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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Rule 13e-3 Transaction Statement
(Pursuant to Section 13(e) of the Securities Exchange Act of 1934)
[Amendment No. 3]
Valero Natural Gas Partners, L.P.
(Name of Issuer)
Valero Natural Gas Partners, L.P., Valero Natural Gas Company
and Valero Energy Corporation
(Name of Person(s) Filing Statement)
Common Units of Limited Partner Interests
(Title of Class of Securities)
918906 20 7
(CUSIP Number of Class of Securities)
Rand C. Schmidt, Esq.
Corporate Secretary
530 McCullough Avenue
San Antonio, Texas 78215
(210) 246-2000
(Name, Address and Telephone Number of Person Authorized to Receive Notices and
Communications on Behalf of Person(s) Filing Statement)
This statement is filed in connection with (check the appropriate box):
a. /X/ The filing of solicitation materials or an
information statement subject to Regulation 14A, Regulation 14C or Rule
13e-3(c) under the Securities Exchange Act of 1934.
b. / / The filing of a registration statement under the
Securities Act of 1933.
c. / / A tender offer.
d. / / None of the above.
Check the following box if the soliciting materials or information statement
referred to in checking box (a) are preliminary copies: /X/
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Calculation of Filing Fee
Not applicable. The filing fee was paid with the filing of the original
Schedule 13E-3 on December 30, 1993.
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INTRODUCTION
This Amendment No. 3 to Schedule 13E-3 relates to the
solicitation of proxies of the holders of the common units of limited partner
interests ("Common Units") in Valero Natural Gas Partners, L.P. ("VNGP") by
VNGP and Valero Natural Gas Company, the general partner of VNGP and a wholly
owned subsidiary of Valero Energy Corporation ("VEC"), in connection with a
proposed merger of VNGP with a limited partnership that is wholly owned by
subsidiaries of VEC. The original Schedule 13E-3 was filed on December 30,
1993. Amendment No. 1 to Schedule 13E-3 was filed on January 11, 1994, and
Amendment No. 2 to Schedule 13E-3 was filed on March 17, 1994. A revised
preliminary draft of the Proxy Statement is attached as Exhibit 17(d) to this
Amendment No. 3 to Schedule 13E-3.
The following is a summary cross-reference sheet, pursuant to
General Instruction F of Schedule 13E-3, showing the location in the revised
Proxy Statement of the information required by Schedule 13E-3.
CROSS REFERENCE SHEET
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Item in
Sched. 13E-3 Location of Item in Proxy Statement
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Item 1
(a) Cover Page
(b) Cover Page; SUMMARY OF THE PROXY STATEMENT--Record Date, Common Units Entitled to Vote, Quorum; THE
PARTNERSHIP--Ownership of Common Units; MARKET PRICES OF COMMON UNITS AND DISTRIBUTION
(c) MARKET PRICES OF COMMON UNITS AND DISTRIBUTIONS
(d) SPECIAL CONSIDERATIONS--Reasons for the Proposed Merger-- Considerations Affecting Future Cash Distributions to
Unitholders; MARKET PRICES OF COMMON UNITS AND DISTRIBUTIONS
(e) *
(f) *
Item 2 COVER PAGE; ADDITIONAL INFORMATION; THE PARTNERSHIP--Background of the Partnership
Item 3
(a) SPECIAL CONSIDERATIONS--Reasons for the Proposed Merger--Prior Financings; SPECIAL CONSIDERATIONS--Reasons for the
Proposed Merger--Alternative Transactions Considered; SPECIAL CONSIDERATIONS--Background of the Merger; SPECIAL
CONSIDERATIONS--Background of the Merger--Certain Contacts; THE PARTNERSHIP--Background of the Partnership
(b) SPECIAL CONSIDERATIONS--Reasons for the Proposed Merger--Alternative Transactions Considered; SPECIAL
CONSIDERATIONS--Background of the Merger; SPECIAL CONSIDERATIONS--Background of the Merger--Certain Contacts
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*Indicates Item is not applicable or the answer thereto is negative.
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Item 4
(a) THE MERGER
(b) THE MERGER--Basic Terms of the Merger; The Merger--Conditions to the Obligations of the Parties to the Merger
Agreement
Item 5
(a) SPECIAL CONSIDERATIONS--Principal Effects of the Merger
(b) *
(c) SPECIAL CONSIDERATIONS--Principal Effects of the Merger
(d) SPECIAL CONSIDERATIONS--Reasons for the Proposed Merger--Considerations Affecting Future Cash Distributions to
Unitholders; SPECIAL CONSIDERATIONS--Reasons for the Proposed Merger--Selection of Merger
(e) *
(f) SPECIAL CONSIDERATIONS--Principal Effects of the Merger
(g) SPECIAL CONSIDERATIONS--Principal Effects of the Merger
Item 6
(a) THE MERGER--Source of Cash Consideration
(b) THE MERGER--Fees and Expenses
(c) *
(d) *
Item 7
(a) SPECIAL CONSIDERATIONS--Reasons for the Proposed Merger
(b) SPECIAL CONSIDERATIONS--Reasons for the Proposed Merger-- Alternative Transactions Considered
(c) SPECIAL CONSIDERATIONS--Reasons for the Proposed Merger-- Industry Opportunities and Need for Additional Financing;
SPECIAL CONSIDERATIONS--Reasons for the Proposed Merger--Selection of Merger
(d) SPECIAL CONSIDERATIONS--Principal Effects of the Merger; FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER; Annex D to
Proxy Statement
Item 8
(a) SPECIAL CONSIDERATIONS--Recommendation of the Board of Directors of the General Partner; Fairness of the Merger
(b) SPECIAL CONSIDERATIONS--Recommendation of the Board of Directors of the General Partner; Fairness of the Merger
(c) SUMMARY OF THE PROXY STATEMENT--Vote Required; THE MERGER--Conditions to the Obligations of the Parties to the
Merger Agreement; THE MERGER--Termination or Amendment of the
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*Indicates Item is not applicable or the answer thereto is negative.
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Agreement of Merger; THE PROXY SOLICITATION--Voting and Proxy Procedure
(d) SPECIAL CONSIDERATIONS--Opinion of the Financial Advisor to the Special Committee
(e) SPECIAL CONSIDERATIONS--Recommendation of the Board of Directors of the General Partner; Fairness of the Merger
(f) *
Item 9
(a) SPECIAL CONSIDERATIONS--Background of the Merger; SPECIAL CONSIDERATIONS--Salomon Brothers' Analysis; SPECIAL
CONSIDERATIONS--Opinion of Financial Advisor to the Special Committee
(b) SPECIAL CONSIDERATIONS--Background of the Merger; SPECIAL CONSIDERATIONS--Salomon Brothers' Analysis; SPECIAL
CONSIDERATIONS--Opinion of Financial Advisor to the Special Committee
(c) AVAILABLE INFORMATION
Item 10
(a) THE PARTNERSHIP--Ownership of Common Units
(b) *
Item 11 THE MERGER; THE PARTNERSHIP--Background of the Partnership; THE PARTNERSHIP--Ownership of Common Units
Item 12
(a) SUMMARY OF THE PROXY STATEMENT--Interests of Certain Persons in the Merger; THE MERGER--Conditions to the
Obligations of the Parties to the Merger Agreement; THE PARTNERSHIP--Ownership of Common Units
(b) SPECIAL CONSIDERATIONS--Recommendation of the Board of Directors of the General Partner; Fairness of the Merger;
THE PARTNERSHIP--Ownership of Common Units
Item 13
(a) SUMMARY OF THE PROXY STATEMENT--No Dissenters' Rights; THE PROXY SOLICITATION--No Dissenters' Rights of Appraisal
(b) *
(c) *
Item 14
(a) SUMMARY FINANCIAL DATA; Annex C to Proxy Statement
(b) *
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*Indicates Item is not applicable or the answer thereto is negative.
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Item 15
(a) THE PROXY SOLICITATION--Solicitation of Proxies
(b) THE PROXY SOLICITATION--Solicitation of Proxies
Item 16 Proxy Statement
Item 17
(a) *
(b) Annex B to Proxy Statement
(c) Annex A to Proxy Statement
(d) Exhibit 17(d) hereto--Letter to Unitholders; Notice of Special Meeting, form of Proxy and preliminary Proxy
Statement
(e) *
(f) *
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*Indicates Item is not applicable or the answer thereto is negative.
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SCHEDULE 13E-3
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Item 1. Issuer and Class of Security Subject to the Transaction.
------------------------------------------------------
(a) The information set forth on the Cover Page of the Proxy Statement is incorporated herein by reference.
(b) The information set forth on the Cover Page of the Proxy Statement and under the caption "SUMMARY OF THE PROXY
STATEMENT--Record Date, Common Units Entitled to Vote, Quorum," and in the first paragraph under the caption "THE
PARTNERSHIP--Ownership of Common Units," and in the first paragraph under the caption "MARKET PRICE OF COMMON UNITS
AND DISTRIBUTIONS" of the Proxy Statement is incorporated herein by reference.
(c) The information set forth under the caption "MARKET PRICES OF COMMON UNITS AND DISTRIBUTIONS" of the Proxy
Statement is incorporated herein by reference.
(d) The information set forth under the captions "SPECIAL CONSIDERATIONS--Reasons for the Proposed
Merger--Considerations Affecting Future Cash Distributions to Unitholders" and "MARKET PRICES OF COMMON UNITS AND
DISTRIBUTIONS" of the Proxy Statement is incorporated herein by reference.
(e) Not applicable.
(f) Not applicable.
Item 2. Identity and Background.
-----------------------
(a)--(g) The information set forth on the Cover Page and under the captions "ADDITIONAL INFORMATION" and "THE PARTNERSHIP--
Background of the Partnership" of the Proxy Statement is incorporated herein by reference.
The information set forth on Annex A, attached hereto, is incorporated herein by reference.
Item 3. Past Contacts, Transactions or Negotiations.
-------------------------------------------
(a) The information set forth in the second, third and fourth paragraphs under the caption "SPECIAL
CONSIDERATIONS--Reasons for the Proposed Merger--Prior Financings," and the information under the captions "SPECIAL
CONSIDERATIONS--Reasons for the Proposed Merger--Alternative Transactions Considered" and "SPECIAL
CONSIDERATIONS--Background of
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the Merger," and under the sixth through ninth paragraphs under the caption "THE PARTNERSHIP--Background of the
Partnership," and under the caption "SPECIAL CONSIDERATIONS--Background of the Merger--Certain Contacts" of the
Proxy Statement is incorporated herein by reference.
(b) The information set forth under the captions "SPECIAL CONSIDERATIONS--Reasons for the Proposed Merger--Alternative
Transactions Considered" and "SPECIAL CONSIDERATIONS--Background of the Merger," and under the caption "SPECIAL
CONSIDERATIONS--Background of the Merger--Certain Contacts" of the Proxy Statement is incorporated herein by
reference.
Item 4. Terms of the Transaction.
------------------------
(a) The information set forth under the caption "THE MERGER" of the Proxy Statement is incorporated herein by
reference.
(b) The information set forth in the second paragraph under the caption "THE MERGER--Basic Terms of the Merger" and in
the final paragraph under the caption "The Merger--Conditions to the Obligations of the Parties to the Merger
Agreement" of the Proxy Statement is incorporated herein by reference.
Item 5. Plans or Proposals of the Issuer or Affiliate.
---------------------------------------------
(a) The information set forth in the sixth paragraph under the caption "SPECIAL CONSIDERATIONS--Principal Effects of
the Merger" of the Proxy Statement is incorporated herein by reference.
(b) Not applicable.
(c) The information set forth in the sixth paragraph under the caption "SPECIAL CONSIDERATIONS--Principal Effects of
the Merger" of the Proxy Statement is incorporated herein by reference.
(d) The information set forth in the third paragraph under the caption "SPECIAL CONSIDERATIONS--Reasons for the
Proposed Merger--Selection of the Merger" and in the second paragraph under the caption "SPECIAL
CONSIDERATIONS--Reasons for the Proposed Merger--Considerations Affecting Future Cash Distributions to Unitholders"
of the Proxy Statement is incorporated herein by reference.
(e) Not applicable.
(f) The information set forth in the fifth paragraph under the caption "SPECIAL CONSIDERATIONS--Principal Effects of
the Merger" of the Proxy Statement is incorporated herein by reference.
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(g) The information set forth in the fifth paragraph under the caption "SPECIAL CONSIDERATIONS--Principal Effects of
the Merger" of the Proxy Statement is incorporated herein by reference.
Item 6. Source and Amounts of Funds or Other Consideration.
--------------------------------------------------
(a) The information set forth under the caption "THE MERGER--Source of Cash Consideration" of the Proxy Statement is
incorporated herein by reference.
(b) The information set forth under the caption "THE MERGER--Fees and Expenses" of the Proxy Statement is incorporated
herein by reference.
(c) Not applicable.
(d) Not applicable.
Item 7. Purpose(s), Alternatives, Reasons and Effects.
---------------------------------------------
(a) The information set forth under the caption "SPECIAL CONSIDERATIONS--Reasons for the Proposed Merger" of the Proxy
Statement is incorporated herein by reference.
(b) The information set forth under the caption "SPECIAL CONSIDERATIONS--Reasons for the Proposed Merger--Alternative
Transactions Considered" of the Proxy Statement is incorporated herein by reference.
(c) The information set forth under the captions "SPECIAL CONSIDERATIONS--Reasons for the Proposed Merger--Industry
Opportunities and Need for Additional Financing" and "SPECIAL CONSIDERATIONS--Reasons for the Proposed
Merger--Selection of Merger" of the Proxy Statement is incorporated herein by reference.
(d) The information set forth under the captions "SPECIAL CONSIDERATIONS--Principal Effects of the Merger" and "FEDERAL
INCOME TAX CONSEQUENCES OF THE MERGER," and the information set forth in Annex D of the Proxy Statement is
incorporated herein by reference.
Item 8. Fairness of the Transaction.
---------------------------
(a) The information set forth under the caption "SPECIAL CONSIDERATIONS-- Recommendation of the Board of Directors of
the General Partner; Fairness of the Merger" of the Proxy Statement is incorporated herein by reference.
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(b) The information set forth under the caption "SPECIAL CONSIDERATIONS-- Recommendation of the Board of Directors of
the General Partner; Fairness of the Merger" of the Proxy Statement is incorporated herein by reference.
(c) The information set forth under the captions "SUMMARY OF THE PROXY STATEMENT--Vote Required," "THE
MERGER--Conditions to the Obligations of the Parties to the Merger Agreement," "THE MERGER--Termination or
Amendment of the Agreement of Merger" and in the fourth paragraph under the caption "THE PROXY SOLICITATION--Voting
and Proxy Procedures" of the Proxy Statement is incorporated herein by reference.
(d) The information set forth under the caption "SPECIAL CONSIDERATIONS--Opinion of the Financial Advisor to the
Special Committee" of the Proxy Statement is incorporated herein by reference.
(e) The information set forth under the caption "SPECIAL CONSIDERATIONS-- Recommendation of the Board of Directors of
the General Partner; Fairness of the Merger" of the Proxy Statement is incorporated herein by reference.
(f) Not applicable.
Item 9. Reports, Opinions, Appraisals and Certain Negotiations.
------------------------------------------------------
(a) The information set forth under the captions "SPECIAL CONSIDERATIONS--Background of the Merger," "SPECIAL
CONSIDERATIONS--Opinion of Financial Advisor to the Special Committee" and "SPECIAL CONSIDERATIONS--Salomon
Brothers Analysis" of the Proxy Statement is incorporated herein by reference.
(b) The information set forth under the captions "SPECIAL CONSIDERATIONS--Background of the Merger," "SPECIAL
CONSIDERATIONS--Opinion of Financial Advisor to the Special Committee" and "SPECIAL CONSIDERATIONS--Salomon
Brothers Analysis" of the Proxy Statement is incorporated herein by reference.
(c) The information set forth in the second paragraph under the caption "AVAILABLE INFORMATION" of the Proxy Statement
is incorporated herein by reference.
Item 10. Interest in Securities of the Issuer.
------------------------------------
(a) The information set forth under the caption "THE PARTNERSHIP--Ownership of Common Units" of the Proxy Statement is
incorporated herein by reference.
(b) Not applicable.
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Item 11. Contracts, Arrangements or Understandings with Respect to the Issuer's Securities.
---------------------------------------------------------------------------------
The information set forth under the caption "THE MERGER," and in the second paragraph under the caption "THE
PARTNERSHIP--Background of the Partnership," and under the caption "THE PARTNERSHIP--Ownership of Common Units" of
the Proxy Statement is incorporated herein by reference.
Item 12. Present Intention and Recommendation of Certain Persons with Regard to the Transaction.
--------------------------------------------------------------------------------------
(a) The information set forth under the caption "SUMMARY OF THE PROXY STATEMENT--Interests of Certain Persons in the
Merger," and in the second paragraph under the caption "THE MERGER--Conditions to the Obligations of the Parties to
the Merger Agreement," and in footnote (1) under the caption "THE PARTNERSHIP--Ownership of Common Units" of the
Proxy Statement is incorporated herein by reference.
(b) The information set forth under the caption "SPECIAL CONSIDERATIONS-- Recommendation of the Board of Directors of
the General Partner; Fairness of the Merger" and in footnote (1) under the caption "THE PARTNERSHIP--Ownership of
Common Units" the Proxy Statement is incorporated herein by reference.
Item 13. Other Provisions of the Transaction.
-----------------------------------
(a) The information set forth under the captions "SUMMARY OF THE PROXY STATEMENT--No Dissenters' Rights" and "THE PROXY
SOLICITATION--No Dissenters' Rights of Appraisal" of the Proxy Statement is incorporated herein by reference.
(b) Not applicable.
(c) Not applicable.
Item 14. Financial Information.
---------------------
(a) The information set forth under the caption "SUMMARY FINANCIAL DATA" and in Annex C of the Proxy Statement is
incorporated herein by reference.
(b) Not applicable.
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Item 15. Persons and Assets Employed, Retained or Utilized.
-------------------------------------------------
(a) The information set forth under the caption "THE PROXY SOLICITATION--Solicitation of Proxies" of the Proxy
Statement is incorporated herein by reference.
(b) The information set forth under the caption "THE PROXY SOLICITATION--Solicitation of Proxies" of the Proxy
Statement is incorporated herein by reference.
Item 16. Additional Information.
----------------------
Reference is hereby made to the Proxy Statement, including each annex thereto, which is incorporated in its
entirety herein by reference.
Item 17. Material to Be Filed as Exhibits.
--------------------------------
(a) Not applicable.
(b-1) Opinion of Financial Advisor to the Special Committee dated as of March ___, 1994, appears as Annex B to the Proxy
Statement and is incorporated herein by reference.
(b-2)+ Report of Financial Advisor to the Special Committee dated as of December 10, 1993.
(b-3)+ Report of the Financial Advisor to Valero Energy Corporation dated October 1993.
(c) 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 appears as Annex A to the Proxy Statement and is
incorporated herein by reference.
(d) Exhibit 17(d) hereto--Letter to Unitholders, Notice of Special Meeting, form of Proxy and preliminary Proxy
Statement.
(e) Not applicable.
(f) Not applicable.
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+Previously filed.
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SIGNATURE
After due inquiry and to the best of my knowledge and belief,
I certify that the information set forth in this statement is true, complete
and correct.
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VALERO NATURAL GAS COMPANY
Date: March 28, 1994
By: /s/ Don M. Heep
------------------------------------
Name: Don M. Heep
----------------------------------
Title: Senior Vice President and
Chief Financial Officer
--------------------------------
VALERO NATURAL GAS PARTNERS, L.P.
Date: March 28, 1994 By: VALERO NATURAL GAS COMPANY,
GENERAL PARTNER
By: /s/ Don M. Heep
------------------------------------
Name: Don M. Heep
----------------------------------
Title: Senior Vice President and
Chief Financial Officer
--------------------------------
VALERO ENERGY CORPORATION
Date: March 28, 1994
By: /s/ Don M. Heep
------------------------------------
Name: Don M. Heep
----------------------------------
Title: Senior Vice President and
Chief Financial Officer
--------------------------------
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ANNEX A
(to Item 2 of Schedule 13E-3)
The following persons are executive officers and/or directors of
Valero Energy Corporation or Valero Natural Gas Company.
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Name: Edward C. Benninger
Business Address: 1200 Smith, Suite 900
Houston, TX 77002-4396
Present Principal Occupation: Executive Vice President, Valero
Energy
Corporation Citizenship: United States
Name: Ronald K. Calgaard
Business Address: 715 Stadium Drive San Antonio, TX
78284
Present Principal Occupation: President, Trinity University,
San Antonio, Texas
Citizenship: United States
Name: Robert G. Dettmer
Business Address: 700 Anderson Hill Road
Purchase, NY 10577
Present Principal Occupation: Executive Vice President and Chief
Financial Officer, Pepsico, Inc.,
Purchase, New York
Citizenship: United States
Name: A. Ray Dudley
Business Address: 530 McCullough Avenue
San Antonio, TX 78215
Present Principal Occupation: Retired
Citizenship: United States
Name: Ruben M. Escobedo
Business Address: 924 McCullough Avenue
San Antonio, TX 78215
Present Principal Occupation: Senior Partner, Ruben Escobedo & Co.
Certified Public Accountants, San
Antonio, Texas
Citizenship: United States
Name: Steven E. Fry
Business Address: 530 McCullough Avenue
San Antonio, TX 78215
Present Principal Occupation: Vice President Administration,
Valero Energy Corporation
Citizenship: United States
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Name: William E. Greehey
Business Address: 530 McCullough Avenue
San Antonio, TX 78215
Present Principal Occupation: Chairman of the Board and Chief
Executive Officer, Valero Energy
Corporation
Citizenship: United States
Name: Don M. Heep
Business Address: 530 McCullough Avenue
San Antonio, TX 78215
Present Principal Occupation: Senior Vice President and
Chief Financial Officer, Valero
Energy Corporation
Citizenship: United States
Name: James L. (Rocky) Johnson
Business Address: 530 McCullough Avenue San Antonio,
TX 78215
Present Principal Occupation: Chairman Emeritus, GTE Corporation,
Stanford, Connecticut
Citizenship: United States
Prior Position: 1988-1992 - Chairman and Chief
Executive Officer, GTE Corporation
Name: Lowell H. Leberman
Business Address: P.O. Box 5339 Austin, TX 78763
Present Principal Occupation: President, Centex Beverage, Inc.,
Austin, Texas
Citizenship: United States
Name: Stan L. McLelland
Business Address: 530 McCullough Avenue San Antonio,
TX 78215
Present Principal Occupation: Executive Vice President and
General Counsel, Valero Energy
Corporation
Citizenship: United States
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Name: Philip K. Verleger, Jr.
Business Address: 11 Dupont Circle NW, Suite 620
Washington, DC 20036-1207
Present Principal Occupation: Independent economic consultant
and a Visiting Fellow at the
Institute for International
Economics, Washington, D.C.
Citizenship: United States
Name: Mack Wallace
Business Address: 900 One Congress Plaza
111 Congress Austin, TX 78701
Present Principal Occupation: Counsel to Hughes & Luce,
Austin, Texas
Citizenship: United States
Prior Position: 1988 - 1990 - Partner, Hughes & Luce
</TABLE>
During the last five years, no person named above has been convicted
in a criminal proceeding (excluding traffic violations or similar
misdemeanors).
During the last five years, no person named above was a party to a
civil proceeding of a judicial or administrative body of competent jurisdiction
as a result of which such person was or is subject to a judgment, decree or
final order enjoining future violations of, or prohibiting or mandating
activities subject to, federal or state securities laws or finding any
violation with respect to such laws.
Except as indicated above, the principal occupation of each person
named above during the preceding five years has been as an officer, director
and/or employee of Valero Energy Corporation or one or more of its
subsidiaries.
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INDEX TO EXHIBITS
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Exhibit No. Title
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17 Consent of Arthur Andersen & Co.
17(d) Notice of Special Meeting, form of proxy and preliminary Proxy Statement
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Exhibit 17
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report
and to all references to our Firm included in or made a part of the proxy
statement for Valero Natural Gas
Partners, L.P.,
ARTHUR ANDERSEN & CO.
San Antonio, Texas
March 23, 1994
<PAGE> 1
VALERO NATURAL GAS PARTNERS, L.P.
(Commission File No. 1-9433)
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of
1934
(Amendment No. 1)
Filed by the Registrant [x]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[x] Preliminary Proxy Statement
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Section 240.14a-11(c) or Section
240.14a-12
--------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
--------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement)
Payment of Filing Fee (Check the appropriate box):
[ ] $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1) or 14a-6(j)(2).
[ ] $500 per each party to the controversy pursuant to Exchange Act Rule
14a-6(i)(3).
[x] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and
0-11.
1) Title of each class of securities to which transaction applies:
Common Units of Limited Partner Interests ("Common Units")
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2) Aggregate number of securities which transaction applies:
9,711,919 Common Units
3) Per unit price or other underlying value of transaction
computed pursuant to Exchange Act Rule 0-11: $12.10 per
Common Unit(1)
4) Proposed maximum aggregate value of transaction:
$117,514,210(1)
[x] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or
the Form or Schedule and the date of its filing.
1) Amount Previously Paid:
$23,502.80
2) Form, Schedule or Registration Statement No.:
Schedule 13E-3
3) Filing Party:
Valero Natural Gas Partners, L.P., Valero Natural Gas Company
and Valero Energy Corporation
4) Date Filed:
December 30, 1993
____________________
(1) In the merger transaction described in the enclosed preliminary proxy
statement, the publicly-held Common Units would be converted into a
right to receive $12.10 per Common Unit, or an aggregate of
$117,514,210, based on an aggregate of 9,711,919 publicly-held Common
Units.
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EXHIBIT 17(d)
PRELIMINARY COPY - SUBJECT TO COMPLETION
VALERO NATURAL GAS COMPANY
530 MCCULLOUGH AVENUE
SAN ANTONIO, TEXAS 78215
Dear Unitholder:
You are cordially invited to attend a Special Meeting of holders of
common units of limited partner interests ("Common Units") of Valero Natural
Gas Partners, L.P. ("VNGP, L.P." and, collectively with its consolidated
subsidiaries, the "Partnership") to be held on ____________, 1994. At the
Special Meeting, the holders of the Common Units will vote upon a proposal that
will result in the merger (the "Merger") of VNGP, L.P. with a wholly-owned
subsidiary of Valero Energy Corporation ("VEC" and, collectively with its
consolidated subsidiaries, the "Company"). As a result of the Merger, VNGP,
L.P. will become a wholly owned subsidiary of VEC, and the Common Units held by
persons other than the Company (the "Public Unitholders"), will be converted
into the right to receive $12.10 in cash per Common Unit.
The Board of Directors (the "Board") of Valero Natural Gas Company, a
Delaware corporation ("VNGC") and general partner of VNGP, L.P. (the "General
Partner"), and a Special Committee of outside directors appointed by the VNGC
Board to consider the proposal each have concluded that the Merger is fair to,
and in the best interest of, the holders of the Common Units, including the
Public Unitholders, and have unanimously approved the Merger. In arriving at
its conclusion, the Special Committee gave due consideration and significant
weight to the fact that its financial advisor, Dillon, Read & Co. Inc. had
delivered to the Special Committee its written opinion, dated December 20, 1993
(and confirmed in writing on __________, 1994), that, based upon the
considerations and subject to the assumptions and limitations set forth
therein, the consideration to be received by the Public Unitholders in the
Merger is fair to the Public Unitholders from a financial point of view. The
VNGC Board unanimously recommends that the holders of the Common Units vote
"FOR" approval of the Merger and the transactions contemplated thereby.
The Merger must be approved by the holders of a majority of the Common
Units, including Common Units held by the Company, and also by the holders of a
majority of the Common Units held by Public Unitholders and voted at the
Special Meeting. The Company holds approximately 47.5% of the issued and
outstanding Common Units and intends to vote such Common Units "FOR" approval
of the Merger. Including its general partner interests, the Company holds an
effective equity interest of approximately 49% in the Partnership.
The accompanying Proxy Statement describes in detail the reasons for
the Merger, the manner in which the transactions will take place, certain tax
consequences of the Merger and other matters. The action to be taken at the
Special Meeting is of great importance and I urge you to read the accompanying
materials carefully. WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING IN
PERSON AND REGARDLESS OF THE NUMBER OF COMMON UNITS YOU OWN, PLEASE COMPLETE,
SIGN AND DATE THE ENCLOSED PROXY CARD AND MAIL IT AS SOON AS POSSIBLE IN THE
BUSINESS REPLY ENVELOPE PROVIDED.
Very truly yours,
William E. Greehey,
Chairman of the Board and Chief Executive Officer
15
<PAGE> 4
Valero Natural Gas Company,
General Partner of Valero Natural Gas Partners, L.P.
16
<PAGE> 5
VALERO NATURAL GAS PARTNERS, L.P.
VALERO NATURAL GAS COMPANY, GENERAL PARTNER
530 MCCULLOUGH AVENUE
SAN ANTONIO, TEXAS 78215
---------------
NOTICE OF SPECIAL MEETING OF UNITHOLDERS
TO BE HELD __________, 1994
---------------
To the Holders of Common Units of Limited
Partner Interests of
Valero Natural Gas Partners, L.P.
Notice is hereby given that a Special Meeting of the holders of common
units of limited partner interests ("Common Units") of Valero Natural Gas
Partners, L.P. ("VNGP, L.P."), will be held at 9:00 a.m. (Central Time) on
__________, _______, 1994 at the offices of Valero Natural Gas Company
("VNGC"), 530 McCullough Avenue, San Antonio, Texas 78215 (the "Special
Meeting") to consider and approve a proposed merger of VNGP, L.P. with Valero
Merger Partnership, L.P., a Delaware limited partnership wholly owned by
subsidiaries of Valero Energy Corporation ("VEC"), and formed at the direction
of VEC for the purpose of engaging in such transaction.
By order of the Board of Directors of VNGC, the close of business on
___________, 1994, has been fixed as the record date for determination of
holders of Common Units entitled to notice of, and to vote at, the Special
Meeting, or any adjournments or postponements thereof.
Whether or not you plan to attend the Special Meeting in person and
regardless of the number of Common Units you own, you are urged to sign and
date the enclosed proxy card and mail it as soon as possible in the stamped,
addressed return envelope provided, so that your Common Units may be
represented and voted at the Special Meeting.
By order of the Board of Directors of
Valero Natural Gas Company, General Partner
Rand C. Schmidt
Corporate Secretary
17
<PAGE> 6
PROXY STATEMENT DATED _______, 1994
VALERO
{LOGO} NATURAL GAS PARTNERS, L.P.
PROXY STATEMENT FOR SPECIAL MEETING
TO BE HELD ON __________, 1994
This Proxy Statement (the "Proxy Statement") and the accompanying
Notice of Special Meeting of Unitholders (the "Notice") are being furnished to
the holders of common units of limited partner interests ("Common Units") of
Valero Natural Gas Partners, L.P. ("VNGP, L.P." and, together with its
consolidated subsidiaries, the "Partnership"), a Delaware limited partnership,
in connection with the solicitation of proxies for use at the special meeting
to be held at 9:00 a.m. (Central Time) on __________, _______, 1994 at the
offices of Valero Natural Gas Company ("VNGC"), the general partner (in such
capacity, the "General Partner") of VNGP, L.P., 530 McCullough Avenue, San
Antonio, Texas 78215, and at any adjournment or postponement thereof (the
"Special Meeting"). Proxies are being solicited by VNGC. This Proxy Statement
and the accompanying form of Proxy are first being mailed to the holders of the
Common Units on or about ________, 1994. Holders of the Common Units are
entitled to one vote for each Unit held of record at the close of business on
___________, 1994 (the "Record Date"), with respect to the proposal described
in the Proxy Statement.
Action may be taken on the proposal described in the Proxy Statement
on the date specified herein, or on any date or dates to which, by original or
later adjournment, the meeting may be adjourned.
At the Special Meeting, the holders of the Common Units will consider
and vote upon a proposal to merge VNGP, L.P. with Valero Merger Partnership,
L.P. ("Newco"), a Delaware limited partnership wholly owned by subsidiaries of
Valero Energy Corporation ("VEC") and, together with its consolidated
subsidiaries, the "Company") and formed at the direction of VEC for the purpose
of engaging in such transaction. VEC is a publicly-traded Delaware corporation
that, through subsidiaries, engages principally in the oil refining and
marketing, natural gas and natural gas liquids ("NGL") businesses. The term
"Company" is used herein to refer to VEC and its various consolidated
subsidiaries, including VNGC (but excluding the Partnership), either
individually or collectively, as the context shall require. Through
subsidiaries, VEC owns 8,774,619 Common Units, representing an approximate
47.5% limited partner interest in VNGP, L.P., and VNGC and other subsidiaries
of VEC hold 1% general partner interests in and serve as general partners of
VNGP, L.P. and its subsidiary partnerships. Including its general partner
interests, the Company holds an effective equity interest of approximately 49%
of the Partnership. The merger (the "Merger") will be accomplished pursuant to
an Agreement of Merger, dated December 20, 1993 (the "Merger Agreement") among
VNGP, L.P., VNGC, Newco and VEC.
