FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1993
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-9433
VALERO NATURAL GAS PARTNERS, L.P.
(Exact name of registrant as specified in its charter)
Delaware 74-2448118
(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 Units of Limited Partner New York Stock Exchange
Interests
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 February 14, 1994 of the
registrant's Common Units 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 such date, was approximately $114 million.
Indicated below is the number of units outstanding of the
registrant's only class of Partnership Units, as of February 14,
1994.
Number of Units
Title of Class Outstanding
Common Units of Limited Partner Interests 18,486,538
<PAGE>
CONTENTS
PAGE
PART I
Item 1. Business . . . . . . . . . . . . . . . . . . . . . 1
Recent Developments. . . . . . . . . . . . . . . 1
Proposed Merger with Energy. . . . . . . . . . 1
Decline of Crude Oil and NGL Prices. . . . . . 2
Natural Gas Operations . . . . . . . . . . . . . 2
General. . . . . . . . . . . . . . . . . . . . 2
Pipeline Facilities. . . . . . . . . . . . . . 3
Gas Sales. . . . . . . . . . . . . . . . . . . 4
Intrastate Sales . . . . . . . . . . . . . . 6
Interstate Sales . . . . . . . . . . . . . . 7
Gas Transportation and Exchange. . . . . . . . 7
Gas Supply . . . . . . . . . . . . . . . . . . 8
Gas Storage Facilities . . . . . . . . . . . . 8
Natural Gas Liquids Operations . . . . . . . . . 9
General. . . . . . . . . . . . . . . . . . . . 9
Gas Processing Facilities. . . . . . . . . . . 9
Fractionation and Other Facilities . . . . . . 10
NGL Supply and Sales . . . . . . . . . . . . . 11
Governmental Regulations . . . . . . . . . . . . 12
Texas Regulation . . . . . . . . . . . . . . . 12
Federal Regulation . . . . . . . . . . . . . . 13
Environmental Matters. . . . . . . . . . . . . . 14
Competition. . . . . . . . . . . . . . . . . . . 14
Natural Gas. . . . . . . . . . . . . . . . . . 14
Natural Gas Liquids. . . . . . . . . . . . . . 16
Employees. . . . . . . . . . . . . . . . . . . . 16
Item 2. Properties . . . . . . . . . . . . . . . . . . . . 16
Item 3. Legal Proceedings. . . . . . . . . . . . . . . . . 17
Item 4. Submission of Matters to a Vote of Security
Holders. . . . . . . . . . . . . . . . . . . . . 20
PART II
Item 5. Market for Registrant's Common Units and Related
Security Holder Matters. . . . . . . . . . . . . 20
Item 6. Selected Financial Data. . . . . . . . . . . . . . 21
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of
Operations . . . . . . . . . . . . . . . . . . . 22
Item 8. Financial Statements and Supplementary Data. . . . 34
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure. . . . . . . 56
PART III
Item 10. Directors and Executive Officers of the
Registrant . . . . . . . . . . . . . . . . . . . 56
Item 11. Executive Compensation . . . . . . . . . . . . . . 58
Summary Compensation Table . . . . . . . . . . . 58
Option/SAR Grants. . . . . . . . . . . . . . . . 60
Aggregated Option/SAR Exercises and Option/
SAR Values . . . . . . . . . . . . . . . . . . 61
Retirement Benefits. . . . . . . . . . . . . . . 62
Executive Severance Program. . . . . . . . . . . 63
Compensation of Directors. . . . . . . . . . . . 64
Item 12. Security Ownership of Certain Beneficial Owners
and Management . . . . . . . . . . . . . . . . . 64
Item 13. Certain Relationships and Related
Transactions . . . . . . . . . . . . . . . . . . 66
PART IV
Item 14. Exhibits, Financial Statement Schedules
and Reports on Form 8-K. . . . . . . . . . . . . 67
<PAGE>
PART I
ITEM 1. BUSINESS
Valero Natural Gas Partners, L.P. ("VNGP, L.P.") was
established under the Delaware Revised Uniform Limited
Partnership Act on January 28, 1987, and commenced actual
operations on March 25, 1987, when Valero Energy Corporation and
its subsidiaries restructured their natural gas and natural gas
liquids operations by transferring such operations to the
Partnership (defined herein). Unless otherwise required by the
context, the term "Energy" as used herein refers to Valero Energy
Corporation and its consolidated subsidiaries, both individually
and collectively, and the term "Partnership" as used herein
refers to VNGP, L.P. and its consolidated subsidiaries. VNGP,
L.P.'s principal executive offices are located at 530 McCullough
Avenue, San Antonio, Texas 78215 (telephone number
(210) 246-2000).
VNGP, L.P. holds a 99% limited partner interest in
Valero Management Partnership, L.P. (the "Management
Partnership") and certain subsidiary partnerships established
subsequent to the creation of the Partnership. The Management
Partnership holds a 99% limited partner interest in eleven
subsidiary operating partnerships which existed at the time VNGP,
L.P. was established and one subsidiary operating partnership
formed in 1992 (collectively, the "Subsidiary Operating
Partnerships"). Valero Natural Gas Company ("VNGC"), a wholly
owned subsidiary of Energy, is the general partner of both VNGP,
L.P. and the Management Partnership (in such capacities, the
"General Partner") and holds a 1% general partner interest in
each partnership. Various subsidiaries of VNGC serve as general
partners (in such capacities, the "Subsidiary General Partners")
of and hold 1% general partner interests in each Subsidiary
Operating Partnership. Unless the context otherwise requires,
any references to VNGP, L.P., the Management Partnership or any
of the original Subsidiary Operating Partnerships regarding any
period prior to March 25, 1987, should be construed to refer, as
appropriate, to Energy, VNGC or the corresponding subsidiaries of
Energy or VNGC that transferred their natural gas and natural gas
liquids operations to the Partnership; references to the
Partnership with respect to such period should be construed to
refer to VNGC and such subsidiaries. For additional information
with respect to the 1987 restructuring, see Note 1 -
"Organization and Control" of Notes to Consolidated Financial
Statements.
The Partnership operates in two business segments:
Natural Gas and Natural Gas Liquids. For additional operational,
financial and statistical information regarding these operations,
see "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and Note 4 of Notes to Consolidated
Financial Statements. For information with respect to cash
provided by and used in the Partnership's operations, see
"Management's Discussion and Analysis of Financial Condition and
Results of Operations - Liquidity and Capital Resources."
RECENT DEVELOPMENTS
Proposed Merger with Energy
In October 1993, Energy publicly announced its proposal
to acquire the 9.7 million issued and outstanding common units of
limited partner interests ("Common Units") in VNGP, L.P. held by
persons other than Energy (the "Public Unitholders") pursuant to
a merger of VNGP, L.P. with a wholly owned subsidiary of Energy
(the "Merger"). The Board of Directors of VNGC appointed a
special committee of outside directors (the "Special Committee")
to consider the Merger and to determine the fairness of the
transaction to the Public Unitholders. The Special Committee
thereafter retained independent financial and legal advisors to
assist the Special Committee. Upon the recommendation of the
Special Committee, the Board of Directors of VNGC unanimously
approved the Merger. Effective December 20, 1993, Energy,
VNGP, L.P. and VNGC entered into an agreement of merger (the
"Merger Agreement") providing for the Merger. In the Merger, the
Common Units held by the Public Unitholders will be converted
into the right to receive cash in the amount of $12.10 per Common
Unit. As a result of the Merger, VNGP, L.P. would become a
wholly owned subsidiary of Energy. There can be no assurance,
however, that the Merger will be completed.
Consummation of the Merger is subject to, among other
things, (i) approval of the Merger Agreement by the holders of a
majority of the issued and outstanding Common Units;
(ii) approval by a majority of the Common Units held by the
Public Unitholders voted at a special meeting of holders of
Common Units to be called to consider the Merger Agreement;
(iii) satisfactory waivers, consents or amendments to certain of
Energy's financial agreements; and (iv) completion of an
underwritten public offering of convertible preferred stock by
Energy. A proposal to approve the Merger Agreement will be
submitted to the holders of Common Units at the special meeting
of Unitholders expected to be scheduled during the second quarter
of 1994. Prior to the special meeting, the holders of Common
Units will receive a proxy statement fully describing the Merger
and explaining the manner in which holders of Common Units may cast
their votes (the "Proxy Statement"). Energy owns approximately
47.5% of the outstanding Common Units and intends to vote its
Common Units in favor of the Merger. The foregoing discussion
of the Merger omits certain information contained in
the Merger Agreement and the Proxy Statement. Statements made in
this Report concerning the Merger are qualified by and are made
subject to the more detailed information contained in the Merger
Agreement and the Proxy Statement.
Decline of Crude Oil and NGL Prices
Beginning in November 1993, crude oil prices fell
significantly and have not recovered to prior levels. The price
decline resulted from a number of factors including the decision
by the Organization of Petroleum Exporting Companies ("OPEC") to
forego cuts in crude oil production, weakened global demand for
crude oil, increasing production from non-OPEC areas and concerns
related to the re-entry of Iraq into world oil markets. Natural
gas liquids ("NGL") prices also fell in conjunction with the
decline in crude oil prices. Record-high NGL inventories also
depressed NGL prices. Because of depressed NGL sales prices and
the high cost of natural gas from which such liquids are
extracted, NGL margins were very depressed in the fourth quarter
of 1993, requiring the Partnership to cease operations for
20 days in December 1993 at one of its gas processing plants and
to suspend the production of ethane for 28 days in December at
two other plants due to lack of profitability. See "Natural Gas
Liquids Operations - NGL Supply and Sales." The Partnership
continues to monitor the market conditions affecting the
profitability of its gas processing plants with a view to
modifying as needed any operations that appear unprofitable.
During the first quarter of 1994, NGL prices have increased
modestly since late December 1993, but remain below first quarter
1993 levels. Concurrently, natural gas prices and resulting
shrinkage costs have increased during the first quarter of 1994
compared to the same period in 1993. Accordingly, the
Partnership's operating income is expected to be substantially
lower in the first quarter of 1994 than in the first quarter of
1993.
NATURAL GAS OPERATIONS
General
The Partnership owns and operates natural gas pipeline
systems principally serving Texas intrastate markets. Through
interconnections with interstate pipelines, the Partnership also
markets natural gas throughout the United States. The
Partnership's natural gas pipeline and marketing operations
consist principally of purchasing, gathering, transporting and
selling natural gas to gas distribution companies, electric
utilities, other pipeline companies and industrial customers, and
transporting natural gas for producers, other pipelines and end
users.
Pipeline Facilities
The Partnership's principal natural gas pipeline system
is the intrastate gas system ("Transmission System") operated by
Valero Transmission, L.P. ("Transmission") in the State of Texas.
(References to Transmission prior to March 25, 1987 refer to
Valero Transmission Company, a wholly owned subsidiary of VNGC,
as the previous owner of the Transmission System. References to
Transmission on or after March 25, 1987 refer to Valero
Transmission, L.P., a Subsidiary Operating Partnership, as
successor owner of the Transmission System.) The Transmission
System generally consists of large diameter transmission lines
which 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 Partnership's wholly owned, jointly owned and leased
natural gas pipeline systems include approximately 7,200 miles of
mainlines, lateral lines and gathering lines. These pipeline
systems are located along the Texas Gulf Coast and throughout
South Texas and extend westerly to near Pecos, Texas; northerly
to near the Dallas-Fort Worth area, easterly to Carthage, Texas,
near the Louisiana border and southerly into Mexico near Reynosa.
The Partnership operates and jointly owns in equal portions with
Texas Utilities Fuel Company ("TUFCO") a 395-mile pipeline
extending from Waha, near Fort Stockton, Texas, to near Ennis,
Texas, south of the Dallas-Fort Worth area. An addition to this
line also extends 58 miles into East Texas from Ennis to Bethel,
Texas, and is jointly owned 39% by TUFCO (which operates the
line), 39% by Lone Star Gas Company and 22% by the Partnership.
The Partnership also operates and jointly owns in equal portions
with TECO Pipeline Company a 340-mile pipeline system and related
facilities extending from Waha to New Braunfels, near
San Antonio, Texas. The Partnership owns a 3.5-mile, 24-inch
pipeline that connects the Partnership's pipeline near Penitas in
South Texas to Petroleos Mexicanos's ("PEMEX") 42-inch pipeline
outside Reynosa, Mexico. The Partnership leases and operates
several pipelines, including approximately 240 miles of 24-inch
pipeline leased from TUFCO that extends from near Dallas to near
Houston, and approximately 105 miles of pipeline leased from
Energy that extends the Partnership's North Texas pipeline
further into East Texas from Bethel to Carthage (the "East Texas
pipeline"). These integrated systems include 39 mainline
compressor stations with a total of approximately
162,000 horsepower, together with gas processing plants,
dehydration and gas treating plants and numerous measuring and
regulating stations. The Partnership's pipeline systems have
considerable flexibility in providing connections between many
producing and consuming areas. The Partnership's owned and
leased pipeline systems have 70 interconnects with 22 intrastate
pipelines and 38 interconnects with 12 interstate pipelines.
The Partnership's pipeline systems are able to handle
widely varying loads caused by changing supply and demand
patterns. Annual average throughput was approximately 2.5 Bcf
(1) per day in 1993, and has been in excess of 2 Bcf per day in
recent years. The system has served peak demands at hourly rates
of flow significantly in excess of these daily averages.
Although capacity in the Partnership's pipeline systems is
generally expected to be adequate for the foreseeable future,
seasonal factors can significantly influence gas sales and
transportation volumes.
[FN]
(1) All volumes of natural gas referred to herein are stated at a
pressure base of 14.65 pounds per square inch absolute and at 60
degrees Fahrenheit and in most instances are rounded to the
nearest major multiple. The term "Mcf" means thousand cubic
feet, 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 term "MMBtu's"
means million Btu's. The number of MMBtu's of total natural gas
deliveries is approximately equal to the number of Mcf's of such
deliveries.
Gas Sales
The Partnership's gas sales are made principally through
the Subsidiary Operating Partnerships which operate special
marketing programs ("SMPs"). The Subsidiary Operating
Partnerships operating the SMPs are Reata Industrial Gas, L.P.
("Reata"), Valero Industrial Gas, L.P. ("Vigas") and VLDC, L.P.
("VLDC"). Reata buys its gas supply from producers, marketers
and certain intrastate pipelines and resells the gas in the
intrastate market on both a long-term basis and a short-term
interruptible basis. Vigas acquires gas supply directly from gas
producers and sells the gas on a short-term interruptible basis
and a term basis to intrastate and interstate markets. VLDC
serves short-term intrastate sales markets with supplies of both
intrastate and interstate gas. In addition, some of the
Partnership's gas sales are made by Valero Gas Marketing, L.P.
("Valero Gas Marketing"), Val Gas, L.P. ("Val Gas") and Rivercity
Gas, L.P. ("Rivercity"). Valero Gas Marketing engages primarily
in off-system sales. Val Gas primarily purchases and resells
natural gas in interstate commerce. Rivercity sells gas on a
short-term, interruptible basis. Most of the gas sold by Reata,
Vigas, VLDC, Val Gas and Rivercity is transported through the
Transmission System by Transmission. Transmission sells natural
gas under long-term contracts to a few remaining intrastate
customers. However, because of various factors described below,
most of the industrial and other gas sales customers previously
served by Transmission, including local distribution companies
("LDCs") and electric utilities, now purchase gas in the spot
market, including purchases from the Subsidiary Operating
Partnerships operating the SMPs, or have entered into gas
transportation contracts with Transmission to transport gas
acquired by the customers directly from producers or other
suppliers. Accordingly, Transmission is primarily a transporter
rather than a seller of natural gas. See "Natural Gas
Operations - Gas Transportation and Exchange" below.
During 1993, the Partnership sold natural gas under
hundreds of separate short-term and long-term gas sales contracts
to numerous customers in both the intrastate and interstate
markets. The Partnership's gas sales are made primarily to gas
distribution companies, electric utilities, other pipeline
companies and industrial users. The gas sold to distribution
companies is resold to consumers in a number of cities including
San Antonio, Dallas, Austin, Corpus Christi and Chicago.
Although the expiration dates of the Partnership's gas sales
contracts range from 1994 to 2001, many of the Partnership's
short-term sales contracts have expired or will expire by their
terms in 1994 or are terminable on a day-to-day, month-to-month
or similar basis by either the Partnership or the party to whom
gas is sold. The General Partner anticipates that most of these
contracts will be renewed for an additional term or converted to
transportation arrangements, or that the gas sold under these
contracts will be marketed to other customers.
The Partnership's gas sales and transportation volumes
(in MMcf per day) for the three years ended December 31, 1993,
are as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
1993 1992 1991
<S> <C> <C> <C>
Intrastate sales:
SMPs and other . . . . . . . . . . 642 552 545
Transmission . . . . . . . . . . . 57 78 103
Total intrastate sales . . . . 699 630 648
Interstate sales . . . . . . . . . . 281 259 363
Total sales. . . . . . . . . . 980 889 1,011
Transportation . . . . . . . . . . . 1,566 1,301 1,132
Total gas throughput . . . . . 2,546 2,190 2,143
</TABLE>
In 1993, the Partnership's ten largest gas sales
customers accounted for approximately 33% of its total
consolidated operating revenues and approximately 48% of its
total consolidated daily gas sales volumes. During 1993, sales
of natural gas accounted for approximately 38% of total daily
Partnership gas throughput volumes. The Partnership's largest
gas sales customer is San Antonio City Public Service ("CPS").
See "Natural Gas Operations - Gas Sales - Intrastate Sales."
Through the SMPs, the Partnership continues to emphasize
sales under term contracts. During 1993, the Partnership
continued to expand its term sales to LDCs who have been seeking
to convert purchase obligations from interstate pipelines into
firm transportation arrangements. In 1993, about 55% of the
Partnership's gas sales were made under term contracts. Term
contracts are becoming more prevalent in the industry and the
Partnership's gas sales under term contracts are expected to
increase over the next several years. See "Natural Gas
Operations - Gas Sales - Interstate Sales" and "Competition -
Natural Gas." The Partnership has also emphasized the
transportation of natural gas for producers and sales customers.
See "Natural Gas Operations - Gas Transportation and Exchange."
The Partnership's natural gas operations have been
affected by an emerging trend of west-to-east movement of gas
across the United States resulting from growing productive
capacity in western supply basins, the completion of new pipeline
capacity from such basins to the U.S. West Coast and increasing
demand for power generation in the East and Southeast. The
General Partner believes that in many of the pipelines serving
this market, west-to-east capacity is becoming constrained. The
General Partner believes that over time, improving transportation
margins resulting from these capacity constraints may warrant
additional west-to-east capacity additions and that the
Partnership would be positioned to participate in such
opportunities if it had the financial flexibility to make the
necessary capital expenditures. See "Natural Gas Operations -
Pipeline Facilities" and "Properties."
Under current regulations of the Railroad Commission of
Texas (the "Railroad Commission"), Transmission, like other gas
purchasers, is required to take ratably first casinghead gas (2)
and certain special allowable gas (casinghead gas and special
allowable gas that are the last to be shut in during periods of
reduced market demand are referred to collectively as "high-
priority" gas) produced from wells connected to Transmission's
pipeline systems and, if Transmission's sales volumes exceed the
amounts of such high-priority gas available, thereafter to take
by specific category other gas, including gas well gas, from
wells from which Transmission purchases gas on a ratable basis to
the extent of market demand. See "Governmental
Regulations - Texas Regulation." Most of the casinghead gas
under contract to Transmission was acquired under older,
long-term contracts which provided for relatively high prices,
together with price escalation provisions under the Natural Gas
Policy Act of 1978 (the "NGPA"). The majority of these contracts
did not contain allowances for price reductions when market
prices declined or contain so-called "market-out" provisions that
permit a purchaser to terminate a contract if market conditions
render the contract uneconomical. As a result, the cost of the
high-priority gas connected to Transmission's system under its
older contracts has remained substantially higher than the cost
of alternative gas supplies. Accordingly, most of Transmission's
major customers have switched upon contract expiration from the
noninterruptible service provided by Transmission to alternative
suppliers including the Subsidiary Operating Partnerships
operating the SMPs, causing Transmission's sales to decline
significantly. For additional information concerning
Transmission's cost of gas and gas sales price, see "Management's
Discussion and Analysis of Financial Condition and Results of
Operations."
[FN]
(2) The Partnership generally purchases "casinghead gas"
(defined as gas produced from wells primarily producing oil) and
"gas well gas" (defined as gas produced from wells primarily
producing gas).
Intrastate Sales
In 1993, the Partnership sold approximately 699 MMcf per
day of gas to its core intrastate market, representing
approximately 71% of total daily gas sales volumes, compared to
630 MMcf per day (71%) in 1992 and 648 MMcf per day (64%) in
1991. The majority of the Partnership's daily intrastate sales
are made through its SMPs (92%, 88% and 84% in 1993, 1992 and
1991, respectively) with the remainder made by Transmission.
The Partnership's sales to CPS are made principally by Reata.
Effective July 1, 1992, the Partnership was awarded a new
contract with CPS to supply 100% of CPS's natural gas
requirements. The contract is effective until 2002, subject to
possible renegotiation of certain contract terms beginning
in 1997. As a result of the CPS contract, the Partnership's
gas sales volumes to CPS increased significantly in 1993.
Natural gas sales to CPS in 1993 represented approximately
11% of the Partnership's total consolidated operating revenues
and approximately 18% of the Partnership's total consolidated
daily gas sales volumes. Except for the CPS contract, the
Partnership's gas sales contracts between the SMPs and the
Partnership's intrastate customers generally require the
Partnership to provide a fixed and determinable quantity of gas
rather than total customer requirements. The Partnership's gas
sales contracts between Transmission and its intrastate customers
generally provide for either maximum volumes or total
requirements, subject to priorities and allocations established
by the Railroad Commission.
Since December 31, 1979, Transmission's gas sales to its
customers have been made at prices established by an order (the
"Rate Order") of the Railroad Commission. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations" and Note 6 of Notes to Consolidated Financial
Statements for a discussion of Transmission's rates and the terms
of the 1993 settlement of a customer's audit of Transmission's
weighted average cost of gas. The price of natural gas sold
under the SMPs is not currently regulated by the Railroad
Commission, and the Subsidiary Operating Partnerships operating
the SMPs may generally enter into any sales contract that they
are able to negotiate with customers. See "Governmental
Regulations - Texas Regulation."
Interstate Sales
In 1993, the Partnership sold, through its SMPs,
approximately 281 MMcf per day of gas to interstate markets,
representing approximately 29% of total daily gas sales volumes,
compared to 259 MMcf per day (29%) in 1992 and 363 MMcf per day
(36%) in 1991. The Partnership pursued opportunities resulting
from favorable market fundamentals and the implementation of
Federal Energy Regulatory Commission ("FERC") Order No. 636
("Order 636") in 1993. The Partnership is continuing to
emphasize diversification of its customer base through interstate
sales and has enjoyed recent success in interstate markets,
adding new term natural gas sales in 1993, mostly in the Midwest,
Northeast and Western United States, which provide for deliveries
of up to 260 MMcf per day. For information regarding Order 636,
which has created new supply, marketing and transportation
opportunities for the Partnership in the interstate market, see
"Governmental Regulations - Federal Regulation" and
"Competition - Natural Gas."
Gas Transportation and Exchange
Gas transportation and exchange transactions
(collectively referred to as "gas transportation" or
"transportation") constitute the largest portion of the
Partnership's natural gas throughput, representing 62%, 59% and
53% of total daily Partnership gas throughput volumes for 1993,
1992 and 1991, respectively. Gas transportation involves several
types of transactions. The common element of a gas
transportation transaction is that the gas is neither purchased
nor sold by the Partnership; instead, the Partnership receives
natural gas on a Btu basis at one point and redelivers an
equivalent amount of gas on a Btu basis at another point for a
negotiated fee and fuel allowance. See "Natural Gas Operations -
Gas Sales" for a discussion of the emerging trend of west-to-east
movement of gas across the United States.
The Partnership transports gas for third parties under
hundreds of separate transportation contracts. The Partnership's
transportation contracts generally limit the Partnership's
maximum transportation obligation (subject to available capacity)
but generally do not provide for any minimum transportation
requirement. Although the expiration dates of the Partnership's
transportation contracts range from 1994 to 2000, many of the
Partnership's transportation contracts expire by their terms in
1994, or are terminable on a day-to-day, month-to-month or
similar basis by the party for whom gas is being transported or
exchanged. The General Partner anticipates that most of these
transportation contracts will be renewed for additional terms or
continued in effect on some other basis. See "Competition -
Natural Gas."
The Partnership's transportation customers include major
oil and natural gas producers and pipeline companies. In 1993,
the Partnership's ten largest gas transportation customers
accounted for approximately 3% of its total consolidated
operating revenues and approximately 69% of its total
consolidated daily transportation volumes. The Partnership's
principal contracts with its largest transportation customer
expire in 1998 and provide for dedication of volumes of
approximately 200 MMcf per day.
The Partnership's delivery of natural gas to Mexico
through the Partnership's connection to PEMEX's pipeline near
Reynosa, Mexico decreased in 1993. Mexico generally decreased
the amount of its natural gas imports in 1993. In December 1993,
Mexico became a net exporter of natural gas to Texas through a
pipeline connection with PEMEX owned by a competitor of the
Partnership. The Partnership's total natural gas sales and
transportation deliveries to Mexico were approximately 56 MMcf
per day in 1993 compared to 75 MMcf per day in 1992 and 31 MMcf
per day in 1991. The Partnership expects to receive
authorization from the FERC in 1994 to operate the Partnership's
pipeline connection to PEMEX for the purpose of importing natural
gas from Mexico.
Gas volumes transported for or exchanged with others (in
MMcf per day) by the Partnership and the Partnership's average
transportation fee for the three years ended December 31, 1993,
are as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
1993 1992 1991
<S> <C> <C> <C>
Transportation volumes . . . . . . . 1,566 1,301 1,132
Average transportation fee per Mcf . $.108 $.118 $.135
</TABLE>
Gas Supply
Gas supplies available to the Partnership 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 Partnership and the Partnership does
not own any gas reserves other than gas in underground storage,
which comprises an insignificant portion of the Partnership's gas
supplies. See "Natural Gas Operations - Gas Storage Facilities."
Because of recent changes in the natural gas industry, gas
supplies have become increasingly subject to shorter term
contracts, rather than long-term dedications.
During 1993, the Partnership purchased natural gas under
hundreds of separate contracts. Surplus gas supplies, if
available, may be purchased to supplement the Partnership's
delivery capability during peak use periods. These contractual
relationships usually are supplemented by a physical
interconnection between the Partnership's pipeline system and
either the wellhead, field gathering system or other delivery
point. A majority of the Partnership's gas supplies are obtained
from sources with multiple connections. In such instances, the
Partnership frequently competes on a monthly basis for available
gas supplies. Purchases from the Partnership's ten largest
suppliers accounted for approximately 37% of total Partnership
gas purchase volumes for 1993.
The Partnership's sources of gas supplies are located in
most of the major producing areas of Texas but are concentrated
primarily in the Delaware, Midland and Val Verde basins of West
Texas, the Maverick basin of South-Central Texas, the Texas Gulf
Coast and the East Texas basin. Because of the extensive
coverage within the State of Texas by the Partnership's pipeline
systems, the General Partner believes that the Partnership can
access a number of supply areas. While there can be no assurance
that the Partnership will be able to acquire new gas supplies in
the future as it has in the past, the General Partner believes
that Texas will remain a major producing state, and that for the
foreseeable future the Partnership will be able to compete
effectively with other producers and to connect sufficient new gas
supplies in order to meet customer demand.
Gas Storage Facilities
Valero Gas Storage Company ("Gas Storage"), a wholly
owned subsidiary of VNGC, operates an underground gas storage
facility (the "Wilson Storage Facility") in Wharton County,
Texas. The current storage capacity of the Wilson Storage
Facility is approximately 7.2 Bcf of gas available for
withdrawal. Natural gas can be continuously withdrawn from the
facility at initial rates of up to approximately 800 MMcf of gas
per day and at declining delivery rates thereafter until the
inventory is depleted. See Note 5 of Notes to Consolidated
Financial Statements for a discussion of the Partnership's use of
the Wilson Storage Facility through certain lease and other
agreements. To meet new Order 636 term business, the Partnership
supplemented its own natural gas storage capacity by securing
during 1993 an additional 6 Bcf of third-party storage capacity
for the 1993-94 winter heating season.
NATURAL GAS LIQUIDS OPERATIONS
General
The Partnership's NGL operations include the processing
of natural gas to extract a mixed NGL stream of ethane, propane,
butanes and natural gasoline conducted by Valero Hydrocarbons,
L.P. ("Hydrocarbons"), and the separation ("fractionation") of
mixed NGLs into component products and the transportation and
marketing of NGLs conducted by Valero Marketing, L.P.
("Marketing"). Extracted NGLs are transported to downstream
fractionation facilities and end-use markets through NGL
pipelines owned or leased by the Partnership and certain
common carrier NGL pipelines. Extraction is the process of
removing NGLs from the gas stream, thereby reducing the Btu
content and volume of incoming gas (referred to as "shrinkage").
In addition, some gas from the gas stream is consumed as fuel
during processing.
The Partnership receives revenues from the extraction of
NGLs principally through the sale of NGLs extracted in its owned
and leased gas processing plants and the collection of processing
fees charged for the extraction of NGLs owned by others. The
Partnership 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 primary markets for NGLs are petrochemical plants
(all NGLs), refineries (butanes and natural gasoline), and
domestic fuel distributors (propane). Because of these uses, NGL
prices are generally set by or in competition with prices for
refined products in the petrochemical, fuel and motor gasoline
markets.
Gas Processing Facilities
The Partnership currently owns eight gas processing
plants. In addition, the Partnership operates and leases from
Energy a 200-million cubic foot per day turboexpander gas
processing plant in South Texas near Thompsonville. See Note 5
of Notes to Consolidated Financial Statements. These owned and
leased plants are located in the western and southern regions of
Texas and process approximately 1.3 Bcf of gas per day. During
1993, the Partnership sold its only off-system gas processing
plant in West Texas. Accordingly, each of the Partnership's
owned or leased plants is now situated along the Transmission
System. The Partnership's NGL production is sold primarily in
the Corpus Christi, Texas and Mont Belvieu (Houston) markets. A
substantial portion of the Partnership's butane production is
sold to Energy as feedstock for Energy's refinery in Corpus
Christi (the "Refinery").
Of the eight gas processing plants owned by the
Partnership, four are located on leased premises, although
substantially all of the plant equipment is owned rather than
leased. Leases for the premises expire on various dates from
1995 to 2006. One of the leases is renewable for an additional
term. The nonrenewable leases do not expire until the years
2000, 2001 and 2006, respectively. The General Partner believes
that the operations of the Partnership will not be materially
affected by the expiration of the leases. In most cases,
satisfactory arrangements can be made through the renewal of
leases, the purchase of leased premises or the relocation of
plant equipment.
In 1993, the Partnership achieved a record NGL
production of approximately 24.8 million barrels for the year.
Volumes of NGLs produced at the Partnership's owned and leased
plants (in thousands of barrels per day) and the average market
price per gallon and average gas cost per MMbtu for the three
years ended December 31, 1993, are as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
1993 1992 1991
<S> <C> <C> <C>
NGL plant production . . . . . . . . 67.9 57.2 50.5
Average market price per gallon (3). $.290 $.314 $.326
Average gas cost per MMbtu . . . . . $1.96 $1.61 $1.42
<FN>
(3) Represents the average Houston area market prices for
individual NGL products weighted by relative volumes of each
product produced.
</TABLE>
The Partnership also operates for a fee two natural gas
processing plants in South Texas owned by Energy under operating
agreements with Energy. See Note 1 - "Transactions with Energy"
of Notes to Consolidated Financial Statements. Total production
at all plants operated by the Partnership, including both the
Partnership's owned and leased plants and the two plants owned by
Energy, averaged 77,400 barrels per day in 1993.
The Partnership and a major South Texas natural gas
producer have executed a letter of intent which, subject to
the execution of a binding contract and the closing of the
transaction, provides for the processing, transportation and
purchase of natural gas by the Partnership. Under the proposed
agreement, the producer will dedicate up to 300 MMcf per day of
natural gas production in South Texas to the Partnership for up
to 10 years, beginning in June 1994. The Partnership currently
processes approximately 150 MMcf per day of the producer's natural
gas under arrangements that expire in 1994 and 1995. The General
Partner anticipates that the Partnership will continue to pursue
opportunities to expand its NGL operations in South Texas.
Fractionation and Other Facilities
The Partnership owns fractionation facilities located at
the Partnership's Shoup gas processing plant near Corpus Christi,
at the Partnership's Armstrong gas processing plant near Yoakum,
Texas and at the Refinery. In addition, the Partnership leases
from Energy a depropanizer constructed at the Shoup plant and
a butane splitter constructed at the Refinery. See Note 5 of
Notes to Consolidated Financial Statements. In 1993, the
Partnership fractionated an average of 70,000 barrels per day
compared to 68,000 barrels per day in 1992 and 51,000 barrels per
day in 1991. Approximately 25%, 38% and 28% of the total volumes
fractionated in 1993, 1992 and 1991, respectively, represented
NGLs fractionated for third parties.
The Partnership also owns or leases approximately 375
miles of NGL pipelines that transport NGLs from gas processing
plants to fractionation facilities. The NGL pipelines also
connect with end users and major common-carrier NGL pipelines,
which ultimately deliver NGLs to the principal NGL markets. The
Partnership's NGL pipelines are located principally in South
Texas and West Texas. In South Texas, the Partnership owns 200
miles of NGL pipelines that directly or indirectly connect four
of the Partnership's owned processing plants and five processing
plants owned by third parties to the Partnership's fractionation
facilities near Corpus Christi. The South Texas system also
delivers NGLs from the Corpus Christi fractionation facilities to
end users and to a major common carrier NGL pipeline. Another
important NGL pipeline owned by the Partnership is located in
Southeast Texas and transports NGLs from the Partnership's
Armstrong plant and fractionation facility near Yoakum to an end
user. The Partnership leases from Energy 48 miles of NGL product
pipeline that connects the Thompsonville plant to the
Partnership's existing NGL pipeline in Freer, Texas. See Note 5
of Notes to Consolidated Financial Statements. The Partnership
also operates a 59-mile NGL products pipeline in South Texas
owned by Energy.
NGL Supply and Sales
The Partnership sells NGLs that have been extracted,
transported and fractionated in the Partnership's facilities and
NGLs purchased in the open market from numerous suppliers under
long-term, short-term and spot contracts. The Partnership's
largest NGL suppliers include major refineries and natural gas
processors. Its ten largest suppliers accounted for
approximately 63% of total NGL purchases in 1993. The
Partnership markets substantially greater volumes of NGLs than it
produces. During 1993, the Partnership sold to third parties on
average 94,500 barrels of NGLs per day compared to an average of
93,600 barrels per day in 1992 and 75,600 barrels per day in
1991.
The Partnership's contracts for the purchase, sale,
transportation and fractionation of NGLs both long-term and
short-term are generally with longstanding customers and
suppliers of the Partnership. The Partnership's long-term
contracts generally provide for monthly pricing adjustments based
on prices established in the principal NGL markets. The
Partnership's principal source of gas for processing is from the
Transmission System. To compensate Transmission's gas sales
customers for Btu reductions associated with the extraction of
NGLs from Transmission System gas, the Rate Order requires
Transmission to adjust the calculation of its weighted average
cost of gas to reflect the Btu shrinkage associated with customer
gas. The Partnership obtains additional gas supplies from
specific producers connected to the Transmission System through
gas processing agreements having terms that vary from a few
months to several years. Substantially all of the contracts with
third parties under which Hydrocarbons processes gas may be
suspended from month-to-month without advance notice at the
option of Hydrocarbons and are subject to termination at the
option of either party after short notice periods. The
profitability of individual processing arrangements is regularly
monitored so that action can be taken to terminate or modify any
arrangements that appear unprofitable as a result of declining
market conditions.
Because of various factors affecting the market price of
NGLs and natural gas, there is for each hydrocarbon component
found in any gas stream a price at which it is more profitable to
leave the component in the natural gas stream rather than to
extract the component and sell it separately as a NGL. Such
prices may vary among processing plants depending on specific
contractual arrangements, plant efficiencies and other factors.
For example, the Partnership has elected at certain times to
reduce the production of ethane by leaving ethane in the gas
stream rather than selling it as a separate product. During 1992
and 1991, the Partnership elected to maximize ethane recoveries
due to favorable market conditions that prevailed during such
periods. However, for certain periods during the fourth quarter
of 1993 and the first quarter of 1994, the Partnership
temporarily ceased the production of ethane at certain of its gas
processing plants because of the depressed market price for
ethane during such periods.
The Partnership's largest NGL customers include
petrochemical companies and major refiners, including Energy.
The Partnership's ten largest NGL customers accounted for
approximately 85% of the Partnership's total 1993 NGL product
sales revenues (22% of which was attributable to Energy's
refining operations). The petrochemical industry is a principal
market for NGLs and is expanding due to increasing market demand
for ethylene-derived products. As of the end of 1993, NGLs
represented about 68% of the total feedstock to the ethylene
crackers in the United States. During 1994, petrochemical
industry demand for NGLs is expected to continue to expand. In
the Partnership's immediate marketing area, additional NGL demand
in 1994 is expected to come from the Refinery's butane upgrade
facility and from the proposed start-up in early 1994 of an
ethylene plant on the Texas Gulf Coast expected to increase the
NGL base demand by approximately 30,000 to 40,000 barrels per day
by the end of 1994. In the longer term, the petrochemical
industry's increased requirements for NGLs are expected to
establish higher floor prices that should continue to support
profitable operation of gas processing facilities. In addition,
NGL demand should continue to increase as a result of existing
and future facilities that consume normal butane or isobutane.
GOVERNMENTAL REGULATIONS
Certain of the Partnership's subsidiaries, including
Transmission, are subject to regulations issued by the Railroad
Commission under the Cox Act, the Gas Utilities Regulatory Act
("GURA") and the Natural Resources Code, all of which are Texas
statutes, and the federal NGPA. In addition, certain activities
of Transmission and Val Gas are subject to the regulations of the
FERC under the NGPA and the Department of Energy Organization
Act of 1977 (the "DOE Act"). On January 1, 1993, all gas prices
were deregulated pursuant to the Natural Gas Wellhead Decontrol
Act of 1989. The Partnership's activities are also subject to
various federal, state and local environmental statutes and
regulations. See "Environmental Matters."
