SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (date of earliest event reported):
March 13, 1997
VALERO ENERGY CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 1-4718 74-1244795
(State of incorporation) Commission File (I.R.S. Employer
jurisdiction Number Identification No.)
of incorporation
530 McCullough Avenue, San Antonio, Texas 78215
(Address of principal executive offices) (Zip Code)
(210) 246-2000
(Registrant's telephone number, including area code)
Not applicable
(Former name or address, if changed since last report)
<PAGE>
Item 5. Other Events
Proposed Acquisition of Basis Petroleum, Inc.
On March 13, 1997, the Board of Directors of Valero Energy Corporation
("Valero") approved a letter of intent executed by Valero to acquire the
outstanding common stock of Basis Petroleum, Inc. ("Basis"), a wholly owned
subsidiary of Salomon Inc ("Salomon"). The primary assets of Basis include
three refineries in the U.S. Gulf Coast area and an extensive wholesale
marketing business. The three refineries are comprised of a 160,000 barrels
per day ("BPD") facility in Texas City, Texas; an 85,000 BPD facility in
Houston, Texas; and a 65,000 BPD facility in Krotz Springs, Louisiana. The
three refineries are projected to produce approximately 330,000 BDP of refined
products, including about 130,000 BPD of gasoline, about 130,000 BPD of
distillates and jet fuel, and about 20,000 BPD of chemical grade propylene and
liquified petroleum gases (LPGs). After acquiring Basis, Valero will own and
operate four refineries with total throughput capacity of about 500,000 BPD.
Valero's existing refining facility is located in Corpus Christi, Texas.
Completion of the transaction is subject to the execution of definitive
agreements, clearance from certain regulatory authorities and the satisfaction
of other customary conditions. The transaction is expected to close on or
about May 1, 1997. It is not expected to affect the timing related to
Valero's announcement in January to spin off its refining and marketing
business (hereafter called "New Valero") to its stockholders (the "Spinoff")
and to merge its remaining natural gas related services business with PG&E
Corporation ("PG&E") (the "Merger"). The Spinoff and Merger are expected to
be completed by mid-year 1997. PG&E has consented to Valero's acquisition of
Basis.
Valero will acquire the stock of Basis for $285 million, plus an amount
representing the value of inventories and other working capital to be acquired
in the transaction, currently estimated to be $200 million. The purchase price
will be paid, in part, with shares of Valero common stock having a fair market
value of approximately $120 million, with the remainder to be paid in cash. In
addition, Salomon will be entitled to receive payments in any of the next 10
years if the average refining margin during any of such years improves above a
specified level. These annual earn-out payments would be based on the
difference between a stated base refining "crack spread" and the theoretical
spread computed using actual average quoted prices, and calculated using a
nominal average annual throughput of 100 million barrels. Any payments under
this earn-out arrangement are limited to $35 million in any year and $200
million in the aggregate. For purposes of determining the number of shares of
Valero common stock to be issued, the letter of intent provides that the fair
market value of Valero stock shall be the average of the high and low sales
prices during a period of five trading days ending five business days prior to
closing.
Valero has assumed that approximately $150 million of the cash
consideration can be obtained through an inventory purchase agreement; the
remaining portion of the cash consideration is expected to be borrowed under a
credit facility. While the letter of intent is expressly non-binding until
definitive agreements are executed, the letter of intent provides that Salomon
will negotiate exclusively with Valero and will not solicit or entertain other
offers until May 1, 1997. Prior to the Spinoff and Merger, Valero will
transfer the stock of Basis to New Valero.