Upon the consummation of the Merger and by virtue thereof, (i) the
Common Units held by persons other than the Company (the "Public Unitholders")
will be converted into the right to receive $12.10 in cash per Common Unit from
VNGC, (ii) the Common Units held by subsidiaries of VEC will remain
outstanding, (iii) the 1% general partner interest in VNGP, L.P. held by VNGC
will remain outstanding, (iv) VNGC will acquire additional Common Units from
VNGP, L.P. in consideration of the cash payment to the Public Unitholders, (v)
VNGP, L.P., together with its consolidated subsidiaries, will become
wholly-owned subsidiaries of VEC and (vi) the Public Unitholders will cease to
be limited partners of VNGP, L.P. The Merger will be a taxable event to the
Public Unitholders. Additionally, certain attorneys' fees paid in connection
with the Merger will affect the calculation of each Public Unitholder's basis
in his Common Units and assumed sales price, but is not expected to affect the
Unitholder's gain or loss resulting from the transaction. See "Federal Income
Tax Consequences of the Merger."
---------------
18
<PAGE> 7
THIS TRANSACTION HAS NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE FAIRNESS OR MERITS
OF THIS TRANSACTION NOR UPON THE ACCURACY OR ADEQUACY OF THE INFORMATION
CONTAINED IN THIS PROXY STATEMENT. ANY REPRESENTATION TO THE CONTRARY IS
UNLAWFUL.
19
<PAGE> 8
VEC has proposed 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. VEC also believes that potential conflict of
interest situations between the Partnership and the Company can be eliminated
through the Merger. The General Partner believes that the Merger is fair to
and in the best interests of the Partnership and the Public Unitholders, based
in part upon the recommendation of a Special Committee of the Board of
Directors of the General Partner, consisting of three members of the General
Partner's Board of Directors who are not employees of the General Partner, VEC
or any of their affiliates (the "Special Committee"). The Board of Directors
of the General Partner and the Special Committee have concluded that the
transactions contemplated by the Merger Agreement are fair to, and in the best
interests of, the Public Unitholders, and have unanimously approved the Merger
Agreement. In arriving at its conclusions, the Special Committee gave due
consideration and significant weight to the opinion of Dillon, Read & Co. Inc.,
an investment banking firm acting as the Special Committee's financial advisor
("Dillon Read"), that, based upon the considerations and subject to the
assumptions and limitations set forth therein, the consideration to be received
by the Public Unitholders in the Merger is fair to the Public Unitholders from
a financial point of view. See "Special Considerations--Opinion of Financial
Advisor to the Special Committee." THE BOARD OF DIRECTORS OF THE GENERAL
PARTNER UNANIMOUSLY RECOMMENDS THAT HOLDERS OF THE COMMON UNITS VOTE "FOR"
APPROVAL OF THE MERGER AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY.
See "Special Considerations."
The consummation of the Merger is subject to several conditions,
including obtaining lender consents. See "The Merger--Conditions to the
Obligations of the Parties to the Merger Agreement." The Merger will be
effected pursuant to the Merger Agreement.
On the Record Date, there were outstanding 18,486,538 Common Units,
which are entitled to vote as a single class. Pursuant to the Delaware Revised
Uniform Limited Partnership Act ("DRULPA"), approval of the Merger Agreement
will require the affirmative vote of the holders of a majority of the
outstanding Common Units entitled to vote thereon (the "Majority Vote
Requirement"), including Common Units held by the Company. Additionally, the
Merger Agreement provides that approval of the Merger shall require the
affirmative vote of a majority of the Common Units held by Public Unitholders
which are voted at the Special Meeting (the "Independent Vote Requirement").
The Company has informed the General Partner that it intends to vote the Common
Units that it owns, representing approximately 47.5% of the outstanding Common
Units, "FOR" approval of the Merger.
WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING IN PERSON AND
REGARDLESS OF THE NUMBER OF COMMON UNITS YOU OWN, PLEASE COMPLETE, SIGN AND
DATE THE ENCLOSED PROXY CARD AND MAIL IT AS SOON AS POSSIBLE IN THE STAMPED,
ADDRESSED RETURN ENVELOPE PROVIDED.
HOLDERS OF COMMON UNITS SHOULD NOT SEND IN ANY CERTIFICATES
REPRESENTING COMMON UNITS AT THIS TIME.
20
<PAGE> 9
AVAILABLE INFORMATION
VNGP, L.P. is subject to the informational requirements of the
Securities Exchange Act of 1934 (the "Exchange Act") and, in accordance
therewith, files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). The reports, proxy
statements and other information filed by VNGP, L.P. with the Commission can be
inspected and copied at the public reference facilities maintained by the
Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549
and at the public reference facilities maintained by the Commission at Seven
World Trade Center, Suite 1300, New York, New York 10048 and at Room 1400,
Northwestern Atrium Center, 500 West Madison Street, Chicago, Illinois 60661.
Copies of such materials can be obtained at prescribed rates from the Public
Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C.
20549. Documents filed by VNGP, L.P. can also be inspected at the offices of
the New York Stock Exchange, 20 Broad Street, New York, New York 10005, on
which exchange the Common Units are listed. VNGP, L.P.'s Annual Report on Form
10-K for the year ended December 31, 1993 (the "Form 10-K") has been
incorporated by reference herein. See "Incorporation of Certain Documents by
Reference."
All reports and opinions from outside parties described under "Special
Considerations" that are materially related to the Merger will be made
available for inspection and copying at the principal executive offices of VNGC
during its regular business hours by any interested holder of Common Units or
his representative who has been so designated in writing. The executive
offices of VNGC, the general partner of VNGP, L.P., are located at 530
McCullough Avenue, San Antonio, Texas 78215 (telephone 210-246-2000). Business
hours are 8:00 a.m. to 5:00 p.m., local time. Prescribed rates of $0.15 per
page, minimum $5.00 per request, will be charged for copying.
ADDITIONAL INFORMATION
Pursuant to Rule 13e-3 of the General Rules and Regulations under the
Exchange Act, VNGP, L.P. and VNGC have filed with the Commission a Rule 13e-3
Transaction Statement on Schedule 13E-3 (the "Schedule 13E-3"), together with
exhibits thereto, furnishing certain additional information with respect to the
Merger. This Proxy Statement does not contain all the information contained in
the Schedule 13E-3, certain portions of which are omitted as permitted by the
rules and regulations of the Commission. Reference is hereby made to the
Schedule 13E-3, including the exhibits thereto, for further information with
respect to VNGP, L.P., VNGC, the Company, the Partnership and the Merger. The
Schedule 13E-3 may be inspected at the Commission's offices, without charge, or
copies thereof may be obtained from the Commission upon payment of prescribed
rates. Statements contained in this Proxy Statement as to the contents of any
contract or other document filed as an exhibit to the Schedule 13E-3 are not
necessarily complete, and in each instance reference is hereby made to the copy
of such contract or other documents filed as an exhibit to the Schedule 13E-3,
each such statement being qualified in all respects by such reference.
21
<PAGE> 10
TABLE OF CONTENTS
<TABLE>
<S> <C>
SUMMARY OF THE PROXY STATEMENT . . . . . . . . . .
Purpose of the Special Meeting . . . . . . . . .
Date, Time and Place of the Special Meeting . . .
Record Date, Common Units Entitled to Vote,
Quorum . . . . . . . . . . . . . . . . . . . . .
Vote Required . . . . . . . . . . . . . . . . . .
Certain Relationships. . . . . . . . . . . . . . .
Interests of Certain Persons in the Merger . . . .
The Special Committee. . . . . . . . . . . . . . .
Recommendations . . . . . . . . . . . . . . . . .
Reasons for the Merger . . . . . . . . . . . . .
Terms of the Merger . . . . . . . . . . . . . . .
Effective Time . . . . . . . . . . . . . . . . .
Financing of the Merger . . . . . . . . . . . . .
Market Prices of the Common Units . . . . . . . .
No Dissenters' Rights . . . . . . . . . . . . . .
Litigation Relating to the Merger . . . . . . . .
Summary of Certain Federal Income Tax
Considerations . . . . . . . . . . . . . . . . . .
SPECIAL CONSIDERATIONS . . . . . . . . . . . . . .
Reasons for the Proposed Merger . . . . . . . . .
Summary . . . . . . . . . . . . . . . . . . . .
Background . . . . . . . . . . . . . . . . . . .
Industry Opportunities and Need for Additional
Financing . . . . . . . . . . . . . . . . . .
Prior Financings . . . . . . . . . . . . . . . .
Limitations on Additional Financing . . . . . .
Selection of Merger . . . . . . . . . . . . . .
Alternative Transactions Considered . . . . . .
Considerations Affecting Future Cash
Distributions to Unitholders . . . . . . . . . .
Background of the Merger . . . . . . . . . . . .
Certain Contacts . . . . . . . . . . . . . . . .
Salomon Brothers' Analysis . . . . . . . . . . . .
March Preliminary Review . . . . . . . . . . . .
Salomon October Report . . . . . . . . . . . . .
Certain Projections. . . . . . . . . . . . . . . .
Recommendation of the Board of Directors of the
General Partner; Fairness of the Merger . . . .
Opinion of Financial Advisor to the
Special Committee . . . . . . . . . . . . . . .
Principal Effects of the Merger . . . . . . . . .
THE MERGER . . . . . . . . . . . . . . . . . . . .
Basic Terms of the Merger . . . . . . . . . . . .
Fees and Expenses . . . . . . . . . . . . . . . .
Effective Time of the Merger . . . . . . . . . .
Source of Cash Consideration . . . . . . . . . .
Conditions to the Obligations of the Parties to
the Merger Agreement . . . . . . . . . . . . . .
Termination or Amendment of the Agreement of
Merger . . . . . . . . . . . . . . . . . . . . .
Method of Surrendering Unit Certificates for
Payment . . . . . . . . . . . . . . . . . . . . .
Accounting Treatment of the Merger . . . . . . .
THE PARTNERSHIP . . . . . . . . . . . . . . . . . .
Background of the Partnership . . . . . . . . . .
Conflicts of Interest . . . . . . . . . . . . . .
Ownership of Common Units . . . . . . . . . . . .
THE PROXY SOLICITATION . . . . . . . . . . . . . .
Voting and Proxy Procedures . . . . . . . . . . .
Solicitation of Proxies . . . . . . . . . . . . .
No Dissenters' Rights of Appraisal . . . . . . .
Conduct of the Special Meeting . . . . . . . . .
SUMMARY FINANCIAL DATA . . . . . . . . . . . . . .
MARKET PRICES OF COMMON UNITS AND
DISTRIBUTIONS . . . . . . . . . . . . . . . . . .
FEDERAL INCOME TAX CONSEQUENCES OF
THE MERGER . . . . . . . . . . . . . . . . . . .
Introduction . . . . . . . . . . . . . . . . . .
Backup Withholding . . . . . . . . . . . . . . .
INCORPORATION OF CERTAIN DOCUMENTS
BY REFERENCE . . . . . . . . . . . . . . . . . .
ANNEX A - Agreement of the Merger . . . . . . . . A-1
ANNEX B - Opinion of Dillon Read . . . . . . . . . B-1
ANNEX C - Consolidated Financial Statements
of VNGP, L.P . . . . . . . . . . . . . . . . . . . C-1
ANNEX D - Per Unit Tax Bases and Income
Allocations. . . . . . . . . . . . . . . . . . . . D-1
</TABLE>
22
<PAGE> 11
SUMMARY OF THE PROXY STATEMENT
The following is a summary of certain information contained elsewhere
in this Proxy Statement (the "Proxy Statement") and is qualified in its
entirety by the more detailed information elsewhere in this Proxy Statement and
the Annexes hereto. Unless otherwise defined, the capitalized terms used in
this Summary have the meanings ascribed to those terms elsewhere in this Proxy
Statement. Holders of Common Units are urged to read this Proxy Statement and
the Annexes hereto in their entirety.
PURPOSE OF THE SPECIAL MEETING
This Proxy Statement is being furnished to the holders of common
units of limited partner interests (the "Common Units") of Valero Natural Gas
Partners, L.P. ("VNGP, L.P." and, together with its consolidated subsidiaries,
the "Partnership"), a Delaware limited partnership, in connection with the
solicitation of proxies for use at a special meeting (the "Special Meeting") of
the holders of the Common Units. At the Special Meeting, the holders of the
Common Units will consider a proposed merger (the "Merger") involving VNGP,
L.P. The Merger will occur pursuant to an agreement of merger (the "Merger
Agreement") among VNGP, L.P., Valero Energy Corporation ("VEC" and, together
with its consolidated subsidiaries, the "Company"), Valero Merger Partnership,
L.P., a Delaware limited partnership ("Newco") which is owned by subsidiaries
of VEC and was formed for the purpose of engaging in the Merger, and Valero
Natural Gas Company, a Delaware corporation ("VNGC"), a wholly owned subsidiary
of VEC and general partner of VNGP, L.P. (in such capacity, the "General
Partner"). Pursuant to the terms of the Merger Agreement, if the merger is
approved, VNGP, L.P. would be merged with Newco, with VNGP, L.P. being the
entity surviving the merger. In the Merger, the Common Units held by persons
other than the Company (the "Public Unitholders") would be converted into a
right to receive $12.10 in cash per Common Unit from VNGC. Upon completion of
the Merger, the Partnership will be wholly owned by VEC.
DATE, TIME AND PLACE OF THE SPECIAL MEETING
The Special Meeting of the holders of the Common Units of VNGP, L.P.
will be held at the offices of the General Partner, 530 McCullough Avenue, San
Antonio, Texas 78215, on _______, 1994 at 9:00 a.m. (Central Time).
RECORD DATE, COMMON UNITS ENTITLED TO VOTE, QUORUM
Only record holders of Common Units at the close of business on
__________, 1994 (the "Record Date") will be entitled to notice of and to vote
at the Special Meeting. On the Record Date, there were outstanding 18,486,538
Common Units, which are entitled to vote as a single class. Such Common Units
were held by approximately holders of record. The presence in person,
or by properly executed proxy, of the holders of more than 50 percent of the
issued and outstanding Common Units is necessary to constitute a quorum at the
Special Meeting.
Each holder of record of Common Units on the Record Date is entitled
to cast one vote per Common Unit on each proposal properly submitted for the
vote of the holders of the Common Units.
23
<PAGE> 12
VOTE REQUIRED
Pursuant to the Delaware Revised Uniform Limited Partnership Act
("DRULPA"), approval of the Merger Agreement will require the affirmative vote
of the holders of a majority of the outstanding Common Units entitled to vote
thereon (the "Majority Vote Requirement"), including Common Units held by the
Company. The Company holds approximately 47.5% of the Common Units and has
advised the General Partner that it intends to vote such Common Units "FOR"
approval of the Merger.
Additionally, in order to address the separate interests of the Public
Unitholders, although not required by the Partnership Agreement, approval of
the Merger Agreement has been conditioned upon the affirmative vote of a
majority of the Common Units held by Public Unitholders that are voted at the
Special Meeting (the "Independent Vote Requirement"). The votes of the Company
will not count toward satisfaction of the Independent Vote Requirement.
Therefore, the Merger will not be consummated without the approval of the
holders of a majority of the Common Units held by Public Unitholders and voted
at the Special Meeting.
CERTAIN RELATIONSHIPS
VEC is a publicly held Delaware corporation whose common stock is
listed and traded on the New York Stock Exchange. VNGC, which serves as
General Partner of VNGP, L.P., is a wholly-owned subsidiary of VEC. The term
"Company," as used herein, refers to VEC and its various consolidated
subsidiaries, including VNGC (but excluding the Partnership), either
individually or collectively, as the context requires. Under the partnership
structure, the partnership interest in VNGP, L.P. consists of a 1% general
partner interest, held by VNGC, and a 99% limited partner interest, represented
by the Common Units. VNGP, L.P. holds a 99% limited partner interest in Valero
Management Partnership, L.P. (the "Management Partnership"), while the
Management Partnership in turn holds a 99% limited partner interest in eleven
subsidiary operating partnerships formed at the time of the creation of the
Partnership in 1987 and one subsidiary operating partnership formed in 1992.
VNGP, L.P. also holds a 99% limited partner interest in certain subsidiary
operating partnerships established subsequent to the original creation of the
partnership structure in 1987 (the subsidiary operating partnerships of VNGP,
L.P. and Management Partnership are referred to herein individually as a
"Subsidiary Operating Partnership" and collectively as the "Subsidiary
Operating Partnerships"). VNGC also holds a 1% general partner interest in the
Management Partnership, while wholly-owned subsidiaries of VNGC hold 1% general
partner interests (in such capacities, the "Subsidiary General Partners") in
each Subsidiary Operating Partnership. Through subsidiaries, including the
Subsidiary General Partners, VEC holds approximately 47.5% of the issued and
outstanding Common Units, while the remaining 52.5% of the Common Units are
publicly held. As a result of its subsidiaries' holdings of Common Units and
their general partner interests in VNGP, L.P., the Management Partnership and
the Subsidiary Operating Partnerships, VEC holds an effective equity interest
in the Partnership of approximately 49%. Under the terms of the Second Amended
and Restated Agreement of Limited Partnership of VNGP, L.P. (the "Partnership
Agreement"), VNGC has exclusive authority to manage the business and operations
of VNGP, L.P. As sole stockholder of VNGC, VEC has the power to elect the
Board of Directors, and therefore may be deemed to effectively control the
management of, VNGC. Because VNGC is wholly-owned by VEC, the interests of VEC
and VNGC may be deemed to be substantially aligned and VNGC may be generally
deemed to not be acting independently of
24
<PAGE> 13
VEC. For this reason, the Special Committee, consisting of three independent
directors of VNGC, was created to separately evaluate the fairness of the
proposed Merger. See "Special Considerations--Background of the Merger" and
"The Partnership--Conflicts of Interest."
Various management personnel are common to both VEC and VNGC. Mr.
William E. Greehey serves as Chairman of the Board, President and Chief
Executive Officer ("CEO") and as a director of both VEC and VNGC. Mr. Edward
C. Benninger serves as Executive Vice President and a director of VEC and as
Executive Vice President and Chief Operating Officer and as a director of VNGC.
Mr. Stan L. McLelland serves as Executive Vice President and General Counsel
of VEC and as Executive Vice President and General Counsel and as a director of
VNGC. Mr. Don M. Heep serves as Senior Vice President and Chief Financial
Officer of both VEC and VNGC. Mr. Steven E. Fry serves as Vice President
Administration of both VEC and VNGC. Mr. John H. Krueger serves as Controller
of both VEC and VNGC. Mr. John D. Gibbons serves as Treasurer of both VEC and
VNGC. Mr. Rand C. Schmidt serves as Corporate Secretary of both VEC and VNGC.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
As of the Record Date, approximately 70,181 (0.4%) of the Common Units
were beneficially owned by officers and directors of VNGC or VEC. See "The
Partnership--Ownership of Common Units." If the Merger is consummated, the
Common Units owned by such persons will be converted into the right to receive
cash in the amount of $12.10 per Common Unit. Such persons have advised the
General Partner that they intend to vote their Common Units "FOR" approval of
the Merger. Such votes will be counted toward satisfaction of the Independent
Vote Requirement.
In addition, VEC is interested in the outcome of the Merger in that,
following the Merger, it would be the sole owner of VNGP, L.P. As sole owner,
VEC would bear the total risk of the Partnership's operations but would also
receive the entire benefit, if any, arising from pursuit of the various
industry opportunities described under "Special Considerations--Reasons for the
Proposed Merger--Industry Opportunities and Need for Additional Financing." If
VNGP, L.P. were to be sold to an unrelated third party, VEC would not have any
further participation in any such opportunities, while, if the current
ownership structure were maintained, it would share any such benefits with the
Public Unitholders. See "The Partnership--Conflicts of Interest."
THE SPECIAL COMMITTEE
The Board of Directors of VNGC appointed the Special Committee on
October 17, 1993, to consider the fairness of the proposed transaction to the
Public Unitholders. The Special Committee consists of Dr. Ronald K. Calgaard,
Chairman of the Special Committee, and Messrs. Ruben M. Escobedo and Mack
Wallace, each of whom is an outside director of VNGC and is not an employee of
VEC or VNGC or otherwise affiliated with the Company. See "Special
Considerations--Background of the Merger."
FAIRNESS OF THE TRANSACTION; RECOMMENDATIONS
The Special Committee concluded that the transactions contemplated by
the Merger Agreement are fair to, and in the best interests of, the Public
Unitholders,
25
<PAGE> 14
and unanimously approved the Merger Agreement. In arriving at its conclusion,
the Special Committee gave due consideration and significant weight to the
written opinion of Dillon Read (confirmed in writing on _______, 1994), that,
based upon the considerations and subject to the assumptions and limitations
set forth therein, the consideration to be received by the Public Unitholders
in the Merger is fair to the Public Unitholders from a financial point of view.
The written report of the Special Committee, setting forth its
conclusions, recommendations and the material considerations applicable
thereto, was delivered to the VNGC Board of Directors at a meeting held on
December 20, 1993. The VNGC Board examined the report of the Special
Committee, and concurred in both the material considerations and the
conclusions set forth in such report. There were no other material
considerations applicable to the deliberations of the VNGC Board. The VNGC
Board unanimously approved the Merger Agreement on the basis of the
considerations and conclusions set forth in the report of the Special
Committee. See "Recommendation of the Board of Directors of the General
Partner; Fairness of the Merger."
In developing its initial merger proposal of $11.00 per Common Unit,
VEC determined, based upon the advice of its investment banker, Salomon
Brothers Inc ("Salomon"), that such initial proposal might reasonably be
expected to result in a successful transaction, but did not determine at that
time whether or not such proposal was fair to the Public Unitholders. Both VEC
and VNGC have interests in the proposed Merger which conflict with the
interests of the Public Unitholders. See "The Partnership--Conflicts of
Interest." Accordingly, the Special Committee was appointed by the VNGC Board
to make a determination with respect to the fairness of the transaction to the
Public Unitholders. VEC subsequently received and examined the report of the
Special Committee and thereupon concurred in both the conclusions of the
Special Committee and the material considerations set forth in the Special
Committee report. See "Special Considerations--Opinion of Financial Advisor to
the Special Committee."
THE BOARD OF DIRECTORS OF THE GENERAL PARTNER UNANIMOUSLY RECOMMENDS
THAT HOLDERS OF THE COMMON UNITS VOTE "FOR" APPROVAL OF THE MERGER AGREEMENT
AND THE TRANSACTIONS CONTEMPLATED THEREBY.
REASONS FOR THE MERGER
VEC (rather than the General Partner) is the party primarily
initiating, supporting, structuring and negotiating the terms of the Merger.
VEC has proposed 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. VEC also believes that potential conflict of interest
situations between the Partnership and VEC can be eliminated through the
Merger. The General Partner believe that the Merger is fair to and in the best
interests of the Partnership and the Public Unitholders, based upon the
analysis and recommendation of the Special Committee. Based upon its review of
and concurrence in the analysis and recommendation of the Special Committee,
VEC also believes that the Merger is fair to and in the best interest of the
Partnership and the Public Unitholders. See "Special Considerations."
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TERMS OF THE MERGER
The Merger will be effected pursuant to the terms of the Merger
Agreement. A copy of the Merger Agreement is attached hereto as Annex A. Upon
the consummation of the Merger and by virtue thereof, (i) each Common Unit held
by a Public Unitholder will be converted into the right to receive from VNGC
the cash amount of $12.10 per Common Unit, (ii) the Common Units held by
subsidiaries of VEC will remain outstanding, (iii) the 1% general partner
interest in VNGP, L.P. held by VNGC will remain outstanding, (iv) VNGC will
acquire additional Common Units from VNGP, L.P. in consideration of the cash
payment to the Public Unitholders, and (v) the general and limited partner
interests in Newco will be converted into the right to receive, on a pro rata
basis, a cash amount equal to the capital accounts of the partners, estimated
to aggregate $1,000. As a result of the Merger, VNGP, L.P. and its
consolidated subsidiaries will become wholly-owned subsidiaries of VEC and the
Public Unitholders will cease to be limited partners of VNGP, L.P. Because no
Common Units will be publicly held after the Merger, the Common Units will be
delisted and will no longer trade on the New York Stock Exchange, Inc. (the
"Exchange"), and VNGP, L.P. will cease to be a separate reporting company under
the Securities Exchange Act of 1934, as amended (the "Exchange Act").
In the Merger Agreement, VEC and VNGC each represented that, with
respect to the regular quarterly distribution on the Common Units, they
intended that such distributions continue to be declared and paid at the
then-established quarterly intervals and rate through the Effective Date (as
hereinafter defined) of the Merger, and that they knew of no reason why the
regular quarterly distribution scheduled to be paid on or about March 1, 1994
could not be declared and paid. Such March 1, 1994 distribution was
subsequently declared and paid. In addition, VEC and VNGC each represented
that, if the closing of the Merger occurred more than 30 days after the last
record date for a regular quarterly distribution, VNGP, L.P. intends and
expects to declare and pay to the holders of the Common Units of record as of
the Effective Date of the Merger a one-time special cash distribution equal to
the product of the regular quarterly distribution per Common Unit of $.125 and
a fraction the numerator of which is the number of days from and excluding the
record date in respect of which the last regular distribution has been paid to
and including the Effective Date, and the denominator of which is 90. Such
representations were based upon the facts and circumstances in existence at
December 20, 1993, the date of the Merger Agreement, and as such were
necessarily subject to the possible effect of subsequent developments upon the
ability of VNGP, L.P. to declare and pay distributions. Cash distributions on
the Common Units can be declared only by the Board of Directors of VNGC, acting
pursuant to the provisions of the Partnership Agreement, and can be declared
only from the Distributable Cash Flow (as defined in the Partnership Agreement)
of VNGP, L.P. See "The Partnership--Background of the Partnership." The
Partnership is subject to a requirement, more fully described under "The
Partnership--Background of the Partnership", that short-term borrowings be
reduced to zero for a period of 45 consecutive days during each period of 16
consecutive calendar months. Under this requirement, the Partnership must
complete such a "clean-up" period in September 1994. Additionally, during the
period since execution of the Merger Agreement, the Partnership's results of
operations have continued to deteriorate and the General Partner now expects
that the Partnership will have substantially reduced operating income for the
first quarter of 1994, compared with the fourth quarter of 1993. In light of
the Partnership's deteriorating operating results and the above-described
clean-up requirement, neither VEC nor VNGC can provide assurance that the
quarterly cash
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distribution expected to be considered at a meeting of the Board of Directors
of VNGC scheduled to be held April 27, 1994 and paid on or about May 31, 1994,
can be so declared and paid, or that the one-time special cash distribution
described above can be declared and paid.
EFFECTIVE TIME
Under the Merger Agreement, the Merger will become effective on the
date (the "Effective Date") and at the time (the "Effective Time") that a
Certificate of Merger is filed pursuant to Delaware law. It is anticipated
that the Effective Date will occur in 1994, although there can be no
assurance in this regard. The Common Unit transfer books of the Partnership
will be closed as of the close of business on the Effective Date and no
transfer of record can be made of certificates representing the Common Units
thereafter other than registrations of transfer reflecting transfers occurring
before the close of business on the Effective Date. See "The Merger--Effective
Time of the Merger."
FINANCING OF THE MERGER
In order to fund the cash payment to the Public Unitholders
contemplated by the Merger Agreement, VEC has issued and sold in an
underwritten public offering (the "Public Offering") 3,000,000 shares of its
$3.125 Convertible Preferred Stock and received net proceeds of $146.2 million.
The Public Offering was closed on March 24, 1994.
MARKET PRICES OF THE COMMON UNITS
Prior to May 30, 1992, the limited partner interests in VNGP, L.P. not
held by subsidiaries of VEC were represented by preference units of limited
partner interests ("Preference Units"). On May 30, 1992, the Preference Units
were automatically converted into Common Units in accordance with the terms of
the Partnership Agreement. See "The Partnership--Background of the
Partnership." The Preference Units and Common Units are sometimes collectively
referred to herein as "Units" and holders of such Units are referred to herein
as "Unitholders." The Common Units have been traded on the Exchange since June
1, 1992. As reported by the Exchange, during the third quarter of 1993, the
closing prices of the Common Units on the Exchange ranged from $8.25 to $9.375
per Common Unit, and the average trading volume for such period was
approximately 19,200 Common Units per day. During the two trading days ended
October 13, 1993, average daily trading volume in the Common Units increased to
approximately 114,000 Units and the closing price per Common Unit on the
Exchange increased from $9.25 on October 11, 1993 to a closing price of $10.25
on October 13, 1993. Heavy trading activity continued and the price of the
Common Units further increased on the morning of October 14, 1993. In response
to such activity, on October 14, 1993, VEC issued a public announcement that
its Board of Directors would meet on October 16, 1993 for the purpose of
considering management's recommendation that the Merger be proposed to the
Board of Directors of the General Partner. On October 14, 1993, the day of
such public announcement, the closing price of the Common Units on the Exchange
was $11.00 per Common Unit. See "Market Prices of Common Units and
Distributions."
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NO DISSENTERS' RIGHTS
In accordance with the DRULPA, the Public Unitholders will have no
dissenters' rights of appraisal in connection with the Merger. See "Principal
Effects of the Merger."
LITIGATION RELATING TO THE MERGER
Seven lawsuits were filed in Chancery Court in Delaware in response to
the announcement by VEC on October 14, 1993 of its proposal to acquire the
publicly-traded Common Units pursuant to the proposed Merger. The suits, which
were consolidated into a single proceeding, requested the court to certify the
litigation as a class action. 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, compensatory damages and attorneys' fees.
Attorneys representing the plaintiffs communicated with counsel for the Special
Committee in the course of the Special Committee's deliberations, and reviewed
Dillon Read's analysis referred to under "Opinion of Financial Advisor to the
Special Committee." Prior to the approval of the Revised Proposal by the
Special Committee, such attorneys advised the General Partner that they were
satisfied with the agreement reached with the Special Committee and had agreed
in principle to recommend that the Chancery Court approve a settlement based
upon the terms of the Merger as described herein. On December 21, 1993, VEC,
VNGP, L.P. and counsel for the plaintiffs executed a memorandum of
understanding (the "Memorandum of Understanding") to such effect.
Subsequently, having been generally advised of the matters discussed under
"Special Considerations--Background of the Merger--Certain Contacts" attorneys
for the plaintiffs and counsel to the Special Committee obtained VEC's
agreement that, if it disposes of its interest in VNGP, L.P., within a period
of two years from the Effective Date, the Public Unitholders who are holders of
Units at the Effective Date will receive an additional cash payment in an
amount per Unit equal to the excess of the per-Unit amount received by VEC in
such transaction over $12.10 per Unit; the right to such payment will be
nontransferable. See "Special Considerations--Principal Effects of the Merger"
and "The Merger--Conditions to the Obligations of the Parties to the Merger."
VEC has no obligation to attempt to dispose of its interest and VNGP, L.P., and
does not intend to do so. VEC has agreed to pay attorneys fees aggregating
approximately $1.1 million in connection with the Memorandum of Understanding.
See "Federal Income Tax Consequences of the Merger."
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<PAGE> 18
SUMMARY OF CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The Merger will be a taxable transaction to the Public Unitholders.
Each Public Unitholder will be required to recognize taxable gain or loss equal
to the difference between the Unitholder's adjusted tax basis for the Common
Units and the amount of cash received as a result of the Merger. Certain
Public Unitholders may realize both ordinary income and capital loss as a
result of the Merger. The utilization of any such capital loss for federal
income tax purposes is subject to certain limitations. Additionally, the
attorneys' fees paid in connection with the Merger, as described above, will
affect the calculation of each Public Unitholder's basis in his Common Units
and assumed sales price, but is not expected to affect the Unitholder's gain or
loss resulting from the transaction. See "Federal Income Tax Consequences of
the Merger".
