration date of such option or right.
4. Removal of Restrictions on Stock Grants. Stock previously granted
to Executive by the Corporation as restricted stock or performance shares
under the Corporation's Restricted Stock Bonus and Incentive Stock Plan or
Executive Stock Incentive Plan (or any other similar stock plan adopted by the
Corporation) will have all restrictions removed on the earlier of (a) the date
of the Change of Control of the Corporation or the Divestiture, or (b) on the
date of approval by the Corporation's shareholders of an agreement providing
for a merger or other transaction in which the Corporation will not remain an
independent publicly owned corporation or a consolidation, a sale, transfer or
other disposition of all or substantially all the assets of the Corporation,
or another transaction constituting a Change of Control or a Divestiture;
provided, that, in the case of stock previously granted to Executive as
performance shares under the Corporation's Executive Stock Incentive Plan (or
any other similar stock plan adopted by the Corporation), the performance
period shall be deemed to have terminated on the earlier of the dates
specified in clauses (a) or (b) above, and the number of shares to which the
Executive is then entitled shall be determined in accordance with such plan.
5. Excess Amounts.
A. Excise Taxes. Anything in this Agreement to the contrary
notwithstanding, in the event any payment or distribution by the Corporation
to or for the benefit of Executive (whether paid or payable or distributed or
distributable pursuant to the terms of this Agreement or otherwise) (a
"Payment") would be subject to the excise tax imposed by Section 4999 of the
Internal Revenue Code of 1986, as amended (the "Code") (such excise tax,
including any interest or penalties incurred with respect thereto, being
referred to herein as the "Excise Tax"), then the lump-sum amount payable to
the Executive pursuant to Paragraph 2.A hereof shall be reduced to such amount
(the "Reduced Payment") but not below zero, such that the receipt of the
Executive of the Reduced Payment and all other payments and distributions
pursuant to this Agreement would not give rise to any Excise Tax.
B. No Duplication. Subject to the terms and conditions hereof, if
Executive has received the lump-sum payment and other benefits specified in
Paragraph 2 for one Change of Control or Divestiture event, Executive shall
not be entitled to receive a lump-sum payment or other such benefits under
this Agreement from the Corporation or a Divested Entity for any subsequent
Change of Control or Divestiture event. In addition, if Executive receives a
lump-sum payment under this Agreement, then except as may be expressly
provided in an individual agreement between Executive and the Corporation,
Executive shall not be entitled to participate in and receive a severance
benefit under any other severance plan maintained by the Corporation for
executive officers or employees generally. The foregoing limitations shall
not be construed to prevent Executive from receiving a payment from the
Corporation or a Divested Entity under any separate agreement, contract or
arrangement.
C. Overpayments and Underpayments. All determinations required to
be made under Paragraph 6.A shall be made by the Corporation which shall
provide detailed supporting calculations to the Executive no later than the
Termination Date. As a result of uncertainty in the application of Section
280G of the Code at the time of the initial determination hereunder, it is
possible that payments will have been made by the Corporation which should not
have been made ("Overpayment") or that additional payments, which will not
have been made by the Corporation could have been made ("Underpayment"), in
each case, consistent with the calculations required to be made hereunder. In
the event that an Overpayment has been made, any such Overpayment shall be
treated for all purposes as a loan to the Executive which the Executive shall
repay to the Corporation together with interest at the applicable Federal rate
provided for in Section 7872(f)(2) of the Code; provided, however, that no
amount shall be payable by the Executive to the Corporation (or if paid by the
Executive to the Corporation shall be returned to the Executive) if and to the
extent such payment would not reduce the amount which is subject to taxation
under Section 4999 of the Code. In the event that an Underpayment has
occurred, any such Underpayment shall be promptly paid by the Corporation to
or for the benefit of the Executive together with interest at the applicable
Federal rate provided for in Section 7872(f)(2) of the Code.
6. General.
A. Indemnification. If litigation shall be brought to enforce or
interpret any provision contained herein, the Corporation, to the fullest
extent permitted by applicable law, hereby agrees to indemnify Executive for
reasonable attorneys' fees and disbursements incurred by Executive in such
litigation (including any appellate proceedings, and regardless of whether or
not such litigation is ultimately resolved in favor of Executive), and hereby
agrees to pay pre-judgement interest on any money judgement obtained by
Executive, calculated at the "prime rate" of interest announced by Morgan
Guaranty Trust Company of New York, New York as being in effect from time to
time, from the date that payment(s) to Executive should have been made in
accordance with the provisions of this Agreement.