Forward-Looking Statements
The following discussion contains certain estimates, predictions,
projections, assumptions 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 Valero's current judgment regarding
the direction of its businesses, actual results will almost always vary,
sometimes materially, from any estimates, predictions, projections,
assumptions, or other future performance suggested herein. In addition to the
factors described below under the caption "Risk Factors," some important
factors (but not necessarily all factors) that could affect the sales volumes,
growth strategies, future profitability and operating results of Valero and New
Valero, or that otherwise could cause actual results to differ materially from
those expressed in any forward-looking statement include the following:
-general economic conditions in the geographic areas served by
Valero and New Valero,
-changes in commodity pricing and demand,
-renewal or satisfactory replacement of feedstock arrangements
as well as market, political or other forces generally
affecting the pricing and availability of refinery
feedstocks and refined products,
-changes in the cost or availability of third-party vessels,
pipelines and other means of transporting feedstocks and
products,
-timely completion of the acquisition of Basis and implementation
of the cost reductions and operational changes and realization
of certain assumptions discussed in this report,
-execution of planned capital projects,
-accidents or other unscheduled shutdowns affecting the
pipelines, plants, machinery or equipment of Valero, New Valero,
or their suppliers or customers,
-competition from products and services offered by other energy
enterprises,
-weather conditions affecting Valero's or New Valero's operations
or the geographic areas in which their products are marketed,
-state and federal environmental, economic, safety and other
legislation, policies and regulations, any changes therein,
and any legal or regulatory delays beyond Valero's or New
Valero's control,
-rulings, judgments, or settlements in litigation or other
legal matters, including unexpected environmental remediation
costs,
-changes in the credit ratings assigned to the debt securities
and trade credit of Valero or New Valero, and the ability of
Valero or New Valero to obtain financing and credit arrangements.
Neither Valero nor New Valero undertakes any 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.
Risk Factors
Basis has incurred operating losses during the last several years.
Neither Valero nor New Valero has an operating history with respect to the
Basis refineries. While Valero's refining operations have been profitable,
there is no assurance that, following the Basis acquisition, the combined
entities will be profitable, or will be able to achieve the cost savings and
operational improvements anticipated by Valero. Additionally, there can be no
assurance that the projected prices of refinery feedstocks and refined products
assumed by Valero in connection with the Basis acquisition will be realized.
Description of Basis
The Texas City and Houston refineries are fully integrated merchant
refining facilities capable of receiving feedstocks and shipping refined
products via ocean-going tankers. In addition to crude oil and vacuum units,
the Texas City facility includes, among other processing units, a 48,000 BPD
fluid catalytic cracking unit ("FCC Unit") (which further processes gas oil
feedstock from the crude and vacuum units), a 22,000 BPD naphtha reformer
("Reformer") (which produces reformate, a low vapor pressure high-octane
gasoline blendstock from naphtha streams), a 40,000 BPD solvent deasphalter
("ROSE Unit") (which recovers deasphalted oil for feed to the FCC Unit from
vacuum tower bottoms) and a 75,000 BPD resid hydrodesulfurization unit
("Residfiner") (which improves the cracking characteristics of the residual oil
feed for the FCC Unit). The Texas City refinery was upgraded in the third
quarter of 1996 through the addition of the Residfiner and ROSE Units, as well
as sour crude oil conversion capacity, tankage and various other improvements.
The Houston facility includes a 61,000 BPD FCC Unit and a 17,000 BPD ROSE
Unit. The Krotz Springs facility includes a 30,000 BPD FCC Unit and a 12,000
BPD Reformer. The Krotz Springs facility has access to the Colonial Pipeline, a
major interstate refined product pipeline. Basis is a merchant refiner and
markets refined products in approximately 155 markets in 36 states. Basis
currently employs approximately 1,275 persons; the workforce is not unionized.
Valero believes that Salomon has invested approximately $660 million in
the Basis refineries for upgrading facilities and other improvements since
1992. Most of these improvements were made at the two Texas refineries.
Although Basis recorded a small profit in 1994, Basis's audited financial
statements reflect that Basis incurred pre-tax losses of approximately $91
million in 1995 and $100 million in 1996. However, Valero believes that the
Basis refineries can be operated profitably due to recently completed refinery
upgrading projects, a reduction in depreciation and amortization expense due to
the acquisition cost of Basis being less than its net book value, and a
projected reduction in operating and overhead costs expected to be achieved
through certain changes to be implemented by New Valero, as more fully
described below. Valero believes that, assuming closing of the transaction on
or about May 1, 1997, and realization of the assumptions described below, the
Basis refineries would be accretive to New Valero's consolidated cash flow and
earnings beginning in 1997.