SPECIAL CONSIDERATIONS
REASONS FOR THE PROPOSED MERGER
Summary. VEC has proposed the Merger at the present time because, as
is more fully described below, it believes that the ability of the Partnership
to sustain, improve and expand its operations, maintain and improve its
competitive position, service its debt obligations and, at the same time,
maintain cash distributions to Unitholders, has been impaired and that the
Partnership no longer has the financial flexibility necessary to achieve these
objectives. As a result, VEC believes that the original goals and objectives
of the Partnership are no longer consistent with the realities of competition
in the current natural gas industry environment or with the Partnership's
current financial position. VEC has proposed the Merger as a means to provide
necessary financial flexibility to the Partnership, as well as resolve
potential conflict of interest situations between VEC and the General Partner,
on the one hand, and the Public Unitholders, on the other hand. VEC (rather
than the General Partner) is the party primarily initiating, supporting,
structuring and negotiating the terms of the Merger. VEC and the General
Partner believe that the natural gas and NGL businesses are undergoing a period
of consolidation and restructuring that may create opportunities for
acquisitions, business alliances and capital investments,but that the
Partnership does not have the financial flexibility to make the capital
expenditures necessary to successfully pursue such opportunities. While the
Partnership has been able to pursue some opportunities through leasing
transactions with subsidiaries of VEC, additional significant leasing
transactions are not desirable to VEC. As a result, VEC and the General
Partner believe that the sources of cash available to the Partnership, in its
current form and condition, will be primarily limited to cash flows generated
from operations.
VEC and the General Partner believe that the Partnership cannot raise
significant additional equity capital, and that any additional equity
securities, if feasible to be issued, would likely be preferred Units with a
priority distribution requirement which would have a negative impact on the
value of the Common Units. Additionally, the Management Partnership's
Indenture of Mortgage, Deed of Trust and Security Agreement, dated as of March
25, 1987, as amended (the "Indenture"), as well as financial market conditions,
severely limit the Partnership's ability to issue additional first mortgage
notes ("Notes") under the Indenture, or other indebtedness. VEC and the
General Partner also believe that leasing assets from third parties is not
efficient or cost effective, and that substantially all of the assets currently
owned by the Partnership are core assets, so that asset sales are also not a
viable financing alternative.
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VEC and the General Partner believe that the Partnership's cash flows
from operations will be fully utilized to fund debt service and lease
obligations and to meet minimum capital expenditure requirements, and that such
cash flows will not be sufficient to pursue emerging industry opportunities.
VEC and the General Partner also believe that the Partnership will be unable to
maintain its competitive position if it does not pursue such opportunities when
and if they arise. The proposed Merger is expected to 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. At
the same time, VEC and the General Partner believe that potential conflict of
interest situations can be eliminated and that some administrative efficiencies
can be realized through the Merger. The Board of Directors of the General
Partner believes that the Merger is fair to and in the best interests of the
Partnership and the Public Unitholders, based upon the analysis and
recommendation of the Special Committee.
The following paragraphs describe in greater detail the reasons for
the Merger proposal. Under the heading "Background" is a description of VEC's
expectations at the time the Partnership was created, the Partnership's capital
expenditure requirements and the effect of certain so-called take-or-pay
settlements upon the Partnership's ability to finance capital projects. Under
the heading "Industry Opportunities and Need for Additional Financing" is a
description of changes in the natural gas industry and other factors that are
expected to create opportunities for the Partnership to improve and expand its
operations but which will require substantial additional capital. Under the
heading "Prior Financings" is a description of the leasing transactions, equity
and debt issuances, asset sales and working capital management that the
Partnership has used in the past to finance its cash requirements. Under the
heading "Limitations on Additional Financing" is an explanation of the
limitations which the Partnership now faces in raising additional capital,
including considerations which make it disadvantageous to the current Public
Unitholders for VNGP, L.P. to issue new equity securities. Under the heading
"Selection of Merger" is an explanation of the considerations that led VEC to
propose the Merger and a description of the Public Offering that VEC has
undertaken in connection with the Merger. Under the heading "Alternative
Transactions Considered" is an explanation of various alternatives considered
and rejected by VEC before proposing the Merger. Under the heading
"Considerations Affecting Future Cash Distributions to Unitholders" is a
discussion of the reduction in the cash distribution to Unitholders which
occurred in 1992, certain financial and other considerations which may require
cash distributions to be further reduced or eliminated and certain litigation
which, if finally determined in a manner materially adverse to the Partnership,
could also affect future cash distributions.
Background. At the time of formation of the Partnership, VEC
expected that the Partnership would continue to operate the natural gas and NGL
businesses of the Company substantially in the manner previously conducted and,
using internally generated funds as well as capital available in the public and
private markets, would be able to sustain, improve and expand such operations,
while at the same time providing a cash distribution to Unitholders. VEC
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. In maintaining asset reliability and pursuing some of these
opportunities, the Partnership's capital expenditures totalled $33.1 million in
1991, $35.9 million in 1992, and $36.1 million in 1993. In its November 10,
1993 projections, VEC had assumed that the Partnership's capital expenditures
for 1994 would be $56.2 million. See "--Certain
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Projections." However, as a result of deteriorating industry conditions,
Partnership capital expenditures in 1994 are now expected to be approximately
$40 million, subject to consummation of the Merger. In addition, lease
transactions were entered into with VEC subsidiaries for certain
newly-constructed facilities with approximate total costs of $75 million for
leases commencing in 1991 and $26 million for leases commencing in 1992. VEC
and the General Partner believe that, due to the Partnership's lack of
financial flexibility, described below, if the Merger is not completed the
Partnership will not be able to continue making capital expenditures at these
levels and, therefore, is likely to 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 herein, that may arise in the
natural gas and NGL businesses over the next several years. While VEC could
continue to pursue investment opportunities after the Partnership declines to
participate in them, a continued expansion of VEC's natural gas and NGL
businesses outside of the Partnership creates potential conflicts of interest
that VEC considers undesirable. See "The Partnership--Conflicts of Interest."
One factor limiting the Partnership's financial flexibility is the
Partnership's assumption of certain liabilities of the Company with respect to
claims and lawsuits involving allegations that the Company had failed to take,
or pay for, natural gas under gas purchase contracts. These liabilities were
assumed by the Partnership when the Preference Units were publicly offered in
1987. At that time, pending lawsuits involving such so-called take-or-pay
claims aggregated approximately $190 million for alleged actual damages and $20
million for alleged consequential damages. In addition, one lawsuit involved
claims of $118 million for alleged punitive or treble damages relating to fraud
or antitrust claims, and producers had invoiced the Company for approximately
$125 million in additional claims with respect to which lawsuits had not then
been initiated. The Partnership stated at the time of the offering of the
Preference Units that additional take-or-pay claims might be asserted. The
Partnership also stated that, if any payments were made in resolution of such
take-or-pay claims, the General Partner believed that such costs should be
recoverable in the weighted average cost of gas sold to the customers of Valero
Transmission, L.P. ("Transmission"), a Subsidiary Operating Partnerships;
however, as a result of market conditions and prior contracting practices,
Transmission's weighted average cost of gas and gas sales prices exceeded
market clearing levels and sales of gas by Transmission were declining in favor
of sales by other Subsidiary Operating Partnerships, which sold gas at
market-related prices. Accordingly, the Partnership indicated that Transmission
could be required to amortize the amounts of any take-or-pay settlements over a
considerable period and provide financing for such amounts until fully
recovered. 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. 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. However, the
resolution of such claims resulted in deferred gas costs that were greater, and
have been recovered more slowly through sales, 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. (For additional information regarding settlement of a
customer audit claim relating to deferred gas costs, see Note 6 of Notes to
Consolidated Financial Statements, included in Annex C.) 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
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projects has been used to make take-or-pay settlements and finance deferred gas
costs, and the ability of the Partnership to maintain, improve and expand the
Partnership's business has been less than originally expected. In addition, in
order to resolve certain contractual claims, the Partnership has agreed to
provide discounted gas transportation services to some customers in lieu of
cash settlements. Certain of these arrangements will continue until 2000. For
information regarding additional litigation in which the Partnership is
currently engaged and certain claims that have been made against the
Partnership, see "Special Considerations--Considerations Affecting Future Cash
Distributions to Unitholders."
Industry Opportunities and Need for Additional Financing. VEC and
the General Partner believe that the natural gas and NGL businesses are
undergoing a period of consolidation as major energy companies divest
operations that are not a part of their core operations and smaller entities
combine to compete more effectively in the competitive natural gas environment
that prevails today. Several such transactions have recently occurred,
including the sale by Oryx Energy Company ("Oryx") of certain NGL assets in
1992 (including certain assets acquired by the Company); the sale by Tenneco,
Inc. ("Tenneco") of certain NGL and gas gathering assets in 1992 and the sale
by Tenneco of its wholly-owned subsidiary Dean Pipeline Company in 1993; the
purchase of United Gas Pipe Line, Inc. ("United") in 1992 by Koch Industries,
Incorporated ("Koch"); the acquisition of certain assets of Exxon Gas Systems,
Inc. ("EGSI") by Tejas Gas Corporation ("Tejas") in 1993; and sales in 1993 of
Louisiana Resources Company ("LRC") and Louisiana Intrastate Gas Corp. ("LIG").
In addition, the Partnership has recently reached agreement with a subsidiary
of Shell Oil Company to acquire a pipeline in South Texas from such producer
and make other capital expenditures necessary to process such producer's
natural gas production in return for a ten-year dedication of such production
to the Partnership. VEC and the General Partner believe that other similar
opportunities will arise in the future that, if pursued, could maintain or
improve the Partnership's competitive position. The types of assets that could
become available for possible acquisition include natural gas and NGL
pipelines, gathering facilities, gas processing plants, NGL fractionation
facilities and related facilities and equipment. In addition to opportunities
for acquisitions, VEC and the General Partner believe that existing trends in
the natural gas industry will create additional capital requirements and
business opportunities. 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 Federal
Energy Regulatory Commission ("FERC") Order 636.
In the late 1980's, VEC and the General Partner determined that a
shift in natural gas movement across the United States was likely to occur as
projected pipeline expansions from Canada and the Rocky Mountain states into
California caused gas sources in the southwestern part of the United States to
seek markets further east. In 1991, the Partnership implemented a project (the
"East Texas Expansion Project") to extend the Partnership's North Texas
pipeline system 105 miles to Carthage, in East Texas, to take advantage of this
projected shift in supply patterns. The East Texas Expansion Project enabled
the Partnership to physically transport gas across the state of Texas, from
Waha, an important pipeline hub in West Texas, to Carthage, an important hub in
East Texas. For information regarding the financing of the East Texas
Expansion Project, see "The Partnership--Background of the Partnership." VEC
and the General Partner believe that the 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 owned by
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the Partnership, west-to-east capacity is becoming constrained. VEC and the
General Partner believe that, over time, improving transportation margins
resulting from these capacity constraints may warrant additional west-to-east
capacity additions and that the Partnership, but for its lack of financial
flexibility, would be positioned to make the capital expenditures necessary to
participate in such opportunities.
South Texas is a core supply area that supports 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. Over the
past several years, the Partnership has been successful in expanding its NGL
production and fractionation capacity in South Texas, including the addition of
a gas processing plant at Thompsonville and the completion of a fractionator
expansion project. For additional information describing these projects and
the funding of these projects through leasing arrangements with the Company,
see "The Partnership--Background of the Partnership." VEC and the General
Partner believe that opportunities to develop incremental NGL production in
South Texas will arise, both through expansion of existing facilities and
through acquisitions. However, any significant increases in NGL production
capacity will require substantial capital expenditures, not only to build or
purchase actual plant capacity but also for required infrastructure expansion.
As a result of capital additions and expansions which have substantially
increased the Partnership's production of NGL's over the past several years,
the Partnership's NGL pipelines and fractionation facilities necessary to
handle such increased volumes are operating at or near capacity. Additional
NGL pipeline capacity may also be needed to move NGLs to markets that may
develop in Mexico, to move additional volumes to Texas Gulf Coast markets or to
provide an alternative method for transporting existing production.
As NGLs are extracted from a "rich" or NGL-laden gas stream, the
resulting lean gas must be moved to market without being commingled with
processable rich gas streams. Due to the recent NGL processing capacity
additions that have led to increased production of lean gas in South Texas, the
Partnership is also capacity-constrained in moving lean gas out of South Texas
and is currently utilizing third-party facilities to move a portion of this gas
to market. Any increase in NGL volumes would lead to a commensurate increase
in lean gas volumes. In order to avoid additional third-party transportation
charges, the Partnership would be required to make the capital expenditures
necessary to add additional natural gas pipeline capacity.
In 1992, the FERC issued Order 636 related to restructuring of the
interstate natural gas pipeline industry. Order 636, which is now implemented,
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. As a result of Order 636, the
Partnership can more effectively compete for sales of natural gas to local
distribution companies ("LDCs") and other potential natural gas sales customers
located outside of Texas. The Partnership has had some success in entering
into contractual arrangements with such customers. At the same time, VEC and
the General Partner believe that contracting practices in the natural gas
industry are moving away from the spot, interruptible type of sales that have
been prevalent over the past several years and toward "firm" and term contracts
that require a gas supplier to commit to specified deliveries without the
option of interrupting service and with specified financial
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penalties for those suppliers that do not perform in accordance with their
contractual commitments. VEC and the General Partner believe that, to LDCs and
others who are contracting for firm supplies of natural gas, the financial
strength of potential suppliers is an important consideration that can affect
the awarding of supply contracts. Additionally, VEC and the General Partner
believe 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. Because of the limited ability of the Partnership to raise additional
debt or equity capital, VEC and the General Partner believe that, unless the
proposed Merger is approved, the Partnership will not be able to significantly
improve its ability to compete in the deregulated natural gas industry
environment and that its competitive position may erode.
Prior Financings. The Partnership has in the past generated cash to
meet its capital expenditure and debt service requirements, and to pay cash
distributions to Unitholders, through a combination of sources, including (i)
operating income, (ii) issuance of additional Notes, (iii) financial support
from VEC through capital leases and other transactions, (iv) reductions in
working capital requirements and (v) asset sales.
At the time of formation of the Partnership, the Management
Partnership issued $550 million principal amount of Notes under the Indenture.
The Management Partnership then issued another $75 million principal amount of
Notes in 1988. As is more fully described under "--Limitations on Additional
Financings," the Management Partnership may not issue additional Notes under
the Indenture unless other debt or equity funds are first raised and utilized
for capital expenditures by the Management Partnership or its Subsidiary
Operating Partnerships.
In 1989, in accordance with the provisions of the Partnership
Agreement, VEC 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 effective equity
interest in the Partnership from approximately 48% to over 49%. However, VEC
cannot purchase any significant number of additional Common Units without
exceeding an effective 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. VEC does not
desire to consolidate the operations and indebtedness of the Partnership
without owning all of the Partnership's business and assets.
Commencing in 1991, VEC subsidiaries entered into a series of leasing
transactions with the Partnership to provide financial support for capital
expenditure projects that were approved by the Board of Directors of the
General Partner. These projects consisted of the East Texas Pipeline
Extension, Fractionator Expansion Project and Thompsonville Plant, described
under "The Partnership--Background of the Partnership." These projects had a
total cost of approximately $101 million and have been leased by the Company to
the Partnership under capital leases. The leasing transactions between the
Company and the Partnership have enabled the Partnership to engage in capital
expansions and business opportunities that would otherwise have been
unavailable to it. However, apart from any indirect benefits, the rate of
return available to the Company from such transactions is limited to the lease
payments specified in the lease and any related tax benefits. Additionally, in
1991, a Unitholder commenced
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a class action and derivative lawsuit against the General Partner, VEC and
certain of their respective officers and directors relating, in part, to such
leasing transactions. See "The Partnership--Conflicts of Interest." As a
result of these and other factors, VEC believes that any significant additional
leasing transactions with the Partnership would not be desirable to VEC.
From time to time, the Partnership has also 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. VEC and 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 an attractive price. However, VEC
and the General Partner believe 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 and the Company enter into various types of
transactions in the normal course of business on market-related terms and
conditions, including natural gas and NGL sales from the Partnership to the
Company, purchases of NGLs and natural gas from the Company and transportation
and other services provided to or by the Company. The Partnership pays the
Company for management fees billed by the Company pursuant to the Partnership
Agreement and makes lease payments under the leases with the Company. To the
extent that net amounts are payable by the Partnership to the Company from time
to time, these transactions also constitute a type of working capital funding
provided by the Company to the Partnership. The net amount owed by the
Partnership to the Company was $13.5 million at December 31, 1992 and $31.8
million at December 31, 1993.
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, VEC and the General Partner believe 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. As a result, working capital reductions are not likely to serve
as a future source of cash to the extent that they have in the past.
Limitations on Additional Financing. The Indenture permits the
Management Partnership to issue up to $625 million principal amount of Notes,
plus additional Notes to the extent that additional debt or equity funds are
raised by VNGP, L.P. and contributed to the Management Partnership and used for
additional capital improvements. As noted above, the Partnership issued $550
million principal amount of Notes in 1987 and an additional $75 million in
1988. However, without additional equity financing, the Management Partnership
is not permitted under the terms of the Indenture to issue any additional debt,
other than up to $50 million of short-term debt for working capital purposes.
The Indenture
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has a "clean-up" provision requiring that such borrowings for working capital
must be reduced to zero for a period of 45 consecutive days during each period
of 16 consecutive months. See "The Partnership--Background of the
Partnership."
Substantially all of the assets owned by the Partnership are pledged
as security for the Notes. Because the Management Partnership and its
Subsidiary Operating Partnerships cannot effectively issue any new indebtedness
other than short-term borrowings for working capital purposes and, subject to
the limitations described herein, additional Notes, any other indebtedness
issued by the Partnership would likely be issued at the VNGP, L.P. level as
unsecured obligations. The General Partner and VEC have been informally
advised by investment bankers that such indebtedness would likely be rated
below investment grade and, if issuable, would necessarily bear a high interest
rate. The General Partner has viewed the issuance of such indebtedness as an
expensive and unattractive financing vehicle, and has not pursued the issuance
of such indebtedness.
The General Partner believes that the market for issuance of equity by
limited partnerships has been and continues to be limited due to changes in the
tax laws since the formation of the Partnership in 1987 affecting the
deductibility of publicly-traded partnership losses. In general, before
complete disposition by a Unitholder of all interests in the Partnership, any
such losses may be deductible only from income allocated by the Partnership.
Based upon informal advice received from time to time from investment bankers,
and internal analyses performed by the Company's staff, VEC and the General
Partner believe that conditions in the financial markets for limited
partnership equity securities would require that any additional Partnership
equity securities issued have cash distributions which are competitive with
the distributions paid by other publicly-traded limited partnerships. In
general, the percentage yield of publicly-traded limited partnership securities
is relatively high, in comparison with the dividend yield of publicly-traded
corporations engaged in similar businesses. The requirement to pay such
distributions at market-determined rates would reduce the Partnership's ability
to utilize future cash flows for capital investments. Additionally, in order
to effectively market any such new equity securities, VEC and the General
Partner believe it is likely such new securities would be preference Units,
structured so as to have a priority, in respect of distributions, over the
existing Common Units. Such a priority would, in the opinion of VEC and the
General Partner, impair distributions on the Common Units and result in a
potential loss in value to the existing holders of the Common Units. See
"--Alternative Transactions Considered," "--Considerations Affecting Future
Cash Distributions to Unitholders" and "Background of the Merger." Neither VEC
nor the General Partner has received or solicited any proposal from an
investment banking firm to underwrite or otherwise market any new Partnership
equity securities, nor has any such offering been discussed with the Public
Unitholders or their representatives, including the Special Committee. As no
specific terms for any equity securities of the Partnership have been proposed,
the Public Unitholders have not been requested to consider the possible
advantages or disadvantages of any such financing, if feasible.
Selection of Merger. The VEC Board determined that the proposed
Merger was the most appropriate means of providing financial flexibility to the
Partnership while at the same time achieving the Company's business objective
of remaining in the natural gas and NGL businesses and structuring a
transaction that would be nondilutive to VEC's shareholders and would be
determined to be fair to the Public Unitholders. Upon completion of the
Merger, subsidiaries of VEC will own all of the general partner and limited
partner interests in the Partnership,
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and the Public Unitholders will be entitled to receive $12.10 per Common Unit
from VNGC. The General Partner anticipates that the Partnership would then
significantly reduce or eliminate cash distributions and retain cash for its
internal use for capital expenditures, debt service and working capital without
having to consider possible adverse effects on the market price of the Common
Units.
VEC has issued additional equity to partially offset the substantial
additional indebtedness that would be consolidated upon acquisition of the
entire Partnership interest. See "the Merger--Sources of Cash Consideration."
While the Merger would result in VEC's consolidated debt-to-capitalization
ratio increasing from approximately 37.5% at December 31, 1993 to approximately
51% at such date on a pro forma basis, such increase is less than would occur
if the publicly-traded Common Units were acquired for cash obtained through
additional borrowings.
In connection with the proposed Merger, VEC has proposed to its
principal bank lenders that the Company's existing committed revolving credit
facilities, aggregating up to $190 million principal amount of borrowing and
letter of credit capacity, and the Partnership's committed revolving credit and
letter of credit facilities, aggregating $80 million principal amount of
borrowing and letter of credit capacity (of which not more than $50 million may
be outstanding at any time under covenants contained in the Indenture), be
combined into a single unsecured $250 million revolving credit and letter of
credit facility. VEC expects that such facility would be implemented at
approximately the same time that the Merger, if approved, is completed.
Alternative Transactions Considered. In addition to the proposed
transaction, the management of VEC considered several other alternative
transactions. For the reasons discussed below, these alternative transactions
were rejected, even though certain of them may have resulted in greater total
consideration to the Public Unitholders than they will receive in the Merger.
The Board of Directors of VNGC was not advised of VEC's consideration of these
various alternatives until October 17, 1993, and VNGC, as General Partner,
played no role in VEC's consideration of such alternatives. See "Background of
the Merger" and "The Partnership-- Conflicts of Interest." The alternatives
considered by VEC and the reasons for their rejection are as follows:
VEC considered the possibility of converting the Partnership to a
corporation, including variations under which the Partnership would merge with
VNGC, acquire other natural gas-related assets of VEC and/or engage in a public
offering of a corporate security. Conversion to a corporation could benefit
the Partnership and the Public Unitholders by improving the attractiveness of
the Partnership's equity securities to institutional investors and increasing
analysts' following of the Partnership. VEC has been advised by its investment
bankers that many institutional investors prefer to invest in corporate, as
opposed to limited partnership, securities and that, because of this limit on
institutional interest, many analysts do not follow limited partnership
securities. A conversion from limited partnership to corporate form might
therefore be expected to increase institutional and analyst interest, which in
turn could result in increased access to equity markets, enabling the
Partnership to raise capital in the future. The conversion to a corporation
could also enable the Partnership to conserve cash for investment in its
business by reducing distributions/dividends to Unitholders/stockholders.
In this regard, VEC has been advised by its investment bankers that,
due to the limited institutional interest, limited partnership securities are
principally sold to "retail" investors interested in high current income,
rather than long-term capital
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appreciation. For this reason, as noted above, limited partnership securities
tend to have a higher percentage yield than securities of corporations engaged
in similar businesses. If the conversion of the Partnership to a corporation
were to attract sufficient interest from institutional investors, VEC has been
advised that it might be possible for the resulting entity to pay a dividend
rate with respect to its newly-converted capital stock below the distribution
rate paid on the Common Units without impairing market price for such security.
To the extent that the Partnership's cash distributions to Unitholders could be
so reduced, the Partnership would be able to conserve cash for capital
investments and other Partnership purposes. Conversion to a corporation would
likely be accomplished in connection with an equity offering by the resulting
corporate entity. As a result, such entity might be more capital
self-sufficient than the Partnership has been, with a greater capacity for
growth. Additionally, depending upon market conditions, equity securities of
the resulting entity may or may not benefit from higher market valuations
sometimes placed on securities of gas gatherers and NGL companies. If these
results occurred, the improved growth and higher securities values could be
beneficial to the Public Unitholders. Conversion to a corporation might also
eliminate the possible liability exposure to the Company as general partner and
reduce some administrative costs. However, the conversion to a corporation
would also likely result in greater overall federal income tax liabilities.
Greater federal income tax liabilities could result because a
corporation, unlike a limited partnership, is subject to federal income
taxation. Taxation of earnings at the corporate level would reduce cash
available for reinvestment in the business or distribution in the form of
dividends. Public Unitholders are not subject to taxation on Partnership
distributions but, instead, are taxed based upon their proportionate share of
Partnership income. Because most of the Partnership's depreciation expense has
been allocated to the Public Unitholders, pursuant to the terms of the
Partnership Agreement, and because the Partnership's taxable income has been
reduced by the deduction of unrecovered take-or-pay settlement payments, the
Public Unitholders have experienced little, if any, taxable income to date, and
most of the Partnership's distributions have been treated as return of capital
to the Public Unitholders. Corporate stockholders are taxed on dividends
received, as opposed to a proportionate share of corporate income. While,
under some circumstances, corporate dividends may be treated, in whole or in
part, as a return of capital, it would not be possible for a corporation to
allocate depreciation expense to the Public Unitholders in the same manner that
the Partnership has done. Conversion to corporate form would therefore result
in potential federal income tax liability at both the corporate level, based
upon the resulting corporation's taxable income, and at the stockholder level,
based upon dividends received by the stockholders/Unitholders.
VEC has also been advised by its investment bankers that, while over
the longer term, conversion to corporate form should improve access to capital
markets, there could be no assurance that such improvement would be immediate.
Additionally, such investment bankers have advised that in other instances
where a corporation has successfully established a separate market for
securities of a subsidiary, it has been necessary to establish a separate,
independent management team for the subsidiary in order to provide assurance to
the financial markets that the subsidiary will be managed with a view to the
interests of the public shareholders. Currently, the officers of VEC and VNGC
are substantially identical. Establishment of a separate management team at
the VNGC level would therefore give rise to additional expense, create
difficult issues regarding the assignment of personnel and risk the possibility
of management changes that might or might not prove to be beneficial to VEC, or
to VNGC, or both.
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Additionally, the viability of the Partnership in corporate form could
necessitate the Company transferring its natural gas and NGL-related assets,
including the assets leased from VEC subsidiaries, to the Partnership.
Potential difficulties in valuing such assets also militated against this
alternative. In the end, this alternative was rejected because it would not
resolve the potential conflict of interest issues involved in transactions
between the Company and the Partnership, because it would involve significant
transaction costs and because it was not clear that merely changing the
organizational form of the Partnership would improve the financial flexibility
of the Partnership, result in an entity that was significantly more attractive
to Unitholders and other investors, or better enable the Partnership to improve
and expand its businesses to compete in the current natural gas industry
environment. Also, conversion to a corporation would likely result in
increased federal income tax liability on the taxable income of the
Partnership, reduced distributions to Unitholders in the form of dividends and
further reductions due to Unitholders being taxed on such dividends. For
additional information regarding possible advantages and disadvantages of a
conversion to corporate form, see the discussion of the March Preliminary
Review under "Special Considerations--Salomon Brothers' Analysis."
VEC also considered transactions in which it disposed of its interest
in the Partnership, including transactions in which either (i) the Company's
interest in the Partnership is "spun off" to the VEC stockholders, (ii) VNGC
and the Company's other gas-related assets, including its interest in the
Partnership, are sold to a third-party buyer, or (iii) the Partnership merges
with another "strategic" company, with VEC receiving a minority interest and/or
surrendering all or part of its subsidiaries' managerial control over the
Partnership's assets. VEC viewed these possible transactions as variations of
a principal alternative in which VEC disengaged, wholly or partially, from the
businesses conducted through the Partnership. Analysis of the various types of
possible transactions prepared by Salomon and delivered to VEC in the March
Preliminary Report indicated that a preliminary rough estimate of the implied
value of all of VEC's and the Partnership's natural gas assets (including
natural gas-related assets held outside the Partnership) could be highest in a
transaction involving a sale of all such assets to a third party. In reaching
this conclusion, Salomon analyzed prices paid by acquiring companies in four
recent transactions involving acquisitions of smaller natural gas assets, and
applied the apparent multiples of earnings (before depreciation, interest and
taxes) paid in such transactions, with appropriate adjustments, to VEC's
natural gas assets but did not make any adjustment to the net value received by
VEC to reflect taxes payable by VEC in such a transaction. See "--Certain
Contacts."
A sale of VEC's interest in the Partnership to a third party or a
spin-off of VEC's interest in the Partnership to VEC stockholders would not
directly benefit the Public Unitholders since the Common Units would continue
to trade as a separate security unless the buyer or a third party also made an
offer for the publicly held Common Units. See "--Certain Contacts." The
management and Board of Directors of VEC have determined that it is in the best
interest of VEC and its stockholders that VEC remain engaged in the natural gas
and NGL businesses and that its subsidiaries continue to manage the assets
controlled by the Partnership, and that a sale, spin-off or other disposition
of the Company's interest in the Partnership would therefore not be in the best
interests of VEC and its stockholders. Additionally, the Company's
debt-to-capitalization and other financial ratios would be negatively impacted
in the event of a spin-off, which could adversely affect the rating of VEC's
securities. There would also be no assurance that VEC's banks and other
lenders would approve a spin-off of assets
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or that they would not condition a spin-off upon financial agreement amendments
deemed onerous by VEC.
Because the Partnership has no employees of its own and employees of
the Company are responsible for all aspects of the Partnership's operations, a
sale or spin-off would also create difficult issues relating to the allocation
of employees and facilities between the Company's ongoing operations and the
sold or spun-off operations. In this regard, the Partnership's gas control
facilities, as well as a substantial number of the employees of the Company
that deal primarily with Partnership matters, are located in VEC's principal
headquarters building in San Antonio, Texas. The primary term of the lease for
this building expires in 1996, but at that time the Company must either renew
the lease or offer to purchase the building at a price which is currently
estimated to exceed market value. Allocation of the obligations under this
lease between VEC and the Partnership could involve renegotiation of the lease
transaction, which could be difficult and time-consuming. Currently, the
Partnership is bearing a part of the cost of this lease, and transfer of VEC's
interest in the Partnership without also allocating a portion of the future
lease expense to the Partnership would effectively reduce the economic benefit
resulting to VEC from any such sale. A merger of the Partnership with another
"strategic" company would reduce the Company's effective economic interest in
the Partnership and would likely result in VEC having a minority interest and
the loss of managerial control over the Partnership's operations.
For the reasons discussed below, VEC rejected the alternative of
liquidating the Partnership and distributing the proceeds to the Unitholders.
As indicated above, VEC's management and Board determined that it was in the
best interests of VEC and its stockholders that VEC remain engaged, through
subsidiaries, in each of its three current principal businesses, namely: the
petroleum refining and marketing business, the natural gas business and the NGL
business, and that VEC's subsidiaries continue to manage the assets owned by
the Partnership. In a liquidation, assets of the Partnership would be sold and
the proceeds distributed to the Unitholders. Thus, in a liquidation, the
Unitholders, including VEC subsidiaries, would receive a cash payment and would
not remain engaged in the natural gas and NGL businesses through the
Partnership. In addition to its interest in the Partnership, VEC also owns,
through subsidiaries, other natural gas-related assets, including the pipeline,
fractionation and natural gas processing facilities leased to the Partnership,
as well as certain natural gas processing plants and related assets operated by
the Partnership for the account of VEC. VEC also believes that a buyer of the
Partnership's assets might condition such acquisition upon the acquisition, or
control, of VEC's other natural gas-related assets. Accordingly, liquidation
of the Partnership would likely necessitate VEC's disposition of these other
natural gas and NGL assets as well. VEC does not wish to liquidate its own
assets, even if such liquidation might be beneficial to the Public Unitholders.
As is more fully described under "The Partnership--Background of the
Partnership," substantially all of the assets of the Partnership are subject to
the lien of the Indenture, which secures approximately $506 million of
outstanding Notes of the Management Partnership. The terms of the Indenture
effectively preclude optional redemption of the Notes by the Partnership.
Accordingly, a buyer of the Partnership's assets would be required to assume
the indebtedness represented by the Notes and the obligations of the Management
Partnership and its Subsidiary Operating Partnerships under the Indenture; such
assumption of indebtedness would require the consent of holders of two-thirds
of the Notes outstanding. There could be no assurance that such consent could
be obtained. Since the Notes were issued,
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prevailing interest rates have declined substantially. For this reason, VEC
believes that the obligation to assume the Notes would be unattractive to
prospective buyers of the Partnership's assets and could impair the
marketability of such assets. Additionally, the business of the Partnership is
different from that of many other publicly-traded limited partnerships; some
publicly-traded limited partnerships were formed to securitize oil or gas
royalty interests or other self-liquidating assets. Liquidation through sale
could be viewed as consistent with the original purpose of such an entity.
However, liquidation would not be consistent with the original purpose of the
Partnership, which was to continue and operate, as an ongoing business, the
natural gas and NGL operations previously conducted by VEC subsidiaries.