Texas Regulation
The Railroad Commission regulates the intrastate
transportation, sale, delivery and pricing of natural gas in
Texas by intrastate pipeline and distribution systems, including
those of the Partnership. Transmission and VLDC are regulated by
the Railroad Commission. The authority of the Railroad
Commission to regulate the Partnership's SMPs is unclear, except
with respect to conservation rules. Sales under the SMPs have
not been regulated by the Railroad Commission to date.
During 1992, the Railroad Commission revised its rules
governing the production and purchase of natural gas. The
Railroad Commission's gas proration rule (the "gas proration
rule") prohibits the production of gas in excess of market
demand. Under the gas proration rule, producers may not tender
and deliver volumes of gas in excess of their market demand.
Similarly, gas purchasers, including pipelines and purchasers
offering SMPs, may not take volumes of gas in excess of their
market demand. The gas proration rule further requires
purchasers to take gas by priority categories, ratably among
producers, without undue discrimination, and with high-priority
gas having higher priority than gas well gas, notwithstanding any
contractual commitments. For a discussion of the effect of the
gas proration rule on the operations of Transmission, see
"Natural Gas Operations - Gas Sales" above. Such revised rules
are intended to simplify the previous system of nominations and
to bring production allowables in line with estimated market
demand.
For pipelines, the Railroad Commission approves
intrastate sales and transportation rates and all proposed
changes to such rates. Changes in the price of gas sold to gas
distribution companies are subject to rate determination in a
rate case before the Railroad Commission. Under applicable
statutes and current Railroad Commission practice, larger volume
industrial sales and transportation charges may be changed
without a rate case if the parties to the transactions agree to
the rate changes and make certain representations. Rates for
Transmission's sales customers are governed by the Rate Order.
See "Management's Discussion and Analysis and Results of
Operations."
A new rate case may be initiated at the request of any
customer or by Transmission, or by the Railroad Commission on its
own initiative. No rate case involving Transmission has taken
place since the date of the Rate Order. The determination of any
rate change would be based on cost-of-service rate regulation
principles, including a return-on-rate base calculation and the
recovery of certain operating costs and depreciation. While
there can be no assurance in this regard, the General Partner
believes that the results of any such rate proceeding would not
materially adversely affect the Partnership's financial position
or results of operations. See Note 6 of Notes to Consolidated
Financial Statements for a discussion of the 1993 settlement of a
certain customer's audit of Transmission's weighted average cost
of gas.
NGL pipeline transportation is also subject to
regulation by the Railroad Commission. The Railroad Commission
requires the filing of tariffs and compliance with environmental
and safety standards. To date, the impact of this regulation on
the Partnership's operations has not been significant. The
Railroad Commission also has regulatory authority over gas
processing operations, but has not exercised such authority.
Federal Regulation
The Partnership's 7,200-mile pipeline system is an
intrastate business not subject to direct regulation by the FERC.
Although the Partnership's interstate sales and transportation
activities are subject to specific FERC regulations, these
regulations do not change the Partnership's overall regulatory
status. The Partnership's operations are more significantly
affected by the implementation of FERC Order 636 related to
restructuring of the interstate natural gas pipeline industry.
Order 636 requires pipelines subject to FERC jurisdiction to
provide unbundled marketing, transportation, storage and load
balancing services on a nondiscriminatory basis to producers
and end users instead of offering only combined packages of
services. This allows companies like the Partnership to
provide these component services separately from the
transportation provided by the interstate pipelines. The
"unbundling" of services under Order 636 allows LDCs and other
customers to choose the combination of services that best meet
their needs at the lowest total cost, thus increasing competition
in the interstate natural gas industry. As a result of
Order 636, the Partnership can more effectively compete for sales
of natural gas to LDCs and other natural gas customers located
outside Texas. See "Competition - Natural Gas."
In 1988, the FERC issued Order No. 497 (amended in 1989
by Order 497-A), which addresses possible abuses in relationships
between interstate natural gas pipelines and their marketing or
brokering affiliates. This order contains standards of conduct
and reporting requirements intended to prevent preferential
treatment of an affiliated marketer by an interstate pipeline in
providing transportation services. The General Partner believes
that Order No. 497, as amended, has assisted the Partnership in
competing for developing interstate markets.
ENVIRONMENTAL MATTERS
The Partnership's operation and construction of
pipelines, plants and other facilities for transporting,
processing, treating or storing natural gas and other products
are subject to environmental regulation by federal, state and
local authorities, including the Environmental Protection Agency
("EPA"), the Texas Natural Resource Conservation Commission
("TNRCC"), the Texas General Land Office and the Railroad
Commission. Compliance with regulations promulgated by these
various governmental authorities increases the cost of planning,
designing, initial installation and operation of the
Partnership's facilities. The regulatory requirements relate to
water and storm water discharges, waste management and air
pollution control measures.
Although the Partnership continues to monitor its
compliance with environmental regulations through audits and
other procedures, the Partnership's expenditures for
environmental control facilities were not material in 1993 and
are not expected to be material in 1994. Currently, expenditures
are made to comply with air emission regulations and solid waste
management regulations applicable to various facilities.
The Partnership will continue to be subject to
regulations concerning wastes and air emissions, including new
federal operating permit requirements for certain air emission
sources. Proposed regulations regarding enhanced monitoring and
other programs for the detection of certain releases may also
affect the Partnership's operations. The Partnership anticipates
increased regulation of wastes by the Railroad Commission, and
increased control of air toxins together with additional
permitting requirements from the EPA regarding storm water
discharges from industrial and construction activities. However,
the General Partner does not expect these requirements to have a
material adverse effect on the Partnership's financial position
or results of operations.
COMPETITION
Natural Gas
Changes in the gas markets during the recent period of
deregulation under FERC Order 636 have resulted in significantly
increased competition. Despite the increased competition, the
Partnership generally has been able to take advantage of the
increased business opportunities resulting from the
implementation of Order 636. Accordingly, the Partnership has
not only maintained but has increased its throughput volumes.
Under Order 636, the Partnership can more effectively compete for
sales of natural gas to LDCs and other customers located outside
Texas. See "Governmental Regulations - Federal Regulation."
Contracting practices in the natural gas industry generally are
moving away from the spot, interruptible type of sales prevalent
in recent years, and toward "firm" and term contracts that
require gas suppliers to commit to specified deliveries of gas
without the option of interrupting service and penalize gas
suppliers for failure to perform in accordance with their
contractual commitments. Because of Order 636, the Partnership
now can guarantee long-term supplies of natural gas to be
delivered to buyers at interstate locations. The Partnership can
charge a fee for this guarantee, which together with
transportation charges, can exceed the amount that the
Partnership could receive for merely transporting natural gas.
The Partnership has enjoyed recent success in entering into such
contracts. See "Natural Gas Operations - Gas Sales - Interstate
Sales." Because of the location of the Transmission System, the
General Partner believes that the Partnership is able to compete
for new gas supplies and new gas sales and transportation
customers. The financial strength of potential suppliers will be
an important consideration to LDCs and other customers when
contracting for firm supplies of natural gas. Accordingly, the
General Partner believes that substantial amounts of working
capital and capital expenditures for gas inventories, storage,
pipeline connections and financial hedging products (e.g.,
futures contracts) will be required to compete effectively for
additional business under Order 636. See "Properties."
The General Partner believes that the natural gas and
NGL industries are undergoing a period of reorganization and
consolidation as major energy companies divest operations that
are not part of their core operations and smaller entities
combine to compete more effectively in the present natural gas
environment. Through ongoing reorganizations and consolidations
in the industry, certain assets may become available for
acquisition by the Partnership including natural gas and NGL
pipelines, gathering facilities, processing plants and NGL
fractionation facilities. The General Partner believes that
certain trends in the natural gas industry will create additional
business opportunities and require additional capital
expenditures for companies that wish to compete effectively in
interstate natural gas markets. These trends include an emerging
west-to-east movement of natural gas across the United States,
the increasing importance of South Texas as a major natural gas
supply area and opportunities created by Order 636.
Many of the market areas served by the Partnership's gas
systems are also served by pipelines of other companies; however,
the location of the Partnership's facilities in major producing
and marketing areas is believed to provide a competitive
advantage. Although gas competes with other fuels, gas to gas
competition continues to set pricing levels. The Partnership
does not anticipate that fuel oil pricing will reach parity with
spot natural gas prices in the foreseeable future, rendering
unlikely any significant switch to fuel oil or other alternate
fuels by the Partnership's intrastate customers. Significant
decreases in the price of fuel oil historically have led to some
switching of load in the interstate market, although the impact
on the Partnership has been indirect and immaterial. The
Partnership's electric power generation and industrial customers
have the ability to substitute alternate fuels for a portion of
their current natural gas deliveries. This capability is
generally reserved for periods of natural gas curtailment, as the
continued disparity in price and the added cost of delivery,
storage and handling of alternate fuels limit their long-term
use. Demand for natural gas continues to be affected by the
operation of various nuclear and coal power plants in the
Partnership's service area. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
In recent years, certain intrastate pipelines with which
the Partnership had traditionally competed have acquired or have
been acquired by interstate pipelines. These combined entities
generally have capital resources substantially greater than those
of the Partnership and, notwithstanding Order 636's "open access"
regulations, may realize economies of scale and other economic
advantages in acquiring, selling and transporting natural gas.
The acquisition of gas supply is capital intensive, as it
frequently requires installation of new gathering lines to reach
sources of 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 Partnership's intrastate and interstate markets.
The U.S.-Canada free trade agreement and changes in
Canadian export regulations have increased Canadian natural gas
imports into the United States. Under the recently adopted North
American Free Trade Agreement, Canadian natural gas imports into
the United States are expected to continue. Canadian imports have
increased competition in the interstate markets in which the
Partnership competes for natural gas sales and have affected natural
gas availability and prices in the Texas intrastate market. As a
result, competition in the natural gas industry is expected to
remain intense.
Natural Gas Liquids
The consumption of NGLs marketed in the United States is
divided among four distinct markets. NGLs are primarily consumed
in the production of petrochemicals (mainly ethylene), followed
by motor gasoline production, residential and commercial heating,
and agricultural uses. Other hydrocarbon alternatives, primarily
refinery-based products, are available for each NGL for most end
uses. For some end uses, including residential and commercial
heating, a conversion from NGLs to other natural hydrocarbon
products requires significant expense or delay, but for others,
such as ethylene and industrial fuel uses, a conversion from NGLs
to other natural hydrocarbon products could be made without
significant delay or expense.
Because certain NGLs are used in the production of motor
gasoline and compete directly with other refined products in the
fuel and petrochemical feedstock markets, NGL prices are set by
or compete with petroleum-derived products. Consequently,
changes in crude and refined product prices cause NGL prices to
change as well. See "Recent Developments - Decline of Crude Oil
and NGL Prices." The economics of natural gas processing depends
principally on the relationship between natural gas costs and NGL
prices. When this relationship has been favorable, the NGL
processing business has been highly competitive. The General
Partner believes that competitive barriers to entering the
business are generally low. Moreover, improvements in
NGL-recovery technology have improved the economics of NGL
processing and have increased the attractiveness of many
processing opportunities. In recent years, NGL margins have been
subject to the extreme volatility of energy prices in general.
The General Partner believes that the level of competition in NGL
processing has increased over the past year and generally will
become more competitive in the longer term as the demand for NGLs
increases.
EMPLOYEES
The Partnership has no employees of its own.
ITEM 2. PROPERTIES
The Partnership owns natural gas pipeline systems and
natural gas liquids facilities, processing plants, compressor
stations, treating plants, measuring and regulating stations,
fractionation facilities, warehouses and offices, all of which
are located in Texas. The Partnership has pledged substantially
all of its gas systems and processing facilities, except for
certain natural gas pipeline, natural gas processing, NGL
fractionation and NGL pipeline assets leased from Energy, as
collateral for its First Mortgage Notes. The Partnership is a
lessee under a number of cancelable and noncancelable leases for
certain real properties. See Notes 3 and 5 of Notes to
Consolidated Financial Statements. Reference is made to "Item 1.
Business," which includes detailed information regarding the
properties of the Partnership.
The General Partner believes that the Partnership's
properties and facilities are generally adequate for their
respective operations, and that the facilities of the Partnership
are maintained in a good state of repair. However, the General
Partner believes that the Partnership must continue to make
substantial capital investments in facilities that will enable
the Partnership to access gas supplies and markets and expand its
NGL processing and transportation capabilities so that the
Partnership may compete effectively in the current natural gas
industry environment. The General Partner believes that the
Partnership's lack of financial flexibility may impair its
ability to make capital expenditures that will enable the
Partnership to improve and expand its operations or to take
full advantage of the opportunities that may arise in the natural
gas and NGL businesses over the next several years. See
"Governmental Regulations - Federal Regulation", "Competition -
Natural Gas" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
ITEM 3. LEGAL PROCEEDINGS
The Partnership is involved in the following
proceedings:
Coastal Oil and Gas Corporation v. TransAmerican Natural
Gas Corporation ("TANG"), 49th State District Court, Webb County,
Texas (filed October 30, 1991). In March 1993, Valero
Transmission Company and Valero Industrial Gas Company were
served as third party defendants in this lawsuit. In August
1993, Energy, VNGP, L.P., and certain of their subsidiaries were
named as additional third-party defendants (collectively,
including the original defendant subsidiaries, the "Valero
Defendants"). In TANG's counterclaims against Coastal and
third-party claims against the Valero Defendants, TANG alleges
that it contracted to sell natural gas to Coastal at the posted
field price of Valero Industrial Gas Company and that the Valero
Defendants and Coastal conspired to set such price at an
artificially low level. TANG also alleges that the Valero
Defendants and Coastal conspired to cause TANG to deliver
unprocessed or "wet" gas thus precluding TANG from extracting
NGLs from its gas prior to delivery. TANG seeks actual damages
of approximately $50 million, trebling of damages under antitrust
claims, punitive damages of $300 million, and attorneys' fees.
In the event of an adverse determination involving Energy, Energy
likely would seek indemnification from the Partnership under
terms of the partnership agreements and other applicable
agreements between VNGP, L.P., its subsidiary partnerships and
their respective general partners. The Valero Defendant's motion
for summary judgment on TANG's antitrust claims was argued on
January 24, 1994. The court has not ruled on such motion. The
current trial setting for this case is March 14, 1994.
Toni Denman v. Valero Natural Gas Partners, L.P., Valero
Natural Gas Company, Valero Energy Corporation, et al., (filed
October 15, 1993); Howard J. Vogel v. Valero Natural Gas
Partners, L.P., Valero Natural Gas Company, Valero Energy
Corporation, et al., (filed October 15, 1993); 7547 Partners v.
Valero Natural Gas Partners, L.P., Valero Natural Gas Company,
Valero Energy Corporation, et al., (filed October 19, 1993);
Robert Endler Trust v. Valero Natural Gas Partners, L.P., Valero
Natural Gas Company, Valero Energy Corporation, et al., (filed
October 27, 1993); Dorothy Real v. Valero Energy Corporation,
Valero Natural Gas Company and Valero Natural Gas Partners, L.P.,
(filed November 4, 1993); Malcolm Rosenwald v. Valero Natural Gas
Partners, L.P., Valero Natural Gas Company, Valero Energy
Corporation, et al., (filed November 9, 1993); Norman Batwin v.
Valero Natural Gas Partners, L.P., Valero Natural Gas Company,
Valero Energy Corporation, et al., (filed November 15, 1993)
Court of Chancery, New Castle County, Delaware. Each of the
foregoing suits was filed in response to the announcement by
Energy on October 14, 1993, of Energy's proposal to acquire the
publicly traded Common Units of VNGP, L.P. pursuant to a proposed
merger of VNGP, L.P. with a wholly owned subsidiary of Energy.
The suits were consolidated by the Court of Chancery on
November 23, 1993. The plaintiffs sought to enjoin or rescind
the proposed merger, alleging that the corporate defendants and
the individual defendants, as officers or directors of the
corporate defendants, have engaged in actions in breach of the
defendants' fiduciary duties to the holders of the Common Units
by proposing the merger. The plaintiffs alternatively sought an
increase in the proposed merger consideration, compensatory
damages and attorneys' fees. In December 1993, the parties
reached a tentative settlement of the consolidated lawsuit. The
terms of the settlement will not require a material payment by
Energy or the Partnership.
The Long Trusts v. Tejas Gas Corporation, 123rd Judicial
District Court, Panola County, Texas (filed March 1, 1989).
Valero Transmission Company ("VTC"), as buyer, and Tejas Gas
Corporation ("Tejas"), as seller, are parties to various gas
purchase contracts assigned to and assumed by Valero
Transmission, L.P. upon formation of the Partnership in 1987.
Tejas is also a party to a series of gas purchase contracts
between Tejas, as buyer, and certain trusts ("The Long Trusts"),
as seller, which are in litigation ("The Long Trusts
Litigation"). Neither the Partnership nor VTC is a party to The
Long Trusts Litigation or the Tejas/Long Trusts contracts.
However, because of the relationship between the
Transmission/Tejas contracts and the Tejas/Long Trusts contracts,
and in order to resolve existing and potential disputes, Tejas,
VTC and Valero Transmission, L.P. have agreed that Tejas, VTC and
Valero Transmission, L.P. will cooperate in the conduct of The
Long Trusts Litigation, and that VTC and Valero Transmission,
L.P. will bear a substantial portion of the costs of any appeal
and any nonappealable final judgment rendered against Tejas. In
The Long Trusts Litigation, The Long Trusts allege that Tejas has
breached various minimum take, take-or-pay and other contractual
provisions of the Tejas/Long Trusts contracts, and assert a
statutory non-ratability claim. The Long Trusts seek alleged
actual damages including interest of approximately $30 million
and an unspecified amount of punitive damages. The District
Court ruled on the plaintiff's motion for summary judgment,
finding that as a matter of law the three gas purchase contracts
at issue were fully binding and enforceable, that Tejas breached
the minimum take obligations under one of the contracts, that
Tejas is not entitled to claimed offsets for gas purchased by
third parties and that the "availability" of gas for take-or-pay
purposes is established solely by the delivery capacity testing
procedures in the contracts. Damages, if any, have not been
determined. Because of existing contractual obligations of
Valero Transmission, L.P. to Tejas, the lawsuit may ultimately
involve a contingent liability for Valero Transmission, L.P. The
court recently granted Tejas's motion for continuance in
connection with the former January 10, 1994 trial setting. The
Long Trusts Litigation is not currently set for trial.
NationsBank of Texas, N.A., Trustee of The Charles
Gilpin Hunter Trust, et al. v. Coastal Oil & Gas Corporation,
Valero Transmission Company, et al., 160th State District Court,
Dallas County, Texas (filed February 2, 1993) (formerly reported
as "Williamson, et al. v. Coastal Oil & Gas Corporation, Valero
Transmission Company, et al., 68th State District Court, Dallas
County, Texas (filed June 30, 1988)" in the Partnership's
Form 10-K for the fiscal year ended December 31, 1992). In a
lawsuit filed in 1988, plaintiffs alleged that defendants Coastal
Oil & Gas Corporation ("Coastal") and Energy, VTC, VNGP, L.P.,
the Management Partnership and Valero Transmission, L.P. (the
"Valero Defendants") were liable for failure to take minimum
quantities of gas, failure to make take-or-pay payments and other
breach of contract and breach of fiduciary duty claims.
Plaintiffs sought declaratory relief, actual damages in excess of
$37 million and unquantified punitive damages. The lawsuit was
settled on terms immaterial to the Valero Defendants, and the
parties agreed to dismissal of the lawsuit. On November 16,
1992, prior to entry of an order of dismissal, NationsBank of
Texas, N.A., as trustee for certain trusts (the "Intervenors"),
filed a plea in intervention to intervene in the lawsuit. The
Intervenors asserted that they held a non-participating mineral
interest in the lands subject to the litigation and that their
rights were not protected by the plaintiffs in the settlement.
On February 4, 1993, the Court struck the Intervenors' plea in
intervention. However, on February 2, 1993, the Intervenors had
filed a separate suit in the 160th State District Court, Dallas
County, Texas, against all prior defendants and an additional
defendant, substantially adopting the allegations and claims of
the original litigation. In February 1994, the parties reached
a tentative settlement of the lawsuit on terms immaterial to the
Partnership.
Valero Transmission, L.P. v. J. L. Davis, et al., 81st
District Court, Frio County, Texas (filed September 20, 1991).
This lawsuit was commenced by Transmission as a suit for breach
of contract against defendant. On January 11, 1993, defendant
filed a cross action against Valero Transmission, L.P., Valero
Industrial Gas, L.P., and Reata Industrial Gas, L.P., asserting
claims for actual damages for failure to pay for goods and
services delivered and various other cross-claims. In January
1994, the parties reached a tentative settlement of the lawsuit
on terms immaterial to the Partnership.
City of Houston Claim. In a letter dated September 1,
1993 from the City of Houston (the "City") to Valero Transmission
Company ("VTC"), the City stated its intent to bring suit against
VTC for certain claims asserted by the City under the franchise
agreement between the City and VTC. VTC is the general partner
of Valero Transmission, L.P. The franchise agreement was
assigned to and assumed by Valero Transmission, L.P. upon
formation of the Partnership in 1987. In the letter, the City
declared a conditional forfeiture of the franchise rights based
on the City's claims. In a letter dated October 27, 1993, the
City claims that VTC owes to the City franchise fees and accrued
interest thereon aggregating approximately $13.5 million. In a
letter dated November 9, 1993, the City claimed an additional
$18 million in damages related to the City's allegations that VTC
engaged in unauthorized activities under the franchise agreement
by transmitting gas for resale and by transporting gas for third
parties on the franchised premises. Any liability of VTC with
respect to the City's claims has been assumed by the Partnership.
The City has not filed a lawsuit.
Take-or-Pay and Related Claims. As a result of past
market conditions and prior contracting practices in the natural
gas industry, numerous producers and other suppliers brought
claims against Valero Transmission, L.P. ("Transmission")
asserting that it was in breach of contractual provisions
requiring that it take, or pay for if not taken, certain
specified volumes of natural gas. The Partnership has settled
substantially all of the significant take-or-pay claims, pricing
differences and contractual disputes heretofore brought against
it. In 1987, Transmission and a producer from whom Transmission
has purchased natural gas entered into an agreement resolving
certain take-or-pay issues between the parties in which
Transmission agreed to pay one-half of certain excess royalty
claims arising after the date of the agreement. The royalty
owners of the producer recently completed an audit of the
producer and have presented to the producer claims for additional
royalty payments in the amount of approximately $17.3 million,
and accrued interest thereon of approximately $19.8 million.
Approximately $8 million of the royalty owners' claim accrued
after the effective date of the agreement between the producer
and Transmission. The producer and Transmission are reviewing
the royalty owners' claims. No lawsuit has been filed by the
royalty owners. The General Partner believes that various
defenses under the agreement may reduce any liability of
Transmission to the producer in this matter.
Although additional claims may arise under older
contracts until their expiration or renegotiation, the General
Partner believes that the Partnership has resolved substantially
all of the significant take-or-pay claims that are likely to be
made. Although the General Partner is currently unable to
predict the amount Transmission or the Partnership ultimately may
be required to pay in connection with the resolution of existing
and potential take-or-pay claims, the General Partner believes
any remaining claims can be resolved on terms satisfactory to the
Partnership and that the resolution of such claims and any
potential claims has not had and will not have a material adverse
effect on the Partnership's financial position or results of
operations. Any liability of Energy with respect to take-or-pay
claims involving Transmission's intrastate pipeline operations
has been assumed by the Partnership.
Conclusion. The Partnership is also a party to
additional claims and legal proceedings arising in the ordinary
course of business. The General Partner believes it is unlikely
that the final outcome of any of the claims or proceedings to
which the Partnership is a party including those listed
above would have a material adverse effect on the Partnership's
financial position or results of operations; however, due to the
inherent uncertainties 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 Partnership's results of operations for the fiscal 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 1993.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON UNITS AND
RELATED SECURITY HOLDER MATTERS
The Partnership's Common Units are listed on the New
York Stock Exchange, which is the principal trading market for
these securities. At February 14, 1994, there were 2,361 holders
of record and an estimated 15,000 beneficial owners of the Common
Units.
The range of the high and low sales prices of the Common
Units, as quoted in the New York Stock Exchange - Composite
Transactions listing in The Wall Street Journal, and the amount
of distributions per Common Unit declared for each quarter in the
preceding two years, are set forth in the table below:
<TABLE>
<CAPTION>
Common Units(1)
Distributions Declared
1993 1992 Per Common Unit(1)(2)
Quarter Ended High Low High Low 1993 1992
<S> <C> <C> <C> <C> <C> <C>
March 31 . . . $ 8 5/8 $8 $11 3/4 $7 3/4 $.125 $.625
June 30. . . . 8 1/2 7 3/4 9 1/2 7 3/4 .125 .125
September 30 . 9 3/8 8 1/8 8 7/8 7 7/8 .125 .125
December 31. . 12 9 9 7/8 7 7/8 .125 .125
_________________
<FN>
(1) Unit prices prior to May 31, 1992, and distributions
declared for the quarters ended prior to June 30, 1992, are
for the Partnership's Preference Units. The Preference
Units were automatically converted into Common Units upon
termination of the Preference Period which ended with the
payment on May 30, 1992 of the cash distribution for the
first quarter of 1992. See Note 1 of Notes to Consolidated
Financial Statements - "Allocation of Net Income and Cash
Distributions."
(2) Distributions declared per Common Unit represent
distributions attributable to the periods indicated.
</TABLE>
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data set forth below for the year
ended December 31, 1993 is derived from the Partnership's
Consolidated Financial Statements contained elsewhere herein.
The selected financial data for the years ended prior to
December 31, 1993 is derived from the selected financial data
contained in the Partnership's Annual Report on Form 10-K for the
year ended December 31, 1992.
The following summaries are in thousands of dollars
except for per Unit amounts:
<TABLE>
<CAPTION>
Year Ended December 31,
1993 1992 1991 1990 1989
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Operating revenues . . . . . . . . . $1,326,458 $1,197,129 $1,144,001 $1,091,452 $1,078,711
Depreciation and amortization. . . . 38,905 37,924 42,306 42,285 40,873
Operating income . . . . . . . . . . 79,478 89,841 99,834 105,231 68,255
Net income . . . . . . . . . . . . . 14,447 24,986 37,036 50,714 13,306
General Partners' interest . . . . . 1,217 1,596 1,973 2,275 1,247
Net income allocable to
Limited Partners . . . . . . . . . 13,230 23,390 35,063 48,439 12,059
Net income per Limited
Partner Unit . . . . . . . . . . . .72 1.27 1.90 2.62 .67
STATEMENT OF CASH FLOWS DATA:
Net cash provided by
operating activities . . . . . . . $ 70,481 $ 77,886 $ 84,281 $ 45,765 $ 58,145
Capital expenditures . . . . . . . . 36,061 35,893 33,074 31,111 21,060
Cash distributions paid per
Limited Partner Unit . . . . . . . .50 1.50 2.50 2.50 2.50
BALANCE SHEET DATA:
Total assets . . . . . . . . . . . . $1,045,082 $1,084,481 $1,061,490 $1,025,531 $1,090,999
Long-term debt obligations . . . . . 506,429 534,286 559,643 582,500 600,000
Long-term capital lease obligations. 103,787 104,075 77,428 - -
<FN>
See Notes to Consolidated Financial Statements.
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
PROPOSED MERGER WITH ENERGY
As fully described in Item 1 - "Business-Recent
Developments," in October 1993, Energy publicly announced its
proposal to acquire the issued and outstanding Common Units in
VNGP, L.P. held by the Public Unitholders and effective
December 20, 1993, Energy, VNGP, L.P. and VNGC entered into the
Merger Agreement providing for the merger of VNGP, L.P. with a
wholly owned subsidiary of Energy subject to various conditions.
The General Partner has approved the merger because it believes
that the Partnership, in its present form, has insufficient
financial flexibility to participate fully in opportunities that
are expected to arise in the natural gas and NGL businesses, that
the ability of the Partnership to compete effectively in these
businesses will be enhanced through the merger and that the
Partnership could lose its competitive position if it does not
pursue such opportunities when and if they become available. The
General Partner also believes that conflicts of interest between
the Partnership and Energy can be eliminated and that
administrative efficiencies can be realized through the merger.
See "Results of Operations" and "Liquidity and Capital Resources"
below.
On January 25, 1994, the VNGC Board of Directors
declared a cash distribution of $.125 per Common Unit for the
fourth quarter of 1993 that is payable March 1, 1994 to holders
of record as of February 7, 1994. If the merger occurs after
March 9, 1994, the General Partner intends and expects to declare
and pay a pro rata distribution to holders of record of the
Common Units on the effective date of the merger based upon the
number of days elapsed between February 7, 1994 and such
effective date.
RESULTS OF OPERATIONS
The following are the Partnership's financial and
operating highlights for each of the three years in the period
ended December 31, 1993 (in thousands of dollars, except as
otherwise noted).
<TABLE>
<CAPTION>
Year Ended December 31,
1993 1992 1991
<S> <C> <C> <C>
OPERATING REVENUES:
Natural gas:
Sales. . . . . . . . . . . . . . . . . . $ 840,066 $ 689,076 $ 710,996
Transportation . . . . . . . . . . . . . 60,186 53,950 53,230
Natural gas liquids. . . . . . . . . . . . 441,741 466,017 390,708
Intersegment eliminations. . . . . . . . . (15,535) (11,914) (10,933)
Total. . . . . . . . . . . . . . . . . . $1,326,458 $1,197,129 $1,144,001
OPERATING INCOME:
Natural gas. . . . . . . . . . . . . . . . $ 53,458 $ 32,484 $ 37,140
Natural gas liquids. . . . . . . . . . . . 26,020 57,357 62,694
Total. . . . . . . . . . . . . . . . . . $ 79,478 $ 89,841 $ 99,834
NET INCOME . . . . . . . . . . . . . . . . . $ 14,447 $ 24,986 $ 37,036
NET INCOME PER LIMITED PARTNER UNIT. . . . . $ .72 $ 1.27 $ 1.90
OPERATING STATISTICS:
Natural gas:
Gas throughput volumes (MMcf per day):
Gas sales. . . . . . . . . . . . . . . 980 889 1,011
Gas transportation . . . . . . . . . . 1,566 1,301 1,132
Total gas throughput . . . . . . . . 2,546 2,190 2,143
Average gas sales price per Mcf. . . . . $ 2.34 $ 2.11 $ 1.92
Average gas transportation fee per Mcf . $ .108 $ .118 $ .135
Natural gas liquids:
Plant production (MBbls per day) . . . . 67.9 57.2 50.5
Sales volumes (MBbls per day) (1). . . . 94.5 93.6 75.6
Average market price per gallon (2). . . $ .290 $ .314 $ .326
Average gas cost per MMBtu . . . . . . . $ 1.96 $ 1.61 $ 1.42
<FN>
(1) Including NGLs purchased from third parties.
(2) Represents the average Houston area market prices for
individual NGL products weighted by relative volumes of
each product produced.
</TABLE>
General
The Partnership's net income for 1993 decreased $10.5
million, or 42%, compared to 1992 due primarily to a $10.4
million, or 12% decrease in operating income. In the fourth
quarter of 1993, a $4.5 million decrease in operating income
resulted in a net loss of $2.1 million compared to net income of
$2.3 million in the fourth quarter of 1992. Increased operating
income from the Partnership's natural gas operations was more
than offset by decreased operating income from the Partnership's
natural gas liquids ("NGL") operations for both the annual and
quarterly periods, as explained below.
The Partnership's natural gas operating results improved
in 1993 due to, among other things, improvement in market
fundamentals as natural gas supply and demand have become more
balanced, and increased business opportunities resulting from the
implementation of Federal Energy Regulatory Commission ("FERC")
Order No. 636 ("Order 636"). Order 636 requires, among other
things, that pipelines subject to FERC jurisdiction provide
"unbundled" transportation, storage and load balancing services
on a nondiscriminatory basis to producers and end users instead
of offering only combined packages of services. This change has
resulted in increased competition in the natural gas industry.
Although no Subsidiary Operating Partnership is directly subject
to Order 636, it has created new interstate supply, marketing
and transportation opportunities for the Partnership. However,
the General Partner believes that substantial amounts of working
capital and capital expenditures for gas inventories, storage
facilities, pipeline connections and related facilities, and for
financial hedging products, such as gas futures contracts, will
be required to compete effectively for additional business under
Order 636. See "Governmental Regulations-Federal Regulation" and
"Competition-Natural Gas" under Item 1 - "Business" for
additional information regarding Order 636 and its effect on the
Partnership's business.
In addition to the opportunities and challenges created
by Order 636, the Partnership's natural gas operations have also
been affected by an emerging trend of west-to-east movement of
gas across the United States resulting from growing productive
capacity in western supply basins, the completion of new pipeline
capacity from such basins to the U.S. West Coast and increasing
demand for power generation in the East or Southeast. The
General Partner believes that this west-to-east shift in natural
gas supply patterns is well underway, and that in many of the
pipelines able to serve this market, including pipelines operated
by the Partnership, west-to-east capacity is becoming
constrained. The General Partner believes that, over time, these
capacity constraints may warrant additional west-to-east capacity
additions and that the Partnership would be positioned to
participate in such opportunities. Because natural gas is a
clean burning fuel, environmental concerns are expected to
increase long-term demand for natural gas which should benefit
the Partnership's natural gas throughput volumes.
The Partnership benefitted in 1993 from an increase in
demand for natural gas resulting from the shutdown of both units
of the South Texas Project nuclear plant ("STP") in Bay City,
Texas during most of 1993 due to operational problems. At full
operation, the STP displaces approximately 650 MMcf per day of
natural gas demand. The Partnership currently expects that the
STP will resume full operations in the second quarter of 1994,
displacing a portion of the Partnership's gas sales volumes and
reducing Partnership operating income. Demand for natural gas in
the Partnership's core service area is also expected to be
affected by the continued operation of other nuclear and coal-
fired power plants. The first and second units of the Comanche
Peak nuclear plant near Ft. Worth, Texas, both 1,150 megawatt
("MW") units, commenced operations in 1991 and 1993,
respectively, and combine to displace approximately 600 MMcf per
day of gas demand. In addition, San Antonio City Public Service,
the Partnership's largest gas sales customer, commenced
commercial operations in 1992 of a 500 MW coal-fired electrical
generation facility which displaces a portion of the
Partnership's gas sales volumes.
The Partnership's gas sales are made by (i) the
Partnership's special marketing programs ("SMPs") and certain
other subsidiary operating partnerships which are not SMPs and
(ii) Valero Transmission, L.P. ("Transmission"). Gas
transportation is conducted primarily by Transmission. Gas sales
and transportation volumes (in MMcf per day), average gas sales
prices and average gas transportation fees for the years ended
December 31, 1993, 1992 and 1991 were as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
1993 1992 1991
<S> <C> <C> <C>
SMPs and other sales volumes:
Intrastate . . . . . . . . . . . . . . . . . . . . 642 552 545
Interstate . . . . . . . . . . . . . . . . . . . . 281 259 363
Total SMPs and other sales volumes . . . . . . . 923 811 908
Transmission sales volumes (intrastate). . . . . . . 57 78 103
Total sales volumes. . . . . . . . . . . . . . . 980 889 1,011
SMPs and other's average gas sales price per Mcf . . $ 2.18 $ 1.86 $ 1.62
Transmission's average gas sales price per Mcf . . . $ 4.86 $ 4.71 $ 4.57
Transportation volumes . . . . . . . . . . . . . . . 1,566 1,301 1,132
Average gas transportation fee per Mcf . . . . . . . $ .108 $ .118 $ .135
</TABLE>
The Partnership's SMPs and other gas sales and
transportation business are based primarily on competitive market
conditions and contracts negotiated with individual customers.
The Partnership has been able to mitigate, to some extent, the
effect of competitive industry conditions by the flexible use of
its strategically located pipeline system and its aggressive
marketing efforts. Sales volumes in the SMPs and other's
intrastate and interstate markets and total transportation
volumes increased in 1993 compared to 1992 due to, among other
things, aggressive efforts to generate business related to the
implementation of FERC Order 636 and the west-to-east shift in
natural gas supply patterns, and the shutdown of the STP during
most of 1993. In 1992, the Partnership established a Market
Center Services Program to provide price risk management services
to gas producers and end users through the use of forward
contracts and other tools which have traditionally been used in
financial risk management. The General Partner believes that the
"value-added" services provided through this program allow the
Partnership to effectively compete in the post-Order 636
environment. The Partnership also utilizes such price risk
management techniques to manage the cost of gas consumed in its
NGL operations, and manage price risk associated with its natural
gas storage and marketing activities. In 1993 and 1992, the
Partnership recognized $18.7 million and $12.9 million,
respectively, in gas cost reductions and other benefits from this
program. An additional $5.1 million and $3.6 million in other
reductions of cost of gas was generated by transactions entered
into in 1993 and 1992, respectively, which is recognized in
income in the subsequent year as the related gas is sold. The
Market Center Services Program benefitted in 1993 and 1992 from
the volatility of natural gas prices and the Partnership's
successful anticipation of price movements. Increased stability
in natural gas prices, however, could reduce the benefits
generated by this program in 1994.
Transmission's sales are made to intrastate customers
under contracts which originated in the 1960s and 1970s with 20-
to 30-year terms. These contracts were full requirements, no-
notice service contracts governed by a rate order (the "Rate
Order") issued in 1979 by the Railroad Commission of Texas (the
"Railroad Commission"). The Rate Order provides for Transmission
to sell gas at its weighted average cost of gas, as defined
("WACOG"), plus a margin of $.15 per Mcf. In addition to the
cost of gas purchases, Transmission's WACOG has included storage,
gathering and other fixed costs totalling approximately $19
million per year (see customer audit settlement agreement
discussed below for adjustments to such amount), and amortization
of deferred gas costs related to the settlement of take-or-pay
and related claims (see Note 1 - "Other Assets" and Note 6 of
Notes to Consolidated Financial Statements). Transmission's gas
purchases include high-cost casinghead gas and certain special
allowable gas that Transmission is required to purchase
contractually and under the Railroad Commission's priority rules.
Transmission's sales volumes have been decreasing with the
expiration of its sales contracts. As a result of these factors,
Transmission's WACOG and gas sales price are substantially in
excess of market clearing levels, as shown in the table above.
In July 1992, a contract representing approximately 37% of
Transmission's sales volumes for the first six months of 1992
expired by its own terms, reducing Transmission's and the
Partnership's cash flow and income in 1992 and 1993.