Selected Pro Forma Projected Financial Information
The following table shows certain selected pro forma projected income
statement, balance sheet and cash flow information for New Valero, Basis, and
New Valero and Basis combined for the years ended December 31, 1997 and 1998,
assuming that the Basis acquisition occurs May 1, 1997. Such selected pro
forma projected financial information (i) assumes the completion of certain
refinery turnarounds, as described below, (ii) reflects cash proceeds of
approximately $150 million from an inventory purchase agreement, (iii) excludes
certain marketing operations of Basis which are expected to be discontinued,
and (iv) includes a preliminary allocation of the purchase price of Basis to
the assets and liabilities assumed. In addition, the purchase accounting
adjustments necessary to allocate the purchase price of Basis remain subject to
change and the depreciation and amortization expense ultimately reflected in
New Valero's financial statements may vary, perhaps significantly, from the
information presented herein.
<TABLE>
NEW VALERO AND BASIS COMBINED
SELECTED PRO FORMA PROJECTED FINANCIAL INFORMATION
(Dollars in Millions, Except per Share Amounts)
<CAPTION>
As of or for the Year Ended December 31,
1997 1998
New Valero Basis Combined New Valero Basis Combined
<S> <C> <C> <C> <C> <C> <C>
Income statement information:
Operating income. . . . . . . . . $ 142 $ 47 $ 189 $ 138 $ 88 $ 226
Interest expense, net . . . . . . 13 10 23 8 15 23
Income taxes. . . . . . . . . . . 46 13 59 47 25 72
Income from continuing operations . . . . . . 84 24 108 86 47 133
Earnings per share of common stock
from continuing operations. . . . . . 1.66 - 2.02 1.69 - 2.44
Balance sheet information:
Working capital . . . . . . . . . 149 50 199 148 50 198
Property, plant and equipment, net. . . . . . 1,259 300 1,559 1,343 327 1,670
Deferred charges and other assets . . . . . . 113 27 140 117 29 146
Long-term debt. . . . . . . . . . 244 229 473 238 197 435
Deferred income taxes and other deferred
credits and other liabilities . . . . . . . 276 5 281 293 20 313
Stockholders' equity. . . . . . . 1,000 143 1,143 1,076 190 1,266
Cash flow information:
Depreciation expense. . . . . . . 56 9 65 56 17 73
Amortization expense. . . . . . . 36 2 38 30 13 43
Capital expenditures. . . . . . . 85 36 121 140 43 183
Deferred turnaround and catalyst costs. . . . . . . . 18 12 30 29 16 45
</TABLE>
Certain Historical and Projected Operating Statistics of Basis
The following table includes historical and projected operating statistics
for Basis, reflecting the feedstocks utilized and products produced by Basis
for 1995 and for the first nine months of 1996, and as projected following the
acquisition after giving effect to the operational improvements that New Valero
expects to implement. The information shown in the column "Historical January
- - - September 1996" reflects charges and yields prior to completion of the
Residfiner and ROSE units at the Texas City refinery.
BASIS REFINERY SYSTEM
CHARGE AND YIELD SUMMARY
(In Thousand Barrels per Calendar Day)
Historical
Historical January-
1995 September 1996 Projected
FEEDSTOCKS:
Crude oil:
Medium sour 94 146 159
Heavy sweet 75 38 80
Light sweet 66 78 61
Total crude oil 235 262 300
Vacuum gas oil 18 21 15
Other feedstocks 4 10 14
Total Refinery Feedstocks 257 293 329
PRODUCTS:
Gasoline and components 113 118 132
Distillates 91 98 129
Naphtha 4 16 36
Propylene/LPG 16 14 20
Low-sulfur residual fuel oil 15 13 15
High-sulfur residual fuel oil 18 27 -
Other - 8 1
Total Products 257 294 333
Certain Assumptions
In preparing the projections set forth in this report, Valero has made
certain assumptions, both with respect to general refining industry conditions
and with respect to the future operations of Basis in particular. Such
projections and underlying assumptions have been made in good faith and reflect
Valero's current judgment regarding such matters. However, there can be no
assurance that actual results will not vary, perhaps significantly, from the
future performance suggested herein. See "Forward-Looking Statements" and
"Risk Factors" above. The following principal assumptions have been made by
Valero in preparing the foregoing projections:
-Improved Refining Economics. To the extent that refining industry
economics improve, Valero believes that the operating results of the Basis
refineries should also improve. Valero has assumed that during 1997-1998, as
well as subsequent periods, there will be some improvement from depressed 1996
levels in general refining economics and, accordingly, in the margins or
"spreads" obtainable in the market between key refined products, on the one
hand, and high-quality West Texas Intermediate crude oil ("WTI"), a key pricing
benchmark, on the other hand, as well as some improvement in the discounts to
WTI obtainable for key refinery feedstocks.