VEC also considered the possibility of making a cash tender offer or
exchange offer for the outstanding Common Units, rather than proposing a merger
transaction. VEC determined that a cash tender offer was not desirable because
it was likely that not all outstanding Common Units would be tendered,
necessitating a merger subsequent to the tender or exchange, and because of
legal and timing issues. VEC determined that an exchange offer involving
convertible Preferred Stock or other securities of VEC was not desirable
because the Public Unitholders, the Special Committee and its financial
advisors might have difficulty valuing the security to be offered in such
transaction. Additionally, because holders of Common Units might require cash
for tax purposes or might not otherwise wish to hold the security offered, such
security and, if convertible, VEC's Common Stock, might experience undue
selling pressure in the market.
In considering the various alternatives for its investment in the
Partnership, VEC recognized that any transaction involving its interest in the
Partnership was likely to involve an inherent conflict of interest between VEC
and the General Partner, on the one hand, and the Public Unitholders, on the
other hand. Under the terms of the Partnership Agreement, whenever a potential
conflict of interest exists or arises between the General Partner or any of its
affiliates, including VEC, and the Public Unitholders, the General Partner is
required to resolve the conflict of interest on a fair and reasonable basis in
light of its fiduciary position, considering, in each such case, (i) the
relative interests of each party to such conflict and the benefits and burdens
relating to such interests, and (ii) such additional circumstances as the
General Partner deems relevant, reasonable or appropriate under the
circumstances. The Partnership Agreement provides that, in the absence of bad
faith, any determination made by the General Partner in accordance with such
provisions shall not constitute a breach of the Partnership Agreement. In
VEC's opinion, VEC has no duty to propose any transaction involving its
interest in the Partnership to the General Partner or the Public Unitholders
and, if it determines to propose a transaction, VEC does not believe that it
has a duty to select the alternative most advantageous to the Public
Unitholders, and to disregard the benefit to or effect upon VEC. The
Partnership Agreement does not preclude VEC from considering its own interests,
so long as any conflict is resolved in accordance with the Partnership
Agreement. In proposing the Merger, VEC considered the obligations of the
General Partner under the Partnership Agreement, and also gave appropriate
recognition to the fact that the VNGC Board would appoint a Special Committee
to consider the fairness of the proposed transaction to the Public Unitholders.
However, in rejecting each alternative other than the proposed Merger, VEC
principally considered the anticipated effects of such alternative upon VEC and
its stockholders, rather than the Public Unitholders.
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In selecting the Merger, the VEC Board considered its fiduciary duty
to VEC stockholders, its business objective of remaining in the natural gas and
NGL businesses and its objective of structuring a transaction that is fair to
the Public Unitholders. The desire to remain in the natural gas and NGL
businesses precluded consideration of such alternatives as liquidation of the
Partnership or a sale of the Company's interest in the Partnership to third
parties. The VEC Board also considered various effects that the alternate
transactions might have on VEC's financial condition as the foregoing
description reflects. In connection with the structuring of the Merger
proposal, VEC also recognized that both VEC and VNGC had directly conflicting
fiduciary duties to their respective stockholders, on the one hand, and the
Public Unitholders, on the other hand. Such conflict was especially apparent
in determining the cash amount into which the Common Units would be converted
in the Merger. VEC, as the sole stockholder of VNGC, recognized that its
fiduciary duty to the Public Unitholders might be deemed to be substantially
the same as that of VNGC, as the General Partner of the Partnership. VEC
addressed this conflict by conditioning its initial proposal upon the
determination by the Special Committee that the proposed transaction is fair to
the Public Unitholders and, in response to a subsequent request by the Special
Committee, included in the Merger Agreement as an additional condition the
Independent Vote Requirement.
Considerations Affecting Future Cash Distributions to Unitholders.
Due to the extremely competitive environment prevailing in the natural gas
industry since 1987 and the other factors discussed herein, the Partnership's
Distributable Cash Flow (as defined in the Partnership Agreement) declined and
the Partnership was unable to maintain the initial $2.50 per Unit per annum
level of distributions to Unitholders, while at the same time servicing the
Partnership's debt and making capital expenditures necessary to access supplies
and markets and to expand the Partnership's NGL processing capabilities.
Accordingly, beginning in August 1992, the Partnership's quarterly distribution
was reduced from $0.625 per Unit per quarter to $0.125 per Unit per quarter.
To enable the Partnership to maintain its capacity to compete in the current
industry environment, the General Partner believes that the Partnership must
continue to make substantial capital investments in natural gas and NGL
facilities. At the same time, the Partnership's scheduled debt service
payments on the Notes and on capital lease obligations will continue at high
levels, with debt service and lease payment requirements aggregating $90.8
million in 1993, $93.9 million in 1994, $93.7 million in 1995, $94.3 million
in 1996, $94.8 million in 1997 and $91.3 million in 1988.
The General Partner expects that the Partnership's internally
generated funds from operations (exclusive of borrowings under short-term
credit lines) will not 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 additional supplemental funding, such as further
borrowings under the short-term credit lines described above. During 1993, the
Partnership had as much as $39.9 million outstanding under such short-term
lines. Although no borrowings were outstanding under such lines at December
31, 1993, the Partnership has incurred borrowings of up to $46 million in 1994
in order to fund working capital requirements. However, because of the
reluctance of VEC to provide additional financial support to the Partnership
and a recent decline in NGL prices described below under "Special
Considerations--Background of the Merger," the General Partner believes that
the clean-up requirement discussed above can be met, but that meeting such
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requirement 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 Merger is completed, the
General Partner anticipates that distributions to the Company from the
Partnership would be significantly reduced or eliminated, with such funds
utilized for working capital, capital expenditures, debt service or other
Partnership purposes.
The Partnership is involved in one lawsuit, and has received notice of
an additional claim, which, if ultimately resolved in a manner materially
adverse to the Partnership, could have a material adverse effect upon the
Partnership's results of operations and impair its ability to pay cash
distributions. 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
Transmission. The franchise agreement was assigned to and assumed by
Transmission upon formation of the Partnership in 1987. In the letter, the
City also 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 additional damages of $18 million, 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 Company and the
City have engaged in formal discussions regarding the possible settlement of
the City's claims, but no agreement has been reached. Any liability of VTC
with respect to the City's claims has been assumed by the Partnership.
VTC, as buyer, and Tejas, as seller, are parties to various gas
purchase contracts which were assigned to and assumed by Transmission upon
formation of the Partnership in 1987. In turn, Tejas has entered into a series
of gas purchase contracts between Tejas, as buyer, and certain trusts ("The
Long Trusts"), as seller. Various claims and disputes have arisen between
Tejas and The Long Trusts under the Tejas/Long Trusts contracts, which have
resulted in litigation by The Long Trusts against Tejas (The Long Trusts v.
Tejas Gas Corporation, 123rd District Court, Panola County, Texas, filed March
1, 1989 ("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 claims and disputes, Tejas, VTC and Transmission have entered into an
agreement pursuant to which, among other things, Tejas, VTC and Transmission
will cooperate in the conduct of The Long Trusts Litigation and VTC and
Transmission will bear a substantial portion of the costs of any appeal and of
the amount of any nonappealable final judgment rendered against Tejas. In The
Long Trusts Litigation, The Long Trusts have asserted claims against Tejas for
the alleged breach of various minimum take, take-or-pay and other contractual
provisions of the Tejas/Long Trusts contracts, and a statutory nonratability
claim, and are seeking alleged actual damages including interest, of
approximately $30 million and an unspecified amount of punitive damages. The
District Court has 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, Tejas breached the
minimum take obligations under one of the contracts, Tejas is not entitled to
claimed offsets for gas purchased by third parties and the "availability" of
gas for
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take-or-pay purposes is established solely by the delivery capacity testing
procedures in the contracts. However, damages, if any, have not been
determined. This litigation is not currently set for trial.
In each of the foregoing cases, the General Partner believes that the
claims have been overstated, and that there are meritorious defenses to the
claims and allegations, including various regulatory, statutory, contractual
and common law defenses. However, due to the inherent uncertainty of
litigation, there can be no assurance that the resolution of the foregoing
matters would not have a material adverse effect upon the Partnership's results
of operations for the fiscal period in which the resolution occurred. In the
event of an adverse determination involving VEC or its subsidiaries, it is
anticipated that VEC would seek indemnification from the Partnership under the
terms of the Partnership Agreement and other applicable agreements between the
Partnership and the Company. The General Partner believes that a materially
adverse determination in any one or more of the foregoing matters could further
impair the Partnership's ability to pay cash distributions.
For additional information regarding litigation affecting the
Partnership, see the Form 10-K, incorporated by reference herein. See
"Incorporation of Certain Documents by Reference."
Background of the Merger. For the reasons discussed above, VEC and
the General Partner have from time to time considered a number of alternatives
that might be available to the Partnership. See "--Reasons for the Proposed
Merger--Alternative Transactions Considered." From time to time in 1992 and
1993, various investment banking firms, including Salomon, provided solicited
or unsolicited proposals, or made unsolicited proposals to provide advice, with
respect to one or more of such alternatives. Such proposals related to the
outlook for and the financial flexibility of the Partnership and considered
various possible financial restructuring options, focusing on the same
alternatives later identified by Salomon in its March Preliminary Review. See
"-- Salomon Brothers' Analysis." Some proposals included an analysis of the
market performance of the Common Units and an analysis of the Partnership's
operations, compared with a "peer group" of other companies in the natural gas
industry. Some analyses also focused on the possibility of issuing VEC
securities in connection with various restructuring options. None of the
firms' analyses or recommendations were materially different from the matters
covered in Salomon's March Preliminary Review and none of the firms making
proposals or presentations was engaged by VEC to thereafter provide investment
banking services with respect to any strategic transaction involving the
Partnership. Except as set forth below, none of such firms engaged in a
valuation of the Partnership or the Units, or made a recommendation of a price
at which VEC might seek to acquire the Units held by the Public Unitholders.
Members of the management of VEC VNGC from time to time involved in such
discussions, as specified below, included Mr. Greehey, Mr. Benninger, Mr.
McLelland, Mr. Heep, Mr. Krueger, Mr. Schmidt, Mr. Greg Wright, director of
Financial Planning for VEC, and Mr. William H. Zesch, Assistant Controller of
VEC. While most of such persons are also officers of VNGC, they represented
VEC in the various negotiations and discussions mentioned herein.
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During 1992, the staff of the Company evaluated possible options
relating to the Partnership, including (i) the merger of VNGP, L.P. or VNGC
with another pipeline company, (ii) acquisition of the publicly held Units for
VEC stock, cash or a combination thereof, (iii) a dividend of Units held by the
Company to VEC's shareholders, (iv) a spin-off of VNGC (alone or together with
the Company's other gas-related assets) to VEC shareholders and (v)sale of the
Company's gas-related assets to a third party.
Also in 1992, Salomon prepared for internal purposes a preliminary
unsolicited analysis of the strategic alternatives available to VEC with
respect to the Partnership, one copy of which was sent to Mr. Heep for his
information. (Although Salomon had previously furnished investment banking
services to VEC from time to time, for which Salomon received customary
compensation, and Salomon continued to be in contract with VEC, there was no
formal relationship between VEC and Salomon with respect to the Partnership in
1992.) The internal Salomon analysis mentioned four principal alternatives to
the status quo: (i) VEC reacquiring complete ownership of the Partnership, (ii)
the merger of the Partnership with another "strategic" company, (iii) the
spin-off of the Partnership to VEC's public shareholders, and (iv) the
conversion of the Partnership into a corporation and its merger with VNGC. The
analysis mentioned possible credit, valuation and tax issues related to these
alternatives, but did not reach any conclusions. VEC provided no instructions
to Salomon in connection with preparation of this preliminary analysis.
In the first quarter of 1993, Salomon was requested by VEC to prepare
a report of strategic alternatives with respect to the Partnership. No
limitations were placed on Salomon with respect to its report. While VEC had
not yet formally engaged Salomon at the time of such request, it was understood
that if VEC decided to proceed with a transaction with respect to the
Partnership requiring an investment banker, it would retain Salomon.
Subsequently, pursuant to an engagement letter dated August 30, 1993, Salomon
was formally engaged as of January 15, 1993.
From the date of Salomon's engagement until the delivery of VEC's
Merger proposal to the VNGC Board on October 17, 1993, as described below, no
representatives of the General Partner were appointed to act, or acted,
separately on behalf of the Public Unitholders.
Salomon has from time to time provided investment banking services to
the Company. At the effective time of its engagement in January 1993, as well
as at the time of preparing and delivering the March 1993 review and October
1993 report hereinafter described, Salomon was serving as placement agent for
medium-term notes of VEC with respect to which a registration statement was
previously filed and had become effective. Additionally, Salomon has served as
lead underwriter with respect to VEC's $3.125 Convertible Preferred Stock
issued in March 1994 to fund the proposed Merger. See "The Merger--Source of
Cash Consideration" and "- -Conditions to the Obligations of the Parties to the
Merger Agreement."
On March 30, 1993, representatives of Salomon presented Salomon's
preliminary review of strategic alternatives to Messrs. Heep, Wright and Zesch
of VEC. The Salomon review was conducted with a view to determining the
potential positive and negative implications of various possible transactions
to VEC and its stockholders,
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and not with the purpose of determining maximum value to the Public
Unitholders. The Salomon review did not have the focus or purpose of
discussing value to the Public Unitholders with respect to any of the possible
alternative transactions. For a description of such preliminary review, see
"Special Considerations--Salomon Brothers' Analysis."
In the summer of 1993, VEC's senior management requested that the
staff of the Company make a detailed presentation and recommendation regarding
the various alternative transactions. During July and August 1993, the staff
of the Company prepared a detailed evaluation, based, among other things, upon
the work previously done by Salomon, and presented such evaluation to Messrs.
Greehey, Benninger, McLelland and Heep on August 23, 1993. The General Partner
was not involved in the preparation of this recommendation.
Following the staff presentation on August 23, 1993, VEC's management,
including Messrs. Greehey, Benninger, McLelland and Heep, determined that, in
light of VEC's long-term strategic objectives and its desire to remain in the
natural gas and NGL businesses, VEC would focus its evaluation efforts on the
possible acquisition by VEC of the Common Units owned by the Public
Unitholders. See "Reasons for the Proposed Merger--Selection of Merger" and
"--Alternative Transactions Considered." With the exception of the preparation
of the Salomon and Company staff presentations described above, no formal steps
were involved in reaching the determination that VEC management would focus on
the possible acquisition of the publicly held Common Units and no formal record
was made of such determination.
Subsequently, Salomon was requested to make a recommendation to VEC as
to the form and amount of consideration that VEC should propose to pay to the
Public Unitholders in such an acquisition and the structure of such an
acquisition.
On August 30, 1993, representatives of Salomon met at the request of
VEC with Messrs. Heep, McLelland, Krueger, Schmidt, Wright and Zesch and with
VEC's outside counsel and certain staff members of VEC to gather information in
connection with the preparation of Salomon's study and recommendations to the
VEC Board of Directors (the "VEC Board") and had numerous subsequent meetings
and telephone conversations during September 1993 with VEC's management.
At a meeting on October 8, 1993, representatives of Salomon presented
to Messrs. Greehey, Benninger, Heep, Krueger, Schmidt, Wright and Zesch and
certain staff members of VEC and VEC's outside counsel, Salomon's analysis and
recommendations with respect to the form and amount of consideration that VEC
should propose to pay to the Public Unitholders in a potential acquisition by
VEC of the publicly-held Common Units, and the structure of such an
acquisition. See "--Salomon Brothers' Analysis" below. Based on the analysis
set forth in the Salomon October Report (hereinafter defined), Salomon
concluded that a value of $11.00 per Common Unit might reasonably be expected
to result in a successful transaction and be found by the Special Committee,
when appointed, and its independent financial advisor, to be fair to the Public
Unitholders from a financial point of view. Salomon's analysis and
recommendation was based, in part, upon certain financial projections and
assumptions, dated October 5, 1993, prepared by the Company's staff. See
"Reasons for the Proposed Merger--Certain Projections."
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At the conclusion of the October 8, 1993 meeting, Messrs. Greehey,
Benninger, McLelland and Heep, acting on behalf of VEC, decided to recommend to
the VEC Board at a meeting scheduled for October 29, 1993 that VEC propose to
the Board of Directors of VNGC (the "VNGC Board") a cash merger for
consideration of $11.00 per Common Unit. No formal record was made of such
determination. In so doing, the management of VEC also did not determine that
the consideration proposed to be paid to the Public Unitholders would be fair,
from a financial point of view.
In response to an increase in the trading volume and price of the
Common Units on October 12, 13 and 14, 1993 , VEC publicly announced on October
14, 1993, that its management intended to propose to the VEC Board at a special
meeting to be held on October 16, 1993 that VEC offer to the VNGC Board a cash
merger for consideration of $11.00 per Common Unit. See "Market Prices of
Common Units and Distributions."
On October 16, 1993, the VEC Board met to receive and consider such
recommendation. At such meeting, Messrs. Greehey, Benninger, McLelland and
Heep of VEC discussed the formation and business history of the Partnership,
factors that had affected the operating results and financial condition of the
Partnership, factors affecting the Partnership's ability to raise additional
capital and the financial assistance provided by VEC to the Partnership,
including the various leasing transactions described in "The
Partnership--Background of the Partnership." They also discussed the various
alternatives considered for the Partnership, and the various interrelationships
that existed between the operations of the Partnership and the other operations
of the Company. The members of VEC's management recommended, and the VEC Board
determined, that a sale, spin-off or other disposition of the Company's
interest in the Partnership would not be in the best interests of VEC or its
stockholders. Mr. Heep of VEC reviewed the financial and accounting effects of
the proposed transaction on VEC and also discussed the anticipated financial
effects on VEC of a public offering of a convertible preferred stock and the
use of the proceeds thereof to finance the Merger. Neither the VEC Board nor
VEC management discussed whether the proposed consideration was fair to the
Public Unitholders, but they recognized that a determination of fairness would
subsequently have to be made.
Representatives of Salomon attended the October 16, 1993 meeting and
summarized that firm's analysis and recommendation made to VEC's management on
October 8, 1993, as described above. Salomon's representatives expressed the
view that a cash price of $11.00 per Common Unit might reasonably be expected
to be found by the Special Committee and its independent financial advisor,
when chosen, to be fair to the Public Unitholders from a financial point of
view. At the conclusion of such meeting, the VEC Board authorized management
to propose to the VNGC Board a cash merger at $11.00 per Common Unit, subject
to (i) receipt by the Special Committee of an opinion from its financial
advisor that the proposed transaction is fair to the Public Unitholders from a
financial point of view, (ii) a determination by the Special Committee that
such transaction is fair to the Public Unitholders, (iii) approval and
recommendation of the proposed transaction to the Public Unitholders by the
VNGC Board and the Special Committee, (iv) satisfactory amendment of VEC's bank
credit and other financing arrangements and (v) receipt of the requisite
approval of the holders of the Common Units. The VEC Board also authorized an
offering of convertible preferred stock to fund the transaction.
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Until October 17, 1993, all discussions and determinations were
internal VEC discussions and determinations in which VEC, with the advice of
its own advisors, determined whether to make a proposal to VNGC, as General
Partner, and, if so, the exact terms and conditions of such proposal. Since
the proposed Merger was initiated solely by VEC, VNGC, in its capacity as
General Partner, was not requested by VEC to play, and did not play, a separate
role in these discussions and determinations. See "The Partnership-- Conflicts
of Interest."
On October 17, 1993, the VNGC Board met to receive the VEC proposal.
At such meeting, it appointed the Special Committee, comprised of unaffiliated
directors of such Board, (a) to consider the proposal (the "Initial Proposal")
of VEC that the Partnership merge with a subsidiary partnership of VEC in a
transaction pursuant to which the Common Units would be converted into the
right to receive $11.00 in cash, subject to certain terms and conditions; and
(b) to report to the VNGC Board regarding the fairness of the Initial Proposal
to the Public Unitholders and whether the Initial Proposal should be approved.
The Special Committee was also authorized and directed to engage and indemnify
a financial advisor and a legal advisor of its own selection to assist it in
evaluating the Initial Proposal. The Special Committee and its advisors were
not authorized by the VNGC Board to seek, and they did not seek, alternative
proposals for the acquisition of the Partnership from third parties.
The Special Committee consists of Dr. Ronald K. Calgaard, Chairman,
President of Trinity University, San Antonio, Texas; Mr. Ruben M. Escobedo, of
Ruben M. Escobedo & Company, a public accounting firm in San Antonio, Texas;
and Mr. Mack Wallace, a former member and Chairman of the Railroad Commission
of Texas who is of counsel to the Austin, Texas law firm of Hughes & Luce. The
three members of the Special Committee are not employees of the Company or,
except for their positions as directors of VNGC, otherwise affiliated with the
Company.
The Special Committee retained the law firm of Wachtell, Lipton, Rosen
& Katz to act as special counsel and to advise it with respect to legal matters
relating to the Initial Proposal, and retained the investment banking firm of
Dillon Read to act as financial advisor to advise the Special Committee with
respect to financial matters and with respect to the fairness, from a financial
point of view, of the consideration to be received by the Public Unitholders
pursuant to the proposed transactions.
During November and December 1993, at the request of the Special
Committee, representatives of Dillon Read, counsel to the Special Committee and
counsel to Dillon Read met with or spoke to various officers and
representatives of VEC and the General Partner and their respective
subsidiaries, and their counsel, and of Salomon, and of Arthur Andersen & Co.,
the independent accountants for the Partnership and the General Partner;
reviewed various documents, financial statements and projections and other
reports and materials provided by such parties, including initial and revised
drafts of the proposed Merger Agreement; discussed such documents with
representatives of and counsel for VEC; proposed changes in the Merger
Agreement; and held several meetings and consultations with the Special
Committee.
The Special Committee, which advised VEC and stated in its final
report that it viewed its role as representing the Public Unitholders,
negotiated diligently
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on their behalf. On December 10, 1993, the Special Committee met and, having
determined that the $11.00 price contained in the Initial Proposal was
inadequate (based, among other things, on the Special Committee's view that VEC
would be likely to pay more than that indicated by the Initial Proposal, on the
fact that the Common Units had been trading on the Exchange at prices above
$11.00 per Unit, and on Dillon Read's statement that it was not prepared to
render an opinion that the Initial Proposal was fair to the Public Unitholders
from a financial point of view) and that other terms of the Initial Proposal
were undesirable (including that the Initial Proposal would not have been
subject to the approval of a majority of the Public Unitholders voting at the
Special Meeting), the Special Committee determined that it would recommend that
the Initial Proposal be rejected. Subsequent to December 10, 1993, the Special
Committee and its legal and financial advisors pursued further discussions and
negotiations with VEC and its representatives. All of the members of the
Special Committee participated in such discussions and negotiations, rather
than appointing a spokesman or representative. As a part of these
negotiations, the Special Committee noted to VEC that VEC would be unlikely, as
a practical matter, to effect the Merger if the Special Committee did not
recommend that the Merger proposal be accepted. As a result of this
negotiating process, the specific details of which are not significant to an
understanding of the matters discussed in this Proxy Statement, on December 17,
1993 VEC made a revised proposal of $12.10 (the "Revised Proposal") and made a
number of revisions to the Merger Agreement. For information regarding the
latter, see "Recommendation of the Board of Directors of the General Partner;
Fairness of the Merger."
On December 17, 1993 and December 20, 1993, the Special Committee met
and reviewed the Revised Proposal and, on December 20, 1993, the Special
Committee determined that it was the unanimous recommendation of the Special
Committee that the VNGC Board accept the Revised Proposal as being fair to and
in the best interests of the Public Unitholders, based on the considerations
discussed under "Recommendation of the Board of Directors of the General
Partner; Fairness of the Merger."
Certain Contacts. On January 21, 1994, VEC's CEO was contacted by Mr.
Charles L. Watson, the Chairman of the Board of Natural Gas Clearinghouse,
Houston, Texas ("NGC") requesting that a meeting between them be scheduled.
Mr. Watson did not explain the purpose of the meeting. A meeting was scheduled
for January 24, 1994. On January 24, 1994, VEC's CEO received a telephone call
from NGC cancelling the meeting and a letter from the Chairman of NGC
indicating that NGC was interested in pursuing joint venture arrangements on or
off the Partnership's pipeline system. The letter further stated that NGC
believed that the value of the Partnership's assets was not being maximized in
its current operating structure and that NGC believed that, through its own
nationwide gas marketing infrastructure, it could increase utilization of the
Partnership's gathering, processing, storage and transmission facilities. NGC
further indicated that it had had substantial discussions regarding the
Partnership with its two principal owners, British Gas plc and NOVA Corporation
of Alberta, and was confident that it could offer VEC an attractive alternative
to the Merger transaction proposed and described in this Proxy Statement. On
January 28, 1994, the CEO of VEC received another letter from NGC proposing
that NGC acquire the Units of VNGP, L.P. held by VEC subsidiaries for $16.00
per Unit; the letter further stated that the proposal was not subject to
financing or other conditions, and that, if VEC agreed to such proposal, NGC
would make a similar offer for the publicly held Common Units at the same
price. Accordingly, insofar as the proposal related to Common Units held by
Public Unitholders, it was contingent on VEC first agreeing to sell
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the Units controlled by its subsidiaries. VEC's CEO was also contacted by
telephone by the NGC Chairman. However, no substantive discussions or
negotiations occurred between the VEC CEO and the NGC Chairman. As described
above, the VEC Board had previously determined that it is in the best interests
of VEC and its stockholders that VEC remain involved in the natural gas and NGL
businesses and that, through subsidiaries, it continue to manage the assets
owned by the Partnership. VEC's CEO advised the VEC Board of the NGC letters;
on January 28, 1994, the VEC Board met to discuss the NGC proposal, unanimously
reaffirmed its prior determination that VEC's interest in the Partnership was
not for sale, and authorized the CEO of VEC to reject the NGC proposal. By
letter dated January 28, 1994, the CEO of VEC advised NGC that VEC's interest
in the Partnership was not for sale.
In a letter to the VNGC Board dated February 3, 1994, NGC reiterated
its proposal and requested that the VNGC Board enter into negotiations with it
regarding the proposal. At a meeting held on February 11, 1994, the CEO of VEC
delivered to the VNGC Board a letter stating unequivocally that VEC was
unwilling to sell the Partnership interests controlled by VEC. The VNGC Board
thereupon determined that, without the consent of VEC, it did not appear to be
feasible to effect the transaction proposed by NGC. However, at the request of
the VNGC Board, a letter was sent from Dr. Calgaard, on behalf of the VNGC
Board, to NGC requesting that NGC promptly advise the VNGC Board if it was
contemplating a specific proposal in which NGC would seek to acquire only the
Partnership interests held by persons other than VEC and, if so, the specific
details of such proposal. By letter dated February 15, 1994, NGC responded to
Dr. Calgaard's letter. NGC indicated that it was interested in discussing a
negotiated transaction in which it would acquire, for an unspecified price,
Common Units held by the Public Unitholders upon mutually agreeable terms and
conditions. NGC stated that, in such a transaction, NGC and the Company would
be the two limited partners of VNGP, L.P. NGC further requested a meeting with
the VNGC Board to discuss terms, conditions, timing and structure of such a
transaction.
On the morning of February 23, 1994, the members of the Special
Committee, Dr. Calgaard and Messrs. Escobedo and Wallace, together with their
independent legal counsel, met with representatives of NGC. NGC's
representative orally reiterated its earlier proposal and made additional
proposals that were each conditioned upon VEC either selling its interest in
the Partnership to NGC, or upon VEC agreeing to permit the Partnership to enter
into a joint venture or other arrangement in which "commercial control" of
VNGP, L.P. would be assumed by NGC. Moreover, the NGC representative made
clear during the meeting that the amount of premium over market that NGC was
willing to pay for Common Units was a function of the amount of control NGC
acquired over the Partnership in the transaction and that, if NGC was offered
no control, it was unwilling to agree to pay any premium for Common Units. At
the meeting, in response to a question from Dr. Calgaard, NGC specifically
declined to make any offer for the publicly held Common Units not conditioned
upon NGC achieving "commercial control" of VNGP, L.P. On February 23, 1994, at
a regularly scheduled meeting of the VNGC Board, Dr. Calgaard reported to the
VNGC Board regarding such earlier meeting with NGC. The VNGC Board thereupon
adopted a resolution requesting that the VEC Board state the position of VEC
with respect to a sale, joint venture or other transaction involving NGC. At a
special meeting of the VEC Board held on February 24, 1994, the VEC Board
discussed the NGC proposals and adopted resolutions (i) reconfirming that it is
in the best interests of VEC and its stockholders that VEC continue to engage,
through its subsidiaries, in the natural gas and NGL businesses, and that its
subsidiaries continue to manage the assets
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owned by VNGP, L.P., and (ii) that VEC does not desire to participate with NGC,
or with any other third party, in any joint venture or other transaction in
which VEC would relinquish, in whole or in part, its subsidiaries' control of
the assets and businesses owned by the Partnership. The result of the VEC
Board meeting was communicated to the VNGC Board by the CEO of VEC. On March
1, 1994, the Chairman of NGC telephoned Dr. Calgaard to further explain NGC's
interest in the Partnership, and was asked by Dr. Calgaard to put in writing
any proposals he might have. On March 2, 1994, NGC sent a letter to Dr.
Calgaard in which it described various "enhancements" which NGC believed it
could provide if it were able to enter into a negotiated transaction with VNGP,
L.P. In the March 2, 1994 letter, NGC indicated that it could provide
off-system gas sales markets to the Partnership which, according to NGC, might
generate additional transportation revenues, help meet contractual gas purchase
obligations and attract new gas supplies to the Partnership's system. NGC also
indicated that it would be willing to subscribe to gas storage capacity that,
in NGC's opinion, would generate incremental transportation and storage
revenue, that NGC would commit to certain gas transportation volumes at
specified prices, and that it believed it could combine with the Partnership in
establishing "supply hubs" to access gas markets. The letter also stated NGC's
belief that other enhancements could be identified if NGC were allowed to
assume "commercial control" of the Partnership's assets. No mention was made
in the letter of any acquisition of Common Units or other interests in the
Partnership. On March 4, 1994, Dr. Calgaard sent a letter to NGC, formally
advising NGC of VEC's position, indicating that none of NGC's proposals
appeared feasible in light of NGC's desire to obtain "commercial control" and
stating that the matter appeared to be concluded. Subsequently, during the
week of March 7, 1993, the Special Committee met by telephone with its legal
and financial advisers to authorize the final response to NGC and, because
Dillon Read had not participated in any of the meetings involving the Special
Committee relating to NGC matters, to apprise Dillon Read formally of those
events. During that meeting, the Special Committee authorized Dillon Read to
contact NGC directly to confirm NGC's position as previously reported to the
Special Committee. A representative of Dillon Read then so confirmed NGC's
position in a telephone conference with the NGC CEO. No further communications
have been received from NGC.
VEC has not made a detailed analysis of NGC's claims and proposals set
forth in the March 2, 1994 letter because it has determined that it has no
interest in a joint venture or other arrangement with NGC or any third party.
However, based upon a preliminary study of the March 2, 1994 letter, VEC
believes that the NGC proposals set forth in the March 2, 1994 letter would
provide little, if any, financial or operational benefit to the Partnership.
VEC has declined to engage in discussions with NGC in connection with
the above expressions of interest because it has determined it to be in the
best interests of VEC and its stockholders to remain engaged in the natural gas
and NGL businesses and that its subsidiaries continue to manage the assets
controlled by the Partnership. Additionally, as is more fully discussed in the
following paragraph, VEC has determined that a sale of its interest in the
Partnership would have severe, adverse federal income tax consequences to VEC
that would render any such sale disadvantageous to VEC and its stockholders.
VEC believes that it has no duty to the Public Unitholders to sell, or to
consider offers to sell, its own interest in the Partnership or its other
natural gas related assets, whether in response to a third party proposal or
otherwise. Neither NGC nor any other third party has expressed an interest in
unconditionally acquiring only the Common Units held by the Public Unitholders.