Transmission's WACOG has been periodically audited by
certain of its customers, as allowed under the Rate Order. One
such customer (the "Customer") questioned the application of
certain of Transmission's current rate policies to future periods
in light of the decreases that have occurred in Transmission's
throughput, and the Customer has recently completed its audit of
Transmission's WACOG with respect thereto. For 1993, the
Customer represented approximately 70% of Transmission's sales
volumes and such percentage is expected to increase as other
sales contracts expire and are not renewed. As a result of the
Customer's audit, Transmission and the Customer entered into a
settlement agreement which excludes certain of the fixed costs
described above from Transmission's WACOG, effective with July
1993 sales, resulting in a reduction of the Partnership's annual
net income by approximately $6 million. Upon the termination of
Transmission's gas sales contract with the Customer in 1998,
Transmission's fixed costs, including storage (see Note 5 of
Notes to Consolidated Financial Statements), would be charged to
income instead of recovered through its gas sales rates.
Transmission expects to recover its deferred gas costs over a
period of approximately eight years. The recovery of any
additional payments made in connection with any future
settlements would be limited.
In the course of making gas sales and providing
transportation services to customers, Transmission experiences
measurement and other volumetric differences related to the
amounts of gas received and delivered. Transmission has in the
past experienced overall net volume gains due to such differences
and its Rate Order allows such volumes to be sold to its
customers. Transmission historically has derived a substantial
benefit from such sales. The amount included in operating income
in 1993 was substantially the same as in 1992. However, the
implementation of more precise gas measurement equipment and
standards and the reduction in Transmission's total sales
volumes, discussed above, is expected to reduce operating income
from such sales in future periods.
The profitability of the Partnership's NGL operations
depends principally on the margin between NGL sales prices and
the cost of the natural gas from which such liquids are extracted
("shrinkage cost"). The Partnership's natural gas liquids
operations were adversely affected in 1993 by a decrease in NGL
market prices, particularly in the fourth quarter. Beginning in
late November 1993, crude oil prices fell significantly resulting
from a decision by the Organization of Petroleum Exporting
Countries ("OPEC") at its November 23, 1993 meeting not to
curtail members' production of crude oil, together with weak
worldwide demand for crude oil, increasing production from non-
OPEC areas and continuing discussions regarding the possibility
of Iraq's re-entry into the world oil markets. In conjunction
with the crude oil price decline, refined product and NGL prices
also fell significantly. Strong natural gas prices throughout
1993 increased shrinkage costs, also adversely affecting NGL
margins and operating results. Partially offsetting the effects
of reduced NGL prices and high shrinkage costs in 1993 were
higher production levels from the Partnership's owned and leased
gas processing plants. The Partnership's processing capacity and
production volumes increased in 1993 compared to 1992 due to a
full year's production from various 1992 facility expansions and
improvements, and various 1993 upgrades at certain processing
plants. See Note 5 of Notes to Consolidated Financial Statements
for a description of the Thompsonville gas processing plant
leased by the Partnership from Energy effective December 1, 1992.
The Partnership's NGL operations should benefit in the longer
term from the expected continued growth in demand for NGLs as
petrochemical feedstocks and in the production of methyl tertiary
butyl ether ("MTBE"). MTBE is an oxygenate produced from butane
feedstocks which can be used as a component of "reformulated"
gasoline mandated by the Clean Air Act Amendments of 1990 (the
"Clean Air Act"). The demand for NGLs, particularly natural
gasoline, will continue to be affected seasonally, however, by
Federal Environmental Protection Agency ("EPA") regulations
limiting gasoline volatility during the summer months.
The Partnership's NGL operations benefit from the
efficiency of its operations and 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
Partnership's natural gas and NGL operations. Approximately 80%
of the Partnership's NGL production comes from plants in South
Texas and the Texas Gulf Coast. However, as the Partnership's
existing South Texas NGL pipeline and fractionation facilities
are operating at or near capacity, the Partnership anticipates
incurring either increased third-party transportation and
fractionation fees or substantial capital expenditures in the
future in order to develop incremental South Texas NGL production
opportunities.
During the first quarter of 1994, NGL prices have
increased modestly since late December 1993, but remain below
first quarter 1993 levels. Concurrently, natural gas prices and
resulting shrinkage costs have increased during the first quarter
of 1994 compared to the same period in 1993. As a result,
Partnership operating income is expected to be substantially
lower in the first quarter of 1994 compared to the first quarter
of 1993.
The General Partner believes that the natural gas and
NGL industries are undergoing a period of consolidation and
restructuring that may create opportunities to enhance the
Partnership's operating results through acquisitions, strategic
business alliances and the various natural gas and NGL business
opportunities described above. However, the General Partner also
believes that the Partnership will be unable to maintain its
competitive position, resulting in adverse operating results, if
it does not pursue such opportunities when and if they arise, and
that currently, the Partnership does not have the financial
flexibility to make the capital expenditures necessary to
successfully pursue such opportunities. See "Liquidity and
Capital Resources" for a discussion of current limitations on the
Partnership's ability to make capital expenditures and incur
additional financing and reasons why the General Partner believes
that the proposed merger with Energy would, among other things,
provide the financial flexibility necessary for the Partnership
to pursue opportunities in the natural gas and NGL businesses
that would otherwise be unavailable to it.
1993 Compared to 1992
Natural Gas
Operating revenues from the Partnership's natural gas
operations increased $157.3 million, or 21%, during 1993 compared
to 1992 due primarily to a 10% increase in daily natural gas
sales volumes, an 11% increase in average natural gas sales
prices and a 12% increase in transportation revenues. These
increases were due to continued strong demand for natural gas
resulting from tightening natural gas supplies, industry-wide
replenishment of natural gas storage inventories and the shutdown
of both units of the STP. For the fourth quarter of 1993,
natural gas operating revenues increased $16.5 million, or 8%,
compared to the same period in 1992 due primarily to a 19%
increase in daily natural gas sales volumes, partially offset by
a 9% decrease in average natural gas sales prices. Daily natural
gas sales volumes increased due to the factors noted above, while
gas sales prices decreased due primarily to a return of natural
gas storage inventories to more normal levels in the 1993 fourth
quarter compared to below normal levels in the 1992 period.
The above noted increase in transportation revenues for
1993 compared to 1992 was due to a 20% increase in daily
transportation volumes which more than offset the effect of an 8%
decrease in average transportation fees. The increase in daily
transportation volumes resulted from the continued shutdown of
the STP, increased west-to-east movement of gas across Texas,
increased gas shrinkage volumes transported for the Partnership's
NGL operations and increased volumes transported under
settlements of take-or-pay and other claims at discounted rates.
See Note 6 of Notes to Consolidated Financial Statements.
Average transportation fees were adversely affected by intense
industry competition and the increase in discounted
transportation volumes noted above. In the fourth quarter of
1993, the effect on transportation revenues of a 4% increase in
daily transportation volumes was substantially offset by a 3%
decrease in average transportation fees compared to the fourth
quarter of 1992.
Operating income from the Partnership's natural gas
operations increased $21 million, or 65%, for 1993 compared to
1992 due to the increase in sales volumes and transportation
revenues noted above, certain favorable measurement, fuel usage
and customer billing adjustments and the increase in income
generated by the Partnership's Market Center Services Program
discussed above under "General." Partially offsetting these
increases in natural gas operating income was a decrease in the
recovery of Transmission's fixed costs resulting from the
customer audit settlement also discussed above under "General."
For the fourth quarter of 1993, natural gas operating income
increased $9.8 million to $15.8 million compared to $6 million in
the fourth quarter of 1992 due to the factors noted above.
Natural Gas Liquids
Operating revenues from the Partnership's NGL operations
decreased $24.3 million, or 5%, in 1993 compared to 1992 due
primarily to a decrease in average NGL market prices in the last
six months of 1993 compared to the same period in 1992 resulting
from the significant decline in refined product prices discussed
above under "General" and continuing high levels of NGL
inventories. NGL sales volumes for 1993 were flat compared to
1992 as a 19% increase in daily production volumes resulting from
various 1992 facility expansions and improvements was offset by a
27% decrease in trading volumes.
Operating income from the Partnership's NGL operations
decreased $31.3 million, or 55%, in 1993 compared to 1992 due to
the sharp decline in NGL prices noted above and an increase in
fuel and shrinkage costs resulting from a 22% increase in the
cost of natural gas. The decline in NGL prices resulted in a
$1.4 million operating loss from NGL operations for the fourth
quarter of 1993 compared to operating income of $12.9 million for
the fourth quarter of 1992. Also adversely affecting fourth
quarter 1993 operating results compared to 1992 was a 4% decrease
in NGL sales volumes and an increase in depreciation expense
resulting from the recognition in the 1992 period of a change in
the estimated useful lives of the majority of the Partnership's
NGL facilities from 14 to 20 years retroactive to January 1,
1992.
1992 Compared To 1991
Natural Gas
Operating revenues from the Partnership's natural gas
operations decreased $21.2 million, or 3%, during 1992 compared
to 1991 due primarily to a decrease in natural gas sales revenues
resulting from a 12% decrease in daily natural gas sales volumes,
partially offset by a 10% increase in average natural gas sales
prices. The increase in average gas sales prices was due to
lower-than-normal inventories of natural gas in storage and a
reduction in natural gas production resulting from the effects of
Hurricane Andrew in the 1992 third quarter.
Transportation revenues were flat in 1992 compared to
1991 as a 15% increase in daily transportation volumes was
largely offset by a 13% decrease in average transportation fees.
Transportation volumes increased due to the commencement of
operations of a pipeline crossing into Mexico in the third
quarter of 1992, increased business generated through the East
Texas pipeline leased from Energy and an increase in gas
shrinkage volumes transported for the Partnership's NGL
operations. Average transportation fees decreased due to market
pressures and because of the expiration on September 30, 1991 of
a transportation contract that provided for a quarterly
reservation fee.
Operating income from the Partnership's natural gas
operations decreased $4.6 million, or 12%, during 1992 compared
to 1991 due to the factors discussed above and higher pipeline
transportation expense related to higher total gas throughput
volumes. Operating income for 1992 was also reduced by a fourth
quarter charge of $3.0 million to natural gas operations
representing its allocable portion of the cost of a voluntary
early retirement program implemented by Energy during the last
quarter of 1992.
Natural Gas Liquids
Operating revenues from the Partnership's NGL operations
increased $75.3 million, or 19%, during 1992 compared to 1991 due
to a 24% increase in daily NGL sales volumes as well as increased
fees and revenues from processing, transporting and fractionating
volumes for third parties. The increase in NGL sales volumes was
due to a 13% increase in daily production volumes resulting from
facility expansions and increased sales volumes related to the
Partnership's NGL trading activities. The increase in operating
revenues as a result of the above factors was partially offset by
a 4% decrease in the average NGL market price resulting from
lower refined product prices in the fourth quarter of 1992.
Operating income from the Partnership's NGL operations
decreased $5.4 million, or 9%, during 1992 compared to 1991 due
to a decrease in the average NGL market price, higher shrinkage
costs and higher operating expenses due primarily to a $1.4
million charge to NGL operations for its allocable portion of the
cost of Energy's early retirement program described above. The
decrease in operating income as a result of these factors was
partially offset by an increase in production, transportation and
fractionation volumes and a $5.6 million decrease in depreciation
expense resulting from the above noted increase in the estimated
useful lives of the majority of the Partnership's NGL facilities
from 14 to 20 years effective January 1, 1992.
Other
Other income, net, decreased $3.4 million during 1992
compared to 1991 due primarily to a decrease in interest earned
on temporary cash investments resulting from lower balances of
cash available for investment and lower interest rates. Interest
and debt expense decreased in 1992 compared to 1991 due primarily
to a decrease in the balance of First Mortgage Notes outstanding,
a decrease in interest cost associated with the East Texas
pipeline capital lease obligation to Energy resulting from the
settlement of certain litigation and increased capitalized
interest resulting from an increase in Partnership capital
expenditures. These decreases were partially offset by an
increase in interest cost associated with the fractionation
facility and Thompsonville Project capital lease obligations to
Energy.
LIQUIDITY AND CAPITAL RESOURCES
The Partnership in the past has generated cash through a
combination of sources to meet its debt service requirements,
make capital expenditures, pay cash distributions to partners and
finance settlements of take-or-pay and related claims. These
sources have included cash flow from operations, the issuance of
additional First Mortgage Notes, financial support from Energy
through capital lease financing and other transactions,
reductions in working capital requirements, and asset sales.
In 1993, the Partnership's operating cash flow was
reduced by depressed NGL product prices, higher natural gas
shrinkage costs, continued intense competition in the natural gas
industry and the reduction of Transmission's sales volumes. See
"Results of Operations" above. These conditions are expected to
continue into 1994 resulting in a reduction of the Partnership's
cash flows from operations.
The Partnership, through the Management Partnership,
issued $550 million principal amount of First Mortgage Notes in
1987 and an additional $75 million of First Mortgage Notes in
1988. However, under the terms of the Mortgage Indenture, the
Management Partnership and the Subsidiary Operating Partnerships,
the principal operating and asset ownership subsidiaries of the
Partnership, are not permitted to issue any additional long-term
debt without the issuance of additional partners' equity. The
General Partner does not anticipate any such issuance as it
believes that the partnership form of business organization does
not allow for the raising of significant additional equity
capital, and that issuance of any additional equity securities,
if feasible, would likely have a negative impact on the existing
holders of Common Units. Debt service on the First Mortgage
Notes, including payments into escrow for both principal and
interest, was $81 million, $80.6 million and $79.2 million for
1993, 1992 and 1991, respectively, and will be $81 million, $80.9
million, $80.4 million, $79.6 million and $75.9 million for the
years 1994 through 1998, respectively. See Note 3 of Notes to
Consolidated Financial Statements.
Commencing in 1991, the Partnership entered into a
series of leasing transactions with Energy to provide financial
support for certain Partnership capital expenditure projects that
were approved by the Board of Directors of the General Partner.
These projects, which had a total cost of approximately $101
million, consisted of the East Texas Pipeline Extension, the
Fractionator Expansion Project and the Thompsonville Project and
are being leased by Energy to the Partnership under capital
leases. See Note 5 of Notes to Consolidated Financial Statements
for additional information with regard to these leases and a
schedule of minimum lease payments. The leasing transactions
between the Partnership and Energy have enabled the Partnership
to engage in capital expansions and business opportunities that
would otherwise have been unavailable to it. However, the rate
of return available to Energy from such transactions is limited
to the lease payments specified in the lease and any related tax
benefits. Additionally, in 1991, a Unitholder commenced a class
action and derivative lawsuit against the General Partner, Energy
and certain of their respective officers and directors relating,
in part, to such leasing transactions. As a result of these and
other factors, the Partnership and Energy do not intend to enter
into any further significant leasing transactions.
In 1989, Energy purchased 400,000 Common Units directly
from VNGP, L.P. for an aggregate of $6.5 million, or $16.24 per
Common Unit, and made a simultaneous capital contribution to
VNGP, L.P., thereby increasing its equity interest in the
Partnership from approximately 48% to over 49%. However, Energy
cannot purchase any significant number of additional Common Units
without exceeding a 50% ownership interest in the Partnership and
being required under applicable accounting rules to consolidate
the operations and indebtedness of the Partnership for financial
reporting purposes. Energy believes that it is not in the best
interest of its shareholders to consolidate the operations and
indebtedness of the Partnership without owning all of the
Partnership's businesses and assets.
The Partnership and Energy also enter into various types
of transactions in the normal course of business on
market-related terms and conditions as described in Note 1 of
Notes to Consolidated Financial Statements - "Transactions with
Energy." To the extent that net amounts are payable by the
Partnership to Energy from time to time, these transactions also
constitute a type of working capital funding provided by Energy
to the Partnership. The net amount owed by the Partnership to
Energy was $31.8 million and $13.5 million at December 31,
1993 and 1992, respectively.
From time to time, the Partnership has generated cash to
reinvest in its business through the sale of nonstrategic assets.
In 1990 and 1991, the Partnership sold its interest in two
off-system natural gas processing plants in Oklahoma and related
contract rights and realized net cash proceeds of approximately
$22 million. In 1993, the Partnership sold a small off-system
gas processing plant in West Texas. The General Partner believed
that the sale of these assets was desirable because the plants
were located off-system and they were not a part of the
Partnership's core businesses, and because the Partnership was
able to sell the assets at a favorable price. However, the
General Partner believes that sales of assets are not a
dependable source of cash that can be relied upon in planning the
Partnership's investment activities.
The Partnership has not historically required
significant amounts of working capital because cash receipts on
billings for sales and cash payments for purchases occur
principally in the same month. Since the inception of the
Partnership, the General Partner has significantly reduced the
Partnership's working capital position (current assets less
current liabilities) from a level of $29.5 million at March 31,
1987 to a negative $33 million at December 31, 1992 and a
negative $48.3 million at December 31, 1993. The reduction in
working capital requirements has generated a significant amount
of cash, which the Partnership has been able to use for capital
expenditures, debt service and cash distributions. However, the
General Partner believes that, not only is a significant further
reduction in the Partnership's working capital requirements
unlikely to be realized, but that working capital requirements
are likely to increase in the future due to increasing gas
storage inventories resulting from the Partnership's efforts to
compete for interstate sales under FERC Order 636. To the extent
that the Partnership's negative working capital position results
in a cash need, the General Partner anticipates that the
Partnership will utilize its available short-term bank lines,
among other things, to satisfy its short-term cash requirements.
As described in Note 2 of Notes to Consolidated
Financial Statements, the Partnership, through the Management
Partnership, currently has five short-term bank lines totalling
$80 million. The Mortgage Note Indenture requires that at least
$20 million of revolving credit agreements be maintained at all
times; however, no more than $50 million of borrowings are
permitted to be outstanding at any time. All of the bank lines
mature at various times during 1994. If the proposed merger with
Energy does not occur, the General Partner believes that these
bank lines could be renewed or replaced with other short-term
lines during 1994 on terms and conditions similar to those
currently existing. If the proposed merger with Energy is
completed, the General Partner anticipates that new bank credit
agreements will be negotiated and that the Partnership's existing
short-term bank lines will be cancelled. The Partnership had
borrowings of as much as $39.9 million under its short-term bank
lines during 1993. Although no borrowings were outstanding under
these bank lines at December 31, 1993, the Partnership has
incurred borrowings in 1994 of up to $42.9 million in order to
fund increased working capital requirements. The Partnership's
short-term bank lines are subject to a requirement, pursuant to
the Mortgage Note Indenture, to have no balances outstanding for
a period of 45 consecutive days during each 16 consecutive
calendar months (referred to herein as a "clean-up period"). The
Partnership completed a clean-up period during June 1993, and
therefore will be required to complete another clean-up period by
September 1994.
At the time of formation of the Partnership, the General
Partner estimated that capital expenditures of approximately
$30 million to $35 million would be sufficient to maintain the
operations of the Partnership and that the operating cash flows
of the Partnership would be sufficient to allow some additional
level of capital expenditures to sustain, improve or expand
operations. The Partnership Agreement currently provides that
subject to certain exceptions, the General Partner will limit
annual consolidated capital expenditures to the greater of $35
million or 30% of operating cash flow, and to the extent annual
capital expenditures exceed such limits, the General Partner is
required to use its best efforts to finance such excess. The
Partnership's capital expenditures totalled $36.1 million in
1993, $35.9 million in 1992 and $33.1 million in 1991. In
addition, as described above, lease transactions with Energy were
entered into for certain facilities with approximate total costs
of $75 million for leases commencing in 1991 and $26 million for
leases commencing in 1992. The capital leases with Energy were
necessary to permit the Partnership to undertake those capital
projects and remain in compliance with the capital expenditure
guidelines described above. The General Partner believes that,
due to the Partnership's lack of financial flexibility as a
result of the factors described above, the Partnership in its
present form would not be able to continue making capital
expenditures at these levels and, therefore, would likely be
unable to participate fully in opportunities to improve and
expand its operations or to take advantage of the types of
opportunities, such as those described in "Results of Operations-
General" above, that may arise in the natural gas and NGL
businesses over the next several years. At the same time, the
General Partner believes that the Partnership must continue to
make substantial capital investments in facilities needed to
access gas supplies and markets and expand its NGL processing and
transportation capabilities in order for it to maintain its
capacity to compete in the current industry environment. Subject
to consummation of the proposed merger with Energy described
above, Partnership capital expenditures are expected to be
approximately $40 million in 1994.
When the Partnership was formed, the Partnership assumed
Energy's liability with respect to a number of claims and
lawsuits involving allegations that Transmission had failed to
take, or pay for, natural gas under gas purchase contracts. The
Partnership has settled substantially all of the take-or-pay
claims previously brought against it, and believes that it has
settled substantially all of the significant take-or-pay claims
that are likely to be made. Amounts paid in settlement of
take-or-pay claims are treated as deferred gas costs and are
included in the Partnership's "deferred charges and other assets"
until recovered through sales of gas by Transmission. However,
the resolution of such claims resulted in deferred gas costs that
were greater, and have been recovered more slowly through sales
due to Transmission's decreasing sales volumes, than had been
anticipated at the time of formation of the Partnership. At
December 31, 1993, the unrecovered balance of deferred gas costs
was $67 million, compared with $72 million at December 31, 1992.
Additionally, during 1988, 1989 and the first half of 1990, the
Partnership's operating income from NGL operations was
substantially below prior (and subsequent) levels. As a result
of these factors, capital that might otherwise have been
available for capital projects has been used to make take-or-pay
settlements and finance deferred gas costs. Accordingly, the
ability of the Partnership to maintain, improve and expand the
Partnership's business has been less than originally expected.
In order to resolve certain contractual claims, the Partnership
has also agreed to provide discounted gas transportation services
to some customers in lieu of cash settlements. Certain of these
arrangements will continue until the year 2000. The Partnership
is currently involved, directly or indirectly, in various
lawsuits and claims, which, if ultimately resolved in a manner
adverse to the Partnership, could adversely affect the
Partnership's cash flows from operations. For additional
information regarding the above, see "Results of Operations" and
Note 1 - "Other Assets" and Note 6 of Notes to Consolidated
Financial Statements.
Quarterly cash distributions can be declared by the
Partnership only after working capital and other operating
requirements, capital expenditures, debt service and capital
lease obligations are funded. As discussed in Note 1 of Notes to
Consolidated Financial Statements - "Allocation of Net Income and
Cash Distributions", the Preference Period for preferential cash
distributions to holders of Preference Units ended with the cash
distribution for the first quarter of 1992 which was paid in the
second quarter. The quarterly cash distributions thereafter were
reduced from $.625 per unit to $.125 per unit because of the
reduction in the Partnership's available cash flows resulting
from the various factors described above. Cash distributions
totalled $10.4 million, $29.5 million and $48 million for the
years ended December 31, 1993, 1992 and 1991, respectively.
Future cash distributions to unitholders will depend upon the
level of cash from operations and there is no assurance that cash
distributions will continue into the future at the current level.
The General Partner expects that the Partnership's
internally generated funds from operations will be sufficient in
the first quarter of 1994 to fund debt service, lease obligations
and minimum capital expenditure requirements. Cash requirements
in excess of such amounts, such as cash distributions on the
Common Units, any increases in working capital requirements and
capital expenditures necessary to pursue possible industry
opportunities, as described above, are expected to require
supplemental funding, such as borrowings under the short-term
credit lines described above. If the proposed merger with Energy
does not occur, the General Partner believes that the above
described clean-up requirement in 1994 can be achieved, but would
require significant capital expenditure and working capital
reductions, the elimination of cash distributions on the Common
Units, the sale of core assets, or other measures likely to have
adverse effects on the Partnership and the Unitholders. When and
if the proposed merger with Energy is completed, the General
Partner anticipates that distributions to Energy from the
Partnership would be significantly reduced or eliminated, with
such funds utilized for debt service including repayment of
borrowings under the Partnership's short-term credit lines,
working capital, capital expenditures or other Partnership
purposes.
The Partnership is subject to environmental regulation
at the federal, state and local level. During 1993, the
Partnership submitted for approval various permitting matters to
the Texas Natural Resource Conservation Commission with respect
to air emissions at Transmission's compressor stations and Valero
Hydrocarbons, L.P.'s gas processing plants. No such matters are
currently pending. The Partnership's annual expenditures related
to environmental remediation have not been significant to date.
The General Partner does not expect that the Partnership will
expend or be required to expend any significant amount on any
environmental remediation matters, including polychlorinated
biphenyls, which have affected certain natural gas pipeline
companies. No amount has been accrued for any contingent
environmental liability.
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of Valero Natural Gas Company
as General Partner of Valero Natural Gas Partners, L.P.
and to the Common Unitholders:
We have audited the accompanying consolidated balance
sheets of Valero Natural Gas Partners, L.P. (a Delaware limited
partnership) as of December 31, 1993 and 1992, and the related
consolidated statements of income, partners' capital and cash
flows for each of the three years in the period ended December
31, 1993. These financial statements and the schedules referred
to below are the responsibility of the Partnership's management.
Our responsibility is to express an opinion on these financial
statements and schedules 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 Natural Gas Partners, L.P. as of December 31,
1993 and 1992, and the results of its operations and its cash
flows for each of the three years in the period ended
December 31, 1993, in conformity with generally accepted
accounting principles.
Our audits were made for the purpose of forming an
opinion on the basic financial statements taken as a whole. The
supplemental schedules V, VI and IX are presented for purposes of
complying with the Securities and Exchange Commission's rules and
are not part of the basic financial statements. These schedules
have been subjected to the auditing procedures applied in the
audits of the basic financial statements and, in our opinion,
fairly state in all material respects the financial data required
to be set forth therein in relation to the basic financial
statements taken as a whole.
ARTHUR ANDERSEN & CO.
San Antonio, Texas
February 17, 1994
<PAGE>
<TABLE>
VALERO NATURAL GAS PARTNERS, L.P.
CONSOLIDATED BALANCE SHEETS
(Thousands of Dollars)
<CAPTION>
December 31,
1993 1992
A S S E T S
<S> <C> <C>
CURRENT ASSETS:
Cash and temporary cash investments. . . . . . . . . . . . . . . . . . . $ 5,523 $ 6,598
Cash held in debt service escrow . . . . . . . . . . . . . . . . . . . . 34,186 32,864
Receivables, less allowance for doubtful accounts of $2,102 (1993)
and $633 (1992). . . . . . . . . . . . . . . . . . . . . . . . . . . . 154,503 171,660
Inventories. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25,434 35,080
Prepaid expenses and other . . . . . . . . . . . . . . . . . . . . . . . 5,321 8,273
224,967 254,475
PROPERTY, PLANT AND EQUIPMENT-including construction in
progress of $16,728 (1993) and $14,341 (1992), at cost . . . . . . . . . 939,565 916,734
Less: Accumulated depreciation . . . . . . . . . . . . . . . . . . . . 199,763 173,518
739,802 743,216
DEFERRED CHARGES AND OTHER ASSETS. . . . . . . . . . . . . . . . . . . . . 80,313 86,790
$1,045,082 $1,084,481
L I A B I L I T I E S A N D P A R T N E R S' C A P I T A L
CURRENT LIABILITIES:
Current maturities of long-term debt and capital lease obligations . . . $ 28,908 $ 26,121
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . 216,953 237,176
Accrued interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,692 16,710
Other accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . 8,719 7,422
273,272 287,429
LONG-TERM DEBT, less current maturities. . . . . . . . . . . . . . . . . . 506,429 534,286
CAPITAL LEASE OBLIGATIONS, less current maturities . . . . . . . . . . . . 103,787 104,075
DEFERRED CREDITS AND OTHER LIABILITIES . . . . . . . . . . . . . . . . . . 1,548 2,672
LIMITED PARTNERS' CAPITAL. . . . . . . . . . . . . . . . . . . . . . . . . 158,448 154,461
GENERAL PARTNERS' CAPITAL. . . . . . . . . . . . . . . . . . . . . . . . . 1,598 1,558
$1,045,082 $1,084,481
<FN>
See Notes to Consolidated Financial Statements.
</TABLE>
<TABLE>
VALERO NATURAL GAS PARTNERS, L.P.
CONSOLIDATED STATEMENTS OF INCOME
(Thousands of Dollars, Except Per Unit Amounts)
<CAPTION>
Year Ended December 31,
1993 1992 1991
<S> <C> <C> <C>
OPERATING REVENUES . . . . . . . . . . . . . . . . . $1,326,458 $1,197,129 $1,144,001
COSTS AND EXPENSES:
Cost of sales. . . . . . . . . . . . . . . . . . . 1,090,363 954,600 896,322
Operating expenses . . . . . . . . . . . . . . . . 120,171 118,284 108,614
Depreciation expense . . . . . . . . . . . . . . . 36,446 34,404 39,231
Total. . . . . . . . . . . . . . . . . . . . . . 1,246,980 1,107,288 1,044,167
OPERATING INCOME . . . . . . . . . . . . . . . . . . 79,478 89,841 99,834
OTHER INCOME, NET. . . . . . . . . . . . . . . . . . 1,263 624 4,013
INTEREST AND DEBT EXPENSE:
Incurred . . . . . . . . . . . . . . . . . . . . . (68,007) (66,679) (67,532)
Capitalized. . . . . . . . . . . . . . . . . . . . 1,713 1,200 721
NET INCOME . . . . . . . . . . . . . . . . . . . . . 14,447 24,986 37,036
Less: General Partners' interest . . . . . . . . . 1,217 1,596 1,973
NET INCOME ALLOCABLE TO LIMITED
PARTNERS . . . . . . . . . . . . . . . . . . . . . $ 13,230 $ 23,390 $ 35,063
NET INCOME PER LIMITED PARTNER
UNIT . . . . . . . . . . . . . . . . . . . . . . . $ .72 $ 1.27 $ 1.90
WEIGHTED AVERAGE LIMITED PARTNER
UNITS OUTSTANDING (in thousands) . . . . . . . . . 18,487 18,487 18,487
<FN>
See Notes to Consolidated Financial Statements.
</TABLE>
<TABLE>
VALERO NATURAL GAS PARTNERS, L.P.
CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL
(Thousands of Dollars)
<CAPTION>
Limited Partners' Capital General
Preference Common Preference Common Partners'
Units Units Total Unitholders Unitholders Total Capital
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE - December 31, 1990. . . 9,690,980 8,795,558 18,486,538 $ 151,436 $ 18,518 $169,954 $ 1,611
Net income . . . . . . . . . . - - - 14,307 20,756 35,063 1,973
Distributions. . . . . . . . . - - - (24,277) (21,939) (46,216) (1,820)
Conversion of Common Units
to Preference Units . . . . . 26,400 (26,400) - 35 (35) - -
BALANCE - December 31, 1991. . . 9,717,380 8,769,158 18,486,538 141,501 17,300 158,801 1,764
Net income . . . . . . . . . . - - - 231 23,159 23,390 1,596
Distributions. . . . . . . . . - - - (12,188) (15,542) (27,730) (1,802)
Conversion of Common Units
to Preference Units . . . . . 32,620 (32,620) - 54 (54) - -
Conversion of Preference Units
to Common Units upon termi-
nation of the Preference
Period . . . . . . . . . . . (9,750,000) 9,750,000 - (129,598) 129,598 - -
BALANCE - December 31, 1992. . . - 18,486,538 18,486,538 - 154,461 154,461 1,558
Net income . . . . . . . . . . - - - - 13,230 13,230 1,217
Distributions. . . . . . . . . - - - - (9,243) (9,243) (1,177)
BALANCE - December 31, 1993. . . - 18,486,538 18,486,538 $ - $158,448 $158,448 $ 1,598
<FN>
See Notes to Consolidated Financial Statements.
</TABLE>
<TABLE>
VALERO NATURAL GAS PARTNERS, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands of Dollars)
<CAPTION>
Year Ended December 31,
1993 1992 1991
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . $ 14,447 $ 24,986 $ 37,036
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation expense . . . . . . . . . . . . . . . . . . . 36,446 34,404 39,231
Amortization of deferred charges and other, net. . . . . . 2,459 3,520 3,075
Changes in current assets and current liabilities. . . . . 13,364 26,676 (1,336)
Changes in deferred items and other, net . . . . . . . . . 3,765 (11,700) 6,275
Net cash provided by operating activities. . . . . . . 70,481 77,886 84,281
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital additions. . . . . . . . . . . . . . . . . . . . . . . (36,061) (35,893) (33,074)
Dispositions of property, plant and equipment. . . . . . . . . 2,585 934 7,926
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . 334 1,493 269
Net cash used in investing activities. . . . . . . . . . . . (33,142) (33,466) (24,879)
CASH FLOWS FROM FINANCING ACTIVITIES:
Reduction of long-term debt and capital lease obligations. . . (26,119) (22,971) (17,500)
Increase in cash held in debt service escrow for principal . . (1,875) (1,875) (4,018)
Proceeds from unexpended debt proceeds held by trustee . . . . - - 937
Partnership distributions. . . . . . . . . . . . . . . . . . . (10,420) (29,532) (48,036)
Net cash used in financing activities. . . . . . . . . . . . (38,414) (54,378) (68,617)
NET DECREASE IN CASH AND TEMPORARY
CASH INVESTMENTS . . . . . . . . . . . . . . . . . . . . . . . (1,075) (9,958) (9,215)
CASH AND TEMPORARY CASH INVESTMENTS AT
BEGINNING OF PERIOD. . . . . . . . . . . . . . . . . . . . . . 6,598 16,556 25,771
CASH AND TEMPORARY CASH INVESTMENTS AT
END OF PERIOD. . . . . . . . . . . . . . . . . . . . . . . . . $ 5,523 $ 6,598 $ 16,556
<FN>
See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
VALERO NATURAL GAS PARTNERS, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Control
Valero Natural Gas Partners, L.P. ("VNGP, L.P."), Valero
Management Partnership, L.P. (the "Management Partnership") and
various subsidiary operating partnerships (the "Subsidiary
Operating Partnerships"), all Delaware limited partnerships, are
the successors to substantially all of the natural gas and
natural gas liquids businesses, assets and liabilities of
substantially all of the subsidiaries of Valero Natural Gas
Company ("VNGC") and the transmission division of Rio Grande
Valley Gas Company ("Rio"). VNGC is, and Rio at the time of such
succession was, a wholly owned subsidiary of Valero Energy
Corporation (unless otherwise required by the context, the term
"Energy" as used herein refers to Valero Energy Corporation and
its consolidated subsidiaries, both individually and
collectively). VNGC is the general partner of VNGP, L.P. and the
Management Partnership (in such capacity, the "General Partner"),
while subsidiaries of VNGC are general partners (the "Subsidiary
General Partners") of the respective Subsidiary Operating
Partnerships.
In March 1987, VNGP, L.P. sold in an underwritten public
offering 9.5 million preference units of limited partner
interests (the "Preference Units"), representing a 52% limited
partner interest in VNGP, L.P. VNGP, L.P. concurrently issued
approximately 8.6 million common units of limited partner
interests (the "Common Units"), representing a 47% limited
partner interest, to subsidiaries of Energy, and issued a 1%
general partner interest in VNGP, L.P. to VNGC. Subsequent to
March 1987, VNGP, L.P. issued .4 million additional Common Units
to a subsidiary of Energy. In addition, approximately .2 million
Common Units held by a subsidiary of Energy were transferred to
employees of Energy and converted into Preference Units in
connection with an employee benefit plan adopted by Energy.
During 1992, all outstanding Preference Units were automatically
converted into Common Units (see "Allocation of Net Income and
Cash Distributions"). The original Common Units and former
Preference Units converted into Common Units are collectively
referred to herein as the "Units." Holders of the Units are
referred to herein as the "Unitholders."
Under the partnership structure, VNGP, L.P. holds a 99%
limited partner interest and VNGC holds a 1% general partner
interest in the Management Partnership. The Management
Partnership in turn holds a 99% limited partner interest and
various wholly owned subsidiaries of VNGC each hold a 1% general
partner interest in the various Subsidiary Operating Partnerships
to which the acquired businesses, assets and liabilities were
transferred. Valero Transmission, L.P. ("Transmission"), one of
the Subsidiary Operating Partnerships, owns and operates the
principal pipeline system of the Partnership. (References to
Transmission prior to March 25, 1987 refer to Valero Transmission
Company, a wholly owned subsidiary of VNGC, and after that date
to its successor in interest, Valero Transmission, L.P.)
Transmission is principally a transporter of natural gas as it
transports gas for affiliates and third parties. Transmission
also sells natural gas to intrastate customers under long-term
contracts; however, most of the Partnership's gas sales are made
through other Subsidiary Operating Partnerships which operate
special marketing programs ("SMPs"). Subsequent to March 1987,
VNGP, L.P. acquired a wholly owned subsidiary that makes certain
intrastate gas sales, and formed certain subsidiary partnerships,
one of which leases certain assets from Energy under capital
leases as described in Note 5. Also, during 1992, an additional
Subsidiary Operating Partnership was formed to make certain
intrastate gas sales. VNGP, L.P., the Management Partnership,
the original Subsidiary Operating Partnerships and the additional
entities acquired or formed subsequent to March 1987 are
collectively referred to herein as the "Partnership." As of
December 31, 1993, Energy's total effective equity interest in
the Partnership was approximately 49%.
In October 1993, Energy publicly announced its proposal
to acquire the 9.7 million issued and outstanding Common Units in
VNGP, L.P. held by persons other than Energy (the "Public
Unitholders") pursuant to a merger of VNGP, L.P. with a wholly
owned subsidiary of Energy. The Board of Directors of VNGC
appointed a special committee of outside directors (the "Special
Committee") to consider the merger and to determine the fairness
of the transaction to the Public Unitholders. The Special
Committee thereafter retained independent financial and legal
advisors to assist the Special Committee. Upon the
recommendation of the Special Committee, the Board of Directors
of VNGC unanimously approved the merger. Effective December 20,
1993, Energy, VNGP, L.P. and VNGC entered into an agreement of
merger (the "Merger Agreement") providing for the merger. In the
merger, the Common Units held by the Public Unitholders will be
converted into the right to receive cash in the amount of $12.10
per Common Unit. As a result of the merger, VNGP, L.P. would
become a wholly owned subsidiary of Energy.
Consummation of the merger is subject to, among other
things, (i) approval of the Merger Agreement by the holders of a
majority of the issued and outstanding Common Units;
(ii) approval by the holders of a majority of the Common Units
held by the Public Unitholders and voted at a special meeting of
holders of Common Units to be called to consider the Merger
Agreement; (iii) receipt of satisfactory waivers, consents or
amendments to certain of Energy's financial agreements; and (iv)
completion of an underwritten public offering of convertible
preferred stock by Energy. Energy currently owns approximately
47.5% of the outstanding Common Units and intends to vote its
Common Units in favor of the merger.
Basis of Presentation
The accompanying consolidated financial statements have
been prepared in accordance with generally accepted accounting
principles and are not the basis for reporting taxable income to
Unitholders. The consolidated financial statements include the
accounts of VNGP, L.P. and its consolidated subsidiaries. All
significant interpartnership transactions have been eliminated in
consolidation.