One nominal indicator of refining profitability is the 2-1-1 "crack
spread," which indicates profitability based upon the Gulf Coast prices
received for one barrel of conventional 87 octane unleaded gasoline and one
barrel of No. 2 fuel oil, less the cost of two barrels of WTI. Since 1991, the
average annual 2-1-1 crack spread per barrel has varied from $2.19 to $3.91,
and averaged $2.88 per barrel for such six-year period. For 1996, the average
2-1-1 "crack spread" per barrel was approximately $2.65. Valero has assumed
that the 2-1-1 crack spread will average about $2.68 per barrel in 1997, and
about $2.73 per barrel in 1998.
Valero expects that medium sour crude oil and heavy sweet crude oil will
be the principal feedstocks utilized for the Basis refineries, and that
gasoline, gasoline blendstocks and distillates will constitute the principal
refined products to be produced at these refineries.
Valero expects that, as a result of the increasing availability of heavier
and higher sulfur crude oils, the discounts between the Basis refineries'
principal feedstocks and WTI will improve. The table below specifies (in per
barrel amounts), for each of the two principal feedstocks for the Basis
refineries, the range of such discount over the past six years, the average
discount in 1996 and the average discount that Valero has assumed for 1997 and
1998.
Feedstock Differentials to WTI (per barrel)*
Discount to WTI
Range of Average Assumed Assumed
discount for the discount discount discount
Feedstock period 1991-1996 in 1996 1997 1998
Medium sour crude $1.03 - $2.04 $1.17 $1.42 $1.42
Heavy sweet crude $0.06 - $1.09 $0.18 $0.29 $0.29
* based on feedstocks delivered to the refinery, including duties
Valero also expects that the margins or "spreads" between the Basis
refineries' principal refined products and WTI will improve in the period
1997-1998. The following table sets forth (in per barrel amounts) the
range of the high and low spreads (based on Platt's mean) over the past
six years, the average spread in 1996 and the assumed average spreads
for 1997 and 1998, for the margin between regular unleaded 87 octane
conventional gasoline, and No. 2 fuel oil, respectively, and WTI.
Refined Product Differentials to WTI (per barrel)
Spread between refined products and WTI
Range of spread Average Assumed Assumed
for the period spread spread spread
Refined Product 1991-1996 in 1996 1997 1998
Regular unleaded
87 octane conven-
tional gasoline $2.87 - $5.01 $2.87 $3.18 $3.20
No. 2 fuel oil $1.40 - $2.81 $2.43 $2.18 $2.25
-Reduction of Operating Costs. The 1997 budget prepared by Basis reflects
approximately $140 million of refinery variable costs, approximately $177
million of refinery fixed costs and approximately $42 million of refinery
secondary costs and corporate overhead and selling, general and administrative
costs. Both Valero and Basis have extensive refined product marketing
operations and both market substantially more refined products than they
produce. Valero has estimated that consolidation of Basis's corporate and
refinery support staff, including its selling, marketing, trading,
transportation, accounting and other functions, will result in net annual
savings in personnel related costs (including salaries, wages and employee
benefit expense; rental expenses; allocated overhead expense; and other
employee-related costs) of approximately $25 million annually.
-Reconfiguration of Operations. Although Basis recently upgraded its
facilities through the addition of, among other things, the 75,000 BPD
Residfiner and 40,000 BPD ROSE Unit at the Texas City refinery, these new
facilities were not placed in service until October 1996, and did not achieve
planned operating levels during 1996. Valero believes that use of these
facilities has not yet been fully optimized. New Valero intends to modify the
slate of feedstocks processed at Basis's Texas refineries principally by
increasing the use of medium sour and heavy sweet crudes. Valero believes that
this change in the feedstock slate will more efficiently utilize the Residfiner
and ROSE Units and produce a lesser amount of low-value residual fuel oil and a
greater proportion of higher value gasoline and other premium products. Valero
believes that it can also achieve more reliable and efficient operation of
other Basis refinery units, and intends to shut down certain marginal and
inefficient units. Valero also believes that it can reduce offsite storage and
working capital requirements, and that it can achieve various other
efficiencies by coordinating the operation of the Basis refineries with its
existing refinery in Corpus Christi, Texas. In its projections, Valero has
assumed that there would be a turnaround for the Texas City Residfiner and
cogeneration units in 1997 and for the Houston refinery in 1998.