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As is more fully described under "The Partnership--Background of the
Partnership," in 1987, VEC formed the Partnership and contributed property of
the Company in exchange for an interest in the Partnership and a distribution
of cash from the Partnership. For tax purposes, the transaction was treated as
a contribution of property and a nontaxable partnership distribution, except as
more fully explained below. The Company's tax basis in its assets contributed
carried over and became the Partnership's basis in the assets. At the time,
the assets, by appraisal, had a fair market value in excess of $1 billion but a
tax basis of $440 million due principally to accelerated depreciation and
rising market values of the assets. The distribution of cash from the
Partnership to the Company was treated as a return of capital to the extent of
the Company's interest in the Partnership. This portion of the cash
distribution exceeded the Company's basis by $190 million and therefore created
a negative basis in the Company's investment in the Partnership. Subsequent to
formation of the Partnership, the Company's basis has been increased by its
share of Partnership income and reduced by distributions received. As of
December 31, 1993, the Company's estimated basis in its investment in the
Partnership was approximately a negative $170 million. If this investment were
to be sold, gain would be recognized for federal income tax purposes to the
extent of such negative basis, plus proceeds received from any such sale. As a
result, any sale of the Company's interest in the Partnership would trigger a
substantial tax liability that would necessarily consume a substantial portion
of the proceeds of any such sale. As a result, the sale of its Partnership
interest would have undesirable tax consequences to VEC.
SALOMON BROTHERS' ANALYSIS
March Preliminary Review
As described above, on March 30, 1993, Salomon presented its
preliminary review of strategic alternatives to certain VEC officers and other
members of VEC management. The preliminary review was prepared at the request
of VEC. No limitations were placed on, or instructions given to, Salomon in
connection with such request. Such preliminary review (as revised on April 2,
1993 to correct certain errors and make minor changes (the "March Preliminary
Review") is summarized below.
In the March Preliminary Review, Salomon noted that the key
difficulties regarding continued maintenance of the status quo included the
large amount of financial support which the Partnership would require from VEC
(projected to equal $50 million over the next two years) to achieve its
business plan, the implications that such financial support might have on VEC's
credit ratings, the minimal benefit that ownership of approximately 49% of the
Partnership provided to VEC's valuation in the equity markets, and the
conflicts of interest which might continue to arise between VEC and the
Partnership. See "The Partnership--Conflicts of Interest." Salomon considered
potential VEC objectives to include: maximizing VEC shareholder value;
retaining VEC's investment grade debt rating; eliminating any need for VEC to
continue to provide capital funding support to the Partnership; allowing the
Partnership to take advantage of opportunities to grow in the natural gas
gathering and processing businesses without VEC support; and eliminating
conflicts of interest between VEC and the Partnership. Salomon then noted that
the choice among the various alternatives would be largely determined by the
financial and strategic objectives of VEC, particularly its long-term strategy
with regard to whether it wished to continue to participate in the natural gas
and NGL businesses and, thus, maintain the resulting upside opportunities and
downside risks of those businesses, and, therefore, whether it wished to
maintain
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control of those businesses. In connection with such potential objectives,
Salomon noted that any transaction would need to be structured so as to be fair
both to the stockholders of VEC and to the Public Unitholders.
Salomon then described VEC's principal alternatives with respect to
the Partnership: (i) maintenance of the status quo; (ii) repurchase of the
publicly held Common Units; (iii) repurchase of the publicly held Common Units,
together with a contribution of VEC's other gas-related assets to VNGC and a
public equity offering in the combined VNGC-Partnership business (the "equity
carve-out alternative"); (iv) a spin-off of VNGC and VEC's other gas-related
assets to VEC's shareholders (the "spin-off alternative"); and (v) the sale of
VNGC and VEC's other gas-related assets to a strategic buyer which would also
acquire the publicly-traded Common Units directly or indirectly following their
acquisition by VNGC (the "sale alternative"). In order to analyze the pro
forma effects of certain of these alternatives, Salomon first performed various
preliminary analyses regarding the value of the Partnership and its businesses,
applying three principal methodologies: (i) an analysis of market trading
multiples for comparable publicly traded companies in the intrastate natural
gas processing and gathering businesses (a "comparable company analysis"), (ii)
an analysis of multiples paid by unaffiliated companies in acquisition
transactions (a "third party acquisition analysis"), and (iii) a discounted
cash flow ("DCF") analysis.
In its comparable company analysis, Salomon identified five publicly
traded companies (Western Gas Resources Inc. ("Western"), Associated Natural
Gas Corp. ("Associated"), Tejas, American Oil & Gas ("American") and USX-Delhi
("Delhi")), as having businesses that are somewhat comparable to the business
of the Partnership. Salomon calculated the following ranges of ratios for this
comparable group: (i) market value of equity plus net debt ("firm value") to
analysts' projected 1993 earnings before interest, taxes, depreciation and
amortization ("EBITDA") of 5.2x to 9.4x, (ii) market value to projected 1993
cash flow from operations (net income plus depreciation and amortization,
change in deferred taxes, and other non cash income) per share of between 4.1x
and 10.7x, and (iii) market value to adjusted book value (book value less
intangibles and cash) per share of between 1.4x and 3.3x. Applying these
ranges to the Partnership resulted in total equity values (after deducting from
firm value $663 million of debt and capital lease obligations (net of excess
cash) of negative to $474 million (equivalent to approximately (meaningless) to
$24.69 per Common Unit based on an assumed 19.2 million Units [including
theoretical Units representing general partner interests] outstanding), $213
million to $556 million ($11.09 to $28.96 per Common Unit), and $221 million to
$521 million ($11.51 to $27.14 per Common Unit), respectively.
In its third party acquisition analysis, Salomon identified four
recent acquisition transactions in the natural gas processing and gathering
industry that it viewed as somewhat comparable to the business of the
Partnership: (i) the purchase by Enron Corp. ("Enron") of LRC for a firm value
of $170 million (10.6x last twelve months' ("LTM") EBITDA), (ii) Arkla's
acquisition of LIG for a firm value of $171 million (11.2x LTM EBITDA), (iii)
LIG Acquisition Corp.'s prior acquisition of LIG for an estimated firm value of
$125 million (8.2x LTM EBITDA), and (iv) Koch's acquisition of United for which
information was not yet publicly available. Taking into account the
differences between the companies acquired and the Partnership, Salomon's
knowledge as financial advisor to United, and its experience generally, in its
third party acquisition analysis Salomon utilized a range of firm value to
projected 1993 EBITDA for the Partnership ($121 million, based on VEC's
strategic plan prepared in October 1992) of 6.5x to 8.5x, resulting
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<PAGE> 43
in a total equity value (after deducting from firm value $659 million of debt
and capital lease obligations, net of excess cash) of $128 million to $370
million (equivalent to approximately $6.67 to $19.27 per Common Unit based on
an assumed 19.2 million Units outstanding).
Salomon's DCF analysis was prepared using both the projections
contained in VEC's strategic plan prepared in October 1992 and revised
projections prepared by Salomon based in part on early 1993 results. Using the
Company's projections and discount rates of 10% to 12% (and subtracting from
firm values debt and capital lease obligations, net of excess cash), implied
equity values of $247 million to $493 million (equivalent to approximately
$12.86 to $25.68 per Common Unit based on an assumed 19.2 million Units
outstanding). Using Salomon's revised projections implied equity values of
$101 million to $306 million (equivalent to approximately $5.26 to $15.94 per
Common Unit based on an assumed 19.2 million Units outstanding).
Since the focus of the March Preliminary Review was to analyze a broad
range of alternatives, Salomon utilized wide ranges of value for the
Partnership and did not refine its valuation further. Salomon also noted some
of the limitations and uncertainties of the various methodologies, as described
below with respect to the Salomon October Report. Salomon also noted that at
the then-current trading value of $8.50 per Common Unit, the total market value
of the Partnership equity was $163 million (based on an assumed 19.2 million
Units outstanding, including Units owned by the Company). In analyzing and
comparing the various alternatives, Salomon assumed that a repurchase by VEC of
the publicly-traded Common Units (either alone or as part of the equity
carve-out alternative) would be completed at $10.20 per Unit, which constituted
a 20% premium over the then-market price.
Salomon then analyzed each alternative in detail, including a summary
of the steps necessary to consummate each transaction, the structure of VEC's
investment in the Partnership's business following a transaction, the benefits
and detriments to VEC associated with each transaction, and the pro forma
financial impact of the transaction on VEC. With respect to the status quo
alternative, Salomon noted as benefits to VEC that: VEC would retain control
over the gas gathering and NGL businesses and would avoid transaction costs or
the payment by VEC of any premium to Public Unitholders; VEC would remain an
investment grade company that would be well-followed by equity research
analysts covering the refining business; and VEC would retain a portion of the
upside of the gas gathering and NGL businesses. As negatives with respect to
the status quo alternative, Salomon noted that: it would strain VEC
financially; it could exacerbate existing conflicts of interest (since, in
order to expand the gas-related business, VEC would need to enter into new
leases or provide additional capital funding for the Partnership); and the
problems with the Partnership's financial and operating structure (see
"--Reasons for the Proposed Merger") would continue.
With respect to the alternative of VEC purchasing the publicly held
Common Units, Salomon assumed that VEC would effect a public offering of VEC
Common Stock, and noted as benefits to VEC that: VEC could invest in the gas
gathering and NGL businesses free of existing structural problems; capital
availability for those businesses would improve; the Public Unitholders'
interests in the Partnership would be eliminated, thereby eliminating conflicts
of interest going forward; and VEC would retain control over the gas gathering
and NGL businesses and increase its participation in any upside of those
businesses. As negatives of that alternative, Salomon noted that: VEC's
leverage would increase significantly; a $300-350 million new equity offering
would be needed to maintain
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<PAGE> 44
its current capital structure and not risk a ratings downgrade; that an equity
offering might be difficult; equity analysts following VEC might not fully
understand the natural gas businesses and thus might fail to assign full values
thereto; and refining equity is not the optimal capital to fund acquisition of
natural gas assets. Salomon indicated that, on balance, this alternative might
have a slightly negative impact on the VEC stock price. Although in this
analysis Salomon assumed that the publicly-traded Common Units would be
acquired at $10.20 per Common Unit, a 20% premium over the market price for the
Common Units, Salomon also analyzed the pro forma impact on VEC resulting from
premiums of -20% to +20% to the market price, and noted that the financial
ratios for VEC would not be sensitive to the premium paid to the Public
Unitholders (since changes in such premium would be relatively small compared
to the Partnership's indebtedness which would be consolidated in VEC's
financial statements upon such an acquisition). Salomon noted that an
acquisition of the publicly-traded Common Units would need to be structured so
as to be fair both to the stockholders of VEC and the Public Unitholders.
With respect to the equity carve-out alternative, Salomon assumed that
VEC would own 49% of the new company's stock following its initial public
offering raising an assumed $250 million. Salomon assumed in this analysis
that Public Unitholders would have the right to receive $10.20 per Common Unit
either in cash or in the form of stock in the new company. The positives to
VEC resulting from the equity carve-out alternative, as identified by Salomon,
included: the anticipated retention by VEC of its investment grade debt rating;
the new company should be capital self-sufficient, eliminating the need for VEC
financial support; the new company would be close to investment grade with a
capacity for growth; assumed payout ratios for the new company (a corporation)
would be lower than those of the Partnership, thus allowing more cash to be
reinvested in the business; the new company would benefit from optimal market
valuations placed on gas gatherers and NGL companies; and VEC would have the
flexibility in the future to sell or spin-off its shares in the new company or
to acquire the publicly held shares. As negatives of the equity carve-out
alternative, Salomon noted that the transaction would result in some
significant earnings per share and cash flow per share dilution to VEC; that
the new company, unlike the Partnership, would be a taxable entity; that any
subsequent spin-off would not be tax-free to VEC shareholders; and that the
required equity offering might be difficult. Salomon indicated that, on
balance, it anticipated that this alternative would be neutral to the VEC stock
price.
With respect to the spin-off alternative, Salomon noted as positives
to VEC that: VEC would remain a "pure-play" refining stock play for investors;
VNGC would be financed independently; the spin-off would be tax-free to VEC
stockholders, who would retain their proportionate ownership in the gas
gathering and NGL businesses and any resulting potential upside (estimated to
have a value of $2-$4 per Unit); that the publicly-traded VNGC stock could
ultimately be an attractive security to be offered in exchange for publicly
held Common Units; and that the VNGC Board could in the future determine
whether to purchase the Common Units owned by the Public Unitholders. As
negatives, Salomon noted that the Partnership's high leverage and constraints
on capital expenditures would continue; perceived conflicts of interest between
VNGC and the Partnership would remain; VEC's equity would be reduced by about
$200 million, which would significantly adversely affect leverage ratios; there
would be a negative impact on VEC's coverage ratios resulting from the loss of
the Partnership's cash flow; as a result of such increased leverage and
worsened coverage ratios there would be an anticipated negative impact on VEC's
credit ratings; that the equity markets might
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<PAGE> 45
have difficulty valuing VNGC and a liquid market for the VNGC equity security
might not develop; and that VNGC would be vulnerable to a takeover. Salomon
anticipated that the spin-off would have a negative impact on the VEC stock
price, in view of the value of the spin-off received by the VEC stockholders.
With respect to the sale alterative involving all of VEC's and the
Partnership's gas-related assets, Salomon noted as positives to VEC that,
Salomon believed an attractive price might be obtainable because of strong
strategic interest in assets in the gas gathering, processing and marketing
industry; it would provide VEC with capital for refining and other potential
expansion; VEC would remain a "pure play" refining stock; and that VEC's credit
would be positively impacted and positioned for a ratings upgrade. Salomon
noted that if VEC wished to exit the gas gathering/NGL business, the sale
alternative might provide maximum value to VEC shareholders. As negatives to
VEC, Salomon noted that the anticipated gain would result in taxes (some of
which might be offset by investment tax credits), that VEC would lose control
of the natural gas business and that there could be employee and personnel
issues. Under the sale alternative, Salomon assumed that VNGC, the Partnership
and VEC's other gas assets could collectively be sold for an estimated $950
million to $1,150 million ($390 million to $590 million plus assumption of $560
million of Partnership debt, with Public Unitholders receiving an assumed $100
million to $120 million (equivalent to approximately $10.25 to $12.30 per
Common Unit based on an assumed 9.75 million publicly held Common Units
outstanding) and VEC receiving an assumed $290 million to $470 million for its
interests in the Partnership, VNGC and its other gas assets.
Salomon did not make a recommendation with respect to which of these
alternatives VEC should pursue since VEC's management needed to consider each
alternative in light of VEC's primary strategic and financial objectives.
Salomon October Report
As described above, on October 8, 1993, at VEC's request Salomon
presented to certain VEC officers and other members of VEC management Salomon's
analysis and recommendations with respect to the form and amount of
consideration that VEC should propose to pay to the Public Unitholders in
connection with a potential acquisition by VEC of the publicly held Common
Units, and the structure of such an acquisition (the "Salomon October Report").
Except for VEC's request that such report be limited to consideration of that
alternative, no instructions were given to Salomon and no limitations were
placed on Salomon, in connection with such request. The Salomon October Report
considered whether the Public Unitholders should be offered VEC equity
securities through a merger or an exchange offer or cash to be obtained through
a separate offering of VEC equity securities. Salomon recommended that the
latter structure would be preferable because, among other reasons, it would (i)
provide Public Unitholders with cash to pay taxes generated by the Merger, (ii)
avoid the need for the Special Committee and the Public Unitholders to value
the VEC equity securities being offered, (iii) avoid possible downward pressure
on the new VEC stock and the VEC Common Stock, and (iv) not be subject to the
Commission's disclosure rules governing partnership "roll up" transactions.
Countervailing factors were the expense of underwriting fees in a separate
securities offering, the need to coordinate the timing of the Merger with the
timing of the offering of equity securities, and the applicability of the
Commission's disclosure rules governing "going private" transactions. Salomon
recommended that the restructuring of VNGP, L.P. should be concluded as a
merger rather than a tender
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offer, regardless of whether the consideration offered to the Public
Unitholders was cash or securities.
The Salomon October Report also contained a valuation analysis of the
Common Units. In connection with its valuation analysis, Salomon reviewed the
trading history of the Common Units in comparison with other publicly-traded
limited partnership ("MLP") units and analyzed the premiums-to-market paid in
certain other comparable MLP buy-in transactions and premiums-to-market paid in
"squeeze-out" transactions by controlling stockholders. Salomon then applied a
comparable company analysis, a third party acquisition analysis and a DCF
analysis. Salomon noted that, given the Partnership's high degree of leverage,
small percentage variations in the value of the Partnership's business would
translate into large percentage variations in the resultant equity value.
Salomon also noted that management anticipated that the Partnership's 1994
income would be significantly less than 1992 and 1993 income due to the
positive effect of certain nonrecurring items in 1992 and 1993 and the
restructuring and expiration of certain favorable sales contracts, and that
multiples of projected 1994 results were more relevant than historical results
or projected 1993 results in determining an appropriate valuation for the
Partnership.
In comparing the Partnership with other publicly-traded MLPs, Salomon
stated that there were no comparable publicly-traded MLPs in the natural gas
processing and gathering business. Salomon then compared the Common Units to
selected pipeline MLPs and calculated a dividend yield of 5.5% on the Common
Units versus a range of 7.0% to 7.9% for the pipeline MLPs, a
debt-to-capitalization ratio of 79.6% for the Partnership versus a range of
24.6% to 58.8% for the pipeline MLPs, and firm value multiples of 6.5x to 8.9x
EBITDA for the pipeline MLPs versus 6.1x EBITDA for the Partnership. Salomon
concluded that the Partnership, especially in light of its limited financial
flexibility, appeared to be fairly valued relative to other MLPs in the public
market.
In its analysis of the prices paid in comparable MLP buy-ins, Salomon
calculated premiums to the market price prior to the announcement of the
transaction. These premiums ranged from 7% to 44%, with a median of 28%. In
"squeeze out" transactions by controlling shareholders of corporations, Salomon
calculated average indexed premiums to market of 29.1% for cash transactions,
24.4% for stock transactions, and 33.0% for cash transactions where the
controlling shareholder owned less than 50% of the target company prior to the
transaction.
In its comparable company analysis Salomon identified five
publicly-traded companies (American, Associated, Tejas, Delhi, and Western, as
well as two initial public offering ("IPO") transactions that were in
registration (Aquila Energy Corp. ("Aquila") and Trident NGL Holdings, Inc.
("Trident")) as having businesses which are somewhat comparable to the
businesses of the Partnership, and determined that Delhi, Aquila and Trident
were the most comparable. Salomon used the midpoint of the price range on the
most recently available Registration Statements for Aquila and Trident to
calculate trading multiples, but was unable to calculate certain ratios
involving estimated 1993 and 1994 results since there are no publicly available
analysts' projections for IPO companies in registration. Salomon calculated
the following trading multiples for the comparables: (i) firm value to LTM
EBITDA of 5.4x to 13.0x for the larger group and 5.4x to 8.1x for the more
comparable group; (ii) firm value to projected 1994 EBITDA of 4.4x to 10.2x for
the larger group and 4.4x for Delhi; (iii) price to LTM cash flow of 5.4x to
14.4x for the larger group and 5.4x to 6.7x for the more comparable group;
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(iv) price to projected 1993 earnings of 16.5x to 36.4x for the larger group
and 16.5x for Delhi; and (v) price to projected 1994 earnings of 12.4x to 26.0x
for the larger group and 13.1x for Delhi. Salomon determined that in the
public market context, the valuation of the Partnership would be negatively
impacted by its high leverage and its low historical and projected growth rates
relative to the comparable companies. Salomon concluded that the appropriate
valuation multiples for the Partnership would be 6.5x to 7.5x LTM EBITDA ($127
million), 6.0x to 7.0x projected 1994 EBITDA ($112 million), 5.5x to 6.5x LTM
cash flow ($55 million), 17.0x to 21.0x projected 1993 earnings ($11 million),
and 15.0x to 19.0x projected 1994 earnings ($4 million). After computing firm
values based on such multiples, and deducting $639 million of debt and capital
lease obligations and adding $28 million in cash and deducting $18 million in
deferred management fees, and assuming 19.05 million Units outstanding, this
implied equity values of approximately $10.33 to $17.00, $2.27 to $8.15, $15.88
to $18.77, $9.82 to $12.13, and $2.91 to $3.69 per Common Unit, respectively.
(As noted above, in its March Preliminary Report, Salomon used wider ranges of
multiples resulting in wider ranges of valuation in its comparable company
analysis.)
Salomon identified four recent merger and acquisition ("M&A")
transactions in the natural gas processing and gathering industry involving
businesses that it viewed as somewhat comparable to the businesses of the
Partnership: (i) Equitable Resources, Inc.'s purchase of LIG for an enterprise
value of $185 million, or 8.0x 1993 estimated EBITDA; (ii) Tejas' purchase of
EGSI for $380 million or 7.9x EBITDA; (iii) Enron's purchase of LRC for $170
million, or 10.6x LTM EBITDA; and (iv) Koch's purchase of United for $385
million, or 7.7x 1993 estimated EBITDA. On the basis of these multiples and
Salomon's experience generally, Salomon utilized a range of 7.0x to 8.0x
EBITDA, or (using the same adjustments to firm value and assumptions as
described above in the comparable company analysis) $13.66 to $20.33 and $12.19
to $18.65 per Common Unit based on LTM ($127 million) and projected 1993 EBITDA
($123 million), respectively, in its third party acquisition analysis of the
Partnership. (As noted above, in Salomon's March Preliminary Report Salomon
utilized a wider range of multiples of between 6.5x and 8.5x projected 1993
EBITDA.) However, given the significantly lower outlook for 1994 results for
the Partnership, Salomon pointed out that these values could be overstated.
Salomon noted that there is a limited amount of public information related to
these transactions, since the acquired companies were either private companies
or subsidiaries of larger companies. Moreover, potential buyers in this
industry generally utilize a DCF analysis (based on projections which are not
publicly available) rather than multiples of current results to value natural
gas pipeline assets. Therefore, the aforementioned multiples generally reflect
the buyers' view of potential synergies, tax benefits, and other unquantifiable
factors. Salomon also noted that each of these transactions was significantly
smaller in size than the firm value of the Partnership, resulting in strategic
interest from a very broad group of potential buyers. In view of the
foregoing, Salomon did not believe that using a methodology based upon
multiples of LTM EBITDA provided a reliable indication of value.
Due to the tax-free nature of the Partnership's structure, Salomon
utilized a flow-through entity cash flow approach in its DCF analysis. Salomon
therefore adjusted its discount rates to reflect the absence of a corporate tax
"shield" on interest expense, resulting in discount rates of 11.5% to 12.5%
based on the adjusted weighted-average cost of capital for the five
publicly-traded comparable companies. Salomon utilized a DCF which
incorporated projected Partnership cash flows for 1994 through 2003. Cash
flows for 1994 through 1998 were estimated by VEC, and cash flows from 1999
through 2003 were estimated by Salomon in
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conjunction with VEC. Salomon's DCF methodology utilized an end-of-year
convention in discounting these cash flows and terminal values based on the
perpetuity growth method assuming 2.5% to 3.5% growth in unlevered free cash
flow after 2003. Salomon utilized VEC management's most recent set of
projections, dated October 5, 1993, in completing its DCF analysis for the
Salomon October Report, which analysis yielded (after computing firm values
based on such methods,and deducting $685.6 million of debt and capital lease
obligations, plus deferred management fees of $18 million, less cash of $3.4
million and assuming Units outstanding of 19.05 million; these amounts differed
from the comparable and M&A analysis by assuming a DCF at January 1, 1994
balance sheet, versus June 30, 1993 for the comparable and M&A analysis) a
range of $4.63 to $11.17 per Common Unit. (Salomon subsequently computed
another DCF analysis using the October 5th projections which assumed the
terminal value was realized at the end of year ten as opposed to year eleven,
which yielded a range of $6.34 to $13.37 per Common Unit. Salomon also
computed a DCF analysis subsequent to the November 10, 1993 projections being
finalized which yielded a valuation of $3.85 to $10.60 per Common Unit based on
discount rates of 11.5% to 12.5%, end-of-year discounting and the terminal
value realized at the end of year ten. See"--Certain Projections.")
Salomon also completed a premium analysis which examined various
transaction multiples at values of $9.00 to $14.00 per Common Unit. A value of
$11.00 per Common Unit would result in premiums of 17.3%, 11.4% and 41.9% to
the market price, the LTM high price and the LTM low price, respectively, for
the Common Units as of October 7, 1993, 11.4x and 56.7x LTM and projected 1994
earnings, 3.8x LTM cash flow, and 6.6x LTM EBITDA.
Based on the foregoing analyses and its experience in other
transactions, Salomon concluded that an offer of $11.00 per Common Unit might
reasonably be expected to be found by a special committee of independent
directors of the General Partner, and its independent financial advisor, to be
fair to the Public Unitholders from a financial point of view and, therefore,
that such an offer might reasonably be expected to lead to a successful
acquisition by VEC of the publicly-traded Common Units, although recognizing
that such a special committee would likely seek to negotiate a higher price.
Certain Projections
During the period that Salomon was preparing the analysis and
recommendations set forth in Salomon's October Report, VEC and the General
Partner were involved in annual recurring strategic planning and budgeting
processes, including planning and budgeting for the Partnership. VEC and the
General Partner utilize a procedure in which budgeting and forecasting
projections and assumptions are first developed by staff personnel, using
general economic assumptions approved by management. These forecasts are then
reviewed by management and refinements are made as a result of these revisions.
VEC's strategic plan and budget, containing VEC and Partnership forecasts and
assumptions for a five-year planning period, is then ultimately approved by the
senior management of VEC and the General Partner, including Messrs. Greehey,
Benninger, McLelland and Heep, and presented to the Board of Directors of VEC.
Beginning on September 10, 1993, the staff of the Company provided Salomon with
numerous successive iterations of the projections and assumptions for the
Partnership being developed in connection with this strategic planning and
budgeting process. The successive iterations of projections were provided to
ensure that Salomon's financial models were functioning properly and to help
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reduce the analysis time required once the approved forecast was available.
The review and approval of these projections were subsequently completed on
October 5, 1993, subject to the resolution of items (5)-(9) described below.
The November 10, 1993 projection was included in Dillon Read's initial opinion
which was presented to the Special Committee and the Board of Directors of the
General Partner on December 20, 1993.
As of September 10, 1993, the Company's staff had determined and
included in its forecast for the Partnership the maximum amount of new business
which could be expected to be achieved from new sales and transportation
customers and contracts. However, as of such date determinations had not been
made with respect to: (1) the incremental capital expenditures required to
increase throughput capacity to be able to handle certain new business
prospects; (2) the operating expenses, primarily fuel, which would be incurred
because of such incremental capital expenditures; (3) the expected proportions
of such new sales business that were expected to be higher margin term sales
and lower margin spot market sales; (4) the effects of an agreement, completed
November 11, 1993, which, in connection with the settlement of a customer
audit, excluded certain costs from the calculation of the price at which gas
will be sold to such customer in the future (described at Note 6 of Notes to
Consolidated Financial Statements included in Annex C); (5) whether certain
potentially favorable measurement, fuel usage, and customer billing adjustments
would be resolved and included in 1993 operating income; (6) the effects of the
reallocation of certain overhead costs following the September 30, 1993 sale of
VEC's natural gas distribution subsidiary; (7) the results of a detailed study
of expected future personnel and other costs which was completed in late
October 1993; (8) a decrease in the projected 1994 market prices for NGLs of
generally $.01 per gallon; and (9) a reclassification of transportation-related
expenses from a reduction of transportation fee revenues to an increase in
operating expenses, with no net effect on 1994 operating income. Between
September 10, 1993 and October 5, 1993, the expected effects of items (1)
through (4) above were estimated and included in the October 5, 1993
projection. Between October 5, 1993 and November 10, 1993, the expected
effects of items (5) through (9) were estimated and included in the November
10, 1993 projection. Salomon did not calculate and provide to VEC any
Partnership or Unit values based upon the September 10, 1993 projections or any
of the other iterations of projections prepared before October 5, 1993.
As discussed in the Form 10-K, 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 NGLs are extracted ("shrinkage cost").
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 the North Sea and other 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. During the first quarter of 1994, NGL prices have
increased modestly since late December 1993, but remain significantly 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 of these factors, operating income from NGL
operations for the fourth quarter of 1993 was substantially lower than the
level included in the November 10, 1993 forecast for such period and a reduced
level of operating income has continued through the first quarter of 1994. In
the event that NGL prices do not recover
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significantly, VEC and the General Partner believe that updated projections and
assumptions taking into account such price decline would result in projections
of future operating income and net income for the Partnership substantially
less than the October 5, 1993, and November 10, 1993 projections.
VEC does not as a matter of course make public its projections as to
future performance or earnings of the Partnership. However, such projections
were provided to Salomon and Dillon Read and their respective counsel for use
in the portion of their Partnership value calculations that utilize DCF
analysis. The projections were not provided to any other outside parties. The
projections were prepared solely for internal use and not with a view to public
disclosure or compliance with published guidelines of the Commission regarding
projections or the guidelines established by the American Institute of
Certified Public Accountants' Guide for Prospective Financial Information and
are included in this Proxy Statement only because such information was made
available to Salomon and Dillon Read and is required by the Commission to be
set forth herein. Neither VEC nor the General Partner assumes any
responsibility for the accuracy of such projections. Because the estimates and
assumptions underlying these projections are inherently subject to significant
economic and competitive uncertainties and contingencies, which are beyond the
control of VEC and the General Partner, there can be no assurance that the
projections will be realized and it is likely that the Partnership's future
financial performance will vary from that set forth below, possibly by material
amounts. Actual results may be materially lower or higher than those set forth
below. VEC does not intend to update and publicly reissue the projections to
reflect circumstances existing or developments occurring after the preparation
of such projections or to reflect the occurrence of unanticipated events.
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<TABLE>
<CAPTION>
Projections as of
(Dollars in Millions)
-------------------------------------------------
November 10, October 5, September 10,
1993 1993 1993
---------------- ------------ ----------------
<S> <C> <C> <C>
Operating Income(1)
- ----------------
1993 - Natural gas . . . . . . . . . . $50.1 $45.7 $45.7
Natural gas liquids . . . . . . 33.7 37.0 37.0
----- ----- -----
Total . . . . . . . . . . . . $83.8 $82.7 $82.7
===== ===== =====
1994 - Natural gas . . . . . . . . . . $29.4 $34.2 $40.9
Natural gas liquids . . . . . . 38.0 38.9 44.1
----- ----- -----
Total . . . . . . . . . . . . $67.4 $73.1 $85.0
===== ===== =====
1995 - Natural gas . . . . . . . . . . $39.6 $40.6 $48.6
Natural gas liquids . . . . . . 37.9 38.2 38.3
----- ----- -----
Total . . . . . . . . . . . . $77.5 $78.8 $86.9
===== ===== =====
1996 - Natural gas . . . . . . . . . . $43.2 $44.2 $55.2
Natural gas liquids . . . . . . 39.1 39.5 39.7
----- ----- -----
Total . . . . . . . . . . . . $82.3 $83.7 $94.9
===== ===== =====
1997 - Natural gas . . . . . . . . . . $45.5 $46.6 $60.7
Natural gas liquids . . . . . . 37.9 38.2 38.8
----- ----- -----
Total . . . . . . . . . . . . $83.4 $84.8 $99.5
===== ===== =====
Net Income (Loss)(2)
- -----------------
1993 . . . . . . . . . . . . . . . . . $18.6 $17.2 $17.2
1994 . . . . . . . . . . . . . . . . . $(1.6) $ 5.7 $18.5
1995 . . . . . . . . . . . . . . . . . $19.2 $21.1 $30.0
1996 . . . . . . . . . . . . . . . . . $16.9 $19.0 $33.3
1997 . . . . . . . . . . . . . . . . . $21.6 $23.9 $43.8
Capital Expenditures
- --------------------
1993 . . . . . . . . . . . . . . . . . $42.4 $44.2 $44.2
1994 . . . . . . . . . . . . . . . . . $56.2 $54.6 $25.4
1995 . . . . . . . . . . . . . . . . . $31.5 $31.5 $26.5
1996 . . . . . . . . . . . . . . . . . $28.0 $28.0 $23.0
1997 . . . . . . . . . . . . . . . . . $29.0 $29.0 $24.0
</TABLE>
<TABLE>
<CAPTION>
Projections as of
(Dollars in Millions)
----------------------------------------------
November 10, October 5, September 10,
1993 1993 1993
------------ ---------- -------------
<S> <C> <C> <C>
1993 OPERATING STATISTICS:
Natural gas:
Gas throughput volumes (MMcf per day):
Gas sales(3) 1,105 1,111 1,111
Gas transportation 1,514 1,525 1,525
------ ------ ------
Total gas throughput 2,619 2,636 2,636
====== ====== ======
Average gas sales margin per Mcf $ .259 $ .239 $ .239
Average gas transportation fee per Mcf $ .108 $ .108 $ .108
Natural gas liquids:
Plant production (MBbls per day) 69.3 69.6 69.6
Average market price per gallon (4) $ .298 $ .306 $ .306
Average gas cost per MMBtu $ 1.98 $ 2.01 $ 2.01
1994 OPERATING STATISTICS:
Natural gas:
Gas throughput volumes (MMcf per day):
Gas sales(3) 1,170 1,174 1,174
Gas transportation 1,664 1,665 1,737
------ ------ ------
Total gas throughput 2,834 2,839 2,911
====== ====== ======
Average gas sales margin per Mcf $ .225 $ .224 $ .230
Average gas transportation fee per Mcf $ .109 $ .100 $ .101
Natural gas liquids:
Plant production (MBbls per day) 76.0 76.0 76.0
Average market price per gallon (4) $ .304 $ .313 $ .313
Average gas cost per MMBtu $ 2.06 $ 2.06 $ 2.06
1995 OPERATING STATISTICS:
Natural gas:
Gas throughput volumes (MMcf per day):
Gas sales(3) 1,228 1,228 1,227
Gas transportation 1,855 1,856 1,878
------ ------ ------
Total gas throughput 3,083 3,084 3,105
====== ====== ======
Average gas sales margin per Mcf $ .217 $ .217 $ .230
Average gas transportation fee per Mcf $ .122 $ .102 $ .103
Natural gas liquids:
Plant production (MBbls per day) 76.5 76.5 76.5
Average market price per gallon (4) $ .324 $ .324 $ .324
Average gas cost per MMBtu $ 2.16 $ 2.16 $ 2.16
</TABLE>
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<PAGE> 52
<TABLE>
<S> <C> <C> <C>
1996 OPERATING STATISTICS:
Natural gas:
Gas throughput volumes (MMcf per day):
Gas sales(3) 1,276 1,276 1,276
Gas transportation 1,856 1,856 1,878
------ ------ ------
Total gas throughput 3,132 3,132 3,154
====== ====== ======
Average gas sales margin per Mcf $ .219 $ .219 $ .238
Average gas transportation fee per Mcf $ .124 $ .104 $ .105
Natural gas liquids:
Plant production (MBbls per day) 76.3 76.3 76.3
Average market price per gallon (4) $ .331 $ .331 $ .331
Average gas cost per MMBtu $ 2.20 $ 2.20 $ 2.20
1997 OPERATING STATISTICS:
Natural gas:
Gas throughput volumes (MMcf per day):
Gas sales(3) 1,333 1,333 1,333
Gas transportation 1,875 1,876 1,898
------ ------ ------
Total gas throughput 3,208 3,209 3,231
====== ====== ======
Average gas sales margin per Mcf $ .221 $ .221 $ .246
Average gas transportation fee per Mcf $ .123 $ .104 $ .105
Natural gas liquids:
Plant production (MBbls per day) 76.5 76.5 76.5
Average market price per gallon (4) $ .336 $ .336 $ .336
Average gas cost per MMBtu $ 2.24 $ 2.24 $ 2.24
</TABLE>
___________________________
(1) Projected operating income is based upon the projected operating
statistics reflected herein and projected increases in operating
expenses assuming increases in the Consumer Price Index of 3.1% for
1993, 3.5% for 1994, and 4% per year thereafter.