B. Payment Obligations Absolute. The Corporation's obligation to
pay Executive the compensation and other amounts specified herein and to make
the arrangements provided herein shall be absolute and unconditional and shall
not be affected by any circumstances, including, without limitation, any
set-off, counterclaim, recoupment, defense or other right which the
Corporation may have against Executive or anyone else, the completion of any
Change of Control or Divestiture or the employment of Executive by any
Divested Entity. All amounts payable by the Corporation hereunder shall be
paid without notice or demand. Each and every payment made hereunder by the
Corporation shall be final and the Corporation will not seek to recover all or
any part of such payment from Executive or from whoever may be entitled
thereto, for any reason whatsoever, excluding manifest error. Executive shall
not be required to mitigate the amount of any payment provided for in this
Agreement by seeking other employment or otherwise, nor shall the amount of
any payment provided for in this Agreement be reduced by any compensation
earned by Executive as a result of employment by another employer, by
retirement benefits, by offset against any amount claimed to be owing by
Executive to the Corporation, or otherwise.
C. Successors. This Agreement shall be binding upon and inure to
the benefit of Executive and Executive's estate, and the Corporation and any
successor of the Corporation, but neither this Agreement nor any rights
arising hereunder may be assigned or pledged by Executive. In the event of a
Divestiture, the Corporation shall cause each Divested Entity to (i) execute
and deliver to Executive a written instrument, in form reasonably satisfactory
to Executive, whereby such Divested Entity shall assume, jointly and severally
with the Corporation, the obligations of the Corporation hereunder, provided
that no such assumption shall operate to release the Corporation from any
liability hereunder, and (ii) deliver to Executive an executive stability
agreement between the Divested Entity and the Executive, substantially
identical to this Agreement, duly authorized by the Board of Directors or
other governing body of such Divested Entity and executed by a duly authorized
officer thereof, provided that no such executive stability agreement between
the Divested Entity and the Executive shall require the payment of a severance
payment or other benefits (a) in the event of a termination of employment
following a further Divestiture transaction involving the Divested Entity, or
(b) with respect to any termination of employment if Executive has previously
received a severance payment pursuant to this Agreement as a result of such
termination.
D. Severability. Any provision in this Agreement which is
prohibited or unenforceable in any jurisdiction shall, as to such
jurisdiction, be ineffective only to the extent of such prohibition or
unenforceability without invalidating or affecting the remaining provisions
hereof, and any such prohibition or unenforceability in any jurisdiction shall
not invalidate or render unenforceable such provision in any other
jurisdiction.
E. Controlling Law and Interpretation. This Agreement shall in
all respects be governed by, and construed in accordance with, the laws of the
State of Texas. In the event that the interpretation or application of any
provision of this Agreement is determined in any proceeding to be ambiguous or
uncertain, the parties expressly intend and agree that such ambiguity or
uncertainty shall be resolved in favor of Executive.
IN WITNESS WHEREOF, the parties have executed this Agreement effective as
of the date set forth above.
/s/ Gregory C. King
Gregory C. King
VALERO ENERGY CORPORATION
By: /s/ E. C. Benninger
Edward C. Benninger
President
WAIVER AND AGREEMENT
This WAIVER AND AGREEMENT ("Waiver"), dated effective as of the 21st day
of November, 1996, by and between Valero Energy Corporation, a Delaware
corporation (the "Corporation"), Valero Refining and Marketing Company, a
Delaware corporation ("VRMC") and William E. Greehey ("Executive"), Witnesseth
That:
WHEREAS, the Corporation and Executive are parties to that certain
Executive Severance Agreement, dated December 15, 1982 (the "Agreement"); and
WHEREAS, the Corporation anticipates that it may solicit or receive
proposals involving a transaction (the "Spin-off/Merger") in which (i) all or
substantially all of the petroleum refining and marketing business of the
Corporation currently conducted through VRMC is distributed to the
stockholders of the Company through a stock dividend, spin-off, split-off or
similar distribution, so that, after giving effect to such distribution, such
business is conducted through VRMC (or another subsidiary of the Corporation
then conducting such business), as a separate, publicly owned entity, and (ii)
the Corporation, and/or all or substantially all of the natural gas and
natural gas liquids businesses of the Corporation currently conducted through
Valero Natural Gas Company ("VNGC"), is merged with or into another entity so
that, after giving effect to such merger, the Corporation may no longer be a
separate, publicly owned entity and the persons who were directors of the
Corporation immediately prior to the Spin-off/Merger may cease to constitute a
majority of the Board of Directors of the Corporation; and
WHEREAS, the Corporation has requested that Executive enter into this
Waiver to clarify the treatment of a Spin-off/Merger under the Agreement;
NOW THEREFORE, in consideration of $10.00 in hand paid to Executive, and
other good and valuable consideration, the receipt and sufficiency of which
are hereby mutually acknowledged, the Corporation and Executive agree as
follows:
1. No Change of Control. If, during the period when the Agreement is
otherwise in effect, the Corporation enters into a merger or other agreement
providing for the Company to undertake a transaction substantially similar to
the Spin-off/Merger, VRMC (or such other publicly owned entity as may then
conduct the Corporation's refining and marketing business) shall be deemed the
successor to the Corporation (in such capacity, the "Successor Corporation")
for all purposes of the Agreement, and the Corporation shall cause the
Successor Corporation to expressly assume the obligations of the Corporation
thereunder. Accordingly, neither the execution and delivery by the
Corporation of such merger agreement, the approval by the Corporation's
stockholders of such agreement, nor the performance by the Corporation of such
agreement substantially in accordance with its terms, shall (i) constitute a
"Change of Control" within the intent of the parties under the Agreement, or
(ii) result in Executive becoming entitled to the lump-sum cash payment,
special retirement benefits, acceleration of options and restricted stock and
other benefits more fully described in the Agreement.