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 (see Note 3), and current maturities
of long-term debt and capital lease obligations. Those changes,
shown as an (increase)/decrease in current assets and an
increase/ (decrease) in current liabilities, are provided in the
following table. Temporary cash investments are highly liquid
low-risk debt instruments which have a maturity of three months
or less when acquired and whose carrying amount approximates fair
value. (Dollars in thousands.)
<TABLE>
<CAPTION>
Year Ended December 31,
1993 1992 1991
<S> <C> <C> <C>
Cash held in debt service escrow for interest. $ 553 $ 483 $ 343
Receivables, net . . . . . . . . . . . . . . . 17,157 3,118 19,963
Inventories. . . . . . . . . . . . . . . . . . 9,646 (656) (10,430)
Prepaid expenses and other . . . . . . . . . . 2,952 (3,679) (2,005)
Accounts payable . . . . . . . . . . . . . . . (20,223) 31,504 (13,277)
Accrued interest . . . . . . . . . . . . . . . 1,982 (2,653) 2,011
Other accrued expenses . . . . . . . . . . . . 1,297 (1,441) 2,059
Total. . . . . . . . . . . . . . . . . . . . $ 13,364 $ 26,676 $ (1,336)
</TABLE>
Cash interest paid by the Partnership (net of amounts
capitalized) for the years ended December 31, 1993, 1992 and 1991
was $62.7 million, $66.4 million and $62.5 million, respectively.
No cash payments for federal income taxes were made during these
periods as the Partnership is not subject to federal income taxes
(see "Income Taxes" below). Cash payments for state income taxes
made during these periods were insignificant.
Noncash investing and financing activities for the years
ended December 31, 1992 and 1991 included $26 million and $75
million, respectively, of various natural gas and natural gas
liquids facilities acquired by the Partnership through capital
lease transactions entered into with Energy. See Note 5.
Transactions with Energy
The Partnership enters into various types of
transactions with Energy in the normal course of business on
market-related terms and conditions. The Partnership is charged
a management fee for the direct and indirect costs incurred by
Energy on behalf of the Partnership that are associated with
managing its operations. The Partnership sells natural gas and
natural gas liquids ("NGLs") to, and purchases NGLs from,
Energy's refining subsidiary. The Partnership sold natural gas
to Energy's retail natural gas distribution business operated by
Rio until September 30, 1993, when Rio was sold by Energy. The
Partnership operates for a fee two natural gas processing plants
and related facilities for Energy and sells natural gas to,
purchases natural gas and NGLs from, and processes natural gas
owned by Energy in connection with these NGL operations. The
Partnership also enters into other operating transactions with
Energy, including certain leasing transactions discussed in Note
5. As of December 31, 1993 and 1992, the Partnership had
recorded approximately $31.8 million and $13.5 million,
respectively, of accounts payable and accrued expenses, net of
accounts receivable, due to Energy.
During the fourth quarter of 1992, the Partnership
recognized a charge to earnings through the management fee billed
by Energy of approximately $4.4 million, or $.23 per limited
partner unit, representing the Partnership's allocable portion of
the cost of a voluntary early retirement program implemented by
Energy.
The following table summarizes transactions between the
Partnership and Energy for the years ended December 31, 1993,
1992 and 1991 (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
1993 1992 1991
<S> <C> <C> <C>
NGL sales to and services for Energy . . . . . . $ 98,590 $ 96,696 $ 86,936
Natural gas sales to Energy. . . . . . . . . . . 59,735 50,991 38,072
Purchases of NGLs and natural gas,
and transportation and other charges
from Energy. . . . . . . . . . . . . . . . . . 38,868 54,674 19,752
Interest expense from capital lease transactions
with Energy. . . . . . . . . . . . . . . . . . 12,828 10,071 9,584
Management fees for direct and indirect
costs billed by the General Partner
and affiliated companies . . . . . . . . . . . 80,727 82,024 73,324
</TABLE>
The direct and indirect costs incurred by the General
Partner on behalf of the Partnership that are charged to the
Partnership through the management fee include, among other
things, salaries and wages and other employee-related costs.
Effective January 1, 1993, Energy adopted the Financial
Accounting Standards Board's Statement of Financial Accounting
Standards ("SFAS") No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions." This statement
requires a change in Energy's accounting for postretirement
benefits other than pensions from a pay-as-you-go basis to an
accrual basis of accounting. Energy is amortizing the transition
obligation over 20 years, which is greater than the average
remaining service period until eligibility of active plan
participants. As a result of Energy's adoption of this
statement, the Partnership's proportionate share of other
postretirement employee benefits included in the management fee
in 1993 increased by approximately $1.5 million and the
Partnership's proportionate share of the total accumulated
postretirement benefit obligation at December 31, 1993 was
approximately $15 million. The adoption of this statement by
Energy did not affect the Partnership's cash flows in 1993, nor
is it expected to affect the Partnership's future cash flows, as
Energy expects to continue to fund its postretirement benefits
other than pensions, and require reimbursement from the
Partnership for the Partnership's proportionate share of such
funding, on a pay-as-you-go basis.
Gas Sales and Transportation
In the course of making gas sales and providing
transportation services to customers, Transmission experiences
measurement and other volumetric differences related to the
amounts of gas received and delivered. Transmission has in the
past experienced overall net volume gains due to such differences
and its Rate Order allows such volumes to be sold to its
customers. Transmission historically has derived a substantial
benefit from such sales. The amount included in operating income
in 1993 was substantially the same as in 1992. However, the
implementation of more precise gas measurement equipment and
standards and the reduction in Transmission's total sales
volumes, discussed in Note 6 - "Customer Audit of Transmission",
is expected to reduce operating income from such sales in future
periods.
Inventories
Inventories are carried principally at weighted average
cost not in excess of market. Inventories as of December 31,
1993 and 1992 were as follows (in thousands):
<TABLE>
<CAPTION>
December 31,
1993 1992
<S> <C> <C>
Natural gas in underground storage . . . . $ 23,184 $ 27,768
Natural gas liquids. . . . . . . . . . . . 2,250 7,312
$ 25,434 $ 35,080
</TABLE>
In addition to the above noted natural gas storage
inventories, which are located at the Wilson Storage Facility in
Wharton County, Texas (see Note 5), the Partnership also had
natural gas in third-party storage facilities, available under
exchange agreements, totalling $10.8 million and $1.2 million at
December 31, 1993 and 1992, respectively. Such amounts are
included in receivables in the accompanying consolidated balance
sheets.
Property, Plant and Equipment
Property, plant and equipment at date of inception of
the Partnership was increased by the excess of the acquisition
cost of the holders of the Preference Units over VNGC's
historical net cost basis. Accordingly, approximately 51% of
property, plant and equipment was recorded at fair value
reflecting the value attributable to the holders of the
Preference Units while the remaining 49% was recorded at
historical net book cost to reflect the value attributable to the
General Partner and the holders of the original Common Units.
Property additions and betterments include capitalized
interest and acquisition and administrative costs allocable to
construction and property purchases. Assets under capital leases
are included in property, plant and equipment and are recorded at
the lesser of the fair value of the leased property at the
inception of the lease or the present value of the related future
minimum lease payments.
The costs of minor property units (or components
thereof), net of salvage, retired or abandoned are charged or
credited to accumulated depreciation. Gains or losses on sales
or other dispositions of major units of property are credited or
charged to income.
Provision for depreciation of property, plant and
equipment is made primarily on a straight-line basis over the
estimated useful lives of the depreciable facilities. Assets
under capital leases are depreciated on a straight-line basis
over the lease term. The rates for depreciation are as follows:
<TABLE>
<S> <C>
Natural gas facilities . . . . . 2 1/4%-20%
Natural gas liquids facilities . 4 1/2%-20%
</TABLE>
During the fourth quarter of 1992, the Partnership
extended the estimated useful lives of the majority of its
natural gas liquids facilities from 14 to 20 years to better
reflect the estimated periods during which such assets are
expected to remain in service. The effect of this change in
accounting estimate, which was made retroactive to January 1,
1992, was to decrease depreciation expense and increase net
income for 1992 by approximately $5.6 million, or $.29 per
limited partner unit.
Other Assets
Payments made or agreed to be made in connection with
the settlement of certain disputed contractual issues with gas
suppliers of Transmission are initially deferred. The balance of
such payments is subsequently reduced as recoveries are made
through Transmission's rates. The balance of deferred gas costs
of $67 million and $72 million at December 31, 1993 and 1992,
respectively, is included in noncurrent other assets and is
expected to be recovered over future periods. See Note 6 -
"Customer Audit of Transmission."
Debt issuance costs are included in deferred charges and
other assets and are amortized by the effective interest method
over the term of each respective issue of the Management
Partnership's First Mortgage Notes ("First Mortgage Notes"). See
Note 3.
Income Taxes
Income and deductions of the Partnership for federal
income tax purposes are includable in the tax returns of the
individual partners. Accordingly, no recognition has been given
to federal income taxes in the accompanying consolidated
financial statements of the Partnership. At December 31, 1993
and 1992, the net difference between the tax bases and the
reported amounts of assets and liabilities in the accompanying
Consolidated Balance Sheets was $314 million and $322 million,
respectively. Under the Revenue Act of 1987, certain publicly
traded limited partnerships will be taxed as corporations after
December 31, 1997 unless specifically exempted. This Act
exempted natural resource partnerships including those dealing
with natural gas transportation and processing of natural gas
liquids, such as the Partnership, from its taxation provision.
Price Risk Management Activities
The Partnership, through its Market Center Services
Program established in 1992, enters into exchange-traded
futures and options contracts, forward contracts, swaps and
other financial instruments with third parties to hedge natural
gas inventories and certain anticipated natural gas purchase
requirements in order to minimize the risk of market
fluctuations. The Partnership also utilizes such price risk
management techniques to provide services to gas producers
and end users. Changes in the market value of these contracts
are deferred until the gain or loss is recognized on the hedged
transaction. As of December 31, 1993 and 1992, the Partnership
had outstanding contracts for natural gas totalling approximately
15.0 billion cubic feet ("Bcf") and 4.8 Bcf, respectively, for
which the Partnership is the fixed price payor and 27.1 Bcf and
10.0 Bcf, respectively, for which the Partnership is the fixed
price receiver. Such contracts run for a period of one to twelve
months. A portion of such contracts represented hedges of
natural gas volumes in underground storage and in third-party
storage facilities which totalled approximately 10.3 Bcf and 7.4
Bcf at December 31, 1993 and 1992, respectively. See
"Inventories" above.
In 1993 and 1992, the Partnership recognized $18.7
million and $12.9 million, respectively, in gas cost reductions
and other benefits from this program. An additional $5.1 million
and $3.6 million in other reductions of cost of gas was generated
by transactions entered into in 1993 and 1992, respectively,
which is recognized in income in the subsequent year as the
related gas is sold.
Allocation of Net Income and Cash Distributions
Net income is allocated to partners based on their
effective ownership interest in the operating results of the
Partnership, except that additional depreciation expense
pertaining to the excess of the Partnership's acquisition cost
over the historical cost basis in net property, plant and
equipment and certain other assets in which the former holders of
Preference Units have an ownership interest is allocated solely
to such holders as a noncash charge to net income. The
allocation of additional depreciation expense to the former
holders of Preference Units does not affect the cash
distributions with respect to the Units. Under the Partnership
structure, the income of the Subsidiary Operating Partnerships is
allocated to the Subsidiary General Partners, which hold a 1%
general partner interest, and to the Management Partnership,
which holds a 99% limited partner interest. As a result, net
income allocable to the Subsidiary General Partners is not
reduced by interest expense associated with the Management
Partnership's First Mortgage Notes.
The Partnership is required to make quarterly cash
distributions with respect to all Units in an amount equal to
"Distributable Cash Flow" as defined in the Second Amended and
Restated Agreement of Limited Partnership of VNGP, L.P. (the
"Partnership Agreement") and as determined by the General
Partner. With the payment on May 30, 1992 of the cash
distribution of $.625 per Unit for the first quarter of 1992, the
Partnership completed the payment of cumulative cash
distributions of $12.50 per Preference Unit resulting in the
termination of the period (the "Preference Period") during which
the holders of Preference Units were entitled to a preferential
distribution amount. As a result of the termination of the
Preference Period, all outstanding Preference Units were
automatically converted into Common Units in accordance with the
terms of the Partnership Agreement. The Partnership subsequently
reduced cash distributions to $.125 per Unit for the remaining
quarters of 1992 and the first three quarters of 1993. On
January 25, 1994, the VNGC Board of Directors declared a cash
distribution of $.125 per Unit for the fourth quarter of 1993
that is payable March 1, 1994 to holders of record as of February
7, 1994. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" for a discussion of factors
that have reduced the amount of cash available for distribution
to Unitholders.
If the proposed merger with Energy described above under
"Organization and Control" occurs after March 9, 1994, the
General Partner intends and expects to declare and pay a pro rata
distribution to holders of record of the Common Units on the
effective date of the merger based upon the number of days
elapsed between February 7, 1994 and such effective date.
2. SHORT-TERM BANK LINES
The Partnership, through the Management Partnership,
currently maintains five separate short-term bank lines of credit
totalling $80 million. In accordance with the terms of the
indenture of mortgage and deed of trust pursuant to which the
Management Partnership's First Mortgage Notes were issued (the
"Mortgage Note Indenture"), at least $20 million of revolving
credit agreements must be maintained at all times; however, no
more than $50 million of borrowings are permitted to be
outstanding at any time. See Note 3. The Partnership had
borrowings of as much as $39.9 million under its short-term bank
lines during 1993. No borrowings were outstanding under these
lines at December 31, 1993 or 1992. The lines of credit mature
at various times during 1994, bear interest at each respective
bank's prime, quoted money market or Eurodollar rate and require
commitment fees based on the unused amount of the credit. If
the proposed merger with Energy does not occur, the General
Partner believes that these short-term bank lines could be
renewed or replaced with other short-term lines during 1994 on
terms and conditions similar to those currently existing. If
the proposed merger with Energy is completed, the General
Partner anticipates that new bank credit agreements will be
negotiated and that the Partnership's existing short-term bank
lines will be cancelled.
3. LONG-TERM DEBT
Long-term debt balances were as follows (in thousands):
<TABLE>
<CAPTION>
December 31,
1993 1992
<S> <C> <C>
First Mortgage Notes . . . . . . . . . . . . . $534,286 $559,643
Less current maturities. . . . . . . . . . . 27,857 25,357
Long-term debt, less current maturities . . $506,429 $534,286
</TABLE>
The First Mortgage Notes, which are currently comprised
of eight remaining series due serially from 1994 through 2009,
are secured by mortgages on and security interests in
substantially all of the currently existing and after-acquired
property, plant and equipment of the Management Partnership and
each Subsidiary Operating Partnership and by the Management
Partnership's limited partner interest in each Subsidiary
Operating Partnership (the "Mortgaged Property"). As of December
31, 1993, the First Mortgage Notes have a remaining weighted
average life of approximately 7.3 years and a weighted average
interest rate of 10.12% 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, 1993 and
1992, $34.2 million and $32.9 million, respectively, 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 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 Mortgage Note
Indenture also provides that it will be an event of default if
VNGC withdraws as General Partner of the Management Partnership
prior to 1997, if VNGC is removed as General Partner but the
Subsidiary General Partners are not also removed, or if the
General Partner or any Subsidiary General Partner withdraws or is
removed and is not replaced within 30 days.
Maturities of long-term debt for the years ending
December 31, 1995 through 1998 are $30.3 million, $32.9 million,
$35.3 million and $37.9 million, respectively.
Based on the borrowing rates currently available to the
Partnership for long-term debt with similar terms and average
maturities, the fair value of the Partnership's First Mortgage
Notes, including current maturities, at December 31, 1993 was
approximately $562 million. At December 31, 1992, the fair value
of the First Mortgage Notes was essentially equal to their
carrying value.
4. INDUSTRY SEGMENT INFORMATION
<TABLE>
<CAPTION>
Year Ended December 31,
1993 1992 1991
(Thousands of Dollars)
<S> <C> <C> <C>
Operating revenues:
Natural gas. . . . . . . . . . . . $ 900,252 $ 743,026 $ 764,226
Natural gas liquids . . . . . . . 441,741 466,017 390,708
Intersegment eliminations. . . . . (15,535) (11,914) (10,933)
Total. . . . . . . . . . . . . . $1,326,458 $1,197,129 $1,144,001
Operating income:
Natural gas. . . . . . . . . . . . $ 53,458 $ 32,484 $ 37,140
Natural gas liquids. . . . . . . . 26,020 57,357 62,694
Total. . . . . . . . . . . . . . 79,478 89,841 99,834
Other income, net. . . . . . . . . . 1,263 624 4,013
Interest expense, net. . . . . . . . (66,294) (65,479) (66,811)
Net income . . . . . . . . . . . $ 14,447 $ 24,986 $ 37,036
Identifiable assets:
Natural gas. . . . . . . . . . . . $ 865,487 $ 889,620 $ 900,588
Natural gas liquids. . . . . . . . 154,767 174,170 126,380
Other. . . . . . . . . . . . . . . 43,008 43,292 52,489
Intersegment eliminations. . . . . (18,180) (22,601) (17,967)
Total. . . . . . . . . . . . . . $1,045,082 $1,084,481 $1,061,490
Depreciation expense:
Natural gas. . . . . . . . . . . . $ 28,549 $ 28,136 $ 27,977
Natural gas liquids. . . . . . . . 7,897 6,268 11,254
Total. . . . . . . . . . . . . . $ 36,446 $ 34,404 $ 39,231
Capital expenditures:
Natural gas. . . . . . . . . . . . $ 20,511 $ 22,537 $ 26,931
Natural gas liquids. . . . . . . . 15,550 13,356 6,143
Total. . . . . . . . . . . . . . $ 36,061 $ 35,893 $ 33,074
</TABLE>
The Partnership operates in the natural gas and natural
gas liquids industry segments. The natural gas operations
consist of purchasing, gathering, transporting and selling
natural gas, principally to gas distribution companies, electric
utilities, pipeline companies and industrial customers. The
Partnership also transports gas for a fee for sales customers,
other pipelines and end users and provides price risk management
services to gas producers and end users through its Market Center
Services Program. The natural gas liquids operations include the
extraction of natural gas liquids, principally from natural gas
throughput of the natural gas operations, and the fractionation
and transportation of natural gas liquids. The primary markets
for sales of natural gas liquids are petrochemical plants,
refineries and domestic fuel distributors. Intersegment revenue
eliminations relate primarily to transportation provided by the
natural gas segment for the natural gas liquids segment. During
1993, natural gas sales and transportation revenues from San
Antonio City Public Service accounted for approximately 11% of
the Partnership's total consolidated operating revenues. No
single unaffiliated customer accounted for more than 10% of the
Partnership's total consolidated operating revenues during 1992
or 1991. Energy and its consolidated subsidiaries accounted for
approximately 12%, 12% and 11% of the Partnership's total
consolidated operating revenues during 1993, 1992 and 1991,
respectively.
The Partnership's natural gas segment has a
concentration of customers in the natural gas transmission and
distribution industries while its natural gas liquids segment has
a concentration of customers in the refining and petrochemical
industries. These concentrations of customers may impact the
Partnership's overall exposure to credit risk, either positively
or negatively, in that the customers may be similarly affected by
changes in economic or other conditions. However, the General
Partner believes that the Partnership's portfolio of accounts
receivable is sufficiently diversified to the extent necessary to
minimize any potential credit risk. Historically, the
Partnership has not had any significant problems in collecting
its accounts receivable. The Partnership's accounts receivable
are generally not collateralized.
5. LEASE AND OTHER COMMITMENTS
Valero Gas Storage Company ("Gas Storage"), a wholly
owned subsidiary of VNGC, is the lessee under an operating lease
for a gas storage facility (the "Wilson Storage Facility"). Gas
Storage and Valero Transmission Company had previously entered
into a gas storage agreement ("Gas Storage Agreement") which
required Valero Transmission Company to pay to Gas Storage
amounts essentially equivalent to the lease payments and
operating costs in connection with Valero Transmission Company's
use of the Wilson Storage Facility. Upon formation of the
Partnership, Valero Transmission Company assigned the Gas Storage
Agreement to Valero Transmission, L.P., and Valero Transmission,
L.P. assumed Valero Transmission Company's obligation to make
such payments to Gas Storage. The remaining primary lease term
for the Wilson Storage Facility is six years with options to
renew at varying terms. The future minimum lease payments
related to this lease are included in the table below. The
Partnership has other noncancelable operating leases with
remaining terms ranging generally from one year to 13 years.
During 1992, the Partnership entered into a capital
lease with Energy to lease a gas processing plant near
Thompsonville in South Texas and 48 miles of NGL product pipeline
(the "Thompsonville Project"). The Thompsonville Project lease
commenced December 1, 1992 and has a term of 15 years. During
1991, the Partnership entered into capital leases with Energy to
lease an interest in an approximate 105-mile pipeline in East
Texas (the "East Texas pipeline") and certain fractionation
facilities in Corpus Christi, Texas. The East Texas pipeline
lease commenced February 1, 1991 and has a term of 25 years while
the lease for the fractionation facilities commenced December 1,
1991 and has a term of 15 years. As a result of the settlement
and dismissal in 1992 of certain claims asserted in litigation
filed against Energy and certain of its affiliates, officers and
directors, Energy agreed to adjust the payments and certain other
terms under these capital leases. Such adjusted payments are
reflected in the table of future minimum lease payments shown
below.
The assets and associated obligations related to the
capital leases with Energy described above are not subject to the
Mortgage Note Indenture. The Partnership has the right to
purchase all or any portion of these assets, subject to certain
restrictions, under purchase option provisions of the respective
lease agreements. The total cost of these leased facilities,
which is included in the accompanying consolidated balance sheets
under property, plant and equipment, was approximately $101
million. Amortization of these capital leases, which is included
in depreciation expense in the accompanying consolidated income
statements, was $5.3 million, $3.5 million and $2.2 million for
1993, 1992 and 1991, respectively.
The related future minimum lease payments under the
Partnership's capital leases and noncancelable operating leases
as of December 31, 1993 are as follows (in thousands):
<TABLE>
<CAPTION>
Operating Leases
Other Partnership
Partnership Commitments
Capital Lease (Wilson Storage
Leases Commitments Facility)
<S> <C> <C> <C>
1994 . . . . . . . . . . . . . . . . $ 12,867 $1,873 $ 10,438
1995 . . . . . . . . . . . . . . . . 12,867 147 10,438
1996 . . . . . . . . . . . . . . . . 13,867 134 10,438
1997 . . . . . . . . . . . . . . . . 15,114 105 9,832
1998 . . . . . . . . . . . . . . . . 15,361 103 10,156
Remainder. . . . . . . . . . . . . . 213,557 449 15,660
Total minimum lease payments . . . . 283,633 $2,811 $66,962
Less amount representing interest. 178,795
Net present value of minimum lease
payments . . . . . . . . . . . . . 104,838
Less current maturities. . . . . . 1,051
Capital lease obligations. . . . . $ 103,787
</TABLE>
The future minimum lease payments listed above under the
caption "Partnership Lease Commitments" exclude certain operating
lease commitments which are cancelable by the Partnership upon
notice of one year or less. Consolidated rent expense was
approximately $698,000, $833,000 and $746,000 for the years ended
December 31, 1993, 1992 and 1991, respectively, and excludes
amounts billed by Energy to the Partnership for its proportionate
use of Energy's corporate headquarters office complex and related
charges which are included in the management fee charged to the
Partnership. See Note 1 - "Transactions with Energy." Rentals
paid of $10,438,000 per year for 1993, 1992 and 1991 in
connection with the Wilson Storage Facility were included in the
computation of Transmission's weighted average cost of gas.
The obligations of Gas Storage 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, including VNGC,
with respect to its own indebtedness could result in a cross
default under the gas storage facility lease. The General Partner
believes that it is unlikely that a default by Energy or a
subsidiary of Energy would result in acceleration of the gas
storage facility lease, and further believes that such event, if
it occurred, would not have a material adverse effect on the
Partnership.
6. LITIGATION AND CONTINGENCIES
Take-or-Pay and Related Claims
As a result of past market conditions and contracting
practices in the natural gas industry, numerous producers and
other suppliers brought claims against Transmission asserting
that it was in breach of contractual provisions requiring that
it take, or pay for if not taken, certain specified volumes of
natural gas. The Partnership has settled substantially all of
the significant take-or-pay claims, pricing differences and
contractual disputes heretofore brought against it. Although
additional claims may arise under older contracts until their
expiration or renegotiation, the General Partner believes that
the Partnership has resolved substantially all of the significant
take-or-pay claims that are likely to be made. As described
below, Energy and/or the Partnership have agreed to bear a
portion of certain potential liabilities that may be incurred by
certain Partnership suppliers. Although the General Partner is
currently unable to predict the total amount Transmission or the
Partnership ultimately may pay or be required to pay in
connection with the resolution of existing and potential take-or-
pay claims, the General Partner believes that any remaining
claims can be resolved on terms satisfactory to the Partnership
and that the resolution of such claims and any potential claims
has not had and will not have a material adverse effect on the
Partnership's financial position or results of operations.
In 1987, Transmission and a producer from whom
Transmission has purchased natural gas entered into an agreement
resolving certain take-or-pay issues between the parties in which
Transmission agreed to pay one-half of certain excess royalty
claims arising after the date of the agreement. The royalty
owners of the producer recently completed an audit of the
producer and have presented to the producer a claim for
additional royalty payments in the amount of approximately $17.3
million, and accrued interest thereon of approximately $19.8
million. Approximately $8 million of the royalty owners' claim
accrued after the effective date of the agreement between the
producer and Transmission. The producer and Transmission are
reviewing the royalty owners' claims. No lawsuit has been filed
by the royalty owners. The General Partner believes that various
defenses under the agreement may reduce any liability of
Transmission to the producer in this matter.
Valero Transmission Company and one of its gas suppliers
are parties to various gas purchase contracts assigned to and
assumed by Valero Transmission, L.P. upon formation of the
Partnership in 1987. The supplier is also a party to a series of
gas purchase contracts between the supplier, as buyer, and
certain trusts, as seller, which are in litigation. Neither the
Partnership nor Valero Transmission Company is a party to this
litigation or the contracts between Transmission's supplier and
the trusts. However, because of the relationship between
Transmission's contracts with the supplier and the supplier's
contracts with the trusts, and in order to resolve existing and
potential disputes, the supplier, Valero Transmission Company and
Valero Transmission, L.P. have agreed that they will cooperate in
the conduct of this litigation, and that Valero Transmission
Company and Valero Transmission, L.P. will bear a substantial
portion of the costs of any appeal and any nonappealable final
judgment rendered against the supplier. In the litigation, the
trusts allege that Transmission's supplier has breached various
minimum take, take-or-pay and other contractual provisions, and
assert a statutory nonratability claim. The trusts seek alleged
actual damages, including interest, of approximately $30 million
and an unspecified amount of punitive damages. The District
Court ruled on the plaintiff's motion for summary judgment,
finding, among other things, that as a matter of law the three
gas purchase contracts at issue were fully binding and
enforceable, the supplier breached the minimum take obligations
under one of the contracts, the supplier is not entitled to
claimed offsets for gas purchased by third parties and the
"availability" of gas for take-or-pay purposes is established
solely by the delivery capacity testing procedures in the
contracts. Damages, if any, have not been determined. Because
of existing contractual obligations of Valero Transmission, L.P.
to its supplier, the lawsuit may ultimately involve a contingent
liability for Valero Transmission, L.P. The General Partner
believes that the claims brought against the supplier have been
significantly overstated, and that the supplier has a number of
meritorious defenses to the claims including various regulatory,
statutory, contractual and common law defenses. The Court
recently granted the supplier's Motion for Continuance of the
former January 10, 1994 trial date. This litigation is not
currently set for trial.
Payments that Transmission has made or agreed to make in
connection with settlements to date are included in its deferred
gas costs. The General Partner believes that the rate order
under which Transmission currently operates (the "Rate Order"),
issued in 1979 by the Railroad Commission of Texas (the "Railroad
Commission," which regulates the sale and transportation of
natural gas by intrastate pipeline systems in Texas), allows for
the recovery of such costs. See Note 1 - "Other Assets" and
"Customer Audit of Transmission" below. Certain take-or-pay and
other claims have been resolved through the Partnership agreeing
to provide discounted transportation services. These agreements
do not involve a cash outlay by the Partnership but in certain
cases have the effect of reducing transportation margins over an
extended period of time.
Any liability of Energy with respect to take-or-pay
claims involving Transmission's intrastate pipeline operations
has been assumed by the Partnership. Based upon the General
Partner's beliefs and rate considerations discussed above, no
liabilities have been recorded for any unresolved take-or-pay
claims.
Other Litigation
Seven lawsuits were filed in Chancery Court in Delaware
against VNGP, L.P., VNGC and Energy and certain officers and
directors of VNGC and/or Energy in response to the
announcement by Energy on October 14, 1993 of its proposal to
acquire the publicly traded Common Units of VNGP, L.P. pursuant
to a proposed merger of VNGP, L.P. with a wholly owned subsidiary
of Energy. See Note 1 - "Organization and Control." The suits
were consolidated into a single proceeding by the Chancery Court
on November 23, 1993. The plaintiffs sought to enjoin or
rescind the proposed merger, alleging that the corporate
defendants and the individual defendants, as officers or
directors of the corporate defendants, engaged in actions in
breach of the defendants' fiduciary duties to the Public
Unitholders by proposing the merger. The plaintiffs
alternatively sought an increase in the proposed merger
consideration, unspecified compensatory damages and attorneys'
fees. In December 1993, the parties reached a tentative
settlement of the consolidated lawsuit. The terms of the
settlement will not require a material payment by Energy or
the Partnership. However, there can be no assurance that the
settlement will be completed, or that it will be approved by the
Chancery Court.
In March 1993, two indirect wholly owned subsidiaries of
Energy serving as general partners of two of VNGP, L.P.'s
principal Subsidiary Operating Partnerships were served as third-
party defendants in a lawsuit originally filed in 1991 by a
subsidiary of The Coastal Corporation ("Coastal") against
TransAmerican Natural Gas Corporation ("TANG"). In August 1993,
Energy, VNGP, L.P. and certain of their respective subsidiaries
were named as additional third-party defendants (collectively,
including the original defendant subsidiaries, the "Valero
Defendants") in this lawsuit. In its counterclaims against
Coastal and third-party claims against the Valero Defendants,
TANG alleges that it contracted to sell natural gas to Coastal at
the posted field price of one of the Valero Defendants and that
the Valero Defendants and Coastal conspired to set the posted
field price at an artificially low level. TANG also alleges that
the Valero Defendants and Coastal conspired to cause TANG to
deliver unprocessed or "wet" gas, thus precluding TANG from
extracting NGLs from its gas prior to delivery. TANG seeks
actual damages of approximately $50 million, trebling of damages
under antitrust claims, punitive damages of $300 million, and
attorneys' fees. The General Partner believes that the
plaintiff's claims have been exaggerated, and that Energy and the
Partnership have meritorious defenses to such claims. In the
event of an adverse determination involving Energy, Energy likely
would seek indemnification from the Partnership under terms of
the partnership agreements and other applicable agreements
between VNGP, L.P., its subsidiary partnerships and their
respective general partners. The Valero Defendants' motion for
summary judgment on TANG's antitrust claims was argued on January
24, 1994. The court has not ruled on such motion. The current
trial setting for this case is March 14, 1994.
In September 1991, a lawsuit was filed by Valero
Transmission, L.P. alleging breach of contract against a
producer. On January 11, 1993, the defendant filed a cross-
action against Valero Transmission, L.P., Valero Industrial Gas,
L.P. and Reata Industrial Gas, L.P. The defendant asserted
claims for actual damages for failure to pay for goods and
services delivered. Additionally, the defendant asserted various
other cross-claims, including conversion, breach of contract,
breach of an alleged duty to market gas in good faith, tortious
breach of a duty imposed by law and tortious negligence. The
defendant sought actual damages aggregating not less than
$1 million, injunctive relief, attorneys fees and costs, and
exemplary damages in the amount of not less than $20 million. In
January 1994, the parties reached a tentative settlement of the
lawsuit on terms immaterial to the Partnership.
The Partnership was a party to a lawsuit originally
filed in 1988 in which Energy, Valero Transmission Company, VNGP,
L.P., the Management Partnership and Valero Transmission, L.P.
(the "Valero Defendants") and a subsidiary of Coastal were
alleged to be liable for failure to take minimum quantities of
gas, failure to make take-or-pay payments and other breach of
contract and breach of fiduciary duty claims. The plaintiffs
sought declaratory relief, actual damages in excess of $37
million and unspecified punitive damages. During the third
quarter of 1992, the plaintiffs, Coastal and the Valero
Defendants settled this lawsuit on terms which were not material
to the Valero Defendants and on July 19, 1993, this lawsuit was
dismissed. On November 16, 1992, prior to entry of the order of
dismissal, NationsBank of Texas, N.A., as trustee for certain
trusts (the "Intervenors"), filed a plea in intervention to
intervene in the lawsuit. The Intervenors asserted that they
held a non-participating mineral interest in the lands subject to
the litigation and that their rights were not protected by the
plaintiffs in the settlement. On February 4, 1993, the Court
struck the Intervenors' plea in intervention. However, on
February 2, 1993, the Intervenors had filed a separate suit in
the 160th State District Court, Dallas County, Texas, against all
prior defendants and an additional defendant, substantially
adopting in form and substance the allegations and claims in the
original litigation. In February 1994, the parties reached a
tentative settlement of the lawsuit on terms immaterial to the
Partnership.
City of Houston Franchise Fee Audit
In a letter dated September 1, 1993 from the City of
Houston (the "City") to Valero Transmission Company ("VTC"), the
City stated its intent to bring suit against VTC for certain
claims asserted by the City under the franchise agreement between
the City and VTC. VTC is the general partner of Valero
Transmission, L.P. The franchise agreement was assigned to and
assumed by Valero Transmission, L.P. upon formation of the
Partnership in 1987. In the letter, the City declared a
conditional forfeiture of the franchise rights based on the
City's claims. In a letter dated October 27, 1993, the City
claimed that VTC owes to the City franchise fees and accrued
interest thereon aggregating approximately $13.5 million. In a
letter dated November 9, 1993, the City claimed an additional
$18 million in damages related to the City's allegations that VTC
engaged in unauthorized activities under the franchise agreement
by transmitting gas for resale and by transporting gas for third
parties on the franchised premises. The City has not filed a
lawsuit. The General Partner believes that the City's claims are
significantly overstated and that VTC has a number of meritorious
defenses to the claims. Any liability of VTC with respect to the
City's claims has been assumed by the Partnership.
Customer Audit of Transmission
Transmission's Rate Order provides for Transmission to
sell gas at its weighted average cost of gas, as defined
("WACOG"), plus a margin of $.15 per Mcf. In addition to the
cost of gas purchases, Transmission's WACOG has included storage,
gathering and other fixed costs totalling approximately $19
million per year, and amortization of deferred gas costs related
to the settlement of take-or-pay and related claims (see Note 1 -
"Other Assets" and "Take-or-Pay and Related Claims" above).
Transmission's gas purchases include high-cost casinghead gas and
certain special allowable gas that Transmission is required to
purchase contractually and under the Railroad Commission's
priority rules. Transmission's sales volumes have been
decreasing with the expiration of its sales contracts including
the July 1992 expiration of a contract representing approximately
37% of Transmission's sales volumes for the first six months of
1992. As a result of each of these factors, Transmission's WACOG
and gas sales price are substantially in excess of market
clearing levels.
Transmission's WACOG has been periodically audited by
certain of its customers, as allowed under the Rate Order. One
such customer (the "Customer") questioned the application of
certain of Transmission's current rate policies to future periods
in light of the decreases that have occurred in Transmission's
throughput, and the Customer has recently completed its audit of
Transmission's WACOG with respect thereto. For 1993, the
Customer represented approximately 70% of Transmission's sales
volumes and such percentage is expected to increase as other
sales contracts expire and are not renewed. As a result of the
Customer's audit, Transmission and the Customer entered into a
settlement agreement which excludes certain of the fixed costs
described above from Transmission's WACOG, effective with July
1993 sales, resulting in a reduction of the Partnership's annual
net income by approximately $6 million. Upon the termination of
Transmission's gas sales contract with the Customer in 1998,
Transmission's fixed costs, including storage (see Note 5), would
be charged to income instead of recovered through its gas sales
rates. Transmission expects to recover its deferred gas costs
over a period of approximately eight years. The recovery of any
additional payments made in connection with any future
settlements would be limited.
The Partnership is also a party to additional claims and
legal proceedings arising in the ordinary course of business.
The General Partner believes it is unlikely that the final
outcome of any of the claims or proceedings to which the
Partnership is a party, including those described above, would
have a material adverse effect on the Partnership's financial
position or results of operations; however, due to the inherent
uncertainties 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
Partnership's results of operations for the fiscal period in
which such resolution occurred.
7. QUARTERLY RESULTS OF OPERATIONS (Unaudited)
The results of operations by quarter for the years ended
December 31, 1993 and 1992 were as follows (in thousands of
dollars, except per Unit amounts):
<TABLE>
<CAPTION>
Net Income
Net (Loss) Per
Operating Operating Income Limited
Revenues Income (Loss) Partner Unit
<S> <C> <C> <C> <C>
1993-Quarter Ended:
March 31 . . . . . . $ 331,484 $ 21,747 $ 5,133 $ .26
June 30. . . . . . . 326,259 23,496 7,699 .39
September 30 . . . . 336,893 19,812 3,621 .18
December 31. . . . . 331,822 14,423 (2,006) (.11)
Total. . . . . . . $1,326,458 $ 79,478 $ 14,447 $ .72
1992-Quarter Ended:
March 31 . . . . . . $ 265,745 $ 18,785 $ 2,617 $ .13
June 30. . . . . . . 276,609 22,035 6,155 .31
September 30 . . . . 314,245 30,032 13,901 .72
December 31. . . . . 340,530 18,989 2,313 .11
Total. . . . . . . $1,197,129 $ 89,841 $ 24,986 $ 1.27
</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
Neither VNGP, L.P., the Management Partnership nor any
Subsidiary Operating Partnership has any officers, directors or
employees of its own. Accordingly, the following information is
provided with respect to the executive officers and directors of
the General Partner.
The following table sets forth certain information as of
December 31, 1993, regarding the present executive officers and
directors of the General Partner. The term of each director
expires at an annual meeting of the sole stockholder of the
General Partner scheduled to be held on or about April 27, 1994.