(2) Net income reflects interest expense on the Partnership's short-term
bank lines, assuming such bank lines are renewed on current terms
through 1997 and bear interest at the rate of 4.4% for 1993, 4.3% for
1994, 5.9% for 1995, 6.3% for 1996, and 6.2% for 1997. The
projections also assume an additional source of financing is arranged,
beginning in 1994, for financing requirements of up to approximately
$75 million in excess of the maximum $50 million in borrowings which
are permitted to be outstanding under the short-term bank lines. The
assumed additional source of financing was assumed to bear interest at
the same rate as the short-term bank lines. In addition, such
additional source of financing was assumed to temporarily further
increase by $50 million to repay all outstanding balances under the
short-term bank lines for a period of 45 consecutive days during each
16 consecutive calendar months (referred to herein as a "clean-up
period"). Such clean-up periods are required under the indenture for
the First Mortgage Notes. Federal income taxes were not included in
the projections above under the assumption that the Partnership will
continue to be treated as a partnership and not be subject to federal
income taxes.
(3) In order to make 1993 gas sales volumes comparable with gas sales
volumes projected for the years 1994-1997, the gas sales volumes for
1993 have been adjusted to include 140 MMcf per day of sales and
related purchases made on pipelines owned by other companies.
(4) Represents the average Houston area market prices for individual NGL
products weighted by relative volumes of each product produced. NGL
price projections are based upon crude oil and refined products
forecasts developed by VEC.
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<PAGE> 53
RECOMMENDATION OF THE BOARD OF DIRECTORS OF THE GENERAL PARTNER; FAIRNESS OF
THE MERGER
At a special meeting of the VNGC Board held on December 20, 1993, the
VNGC Board received and reviewed the written report of the Special Committee.
The VNGC Board did not separately analyze the fairness of the proposed
transaction. The VNGC Board reviewed the report of the Special Committee,
including the material factors listed in the report of the Special Committee.
The VNGC Board concurred that the material considerations listed in the Special
Committee report were the material considerations involved in the transaction.
The VNGC Board also concurred in both the analysis set forth in the Special
Committee report and in the conclusions contained therein. There were no other
material considerations applicable to the deliberations of the VNGC Board. The
VNGC Board thereupon unanimously (i) voted to approve the Merger, (ii)
determined that the Merger is fair to and in the best interests of the Public
Unitholders and (iii) voted to recommend that the Unitholders vote FOR approval
and adoption of the Merger Agreement. VEC also reviewed the report of the
Special Committee, including the material considerations listed therein, and
determined that the material considerations listed in such report were the
material considerations involved in the transaction. VEC therefore concurred
in the analysis set forth in the Special Committee report and in the
conclusions contained therein and, based thereon, believes that the Merger is
fair to and in the best interests of the Public Unitholders; there were no
other material considerations applicable to such determinations by VEC.
Among the factors considered by the VNGC Board and VEC relating in
particular to the procedural fairness of the proposed transaction, as set forth
in the Special Committee report, were the fact that the price of $12.10 and
other terms and conditions of the Revised Proposal were determined through
negotiations between VEC and the Special Committee, the fact that the Special
Committee was assisted by independent financial and legal advisors of its own
selection, the fact that the Merger is subject to the Independent Vote
Requirement through which VEC has neutralized its vote, the fact that the
Merger Agreement does not preclude the Special Committee from taking into
consideration other alternatives to the Merger through the date of closing and
does not contain any "bust up" or termination fee or penalty, and the view of
plaintiffs' counsel in the lawsuits involving VEC's Initial Proposal that the
Revised Proposal, subject to confirmation upon discovery, was fair to the
Public Unitholders.
In reaching the conclusion that the Revised Proposal is fair to and in
the best interests of the Public Unitholders and should be accepted by the
Board of Directors of the General Partner, the Special Committee considered all
factors it deemed to be material, as follows:
-- That the price of $12.10 and other terms and conditions of
the Revised Proposal were determined through negotiations between VEC and the
Special Committee, in which the Special Committee was advised by its financial
and legal advisors (although Dillon Read did not participate in any negotiating
sessions between the Special Committee and VEC), and the Special Committee's
belief that such price represents the highest price that VEC would be prepared
to pay. In part, the Special Committee's belief was based upon the discussions
and negotiations between the Special Committee and its advisors and VEC and its
advisors, including the statement by VEC that, were the Special Committee to
determine not to recommend that the Revised Proposal be accepted, VEC would
withdraw the Revised Proposal and publicly announce that it had determined not
to proceed with the Merger or similar transaction, and the fact that nothing
had come to the Special Committee's attention to indicate that VEC would be
willing to offer a higher price than that contained in the Revised Proposal in
the foreseeable future.
-- Dillon Read's oral preliminary opinion delivered to the
Special Committee on December 17, 1993, confirmed in writing on December 20,
1993, and revised and confirmed in writing on , 1994 (see "Opinion of
Financial Advisor to the Special Committee") that the consideration to be
received by the Public Unitholders pursuant to the Revised Proposal is fair,
from a financial point
65
<PAGE> 54
of view, to the Public Unitholders, upon which opinion the Special Committee
placed significant weight and Dillon Read's financial analysis (see "Opinion of
Financial Advisor to the Special Committee") in which the Special Committee
concurred.
-- That the $12.10 price represents a premium of approximately 36%
over the market price of $8.875 of the Common Units on September 14, 1993, a
date that is one month prior to public announcement on October 14, 1993 of the
Initial Proposal and which was chosen as one of a number of dates on which the
market for Common Units was viewed as likely to have been unaffected by the
Initial Proposal, and materially exceeds the price at which the Common Units
have traded in recent periods (see "Market Prices of Common Units and
Distributions"); that the $12.10 price represents an increase of $1.10 over the
price contained in the Initial Proposal, which, in light of the current market
and business conditions affecting the Partnership and VEC, the Special
Committee believed to be a significant increase; that, as compared to trading
volumes prior to the Initial Proposal, significant volumes of Common Units have
traded subsequent to the public announcement of the Initial Proposal, and at
prices at, above or near the $11.00 price contained in the Initial Proposal
(see "Market Prices of Common Units and Distributions"); and the likely effect
that the withdrawal of the Revised Proposal or failure to complete the Merger
would have on the trading prices of the Common Units.
-- The position of VEC, which, directly or indirectly,
controls approximately 47.5% of the outstanding Common Units, that it has
determined that it is in the best interests of VEC and its stockholders for VEC
to retain its interests in the natural gas and NGL businesses of the
Partnership and that VEC is not interested in selling or spinning off its
interests in the Partnership; that the Partnership Agreement contains no
prohibition on VEC or its subsidiaries acquiring more Units; and that any
merger or sale of substantially all the assets of the Partnership would
effectively require the consent or approval of VEC and its subsidiaries. The
Special Committee also considered that VEC's control over the Partnership
through its indirect ownership of all the outstanding capital stock of the
General Partner makes it questionable whether those Public Unitholders who are
interested in selling their Common Units at this time would be able to find any
other buyer willing to pay more than $12.10 for each Common Unit not owned by
VEC or its subsidiaries.
-- The statements made to the Special Committee by management
of VEC and its financial advisor and by the Company, including (i) that none of
such parties has any reason to believe that the conditions to the Merger
(including the condition that VEC have completed a public offering of
convertible preferred stock to finance the Revised Offer and that various
consents be obtained from lenders to VEC and the Partnership or their
subsidiaries) will not be satisfied reasonably promptly and (ii) that the
General Partner currently intends and expects to declare and pay quarterly
distributions on the Common Units consistent with past practice in the amount
of $.125 per quarter per Common Unit through the closing of the Merger and
that, if the closing of the Merger occurs more than 30 days after the last
record date for such a quarterly distribution, the Company intends and expects
to declare and pay to holders of Common Units of record as of the Effective
Time a one-time special cash distribution equal to the product of the quarterly
distribution per Common Unit of $.125 and a fraction the numerator of which is
the number of days from and excluding the record date in respect of which the
last quarterly distribution has been paid to and including the Effective Date
and the denominator of which is 90.
-- The terms and conditions of the Merger Agreement, as
revised following discussions between the Special Committee and its advisors
and VEC and its advisors, including:
-- that the Merger is subject to the Majority Vote Requirement
and the Independent Vote Requirement and that by its terms the Merger
Agreement will be terminated if the Special Meeting is held but the
Public Unitholders do not so approve the Merger;
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<PAGE> 55
-- that the Merger Agreement will terminate if the Merger has
not been consummated by June 1, 1994 (it being important to the
Special Committee that the Merger be consummated at an early date);
-- the representation and agreement of VEC and the General
Partner that prior to the Effective Time, the General Partner will
operate the Partnership in the ordinary course consistent with past
practice, and the Special Committee will continue in existence without
diminution of its powers or duties and may at any time withdraw or
modify its recommendation if and to the extent that the Special
Committee, after consultation with and based upon advice of outside
legal counsel, determines in good faith that such action is required
for the Board of Directors of the General Partner to comply with any
fiduciary duties it may have to the Public Unitholders under Delaware
law as in effect from time to time;
-- the representations of VEC and VNGC contained in Section
2(c) of the Merger Agreement regarding their intentions to continue
the declaration and payment by the Partnership of regular quarterly
distributions on the Common Units at the established quarterly
intervals through the Effective Date in the amount of $0.125 per
quarter per Common Unit and, under the circumstances referenced
therein, to cause the Partnership to declare and pay a one-time
special cash distribution to holders of Common Units;
-- that the Merger is conditioned on, among other things, the
Special Committee not having withdrawn or modified its recommendation
in a manner materially adverse to any party to the Merger Agreement
and on Dillon Read not having withdrawn or modified its opinion to the
Special Committee in a manner materially adverse to any party to the
Merger Agreement; and
-- that the Merger Agreement may be terminated by any party
prior to the Effective Time if at any time either the Special
Committee's recommendation or Dillon Read's opinion to the Special
Committee is withdrawn or modified in any manner materially adverse to
any party to the Merger Agreement.
-- That the Merger Agreement does not prohibit the Special
Committee from considering any and all information it may receive through the
date of the closing of the Merger, including with respect to alternatives to
the Merger and that the Merger Agreement does not provide for any "bust-up" or
termination fee or penalty to be paid to any party in the event the Merger
Agreement is terminated or otherwise.
-- That between October 14, 1993, the date on which the
Initial Proposal was publicly announced, and December 20, 1993, the date of the
Special Committee's recommendation, no proposals, inquiries or indications of
interest had been received from any third party regarding a merger, business
combination or other similar alternative transaction and the Special
Committee's view that the public announcement of the Initial Proposal would be
likely (though not certain) to elicit such proposals, inquiries or indications
of interest, whether such were actively solicited, while recognizing that
active solicitation might be more likely to elicit such proposals, inquiries or
indications.
-- The expected tax treatment of the consideration to be
received by the Public Unitholders in the Merger (see "Federal Income Tax
Consequences of the Merger").
-- The Partnership's financial leverage and the constraints
on the Partnership's ability to raise additional capital, including the terms
of the Notes, the terms of the Partnership Agreement and the conditions of the
financial markets; in connection therewith, the Special Committee considered
the views of management of the General Partner and the views of Dillon Read
with respect to the difficulties that the Partnership would have in raising
additional equity or debt
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<PAGE> 56
capital. The Special Committee also considered the Partnership's likely need
for additional capital in the future to fund capital expenditures that the
management of the Company believes will be necessary for the Partnership to
improve upon or even maintain its historic operational results, and that, after
application of the capital expenditures included in the General Partner's 1994
projections, the Partnership would continue to be operating at or near
sustainable throughput capacity, limiting the Partnership's growth prospects
without additional capital.
-- The possibility that, as a result of the likely need for
additional capital and the constraints on the Partnership's ability to raise
additional capital referred to above, the Partnership could be required in the
longer term to raise capital or enter into other financing arrangements on
terms that would not be favorable to the Partnership or the Public Unitholders,
to reduce the rate of distributions on Common Units below the current rate,
with consequent impact on the market price of the Units, or to attempt to enter
into lease financing or similar arrangements with VEC, with the possibility
that VEC would be unwilling or unable to enter into such arrangements and that
such transactions would represent a conflict of interest between VEC and the
General Partner, with higher attendant transaction costs.
-- The effects of the recent decline in petroleum and NGL
prices, coupled with the lack of a concurrent decline in natural gas prices, on
the Partnership's operations and expected cash flows, and the possibility that
such conditions could continue for an indefinite period of time, and Dillon
Read's views as to the possible future prices for natural gas and NGLs.
-- The lawsuits with respect to the Initial Proposal, the
allegations contained therein, discussions between the advisors to the Special
Committee and plaintiffs' counsel and the view of such counsel that, subject to
confirmation upon discovery, the Revised Proposal was fair to the Public
Unitholders.
-- The Partnership's contingent liabilities, including the
pending or potential litigation involving the City of Houston and the Long
Trusts litigation, and the effect on the Partnership's results of operations
and financial condition if the Partnership were required to record a
significant liability under generally accepted accounting principles as a
result of an adverse ruling in one or more of such lawsuits in the near term.
See "Special Considerations--Reasons for the Merger--Considerations Affecting
Future Cash Distributions to Unitholders."
The Special Committee also considered the fact that under Delaware
law, the Public Unitholders would not be entitled to appraisal or dissenters'
rights as a result of the Merger, recognizing that such rights were available
in comparable transactions involving corporations, rather than limited
partnerships.
The foregoing discussion of the information and factors considered by
the Special Committee is not intended to be exhaustive but is believed to
include all material factors considered by the Special Committee. In reaching
the conclusion that the Revised Proposal is fair to and in the best interests
of the Public Unitholders and should be accepted by the Board of Directors of
the General Partner, the Special Committee did not assign any specific or
relative weights to the foregoing factors, and individual directors may have
given differing weights to different factors.
In view of the wide variety of factors considered in connection with
its evaluation of the Merger, the VNGC Board and the Special Committee did not
find it practical to, and did not, quantify or otherwise assign relative
weights to the individual factors considered in reaching their determinations,
except that significant weight was placed on the opinion of Dillon Read.
OPINION OF FINANCIAL ADVISOR TO THE SPECIAL COMMITTEE
On December 17, 1993, Dillon Read gave the Special Committee its
preliminary oral advice that the proposed cash consideration of $12.10 per
Common Unit to be received by the Public Unitholders pursuant to the Merger was
fair to such Public Unitholders from a financial point of view. Dillon Read
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<PAGE> 57
delivered its written opinion confirming such preliminary oral advice on
December 20, 1993 (the "First Opinion"). On March ___, 1994, Dillon Read
delivered its revised opinion (the "Current Opinion") to the Special Committee.
In the Current Opinion, Dillon Read takes into account the events described
under "--Certain Contacts" above; nonetheless, in the Current Opinion, Dillon
Read confirmed the opinion set forth in the First Opinion. A copy of Dillon
Read's Current Opinion, setting forth certain of the assumptions made, matters
considered and limitations regarding the review undertaken is included herein
as Annex B. Public Unitholders are urged to read the opinion in its entirety.
For purposes of its opinions, Dillon Read, without independent
verification, assumed and relied upon the accuracy and completeness of the
financial and other information obtained by Dillon Read from public sources and
from the Partnership, the General Partner, VEC and its affiliates and advisors.
Dillon Read did not make an independent evaluation or appraisal of any assets
or liabilities (contingent or otherwise) of the Partnership, nor was it
furnished with any such appraisal.
Dillon Read was requested not to approach and it did not approach any
unaffiliated persons or entities with respect to the acquisition of the
Partnership or any of its assets. Except to that extent and for its limited
participation in the NGC deliberations, no limitations were imposed by the
Special Committee or the VNGC Board upon Dillon Read with respect to the
investigations made or the procedures followed by Dillon Read in rendering its
opinion, and the management of the General Partner and VEC cooperated fully
with Dillon Read in its analysis of the Partnership.
December Events. At a meeting of the Special Committee on December 3,
1993, Dillon Read reviewed, on a preliminary basis, the following methodologies
it was employing in the evaluation of the Partnership: (i) DCF analysis, (ii)
an analysis of comparable publicly-traded companies, (iii) an analysis of
premiums paid in noncontrol position buyouts and (iv) an analysis of comparable
company acquisitions.
Dillon Read's purpose in using each methodology was to produce ranges
of values for the Partnership predicated on objective data from which a range
of fair values for the Common Units could be synthesized. Each methodology
differed as to the objective data utilized. In Dillon Read's view, absent an
arm's length transaction between a willing buyer and seller, the process of
evaluation of an enterprise requires experience, judgment and expertise. Thus,
Dillon Read did not accept all values produced by its calculations; it excluded
any that, in Dillon Read's judgment, were aberrational for one reason or
another or were regarded by Dillon Read as unrealistic in light of the results
of its analysis as a whole. Accordingly, while the methodologies themselves
may have been predicated on objective data, the use of the analytical results
of such methodologies to synthesize a range of fair values for the Common
Units was very much a matter of Dillon Read's experience, judgment and
expertise. Indeed, Dillon Read's selection of the methodologies to be used for
that purpose was itself a matter of Dillon Read's experience and judgment in
valuing enterprises and its knowledge of the Partnership's industry.
At that meeting on December 3, 1993, no conclusions were offered by
Dillon Read. During the following week, Dillon Read performed various
sensitivity analyses with respect to, among other things, NGL margins,
conducted comparative reviews of general and administrative expenses and
operating and maintenance expenses and, in general, refined the information on
which it would predicate its conclusions.
At the meeting of the Special Committee held on December 10, 1993,
representatives of Dillon Read presented the results of their final analyses.
At that meeting, the representatives of Dillon Read did not present a specific
range of values that was represented to be Dillon Read's opinion of the range
of fair values for the Common Units. Rather, they discussed with the members
of the Special Committee the nature of their methodologies, the results thereof
and their
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<PAGE> 58
judgments as to the more relevant results of their analyses. The following is
a summary of such analyses:
1. Discounted Cash Flow Analysis. Dillon Read performed a DCF
analysis for the purpose of determining the value per Common Unit based in part
upon certain projections and assumptions regarding future Partnership
operations prepared and provided by the General Partner and described above
under "--Background of the Merger". The projections and assumptions were the
same as those described above as the "November 10th projections" and are here
called the "Forecast". Dillon Read utilized certain information set forth in
the Forecast and assumed that such information was reasonably prepared on bases
reflecting the best currently available estimates and judgments of the
managements of the Partnership and VEC as to the future financial performance
of the Partnership. With the assistance of the General Partner, Dillon Read
extended the Forecast from 1997 to 1999. In preparing its DCF analysis, Dillon
Read derived from the Forecast the unlevered free cash flow (defined as the
cash flow from operating activities less projected capital expenditures) for
the Partnership for the six years ending December 31, 1999 on three bases: (i)
the base case from the Forecast ("Base Case"); (ii) the Base Case adjusted for
certain assumptions made by Dillon Read as to declines in NGL prices in
recognition of a decline in NGL prices experienced during the fourth quarter of
1993 and potential annual savings in general and administrative expenses and
operating and maintenance expenses ("G&A and O&M Expenses") totaling $5 million
("First Adjusted Base Case"); and (iii) the Base Case adjusted for assumptions
made by Dillon Read as to potential annual G&A and O&M Expense savings totaling
$10 million ("Second Adjusted Base Case"). The Forecast included maintenance
capital expenditures averaging approximately $28 million annually during the
period and other capital expenditures in 1994 of approximately $29 million.
Dillon Read then prepared a weighted average cost of capital analysis using a
group of five publicly owned gas gathering and transmission companies. Based
on a range of 10.27% to 12.36% for the implied weighted average cost of capital
to the Partnership, Dillon Read selected discount rates of 10.0%, 10.5%,
11.0%, 11.5% and 12.0%. Dillon Read also selected assumed terminal EBITDA
multiples of 7.5, 8.0, 8.5 and 9.0. In deriving the Partnership's unlevered
free cash flow and estimating its weighted average cost of capital, Dillon Read
disregarded the effect of federal income taxes because of the tax-free nature
of the Partnership's structure. Utilizing these unlevered cash flows, discount
rates and terminal EBITDA multiples, Dillon Read prepared ranges of total
enterprise values for the Base Case and the First and Second Adjusted Base
Cases. After deducting net debt (total indebtedness less cash and cash
equivalents) to derive the indicated value ranges for total partners' capital
represented by the Partnership, Dillon Read then calculated the ranges of
estimated values per Common Unit held by the Public Unitholders in the Base
Case and each of the Adjusted Base Cases.
These ranges of estimated values were as follows: Base Case - $7.98
per Common Unit (based on an assumed terminal EBITDA multiple of 7.5 and a
discount rate of 12.0%) to $16.48 (based on an assumed terminal EBITDA multiple
of 9.0 and a discount rate of 10.0%); First Adjusted Base Case - $8.00 per
Common Unit (7.5; 12.0%) to $16.83 per Common Unit (9.0; 10.0%); Second
Adjusted Base Case - $12.50 per Common Unit (7.5; 12.0%) to $21.81 per Common
Unit (9.0; 10.0%).
In the meeting of the Special Committee on December 10, 1993,
representatives of Dillon Read expressed the view that the Second Adjusted Base
Case was too optimistic in that it assumed the most optimistic level of
potential savings in G&A and O&M Expenses ($10 million) but did not reflect the
then declining prices in the NGL markets that Dillon Read expected to continue
during the next year. As a consequence, the representatives of Dillon Read
advised the Special Committee that, in their view, the Special Committee
members should focus on the Base Case and the First Adjusted Base Case. In
addition, the Dillon Read representatives expressed the view that, in their
judgment, the most realistic value ranges produced by this methodology were
those bracketed by the discount rates of 11.0% and 11.5% and the terminal
multiples of 8.0 and 8.5. In the Base Case, this produced a range of indicated
values for the Common Units of $10.37
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<PAGE> 59
to $12.86, while, in the First Adjusted Base Case, this produced a range of
indicated values of $10.48 to $13.07 per Common Unit.
2. Analysis of Comparable Publicly-Traded Companies. In its market
comparison analysis, Dillon Read selected eight companies engaged in lines of
business somewhat similar to that of the Partnership (the "Industry Group").
The Industry Group consisted of: American, Aquila, Associated, Tejas, Tejas
Power Corporation, Trident, Delhi and Western. Dillon Read reduced this group
to the four that maintain NGL processing businesses similar in relative size to
that of the Partnership: Aquila, Associated, Trident and Western (the "Peer
Group"). Dillon Read noted that it was difficult to select publicly-traded
companies that could be used to establish meaningful comparisons with the
Partnership for at least four reasons: the historical growth rates and
prospects for future growth of such companies in comparison with the
Partnership; the Partnership's ratio of debt-to-capitalization in comparison
with other members of the industry; the relative mix of the intrastate natural
gas transmission business and the NGL production, transmission and sale
business; and the corporate rather than partnership organizational structure of
the comparable companies. Dillon Read then prepared implied valuation ranges
based on (i) Peer Group trading multiples and (ii) Industry Group trading
multiples. In each case, Dillon Read determined the comparable company's
trading multiples with respect to its net income for (i) the LTM ended
September 30, 1993, (ii) 1993 (estimated) and (iii) 1994 (estimated); its cash
flow from operations for the LTM ended September 30, 1993 and for 1994
(estimated) and its EBITDA for the LTM ended September 30, 1993. Dillon Read
then determined implied equity market value ranges for the Partnership by
applying the means and medians of such multiples to the Partnership's net
income for the same periods, its cash flow from operations for the same periods
and its EBITDA for the LTM ended September 30, 1993 (and, in the latter case,
by deducting the Partnership's net debt therefrom). Partnership net income for
1993 and 1994 was estimated as reported by Institutional Brokers Estimate
System, which estimates were higher than those contained in the Forecast..
The Partnership's net income and its cash flow from operations were,
for purposes of this analysis, adjusted for federal income taxes at a 35% rate
to make trading comparisons with the Peer Group and the Industry Group
comparable because the entities that comprise the Groups are tax-paying
entities.
This analysis produced a matrix of implied equity market values for
the Common Units:
(A) For the Peer Group, (i) using the mean of the Peer
Group trading multiples, the implied values ranged from $10.04 per Unit (a net
income multiple of 15.7 times the Partnership's net income for the LTM, as of
September 30, 1993) to $17.60 (an EBITDA multiple of 8.3 times the
Partnership's LTM EBITDA as of the same date), and (ii) using the median of the
Peer Group trading multiples, the implied values ranged from $10.30 per Common
Unit (a net income multiple of 16.1 times the Partnership's net income for the
LTM as of the same date) to $16.52 (a cash flow multiple of 6.8 times the
Partnership's cash flow from operations for the LTM as of the same date).
(B) For the Industry Group, (i) using the mean of the
Industry Group trading multiples, the implied values ranged from $13.30 per
Common Unit (a cash flow multiple of 6.4 times the Partnership's 1994 estimated
cash flow from operations) to $17.87 (a cash flow multiple of 7.4 times the
Partnership's cash flow from operations for the LTM as of September 30, 1993),
and (ii) using the median of the Industry Group trading multiples, the implied
values ranged from $13.80 per Common Unit (a net income multiple of 21.6 times
the Partnership's net income for the LTM as of the same date) to $20.18 (a cash
flow multiple of 8.3 times the Partnership's cash flow from operations for the
LTM as of the same date).
In the case of both the Peer Group and the Industry Group, Dillon
Read prepared various ancillary analyses. Such analyses were prepared using
the Partnership's actual net income for the LTM ended September 30, 1993 and
for 1993 (estimated) and cash flow from operations and EBITDA for the LTM ended
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as of the same date and, alternatively, using such LTM results after excluding
the benefits of certain nonrecurring items realized in 1993 ("Adjusted
Results").
After adjustment of the Partnership's results, the Peer Group analysis
produced a range of implied values per Common Unit of $9.16 (a median EBITDA
multiple of 7.7 times the Partnership's EBITDA for the LTM as of September 30,
1993) to $14.82 (a median cash flow multiple of 6.8 times the Partnership's
cash flow from operations for the LTM as of the same date), and the Industry
Group analysis produced a range of implied values per Common Unit of $11.61 (a
mean EBITDA multiple of 8.2 times the Partnership's EBITDA for the LTM as of
the same date) to $18.10 (a median cash flow multiple of 8.3 times the
Partnership's cash flow from operations for the LTM as of the same date).
In discussions with the members of the Special Committee on December
10, 1993, the representatives of Dillon Read emphasized the Peer Group trading
multiples as being more relevant in the evaluation of the Common Units than
those of the Industry Group because of the importance of the NGL business to
the Partnership. On this basis, the ranges of indicated values per Common Unit
were $10.04 to $17.60 (actual results) and $9.16 to $14.82 (Adjusted Results).
3. Analysis of Premiums Paid In Noncontrol Position Buyouts. Dillon
Read reviewed 137 buyouts of noncontrol equity positions in publicly owned
entities by controlling persons effected during the eight year period
commencing January 1, 1986. These 137 buyouts represent, according to an
unaffiliated statistical source Securities Data Corporation, all noncontrol
acquisition transactions that were effected subsequent to December 31, 1985 and
prior to December 10, 1993. Dillon Read did not attempt to categorize or
subdivide these transactions into subgroups by industry or otherwise. In
analyzing the premiums paid in these transactions, Dillon Read considered the
"premium" to be equivalent to the percentage price change in the market price
of the relevant stock between the "undisturbed" price on a date one month prior
to the date of public announcement of the transaction and the price on the
latter announcement date. Dillon Read selected one month earlier prices from a
choice of three alternatives published by Securities Data Corporation: one
month; one week; and one day. It was Dillon Read's intention to determine the
price of the security without any market influence with respect to the
prospective transaction. Dillon Read's review of the 137 transactions revealed
a wide range of premiums, as illustrated by the fact that, in 72% of the
transactions, the premiums ranged from 0% to 70%. Dillon Read found that the
mean of the premiums for all 137 transactions was 35.2% and the median was
33.0%. Based on the closing price for the Common Units on the Exchange on
September 14, 1993 of $8.875, the mean premium would suggest a value of $12.00
per Common Unit and the median premium would suggest a value of $11.80 per
Common Unit.
4. Analysis of Comparable Company Acquisitions. In this methodology,
Dillon Read examined 24 selected mergers and other acquisitions in the gas
gathering and processing industry effected since August 1, 1987. Of these, 18
were effected since January 1, 1991. Dillon Read noted that it was difficult
to select transactions that could be used to establish meaningful comparisons.
Useful data regarding the transactions is publicly available only with respect
to 13 of the 24 transactions. Moreover, many of those for which data is
available were not of the same order of magnitude as the current transaction.
These 13 transactions produced a range of EBITDA multiples from 3.5x to 11.2x.
The mean and median of such multiples were 6.8x and 6.9x, respectively.
Applying the latter multiples to the Partnership's EBITDA for the LTM ended as
of September 30, 1993 would produce implied values per Common Unit of $8.43 and
$9.04, respectively. In discussions with the Special Committee at their
meeting on December 10, 1993, however, Dillon Read concentrated on the seven
out of the 13 transactions that Dillon Read considered to resemble the
Partnership assets more closely. Of these, the more significant transactions
were the acquisition by Tejas from EGSI of substantially all of EGSI's Texas
and Louisiana intrastate gathering systems and the West Clear Lake storage
facility and the acquisition by Western from Union Texas Petroleum Company of
12 gas processing plants and 5,200 miles of gas gathering systems in Texas,
Oklahoma and Louisiana. These transactions produced a mean EBITDA multiple of
7.7x which, when applied to the Partnership's EBITDA for
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the LTM ended as of September 30, 1993, resulted in indicated values per Common
Unit of $13.91 (actual EBITDA) and $9.10 (EBITDA adjusted, as referenced above,
for certain nonrecurring items).