-Allocation of Purchase Price. The amounts shown above in the Selected
Pro Forma Projected Financial Information for New Valero and Basis Combined
include preliminary allocations of the purchase price of Basis to the assets
acquired and liabilities assumed based on estimated fair values. Further
allocations will be made based upon an appraisal of such assets and
liabilities.
Item 7. Financial Statements and Exhibits
(c) Exhibits. Filed as part of this Form 8-K are the following
exhibits:
20.1 -- Press Release of Valero Energy Corporation dated
March 17, 1997.
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this Current Report on Form 8-K to be
signed on its behalf by the undersigned thereunto duly authorized.
VALERO ENERGY CORPORATION
By: /s/ Edward C. Benninger, Jr.
Edward C. Benninger, Jr.
President and Chief Financial Officer
Dated: March 21, 1997
Valero to Acquire Basis Petroleum
SAN ANTONIO, March 17, 1997 -- Valero Energy Corporation (NYSE: VLO) announced
today that it has signed a letter of intent to acquire Basis Petroleum, Inc.
(Basis), a wholly owned subsidiary of Salomon Inc (NYSE: SB). The primary
assets of Basis include three refineries with total throughput capacity in
excess of 300,000 barrels per day (BPD) and an extensive wholesale marketing
business. The three refineries are comprised of a 160,000 BPD facility in
Texas City, Texas; an 85,000 BPD facility in Houston, Texas; and a 65,000 BPD
facility in Krotz Springs, Louisiana. After acquiring Basis, Valero will own
and operate four refineries with total throughput capacity of about 500,000
BPD, making it one of the largest independent refining companies in the U.S.
Valero will acquire the stock of Basis for $285 million, plus approximately
$200 million for inventories and other working capital to be acquired in the
transaction. The purchase price will consist of Valero common stock having a
fair market value of approximately $120 million, with the remainder to be paid
in cash. In addition, Salomon will receive payments in any of the next ten
years if the average refining margin during any of such years improves above a
specified level. Any payments under this earn-out arrangement will not exceed
$35 million in any year or $200 million in the aggregate.
The acquisition has been approved in principle by the board of directors of
both Valero and Salomon. Completion is subject to execution of definitive
agreements and the satisfaction of other customary conditions. The transaction
is expected to close in May 1997. The acquisition is not expected to affect
the timing related to Valero's announcement in January to spin off its refining
and marketing business to a separate company and merge its natural gas related
services business with PG&E Corporation. The spin-off and merger are still
expected to be completed by mid-year.
"We are very excited to be acquiring Basis Petroleum," said Bill Greehey,
Valero's Chairman of the Board and Chief Executive Officer. "This acquisition
represents the initial step in building our new refining company into one of
the preeminent players in the industry. It will substantially increase our
scope and size and will provide a strong base for future growth. The addition
of Basis' three refineries to our state-of-the-art facility in Corpus Christi,
Texas, creates tremendous value for our shareholders. Basis has recently
completed significant upgrades to its facilities and we are convinced that,
primarily through certain reconfiguration of operations and reduction in
overhead costs, the acquisition will be accretive to Valero's earnings and cash
flow as early as the first year of consolidation."
Valero will hold a conference call for the investment community today at 9:00
a.m. CST to further discuss details of this transaction. If you are interested
in participating in the conference call, please call 1-800-553-2599, conference
I.D. 182484, no later than five minutes prior to 9:00 a.m. CST. After the
conference call is completed, a playback may be accessed by calling
1-800-625-5288.
Valero Energy 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. Valero refines high-sulfur atmospheric residual oil into premium
products, primarily reformulated gasoline, at its 171,500-barrel-per-day
refinery in Corpus Christi, Texas, and markets those products. In addition,
the company owns and operates a 7,500-mile natural gas pipeline system and
eight natural gas processing plants, and is a leading marketer of natural gas,
natural gas liquids and electric power.
For more information about Valero Energy Corporation, please visit our web
site, http://www.valero.com.