The General Partner is a wholly owned subsidiary of Energy. Each
executive officer named in the following table has been elected
to serve until his successor is duly appointed or elected or his
earlier removal or resignation from office.
There is no family relationship among any of the
executive officers or directors of the General Partner, and no
arrangement or understanding exists between any executive officer
and any other person pursuant to which he was or is to be
selected as an officer.
<TABLE>
<CAPTION>
Year First
Elected or
Appointed as Age
Executive as of
General Partner Position(s) Officer December 31,
Name and Other Office(s) Held or Director 1993
<S> <C> <C> <C>
Edward C. Benninger. . . Director, Executive Vice President and 1982 51
Chief Operating Officer
Ronald K. Calgaard . . . Director 1987 56
Ruben M. Escobedo. . . . Director 1989 56
William E. Greehey . . . Director, Chairman of the Board 1982 57
and Chief Executive Officer
Stan L. McLelland. . . . Director, Executive Vice President and 1982 48
General Counsel
Mack Wallace . . . . . . Director 1987 64
Don M. Heep. . . . . . . Senior Vice President and Chief
Financial Officer 1988 44
Steven E. Fry. . . . . . Vice President Administration 1982 48
</TABLE>
Mr. Benninger was elected Executive Vice President of
VNGC in 1990 and as a director and Chief Operating Officer of
VNGC in 1992. He served as Chief Financial Officer of VNGC from
1986 to 1992, as Senior Vice President of VNGC from 1987 to 1990
and as Vice President of VNGC from 1983 to 1987. Mr. Benninger
also served as Treasurer of VNGC from its formation in 1982 to
1986. Mr. Benninger is also a director and the Executive Vice
President of Energy and has served in various capacities with
Energy since 1975.
Dr. Calgaard has served as a director of VNGC since
1987. He has also served as President of Trinity University, San
Antonio, Texas, since 1979. Dr. Calgaard presently serves as a
director of the Association of American Colleges, Southwest
Research Institute and Rayco, Ltd. None of these entities is
affiliated with the Partnership or the General Partner.
Mr. Escobedo has served as a director of VNGC since
1989. He is currently, and has been for the past five years, a
senior partner of the independent public accounting firm of Ruben
Escobedo & Co., Certified Public Accountants.
Mr. Greehey has served as Chief Executive Officer and a
director of VNGC since its formation in 1982. Mr. Greehey is
also Chairman of the Board and Chief Executive Officer of Energy
and has been employed by Energy in various capacities since 1979.
Mr. Greehey is also a director of Weatherford International
Incorporated and Santa Fe Energy Resources, Inc., which are not
affiliated with the Partnership or the General Partner.
Mr. McLelland was elected Executive Vice President of
VNGC in 1990 and has served as General Counsel and a director of
VNGC since its formation in 1982. Mr. McLelland served as Senior
Vice President of VNGC from 1982 until his election as Executive
Vice President. He also serves as Executive Vice President and
General Counsel of Energy.
Mr. Wallace has served as a director of VNGC since 1987.
He was engaged in the private practice of law with the firm
Hughes & Luce, Austin, Texas, from 1987 to 1990 and currently
serves as counsel to such firm. He previously served as a member
and Chairman of the Railroad Commission of Texas from 1973 to
1987.
Mr. Heep was elected Senior Vice President and Chief
Financial Officer in January 1994. Mr. Heep served as Vice
President Finance of VNGC from 1990 until his election as Senior
Vice President. He was first elected Vice President of VNGC in
1988. He also serves as Senior Vice President and Chief
Financial Officer of Energy. He has been employed by Energy
since 1977.
Mr. Fry was elected Vice President Administration of
VNGC in 1990. He served as Secretary of VNGC since its formation
in 1982 until 1992. He has been employed by Energy since 1978
and also serves as Vice President Administration of Energy.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth information as to items
of compensation paid to VNGC's Chief Executive Officer and its
four other most highly compensated executive officers for
services rendered in all capacities to Energy in 1991, 1992 and
1993. The Partnership has reimbursed the General Partner and its
subsidiaries for approximately 60% of the aggregate amount of
such 1993 compensation pursuant to the Partnership Agreement of
VNGP, L.P. and the corresponding partnership agreements of the
Management Partnership and Subsidiary Operating Partnerships
(collectively the "Partnership Agreements"). See "Certain
Relationships and Related Transactions."
<TABLE>
Summary Compensation Table
<CAPTION>
Long-Term Compensation
Securities
Restricted Under- All Other
Annual Compensation Stock lying Compen-
Name and Salary Bonus Award(s) Options/ sation
Principal Position Year ($) ($)(1) ($)(2) SARs(#) ($)(3)
<S> <C> <C> <C> <C> <C> <C>
William E. Greehey
Chairman of the 1993 $622,020 $375,000 $457,500 50,000 $77,861
Board, and 1992 $610,050 $365,000 $367,413 32,884 $78,327
Chief Executive 1991 $586,560 $472,804 $397,211 - -
Officer of VNGC
Edward C. Benninger
Executive Vice 1993 $335,040 $170,000 $228,750 18,000 $32,923
President and Chief 1992 $303,778 $155,000 $165,538 18,805 $33,507
Operating Officer 1991 $285,630 $200,942 $161,088 - -
of VNGC
Stan L. McLelland 1993 $262,380 $ 87,000 $102,938 12,000 $28,777
Executive Vice 1992 $257,310 $ 91,000 $ 88,825 12,524 $31,885
President and 1991 $247,380 $118,201 $ 93,650 - -
General Counsel
of VNGC
Don M. Heep 1993 $180,300 $ 65,000 $ 91,500 7,000 $14,315
Senior Vice President 1992 $153,508 $ 55,000 $ 68,638 9,435 $15,065
and Chief Financial 1991 $142,860 $ 59,101 - - -
Officer of VNGC
Steven E. Fry 1993 $173,040 $ 42,000 $ 34,313 6,000 $16,745
Vice President 1992 $154,482 $ 45,000 $ 40,375 9,435 $19,809
Administration 1991 $145,350 $ 59,101 - - -
of VNGC
<FN>
(1) In 1991, 60% of the bonus was paid in Common Stock and 40%
in cash. For 1992 and 1993, executives received bonuses in
40% Common Stock and 60% cash.
(2) Represents the dollar value obtained by multiplying the
number of shares of restricted Common Stock ("Restricted
Stock") and granted to each named executive officer under
Energy's Restricted Stock Bonus and Incentive Stock Plan
("Restricted Stock Plan") by the closing market price of
Energy's unrestricted Common Stock on the date of grant.
Amounts for 1991 also include grants of L.P. Units
("Restricted Units") under Energy's Preference Unit Award
Plan ("Unit Plan"), valued at the closing market price of
L.P. Units on the date of grant. No grants were made to any
named executive under the Unit Plan after 1991, and no
grants under the Unit Plan remain unvested. For each named
executive officer, the number of shares of Restricted Stock
held at December 31, 1993, and the value thereof, based on
the closing market price of the Common Stock at December 31,
1993, are as follows: Mr. Greehey: 35,133 shares -
$742,185; Mr. Benninger: 16,532 shares - $349,239;
Mr. McLelland: 8,066 shares - $170,394; Mr. Heep: 6,266
shares - $132,369; Mr. Fry: 2,833 shares - $59,847.
Dividends and distributions are paid on the Restricted
Stock at the same rate applicable to Energy's Common Stock.
Except as noted below, all grants of Restricted Stock and
Restricted Units vest in annual increments of 33 1/3%
beginning on the first anniversary of the grant date. In
November 1993, the Compensation Committee of Energy's
Board of Directors accelerated from February 1994 to
November 1993 the vesting date of certain grants under the
Restricted Stock Plan and Unit Plan, as permitted under
the provisions of the plans.
(3) Amounts for 1992 and 1993 include Energy contributions
pursuant to various employee stock plans established by
Energy and available to employees generally (collectively,
the "Employee Stock Plans"), and that portion of interest
accrued under Energy's Executive Deferred Compensation Plan
which is deemed to be at "above-market" rates under
applicable SEC rules. Messrs. Greehey, Benninger,
McLelland, Heep and Fry were allocated $50,280, $28,092,
$21,215, $14,315 and 13,734, respectively, as a result of
Energy contributions to Employee Stock Plans for 1993.
Messrs. Greehey, Benninger, McLelland and Fry were allocated
$14,581, $4,831, $7,562 and $3,011, respectively, as a
result of Energy "above-market" allocations to the Executive
Deferred Compensation Plan for 1993. Mr. Heep does not
participate in the Executive Deferred Compensation Plan.
Amounts for Mr. Greehey for 1992 and 1993 also include
executive insurance policy premiums with respect to standard
cash value life insurance (and not split-dollar life
insurance) in the amount of $13,000. Reporting of "other
compensation" is not required for years prior to 1992.
</TABLE>
Shown below is further information regarding the grants of stock
options to the named executive officers reflected in the Summary
Compensation Table.
<TABLE>
Option/SAR Grants in the Last Fiscal Year
<CAPTION>
Individual Grants
Number of % of
Securities Total
Under- Options/
lying SARs
Options/ Granted to Exercise
SARs Employees or Base
Granted in Fiscal Price Expiration Grant Date Present
Name (#)(1) Year ($/Sh) Date Value $ (2)
<S> <C> <C> <C> <C> <C>
William E. Greehey 50,000 8.3745% $23.1875 01/20/03 $440,865
Edward C. Benninger 18,000 3.0148% $23.1875 01/20/03 $158,711
Stan L. McLelland 12,000 2.0099% $23.1875 01/20/03 $105,807
Don M. Heep 7,000 1.1724% $23.1875 01/20/03 $ 61,721
Steven E. Fry 6,000 1.0049% $23.1875 01/20/03 $ 52,904
<FN>
(1) Options granted in 1993 are exercisable in cumulative 33
1/3% installments annually commencing one year from date of
grant. In the event of a change of control of Energy, the
options will become immediately exercisable pursuant to
provisions of the stock option plans or executive severance
agreements between Energy and certain executive officers.
Under the terms of the plans, the exercise price and tax
withholding obligations related to exercise may be paid by
delivery of 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 Energy's option plans are not freely traded, and
the exercise of these options is subject to substantial
restrictions. The Black-Scholes model does not give effect
to risk of forfeiture or lack of transferability. The
estimated values under the Black-Scholes model are based on
assumptions for variables such as interest rates, stock price
volatility and future dividend yield. The grant date
present values presented in the table are calculated using
an expected average option term of six years, a risk-free
rate of return of 6.4%, a three-year average historical
volatility rate of 35% and a dividend yield of 1.9%, which
is the annualized quarterly dividend rate in effect at the
date of grant, expressed as a percentage of the market value
of the Common Stock at the date of grant. The actual value
of stock options 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 the table may not be achieved.
</TABLE>
<TABLE>
Aggregated Option/SAR Exercises in Last Fiscal Year
and FY-End Option/SAR Values
<CAPTION>
Number of Securities
Underlying Unexercised Value of Unexercised,
Value Options/SARs Held at In-the-Money Options/SARs
Shares Acquired Realized FY-End (#) at FY-End ($)(2)
Name on Exercise (#) ($)(1) Exercisable Unexercisable Exercisable Unexercisable
<S> <C> <C> <C> <C> <C> <C>
William E. Greehey 0 $ 0 82,962 71,922 $480,276 $ 0
Edward C. Benninger 0 $ 0 15,269 30,536 $ 60,035 $ 0
Stan L. McLelland 2,500 $46,563 16,174 20,349 $ 80,039 $ 0
Don M. Heep 1,500 $26,813 7,945 13,289 $ 32,012 $ 0
Steven E. Fry 3,600 $30,539 3,146 12,289 $ 0 $ 0
<FN>
(1) Represents the dollar value obtained by multiplying the
difference between the exercise price and the average
market price of Energy's Common Stock on the exercise date
by the number of options/SARs exercised. The amounts
reported do not reflect any costs incurred by the named
executive officer, including payments for related taxes.
(2) Represents the dollar value obtained by multiplying the
number of unexercised Options/SARs by the difference
between the strike price and the average market price of
Energy's Common Stock on December 31, 1993.
</TABLE>
Retirement Benefits
The following table shows, for purposes of illustration,
the estimated annual gross benefits payable under Energy's
Pension Plan ("Pension Plan") and Supplemental Executive
Retirement Plan ("SERP") upon retirement at age 65 on the assumed
compensation levels and years of service indicated, assuming an
election to have payments continue for the benefit of the life of
the participant only.
<TABLE>
Pension Table
<CAPTION>
___________________________________________________________________________________________
Years of Service
_________________________________________________________________________
Remuneration 15 20 25 30 35
___________________________________________________________________________________________
<S> <C> <C> <C> <C> <C>
$ 200,000 $ 55,000 $ 74,000 $ 92,000 $111,000 $129,000
250,000 70,000 93,000 117,000 140,000 164,000
300,000 85,000 113,000 141,000 169,000 198,000
400,000 114,000 152,000 190,000 228,000 266,000
500,000 143,000 191,000 239,000 286,000 334,000
600,000 172,000 230,000 287,000 345,000 402,000
700,000 202,000 269,000 336,000 403,000 471,000
800,000 231,000 308,000 385,000 462,000 539,000
900,000 260,000 347,000 434,000 520,000 607,000
1,000,000 289,000 386,000 482,000 579,000 675,000
1,200,000 348,000 464,000 580,000 696,000 812,000
___________________________________________________________________________________________
</TABLE>
Energy maintains a noncontributory pension plan in which
virtually all Energy employees are eligible to participate. The
Pension Plan is a defined benefit plan funded by a method which
determines contribution requirements in the aggregate for all
participants. Accordingly, contributions for individual
participants are not determinable. Accrued contributions to the
Pension Plan in 1993 for the 1993 Pension Plan year were
approximately 7.4% of total covered remuneration. The 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 under the Pension Plan.
Energy also maintains the SERP, a nonqualified supplemental
retirement plan which provides additional pension benefits to the
executive officers and certain employees of Energy. In
December 1989, Energy funded its obligations through that date
under the SERP through the contribution of Common Stock to a
trust established as a vehicle to fund disbursements to SERP
participants. No additional contributions were made to the SERP
during 1993.
Compensation for purposes of the Pension Plan includes only
annual salary as reported in the Summary Compensation Table and
excludes cash bonuses. For purposes of calculating the amount
payable under the SERP, the participant's most highly compensated
consecutive 36 months of service (rather than 60
months) in the prior 10 years are considered, and bonuses are
included in calculating covered compensation. Accordingly, the
amounts reported as annual compensation in the Summary
Compensation Table under the heading "Salaries" and "Bonus"
constitute covered compensation for purposes of the SERP.
Benefits listed in the Pension Table are not subject to any
deduction for social security or other offset amounts.
Credited years of service for the period ending December
31, 1993, for the executive officers of VNGC named in the cash
compensation table are as follows: Mr. Greehey - 30 years;
Mr. Benninger - 19 years; Mr. McLelland -15 years; Mr. Heep - 16
years; and Mr. Fry - 15 years. The credited service for Mr.
McLelland includes two years service credited pursuant to the
terms of Mr. McLelland's employment by Energy and for which
benefits are payable only from the SERP.
Executive Severance Program
The Board approved an executive severance program in 1982
administered by the Compensation Committee. Pursuant to this
program, Energy has entered into agreements (the "Executive
Severance Agreements") with Messrs. Greehey, Benninger, McLelland
and Fry. The Executive Severance Agreements provide payments and
other benefits to the executives in the event of termination of
their employment with Energy under certain circumstances. The
Executive Severance Agreements provide that if the executive
leaves the employ of Energy for any reason other than death,
disability or normal retirement within two years after a change
of control of Energy, the executives will receive a lump sum cash
payment equal to three times (for Messrs. Greehey and McLelland)
and two times (for Messrs. Benninger and Fry) the highest
compensation paid to the executive during any consecutive
12-month period prior to termination. The executive will also be
entitled to accelerated exercise of stock options or SARs
previously granted under Energy's stock option plans and held for
more than six months. If the executive received a grant of
Restricted Stock under Energy's Restricted Stock Plan or L.P.
Units under Energy's Preference Unit Award Plan, any restrictions
imposed by such plans on the vesting and sale of the stock or
L.P. Units are removed. The Executive Severance Agreements also
provide (i) special retirement benefits if the executive would
have qualified for benefits under Energy's Pension Plan had the
executive remained in the employ of Energy for the three-year
period following termination, (ii) continuance of life insurance,
(iii) health coverages, (iv) other fringe benefits previously
provided to the executive for such three-year period, and
(v) relocation assistance if the executive chooses to relocate
after termination. Although Energy has entered into employment
agreements with various executive officers, including certain
executive officers of the General Partner, neither the General
Partner nor the Partnership is a party to these arrangements or
directly obligated thereunder.
Compensation of Directors
Each director of VNGC is reimbursed for the usual and
ordinary expenses of meeting attendance. Directors who are
employees of Energy receive no compensation (other than
reimbursement of usual and ordinary expenses of meeting
attendance) for serving as directors. The compensation of each
nonemployee director of VNGC is a retainer fee of $18,000 per
year, plus $1,000 for each Board and committee meeting attended
($500 for telephonic meetings).
Retirement Plan for Nonemployee Directors
Effective January 1, 1992, the General Partner adopted a
retirement plan for nonemployee directors (the "Retirement
Plan"). Under the Retirement Plan, a nonemployee director is
entitled to a retirement benefit upon completion of five years of
service on the Board of Directors of the General Partner. The
annual benefit at retirement is equal to the product of 10% of
the highest annual cash retainer paid to the nonemployee director
during the director's service on the Board, multiplied by the
number of full and partial years of service on the Board (not to
exceed 10 years). Retirement benefits are paid for a period
equal to the shorter of the nonemployee director's number of
whole and partial years of service on the Board, 10 years, or the
remainder of the director's life. The Retirement Plan does not
provide survivor benefits. It is an unfunded plan, the benefits
of which are paid from the general assets of Energy. Amounts
paid under the Retirement Plan are borne by the Partnership
pursuant to the Partnership Agreements.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The following table sets forth information as of December
31, 1993, with respect to each person (including any group as
that term is used in Section 13(d)(3) of the Securities Exchange
Act of 1934, as amended; the "Exchange Act") known to the General
Partner to be the beneficial owner of more than five percent of
any class of VNGP, L.P.'s voting securities:
<TABLE>
<CAPTION>
Amount
Name and Address Beneficially Percent
Title of Class of Beneficial Owner Owned of Class
<S> <C> <C> <C>
Common Units of Limited Partner
Interests . . . . . . . . . . Valero Energy Corporation 8,774,619 47.5%
530 McCullough Avenue
San Antonio, TX 78215
</TABLE>
The General Partner is unaware of any other person or group (as
such term is defined in Section 13(d)(3) of the Exchange Act)
that beneficially owns more than five percent of any class of
VNGP, L.P.'s voting securities.
Except as otherwise indicated, the following table sets forth
information as of December 31, 1993, regarding Common Units
beneficially owned (or deemed to be owned) by each current
director and all current directors and executive officers of the
General Partner as a group. The following information was
furnished to the General Partner by the persons listed below and
cannot be independently verified by the General Partner.
<TABLE>
<CAPTION>
Common Units
Name of Beneficially Percent
Beneficial Owner(1)(2)(3) Owned of Class(4)
<S> <C> <C>
Edward C. Benninger . . . . . . . . . . 15,774
Ronald K. Calgaard. . . . . . . . . . . 0
Ruben M. Escobedo . . . . . . . . . . . 0
William E. Greehey. . . . . . . . . . . 33,595
Stan L. McLelland . . . . . . . . . . . 20,260
Mack Wallace. . . . . . . . . . . . . . 0
Don M. Heep . . . . . . . . . . . . . . 552
Steven E. Fry . . . . . . . . . . . . . 0
All current executive officers and
directors of the General Partner as a
group, including the persons
named above(5). . . . . . . . . . . . 74,606
__________________
<FN>
(1) No executive officer or director of the General Partner
owns any class of equity securities of VNGP, L.P. other
than Common Units.
(2) The business address of each beneficial owner listed
above is 530 McCullough Avenue, San Antonio, Texas
78215.
(3) 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 Units beneficially
owned by him and each person named in the table, and
each other executive officer, has sole power to dispose
or direct the disposition of Units beneficially owned by
him.
(4) As of December 31, 1993, each current executive officer
and director of the General Partner owned less than 1%
of the outstanding Common Units. All of the current
executive officers and directors of the General Partner
as a group beneficially owned approximately .4% of the
Common Units as of the same date.
(5) Certain officers of VNGC not designated as executive
officers by the VNGC Board of Directors do not perform
the duties of executive officers and are not classified
an "executive officer" for purposes of this Report.
</TABLE>
Section 16 Reporting
Section 16(a) of the Securities Exchange Act of 1934, as
amended, requires the General Partner's executive officers and
directors, and persons who own more than ten percent of a
registered class of the Partnership's equity securities, to file
reports of ownership and changes in ownership with the SEC and
the New York Stock Exchange. Officers, directors and greater
than ten-percent shareholders are required by SEC regulation to
furnish to the Partnership copies of all forms filed pursuant to
Section 16(a). Based on a review of the copies of such forms
received by the Partnership, and based on written representations
from certain reporting persons that no Forms 5 were required for
those persons, the General Partner believes that its executive
officers, directors and greater than ten-percent beneficial
owners were in compliance with applicable requirements of Section
16(a) during the year ended December 31, 1993.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In the ordinary course of business, the Partnership engages
in various transactions with subsidiaries of Energy. A summary of
the transactions is set forth at Note 1 of Notes to Consolidated
Financial Statements under the heading "Transactions with
Energy," and such information is incorporated herein by
reference. The General Partner believes that all such
transactions were made upon terms which would be obtained in
similar transactions between unaffiliated parties and were fair
and reasonable to the Partnership.
Pursuant to the respective Partnership Agreements of VNGP,
L.P., the Management Partnership and the Subsidiary Operating
Partnerships, the General Partner and Subsidiary General Partners
receive a management fee equal to all expenses, disbursements and
advances made in connection with the organization of the
partnerships, the offering of the Partnership's securities and
the First Mortgage Notes, the qualification of such partnerships
to do business, all direct expenses incurred on behalf of such
partnerships and all direct and indirect administration and
incidental expenses incurred by the general partner in operating
the partnership's business. See Note 1 of Notes to Consolidated
Financial Statements under the heading "Transactions with
Energy." The portion of executive compensation (including
contributions under employee benefit plans) reimbursed by the
Partnership and disclosed in "Item 11. Executive Compensation" is
included in the amounts used to calculate the management fee
payable to the General Partner.
The law firm of Hughes & Luce, Austin, Texas, has provided
and continues to provide various legal services to Energy. Legal
fees paid to the firm totalled approximately $42,000 in 1993. A
portion of these fees may be paid by the Partnership relating to
litigation or other matters involving the Partnership.
Mr. Wallace, a director of the General Partner, is of counsel to
such firm and, as such, has an indirect interest in the foregoing
fees. However, it is not practicable to determine the exact
amount of such interest. The General Partner believes that the
legal fees paid to Hughes & Luce are comparable to fees the
Partnership would pay to comparable firms.
<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
Natural Gas Partners, L.P. and its consolidated subsidiaries are
included in Part II, Item 8 of this Form 10-K:
Page
Report of independent public accountants . . . . . . . . . 34
Consolidated balance sheets as of December 31, 1993 and
1992 . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Consolidated statements of income for the years ended
December 31, 1993, 1992 and 1991 . . . . . . . . . . . . 36
Consolidated statements of partners' capital for the
years ended December 31, 1993, 1992 and 1991 . . . . . . 37
Consolidated statements of cash flows for the years
ended December 31, 1993, 1992 and 1991 . . . . . . . . . 38
Notes to consolidated financial statements . . . . . . . . 39
2. Financial Statement Schedules and Other Financial
Information-
(A) Schedules required to be furnished for
the years ended December 31, 1993,
1992 and 1991-
Schedule V - Property, plant and
equipment . . . . . . . . . . . . . . . . 71
Schedule VI - Accumulated depreciation,
depletion and amortization of
property, plant and equipment . . . . . . 72
Schedule IX - Short-term borrowings . . . . 73
All other schedules are not submitted because they are
not applicable or because the required information is included in
the financial statements or notes thereto.
<PAGE>
3. Exhibits
Filed as part of this Form 10-K are the following exhibits:
Exhibit
No.
2.1 - Agreement of Merger, dated December 20, 1993,
among Valero Natural Gas Partners, L.P., Valero
Merger Partnership, L.P., Valero Natural Gas
Company and Valero Energy Corporation--
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 - Second Amended and Restated Agreement of Limited
Partnership of the Partnership, dated effective
March 25, 1987 - 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 August 14, 1990).
4.1 - 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).
4.2 - 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).
4.3 - 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).
4.4 - 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).
4.5 - 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).
4.6 - 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).
4.7 - 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 - Assignment and Assumption Agreement, dated as of
March 25, 1987, from Valero Transmission Company
to Valero Transmission, L.P. - incorporated by
reference from Exhibit 19.1 to the Valero Energy
Corporation Quarterly Report on Form 10-Q
(Commission File No. 1-4718, filed May 15, 1987).
+10.2 - 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).
+10.3 - 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).
+10.4 - Valero Energy Corporation Amended and Restated
Restricted Stock Bonus and Incentive Stock Plan
dated as of January 24, 1984 (as amended through
January 1, 1988) - incorporated by reference from
Exhibit 10.19 to the Valero Energy Corporation
Annual Report on Form 10-K (Commission File No.
1-4718, filed February 26, 1988).
+*10.5 - Valero Energy Corporation Stock Option Plan No.
3, as amended and restated effective November 28,
1993.
+*10.6 - Valero Energy Corporation Stock Option Plan No. 4
as amended and restated effective November 28,
1993.
+10.7 -- Valero Energy Corporation Supplemental Executive
Retirement Plan as amended and restated effective
January 1, 1990--incorporated by reference from
Exhibit 10.24 to the Valero Energy Corporation
Annual Report on Form 10-K (Commission File No.
1-4718, filed February 26, 1991).
+10.8 - Valero Energy Corporation Executive Incentive
Bonus Plan--incorporated by reference from
Exhibit 10.9 to the Valero Natural Gas Partners,
L.P. Annual Report on Form 10-K (Commission File
No. 1-9433, filed February 20, 1992).
+10.9 - 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).
+10.10 - Schedule of Executive Severance Agreements--
incorporated by reference from Exhibit 10.12 to
the Valero Natural Gas Partners, L.P. Annual
Report on Form 10-K (Commission File No. 1-9433,
filed February 25, 1993).
+10.11 - Indemnity Agreement, dated as of March 23, 1987,
between Valero Natural Gas Company and William E.
Greehey--incorporated by reference from Exhibit
10.13 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 Indemnity Agreements--incorporated by
reference from Exhibit 10.14 to the Valero
Natural Gas Partners, L.P. Annual Report on Form
10-K (Commission File No. 1-9433, filed
February 25, 1993).
21.1 - Valero Natural Gas Partners, L.P. subsidiaries,
including state or other jurisdiction of
organization--incorporated by reference from
Exhibit 22.1 to the Valero Natural Gas Partners,
L.P. Annual Report on Form 10-K (Commission File
No. 1-9433, filed February 25, 1993).
*24.1 - Power of Attorney, dated March 1, 1994 is
set forth at the signatures page of this Report
on Form 10-K.
_______________
* 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.
Copies of exhibits filed as a part of this Form 10-K
may be obtained by Unitholders of record at a charge of $.15 per
page, minimum $5.00 each request. Direct inquiries to Rand C.
Schmidt, Corporate Secretary, Valero Natural Gas Company, 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) No reports on Form 8-K were filed during the fourth
quarter of 1993.
<PAGE>
<TABLE>
SCHEDULE V
VALERO NATURAL GAS PARTNERS, L.P.
PROPERTY, PLANT AND EQUIPMENT
(Thousands of Dollars)
<CAPTION>
Balance at Balance
Beginning Additions Other at End
Description of Period at Cost Retirements Changes of Period
<S> <C> <C> <C> <C> <C>
Year Ended December 31, 1993
Natural gas. . . . . . . . $745,223 $ 20,511 $ 9,300 $ (164) (2) $756,270
Natural gas liquids. . . . 171,511 15,550 3,638 (128) (2) 183,295
$916,734 $ 36,061 $ 12,938 $ (292) $939,565
Year Ended December 31, 1992
Natural gas. . . . . . . . $732,014 $ 22,537 $ 9,483 $ 155 (2) $745,223
Natural gas liquids. . . . 135,231 13,356 1,535 26,589 (1)
(2,130) (2) 171,511
$867,245 $ 35,893 $ 11,018 $ 24,614 $916,734
Year Ended December 31, 1991
Natural gas. . . . . . . . $653,098 $ 26,931 $ 7,018 $ 58,627 (1) $732,014
376 (2)
Natural gas liquids. . . . 126,862 6,143 14,125 16,611 (1) 135,231
(260) (2)
$779,960 $ 33,074 $ 21,143 $ 75,354 $867,245
<FN>
Note: See Note 1 - "Property, Plant and Equipment" of Notes to
Consolidated Financial Statements for disclosure of depreciation
methods and rates.
(1) Assets acquired under capital leases with Energy.
(2) Reclassifications, intersegment transfers and other
miscellaneous adjustments.
</TABLE>
<TABLE>
SCHEDULE VI
VALERO NATURAL GAS PARTNERS, L.P.
ACCUMULATED DEPRECIATION, DEPLETION AND AMORTIZATION
OF PROPERTY, PLANT AND EQUIPMENT
(Thousands of Dollars)
<CAPTION>
Additions
Balance at Charged to Balance
Beginning Costs and Other at End
Description of Period Expenses Retirements Changes (1) of Period
<S> <C> <C> <C> <C> <C>
Year Ended December 31, 1993
Natural gas. . . . . . . . $118,994 $ 28,549 $ 8,066 $ 117 $139,594
Natural gas liquids. . . . 54,524 7,897 2,287 35 60,169
$173,518 $ 36,446 $ 10,353 $ 152 $199,763
Year Ended December 31, 1992
Natural gas. . . . . . . . $ 98,870 $ 28,136 $ 8,652 $ 640 $118,994
Natural gas liquids. . . . 50,070 6,268 1,432 (382) 54,524
$148,940 $ 34,404 $ 10,084 $ 258 $173,518
Year Ended December 31, 1991
Natural gas. . . . . . . . $ 76,816 $ 27,977 $ 6,367 $ 444 $ 98,870
Natural gas liquids. . . . 46,323 11,254 7,448 (59) 50,070
$123,139 $ 39,231 $ 13,815 $ 385 $148,940
<FN>
NOTE: See Note 1 - "Property, Plant and Equipment" of Notes to
Consolidated Financial Statements for disclosure of depreciation
methods and rates.
(1) Reclassifications, intersegment transfers and other
miscellaneous adjustments.
</TABLE>
<TABLE>
SCHEDULE IX
VALERO NATURAL GAS PARTNERS, L.P.
SHORT-TERM BORROWINGS(1)
(Thousands of Dollars)
<CAPTION>
Maximum Average Weighted-
Category Weighted- Amount Amount Average
of Aggregate Balance at Average Outstanding Outstanding Interest Rate
Short-Term End of Interest During the During the During the
Borrowings Period Rate Period(2) Period(3) Period(4)
<S> <C> <C> <C> <C> <C>
Year Ended:
December 31, 1993 . . . . . $ - - % $39,900 $10,925 4.04%
December 31, 1992 . . . . . - - 23,500 359 4.16
December 31, 1991 . . . . . - - 14,200 458 7.55
<FN>
(1) See Note 2 of Notes to Consolidated Financial Statements
for a discussion of the terms and provisions of the
Partnership's short-term bank lines.
(2) The maximum amount outstanding occurred during September
of 1993, December of 1992 and January of 1991,
respectively.
(3) The average amount outstanding during the period was
determined on a daily average basis.
(4) Percentages were computed by dividing total interest
expense on all short-term borrowings by the average amount
outstanding during the period.
</TABLE>
<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 NATURAL GAS PARTNERS, L.P.
(Registrant)
By Valero Natural Gas Company,
its General Partner
By /s/ William E. Greehey
(William E. Greehey)
Chairman of the Board and
Chief Executive Officer
Date: March 1, 1994
<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. All such capacities are with Valero Natural
Gas Company, General Partner of the registrant.
Signature Title Date
Director, Chairman of the
Board and Chief Executive
Officer (Principal
/s/ William E. Greehey Executive Officer) March 1, 1994
(William E. Greehey)
Senior Vice President and
Chief Financial Officer
(Principal Financial and
/s/ Don M. Heep Accounting Officer) March 1, 1994
(Don M. Heep)
/s/ Edward C. Benninger Director March 1, 1994
(Edward C. Benninger)
/s/ Ronald K. Calgaard Director March 1, 1994
(Ronald K. Calgaard)
/s/ Ruben M. Escobedo Director March 1, 1994
(Ruben M. Escobedo)
/s/ Stan L. McLelland Director March 1, 1994
(Stan L. McLelland)
/s/ Mack Wallace Director March 1, 1994
(Mack Wallace)
VALERO ENERGY CORPORATION
______________________________
STOCK OPTION PLAN NO. 3
(as amended and restated effective November 28, 1993)
____________________________
<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 . . . . . . . . . . . . . . . . . . . . . . 4
3.1. Selection of Participants . . . . . . . . . . . . 4
3.2. Exclusion of Committee Members. . . . . . . . . . 5
3.3. No Right to Participate . . . . . . . . . . . . . 5
3.4. Automatic Grant of Limited Rights . . . . . . . . 5
3.5. Determination of Option Provisions. . . . . . . . 5
3.6. Option Shares, Limited Rights and SARs
Available for Grant. . . . . . . . . . . . . . . 6
3.7. Limitations Regarding Option Price and Strike
Price. . . . . . . . . . . . . . . . . . . . . . 6
3.8. Limitation Regarding Option Period. . . . . . . . 7
3.9. Option Agreements . . . . . . . . . . . . . . . . 7
3.10. Provisions Regarding Prospective Employees. . . . 7
4. Exercise of Options, Limited Rights and SARs. . . . . . 8
4.1. Exercise of Options . . . . . . . . . . . . . . . 8
4.2. Exercise of Limited Rights. . . . . . . . . . . . 8
4.3. Automatic Exercise of SARs; Settlement Price
for SARs. . . . . . . . . . . . . . . . . . . . 9
4.4. Exercise of Limited Rights by Restricted
Optionees . . . . . . . . . . . . . . . . . . . 9
4.5. Forfeiture of Certain SARs. . . . . . . . . . . . 9
4.6. Exercise Procedure. . . . . . . . . . . . . . . . 10
4.7. Payment for SARs and Limited Rights . . . . . . . 11
4.8. Payment with Common Stock . . . . . . . . . . . . 11
4.9. Rights as Stockholder . . . . . . . . . . . . . . 12
4.10. Effect of Termination and Forfeiture. . . . . . . 12
4.11. Effect of Leave of Absence. . . . . . . . . . . . 13
4.12. Effect of Disability. . . . . . . . . . . . . . . 14
4.13. Effect of Retirement or Death . . . . . . . . . . 14
4.14. Exercise Following Termination, Retirement,
Disability or Death . . . . . . . . . . . . . . 15
4.15. Effect of Change of Control . . . . . . . . . . . 17
5. Adjustments Upon Changes In Capitalization. . . . . . . 20
5.1. Securities Received Upon Exercise . . . . . . . . 20
5.2. Adjustment of Option Shares Available . . . . . . 22
6. Administration. . . . . . . . . . . . . . . . . . . . . 22
6.1. Plan Administered by Committee. . . . . . . . . . 22
6.2. Powers of the Committee . . . . . . . . . . . . . 23
6.3. Express Powers not Exclusive. . . . . . . . . . . 24
7. Miscellaneous Provisions. . . . . . . . . . . . . . . . 24
7.1. Nonassignability. . . . . . . . . . . . . . . . . 24
7.2. Investment Letter . . . . . . . . . . . . . . . . 25
7.3. [Reserved]. . . . . . . . . . . . . . . . . . . . 25
7.4. Responsibility for Taxes. . . . . . . . . . . . . 25
7.5. Employment Not Guaranteed . . . . . . . . . . . . 25
7.6. Gender, Singular and Plural . . . . . . . . . . . 25
7.7. Captions. . . . . . . . . . . . . . . . . . . . . 25
7.8. Validity. . . . . . . . . . . . . . . . . . . . . 25
7.9. Notice. . . . . . . . . . . . . . . . . . . . . . 26
7.10. Applicable Law. . . . . . . . . . . . . . . . . . 26
7.11. Inconsistency . . . . . . . . . . . . . . . . . . 26
7.12. No Adoption of SEC Rules. . . . . . . . . . . . . 26
8. Amendment and Termination of Plan and Option
Agreements. . . . . . . . . . . . . . . . . . . . . . 26
8.1. Amendments. . . . . . . . . . . . . . . . . . . . 26
8.2. Termination . . . . . . . . . . . . . . . . . . . 26
8.3. Effect of Amendment or Termination. . . . . . . . 26
8.4 Cancellation of Options . . . . . . . . . . . . . 27
9. Claims. . . . . . . . . . . . . . . . . . . . . . . . . 27
9.1. Filing of Claims. . . . . . . . . . . . . . . . . 27
9.2. Denial of Claims. . . . . . . . . . . . . . . . . 28
9.3. Review of Claims. . . . . . . . . . . . . . . . . 28
9.4. Decision by Committee . . . . . . . . . . . . . . 28
<PAGE>
1. Introduction and Statement of Purpose.
This Valero Energy Corporation Stock Option Plan No. 3 (the
"Plan") is established for the purpose of giving additional
incentive to Key Employees of the Company by creating an
opportunity for capital accumulation by such Key Employees. It
is intended that the benefits available under this Plan, when
added to other benefits payable to these Key Employees, will
furnish total compensation to such Key Employees which is
competitive in the industries in which the Company conducts its
business and in which the Company competes for employees. This
Plan sets forth the basis for the eligibility of Employees to
participate in the Plan and the terms and conditions regulating
such participation. The Plan provides for the grant of Options
to purchase Common Stock of Valero, Limited Rights which may be
exercised in lieu of Options and stock appreciation rights which
are automatically exercised upon the exercise of an Option. The
Options granted under the Plan are and are intended to be
"non-qualified" options under the Internal Revenue Code of 1986,
as amended. The Plan amendments first included in this amended
and restated Stock Option Plan No. 3 shall be effective as of
November 28, 1993.
2. Definitions.
For the purposes of this Plan, the following terms shall
have the meanings stated below unless a different meaning is
plainly required by the context or such term is otherwise defined
herein.
(a) "Board of Directors" shall mean the Board of
Directors of Valero.