While Dillon Read did not consider it to be a valuation methodology,
Dillon Read performed an analysis of the effect of the proposed Merger on VEC
to determine the price at which the acquisition became dilutive to the earnings
per share of common stock of VEC. Such analysis was prepared using pro forma
combined results of operations of VEC and the Partnership for the nine months
ended September 30, 1993, and, on that basis, the transaction was determined to
be dilutive at $14.75 per Common Unit. The consideration given by Dillon Read
to the results for valuation purposes was limited to assurance that VEC could
pay more than $11.00 per Common Unit without dilution of earnings.
At the meeting of the Special Committee held December 10, 1993, in
addition to noting the results produced by each methodology, the
representatives of Dillon Read pointed out the weaknesses, as indicated above,
of the comparable company acquisition analysis and the comparable
publicly-traded company analysis and the fact that the premiums paid in
noncontrol position buyouts analysis was, in large measure, simply a
statistical compilation. The representatives of Dillon Read did not, however,
assign any specific weight or priority to any of the methodologies used.
Moreover, they did not render an opinion as to a range of fair values for the
Common Units. They did, however, observe that Dillon Read was not then
prepared to render an opinion that the then pending offer of $11.00 per Common
Unit was fair to the Public Unitholders from a financial point of view and that
the Special Committee might infer from Dillon Read's advice that $15.00 was at
or near the top of the range of values for the Common Units held by the
Public Unitholders that Dillon Read considered to be fair.
When the Special Committee concluded its negotiations with VEC and
tentatively agreed upon a price of $12.10 per Common Unit, Dillon Read rendered
the First Opinion on December 20, 1993 that such price was fair to the Public
Unitholders from a financial point of view. In rendering the First Opinion,
Dillon Read considered (i) the fact that, given Valero's ownership of an
approximate 49% interest in the Partnership, the role of its wholly owned
subsidiary as the General Partner and VEC's stated unwillingness to sell its
interest in the Partnership, a sale of the Common Units held by the Public
Unitholders to a third party was unlikely, (ii) the probability of a return of
Common Unit market prices to pre-October 1993 levels if negotiations regarding
the Merger were terminated without agreement and (iii) the prospects for the
Partnership given its current structure and ownership in the current
environment if such negotiations were terminated. Dillon Read also considered
the representations contained in the Merger Agreement regarding the
continuation of distributions by VNGP, L.P. during the pendency of the Merger
Agreement and the payment, subject to the conditions therein specified, of an
interim distribution by VNGP, L.P. through the date of consummation of the
Merger. Moreover, although Dillon Read did not attempt to place a value on the
contingent liabilities represented by the claim and litigation discussed under
"Special Considerations--Reasons for the Proposed Merger--Considerations
Affecting Future Cash Distributions to Unitholders", it did, in arriving at its
opinion, consider the consequences an adverse ruling related thereto could have
on the Partnership's results of operations and financial condition.
February and March Events. As indicated above, in connection with its
First Opinion, Dillon Read was requested not to approach and did not approach
any unaffiliated persons or entities with respect to the acquisition of the
Partnership, any of its affiliates or any of its assets. In early February
1994, however, Dillon Read was advised that first VEC and then the General
Partner received an unsolicited offer from NGC to acquire all the Units owned
by subsidiaries of VEC for $16.00 per Unit in cash and, if the offer were
accepted by VEC, to offer to acquire Common Units from the Public Unitholders
on the same basis (the "Unsolicited Offer"). Moreover, Dillon Read was
apprised of, or to the extent so indicated participated in, the related
subsequent events, all as described under "--Certain Contacts."
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In light of those events and having been advised that the Partnership
was likely soon to be soliciting proxies in connection with the Special
Meeting, Dillon Read elected to review and, if appropriate, to update its
opinion. In connection with such review, Dillon Read requested, received and
reviewed more recent business and financial information relating to the
Partnership, including recent revisions to the Forecast as well as information
contained in the Partnership's reports filed with the Commission since the
First Opinion.
In addition to the matters described under "--Certain Contacts", the
most notable events that transpired subsequent to the First Opinion with
respect to valuation of the Common Units were that (i) the Partnership revised
its Forecast as of February 7, 1994 to reflect the current NGL price
environment, resulting in a reduction of the Partnership's estimated 1994
EBITDA by $29 million and (ii) the index of stock market prices for the Peer
Group remained about flat (a decline of approximately 1%), while their
financial results for the last three months of the LTM ended December 31, 1993
were lower, circumstances that generally resulted in increased multiples for
the group. (The index of stock market prices for the Industry Group increased
by about 9% during the same period, and the financial results for the group
during the period also declined, resulting in higher multiples. As indicated
elsewhere, however, Dillon Read believes that the Peer Group multiples are more
relevant to a valuation of the Common Units.)
In assessing the effect of the Unsolicited Offer, Dillon Read (i) was
apprised of and evaluated the various communications between or among VEC, the
General Partner, the Special Committee and NGC, as described under "--Certain
Contacts", (ii) as so described, participated in a meeting with the Special
Committee regarding the development of events and (iii) as indicated under "--
Certain Contacts," communicated directly with NGC regarding NGC's desires and
intentions with respect to the Partnership. At the conclusion of these events,
Dillon Read concluded that, whatever the value of the Unsolicited Offer to VEC,
it was not indicative of the value of the Common Units in the hands of the
public because the public could not deliver that which NGC desired, that is,
control of the Partnership.
In assessing the effect of the other events, Dillon Read determined
that the application of the discounted cash flow analysis to the revised
Forecast resulted in uniformly reduced implied values when compared with those
described above under "December Events". For example, the current analysis
yields an implied value per Unit of $8.61 (Base Case, using an 8.0 terminal
value and a 12% discount factor) as compared with $9.49 in the December
analysis using the same factors; the current analysis yields an implied value
of $11.97 per Common Unit (Base Case, using a terminal value of 8.5 and a
discount factor of 11%) as compared with $12.86 in the December analysis using
the same factors.
With respect to the comparable company analysis, Dillon Read continues
to believe that Peer Group comparisons are more relevant in valuation of Common
Units than Industry Group comparisons because of the importance of the NGL
business to the Partnership. In this regard, the combined effect of flat stock
prices and lower financial results during the last three months of the LTM
ended December 31, 1993 was to increase the trading multiples of the Peer Group
as compared with the trading multiples for the LTM ended on September 30, 1993.
Although applied to lower financial results for the Partnership for the LTM
ended on the same date, the higher trading multiples resulted in generally
higher implied values for the Common Units for the LTM ended December 31, 1993
when compared with those for the LTM ended September 30, 1993. For example,
the mean and the median trading multiples produced implied values of $14.48 and
$14.82 based on cash flow from operations for the LTM ended September 30, 1993
(adjusted as described above); the current analysis produced comparable implied
values per Common Unit of $15.15 and $16.36 for the LTM ended December 31,
1993. When the analysis is applied to estimated 1994 cash flow from
operations, however, the result is reversed. NGL prices began to decline in
the fourth quarter of 1993, and this trend was recognized in the Partnership's
changes in the Forecast as described above. As a result largely of the impact
on the Forecast of a full year of reduced NGL prices, the implied values for
the Common Units based on estimated 1994 cash flow from operations were lower
in the current analysis than
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in the analysis utilized for the First Opinion. The implied median value per
Common Unit utilized for the First Opinion was $13.38, while the comparable
median value under the current analysis was $9.95.
On March ___, 1994, Dillon Read delivered the Current Opinion to the
Special Committee. In rendering the Current Opinion, Dillon Read took into
account all of the matters indicated above with respect to its First Opinion,
the matters discussed under this caption and, in addition, the agreement of
VEC, as more fully described under "The Merger--Conditions to the Obligations
of the Parties to the Merger Agreement", to pay or cause to be paid to those
persons who were Public Unitholders on the Effective Date an amount in cash
equal to the difference, if any, between $12.10 per Common Unit and the fair
value of any greater amount of consideration per Unit realized by VEC as a
result of any sale of its interest in VNGP, L.P. during the two years following
the Effective Date.
General. The summary of Dillon Read's procedures set forth above is
by no means all inclusive; Dillon Read performed other analyses and procedures
not described above. The summary does, however, describe the material points
of the most important analyses performed by Dillon Read in arriving at its
fairness opinion. Dillon Read believes that its analyses must be considered as
a whole; the selection of only a portion of its analyses and the factors
considered by it would create an incomplete view of the processes underlying
its opinion. The preparation of a fairness opinion is a complex process
involving subjective judgments and is not necessarily susceptible to partial
analysis or summary description. In its analysis, Dillon Read made a number of
assumptions, which include the assumption that the Partnership's gas
transmission system, after application of the capital expenditures included in
the Forecast for 1994, would be at or near maximum sustainable throughput. Any
estimates contained in such assumptions are not necessarily indicative of
actual values, which may be significantly more or less favorable than those set
forth herein. Estimates of values of companies do not purport to be appraisals
or necessarily reflect the prices at which companies may actually be sold.
Because such estimates are inherently subject to uncertainty, none of VNGP,
L.P., the General Partner, VEC, Dillon Read, or any other person assumes any
responsibility for their accuracy.
Dillon Read was selected as financial advisor to the Special Committee
because it is a nationally recognized investment banking firm and engages in
providing financial advisory services in connection with mergers and
acquisitions, leveraged buyouts, business valuations, recapitalizations and
private placements. To the best of its knowledge, Dillon Read has not had any
material relationship with the Partnership, the General Partner, VEC or their
respective officers or directors during the past three years. A managing
director and an associate of Dillon Read, who were involved in this engagement,
were, however, previously employed in similar capacities by another investment
banking firm. While with the latter firm, both individuals were involved on
behalf of such firm in an underwritten public offering of securities by VEC
effected in early 1992, and the associate participated on such firm's behalf in
a proposed offering of securities by VEC in mid-1993.
As compensation for Dillon Read's services as financial advisor to the
Special Committee, the General Partner has paid Dillon Read, pursuant to the
terms of an engagement letter dated November 9, 1993, a fee of $250,000 that
was payable upon execution of the engagement letter and an additional fee of
$250,000 that was payable on submission of Dillon Read's written opinion to the
Special Committee. These fees were not contingent upon the successful
completion of the Merger. The Partnership has also agreed to indemnify Dillon
Read against certain liabilities, including liabilities arising under the
federal securities laws, and agreed to reimburse Dillon Read for its expenses.
PRINCIPAL EFFECTS OF THE MERGER
If the Merger is effected, (i) the Common Units held by the Public
Unitholders will be converted into the right to receive $12.10 in cash per
Common Unit from VNGC, (ii) the Common Units held by subsidiaries of VEC will
remain outstanding, (iii) the 1% general partner interest in VNGP, L.P. held by
VNGC
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will remain outstanding, (iv) VNGC will acquire additional Common Units from
VNGP, L.P. in consideration of the cash payment to the Public Unitholders, (v)
the general and limited partner interests in Newco will be converted into the
right to receive, on a pro rata basis, a cash amount equal to the capital
account of the partners, estimated to aggregate $1,000, (vi) VNGP, L.P. and its
consolidated subsidiaries will become wholly owned subsidiaries of VEC, and
(vii) the Public Unitholders (including Public Unitholders who vote against, or
do not exercise their voting rights with respect to, the proposed Merger) will
cease to be limited partners of VNGP, L.P.
As a result of the Merger, the proportionate interest of the Company
in the net book value and net earnings of the Partnership applicable to the
Common Units will increase from approximately 49 percent to 100 percent.
Public Unitholders who vote in favor of the Merger or who accept the
benefits of the Merger by surrendering their Common Units for payment of the
Merger consideration may thereafter be estopped from challenging the Merger.
Further, on December 21, 1993, VEC and VNGP, L.P. entered into a Memorandum of
Understanding to resolve a class action challenging the Merger commenced in the
Delaware Court of Chancery on behalf of the Public Unitholders and entitled In
re Valero Natural Gas Partners, L.P. Litigation, Consolidated Civil Action No.
13194. See "The Merger--Conditions to the Obligations of the Parties to the
Merger Agreement." If the settlement contemplated by the Memorandum of
Understanding is finalized and approved by the Court, it would release all
claims by Public Unitholders in connection with or that arise out of the
Merger. Under Delaware law, Public Unitholders would not be permitted to opt
out of the settlement.
The Merger is expected to facilitate financing arrangements, including
capital contributions and distributions, between the Company and the
Partnership because the interest of Public Unitholders will not be required to
be considered in any such transactions. The Merger will also benefit the
Company by eliminating the management time and out-of-pocket costs associated
with the preparation and filing of reports under the Exchange Act, transfer
agent costs, tax compliance costs and other miscellaneous costs. However, such
savings are expected to be offset by other incremental costs and expenses. See
"Special Considerations--Background of the Merger" and "--Reasons for the
Proposed Merger."
The Merger will be a taxable transaction to the Public Unitholders,
but will not be a taxable transaction to the Company. See "Federal Income Tax
Consequences of the Merger."
Under Section 12(g)(4) of the Exchange Act, registration of any class
of security registered pursuant to Section 12(g) of the Exchange Act (as are
the Common Units) may be terminated within 90 days, or such shorter period as
the Commission may determine, after the issuer files a certification with the
Commission that the number of record holders of its securities is less than
300. The Partnership intends to file with the Commission its certificate and
notice of termination of registration of the Common Units as soon as
practicable after the consummation of the Merger. As a result of the filing of
its certificate and notice of termination of registration of the Common Units,
VNGP, L.P. will no longer be required to file annual and quarterly reports with
the Commission or to send annual reports to its Public Unitholders. Upon the
effectiveness of the termination of registration, the Company, its officers and
directors and certain of its stockholders will no longer be required to make
any other filings with the Commission with respect to the Common Units. It is
anticipated that, after the Effective Time, the Common Units will cease to be
traded on the Exchange.
As is mentioned above, VEC is principally involved, through
subsidiaries, in the oil refining and marketing, natural gas and NGL
businesses. VEC has substantially completed a major capital expansion at its
refinery in Corpus Christi, Texas (the "Refinery"), and does not currently
intend to undertake any further substantial additions to the Refinery.
Following the Merger, VEC anticipates that its principal business focus will be
on maintaining the operations of the Refinery and improving and expanding the
operations of the Partnership through capital
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additions and by taking advantage of business opportunities that may arise over
the next several years, as described under "Special Considerations--Reasons for
the Proposed Merger--Industry Opportunities and Need for Additional Financing."
However, except as described above, neither VEC nor its affiliates has any
specific plans or proposals regarding activities or transactions that relate to
or would result in an extraordinary partnership transaction, including any
merger, reorganization or liquidation, involving the Partnership, a sale or
transfer of a material amount of assets of the Partnership, any change in the
present board of directors or management of the General Partner, any material
change in the indebtedness or capitalization of the Partnership or any other
material change in the Partnership's corporate structure or business. However,
the Board of Directors of the General Partner currently includes three members
who are not otherwise affiliated with the Company principally because of an
Exchange requirement that entities whose securities are traded on the Exchange
have an independent audit committee. As a wholly owned subsidiary of VEC
following the merger, VNGP, L.P. would no longer be subject to this
requirement.
In the event that the Merger is not approved, VEC intends to continue
to manage and operate the Partnership, through the General Partner, subject to
the capital expenditure restrictions and limitations described under "The
Partnership--Background of the Partnership". The management of VEC has not
formulated any other plan, proposal or intent with respect to the Partnership
or the Common Units if the Merger is not approved.
THE MERGER
BASIC TERMS OF THE MERGER
VNGP, L.P., VNGC, Newco and VEC have entered into the Merger
Agreement, a copy of which is attached to this Proxy Statement as Annex A. A
summary of certain basic provisions of the Merger Agreement is set forth in
this section. The summary, which is not a complete explanation or description
of the terms of the Merger Agreement, is qualified in its entirety by reference
to Annex A.
The Merger Agreement provides that, subject to certain conditions (see
"The Merger--Conditions to the Obligations of the Parties to the Merger
Agreement"), Newco will be merged with and into VNGP, L.P., the surviving
entity, which shall continue to exist under the terms of its present
Partnership Agreement. Upon the filing of the Certificate of Merger pursuant
to Delaware law, all rights, powers, liabilities and obligations of VNGP, L.P.
shall continue in effect unimpaired by the Merger, and all rights, powers,
liabilities and obligations of Newco will become the rights, powers,
liabilities and obligations of VNGP, L.P. Also on the Effective Date, each of
the Common Units outstanding at the close of business on the Effective Date and
held of record by a Public Unitholder will, by virtue of the Merger and without
any action on the part of the holder thereof, be converted into and represent
the right to receive $12.10 in cash from VNGC. The present Public Unitholders
will not be partners of VNGP, L.P. (the surviving entity) following the Merger
and will be entitled only to receive cash. Upon execution of the Merger
Agreement, VNGP, L.P. and VNGC will enter into a separate agreement (the
"Purchase Agreement") pursuant to which VNGC will acquire 9,711,919 newly
issued Common Units immediately following completion of the Merger, in
consideration of the cash payment to be made by VNGC.
In the Merger Agreement, VEC and VNGC each represented that, with
respect to the regular quarterly distribution on the Common Units, they
intended that such distributions continue to be declared and paid at the
then-established quarterly intervals and rate through the Effective Date of the
Merger, and that they knew of no reason why the regular quarterly distribution
scheduled to be paid on or about March 1, 1994 could not be declared and paid.
Such March 1, 1994 distribution was subsequently declared and paid. In
addition, VEC and VNGC each represented that, if the closing of the Merger
occurred more than 30 days after the last record date for a regular quarterly
distribution, VNGP, L.P. intends and expects to declare and pay to the holders
of the Common Units of record as of the Effective Date (as hereinafter defined)
of the Merger a one-time special cash
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distribution equal to the product of the regular quarterly distribution per
Common Unit of $.125 and a fraction the numerator of which is the number of
days from and excluding the record date in respect of which the last regular
distribution has been paid to and including the Effective Date, and the
denominator of which is 90. Such representations were based upon the facts and
circumstances in existence at December 20, 1993, the date of the Merger
Agreement, and as such were necessarily subject to the possible effect of
subsequent developments upon the ability of VNGP, L.P. to declare and pay
distributions. Cash distributions on the Common Units can be declared only by
the Board of Directors of VNGC, acting pursuant to the provisions of the
Partnership Agreement, and can be declared only from the Distributable Cash
Flow of VNGP, L.P. See "The Partnership--Background of the Partnership." The
Partnership is subject to a requirement, more fully described under "The
Partnership--Background of the Partnership", that short-term borrowings be
reduced to zero for a period of 45 consecutive days during each period of 16
consecutive calendar months. Under this requirement, the Partnership must
complete such a "clean-up" period in September 1994. Additionally, during the
period since execution of the Merger Agreement, the Partnership's results of
operations have continued to deteriorate and the General Partner now expects
that the Partnership will incur substantially reduced operating income for the
first quarter of 1994 compared with the fourth quarter of 1993. In light of
the Partnership's deteriorating operating results and the above-described
clean-up requirement, neither VEC nor VNGC can provide assurance that the
quarterly cash distribution expected to be considered at a meeting of the Board
of Directors of VNGC scheduled to be held April 27, 1994 and paid on or about
May 31, 1994, can be so declared and paid, or that the one-time special cash
distribution described above can be declared and paid.
For a discussion of the background, fairness and purpose of the Merger
and other matters concerning the Merger, see "Special
Considerations--Background of the Merger," "--Reasons for the Proposed Merger"
and "--Opinion of Financial Advisor to the Special Committee."
FEES AND EXPENSES
The Company will pay all expenses of the Merger. It is estimated that
if the Merger is consummated, the fees and expenses incurred in connection
therewith will be as set forth below:
<TABLE>
<S> <C>
Filing Fees (Securities and Exchange Commission) . . . . . $ 23,503
Legal Fees and Expenses . . . . . . . . . . . . . . . . . . 2,100,000
Accounting Fees and Expenses . . . . . . . . . . . . . . . 50,000
Printing Costs . . . . . . . . . . . . . . . . . . . . . . 50,000
Fees and Expenses of Investment Advisors . . . . . . . . . 2,000,000
Fees and Expenses of Information Agent . . . . . . . . . . 15,000
Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . 11,497
------------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,250,000
============
</TABLE>
In addition, in connection with the Public Offering to fund the
Merger, the Company has incurred additional expenses of approximately $310,000,
in addition to usual and customary underwriters' discounts and commissions.
EFFECTIVE TIME OF THE MERGER
Under the Merger Agreement, the Merger will become effective at the
time that a Certificate of Merger is filed pursuant to Delaware law. It is
anticipated that, if all conditions have been met or waived, the Effective Date
will occur in 1994, although there can be no assurance in that regard.
The Common Unit transfer books of the Partnership will be closed as of the
close of business on the day of such filing, and no registration of transfer of
certificates representing Common Units will be made thereafter other than
registrations of transfers occurring before the close of business on the
Effective Date.
SOURCE OF CASH CONSIDERATION
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VEC intends to fund the cash payment to the Public Unitholders
contemplated by the Merger Agreement with a portion of the proceeds of the
Public Offering. On October 18, 1993, VEC filed a registration statement on
Form S-3, as subsequently amended, registering shares of VEC's $3.125
Convertible Preferred Stock for issuance and sale. The Public Offering was
completed on March 24, 1994, and VEC received net proceeds from the Public
Offering (after underwriters' discounts and commissions, but before expenses
and underwriters' over-allotment options) of $146.2 million. VEC will advance
or contribute proceeds from the Public Offering to VNGC, and VNGC will make the
cash payment to the Public Unitholders.
CONDITIONS TO THE OBLIGATIONS OF THE PARTIES TO THE MERGER AGREEMENT
In order to address the separate concerns of the Public Unitholders,
although not required by the Partnership Agreement, the General Partner has
conditioned approval of the Merger upon satisfaction of the Independent Vote
Requirement. Accordingly, the effectiveness of the Merger must be preceded by,
and is expressly subject to, the adoption of the Merger Agreement through
satisfaction of both the Majority Vote Requirement and the Independent Vote
Requirement. The Majority Vote Requirement and Independent Vote Requirement
cannot be waived. See "The Proxy Solicitation--Voting and Proxy Procedures."
On the Record Date, there were outstanding 18,486,538 Common Units,
which are entitled to vote as a single class. The General Partner and its
subsidiaries have informed the Partnership that they intend to vote the Common
Units that they own, representing approximately 47.5% of the outstanding Common
Units, "FOR" approval of the Merger.
Under the Merger Agreement, the obligations of VNGP, L.P., VNGC, Newco
and VEC are subject to various conditions, including that before the Effective
Time, (i) the Merger Agreement shall have been approved by both the Majority
Vote Requirement and the Independent Vote Requirement; (ii) there shall not
have been any governmental or judicial action, law or regulation prohibiting,
restraining (whether by imposing additional conditions or covenants or
otherwise) or making unlawful the Merger or prohibiting, restraining or making
unlawful the payment or receipt of cash for Common Units as contemplated by the
Merger Agreement; (iii) the Internal Revenue Service ("IRS") shall have issued
a response (the "Private Letter Ruling") with respect to the private letter
ruling request of VNGP, L.P. dated December 6, 1993, ruling that the proposed
Merger, if effected in the manner described in such private letter ruling
request, will not result in any technical termination of VNGP, L.P.; and (iv)
neither the opinion of Dillon Read set forth at Annex B, nor the recommendation
of the Special Committee referred to above shall have been withdrawn or
modified in any manner materially adverse to VEC, VNGC, VNGP, L.P. or Newco.
The conditions described in clauses (iii) and (iv) may be waived by VNGP, L.P.,
VNGC, VEC and Newco, while the conditions described in clauses (i) and (ii)
cannot be waived. See "Federal Income Tax Consequences of the Merger." A
satisfactory Private Letter Ruling, dated February 7, 1994, has been received
by the General Partner and the condition specified in clause (iii) has been
satisfied. See "Federal Income Tax Consequences of the Merger- -IRS Private
Ruling Letter Ruling."
In addition, the obligations of Newco to effect the Merger shall also
be subject to the fulfillment of various conditions, any or all of which may be
waived by Newco in its sole discretion; including that (i) any consent, waiver
or amendment necessary or desirable in the opinion of Newco under certain
financial agreements of VEC shall have been obtained, in form and substance
reasonably satisfactory to Newco; (ii) VEC shall have completed the Public
Offering and shall have received proceeds therefrom, net of all underwriters'
discounts and commissions, equal to not less than the aggregate amount payable
to the Public Unitholders; (iii) except for changes in the business or
condition of the Partnership, financial or otherwise, or in the results of
operations of the Partnership, occurring prior to the date of the Merger
Agreement, or expected by the management of the General Partner to occur based
on events occurring prior to the date of the Merger Agreement, there shall not
have occurred any material adverse change in the
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business or condition of the Partnership, financial or otherwise, or in the
results of operations of the Partnership from that set forth in or contemplated
by the financial statements of the Partnership for the nine months ended
September 30, 1993; (iv) with certain exceptions there shall not be pending or
threatened against VNGP, L.P., or any subsidiary of VNGP, L.P., any action,
suit or proceeding involving a claim at law or in equity or before or by any
federal, state, or municipal or other governmental department, commission,
board, business, agency or instrumentality, domestic or foreign, that would be
reasonably likely to have a material adverse effect on the condition, financial
or otherwise, of VNGP, L.P.; and (v) there shall not be pending or threatened
against VEC, VNGC, VNGP, L.P., Newco, or any affiliate of VEC, VNGC, VNGP,
L.P., or Newco or the property or business of VEC, VNGC, VNGP, L.P. or Newco,
any other action, suit or proceeding involving a claim at law or in equity or
before or by any federal, state, or municipal or other government department,
commission, board, bureau, agency or instrumentality, domestic or foreign,
relating to the Merger or the Merger Agreement that would be reasonably likely
to have a material adverse effect on the condition, financial or otherwise, of
VEC, VNGC or VNGP, L.P. As is noted above under "--Source of Cash
Consideration," the Public Offering has been completed.
Seven lawsuits were filed in Chancery Court in Delaware in response to
the announcement by VEC on October 14, 1993 of its proposal to acquire the
publicly-traded Common Units pursuant to the proposed Merger. The suits, which
were consolidated into a single proceeding, requested the court to certify the
litigation as a class action. 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, compensatory damages and attorneys' fees.
Attorneys representing the plaintiffs communicated with counsel for the Special
Committee in the course of the Special Committee's deliberations, and reviewed
Dillon Read's analysis referred to under "Opinion of Financial Advisor to the
Special Committee." Prior to the approval of the Revised Proposal by the
Special Committee, such attorneys advised the General Partner that they were
satisfied with the agreement reached with the Special Committee and had entered
into a Memorandum of Understanding with VEC and VNGP, L.P. in which they have
agreed in principle to recommend that the Chancery Court approve a settlement
based upon the terms of the Merger as described herein.
The Memorandum of Understanding, as amended, provides that for a
period beginning on the Effective Date, and ending on the second anniversary of
the Effective Date, VEC will not dispose of its interest in VNGP, L.P. except
in a transaction (the "Second Transaction") in which the Public Unitholders who
hold the Common Units at the Effective Date would receive a payment such that
upon the consummation of the Second Transaction each such Public Unitholder
would receive a payment equal to the difference between the per-Unit value of
the Second Transaction and $12.10. Such right is nontransferable.
Additionally, VEC has no obligation to attempt to sell its interest in VNGP,
L.P., and does not intend to do so.
TERMINATION OR AMENDMENT OF THE AGREEMENT OF MERGER
The Merger Agreement may be terminated and the Merger abandoned at any
time before the Effective Time, notwithstanding the prior approval of the
holders of Common Units or the partners of Newco, by the consent of the Board
of Directors of VNGC (with the prior written consent of a majority of the
members of the Special Committee) and the Board of Directors of the general
partner of Newco. The Merger Agreement shall be terminated and the Merger
abandoned if (a) the Closing Date and consummation of the Merger shall not have
occurred by June 1, 1994, or (b) any governmental or judicial action, law or
regulation shall be enacted or become effective which prohibits, restrains or
renders unlawful the Merger or prohibits, restrains, or renders unlawful the
payment or receipt of cash as contemplated by the Merger Agreement, or (c) if
the Special Meeting is held but the Independent Vote Requirement is not met,
and shall also be terminated (unless
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such condition is waived, as provided above) if the Special Committee
withdraws, or materially modifies in a manner materially adverse to VEC, its
recommendation regarding the Merger, or the opinion of Dillon Read is withdrawn
or modified in a manner materially adverse to any party to the Merger
Agreement. The Merger Agreement may be terminated by the Board of Directors of
VNGC if VEC or Newco breaches in any material respect any of its covenants or
agreements contained herein, and by VEC or the Board of Directors of the
general partner of Newco if VNGC or VNGP, L.P. breaches in any material respect
any of its covenants or agreements contained herein. Additionally, the Merger
Agreement may be terminated by VEC or by the Board of Directors of the general
partner of Newco if (i) all necessary governmental consents and approvals have
not been obtained, and the Hart-Scott-Rodino waiting period has not expired,
all on or before March 31, 1994; (ii) the IRS shall issue a private letter
ruling to the effect that the Merger will result in a technical termination of
VNGP, L.P. or which is otherwise materially adverse to VEC or Newco; (iii)
appropriate consents, waivers and amendments to VEC's various financing
agreements have not been obtained on or before March 31, 1994, and VEC
reasonably determines that such consents, waivers and amendments cannot be
obtained upon terms and conditions reasonably satisfactory to VEC; (iv) the
Public Offering has not been completed on or before March 31, 1994, and VEC
reasonably determines that the Public Offering cannot be completed upon terms
and conditions reasonably satisfactory to VEC; or (v) in the reasonable opinion
of VEC, certain events have occurred, or there has occurred the filing of, or a
development in, any action, suit or proceeding which, unless waived by VEC and
Newco, would result in the failure of a condition to closing the Merger. In
the event of termination of this Agreement and abandonment of the Merger as
provided herein, this Agreement shall become wholly void and of no effect and
there shall be no liability pursuant to this Agreement on the part of any party
hereto or its respective officers, directors, stockholders, or general or
limited partners. As of the date of this Proxy Statement, the
Hart-Scott-Rodino waiting period mentioned in clause (i) above has expired, the
Private Letter Ruling has been issued, satisfying the condition in clause (ii),
and the Public Offering has been completed, satisfying the condition in clause
(iv).
METHOD OF SURRENDERING UNIT CERTIFICATES FOR PAYMENT
Promptly following the Special Meeting, if the Merger is approved and
completed, the General Partner will mail or cause to be mailed to each
registered holder of the Common Units at the Effective Time of the Merger, a
transmittal form and appropriate instructions regarding the transmittal of
certificates representing the Common Units to VEC (in such capacity, the
"Disbursing Agent") for payment. No certificates should be sent until such
transmittal letter and instructions are received. During the twelve-month
period following the Effective Time, the Disbursing Agent will pay to the
Public Unitholders upon surrender of their certificates for Common Units
(together with a validly completed and duly executed transmittal letter in the
form furnished) the amount of cash into which the Common Units represented by
such certificates shall have been converted, without interest. After such
twelve-month period, any holders of Common Units that have not so surrendered
their certificates representing Common Units must obtain such payment from VEC
or any successor thereof.
If any payment for Common Units is to be made in a name other than
that in which the certificate for such Common Units is registered on the Common
Units transfer books of the Partnership at the Effective Time, the certificate
must be endorsed properly or otherwise be in proper form for transfer and the
person requesting such payment must either (i) pay to the Disbursing Agent any
transfer or other taxes required by reason of the payment to a person other
than the registered holder of the certificate or (ii) establish to the
satisfaction of VNGC (as the General Partner of the surviving entity in the
Merger) that such tax has been paid. If satisfactory evidence of the payment
of such tax (or applicable exemption therefrom) is not submitted, the
Disbursing Agent will deduct the amount of any such tax (whether imposed on the
registered holder or transferee) from the amount otherwise payable.
Each certificate that, before the Effective Time, represented
outstanding Common Units held by Public Unitholders will, after the Effective
Time, be
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deemed for all purposes to evidence only the right to receive, without
interest, the amount of cash into which the Common Units represented thereby
shall have been converted. Interest or other income on funds held by the
Disbursing Agent for the benefit of the holders of Common Units will be paid to
VEC or any person designated by VEC and will not be paid to the Public
Unitholders or any person claiming by, through or under a Public Unitholder.
ACCOUNTING TREATMENT OF THE MERGER
The Merger will be accounted for using the "purchase" method of
accounting for accounting and financial reporting purposes.