2. Waiver and Release. Executive hereby forever releases, waives and
relinquishes, and agrees not to assert, any claim, demand or cause of action
that, but for this Waiver, Executive now or hereafter has, or may have, under
the Agreement against the Corporation, the Successor Corporation, or any of
their respective subsidiaries or affiliates, arising out of, or in any way
related to or connected with, such Spin-off/Merger.
3. Agreements Unaffected. This Waiver is not intended and shall not be
construed to amend or modify the Agreement except as otherwise expressly set
forth herein, or to amend or modify any existing employment agreement or any
existing stock option, restricted stock, performance share or other similar
agreement between Executive and the Corporation, all of which shall remain in
full force and effect in accordance with their respective existing terms.
Upon the consummation of a Spin-off/Merger, the term "Corporation," as used in
the Agreement, and all references to the Corporation therein, shall refer
solely to the Successor Corporation, as successor to the Corporation, and the
Agreement shall thereupon constitute an agreement between Executive and the
Successor Corporation, in accordance with its terms. Nothing contained is
this Waiver shall be construed to create a contract of employment or establish
any right to be employed by or to serve as an officer of the Corporation or
the Successor Corporation or any of their respective subsidiaries or
affiliates.
4. Successors and Assigns. This Waiver shall be binding upon and inure
to the benefit of the Executive and his estate, and the Corporation and any
successor to the Corporation (including the Successor Corporation), but
neither this Waiver nor any rights arising hereunder may be assigned or
pledged by the Executive.
5. Controlling Law. This Waiver shall in all respects be governed by,
and construed in accordance with, the laws of the State of Texas.
IN WITNESS WHEREOF, the parties have executed this Waiver and Consent
effective as of the date first above set forth.
VALERO ENERGY CORPORATION
By: /s/ E. C. Benninger, Jr.
President
VALERO REFINING AND MARKETING COMPANY
By: /s/ E. C. Benninger, Jr.
President
/s/ William E. Greehey
William E. Greehey
"Executive"
EXHIBIT 10.24
SCHEDULE OF WAIVER AGREEMENTS
Employee Date of Agreement
Edward C. Benninger November 21, 1996
Stan L. McLelland November 21, 1996
E. Baines Manning November 21, 1996
Each of these agreements is in substantially the same form as the
agreement described in Exhibit 10.23 to the Valero Energy Corporation Annual
Report on Form 10-K for the year ended December 31, 1996.
<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,
1996 1995 1994
<S> <C> <C> <C>
COMPUTATION OF EARNINGS PER SHARE
ASSUMING NO DILUTION:
Net income. . . . . . . . . . . . . . . . . . . . . $ 72,701 $ 59,838 $ 26,882
Less: Preferred stock dividend requirements. . . . (11,327) (11,818) (9,490)
Net income applicable to common stock . . . . . . . $ 61,374 $ 48,020 $ 17,392
Weighted average number of shares of common
stock outstanding . . . . . . . . . . . . . . . . 43,926,026 43,651,914 43,369,836
Earnings per share assuming no dilution . . . . . . $ 1.40 $ 1.10 $ .40
COMPUTATION OF EARNINGS PER SHARE
ASSUMING FULL DILUTION:
Net income. . . . . . . . . . . . . . . . . . . . $ 72,701 $ 59,838 $ 26,882
Less: Preferred stock dividend requirements. . . (11,327) (11,818) (9,490)
Add: Reduction of preferred stock dividends
applicable to the assumed conversion of
Convertible Preferred Stock . . . . . . . . . . 10,781 10,781 8,325
Net income applicable to common stock
assuming full dilution. . . . . . . . . . . . . $ 72,155 $ 58,801 $ 25,717
Weighted average number of shares of common
stock outstanding . . . . . . . . . . . . . . . 43,926,026 43,651,914 43,369,836
Weighted average common stock equivalents
applicable to stock options . . . . . . . . . . 632,967 413,809 56,926
Weighted average shares issuable upon
conversion of Convertible Preferred Stock . . . 6,381,798 6,381,798 4,948,079
Weighted average shares used for computation. . . 50,940,791 50,447,521 48,374,841
Earnings per share assuming full dilution . . . . $ 1.42<F1> $ 1.17<F1> $ .53<F1>
<FN>
<F1> This calculation is submitted in accordance with paragraph 601(b)(11) of Regulation S-K although
it is contrary to APB Opinion No. 15 because it produces an antidilutive result.