(b) "Change of Control" shall have the meaning specified in
Paragraph 4.15.
(c) "Change of Control Period" shall mean a period
beginning on any date that a Change of Control shall occur and
ending at the close of business on the 90th day thereafter,
provided however, that if a tender offer or exchange offer
constituting a Change of Control pursuant to clause (ii) of
Paragraph 4.15 shall be canceled, expire or otherwise terminate
without Voting Securities having been acquired pursuant thereto,
the Change of Control Period shall terminate at the close of
business on (a) the seventh day following the date of
cancellation, expiration or other termination of such tender
offer or exchange offer, or (b) the 90th day after the
commencement of such offer, whichever shall first occur.
(d) "Committee" shall mean the persons administering this
Plan from time to time pursuant to Paragraph 6.1.
(e) "Common Stock" shall mean the common stock, par value
$1.00 per share, of Valero.
(f) "Company" shall mean Valero and any Parent or
Subsidiary of Valero which now exists or hereafter is organized
or acquired by or acquires Valero, and any successor or
successors to such entities. The terms "Parent" and "Subsidiary"
shall have the same meaning as the terms "parent corporation" and
"subsidiary corporation," respectively, as specified in Section
425 of the Internal Revenue Code of 1986, as amended.
(g) "Compensation Committee" shall mean the Compensation
Committee of the Board of Directors, as constituted from time to
time.
(h) "Controlled Subsidiary" shall mean a corporation of
which a majority of the outstanding common stock is directly or
indirectly beneficially owned by Valero.
(i) "Employee" shall mean any person employed by the
Company, including officers and directors of the Company within
the meaning of Section 16(a) of the Exchange Act, but shall
include a director only if also employed by the Company on a
full-time basis.
(j) "Exchange Act" shall mean the Securities Exchange Act
of 1934, as amended and in effect from time to time.
(k) "Exercise Date" -- see Paragraph 4.6.
(l) "Expiration Date" -- see Paragraph 3.5.
(m) "Exercise Notice" -- see Paragraph 4.6.
(n) "Group" -- see Paragraph 4.15.
(o) "Installment Option" -- see Paragraph 4.1.
(p) "Key Employee" shall mean any key executive, managerial
or professional Employee or prospective Employee of the Company
having responsibility for planning the Company's operations,
controlling or managing its business activities, or advising the
management of the Company with respect to its operations and
business activities. The determination of "Key Employees" for
purposes of determining eligibility for participation in this
Plan, and the determination of "key employees" for purposes of
applying any New York Stock Exchange Rule or determining
eligibility for participation in any other stock option plan of
the Company, need not be consistent.
(q) "Limited Right" shall mean the right, following a
Change of Control of Valero and in lieu of purchasing an Option
Share pursuant to the exercise of an Option, to receive a cash
payment equal to the difference between the Strike Price of such
Limited Right and the price of one share of Common Stock at the
time specified in Paragraph 4.2.
(r) "Nonaccelerated Person" -- see Paragraph 4.15.
(s) "Nonacceleration Notice" -- see Paragraph 4.15.
(t) "Option" or "Options" shall mean an option or options
granted pursuant to this Plan to purchase shares of Common Stock.
(u) "Option Agreement" shall mean a written agreement
entered into between Valero and a Participant pursuant to
Paragraph 3.9.
(v) "Option Price" -- see Paragraph 3.5.
(w) "Option Share" shall mean one share of Common Stock
purchased or which may be purchased pursuant to an Option.
(x) "Parent" -- see subparagraph (f) of this Paragraph 2.
(y) "Participant" shall mean a Key Employee who has entered
into an Option Agreement which is in force and effect.
(z) "Person" -- see Paragraph 4.15.
(aa) "Plan" -- see Paragraph 1.
(bb) "Plan No. 1" shall mean the Valero Energy Corporation
Stock Option Plan No. 1, as amended and in effect from time to
time.
(cc) "Plan No. 2" shall mean the Valero Energy Corporation
Non-Qualified Stock Option Plan No. 2, as amended and in effect
from time to time.
(dd) "Preference Share Purchase Right" shall mean one of the
rights distributed to holders of record of Valero on November 25,
1985, to purchase 1/100 share of the Junior Participating Serial
Preference Stock, Series II, of Valero.
(ee) "Rights Agreement" shall mean that certain Amended and
Restated Rights Agreement, dated as of October 17, 1991, between
Valero and Ameritrust Texas National Association, successor to
MBank Alamo, N.A., as Rights Agent, as amended and in effect from
time to time.
(ff) "Restricted Optionee" shall mean any person who is a
"director" or "officer" of Valero within the meaning of Section
16(a) of the Exchange Act, together with any person who is the
beneficial owner of more than 10 percent of any class of equity
security of Valero registered under Section 12 of the Exchange
Act.
(gg) "SAR" or "stock appreciation right" shall mean the
right, subject to the provisions of this Plan, to receive a
payment in cash equal to the difference between the specified
Strike Price of the SAR and the price of one share of the Common
Stock at the time specified in Paragraph 4.3.
(hh) "SEC" shall mean the Securities and Exchange
Commission.
(ii) "Settlement Date" -- see Paragraph 4.6.
(jj) "Strike Price" shall mean the price per share of the
Common Stock, determined pursuant to Paragraph 3.7, from which
the appreciation (if any) with respect to a SAR or Limited Right
shall be calculated.
(kk) "Subsidiary" -- see subparagraph (f) of this Paragraph
2.
(ll) "Tax Payment" -- see Paragraph 4.6.
(mm) "Valero" shall mean Valero Energy Corporation, a
Delaware corporation.
(nn) "Valero Pension Plan" -- see Paragraph 4.13.
(oo) "Voting Securities" -- see Paragraph 4.15.
(pp) "Window Period" shall mean a period beginning on the
third business day following the date of release for publication
of the financial data specified in paragraph (e)(1)(ii) of Rule
16b-3 under the Exchange Act and ending on the twelfth business
date following such date.
3. Granting of Options, Limited Rights and SARs to Employees.
3.1. Selection of Participants. The Committee shall, from
time to time, grant Options to purchase a specified number of
Option Shares to such Key Employees of the Company as the
Committee, in its sole and absolute discretion, shall select to
become Participants. At or subsequent to the time that an Option
is granted to a Key Employee by the Committee, the Committee may
grant such Key Employee a number of SARs not exceeding the number
of Option Shares which may be purchased (whether in installments
or otherwise) pursuant to such Option, provided, that no SARs
shall be granted with respect to Option Shares which have
theretofore been purchased by a Participant or to any Participant
who, subsequent to the date of grant of such Option, is no longer
an Employee as such term is defined herein. Subject to the full
and final authority of the Committee to administer the Plan and
select Participants, the granting of Options, Limited Rights and
SARs hereunder and the selection of Participants may be based on
recommendations made by the Chairman of the Board and Chief
Executive Officer (or, if such office shall be vacant, the
President) of Valero.
3.2. Exclusion of Committee Members. No member of the
Committee, while so serving, may be granted any Option, Limited
Rights or SARs. However, a Participant who has been granted an
Option, Limited Rights or SARs under this Plan prior to serving
on the Committee may, during such term of service, continue to
hold any Options, Limited Rights and SARs previously granted and
may exercise any such Options, Limited Rights and SARs and hold
Option Shares acquired upon the exercise of any such Options,
subject to the provisions of this Plan.
3.3. No Right to Participate. No Employee or prospective
Employee of the Company shall have the right to require the
Company or the Committee to make him a Participant under this
Plan.
3.4. Automatic Grant of Limited Rights. Each Option granted
pursuant to this Plan (whether or not the Option Agreement shall
so specify) shall be automatically accompanied by that number of
Limited Rights which equals the number of Option Shares which may
be purchased (whether in installments or otherwise) pursuant to
such Option. Limited Rights may not be granted separate or apart
from the grant of an Option to purchase Option Shares.
3.5. Determination of Option Provisions. In determining
that a Key Employee shall be granted an Option, the Committee
shall designate the number of Option Shares the Employee may
purchase under the Option, a date upon which the Option (unless
an earlier termination date is established pursuant to Paragraph
8.4) will automatically expire (the earlier of such dates being
referred to herein as the "Expiration Date"), the price per share
at which such Option Shares may be purchased (the "Option Price")
and the remaining terms and conditions of such Option. If the
Committee shall determine to grant SARs to the grantee or holder
of an Option, the Committee shall designate the number of SARs
granted and any terms and conditions pertaining thereto.
3.6. Option Shares, Limited Rights and SARs Available for
Grant. (A) Subject to the provisions of Paragraphs 4.10 and 5,
the maximum number of shares of Common Stock which may be
optioned and sold under this Plan shall be equal to the sum of
(a) 500,000 shares, plus (b) the number of shares available for
grant under Plan No. 1 and Plan No. 2 at the close of business on
the day that the stockholders of Valero approved the adoption of
this Plan, plus (c) a number of shares equal to the number of
shares previously granted under Plan No. 1 and Plan No. 2
pursuant to Options which are forfeited or surrendered, or which
expire, terminate or lapse, after such date of approval. Shares
of Common Stock optioned and sold under this Plan (and any rights
or other securities sold or delivered in accordance with
Paragraph 5.1) may be either authorized but unissued securities
or reacquired (treasury) securities.
(B) The maximum number of SARs which may be granted
under this Plan shall (subject to the provisions of Paragraphs
4.10 and 5) be equal to the maximum number of shares of Common
Stock which may be optioned and sold under this Plan, as
determined pursuant to clauses (a), (b) and (c) of subparagraph
(A) above. The number of Limited Rights which shall be granted
under this Plan shall be equal to the number of shares of Common
Stock optioned under this Plan.
(C) During the term of this Plan, Valero will at all
times reserve and keep available, or have authorized but
unissued, shares of Common Stock sufficient to satisfy the
requirements of this Plan. The inability of Valero to obtain,
from any regulatory body having jurisdiction, any authority
deemed by Valero's counsel to be necessary to the lawful issuance
and sale of Common Stock hereunder, shall relieve the Company of
any liability in respect of the nonissuance or sale of such
Common Stock as to which such requisite authority shall not have
been obtained.
3.7. Limitations Regarding Option Price and Strike Price.
The Option Price for any Option Share shall be as specified by
the Committee, but shall not be less than 75% of the average
sales price of a share of Common Stock on the date such Option is
granted. The determination of such average sales price shall be
made in accordance with Paragraph 4.2. The Strike Price at which
an SAR or Limited Right is granted shall be equal to the Option
Price of the Option Shares to which such SAR or Limited Right is
related.
3.8. Limitation Regarding Option Period. The Plan shall
continue indefinitely. However, no Option granted under this
Plan shall have a stated Expiration Date which is more than 10
years and thirty days following the date of grant of such Option.
Subject to the provisions of Paragraph 4.14, an Option, the
associated Limited Rights and any associated SARs shall lapse and
shall be automatically forfeited upon the earlier of the
Expiration Date (i) as set forth in the Option Agreement pursuant
to which such Option, the associated Limited Rights and any
associated SARs are granted, or (ii) as established pursuant to
Paragraph 8.4, unless an Exercise Notice is delivered to Valero
on or before the Expiration Date.
3.9. Option Agreements. Options, Limited Rights and SARs
shall be evidenced by Option Agreements having such terms and
provisions, not inconsistent with this Plan, as the Committee
deems advisable. Option Agreements need not be uniform.
Promptly following each determination by the Committee to grant
an Option or SARs to a Key Employee, the Committee shall cause
Valero to enter into an appropriate Option Agreement (or, in the
case of a grant only of SARs, an amendment to an existing Option
Agreement) with such Key Employee. No Key Employee or other
person claiming by, through or under a Key Employee shall be
entitled to exercise any Option, Limited Right or SAR until an
appropriate Option Agreement (or amendment thereto) shall have
been executed by Valero and such Key Employee. In the event a
Key Employee of the Company is granted an Option or SARs by the
Committee but for any reason, including, but not limited to,
death or total and permanent disability, does not actually enter
into a fully executed Option Agreement (or appropriate amendment
thereto) with Valero, such Key Employee shall not be deemed a
Participant with respect to such Option or SARs and neither such
Key Employee nor any person claiming by, through or under such
Key Employee shall be entitled under any circumstances to
exercise such Option, Limited Rights or SARs.
3.10. Provisions Regarding Prospective Employees. In
the event that a prospective Key Employee of the Company is
granted an Option, Limited Rights or SARs pursuant to this Plan
prior to actually commencing employment with the Company but for
any reason, including, but not limited to, death or total and
permanent disability, does not actually commence employment with
the Company, such person shall not be deemed a Participant for
any purpose of this Plan and neither such person nor any person
claiming by, through or under such person shall be entitled under
any circumstances to exercise such Option, Limited Rights or
SARs. Upon actually commencing employment with the Company, such
a prospective Key Employee will then be deemed a Participant for
all purposes of this Plan, and will then, but only then, be
deemed for purposes of this Plan (but not for purposes of the
Valero Pension Plan or other employee benefit plans of the
Company unless expressly so provided therein) to have been
continually employed by the Company from the date of grant of the
Option to the date of commencement of employment.
4. Exercise of Options, Limited Rights and SARs.
4.1. Exercise of Options. Any Option and any associated
SARs shall be exercisable at such time and in such amounts,
either as to all of the Option Shares covered thereby or in
installments ("Installment Options"), as is provided in the
Participant's Option Agreement or as may otherwise be provided in
this Plan. An Installment Option may allow the purchase of all
or any part of the Option Shares on a specified installment date
or dates, and the subsequent purchase of any unpurchased Option
Shares after such installment date(s) and through the Expiration
Date. However, no Option may be exercised with respect to a
fractional share.
4.2. Exercise of Limited Rights. Any Limited Right may be
exercised only following a Change of Control of Valero, and may
be exercised only in lieu of the purchase of the related Option
Shares. However, a Participant may, at his election, either
exercise a Limited Right or purchase the related Option Share
upon exercise of the Option. Upon the exercise of a Limited
Right, the Participant's Option to purchase the related Option
Share shall automatically terminate and be forfeited. Upon the
exercise of a Limited Right, the Participant shall be entitled to
receive a cash payment in an amount equal to the difference
between the Strike Price of the Limited Right and (a) if the
Limited Right is exercised during a Window Period or Change of
Control Period, the highest of the daily average sales prices for
the Common Stock during such Window Period or Change of Control
Period or (b) if the Limited Right is not exercised during a
Window Period or Change of Control Period, the highest of the
daily average sales prices for the Common Stock within the 30 day
period prior to the Exercise Date. The daily average sales price
of the Common Stock on a given date shall be the mean of the
reported "high" and "low" prices for the Common Stock on such
date, as reported in the New York Stock Exchange - Composite
Transactions listing in The Wall Street Journal (or such other
listing or quotation medium as the Committee shall later
designate) for such date, corrected, if necessary, to exclude the
effect of typographical errors.
4.3. Automatic Exercise of SARs; Settlement Price for SARs.
(A) No SARs may be exercised except simultaneously with the
exercise of an Option or Limited Right. A Participant or other
person exercising an Option or Limited Right shall be deemed to
have automatically exercised on the Exercise Date that number of
related SARs which equals the number of Option Shares purchased
or Limited Rights exercised, not exceeding the lesser of (a) the
number of related SARs held by such Participant, or (b) the
number of SARs then permitted to be exercised under the
Participant's Option Agreement. Where a Participant holds fewer
related SARs than the number of Option Shares to which his Option
pertains, the Committee may adopt policies, or include terms in
the Participant's Option Agreement, which permit or require the
Participant to exercise such SARs during or after specified
periods, or in conjunction with the exercise of a certain portion
of an Option, or which permit the Participant to determine, with
such restrictions as the Committee may prescribe, the timing of
exercise of such SARs.
(B) Any SAR which is exercised at the same time as a
related Limited Right shall be settled on the basis of the same
daily average sales price for the Common Stock as is such Limited
Right. Except as provided in the foregoing sentence, any SAR
which is exercised during a Window Period or Change of Control
Period shall be settled on the basis of the highest daily average
sales prices of the Common Stock during such Window Period or
Change of Control Period. Except as provided in the two
foregoing sentences, SARs shall be settled on the basis of the
daily average sales price of the Common Stock on the Exercise
Date.
4.4. Exercise of Limited Rights by Restricted Optionees. A
Restricted Optionee exercising Limited Rights may do so only
during a Change of Control Period or Window Period following a
Change of Control and more than six months following the date of
grant of the Option to which such Limited Rights relate.
4.5. Forfeiture of Certain SARs. No SARs may be exercised
by a Restricted Optionee within six months following the date of
grant of such SARs or the date of grant of the Option to which
such SARs relate. Any other provision of this Plan to the
contrary notwithstanding, in the event that an Option or Limited
Rights are exercised by a Restricted Optionee within six months
following the date of grant of the Option or within six months
following the date of grant of any related SARs, any SARs related
to the Option Shares purchased upon such exercise or to the
Limited Rights exercised shall thereupon automatically terminate
and be forfeited with the same effect as if such SARs had never
been granted.
4.6. Exercise Procedure. Options, Limited Rights and SARs
may be exercised only by written notice of such exercise (the
"Exercise Notice"), in such form as the Committee may prescribe,
delivered to Valero's Stock Benefit Plan Administration
department at Valero's principal business office and signed by
the Participant or other person specified herein as being
entitled to exercise the same. The date on which such Exercise
Notice is delivered to Valero shall be the "Exercise Date". The
Exercise Notice for Options Shares shall specify a date (the
"Settlement Date"), not less than five business days nor more
than 10 business days following the Exercise Date, upon which the
Option Shares shall be issued to the Participant (or other person
entitled to exercise the Option) and the Option Price shall be
paid to Valero. Upon the exercise of an Option, the
Participant's right to exercise the related Limited Rights shall
automatically terminate and be forfeited. Subject to the
provisions of Paragraph 3.6(A), on the Settlement Date the person
exercising an Option shall tender to Valero full payment (in
cash, certified check, cashier's check or bank draft approved by
Valero, unless shares of Common Stock are tendered, as provided
in Paragraph 4.8) for the Option Shares with respect to which the
Option is exercised, together with an additional amount, in cash,
certified check, cashier's check or bank draft approved by
Valero, equal to the amount of any and all taxes required to be
collected or withheld by the Company in connection with such
exercise of such Option (the "Tax Payment"); provided, however,
that when related SARs are exercised at the same time an Option
is exercised, such Tax Payment shall be reduced by withholding
the amount thereof, to the extent possible, from the cash payment
otherwise payable by the Company to the Participant as the result
of the exercise of such SARs. Subject to the prior approval or
disapproval of the Committee, and to such rules and limitations
as it may adopt, if no related SARs are exercised such Tax
Payment may also be made in whole or in part by (a) withholding
from the number of shares otherwise deliverable to the person
exercising the Option a number of shares whose fair market value
equals the Tax Payment or (b) delivering certificates for other
shares of Common Stock owned by the person exercising the Option,
endorsed in blank with appropriate signature guarantee, having a
fair market value equal to the amount otherwise to be collected
or withheld. When Limited Rights are exercised, the Tax Payment
shall be withheld, to the extent possible, from any cash amount
otherwise payable by the Company as the result of the exercise of
such Limited Rights (and any related SARs). Any and all
calculations with respect to a Participant's income, required tax
withholding or other matters required to be made by the Company
upon the exercise of an Option shall be made using the average
sales price of the Common Stock on the Exercise Date, whether or
not the Exercise Notice is delivered to Valero before or after
the close of trading on such date, unless otherwise specified by
the Committee. Any and all calculations made with respect to a
Participant's income, required tax withholding or other matters
made upon exercise of a SAR or Limited Right shall be made using
the price at which such SAR or Limited Right is settled, unless
otherwise specified by the Committee.
4.7. Payment for SARs and Limited Rights. SARS and Limited
Rights shall be paid or settled only in cash. Payment for
Limited Rights and SARs exercised hereunder shall be made on the
Settlement Date. In the event the final amount of such payment
cannot be immediately determined (e.g., if exercise occurs near
the beginning of a Change of Control Period), an interim payment
shall be made as soon as practicable following the Exercise Date,
and the final payment shall be made as soon as practicable after
the applicable daily average sales price can be determined.
4.8. Payment with Common Stock. Subject to approval of the
Committee, a person exercising an Option may pay for Option
Shares by tendering to Valero other shares of Common Stock
legally and beneficially owned by such person at the time of the
exercise of an Option. Subject to approval of the Committee, a
person exercising an Option may also pay for Option Shares by
delivering a notarized affidavit, in such form as the Committee
may prescribe, certifying as to such person's legal and
beneficial ownership of shares of Common Stock held either in
such person's name or in "street name" and, in the case of shares
held in such person's name, providing the certificate number(s)
for such shares; if such method of payment is approved and
utilized, the number of shares issued upon exercise of the Option
shall be reduced by the number of shares represented by such
affidavit. If approved by the Committee, either such method of
exercise may include use of a procedure whereby a person
exercising an Option may request that shares received upon
exercise of a portion of an Option be automatically applied to
satisfy the exercise price for additional and increasingly larger
portions of the Option. The certificate(s) representing any
shares of Common Stock tendered in payment of the Option Price
must be accompanied by a stock power duly executed with
appropriate signature guarantees. Shares of Common Stock
tendered in payment of the Option Price (including shares
represented by an affidavit) shall be valued at the daily average
sales price of the Common Stock on the Exercise Date, determined
as specified in Paragraph 4.2 above. The Committee may, in its
sole and absolute discretion, refuse any tender of shares of
Common Stock, in which case it shall promptly deliver the shares
of Common Stock back to the person exercising the Option and
notify such person of such refusal as soon as practicable. In
such event, such person may either (a) tender to Valero on the
Settlement Date the cash amount required to pay for such Option
Shares, or (b) rescind his Exercise Notice. If such person
elects to rescind his Exercise Notice, such person may again
(subject to the provisions of this Plan relating to the
termination, forfeiture, lapse or expiration of Options granted
hereunder) deliver an Exercise Notice with respect to such Option
Shares or the associated Limited Rights (and any related SARs) at
any time prior to the Expiration Date of such Options.
4.9. Rights as Stockholder. Until the issuance of the stock
certificate(s) for Option Shares purchased hereunder (as
evidenced by the appropriate entry on the books of Valero or of a
duly authorized transfer agent of Valero), no right to vote or
receive dividends or any other rights as a stockholder of Valero
shall exist with respect to such Option Shares, notwithstanding
the exercise of any Option. No adjustment will be made for a
dividend or other rights for which the record date is prior to
the date the stock certificates evidencing such shares of Common
Stock are issued, except as otherwise provided under Paragraph 5
of this Plan.
4.10. Effect of Termination and Forfeiture. Except as
provided in Paragraphs 4.14 and 4.15, an Option (and any
associated Limited Rights and SARs) may be exercised by a
Participant only while he is and has continually been, since the
date of the grant of the Option, an Employee of the Company. In
the event a Participant's employment with the Company is
voluntarily terminated by the Participant (other than through
retirement) or is terminated by the Company under circumstances
involving willful misconduct or criminal activity by the
Participant, then, except as provided in Paragraph 4.14(D), all
Options (and any associated Limited Rights and SARs) previously
awarded to such Participant hereunder and not theretofore
exercised in accordance with Paragraph 4.6 shall automatically
lapse and be forfeited as of the date of the Participant's
termination. Should a Participant's employment be terminated by
retirement, death or total and permanent disability, or by the
Company (except under circumstances involving willful misconduct
or criminal activity by the Participant), the provisions of
Paragraph 4.14 shall apply. Except as set forth in the following
sentence, if a Participant shall forfeit, voluntarily surrender
or otherwise permanently lose his right to exercise an Option or
SARs or any associated Limited Rights under any provision of this
Plan or otherwise, or any Option shall terminate or expire
pursuant to its terms, the Option Shares subject to such Option
shall once more be available to be optioned and sold under this
Plan pursuant to a new Option granted hereunder, and any
associated Limited Rights and SARs shall again be available for
grant hereunder. However, if a Limited Right has terminated and
been forfeited because an Option has been exercised with respect
to the related Option Shares, or an Option to purchase Option
Shares has terminated and been forfeited because the related
Limited Rights have been exercised, the Limited Rights or Option
Shares so forfeited shall not become available for additional
grants hereunder.
4.11. Effect of Leave of Absence. A Participant who
commences a leave of absence (such as a disability leave of
absence) shall thereupon be suspended from participation in this
Plan during such leave of absence. During a period of suspension
from this Plan, a Participant cannot exercise any Option
(including any Installment Option) or any associated SARs that,
but for this provision, would otherwise become exercisable during
such period of suspension, provided however, that such
Participant shall be entitled to exercise any Options, Limited
Rights or SARs which become exercisable during such period of
suspension pursuant to Paragraph 4.15. A Participant, while
suspended, may exercise an Option (and any related SARs) with
respect to any unpurchased Option Shares which such Participant
was eligible to purchase on the day preceding the first day of
such suspension; however, such Option Shares must be purchased
prior to the Expiration Date of the Option. Notwithstanding the
foregoing provisions of this Paragraph 4.11, the Committee, in
its sole and absolute discretion, may determine at any time
before or after the commencement of such leave of absence that
the commencement of such leave of absence will be treated as a
termination of employment for purposes of the Plan. If the
Committee so determines, the Committee shall so notify the
Participant and specify a date, not less than 10 days following
such notification, by which the Participant must deliver an
Exercise Notice with respect to any Option Shares which the
Participant is then entitled to purchase and exercise any related
Limited Rights and SARs which may then be exercised. Options,
Limited Rights and SARs not exercised by the Participant by such
date shall be forfeited. The Committee may, in its sole and
absolute discretion, change or modify the exercise dates or other
terms of any Option or SARs held by a Participant who goes on a
leave of absence and which were not exercisable by such
Participant at the commencement of such leave of absence.
4.12 Effect of Disability. The total and permanent
disability of a Participant shall terminate, effective on the
first day of such disability, as determined by the Committee, the
participation of such Participant in this Plan subject to the
conditions set forth in Paragraph 4.14. The Committee shall
determine, in its sole and absolute discretion, whether or not a
Participant is totally and permanently disabled for purposes of
this Plan and when such disability (if any) commenced, and such
determinations by the Committee shall be conclusive and binding
on the Participant and all persons claiming by, through or under
such Participant. Such determinations shall be made on the basis
of medical reports and other evidence satisfactory to the
Committee and in accordance with a uniform, nondiscriminatory
policy applied by the Committee, but such determinations shall
not be binding on the Company or any Participant with respect to
any other employee benefit or other plan or insurance policy
wherein such determinations may be relevant, and need not be
consistent with any determinations made under any such plan or
insurance policy.
4.13. Effect of Retirement or Death. The retirement or
death of a Participant shall terminate, effective on the date of
such retirement or death, the participation of such Participant
in this Plan subject to the conditions set forth in Paragraph
4.14. For purposes of this Plan, a Participant shall be deemed
to have retired when the Participant retires under the provisions
of the Pension Plan for Employees of Valero Energy Corporation or
any other, similar pension plan of the Company providing benefits
to such Participant ("Valero Pension Plan"). In the case of a
Participant who is not a participant in a Valero Pension Plan,
retirement shall be deemed to occur when the Participant retires
from the service of the Company.
4.14. Exercise Following Termination, Retirement,
Disability or Death. (A) Should the Committee determine that a
Participant has become totally and permanently disabled, or
should the Participant's employment with the Company be
terminated as the result of death or retirement, the first day of
such disability (as determined by the Committee) or the date of
retirement or death, as the case may be, shall be treated as the
date of the Participant's termination from the Plan, and the
Participant (or the Participant's heir, beneficiary, guardian,
legal representative, administrator or executor, as the case may
be) shall be entitled for the period specified in subparagraph
(C) below to (a) purchase any Option Shares (or, if a Change of
Control has occurred, exercise any Limited Rights) that the
Participant was eligible to purchase or exercise on the day prior
to such date of retirement, death or disability and which such
Participant (had he not died, retired or become disabled) would
have become eligible to purchase or exercise within the six month
period following such date of retirement, death or disability and
(b) exercise any SARs associated with such Option Shares so
purchased or Limited Rights so exercised.
(B) A Participant who retires, dies, or becomes totally and
permanently disabled while suspended from this Plan will be
deemed to have been reinstated into the Plan on the day prior to
the date of retirement, death or disability, and such Participant
(or the Participant's heir, beneficiary, guardian, legal
representative, administrator or executor, as the case may be),
shall be entitled for the period specified in subparagraph (C)
below to (i) purchase any Option Shares (or, if a Change of
Control has occurred, exercise any Limited Rights) which the
Participant, had he not retired, died or become disabled, would
have been entitled to purchase or exercise on the day prior to
the date of retirement, death or disability, and would have
become entitled to purchase or exercise within the six month
period following the date of retirement, death or disability, and
(ii) exercise any SARs related to the Option Shares so purchased
or Limited Rights so exercised.
(C) A Participant or other person entitled to exercise any
Options, Limited Rights or SARs pursuant to subparagraph (A) or
(B) above other than a Restricted Optionee or other person
exercising an Option, Limited Right or SAR on behalf of a
Restricted Optionee shall have until the earlier of (i) the
Option Expiration Date, or (ii) three years from the date of such
Participant's retirement, death or disability, to deliver in
accordance with Paragraph 4.6 an Exercise Notice with respect to
such Options, Limited Rights and SARs. A Restricted Optionee or
other person entitled to exercise an Option, Limited Right or SAR
on behalf of a Restricted Optionee pursuant to subparagraph (A)
or (B) above shall have until the earlier of (i) the Option
Expiration Date, or (ii) three years from the date of such
Restricted Optionee's retirement, death or disability, to deliver
in accordance with Paragraph 4.6 an Exercise Notice with respect
to such Options, Limited Rights and SARs granted on or after
November 28, 1993. For Options, Limited Rights and SARs granted
to Restricted Optionees under this Plan before November 28, 1993,
a Restricted Optionee or other person entitled to exercise an
Option, Limited Right or SAR on behalf of a Restricted Optionee
pursuant to subparagraph (A) or (B) above shall have until the
earlier of (i) the Option Expiration Date, or (ii) 90 days from
the date of such Restricted Optionee's retirement, death or
disability to deliver the Exercise Notice prescribed by Paragraph
4.6 herein. Any Options, Limited Rights or SARs not exercised
within such periods shall be automatically forfeited; provided
however, that the Committee or the Chairman of the Board and
Chief Executive Officer (or if such office shall be vacant, the
President) of Valero upon application of any proper party may in
its sole and absolute discretion grant extensions of such three
year or 90 day period upon such terms and subject to such
conditions as it may specify; provided further, however, that in
the case of a Restricted Optionee, any such extension shall be
subject to the prior approval of the Committee, which shall
either approve or disapprove the same in its sole discretion.
Neither the Company, its officers, directors, employees, or
agents, nor any member of the Committee shall bear any liability
to the estate of, or to any spouse, beneficiary, legatee or heir
of a Participant, or to the Participant himself, or to any other
person, for authorizing an heir, beneficiary, executor, legatee,
administrator, guardian or legal representative of a Participant,
or an individual or entity who is represented as such, to
exercise an Option, Limited Right or SAR granted hereunder or for
issuing the Option Shares purchased pursuant to the exercise of
any Option, or for making any cash payment (or for withholding
any Tax Payment from any cash payment) relating to any Limited
Right or SAR, granted under this Plan.
(D) In the case of any termination of employment (whether
voluntary or involuntary termination or otherwise), the Committee
or, except with respect to a Restricted Optionee, the Chairman of
the Board and Chief Executive Officer (or, if such office shall
be vacant, the President) of Valero shall be entitled (but shall
not be required) to permit the Participant to exercise, for a
period not to exceed 90 days, all or part of the Participant's
Options (and any associated Limited Rights and SARs) which, at
the date of termination of employment, were exercisable pursuant
to the Participant's Option Agreement(s) and the provisions of
the Plan and remained unexercised. In addition, except with
respect to a Restricted Optionee, the Chairman of the Board and
Chief Executive Officer (or, if such office shall be vacant, the
President) of Valero may, in connection with the termination of
any Participant's employment with the Company, 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 authorize
amendments to any existing Option Agreement (or a new Option
Agreement superseding any prior Option Agreement) between Valero
and such Participant removing any or all of the restrictions on
the exercise of the Options (and any associated Limited Rights
and SARs) previously granted to such Participant; no such
authorization or amendment (or new Option Agreement) shall
increase the aggregate number of Options granted to any
Participant. Any action referred to in the preceding two
sentences shall be taken by the Committee, Chairman of the Board
and Chief Executive Officer (or, if such office shall be vacant,
the President) of Valero, if at all, within one month from the
Participant's date of termination.
4.15 Effect of Change of Control. (A) As used herein, the
term "Change of Control" shall mean each occurrence of any one or
more of the following events:
(i) any person (excluding any employee benefit plan of
Valero, any trustee, administrator or other entity administering
any such plan, and Valero or any Controlled Subsidiary) or any
partnership, limited partnership, syndicate or other group formed
for the purpose of acquiring, holding or disposing of Voting
Securities within the meaning of Rule 13(d) under the Exchange
Act (a "Group") which theretofore beneficially owns less than 20%
of the Voting Securities of Valero then issued and outstanding
shall publicly announce, or shall file with the SEC a Schedule
13D pursuant to Section 13(d) of the Exchange Act (or successor
form pursuant to such or any successor provision) indicating,
that it has acquired (whether in one or more transactions) Voting
Securities of Valero that result in such person or Group directly
or indirectly beneficially owning 20% or more of the Voting
Securities of Valero; or
(ii) any person (other than Valero, any Controlled
Subsidiary, any employee benefit plan of Valero and any trustee,
administrator or other entity administering any such plan) or
Group shall commence a tender offer or exchange offer for 30% or
more of the Voting Securities of Valero, or for any number or
amount of Voting Securities of Valero which, if such offer were
to be fully subscribed and all Voting Securities for which such
tender or exchange offer is made were to be purchased or
exchanged pursuant to such offer, would result in such person or
Group directly or indirectly beneficially owning 50% or more of
the Voting Securities of Valero; or
(iii) during any period of 24 consecutive calendar
months, there shall be a change in the composition of the Board
of Directors of Valero such that the persons who at the beginning
of any such period constituted a majority of the directors of
Valero shall cease to constitute a majority of the Board of
Directors of Valero, unless the election, or the nomination for
election, by the shareholders of Valero, or the appointment by
the Board of Directors, of each new director during such 24 month
period was approved by the vote at a meeting or the written
consent of at least two-thirds of the directors then still in
office who were directors at the beginning of such period; or
(iv) the shareholders of Valero shall approve an agreement
providing either for any merger, consolidation, combination or
other transaction in which Valero will cease to be an independent
publicly owned corporation, or for the liquidation or the sale of
all or substantially all of the assets of Valero.
(v) the occurrence of the Distribution Date, as such term
is defined in the Rights Agreement.
(vi) any other event determined by the Board of Directors or
the Committee to constitute a Change of Control.
(B) As used herein, the term "Voting Securities" shall mean
the Common Stock, any other equity security of Valero ordinarily
entitled to vote for directors at meetings of the stockholders of
Valero and any debt or equity security of Valero convertible into
Common Stock or another security so entitled to vote for the
election of directors of Valero. In calculating the percentage
of Voting Securities owned by a person or Group, securities that
are immediately convertible, or by their terms, upon the
occurrence of any event or the lapse of time, or both, will
become convertible into or exchangeable or exercisable for shares
of Common Stock (or other Voting Securities) shall be deemed to
represent the number of whole shares of Common Stock (or other
Voting Securities) into which such securities are then or will
become ultimately convertible or for which they are then or will
become ultimately exchangeable or exercisable, and the total
number of issued and outstanding shares of Common Stock (or other
Voting Securities) of Valero shall be determined on a pro forma
basis after giving effect to such conversion. The percentage of
Voting Securities held by a person or Group shall be deemed to be
equal to the percentage of the number of the votes that could be
cast for the election of directors of Valero at a meeting of
stockholders that such person or Group would be entitled to so
cast after giving effect to the provisions of the preceding
sentence. As used in this Paragraph 4.15, the term "person"
shall include any individual, corporation, partnership, firm or
other entity.
(C) In the event that a Change of Control shall occur, the
Chairman of the Board and Chief Executive Officer (or, if such
office shall at such time be vacant, the President ) of Valero
may, on or before the date of such event constituting a Change of
Control, file with the Corporate Secretary of Valero a written
notice (the "Nonacceleration Notice") signed by such officer
stating that such Change of Control shall not result in the
acceleration of Options (or any related Limited Rights and SARs)
granted under the Plan to the Participants identified in such
notice (or held by persons claiming by, through or under such
Participants). Such Nonacceleration Notice may be filed with
respect to all Options granted under the Plan or with respect to
Options granted to specified Participants (each such Participant
referred to by name or generically in a Nonacceleration Notice
timely filed with the Corporate Secretary of Valero, together
with each person claiming by, through or under such a
Participant, is hereinafter referred to as a "Nonaccelerated
Person"). Any other provision of this Plan notwithstanding, each
Option (and, subject to the provisions of Paragraph 4.2, all
Limited Rights and SARs) granted under this Plan, not theretofore
forfeited or terminated and held at the date of a Change of
Control by a person who at such date is neither a Nonaccelerated
Person nor a Restricted Optionee shall upon occurrence of such
Change of Control immediately become exercisable with respect to
all of the Shares of Common Stock specified therein (less any
such shares previously purchased under the Option) and any
related Limited Rights and SARs. The inclusion of a Participant
or other person as a Nonaccelerated Person in a Nonacceleration
Notice shall not be construed to alter or amend any rights such
Participant or other person may have under this Plan under the
provisions of any executive severance agreement or other
contractual relationship with Valero.
(D) Notwithstanding the provisions of Paragraph 4.10, in
the event that a Change of Control shall occur, each Option (and
any Limited Rights and SARs) held by a Participant pursuant to
the Plan shall remain exercisable until the earlier of (i) the
Expiration Date of the Option, or (ii) 90 days following the
Participant's date of termination of employment.
5. Adjustments Upon Changes In Capitalization.
5.1. Securities Received Upon Exercise. If all or any
portion of an Option, Limited Right or SAR is exercised
subsequent to any stock dividend, rights distribution, split-up,
recapitalization, combination or exchange of shares, merger,
consolidation, acquisition of property or stock, spin-off or
separation, reorganization, or liquidation, as a result of which
shares or other Securities of any class or rights shall be issued
in respect of outstanding shares of Common Stock or shares of
Common Stock shall be changed into the same or a different number
of shares of the same or another class or classes or other
securities, the person or persons so exercising such Option,
Limited Right or SAR shall receive, (a) for the aggregate price
payable upon such exercise of such Option, (i) the aggregate
number and class of shares, rights or other securities for which
a recognized market exists, and (ii) a cash amount equal to the
fair market value on such date, as reasonably determined by the
Committee, of any other property (other than regular cash
dividend payments) and of any shares, rights or other securities
for which no recognized market exists, which, if shares of Common
Stock (as authorized at the date of the granting of such Option)
had been purchased at the date of granting of the Option for the
same aggregate price (on the basis of the price per share
provided in the Option) and had not been disposed of, such person
or persons would be holding at the time of such exercise as a
result of such purchase and any such stock dividend, rights
distribution, split-up, recapitalization, combination or exchange
of shares, merger, consolidation, acquisition of property or
stock, spin-off or separation, reorganization, or liquidation and
(b) a cash amount upon the exercise of the Limited Rights or SARs
equal to the difference between the aggregate Strike Price of
such Limited Right or SAR and the aggregate of (i) the average
sales price, on the date provided in Paragraph 4.2 or 4.3 hereof,
as the case may be, of any whole shares or units of Common Stock,
rights or other securities for which a recognized market exists,
and (ii) the fair market value on such date, as reasonably
determined by the Committee, of any other property (other than
regular cash dividend payments) which the holder of a number of
shares of Common Stock equal to the number of such Limited Rights
or SARs, if such shares had been purchased at the date of
granting of such Limited Rights or SARs and not otherwise
disposed of, would be holding at the time of exercise of such
Limited Rights or SARs as a result of such purchase and any such
stock dividend, rights distribution, split-up, recapitalization,
combination or exchange of shares, merger, consolidation,
acquisition of property or stock, spin-off or separation,
reorganization or liquidation; provided however, that no
fractional share of Common Stock, fractional right or other
fractional security shall be issued upon any such exercise, and
the aggregate price paid shall be appropriately reduced to
reflect any fractional share of Common Stock, fractional right or
other fractional security not issued; and provided further,
however, that if the exercise of any Option subsequent to any
stock dividend, rights distribution, split-up, recapitalization,
combination or exchange of shares, merger, consolidation,
acquisition of property, or stock, spin-off or separation,
reorganization or liquidation would, pursuant to clause (a) of
this Paragraph 5.1, require the delivery of shares, rights or
other securities which Valero is not then authorized to issue or
which in the sole judgment of the Committee cannot be issued
without undue effort or expense, the person exercising such
Option shall receive, in lieu of such shares, rights or other
securities, a cash payment equal to the fair market value on the
Exercise Date, as reasonably determined by the Committee, of such
shares, rights or other securities. For purposes of applying
the provisions of this Plan, the Preference Share Purchase Rights
distributed to stockholders of record of Valero on November 25,
1985, shall be deemed not to have been distributed until the
Distribution Date (as defined in the Rights Agreement).
5.2. Adjustment of Option Shares Available. In the event of
any change in the number of shares of Common Stock outstanding
resulting from a stock dividend, rights distribution, split-up,
recapitalization, combination or exchange of shares, merger,
consolidation, acquisition of property or stock, spin-off or
separation, reorganization or liquidation, (a) the aggregate
number and class of shares of Common Stock remaining available to
be optioned under this Plan shall be that number and class which
a person, to whom an Option had been granted for all of the
available shares of Common Stock under this Plan on the date
preceding such change, would be entitled to receive as provided
in Paragraph 5, and (b) the aggregate number of Limited Rights
and SARs remaining available under this Plan shall be determined
pursuant to the formula b/a (c) wherein:
a = the number of Option Shares available to be optioned
under this Plan immediately prior to such change,
b = the number of Option Shares available to be optioned
under this Plan immediately following such change, and
c = the number of Limited Rights or SARs available for
grant under this Plan immediately prior to such change.
Upon the occurrence of any stock dividend, rights
distribution, split-up, recapitalization, combination or exchange
of shares, merger, consolidation, acquisition of property or
stock, spin-off or separation, reorganization or liquidation, the
Committee shall be entitled (but shall not be required) to
determine that new Option Agreements shall be entered into with
Participants reflecting such stock dividend or other event.
6. Administration.
6.1. Plan Administered by Committee. This Plan shall be
administered by a committee of not less than three directors of
Valero, which committee shall, except as hereinafter set forth,
be the Compensation Committee, as appointed and constituted from
time to time by the Board of Directors. In the event the
Compensation Committee shall have fewer than three members, or
fewer than three members of the Compensation Committee shall be
eligible to act with respect to this Plan, then additional
members of the Board of Directors shall be appointed by the Board
of Directors to act with and as a part of the Compensation
Committee for purposes of administering this Plan so that the
Committee administering this Plan shall consist of at least three
members of the Board of Directors. No person shall serve on or
act as a member of the Committee administering this Plan who has
been granted or was eligible for selection as a person to be
granted an Option or SARs pursuant to this Plan, or was eligible
for an award under any other discretionary plan of Valero or the
Company (whether or not similar to the Plan) entitling the
participants therein to acquire SARs, Limited Rights or shares of
Common Stock, stock options or other securities of Valero or the
Company, within one year prior to the date such person would
first serve on or act as a member of the Committee.
6.2. Powers of the Committee. In connection with its
administration of this Plan, the Committee is empowered to:
(a) Make all determinations and computations concerning the
selection of Participants, the granting of Options, Limited
Rights and SARs, the pricing thereof and the number of Option
Shares to be optioned, and SARs to be granted, to each
Participant;
(b) Cause Valero to enter into Option Agreements with
Participants;
(c) With the consent of the Participant, enter into
agreements amending any Option Agreement so as to grant SARs
thereunder, change the Option Price or Expiration Date of any
Option, the Strike Price of any Limited Right or SAR or any other
term or condition thereof, or to terminate any such Option
Agreement;
(d) Make rules and regulations for the administration of
the Plan which are not inconsistent with the terms and provisions
of this Plan, including rules providing for the accelerated
exercise of Options and SARs in such circumstances as the
Committee may deem appropriate;
(e) Construe all terms, provisions, conditions and
limitations of the Plan in good faith, and adopt amendments to
the Plan;
(f) Make equitable adjustments for any mistakes or errors
in the administration of this Plan or deemed by the Committee to
be necessary as the result of any unusual situation or any
ambiguity in the Plan;
(g) Select, employ and compensate, from time to time,
consultants, accountants, attorneys and other agents and
employees as the Compensation Committee may deem necessary or
advisable for the proper and efficient administration of this
Plan.
6.3. Express Powers not Exclusive. The foregoing list of
express powers granted to the Committee upon the adoption of this
Plan is not intended to be either complete or exclusive, but the
Committee shall, in addition to the specific powers granted by
this Plan, have such powers, whether or not expressly authorized
herein, which it may deem necessary, desirable, advisable,
proper, convenient or appropriate for the supervision and
administration of this Plan. Except as otherwise specifically
provided herein, the decisions or judgment of the Committee on
any question or claim arising hereunder shall be final, binding
and conclusive upon the Participants and all persons claiming by,
through or under a Participant.
7. Miscellaneous Provisions.
7.1. Nonassignability. No Options, SARs, Limited Rights or
any other security, right or interest under this Plan, shall be
transferable by the Participant other than pursuant to a will or
the laws of descent and distribution or as provided pursuant to a
qualified domestic relations order as defined by the Internal
Revenue Code of 1986, as amended, 26 U.S.C. paragraph 1 et seq. or
Title I of the Employee Retirement Income Security Act, or the rules
thereunder and no Participant or other person claiming by,
through or under a Participant shall have any right to sell,
assign, transfer, pledge, anticipate, mortgage or otherwise
encumber, transfer, hypothecate or convey in advance of actual
receipt any Option Shares, SARs, Limited Rights or any cash
amounts or other shares, rights or securities (if any) payable
hereunder, or any part thereof, all of which are, and all rights
in and to which are, hereby expressly declared to be
nonassignable and nontransferable; any such purported sale,
assignment, transfer, pledge, anticipation, mortgage,
encumbrance, transfer, hypothecation or conveyance shall be void
and of no force or effect. No Option Shares, SARs, Limited
Rights and no part of any cash amounts or other shares, rights or
securities payable hereunder (if any) shall, prior to actual
payment or delivery, be subject to seizure or sequestration for
the payment of any debts, judgments, alimony or separate
maintenance owed by a Participant, or other person claiming by,
through or under a Participant, nor be transferable by operation
of law in the event of bankruptcy or insolvency, except as
required by law. The designation of a beneficiary shall not
constitute a transfer hereunder.
7.2. Investment Letter. As a condition to the exercise of
any portion of an Option, the Committee, the General Counsel or
the Corporate Secretary may require the person exercising such
Option to represent and warrant to Valero at the time of any such
exercise that the Option Shares are being purchased only for
investment and without any present intention to sell or
distribute such Option Shares, if, in the opinion of counsel for
Valero, such representation is required or desirable under the
Securities Act of 1933 or any other applicable state, federal or
local law, regulation or rule of any governmental agency. The
Committee, the General Counsel or the Corporate Secretary may
require such person to execute and deliver to Valero an
appropriate investment letter containing representations and
warranties of the type generally described above.
7.3. [Reserved]
7.4. Responsibility for Taxes. Any and all taxes payable
with respect to income to a Participant resulting from the
exercise of an Option, Limited Rights or SARs granted hereunder
shall be the sole responsibility of the Participant, not of the
Company or Valero, whether or not Valero or the Company shall
have withheld or collected from the Participant any sums required
to be so withheld or collected in respect of such income, and
whether or not any sums so withheld or collected shall be
sufficient to provide for any such taxes.
7.5. Employment Not Guaranteed. Nothing contained in this
Plan nor any action taken hereunder shall be construed to create
a contract of employment or to give any Participant any right to
be retained in the employ of the Company or to serve or continue
to serve as an officer or director of Valero or any Subsidiary.
7.6. Gender, Singular and Plural. All pronouns and any
variations thereof shall be deemed to refer to the masculine,
feminine, or neuter, as the identity of the person or persons may
require. As the context may require, the singular may be read as
the plural and the plural as the singular.
7.7. Captions. The captions of the Paragraphs of this Plan
are for convenience only and shall not control or affect the
meaning or construction of any of its provisions.
7.8. Validity. In the event any provision of this Plan is
held invalid, void, or unenforceable, the same shall not affect,
in any respect whatsoever, the validity of any other provision of
this Plan.
7.9. Notice. Any notice, statement, decision or
communication required or permitted to be given under this Plan
shall be sufficient if in writing and hand delivered, or sent by
registered or certified mail, if to the Company, to the principal
office of Valero, directed to the attention of the Corporate
Secretary of Valero, and if to a Participant or other person, to
the address of the Participant or other person as it shall appear
on the books of the Company. Any such notice shall be deemed
given as of the date of delivery or, if delivery is made by mail,
as of the third day following the date shown on the postmark on
receipt for registration or certification.
7.10. Applicable Law. This Plan shall be governed and
construed in accordance with the laws of the State of Texas.
7.11. Inconsistency. In the event of any conflict or
inconsistency between the provisions of this Plan and the
provisions of any Option Agreement, the provisions of this Plan
shall control.
7.12. No Adoption of SEC Rules. The adoption by the
Committee of this amended and restated Stock Option Plan No. 3 is
not intended to, and shall not, constitute an election by the
Company to adopt the rules promulgated by the SEC under Section
16 of the Exchange Act pursuant to Release No. 34-28869.
8. Amendment and Termination of Plan and Option Agreements.
8.1. Amendments. The Board of Directors or the Committee,
without approval of the Participants but subject to Paragraph
8.3, may amend this Plan from time to time in such respect as it
deems advisable.
8.2. Termination. The Board of Directors or the Committee,
without approval of the Participants but subject to Paragraph
8.3, may at any time terminate this Plan.
8.3. Effect of Amendment or Termination. Any such amendment
or termination of this Plan shall not materially adversely affect
Options, Limited Rights or SARs already granted. In the event of
any termination of this Plan or amendment which materially
adversely affects Options, Limited Rights or SARs, Options,
Limited Rights and SARs already granted shall, subject to
Paragraph 8.4, remain in full force and effect as if this Plan
had not been so amended or terminated. In any case where the
Board of Directors or the Committee feels it appropriate or is
advised by counsel that such approval is required, the amendment
or termination of this Plan shall be submitted to the
stockholders of Valero for approval.
8.4 Cancellation of Options. Any other provision of this
Plan to the contrary notwithstanding, in the event that either
(a) the Option Price of any Option shall on any NYSE trading day
equal or exceed 125% of the closing sales price per share of the
Common Stock (determined as provided in Paragraph 3.7), or (b)
out of any period of 120 consecutive NYSE trading days the Option
Price of any Option shall exceed the closing sales price per
share of the Common Stock (determined as provided in Paragraph
3.7) on any 80 or more of such days, then the Committee, in its
sole discretion, may unilaterally determine to cancel and
terminate such Option, the related Option Agreement and
associated Limited Rights and any associated SARs. Upon such
Committee determination, the Expiration Date of such Option,
Option Agreement, Limited Rights and SARs shall be at the close
of business on the date of such determination. The Committee
shall cause notification of such cancellation to be sent to the
Participant (or other person entitled to exercise such Option),
but failure to send or any delay in sending such notice shall not
nullify, delay, or otherwise affect such cancellation. No
compensation shall be paid or payable to any Participant (or
other person entitled to exercise such Option), or other person
claiming by, through or under a Participant, in respect of any
such cancellation. If an Option, the related Option Agreement
and associated Limited Rights, and any associated SARs, shall be
terminated and cancelled pursuant to the provisions of this
Paragraph 8.4, the Option Shares and associated Limited Rights,
and any associated SARs, subject to such Option (to the extent
not theretofore exercised) shall once more be available to be
optioned and sold under this Plan pursuant to a new Option
granted hereunder. No Participant with respect to whom an Option
and associated Limited Rights, and any associated SARs, has been
cancelled pursuant to this Paragraph 8.4 shall have any right,
whether by virtue of such cancellation or otherwise, to require
the Company or the Committee to grant a new Option to him under
this Plan or any other stock option plan of the Company.
9. Claims.
9.1. Filing of Claims. A Participant or other person who
believes that he has been denied any benefit or right provided
under this Plan shall have the right to file a written claim with
the Committee. All such claims shall be submitted on a form
provided by the Committee, which shall be signed by the claimant
and shall be considered filed on the date the claim is received
by the Committee. The claim will be reviewed and a decision
rendered by a member of the Committee designated by the Committee
for such purpose.
9.2. Denial of Claims. In the event the claim is denied, in
whole or in part, the Committee member reviewing the claim shall,
within 90 days following receipt of the claim, provide the
claimant with either (i) a written statement containing the
following:
(1) the specific reason or reasons for the denial of
benefits;
(2) a specific reference to the pertinent provisions of the
Plan upon which the denial is based;
(3) a description of any additional material or information
which is necessary for the claimant to perfect the
claim and an explanation of why such material or
information is necessary; and
(4) an explanation of the review procedure provided below;
or (ii) a written notice that special circumstances (which shall
be specified in the notice) require an additional specified
period (not to exceed 90 days) for processing of the claim. If a
claimant is provided with the notice specified in clause (ii), he
shall thereafter be provided with the statement required by
clause (i) within the period specified in such notice.
9.3. Review of Claims. Within 90 days after receipt of a
notice of a denial of benefits as provided above, the claimant or
his authorized representative may request, in writing, to appear
before the full Committee for a review of his claim. In
conducting its review, the Committee shall consider any oral or
written statement or other evidence presented by the claimant or
his authorized representative in support of his claim. The
Committee shall give the claimant and his authorized
representative reasonable access to all pertinent documents
necessary for the preparation and presentation of his claim.
9.4. Decision by Committee. Within 60 days after receipt by
the Committee of the written request for review of his claim (or
in the event of special circumstances which require additional
time for review, not later than 120 days after receipt of such
request) the Committee shall notify the claimant of its decision.
If an extension of time for review is required because of special
circumstances, written notice of the extension shall be furnished
to the claimant prior to the commencement of the extension. In
the event the Committee shall hold regularly scheduled meetings
at least quarterly, then in lieu of the 60 day period specified
above, the decision on review shall be made by no later than the
date of the meeting of the Committee which immediately follows
receipt of the claimant's request for review, provided, that if
the request for review is received within 30 days preceding the
date of such meeting, the decision shall be made by no later than
the date of the second meeting following receipt of such request
for review, provided further, that if special circumstances
require a further extension of time for processing of the report,
such decision shall be rendered not later than the date of the
third meeting of the Committee following receipt of the written
request for review. The decision of the Committee shall be in
writing and shall include the specific reasons for the decision
and references to relevant Plan provisions on which the decision
is based. The decision of the Committee shall be final,
conclusive and binding upon the Participant or other claimant and
all persons claiming by, through or under such claimant.
VALERO ENERGY CORPORATION
_____________________________
STOCK OPTION PLAN NO. 4
(as amended and restated effective November 28, 1993)
_____________________________
<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 . . . . . . . . . . . . . . . . . . . . 5
3.1. Selection of Participants . . . . . . . . . . 5
3.2. Exclusion of Committee Members. . . . . . . . 5
3.3. No Right to Participate . . . . . . . . . . . 5
3.4. Automatic Grant of Limited Rights . . . . . . 5
3.5. Determination of Option Provisions. . . . . . 6
3.6. Option Shares, Limited Rights and SARs
Available for Grant . . . . . . . . . . . . 6
3.7. Limitations Regarding Option Price and
Strike Price. . . . . . . . . . . . . . . . 6
3.8. Limitation Regarding Option Period. . . . . . 7
3.9. Option Agreements . . . . . . . . . . . . . . 7
3.10 Provisions Regarding Prospective Employees. . 8
4. Exercise of Options, Limited Rights and SARs. . . . 8
4.1. Exercise of Options . . . . . . . . . . . . . 8
4.2. Exercise of Limited Rights. . . . . . . . . . 8
4.3. Automatic Exercise of SARs; Settlement
Price for SARs. . . . . . . . . . . . . . . 9
4.4. Exercise of Limited Rights by Restricted
Optionees . . . . . . . . . . . . . . . . . 10
4.5. Forfeiture of Certain SARs. . . . . . . . . . 10
4.6. Exercise Procedure. . . . . . . . . . . . . . 10
4.7. Payment for SARs and Limited Rights . . . . . 11
4.8. Payment with Common Stock . . . . . . . . . . 12
4.9. Rights as Stockholder . . . . . . . . . . . . 12
4.10 Effect of Termination and Forfeiture. . . . . 13
4.11 Effect of Leave of Absence. . . . . . . . . . 13
4.12 Effect of Disability. . . . . . . . . . . . . 14
4.13 Effect of Retirement or Death . . . . . . . . 15
4.14 Exercise Following Termination, Retirement,
Disability or Death . . . . . . . . . . . . 15
4.15 Effect of Change of Control . . . . . . . . . 18
5. Adjustments Upon Changes In Capitalization. . . . . 20
5.1. Securities Received Upon Exercise . . . . . . 20
5.2. Adjustment of Option Shares Available . . . . 22
6. Administration. . . . . . . . . . . . . . . . . . . 23
6.1. Plan Administered by Committee. . . . . . . . 23
6.2. Powers of the Committee . . . . . . . . . . . 23
6.3. Express Powers not Exclusive. . . . . . . . . 24
7. Miscellaneous Provisions. . . . . . . . . . . . . . 24
7.1. Nonassignability. . . . . . . . . . . . . . . 24
7.2. Investment Letter . . . . . . . . . . . . . . 25
7.3. [Reserved]. . . . . . . . . . . . . . . . . . 25
7.4. Responsibility for Taxes. . . . . . . . . . . 25
7.5. Employment Not Guaranteed . . . . . . . . . . 26
7.6. Gender, Singular and Plural . . . . . . . . . 26
7.7. Captions. . . . . . . . . . . . . . . . . . . 26
7.8. Validity. . . . . . . . . . . . . . . . . . . 26
7.9. Notice. . . . . . . . . . . . . . . . . . . . 26
7.10. Applicable Law. . . . . . . . . . . . . . . . 26
7.11. Inconsistency . . . . . . . . . . . . . . . . 26
7.12. No Adoption of SEC Rules. . . . . . . . . . . 26
8. Amendment and Termination of Plan and Option
Agreements. . . . . . . . . . . . . . . . . . . . 27
8.1. Amendments. . . . . . . . . . . . . . . . . . 27
8.2. Termination . . . . . . . . . . . . . . . . . 27
8.3. Effect of Amendment or Termination. . . . . . 27
8.4 Cancellation of Options . . . . . . . . . . . 27
9. Claims. . . . . . . . . . . . . . . . . . . . . . . 28
9.1. Filing of Claims. . . . . . . . . . . . . . . 28
9.2. Denial of Claims. . . . . . . . . . . . . . . 28
9.3. Review of Claims. . . . . . . . . . . . . . . 29
9.4. Decision by Committee. . . . . . . . . . . . . 29
<PAGE>
1. Introduction and Statement of Purpose.
This Valero Energy Corporation Stock Option Plan No. 4 (the
"Plan") is established for the purpose of giving additional
incentive to Key Employees of the Company by creating an
opportunity for capital accumulation by such Key Employees. It
is intended that the benefits available under this Plan, when
added to other benefits payable to these Key Employees, will
furnish total compensation to such Key Employees which is
competitive in the industries in which the Company conducts its
business and in which the Company competes for employees. This
Plan sets forth the basis for the eligibility of Employees to
participate in the Plan and the terms and conditions regulating
such participation. The Plan provides for the grant of Options
to purchase Common Stock of Valero, Limited Rights which may be
exercised in lieu of Options and stock appreciation rights which
are automatically exercised upon the exercise of an Option. The
Options granted under the Plan are and are intended to be
"non-qualified" options under the Internal Revenue Code of 1986,
as amended. The Plan amendments first included in this amended
and restated Stock Option Plan No. 4 shall be effective as of
November 28, 1993. 2. Definitions.
For the purposes of this Plan, the following terms shall have
the meanings stated below unless a different meaning is plainly
required by the context or such term is otherwise defined herein.
(a) "Board of Directors" shall mean the Board of Directors
of Valero.
(b) "Change of Control" shall have the meaning specified
in Paragraph 4.15.
(c) "Change of Control Period" shall mean a period
beginning on any date that a Change of Control shall occur and
ending at the close of business on the 90th day thereafter,
provided however, that if a tender offer or exchange offer
constituting a Change of Control pursuant to clause (ii) of
Paragraph 4.15 shall be canceled, expire or otherwise terminate
without Voting Securities having been acquired pursuant thereto,
the Change of Control Period shall terminate at the close of
business on (a) the seventh day following the date of
cancellation, expiration or other termination of such tender
offer or exchange offer, or (b) the 90th day after the
commencement of such offer, whichever shall first occur.
(d) "Committee" shall mean the persons administering this
Plan from time to time pursuant to Paragraph 6.1.
(e) "Common Stock" shall mean the common stock, par value
$1.00 per share, of Valero.
(f) "Company" shall mean Valero and any Parent or
Subsidiary of Valero which now exists or hereafter is organized
or acquired by or acquires Valero, and any successor or
successors to such entities. The terms "Parent" and "Subsidiary"
shall have the same meaning as the terms "parent corporation" and
"subsidiary corporation," respectively, as specified in Section
425 of the Internal Revenue Code of 1986, as amended.
(g) "Compensation Committee" shall mean the Compensation
Committee of the Board of Directors, as constituted from time to
time.
(h) "Controlled Subsidiary" shall mean a corporation of
which a majority of the outstanding common stock is directly or
indirectly beneficially owned by Valero.
(i) "Employee" shall mean any person employed by the
Company, including officers and directors of the Company within
the meaning of Section 16(a) of the Exchange Act, but shall
include a director only if also employed by the Company on a
full-time basis.
(j) "Exchange Act" shall mean the Securities Exchange Act
of 1934, as amended and in effect from time to time.
(k) "Exercise Date" -- see Paragraph 4.6.
(l) "Expiration Date" -- see Paragraph 3.5.
(m) "Exercise Notice" -- see Paragraph 4.6.
(n) "Group" -- see Paragraph 4.15.
(o) "Installment Option" -- see Paragraph 4.1.
(p) "Key Employee" shall mean any key executive,
managerial or professional Employee or prospective Employee of
the Company having responsibility for planning the Company's
operations, controlling or managing its business activities, or
advising the management of the Company with respect to its
operations and business activities. The determination of "Key
Employees" for purposes of determining eligibility for
participation in this Plan, and the determination of "key
employees" for purposes of applying any New York Stock Exchange
Rule or determining eligibility for participation in any other
stock option plan of the Company, need not be consistent.
(q) "Limited Right" shall mean the right, following a
Change of Control of Valero and in lieu of purchasing an Option
Share pursuant to the exercise of an Option, to receive a cash
payment equal to the difference between the Strike Price of such
Limited Right and the price of one share of Common Stock at the
time specified in Paragraph 4.2.
(r) "Nonaccelerated Person" -- see Paragraph 4.15.
(s) "Nonacceleration Notice" -- see Paragraph 4.15.
(t) "Option" or "Options" shall mean an option or options
granted pursuant to this Plan to purchase shares of Common Stock.
(u) "Option Agreement" shall mean a written agreement
entered into between Valero and a Participant pursuant to
Paragraph 3.9.
(v) "Option Price" -- see Paragraph 3.5.
(w) "Option Share" shall mean one share of Common Stock
purchased or which may be purchased pursuant to an Option.
(x) "Parent" -- see subparagraph (f) of this Paragraph 2.
(y) "Participant" shall mean a Key Employee who has
entered into an Option Agreement which is in force and effect.
(z) "Person" -- see Paragraph 4.15.
(aa) "Plan" -- see Paragraph 1.
(bb) "Preference Share Purchase Right" shall mean one of
the rights distributed to holders of record of Valero on November
25, 1985, to purchase 1/100 share of the Junior Participating
Serial Preference Stock, Series II, of Valero.
(cc) "Rights Agreement" shall mean that certain Amended
and Restated Rights Agreement, dated as of October 17, 1991,
between Valero and Ameritrust Texas National Association,
successor to MBank Alamo, N.A., as Rights Agent, as amended and
in effect from time to time.
(dd) "Restricted Optionee" shall mean any person who is a
"director" or "officer" of Valero within the meaning of Section
16(a) of the Exchange Act, together with any person who is the
beneficial owner of more than 10 percent of any class of equity
security of Valero registered under Section 12 of the Exchange
Act.
(ee) "SAR" or "stock appreciation right" shall mean the
right, subject to the provisions of this Plan, to receive a
payment in cash equal to the difference between the specified
Strike Price of the SAR and the price of one share of the Common
Stock at the time specified in Paragraph 4.3.
(ff) "SEC" shall mean the Securities and Exchange
Commission.
(gg) "Settlement Date" -- see Paragraph 4.6.
(hh) "Strike Price" shall mean the price per share of the
Common Stock, determined pursuant to Paragraph 3.7, from which
the appreciation (if any) with respect to a SAR or Limited Right
shall be calculated.
(ii) "Subsidiary" -- see subparagraph (f) of this Paragraph
2.
(jj) "Tax Payment" -- see Paragraph 4.6.
(kk) "Valero" shall mean Valero Energy Corporation, a
Delaware corporation.
(ll) "Valero Pension Plan" -- see Paragraph 4.13.
(mm) "Voting Securities" -- see Paragraph 4.15.
(nn) "Window Period" shall mean a period beginning on the
third business day following the date of release for publication
of the financial data specified in paragraph (e)(1)(ii) of Rule
16b-3 under the Exchange Act and ending on the twelfth business
date following such date.
3. Granting of Options, Limited Rights and SARs to Employees.
3.1. Selection of Participants. The Committee shall, from
time to time, grant Options to purchase a specified number of
Option Shares to such Key Employees of the Company as the
Committee, in its sole and absolute discretion, shall select to
become Participants. At or subsequent to the time that an Option
is granted to a Key Employee by the Committee, the Committee may
grant such Key Employee a number of SARs not exceeding the number
of Option Shares which may be purchased (whether in installments
or otherwise) pursuant to such Option, provided, that no SARs
shall be granted with respect to Option Shares which have
theretofore been purchased by a Participant or to any Participant
who, subsequent to the date of grant of such Option, is no longer
an Employee as such term is defined herein. Subject to the full
and final authority of the Committee to administer the Plan and
select Participants, the granting of Options, Limited Rights and
SARs hereunder and the selection of Participants may be based on
recommendations made by the Chairman of the Board and Chief
Executive Officer (or, if such office shall be vacant, the
President) of Valero.
3.2. Exclusion of Committee Members. No member of the
Committee, while so serving, may be granted any Option, Limited
Rights or SARs. However, a Participant who has been granted an
Option, Limited Rights or SARs under this Plan prior to serving
on the Committee may, during such term of service, continue to
hold any Options, Limited Rights and SARs previously granted and
may exercise any such Options, Limited Rights and SARs and hold
Option Shares acquired upon the exercise of any such Options,
subject to the provisions of this Plan.
3.3. No Right to Participate. No Employee or prospective
Employee of the Company shall have the right to require the
Company or the Committee to make him a Participant under this
Plan.
3.4. Automatic Grant of Limited Rights. Each Option granted
pursuant to this Plan (whether or not the Option Agreement shall
so specify) shall be automatically accompanied by that number of
Limited Rights which equals the number of Option Shares which may
be purchased (whether in installments or otherwise) pursuant to
such Option. Limited Rights may not be granted separate or apart
from the grant of an Option to purchase Option Shares.
3.5. Determination of Option Provisions. In determining
that a Key Employee shall be granted an Option, the Committee
shall designate the number of Option Shares the Employee may
purchase under the Option, a date upon which the Option (unless
an earlier termination date is established pursuant to Paragraph
8.4) will automatically expire (the earlier of such dates being
referred to herein as the "Expiration Date"), the price per share
at which such Option Shares may be purchased (the "Option Price")
and the remaining terms and conditions of such Option. If the
Committee shall determine to grant SARs to the grantee or holder
of an Option, the Committee shall designate the number of SARs
granted and any terms and conditions pertaining thereto.
3.6. Option Shares, Limited Rights and SARs Available for
Grant. (A) Subject to the provisions of Paragraphs 4.10 and 5,
the maximum number of shares of Common Stock which may be
optioned and sold under this Plan shall be 600,000 shares.
Shares of Common Stock optioned and sold under this Plan (and any
rights or other securities sold or delivered in accordance with
Paragraph 5.1) may be either authorized but unissued securities
or reacquired (treasury) securities.
(B) The maximum number of SARs which may be granted under
this Plan shall (subject to the provisions of Paragraphs 4.10 and
5) be equal to the maximum number of shares of Common Stock which
may be optioned and sold under this Plan. The number of Limited
Rights which shall be granted under this Plan shall be equal to
the number of shares of Common Stock optioned under this Plan.
(C) During the term of this Plan, Valero will at all times
reserve and keep available, or have authorized but unissued,
shares of Common Stock sufficient to satisfy the requirements of
this Plan. The inability of Valero to obtain, from any
regulatory body having jurisdiction, any authority deemed by
Valero's counsel to be necessary to the lawful issuance and sale
of Common Stock hereunder, shall relieve the Company of any
liability in respect of the nonissuance or sale of such Common
Stock as to which such requisite authority shall not have been
obtained.
3.7. Limitations Regarding Option Price and Strike Price.
The Option Price for any Option Share shall be as specified by
the Committee in its sole discretion, but shall not be less than
75% of (a) the closing sales price per share of Common Stock as
reported in the New York Stock Exchange - Composite Transactions
listing in The Wall Street Journal or such other listing or
quotation medium as the Committee may later designate (the
"Transactions Listing") for the New York Stock Exchange (the
"NYSE") trading day immediately preceding such date, or if there
are no sales on such date, on the next preceding day on which
there were sales, or (b) in the event that the Common Stock is
not listed for trading on the NYSE, an amount determined in
accordance with standards adopted by the Committee; provided
however, that, at its election, the Committee may specify an
option price which is not less than 75% of the average closing
sales price per share of the Common Stock as reported in the
Transactions Listing for a period of not less than 10 nor greater
than 60 consecutive trading days as determined by the Committee
in its sole discretion, provided that such period as determined
by the Committee shall not commence on a date more than 60
trading days prior to the date of grant nor end on a date more
than 60 trading days after the date of grant. The Strike Price
at which a SAR or Limited Right is granted shall be equal to the
Option Price of the Option Shares to which such SAR or Limited
Right is related.
3.8. Limitation Regarding Option Period. The Plan shall
continue indefinitely. However, no Option granted under this
Plan shall have a stated Expiration Date which is more than ten
years and thirty days following the date of grant of such Option.
Subject to the provisions of Paragraph 4.14, an Option, the
associated Limited Rights and any associated SARs shall lapse and
shall be automatically forfeited upon the earlier of the
Expiration Date (i) as set forth in the Option Agreement pursuant
to which such Option, the associated Limited Rights and any
associated SARs are granted, or (ii) as established pursuant to
Paragraph 8.4, unless an Exercise Notice is delivered to Valero
on or before the Expiration Date.
3.9. Option Agreements. Options, Limited Rights and SARs
shall be evidenced by Option Agreements having such terms and
provisions, not inconsistent with this Plan, as the Committee
deems advisable. Option Agreements need not be uniform.
Promptly following each determination by the Committee to grant
an Option or SARs to a Key Employee, the Committee shall cause
Valero to enter into an appropriate Option Agreement (or, in the
case of a grant only of SARs, an amendment to an existing Option
Agreement) with such Key Employee. No Key Employee or other
person claiming by, through or under a Key Employee shall be
entitled to exercise any Option, Limited Right or SAR until an
appropriate Option Agreement (or amendment thereto) shall have
been executed by Valero and such Key Employee. In the event a
Key Employee of the Company is granted an Option or SARs by the
Committee but for any reason, including, but not limited to,
death or total and permanent disability, does not actually enter
into a fully executed Option Agreement (or appropriate amendment
thereto) with Valero, such Key Employee shall not be deemed a
Participant with respect to such Option or SARs and neither such
Key Employee nor any person claiming by, through or under such
Key Employee shall be entitled under any circumstances to
exercise such Option, Limited Rights or SARs.
3.10 Provisions Regarding Prospective Employees. In the
event that a prospective Key Employee of the Company is granted
an Option, Limited Rights or SARs pursuant to this Plan prior to
actually commencing employment with the Company but for any
reason, including, but not limited to, death or total and
permanent disability, does not actually commence employment with
the Company, such person shall not be deemed a Participant for
any purpose of this Plan and neither such person nor any person
claiming by, through or under such person shall be entitled under
any circumstances to exercise such Option, Limited Rights or
SARs. Upon actually commencing employment with the Company, such
a prospective Key Employee will then be deemed a Participant for
all purposes of this Plan, and will then, but only then, be
deemed for purposes of this Plan (but not for purposes of the
Valero Pension Plan or other employee benefit plans of the
Company unless expressly so provided therein) to have been
continually employed by the Company from the date of grant of the
Option to the date of commencement of employment.
4. Exercise of Options, Limited Rights and SARs.
4.1. Exercise of Options. Any Option and any associated SARs
shall be exercisable at such time and in such amounts, either as
to all of the Option Shares covered thereby or in installments
("Installment Options"), as is provided in the Participant's
Option Agreement or as may otherwise be provided in this Plan.
An Installment Option may allow the purchase of all or any part
of the Option Shares on a specified installment date or dates,
and the subsequent purchase of any unpurchased Option Shares
after such installment date(s) and through the Expiration Date.
However, no Option may be exercised with respect to a fractional
share.
4.2. Exercise of Limited Rights. Any Limited Right may be
exercised only following a Change of Control of Valero, and may
be exercised only in lieu of the purchase of the related Option
Shares. However, a Participant may, at his election, either
exercise a Limited Right or purchase the related Option Share
upon exercise of the Option. Upon the exercise of a Limited
Right, the Participant's Option to purchase the related Option
Share shall automatically terminate and be forfeited. Upon the
exercise of a Limited Right, the Participant shall be entitled to
receive a cash payment in an amount equal to the difference
between the Strike Price of the Limited Right and (a) if the
Limited Right is exercised during a Window Period or Change of
Control Period, the highest of the daily average sales prices for
the Common Stock during such Window Period or Change of Control
Period or (b) if the Limited Right is not exercised during a
Window Period or Change of Control Period, the highest of the
daily average sales prices for the Common Stock within the 30 day
period prior to the Exercise Date. The daily average sales price
of the Common Stock on a given date shall be the mean of the
reported "high" and "low" prices for the Common Stock on such
date, as reported in the Transactions Listing (as defined in
Paragraph 3.7) for such date, corrected, if necessary, to exclude
the effect of typographical errors.
4.3. Automatic Exercise of SARs; Settlement Price for SARs.
(A) No SARs may be exercised except simultaneously with the
exercise of an Option or Limited Right. A Participant or other
person exercising an Option or Limited Right shall be deemed to
have automatically exercised on the Exercise Date that number of
related SARs which equals the number of Option Shares purchased
or Limited Rights exercised, not exceeding the lesser of (a) the
number of related SARs held by such Participant, or (b) the
number of SARs then permitted to be exercised under the
Participant's Option Agreement. Where a Participant holds fewer
related SARs than the number of Option Shares to which his Option
pertains, the Committee may adopt policies, or include terms in
the Participant's Option Agreement, which permit or require the
Participant to exercise such SARs during or after specified
periods, or in conjunction with the exercise of a certain portion
of an Option, or which permit the Participant to determine, with
such restrictions as the Committee may prescribe, the timing of
exercise of such SARs.
(B) Any SAR which is exercised at the same time as a related
Limited Right shall be settled on the basis of the same daily
average sales price for the Common Stock as is such Limited
Right. Except as provided in the foregoing sentence, any SAR
which is exercised during a Window Period or Change of Control
Period shall be settled on the basis of the highest daily average
sales prices of the Common Stock during such Window Period or
Change of Control Period. Except as provided in the two
foregoing sentences, SARs shall be settled on the basis of the
daily average sales price of the Common Stock on the Exercise
Date.
4.4. Exercise of Limited Rights by Restricted Optionees. A
Restricted Optionee exercising Limited Rights may do so only
during a Change of Control Period or Window Period following a
Change of Control and more than six months following the date of
grant of the Option to which such Limited Rights relate.
4.5. Forfeiture of Certain SARs. No SARs may be exercised by
a Restricted Optionee within six (6) months following the date of
grant of such SARs or the date of grant of the Option to which
such SARs relate. Any other provision of this Plan to the
contrary notwithstanding, in the event that an Option or Limited
Rights are exercised by a Restricted Optionee within six (6)
months following the date of grant of the Option or within six
(6) months following the date of grant of any related SARs, any
SARs related to the Option Shares purchased upon such exercise or
to the Limited Rights exercised shall thereupon automatically
terminate and be forfeited with the same effect as if such SARs
had never been granted.