</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,
1996 1995 Pro Forma<F1> Historical Pro Forma<F1> Historical 1992
<S> <C> <C> <C> <C> <C> <C> <C>
Pretax income from continuing
operations . . . . . . . . . . . . . . . $113,701 $ 95,138 $ 31,289 $ 42,782 $ 76,698 $ 68,224 $131,419
Add (Deduct):
Net interest expense <F4> . . . . . . . . 95,177 101,222 98,695 76,921 89,413 37,182 30,423
Amortization of previously capitalized
interest . . . . . . . . . . . . . . . . 6,061 6,820 6,847 6,282 6,300 4,998 4,544
Interest portion of rental expense <F2> . 14,034 13,251 8,259 6,695 8,003 4,316 4,214
Distributions (less than)/in excess of
equity in earnings of VNGP, L.P. <F3>. . - - - 18,968 - (4,970) (1,067)
Distributions (less than) equity in
earnings of joint ventures <F4>. . . . . (3,899) (4,304) (2,437) (2,437) - - -
Earnings as defined. . . . . . . . . . . $225,074 $212,127 $142,653 $149,211 $180,414 $109,750 $169,533
Net interest expense <F4>. . . . . . . . . $ 95,177 $101,222 $ 98,695 $ 76,921 $ 89,413 $ 37,182 $ 30,423
Capitalized interest . . . . . . . . . . . 4,328 4,699 2,558 2,365 14,048 12,335 15,853
Interest portion of rental expense <F2>. . 14,034 13,251 8,259 6,695 8,003 4,316 4,214
Fixed charges as defined . . . . . . . . $113,539 $119,172 $109,512 $ 85,981 $111,464 $ 53,833 $ 50,490
Ratio of earnings to fixed charges . . . . 1.98x 1.78x 1.30x 1.74x 1.62x 2.04x 3.36x
<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.
</TABLE>
Exhibit 21.1
Valero Energy Corporation
Schedule of Subsidiaries
Name of Subsidiary State of Organization
Valero Energy Corporation Delaware
Valero Management Company Delaware
Valero Corporate Services Company Delaware
Valero Coal Company Delaware
Valero Producing Company Delaware
VMGA Company Texas
Valero Refining and Marketing Company Delaware
Valero Javelina Company Delaware
Valero Refining Company Delaware
Valero MTBE Operating Company Delaware
Valero MTBE Investments Company Delaware
Valero Technical Services Company Delaware
Valero Mediterranean Company Delaware
Valero Mexico Company Delaware
Valero Marketing and Supply 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
Valero Natural Gas Partners, L.P. Delaware
ValeroTex, 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. 33-14455, 33-38045, 33-53796,
33-52533, 33-59040, 33-59217, 33-63703, 333-02987) and on Form S-3 (File No.
33-56441).
/s/ ARTHUR ANDERSEN LLP
San Antonio, Texas
February 27, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1996 AND THE CONSOLIDATED
STATEMENT OF INCOME FOR THE YEAR ENDED DECEMBER 31, 1996 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-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 57,593
<SECURITIES> 0
<RECEIVABLES> 567,712
<ALLOWANCES> 1,624
<INVENTORY> 212,134
<CURRENT-ASSETS> 888,169
<PP&E> 2,802,231
<DEPRECIATION> 708,352
<TOTAL-ASSETS> 3,149,574
<CURRENT-LIABILITIES> 875,154
<BONDS> 868,300
1,150
3,450
<COMMON> 44,186
<OTHER-SE> 1,037,789
<TOTAL-LIABILITY-AND-EQUITY> 3,149,574
<SALES> 4,990,681
<TOTAL-REVENUES> 4,990,681
<CGS> 4,789,772
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