4.6. Exercise Procedure. Options, Limited Rights and SARs
may be exercised only by written notice of such exercise (the
"Exercise Notice"), in such form as the Committee may prescribe,
delivered to Valero's Stock Benefit Plan Administration
department at Valero's principal business office and signed by
the Participant or other person specified herein as being
entitled to exercise the same. The date on which such Exercise
Notice is delivered to Valero shall be the "Exercise Date." The
Exercise Notice for Options Shares shall specify a date (the
"Settlement Date"), not less than five business days nor more
than ten business days following the Exercise Date, upon which
the Option Shares shall be issued to the Participant (or other
person entitled to exercise the Option) and the Option Price
shall be paid to Valero. Upon the exercise of an Option, the
Participant's right to exercise the related Limited Rights shall
automatically terminate and be forfeited. Subject to the
provisions of Paragraph 3.6(A), on the Settlement Date the person
exercising an Option shall tender to Valero full payment (in
cash, certified check, cashier's check or bank draft approved by
Valero, unless shares of Common Stock are tendered, as provided
in Paragraph 4.8) for the Option Shares with respect to which the
Option is exercised, together with an additional amount, in cash,
certified check, cashier's check or bank draft approved by
Valero, equal to the amount of any and all taxes required to be
collected or withheld by the Company in connection with such
exercise of such Option (the "Tax Payment"); provided, however,
that when related SARs are exercised at the same time an Option
is exercised, such Tax Payment shall be reduced by withholding
the amount thereof, to the extent possible, from the cash payment
otherwise payable by the Company to the Participant as the result
of the exercise of such SARs. Subject to the prior approval or
disapproval of the Committee, and to such rules and limitations
as it may adopt, if no related SARs are exercised such Tax
Payment may also be made in whole or in part by (a) withholding
from the number of shares otherwise deliverable to the person
exercising the Option a number of shares whose fair market value
equals the Tax Payment or (b) delivering certificates for other
shares of Common Stock owned by the person exercising the Option,
endorsed in blank with appropriate signature guarantee, having a
fair market value equal to the amount otherwise to be collected
or withheld. When Limited Rights are exercised, the Tax Payment
shall be withheld, to the extent possible, from any cash amount
otherwise payable by the Company as the result of the exercise of
such Limited Rights (and any related SARs). Any and all
calculations with respect to a Participant's income, required tax
withholding or other matters required to be made by the Company
upon the exercise of an Option shall be made using the average
sales price of the Common Stock on the Exercise Date, whether or
not the Exercise Notice is delivered to Valero before or after
the close of trading on such date, unless otherwise specified by
the Committee. Any and all calculations made with respect to a
Participant's income, required tax withholding or other matters
made upon exercise of a SAR or Limited Right shall be made using
the price at which such SAR or Limited Right is settled, unless
otherwise specified by the Committee.
4.7. Payment for SARs and Limited Rights. SARS and Limited
Rights shall be paid or settled only in cash. Payment for
Limited Rights and SARs exercised hereunder shall be made on the
Settlement Date. In the event the final amount of such payment
cannot be immediately determined (e.g., if exercise occurs near
the beginning of a Change of Control Period), an interim payment
shall be made as soon as practicable following the Exercise Date,
and the final payment shall be made as soon as practicable after
the applicable daily average sales price can be determined.
4.8. Payment with Common Stock. Subject to approval of the
Committee, a person exercising an Option may pay for Option
Shares by tendering to Valero other shares of Common Stock
legally and beneficially owned by such person at the time of the
exercise of an Option. Subject to approval of the Committee, a
person exercising an Option may also pay for Option Shares by
delivering a notarized affidavit, in such form as the Committee
may prescribe, certifying as to such person's legal and
beneficial ownership of shares of Common Stock held either in
such person's name or in "street name" and, in the case of shares
held in such person's name, providing the certificate number(s)
for such shares; if such method of payment is approved and
utilized, the number of shares issued upon exercise of the Option
shall be reduced by the number of shares represented by such
affidavit. If approved by the Committee, either such method of
exercise may include use of a procedure whereby a person
exercising an Option may request that shares received upon
exercise of a portion of an Option be automatically applied to
satisfy the exercise price for additional and increasingly larger
portions of the Option. The certificate(s) representing any
shares of Common Stock tendered in payment of the Option Price
must be accompanied by a stock power duly executed with
appropriate signature guarantees. Shares of Common Stock
tendered in payment of the Option Price (including shares
represented by an affidavit) shall be valued at the daily average
sales price of the Common Stock on the Exercise Date, determined
as specified in Paragraph 4.2 above. The Committee may, in its
sole and absolute discretion, refuse any tender of shares of
Common Stock, in which case it shall promptly deliver the shares
of Common Stock back to the person exercising the Option and
notify such person of such refusal as soon as practicable. In
such event, such person may either (a) tender to Valero on the
Settlement Date the cash amount required to pay for such Option
Shares, or (b) rescind his Exercise Notice. If such person
elects to rescind his Exercise Notice, such person may again
(subject to the provisions of this Plan relating to the
termination, forfeiture, lapse or expiration of Options granted
hereunder) deliver an Exercise Notice with respect to such Option
Shares or the associated Limited Rights (and any related SARs) at
any time prior to the Expiration Date of such Options.
4.9. Rights as Stockholder. Until the issuance of the stock
certificate(s) for Option Shares purchased hereunder (as
evidenced by the appropriate entry on the books of Valero or of a
duly authorized transfer agent of Valero), no right to vote or
receive dividends or any other rights as a stockholder of Valero
shall exist with respect to such Option Shares, notwithstanding
the exercise of any Option. No adjustment will be made for a
dividend or other rights for which the record date is prior to
the date the stock certificates evidencing such shares of Common
Stock are issued, except as otherwise provided under Paragraph 5
of this Plan.
4.10 Effect of Termination and Forfeiture. Except as
provided in Paragraphs 4.14 and 4.15, an Option (and any
associated Limited Rights and SARs) may be exercised by a
Participant only while he is and has continually been, since the
date of the grant of the Option, an Employee of the Company. In
the event a Participant's employment with the Company is
voluntarily terminated by the Participant (other than through
retirement) or is terminated by the Company under circumstances
involving willful misconduct or criminal activity by the
Participant, then, except as provided in Paragraph 4.14(D), all
Options (and any associated Limited Rights and SARs) previously
awarded to such Participant hereunder and not theretofore
exercised in accordance with Paragraph 4.6 shall automatically
lapse and be forfeited as of the date of the Participant's
termination. Should a Participant's employment be terminated by
retirement, death or total and permanent disability, or by the
Company (except under circumstances involving willful misconduct
or criminal activity by the Participant), the provisions of
Paragraph 4.14 shall apply. Except as set forth in the following
sentence, if a Participant shall forfeit, voluntarily surrender
or otherwise permanently lose his right to exercise an Option or
SARs or any associated Limited Rights under any provision of this
Plan or otherwise, or any Option shall terminate or expire
pursuant to its terms, the Option Shares subject to such Option
shall once more be available to be optioned and sold under this
Plan pursuant to a new Option granted hereunder, and any
associated Limited Rights and SARs shall again be available for
grant hereunder. However, if a Limited Right has terminated and
been forfeited because an Option has been exercised with respect
to the related Option Shares, or an Option to purchase Option
Shares has terminated and been forfeited because the related
Limited Rights have been exercised, the Limited Rights or Option
Shares so forfeited shall not become available for additional
grants hereunder.
4.11 Effect of Leave of Absence. A Participant who commences
a leave of absence (such as a disability leave of absence) shall
thereupon be suspended from participation in this Plan during
such leave of absence. During a period of suspension from this
Plan, a Participant cannot exercise any Option (including any
Installment Option) or any associated SARs that, but for this
provision, would otherwise become exercisable during such period
of suspension, provided however, that such Participant shall be
entitled to exercise any Options, Limited Rights or SARs which
become exercisable during such period of suspension pursuant to
Paragraph 4.15. A Participant, while suspended, may exercise an
Option (and any related SARs) with respect to any unpurchased
Option Shares which such Participant was eligible to purchase on
the day preceding the first day of such suspension; however, such
Option Shares must be purchased prior to the Expiration Date of
the Option. Notwithstanding the foregoing provisions of this
Paragraph 4.11, the Committee, in its sole and absolute
discretion, may determine at any time before or after the
commencement of such leave of absence that the commencement of
such leave of absence will be treated as a termination of
employment for purposes of the Plan. If the Committee so
determines, the Committee shall so notify the Participant and
specify a date, not less than 10 days following such
notification, by which the Participant must deliver an Exercise
Notice with respect to any Option Shares which the Participant is
then entitled to purchase and exercise any related Limited Rights
and SARs which may then be exercised. Options, Limited Rights
and SARs not exercised by the Participant by such date shall be
forfeited. The Committee may, in its sole and absolute
discretion, change or modify the exercise dates or other terms of
any Option or SARs held by a Participant who goes on a leave of
absence and which were not exercisable by such Participant at the
commencement of such leave of absence.
4.12 Effect of Disability. The total and permanent
disability of a Participant shall terminate, effective on the
first day of such disability, as determined by the Committee, the
participation of such Participant in this Plan subject to the
conditions set forth in Paragraph 4.14. The Committee shall
determine, in its sole and absolute discretion, whether or not a
Participant is totally and permanently disabled for purposes of
this Plan and when such disability (if any) commenced, and such
determinations by the Committee shall be conclusive and binding
on the Participant and all persons claiming by, through or under
such Participant. Such determinations shall be made on the basis
of medical reports and other evidence satisfactory to the
Committee and in accordance with a uniform, nondiscriminatory
policy applied by the Committee, but such determinations shall
not be binding on the Company or any Participant with respect to
any other employee benefit or other plan or insurance policy
wherein such determinations may be relevant, and need not be
consistent with any determinations made under any such plan or
insurance policy.
4.13 Effect of Retirement or Death. The retirement or death
of a Participant shall terminate, effective on the date of such
retirement or death, the participation of such Participant in
this Plan subject to the conditions set forth in Paragraph 4.14.
For purposes of this Plan, a Participant shall be deemed to have
retired when the Participant retires under the provisions of the
Pension Plan for Employees of Valero Energy Corporation or any
other, similar pension plan of the Company providing benefits to
such Participant ("Valero Pension Plan"). In the case of a
Participant who is not a participant in a Valero Pension Plan,
retirement shall be deemed to occur when the Participant retires
from the service of the Company.
4.14 Exercise Following Termination, Retirement, Disability
or Death. (A) Should the Committee determine that a Participant
has become totally and permanently disabled, or should the
Participant's employment with the Company be terminated as the
result of death or retirement, the first day of such disability
(as determined by the Committee) or the date of retirement or
death, as the case may be, shall be treated as the date of the
Participant's termination from the Plan, and the Participant (or
the Participant's heir, beneficiary, guardian, legal
representative, administrator or executor, as the case may be)
shall be entitled for the period specified in subparagraph (C)
below to (a) purchase any Option Shares (or, if a Change of
Control has occurred, exercise any Limited Rights) that the
Participant was eligible to purchase or exercise on the day prior
to such date of retirement, death or disability and which such
Participant (had he not died, retired or become disabled) would
have become eligible to purchase or exercise within the six month
period following such date of retirement, death or disability and
(b) exercise any SARs associated with such Option Shares so
purchased or Limited Rights so exercised.
(B) A Participant who retires, dies or becomes totally and
permanently disabled while suspended from this Plan will be
deemed to have been reinstated into the Plan on the day prior to
the date of retirement, death or disability, and such Participant
(or the Participant's heir, beneficiary, guardian, legal
representative, administrator or executor, as the case may be),
shall be entitled for the period specified in subparagraph (C)
below to (i) purchase any Option Shares (or, if a Change of
Control has occurred, exercise any Limited Rights) which the
Participant, had he not retired, died or become disabled, would
have been entitled to purchase or exercise on the day prior to
the date of retirement, death or disability, and would have
become entitled to purchase or exercise within the six month
period following the date of retirement, death or disability, and
(ii) exercise any SARs related to the Option Shares so purchased
or Limited Rights so exercised.
(C) A Participant or other person entitled to exercise any
Options, Limited Rights or SARs pursuant to subparagraph (A) or
(B) above other than a Restricted Optionee or other person
exercising an Option, Limited Right or SAR on behalf of a
Restricted Optionee shall have until the earlier of (i) the
Option Expiration Date, or (ii) three years from the date of such
Participant's retirement, death or disability, to deliver in
accordance with Paragraph 4.6 an Exercise Notice with respect to
such Options, Limited Rights and SARs. A Restricted Optionee or
other person entitled to exercise an Option, Limited Right or SAR
on behalf of a Restricted Optionee pursuant to subparagraph (A)
or (B) above shall have until the earlier of (i) the Option
Expiration Date, or (ii) three years from the date of such
Restricted Optionee's retirement, death or disability, to deliver
in accordance with Paragraph 4.6 an Exercise Notice with respect
to such Options, Limited Rights and SARs granted on or after
November 28, 1993. For Options, Limited Rights and SARs granted
to Restricted Optionees under this Plan before November 28, 1993,
a Restricted Optionee or other person entitled to exercise an
Option, Limited Right or SAR on behalf of a Restricted Optionee
pursuant to subparagraph (A) or (B) above shall have until the
earlier of (i) the Option Expiration Date, or (ii) 90 days from
the date of such Restricted Optionee's retirement, death or
disability to deliver the Exercise Notice prescribed by Paragraph
4.6 herein. Any Options, Limited Rights or SARs not exercised
within such periods shall be automatically forfeited; provided,
however, that the Committee or the Chairman of the Board and
Chief Executive Officer (or if such office shall be vacant, the
President) of Valero upon application of any proper party may in
its sole and absolute discretion grant extensions of such three
year or 90 day period upon such terms and subject to such
conditions as it may specify; provided further, however, that in
the case of a Restricted Optionee, any such extension shall be
subject to the prior approval of the Committee, which shall
either approve or disapprove the same in its sole discretion.
Neither the Company, its officers, directors, employees, or
agents, nor any member of the Committee shall bear any liability
to the estate of, or to any spouse, beneficiary, legatee or heir
of a Participant, or to the Participant himself, or to any other
person, for authorizing an heir, beneficiary, executor, legatee,
administrator, guardian or legal representative of a Participant,
or an individual or entity who is represented as such, to
exercise an Option, Limited Right or SAR granted hereunder or for
issuing the Option Shares purchased pursuant to the exercise of
any Option, or for making any cash payment (or for withholding
any Tax Payment from any cash payment) relating to any Limited
Right or SAR, granted under this Plan.
(D) In the case of any termination of employment (whether
voluntary or involuntary termination or otherwise), the Committee
or, except with respect to a Restricted Optionee, the Chairman of
the Board and Chief Executive Officer (or, if such office shall
be vacant, the President) of Valero shall be entitled (but shall
not be required) to permit the Participant to exercise, for a
period not to exceed 90 days, all or part of the Participant's
Options (and any associated Limited Rights and SARs) which, at
the date of termination of employment, were exercisable pursuant
to the Participant's Option Agreement(s) and the provisions of
the Plan and remained unexercised. In addition, except with
respect to a Restricted Optionee, the Chairman of the Board and
Chief Executive Officer (or, if such office shall be vacant, the
President) of Valero may, in connection with the termination of
any Participant's employment with the Company, 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 authorize
amendments to any existing Option Agreement (or a new Option
Agreement superseding any prior Option Agreement) between Valero
and such Participant removing any or all of the restrictions on
the exercise of the Options (and any associated Limited Rights
and SARs) previously granted to such Participant; no such
authorization or amendment (or new Option Agreement) shall
increase the aggregate number of Options granted to any
Participant. Any action referred to in the preceding two
sentences shall be taken by the Committee, Chairman of the Board
and Chief Executive Officer (or, if such office shall be vacant,
the President) of Valero, if at all, within one month from the
Participant's date of termination.
4.15 Effect of Change of Control. (A) As used herein, the
term "Change of Control" shall mean each occurrence of any one or
more of the following events:
(i) any person (excluding any employee benefit plan of
Valero, any trustee, administrator or other entity administering
any such plan, and Valero or any Controlled Subsidiary) or any
partnership, limited partnership, syndicate or other group formed
for the purpose of acquiring, holding or disposing of Voting
Securities within the meaning of Rule 13(d) under the Exchange
Act (a "Group") which theretofore beneficially owns less than 20%
of the Voting Securities of Valero then issued and outstanding
shall publicly announce, or shall file with the SEC a Schedule
13D pursuant to Section 13(d) of the Exchange Act (or successor
form pursuant to such or any successor provision) indicating,
that it has acquired (whether in one or more transactions) Voting
Securities of Valero that result in such person or Group directly
or indirectly beneficially owning 20% or more of the Voting
Securities of Valero; or
(ii) any person (other than Valero, any Controlled
Subsidiary, any employee benefit plan of Valero and any trustee,
administrator or other entity administering any such plan) or
Group shall commence a tender offer or exchange offer for 30% or
more of the Voting Securities of Valero, or for any number or
amount of Voting Securities of Valero which, if such offer were
to be fully subscribed and all Voting Securities for which such
tender or exchange offer is made were to be purchased or
exchanged pursuant to such offer, would result in such person or
Group directly or indirectly beneficially owning 50% or more of
the Voting Securities of Valero; or
(iii) during any period of 24 consecutive calendar months,
there shall be a change in the composition of the Board of
Directors of Valero such that the persons who at the beginning of
any such period constituted a majority of the directors of Valero
shall cease to constitute a majority of the Board of Directors of
Valero, unless the election, or the nomination for election, by
the shareholders of Valero, or the appointment by the Board of
Directors, of each new director during such 24 month period was
approved by the vote at a meeting or the written consent of at
least two-thirds of the directors then still in office who were
directors at the beginning of such period; or
(iv) the shareholders of Valero shall approve an agreement
providing either for any merger, consolidation, combination or
other transaction in which Valero will cease to be an independent
publicly owned corporation, or for the liquidation or the sale of
all or substantially all of the assets of Valero.
(v) the occurrence of the Distribution Date, as such term is
defined in the Rights Agreement.
(vi) any other event determined by the Board of Directors or
the Committee to constitute a Change of Control.
(B) As used herein, the term "Voting Securities" shall mean
the Common Stock, any other equity security of Valero ordinarily
entitled to vote for directors at meetings of the stockholders of
Valero and any debt or equity security of Valero convertible into
Common Stock or another security so entitled to vote for the
election of directors of Valero. In calculating the percentage
of Voting Securities owned by a person or Group, securities that
are immediately convertible, or by their terms, upon the
occurrence of any event or the lapse of time, or both, will
become convertible into or exchangeable or exercisable for shares
of Common Stock (or other Voting Securities) shall be deemed to
represent the number of whole shares of Common Stock (or other
Voting Securities) into which such securities are then or will
become ultimately convertible or for which they are then or will
become ultimately exchangeable or exercisable, and the total
number of issued and outstanding shares of Common Stock (or other
Voting Securities) of Valero shall be determined on a pro forma
basis after giving effect to such conversion. The percentage of
Voting Securities held by a person or Group shall be deemed to be
equal to the percentage of the number of the votes that could be
cast for the election of directors of Valero at a meeting of
stockholders that such person or Group would be entitled to so
cast after giving effect to the provisions of the preceding
sentence. As used in this Paragraph 4.15, the term "person"
shall include any individual, corporation, partnership, firm or
other entity.
(C) In the event that a Change of Control shall occur, the
Chairman of the Board and Chief Executive Officer (or, if such
office shall at such time be vacant, the President ) of Valero
may, on or before the date of such event constituting a Change of
Control, file with the Corporate Secretary of Valero a written
notice (the "Nonacceleration Notice") signed by such officer
stating that such Change of Control shall not result in the
acceleration of Options (or any related Limited Rights and SARs)
granted under the Plan to the Participants identified in such
notice (or held by persons claiming by, through or under such
Participants). Such Nonacceleration Notice may be filed with
respect to all Options granted under the Plan or with respect to
Options granted to specified Participants (each such Participant
referred to by name or generically in a Nonacceleration Notice
timely filed with the Corporate Secretary of Valero, together
with each person claiming by, through or under such a
Participant, is hereinafter referred to as a "Nonaccelerated
Person"). Any other provision of this Plan notwithstanding, each
Option (and, subject to the provisions of Paragraph 4.2, all
Limited Rights and SARs) granted under this Plan, not theretofore
forfeited or terminated and held at the date of a Change of
Control by a person who at such date is neither a Nonaccelerated
Person nor a Restricted Optionee shall upon occurrence of such
Change of Control immediately become exercisable with respect to
all of the Shares of Common Stock specified therein (less any
such shares previously purchased under the Option) and any
related Limited Rights and SARs. The inclusion of a Participant
or other person as a Nonaccelerated Person in a Nonacceleration
Notice shall not be construed to alter or amend any rights such
Participant or other person may have under this Plan under the
provisions of any executive severance agreement or other
contractual relationship with Valero.
(D) Notwithstanding the provisions of Paragraph 4.10, in the
event that a Change of Control shall occur, each Option (and any
Limited Rights and SARs) held by a Participant pursuant to the
Plan shall remain exercisable until the earlier of (i) the
Expiration Date of the Option, or (ii) 90 days following the
Participant's date of termination of employment.
5. Adjustments Upon Changes In Capitalization.
5.1. Securities Received Upon Exercise. If all or any
portion of an Option, Limited Right or SAR is exercised
subsequent to any stock dividend, rights distribution, split-up,
recapitalization, combination or exchange of shares, merger,
consolidation, acquisition of property or stock, spin-off or
separation, reorganization, or liquidation, as a result of which
shares or other Securities of any class or rights shall be issued
in respect of outstanding shares of Common Stock or shares of
Common Stock shall be changed into the same or a different number
of shares of the same or another class or classes or other
securities, the person or persons so exercising such Option,
Limited Right or SAR shall receive, (a) for the aggregate price
payable upon such exercise of such Option, (i) the aggregate
number and class of shares, rights or other securities for which
a recognized market exists, and (ii) a cash amount equal to the
fair market value on such date, as reasonably determined by the
Committee, of any other property (other than regular cash
dividend payments) and of any shares, rights or other securities
for which no recognized market exists, which, if shares of Common
Stock (as authorized at the date of the granting of such Option)
had been purchased at the date of granting of the Option for the
same aggregate price (on the basis of the price per share
provided in the Option) and had not been disposed of, such person
or persons would be holding at the time of such exercise as a
result of such purchase and any such stock dividend, rights
distribution, split-up, recapitalization, combination or exchange
of shares, merger, consolidation, acquisition of property or
stock, spin-off or separation, reorganization, or liquidation and
(b) a cash amount upon the exercise of the Limited Rights or SARs
equal to the difference between the aggregate Strike Price of
such Limited Right or SAR and the aggregate of (i) the average
sales price, on the date provided in Paragraph 4.2 or 4.3 hereof,
as the case may be, of any whole shares or units of Common Stock,
rights or other securities for which a recognized market exists,
and (ii) the fair market value on such date, as reasonably
determined by the Committee, of any other property (other than
regular cash dividend payments) which the holder of a number of
shares of Common Stock equal to the number of such Limited Rights
or SARs, if such shares had been purchased at the date of
granting of such Limited Rights or SARs and not otherwise
disposed of, would be holding at the time of exercise of such
Limited Rights or SARs as a result of such purchase and any such
stock dividend, rights distribution, split-up, recapitalization,
combination or exchange of shares, merger, consolidation,
acquisition of property or stock, spin-off or separation,
reorganization or liquidation; provided, however, that no
fractional share of Common Stock, fractional right or other
fractional security shall be issued upon any such exercise, and
the aggregate price paid shall be appropriately reduced to
reflect any fractional share of Common Stock, fractional right or
other fractional security not issued; and provided further,
however, that if the exercise of any Option subsequent to any
stock dividend, rights distribution, split-up, recapitalization,
combination or exchange of shares, merger, consolidation,
acquisition of property, or stock, spin-off or separation,
reorganization or liquidation would, pursuant to clause (a) of
this Paragraph 5.1, require the delivery of shares, rights or
other securities which Valero is not then authorized to issue or
which in the sole judgment of the Committee cannot be issued
without undue effort or expense, the person exercising such
Option shall receive, in lieu of such shares, rights or other
securities, a cash payment equal to the fair market value on the
Exercise Date, as reasonably determined by the Committee, of such
shares, rights or other securities. For purposes of applying
the provisions of this Plan, the Preference Share Purchase Rights
distributed to stockholders of record of Valero on November 25,
1985, shall be deemed not to have been distributed until the
Distribution Date (as defined in the Rights Agreement).
5.2. Adjustment of Option Shares Available. In the event of
any change in the number of shares of Common Stock outstanding
resulting from a stock dividend, rights distribution, split-up,
recapitalization, combination or exchange of shares, merger,
consolidation, acquisition of property or stock, spin-off or
separation, reorganization or liquidation, (a) the aggregate
number and class of shares of Common Stock remaining available to
be optioned under this Plan shall be that number and class which
a person, to whom an Option had been granted for all of the
available shares of Common Stock under this Plan on the date
preceding such change, would be entitled to receive as provided
in Paragraph 5, and (b) the aggregate number of Limited Rights
and SARs remaining available under this Plan shall be determined
pursuant to the formula b/a (c) wherein:
a = the number of Option Shares available to be optioned
under this Plan immediately prior to such change,
b = the number of Option Shares available to be optioned
under this Plan immediately following such change, and
c = the number of Limited Rights or SARs available for grant
under this Plan immediately prior to such change.
Upon the occurrence of any stock dividend, rights
distribution, split-up, recapitalization, combination or exchange
of shares, merger, consolidation, acquisition of property or
stock, spin-off or separation, reorganization or liquidation, the
Committee shall be entitled (but shall not be required) to
determine that new Option Agreements shall be entered into with
Participants reflecting such stock dividend or other event.
6. Administration.
6.1. Plan Administered by Committee. This Plan shall be
administered by a committee of not less than three directors of
Valero, which committee shall, except as hereinafter set forth,
be the Compensation Committee, as appointed and constituted from
time to time by the Board of Directors. In the event the
Compensation Committee shall have fewer than three members, or
fewer than three members of the Compensation Committee shall be
eligible to act with respect to this Plan, then additional
members of the Board of Directors shall be appointed by the Board
of Directors to act with and as a part of the Compensation
Committee for purposes of administering this Plan so that the
Committee administering this Plan shall consist of at least three
members of the Board of Directors. No person shall serve on or
act as a member of the Committee administering this Plan who has
been granted or was eligible for selection as a person to be
granted an Option or SARs pursuant to this Plan, or was eligible
for an award under any other discretionary plan of Valero or the
Company (whether or not similar to the Plan) entitling the
participants therein to acquire SARs, Limited Rights or shares of
Common Stock, stock options or other securities of Valero or the
Company, within one year prior to the date such person would
first serve on or act as a member of the Committee.
6.2. Powers of the Committee. In connection with its
administration of this Plan, the Committee is empowered to:
(a) Make all determinations and computations concerning the
selection of Participants, the granting of Options, Limited
Rights and SARs, the pricing thereof and the number of Option
Shares to be optioned, and SARs to be granted, to each
Participant;
(b) Cause Valero to enter into Option Agreements with
Participants;
(c) With the consent of the Participant, enter into
agreements amending any Option Agreement so as to grant SARs
thereunder, change the Option Price or Expiration Date of any
Option, the Strike Price of any Limited Right or SAR or any other
term or condition thereof, or to terminate any such Option
Agreement;
(d) Make rules and regulations for the administration of the
Plan which are not inconsistent with the terms and provisions of
this Plan, including rules providing for the accelerated exercise
of Options and SARs in such circumstances as the Committee may
deem appropriate;
(e) Construe all terms, provisions, conditions and
limitations of the Plan in good faith, and adopt amendments to
the Plan;
(f) Make equitable adjustments for any mistakes or errors in
the administration of this Plan or deemed by the Committee to be
necessary as the result of any unusual situation or any ambiguity
in the Plan;
(g) Select, employ and compensate, from time to time,
consultants, accountants, attorneys and other agents and
employees as the Compensation Committee may deem necessary or
advisable for the proper and efficient administration of this
Plan.
6.3. Express Powers not Exclusive. The foregoing list of
express powers granted to the Committee upon the adoption of this
Plan is not intended to be either complete or exclusive, but the
Committee shall, in addition to the specific powers granted by
this Plan, have such powers, whether or not expressly authorized
herein, which it may deem necessary, desirable, advisable,
proper, convenient or appropriate for the supervision and
administration of this Plan. Except as otherwise specifically
provided herein, the decisions or judgment of the Committee on
any question or claim arising hereunder shall be final, binding
and conclusive upon the Participants and all persons claiming by,
through or under a Participant.
7. Miscellaneous Provisions.
7.1. Nonassignability. No Options, SARs, Limited Rights or
any other security, right or interest under this Plan, shall be
transferable by the Participant other than pursuant to a will or
the laws of descent and distribution or as provided pursuant to a
qualified domestic relations order as defined by the Internal
Revenue Code of 1986, as amended, 26 U.S.C. paragraph 1 et seq. or
Title I of the Employee Retirement Income Security Act, or the rules
thereunder and no Participant or other person claiming by,
through or under a Participant shall have any right to sell,
assign, transfer, pledge, anticipate, mortgage or otherwise
encumber, transfer, hypothecate or convey in advance of actual
receipt any Option Shares, SARs, Limited Rights or any cash
amounts or other shares, rights or securities (if any) payable
hereunder, or any part thereof, all of which are, and all rights
in and to which are, hereby expressly declared to be
nonassignable and nontransferable; any such purported sale,
assignment, transfer, pledge, anticipation, mortgage,
encumbrance, transfer, hypothecation or conveyance shall be void
and of no force or effect. No Option Shares, SARs, Limited
Rights and no part of any cash amounts or other shares, rights or
securities payable hereunder (if any) shall, prior to actual
payment or delivery, be subject to seizure or sequestration for
the payment of any debts, judgments, alimony or separate
maintenance owed by a Participant, or other person claiming by,
through or under a Participant, nor be transferable by operation
of law in the event of bankruptcy or insolvency, except as
required by law. The designation of a beneficiary shall not
constitute a transfer hereunder.
7.2. Investment Letter. As a condition to the exercise of
any portion of an Option, the Committee, the General Counsel or
the Corporate Secretary may require the person exercising such
Option to represent and warrant to Valero at the time of any such
exercise that the Option Shares are being purchased only for
investment and without any present intention to sell or
distribute such Option Shares, if, in the opinion of counsel for
Valero, such representation is required or desirable under the
Securities Act of 1933 or any other applicable state, federal or
local law, regulation or rule of any governmental agency. The
Committee, the General Counsel or the Corporate Secretary may
require such person to execute and deliver to Valero an
appropriate investment letter containing representations and
warranties of the type generally described above.
7.3. [Reserved]
7.4. Responsibility for Taxes. Any and all taxes payable
with respect to income to a Participant resulting from the
exercise of an Option, Limited Rights or SARs granted hereunder
shall be the sole responsibility of the Participant, not of the
Company or Valero, whether or not Valero or the Company shall
have withheld or collected from the Participant any sums required
to be so withheld or collected in respect of such income, and
whether or not any sums so withheld or collected shall be
sufficient to provide for any such taxes.
7.5. Employment Not Guaranteed. Nothing contained in this
Plan nor any action taken hereunder shall be construed to create
a contract of employment or to give any Participant any right to
be retained in the employ of the Company or to serve or continue
to serve as an officer or director of Valero or any Subsidiary.
7.6. Gender, Singular and Plural. All pronouns and any
variations thereof shall be deemed to refer to the masculine,
feminine, or neuter, as the identity of the person or persons may
require. As the context may require, the singular may be read as
the plural and the plural as the singular.
7.7. Captions. The captions of the Paragraphs of this Plan
are for convenience only and shall not control or affect the
meaning or construction of any of its provisions.
7.8. Validity. In the event any provision of this Plan is
held invalid, void, or unenforceable, the same shall not affect,
in any respect whatsoever, the validity of any other provision of
this Plan.
7.9. Notice. Any notice, statement, decision or
communication required or permitted to be given under this Plan
shall be sufficient if in writing and hand delivered, or sent by
registered or certified mail, if to the Company, to the principal
office of Valero, directed to the attention of the Corporate
Secretary of Valero, and if to a Participant or other person, to
the address of the Participant or other person as it shall appear
on the books of the Company. Any such notice shall be deemed
given as of the date of delivery or, if delivery is made by mail,
as of the third day following the date shown on the postmark on
receipt for registration or certification.
7.10 Applicable Law. This Plan shall be governed and
construed in accordance with the laws of the State of Texas.
7.11 Inconsistency. In the event of any conflict or
inconsistency between the provisions of this Plan and the
provisions of any Option Agreement, the provisions of this Plan
shall control.
7.12 No Adoption of SEC Rules. The adoption by the Committee
of this amended and restated Stock Option Plan No. 4 is not
intended to, and shall not, constitute an election by the Company
to adopt the rules promulgated by the SEC under Section 16 of the
Exchange Act pursuant to Release No. 34-28869.
8. Amendment and Termination of Plan and Option Agreements.
8.1. Amendments. The Board of Directors or the Committee,
without approval of the Participants but subject to Paragraph
8.3, may amend this Plan from time to time in such respect as it
deems advisable.
8.2. Termination. The Board of Directors or the Committee,
without approval of the Participants but subject to Paragraph
8.3, may at any time terminate this Plan.
8.3. Effect of Amendment or Termination. Any such amendment
or termination of this Plan shall not materially adversely affect
Options, Limited Rights or SARs already granted. In the event of
any termination of this Plan or amendment which materially
adversely affects Options, Limited Rights or SARs, Options,
Limited Rights and SARs already granted shall, subject to
Paragraph 8.4, remain in full force and effect as if this Plan
had not been so amended or terminated. In any case where the
Board of Directors or the Committee feels it appropriate or is
advised by counsel that such approval is required, the amendment
or termination of this Plan shall be submitted to the
stockholders of Valero for approval.
8.4 Cancellation of Options. Any other provision of this
Plan to the contrary notwithstanding, in the event that either
(a) the Option Price of any Option shall on any NYSE trading day
equal or exceed 125% of the closing sales price per share of the
Common Stock (determined as provided in Paragraph 3.7), or (b)
out of any period of 120 consecutive NYSE trading days the Option
Price of any Option shall exceed the closing sales price per
share of the Common Stock (determined as provided in Paragraph
3.7) on any 80 or more of such days, then the Committee, in its
sole discretion, may unilaterally determine to cancel and
terminate such Option, the related Option Agreement and
associated Limited Rights and any associated SARs. Upon such
Committee determination, the Expiration Date of such Option,
Option Agreement, Limited Rights and SARs shall be at the close
of business on the date of such determination. The Committee
shall cause notification of such cancellation to be sent to the
Participant (or other person entitled to exercise such Option),
but failure to send or any delay in sending such notice shall not
nullify, delay, or otherwise affect such cancellation. No
compensation shall be paid or payable to any Participant (or
other person entitled to exercise such Option), or other person
claiming by, through or under a Participant, in respect of any
such cancellation. If an Option, the related Option Agreement
and associated Limited Rights, and any associated SARs, shall be
terminated and cancelled pursuant to the provisions of this
Paragraph 8.4, the Option Shares and associated Limited Rights,
and any associated SARs, subject to such Option (to the extent
not theretofore exercised) shall once more be available to be
optioned and sold under this Plan pursuant to a new Option
granted hereunder. No Participant with respect to whom an Option
and associated Limited Rights, and any associated SARs, has been
cancelled pursuant to this Paragraph 8.4 shall have any right,
whether by virtue of such cancellation or otherwise, to require
the Company or the Committee to grant a new Option to him under
this Plan or any other stock option plan of the Company.
9. Claims.
9.1. Filing of Claims. A Participant or other person who
believes that he has been denied any benefit or right provided
under this Plan shall have the right to file a written claim with
the Committee. All such claims shall be submitted on a form
provided by the Committee, which shall be signed by the claimant
and shall be considered filed on the date the claim is received
by the Committee. The claim will be reviewed and a decision
rendered by a member of the Committee designated by the Committee
for such purpose.
9.2. Denial of Claims. In the event the claim is denied, in
whole or in part, the Committee member reviewing the claim shall,
within 90 days following receipt of the claim, provide the
claimant with either (i) a written statement containing the
following:
(1) the specific reason or reasons for the denial of
benefits;
(2) a specific reference to the pertinent provisions of the
Plan upon which the denial is based;
(3) a description of any additional material or information
which is necessary for the claimant to perfect the claim and an
explanation of why such material or information is necessary; and
(4) an explanation of the review procedure provided below;
or (ii) a written notice that special circumstances (which shall
be specified in the notice) require an additional specified
period (not to exceed 90 days) for processing of the claim. If a
claimant is provided with the notice specified in clause (ii), he
shall thereafter be provided with the statement required by
clause (i) within the period specified in such notice.
9.3. Review of Claims. Within 90 days after receipt of a
notice of a denial of benefits as provided above, the claimant or
his authorized representative may request, in writing, to appear
before the full Committee for a review of his claim. In
conducting its review, the Committee shall consider any oral or
written statement or other evidence presented by the claimant or
his authorized representative in support of his claim. The
Committee shall give the claimant and his authorized
representative reasonable access to all pertinent documents
necessary for the preparation and presentation of his claim.
9.4. Decision by Committee. Within 60 days after receipt by
the Committee of the written request for review of his claim (or
in the event of special circumstances which require additional
time for review, not later than 120 days after receipt of such
request) the Committee shall notify the claimant of its decision.
If an extension of time for review is required because of special
circumstances, written notice of the extension shall be furnished
to the claimant prior to the commencement of the extension. In
the event the Committee shall hold regularly scheduled meetings
at least quarterly, then in lieu of the 60 day period specified
above, the decision on review shall be made by no later than the
date of the meeting of the Committee which immediately follows
receipt of the claimant's request for review, provided, that if
the request for review is received within 30 days preceding the
date of such meeting, the decision shall be made by no later than
the date of the second meeting following receipt of such request
for review, provided further, that if special circumstances
require a further extension of time for processing of the report,
such decision shall be rendered not later than the date of the
third meeting of the Committee following receipt of the written
request for review. The decision of the Committee shall be in
writing and shall include the specific reasons for the decision
and references to relevant Plan provisions on which the decision
is based. The decision of the Committee shall be final,
conclusive and binding upon the Participant or other claimant and
all persons claiming by, through or under such claimant.