THE PARTNERSHIP
BACKGROUND OF THE PARTNERSHIP
The Partnership was formed on January 28, 1987 and commenced
operations on March 25, 1987. The Partnership was created to succeed to
substantially all of the natural gas and NGL businesses previously conducted by
subsidiaries of VEC and VNGC. The operations of the Partnership are conducted
pursuant to the Partnership Agreement. The Partnership was expected to
continue the natural gas and NGL businesses previously conducted by the Company
and to make distributions to partners of the Distributable Cash Flow (as
defined in the Partnership Agreement) resulting from such operations. The
Partnership Agreement provided that such distributions would be made in a
particular order of priority, with holders of the Preference Units being
entitled during a specified period (the "Preference Period") to a preferential
distribution of such Distributable Cash Flow (pari passu with distribution to
the general partners) to the extent of $0.625 per Unit per quarter prior to any
distribution to the Company, as holder of the Common Units. The Preference
Period would terminate and the Preference Units would automatically convert
into Common Units when the Preference Unitholders had received cumulative cash
distributions of $12.50 per Unit at a rate not to exceed $1.875 in 1987 and
$2.50 in subsequent years.
On March 25, 1987, substantially all of the natural gas and NGL assets
of the principal subsidiaries of VNGC, including a transmission division
formerly owned by Rio Grande Valley Gas Company ("Rio"), were transferred
through VNGP, L.P. and the Management Partnership to certain Subsidiary
Operating Partnerships. To fund the acquisition of these assets, VNGP, L.P.
sold in an underwritten public offering 9,500,000 Preference Units representing
an approximately 52% limited partner interest in VNGP, L.P. The Preference
Units were sold at a price of $22.75 per Unit, or an aggregate of $216,125,000,
and the Partnership realized approximately $201,020,000 after underwriting
discounts and commissions, but before expenses. At the same time, the
Management Partnership issued in a private placement transaction $550 million
principal amount of Notes pursuant to the Indenture. Substantially all of the
proceeds from the sale of the Preference Units and the Notes were transferred
to the selling VNGC subsidiaries in return for the transferred assets. At the
same time, the subsidiaries of VNGC transferring assets to the Partnership
received Common Units representing an approximately 47% limited partner
interest in VNGP, L.P.; VNGC also received a 1% general partner interest in
each of VNGP, L.P. and Management Partnership, and various corporate
subsidiaries of VNGC received 1% general partner interests in the various
Subsidiary Operating Partnerships. Throughout the existence of the
Partnership, VNGC has served as general partner of VNGP, L.P. and Management
Partnership, while subsidiaries of VNGC have served as general partners of the
various Subsidiary Operating Partnerships. Management Partnership holds a 99%
limited partner interest in the principal Subsidiary Operating Partnerships,
while VNGP, L.P. holds a 99% limited partner interest in certain Subsidiary
Operating Partnerships formed after the original creation of the Partnership.
At March 25, 1987, 250,000 Common Units were also sold by VNGP, L.P. to Valero
Management Company, a wholly owned subsidiary of VEC, for use in connection
with an employee benefit plan. These Common Units were subsequently converted
into Preference Units and granted to key employees of the Company pursuant to a
Preference Unit Award Plan. The proceeds received by the Company from the
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Partnership attributable to the offering of the Preference Units and Notes, as
described above, were utilized by the Company to retire indebtedness.
As noted above, upon formation of the Partnership in 1987, $550
million aggregate principal amount of Notes were issued. Subsequently,
Management Partnership issued $40 and $35 million of additional Notes in June
1988 and December 1988, respectively, pursuant to the Indenture. The Notes,
which are due serially through 2009, are secured by a mortgage on and security
interest in substantially all of the currently existing and after-acquired
property, plant and equipment of Management Partnership and each of its
Subsidiary Operating Partnerships and by Management Partnership's limited
partner interest in its Subsidiary Operating Partnerships, but are non-recourse
to VEC and its corporate subsidiaries. The Indenture contains covenants
prohibiting the Management Partnership and its Subsidiary Operating
Partnerships from incurring additional indebtedness, including issuing any
additional Notes, other than (i) the aggregate of $625 million of Notes
heretofore issued, (ii) up to $50 million of indebtedness for working capital
purposes (subject to a requirement that, for a period of 45 consecutive
calendar days during each period of 16 consecutive calendar months, no such
indebtedness will be permitted to be outstanding) and (iii) 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
Management Partnership. The Management Partnership will be required to
complete another such "clean-up" period by September 1994. The Indenture also
prohibits the Management Partnership and its Subsidiary Operating Partnerships
from, among other things, creating any new funded indebtedness unless certain
cash-flow-to-debt-service ratios are met.
Under the provisions of the Partnership Agreement, quarterly cash
distributions are paid by VNGP, L.P. from the Partnership's Distributable Cash
Flow after working capital and other operating requirements, capital
expenditures, debt service on the Notes and other debt service obligations are
funded. Under the Partnership structure, the general partners of VNGP, L.P.,
the Management Partnership and each Subsidiary Operating Partnership each
receive quarterly distributions equal to 1% of the Distributable Cash Flow from
the respective partnership, which is an amount aggregating approximately 3% of
the Partnership's Distributable Cash Flow. Concurrently, the limited partners
share pro rata in the remaining Distributable Cash Flow. As noted above,
during the Preference Period, the holders of the Preference Units were entitled
to a preferential call on the Distributable Cash Flow of the Partnership. The
Preference Period terminated May 30, 1992, with the distribution of an
aggregate of $12.50 per Preference Unit for the period April 1, 1987 through
March 31, 1992. Upon the termination of the Preference Period, the
preferential distribution rights of the Preference Unit holders terminated and
the Preference Units were automatically converted into Common Units. As a
result of the termination of the Preference Period and the conversion of the
Preference Units into Common Units, VNGP, L.P. now has only one class of
limited partner interest, the Common Units. At the date of this Proxy
Statement, 18,486,538 Common Units were issued and outstanding, including
8,774,619 Common Units held by the Company, approximately 90,104 Common Units
held by persons who are currently officers or directors of VEC or VNGC or
employees of the Company and approximately 9,621,815 Common Units that are
publicly held (other than by such officers and employees).
In offering Preference Units to the public in March 1987, the
Partnership stated its intent to distribute $0.625 per Preference Unit (the
"Indicated Distribution") on a quarterly basis and indicated that it expected
to distribute at least such amount quarterly with respect to each quarter in
calendar year 1987, but that the ability to make such distributions would
depend on the future operating performance of the Partnership, among other
factors. The Partnership further stated that the Partnership's Distributable
Cash Flow would depend upon the Partnership's future performance and would be
subject to prevailing economic conditions and to financial, business and other
factors, many of which were beyond its control, including the possible adverse
determination of certain take-or-pay claims in litigation. For a further
discussion of such take-or-pay claims, see "Special Considerations--Reasons for
the Proposed Merger--Background of the Merger." As a result, increases in
working capital, debt service or other operating
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requirements, or decreases in the Partnership's earnings or cash flow, can
adversely affect the Partnership's ability to make cash distributions. For the
past several years, the Partnership's operating income from natural gas
operations has been adversely affected by industry-wide excess pipeline
deliverability capacity, which has caused extreme competition in both the sales
and transportation segments of the Partnership's natural gas business. These
and other events have reduced the cash flow and operating income levels of the
Partnership. At the same time, the provisions of the Partnership Agreement
requiring the distribution to the Unitholders of all Distributable Cash Flow of
the Partnership have had the effect of channeling available cash to Partnership
distributions, rather than to capital projects. However, the General Partner
believed that it would be advisable to expand the Partnership's pipeline system
so as to diversify supply sources and to increase the Partnership's access to
gas markets, and that the Partnership should undertake an expansion of its NGL
operations in order to remain competitive in the NGL business. Also, the
Partnership's principal and interest payments on the Notes and payments under
capital leases with VEC subsidiaries have continued to increase. Taken
together, capital investment and debt service requirements have imposed
significant and increasing funding requirements on the Partnership. Beginning
in April 1991, the Company publicly advised the Preference Unitholders that,
principally as a result of the foregoing factors, cash distributions on the
Common Units were likely to be substantially reduced following the end of the
Preference Period to an annualized rate of approximately $0.50 to $0.75 per
Unit. In August 1992, the quarterly cash distribution rate on the Units was
reduced from $0.625 to $0.125 per Unit per quarter, and subsequent quarterly
cash distributions have been made on the Units at this lower rate. To date,
aggregate distributions of $13.545 have been paid per Common Unit, which
distributions have generally not been subject to current federal income
taxation.
The Partnership Agreement contains provisions that limit the
Partnership's consolidated capital expenditures during any calendar year to the
greater of (i) $35 million, or (ii) 30% of the Partnership's Operating Cash
Flow (as defined in the Partnership Agreement) unless in the good faith opinion
of the General Partner capital expenditures in excess of such limit are
required to sustain, improve or expand the natural gas operations of the
Partnership. In 1989, the General Partner determined that it would be desirable
to undertake the East Texas Expansion Project to extend the Partnership's North
Texas pipeline system, extending the then-existing pipeline by approximately
105 miles to Carthage, in east Texas, at a cost of approximately $60 million.
As a result of the capital limitations then facing the Partnership, the General
Partner recommended that the pipeline extension be constructed and owned by a
subsidiary of VEC and leased to the Partnership (the "East Texas Pipeline
Lease"). See "The Partnership--Conflicts of Interest." At a meeting of the
VNGC Board held on December 18, 1989, the VNGC Board determined that the
Partnership could not participate directly in the East Texas Expansion Project
due to capital limitations, that the leasing arrangement proposed to the VNGC
Board was in the best interests of the Partnership and that the terms and
conditions of the East Texas Pipeline Lease were fair and reasonable to the
Partnership. The East Texas Expansion Project was subsequently completed and
the facilities were leased by a subsidiary of VEC to the Partnership under the
East Texas Pipeline Lease, which commenced February 1, 1991 and has a term of
25 years.
In July 1990, the General Partner recommended that the Partnership's
fractionation and related pipeline facilities in the Corpus Christi, Texas,
area be expanded in order to improve the Partnership's ability to fractionate
NGLs. The fractionation facilities expansion cost approximately $15 million
and the General Partner again recommended that the project (the "Fractionator
Expansion Project") be funded through a leasing arrangement similar to the East
Texas Pipeline Lease. On July 25, 1990, the VNGC Board determined that the
Partnership could not participate directly in the Fractionator Expansion
Project, that the proposed lease (the "Fractionator Expansion Lease") was in
the best interests of the Partnership, and that the terms of the Fractionator
Expansion Lease were fair and reasonable to the Partnership. The Fractionator
Expansion Lease commenced December 1, 1991 and has a term of 15 years.
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In April 1991, the General Partner publicly announced that VNGP,
L.P.'s cash distribution per Unit was likely to be reduced following the end of
the Preference Period in May 1992, from the then current rate of $2.50 per Unit
annually, to an estimated annual range of $0.50 to 0.75 per Unit. Following
this announcement, the market price of the Preference Units declined. See
"Market Price of Common Units and Distributions."
In November 1991, the General Partner proposed that an approximately
200MMcf/d natural gas processing plant be built near Thompsonville, Texas (the
"Thompsonville Plant"), and that certain related pipeline and fractionator
facilities improvements be undertaken, all at a cost of approximately $26
million. At a meeting of the VNGC Board held December 6, 1991, the VNGC Board
determined that the Partnership was itself unable to pursue most of such
capital expenditures, and approved the terms of a lease (the "Thompsonville
Plant Lease") under which the Thompsonville Plant and related pipelines would
be constructed by subsidiaries of VEC and leased to the Partnership. The
Thompsonville Plant Lease commenced December 1, 1992 and has a term of 15
years.
In late 1992, VEC was advised that certain assets owned by Oryx,
consisting principally of a natural gas processing plant in Starr County,
Texas, a second plant located in Dimmit County, Texas, and a 59-mile NGL
pipeline located in Starr County, Texas, were being offered for sale. Under
the terms of the Partnership Agreement, certain proposed investments in the
natural gas business within the State of Texas are designated as "Natural Gas
Business Opportunities" which may not be acquired by the Company unless, in the
good faith determination of the General Partner, the Partnership is unable to
pursue such investments due to capital limitations of the Partnership on a
consolidated basis or because the proposed investment is determined by the
General Partner to involve a degree of risk (including consideration of
potential impairment of the ability to make the Indicated Distribution)
unsuitable for investments by the Partnership. Additionally, if the General
Partner determines that the investment is appropriate for the Partnership
except for capital limitations of the Partnership, then the Partnership will be
permitted to participate in the Natural Gas Business Opportunity on a fair and
reasonable basis if such participation is reasonably practicable. In its
capacity as General Partner, VNGC determined that the Partnership would be
unable to undertake the acquisition of the Oryx assets due to capital
limitations. VEC then submitted a bid for the Oryx assets on behalf of the
Company. On January 29, 1992, at the next regularly scheduled VNGC Board
meeting, the General Partner presented the proposed transaction involving the
Oryx assets to the VNGC Board for consideration. At such meeting, the VNGC
Board determined that the Partnership was unable due to capital limitations to
pursue the Oryx asset purchase. The VNGC Board also considered and approved an
arrangement, proposed by VEC, whereby the Partnership would participate in the
Oryx transaction by entering into contractual arrangements to manage and
operate the Oryx assets on behalf of the Company, acquire processing rights to
residue gas from the Dimmit County processing plant, enter into certain gas
transportation agreements with Oryx and pay $3 million to Oryx for such
contractual commitments. A subsidiary of VEC was determined by Oryx to be the
successful bidder, subsequently acquired the Oryx assets effective May 1992 for
approximately $80 million and entered into operating agreements with the
Partnership for operation of the Oryx assets by the Partnership and a residue
gas processing agreement.
In August 1991, a lawsuit was filed in 57th Judicial District Court,
Bexar County, Texas, against VEC, VNGC and certain officers and directors of
VEC and VNGC, alleging that the corporate defendants and the individual
defendants, as officers or directors of one or both of the corporate
defendants, engaged in actions constituting self-dealing, lack of due care and
breach of fiduciary duty to the holders of the Preference Units and the
Partnership. The plaintiffs further alleged that, in exercising dominance and
control over the Partnership, such defendants, among other things, diverted
assets, reduced capital expenditures, incurred unnecessary debt and caused the
Partnership to enter into the East Texas Pipeline Lease and other transactions
on terms unfavorable to the Partnership. The plaintiffs sought to have the
East Texas Pipeline Lease set aside and to have the defendants account for the
alleged damages suffered. In October 1992, this litigation was certified by
the court as a class action and, at the same time, the
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court preliminarily approved a settlement of all claims in the lawsuit. The
settlement provided for an adjustment in the terms of the East Texas Pipeline
Lease, which had the effect of reducing lease payments under the lease by
approximately $2.5 million annually. In addition, the settlement provided for
the terms of the Fractionator Expansion Lease to be conformed to those of the
East Texas Pipeline Lease, for the payment of $3 million to a settlement fund
(the "Settlement Fund") established for the benefit of members of a class
consisting of certain selling Unitholders and for the dismissal and full
release of all claims that were brought, or which could have been brought, in
the litigation. The settlement was approved by the court on November 23, 1992,
and the lawsuit was dismissed. Final distribution of amounts payable to the
class of selling Unitholders out of the Settlement Fund occurred on October 18,
1993.
CONFLICTS OF INTEREST
The directors and officers of VEC owe a fiduciary duty to VEC to
manage VEC and its investments for the benefit of VEC and its shareholders.
Similarly, VNGC, as the General Partner of the Partnership, and the VNGC Board
of Directors have fiduciary duties to the Partnership and to the Public
Unitholders while at the same time the Board of Directors of VNGC has a
fiduciary duty to manage VNGC for the benefit of VEC. At the same time, VEC,
as the sole stockholder of the General Partner of the Partnership, may, under
the DRULPA, be accountable to the Partnership as a fiduciary and, accordingly,
be required to exercise good faith and integrity in relation to the assets and
affairs of the Partnership. These obligations give rise to certain conflicts
of interest.
Through subsidiaries, including the Subsidiary General Partners, VEC
holds approximately 47.5% of the issued and outstanding Common Units, while the
remaining 52.5% of the Common Units are publicly held. As a result of its
subsidiaries' holdings of Common Units and their general partner interests in
VNGP, L.P., the Management Partnership and the Subsidiary Operating
Partnerships, VEC holds an effective equity interest in the Partnership of
approximately 49%. Under terms of the Partnership Agreement, VNGC has exclusive
authority to manage the business and operations of VNGP, L.P. As sole
stockholder of VNGC, VEC has the power to elect the Board of Directors, and
therefore may be deemed to effectively control the management of, VNGC.
Because VNGC is wholly-owned by VEC, the interests of VEC and VNGC may be
deemed to be substantially aligned and VNGC may be deemed to be unable, as a
practical matter, to act independently of VEC. For this reason, the Special
Committee, consisting of three independent directors of VNGC, was created to
separately evaluate the fairness of the proposed Merger. See "Special
Considerations--Background of the Merger." Under Delaware law, VNGC could not
merge or dispose of its interest in the Partnership without the consent of its
sole stockholder, VEC. In addition, VEC, through its ability to elect the
directors of VNGC, controls the membership of the VNGC Board, and there is a
substantial similarity between the management of VEC and the management of
VNGC. As a result, for legal and practical reasons, VNGC could not act
independently of VEC in considering alternative transactions available to the
Partnership, and did not do so. See "Special Considerations--Alternative
Transactions Considered."
Various management personnel are common to both VEC and VNGC. Mr.
William E. Greehey serves as CEO and as a director of both VEC and VNGC. Mr.
Edward C. Benninger serves as Executive Vice President and a director of VEC
and as Executive Vice President and Chief Operating Officer and as a director
of VNGC. Mr. Stan L. McLelland serves as Executive Vice President and General
Counsel of VEC and as Executive Vice President and General Counsel and as a
director of VNGC. Mr. Don M. Heep serves as Senior Vice President and Chief
Financial Officer of both VEC and VNGC. Mr. Steven E. Fry serves as Vice
President Administration of both VEC and VNGC. Mr. John H. Krueger serves as
Controller of both VEC and VNGC. Mr. John D. Gibbons serves as Treasurer of
both VEC and VNGC. Mr. Rand C. Schmidt serves as Corporate Secretary of both
VEC and VNGC.
Subsidiaries of VEC have entered into several transactions in which
natural gas and NGL-related assets have been constructed and owned by
subsidiaries of
86
<PAGE> 75
VEC and leased to the Partnership. For a description of these leasing
transactions between the Company and the Partnership, see "The
Partnership--Background of the Partnership." The various leasing transactions
have been approved by the VNGC Board and also by the VEC Board. Nonetheless,
such transactions inevitably give rise to conflicts of interest. From the
point of view of VEC and its stockholders, an investment in assets leased to
the Partnership is a use of VEC's capital resources that must be measured
against other possible uses of such resources, such as capital investments in
VEC's other businesses or increased returns to stockholders through increased
dividends or repurchases of VEC common stock. To date, VEC has determined that
such transactions are nonetheless in the best interest of the Company because
of the substantial investment of the Company in the Partnership and the
Company's desire to maintain and enhance the value of this investment.
Nonetheless, VEC must still weigh the alternatives of investing in assets
leased to the Partnership at a fixed rate and investing in other capital assets
that may produce a higher rate of return. To the extent that higher rates of
return could be obtained on assets leased to the Partnership, the financial
return to the Company and its stockholders would be enhanced. From the point
of view of the Partnership and the Public Unitholders, leases of assets from
the Company provide an important source of capital because of the financial
limitations of the Partnership. See "Special Considerations--Reasons for the
Proposed Merger." However, financial returns to the Partnership and the Public
Unitholders are enhanced to the extent that the Company's return on its
investment in leased assets, and therefore the Partnership's lease payments,
are reduced. In 1991, certain Public Unitholders brought suit against VEC, the
General Partner and certain of their respective officers and directors
alleging, among other things, that the terms of the East Texas Pipeline Lease
were unfavorable to the Partnership. In 1992, this lawsuit was settled and,
among other things, the Company agreed to reduce the lease payments, and its
rate of return, under this lease. Because the Company and the VEC stockholders
generally benefit to the extent that the rate of return and lease payments
under leases with the Partnership are higher, and the Partnership and Public
Unitholders generally benefit to the extent that lease payments and the
Company's rate of return are lower, there is an inevitable conflict of interest
between the Company and the Partnership with respect to this type of
transaction. Additionally, further leasing transactions would inevitably
invite the possibility of either litigation by Public Unitholders if lease
terms are perceived to be too favorable to the Company, or complaints and
possible litigation by VEC stockholders if lease terms are perceived to be too
favorable to the Partnership. For these reasons, and because of concerns
expressed by certain debt rating agencies with respect to this type of
transaction, VEC does not intend to enter into any further significant leasing
transactions with the Partnership.
Certain proposed capital investments in the natural gas and NGL
businesses within the State of Texas are classified under the Partnership
Agreement as "Natural Gas Business Opportunities" and must generally be offered
first to the Partnership before the Company can make such investments. See
"The Partnership--Background of the Partnership." For example, each of the
leasing transactions between the Company and the Partnership described herein,
because it involves a capital investment in such businesses in the State of
Texas, constituted such a "Natural Gas Business Opportunity" and was offered to
the Partnership. In each case, the VNGC Board determined that the Partnership
was unable to directly undertake such investment due to capital limitations.
Additionally, in 1992, VEC became aware of an opportunity to acquire certain
NGL-related assets from Oryx. The VNGC Board again determined that the
Partnership was unable to make the substantial capital investment involved in
this acquisition and the acquisition was made by the Company, with the
Partnership participating through operating agreements, gas processing and gas
transportation arrangements. See "--Background of the Partnership." The
General Partner expects that similar situations will arise in the future
involving possible acquisitions of natural gas or NGL-related assets by either
the Company or the Partnership. Determinations by the VNGC Board as to whether
or not to participate in a particular Natural Gas Business Opportunity
necessarily involve an inherent conflict of interest because the VNGC Board
owes a fiduciary duty both to VEC, as the sole stockholder of VNGC, and to the
Public Unitholders.
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<PAGE> 76
Significant capital transactions by the Partnership, involving an
expenditure of $2 million or more, are reviewed by the VNGC Board. The VNGC
Board also reviews significant transactions between the Partnership and the
Company, such as the East Texas Pipeline Lease, Fractionator Expansion Lease
and Thompsonville Lease, and also reviews situations constituting a Natural Gas
Business Opportunity, such as the acquisition by the Company of the assets from
Oryx, to determine that the Partnership is unable to itself undertake or
participate in the particular opportunity due to capital limitations or because
the transaction is otherwise unsuitable for the Partnership. Notwithstanding
the conflicting fiduciary duties that the members of the VNGC Board have to VEC
and to the Public Unitholders of the Partnership, the members of the VNGC Board
balance their respective duties and review transactions and conflicts between
the Company and the Partnership with a view to determining in their judgment
that the transactions are fair to the Partnership. Although the VNGC Board
considered the terms of such transactions to be fair to the Partnership, there
can be no assurance that more favorable terms could not have been obtained by
the Partnership in substantially similar transactions with independent third
parties.
VNGC, as General Partner of the Partnership, is responsible for all
management and operational decisions of the Partnership. All of the members of
the VNGC Board are elected by VEC, acting as sole stockholder of VNGC. Three
of the six members of the VNGC Board of Directors are also officers of VEC.
Because the Partnership has no employees of its own, employees of the General
Partner and its subsidiaries, acting on behalf of the Partnership, conduct all
of the operations of the Partnership; evaluate and make decisions and
recommendations regarding capital investments and similar transactions,
including leasing transactions involving VEC and its subsidiaries; evaluate and
make decisions regarding all natural gas and NGL purchase, sale,
transportation, processing and other contractual arrangements involving the
Partnership, including such arrangements between the Partnership and
subsidiaries of VEC; and evaluate and make decisions regarding financing for
the Partnership's operations. In the normal course of business, subsidiaries of
VEC and the Subsidiary Operating Partnerships engage in many transactions with
one another, and in connection therewith, the officers and employees of the
General Partner and its subsidiaries owe a fiduciary duty to the Partnership
and the Public Unitholders and at the same time owe a duty to the General
Partner and VEC. Additionally, under the terms of the Partnership Agreement,
all transactions between the Company and the Partnership, including those that
are not specifically reviewed by the VNGC Board, are required to be fair and
reasonable to the Partnership and, under the terms of VEC's own credit
agreements, must be entered into on an arm's length basis. However, these
transactions are generally negotiated between employees of the General Partner
and employees of other VEC subsidiaries, and no independent third party reviews
such transactions for compliance with such requirements.
Under the terms of the Partnership Agreement, the Partnership is
required to indemnify the General Partner and its officers and directors
against all losses, claims, damages, liabilities, costs and expenses incurred
by them if the indemnitee acted in good faith and in a manner the indemnitee
reasonably considered to be in, or not opposed to, the best interests of the
Partnership, and the indemnitee's conduct did not constitute gross negligence
or willful misconduct. Unless ordered by a court, such indemnification shall
be made only upon a determination by the General Partner, if not a named
defendant or respondent in the proceeding, by a majority in interest of the
Unitholders or by an opinion of counsel that such indemnification is proper in
the circumstances because the indemnitee has met the applicable standard of
conduct.
Additionally, under the Partnership Agreement, the Company is
authorized to obtain, at the expense of the Partnership, insurance on behalf of
the General Partner, its officers, directors, employees and agents against any
liability that may be asserted against or expense that may be incurred by such
persons in connection with the activities of the Partnership.
88
<PAGE> 77
OWNERSHIP OF COMMON UNITS
On the Record Date, there were 18,486,538 Common Units outstanding, of
which 8,864,223 Common Units (47.9%) were owned by the Company, executive
officers or directors of VEC or VNGC, or employees of the Company, as shown in
the following table:
<TABLE>
<CAPTION>
COMMON UNITS PERCENT
BENEFICIALLY OWNED(1) OF CLASS
--------------------- --------
<S> <C> <C>
Subsidiaries of VEC:
VT Company . . . . . . . . . . . . . . . 7,374,282 39.89%
VM Company . . . . . . . . . . . . . . . 510,970 2.76
VH Company . . . . . . . . . . . . . . . 412,626 2.23
Rio Pipeline Company . . . . . . . . . . 214,051 1.16
Val Gas Company . . . . . . . . . . . . 117,965 (2)
Reata Industrial Gas Company . . . . . . 42,552 (2)
Valero Management Company . . . . . . . 38,081 (2)
Valero Gathering Company . . . . . . . . 25,210 (2)
VLDC Company . . . . . . . . . . . . . . 15,126 (2)
V.H.C. Pipeline Company . . . . . . . . 14,476 (2)
Valero Industrial Gas Company . . . . . 9,280 (2)
--------- ----
8,774,619 47.5%
--------- ----
Executive Officers and Directors:(3)
Edward C. Benninger(5) . . . . . . . . . 15,774 (2)
Ronald K. Calgaard(4) . . . . . . . . . -- --
Ruben M. Escobedo(4) . . . . . . . . . . -- --
Steven E. Fry(6) . . . . . . . . . . . . -- --
William E. Greehey(5) . . . . . . . . . 33,595 (2)
Don M. Heep(6) . . . . . . . . . . . . . 552 (2)
Stan McLelland(5) . . . . . . . . . . . 20,260 (2)
Mack Wallace(4) . . . . . . . . . . . . -- --
--------- ----
70,181 (2)
--------- ----
Other Company employees . . . . . . . . . . 19,923 (2)
--------- ----
All current officers, directors and
employees of the Company as a group,
including the persons named above . . . 90,104 0.4%
--------- ----
</TABLE>
- ---------------
(1) Each individual named in the table has sole power to vote or direct
the vote of all such Common Units beneficially owned by him. Each
individual named in the table has sole power to dispose or direct the
disposition of Common Units beneficially owned by him. The executive
officers and directors of the General Partner identified herein as
owning Common Units have advised the General Partner that they intend
to vote such Common Units "FOR' the Merger. Messrs. Benninger,
Greehey and McLelland are directors of the General Partner and, in
such capacity, have voted in favor of approving the Merger. See
"Special Considerations--Recommendation of the Board of Directors of
the General Partner." No such person has made a separate
recommendation with respect to the Merger.
(2) Less than 1%.
(3) The business address of each beneficial owner listed above is 530
McCullough Avenue, San Antonio, Texas 78215.
(4) Director of VNGC.
(5) Executive officer and director of VEC and VNGC.
(6) Officer of VEC and VNGC.
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<PAGE> 78
THE PROXY SOLICITATION
VOTING AND PROXY PROCEDURES
A proxy enables a Unitholder to be represented at a meeting at which
he would otherwise be unable to participate. The proxy card accompanying this
Proxy Statement is solicited because each Unitholder is entitled, as a limited
partner of VNGP, L.P., to vote on matters scheduled to come before the Special
Meeting.
Common Units eligible to be voted and for which a proxy card in the
accompanying form is properly signed, dated and returned in sufficient time to
permit the necessary examination and tabulation of the proxy before a vote is
taken will be voted in accordance with any choice specified. The proxy card
permits a specification of approval, disapproval or abstention as to the
proposal described in this Proxy Statement. Unitholders are urged to specify
their choice by marking an (x) or other mark in the appropriate box on the
proxy card, but where no choice is specified, eligible Common Units will be
voted as indicated on the proxy card.
If any matters not specified in this Proxy Statement come before the
Special Meeting, eligible Common Units will be voted in accordance with the
best judgment of the persons named therein as proxies. At the time this Proxy
Statement was printed, the management of the General Partner was not aware of
any other matters to be voted upon. Only procedural matters may come before
the Special Meeting since the only substantive matters which may be considered
are those with respect to which prior notice is given.
The proxy may be revoked at any time before it is exercised by
submitting a written revocation or a later-dated proxy or proxy card to Rand C.
Schmidt, Corporate Secretary, Valero Natural Gas Company, P.O. Box 500, San
Antonio, Texas 78292, or by attending the Special Meeting in person and so
notifying the meeting inspectors. See "The Merger."
The presence in person, or by properly executed proxy, of the holders
of more than 50 percent of the issued and outstanding Common Units is necessary
to constitute a quorum at the Special Meeting. Each holder of record of Common
Units on the Record Date is entitled to cast one vote per Common Unit on each
proposal properly submitted for the vote of the holders of the Common Units.
Pursuant to the DRULPA, approval of the Merger requires satisfaction
of the Majority Vote Requirement. Additionally, in order to address the
separate interests of the Public Unitholders, although not required by the
Partnership Agreement or the DRULPA, the General Partner has conditioned
approved of the Merger upon satisfaction of the Independent Vote Requirement.
Abstentions and any unvoted positions in brokerage accounts will be counted
toward the calculation of a quorum, but are not treated as either a vote for or
against the proposal. Abstentions and unvoted Common Units will have the same
effect as a vote against the proposal with respect to satisfaction of the
Majority Vote Requirement but will not have any effect on satisfaction of the
Independent Vote Requirement.
SOLICITATION OF PROXIES
Solicitation of proxies from VNGP, L.P.'s Unitholders will be made by
the General Partner and will be undertaken principally by use of the United
States Postal Service. However, such solicitation may also be undertaken,
without additional remuneration, by the directors, officers and employees of
the Company, and the General Partner may also utilize the services of the firm
of Kissel-Blake Inc. ("Kissel-Blake"), New York, New York. Such solicitation
could be undertaken either by telephone, telegraph or personal interview. The
cost of any such solicitation, including the cost of preparing and mailing
proxy materials, returning the proxies and reimbursing brokerage houses and
nominees for forwarding proxy materials to beneficial owners, will be borne by
the Company. The General Partner's arrangement with Kissel-Blake provides for
payments to Kissel-Blake for compensation and reimbursement of expenses, all of
which are estimated not to exceed $15,000.
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<PAGE> 79
NO DISSENTERS' RIGHTS OF APPRAISAL
In accordance with the DRULPA, the Public Unitholders will have no
dissenters' rights of appraisal in connection with the Merger. For information
regarding the effect of the Merger and related class-action litigation on the
rights of Public Unitholders, see "Principal Effects of the Merger."
CONDUCT OF THE SPECIAL MEETING
An agenda will be distributed at the Special Meeting, and the meeting
will be conducted in accordance with the agenda. The Chairman's rules will
govern the meeting.
91
<PAGE> 80
92
<PAGE> 81
SUMMARY FINANCIAL DATA
The following summary consolidated financial information relating to
the Partnership has been taken or derived from the audited financial statements
contained in the VNGP, L.P. 1993 Form 10-K and other public documents of VNGP,
L.P. More comprehensive financial information is included in the VNGP, L.P.
1993 Form 10-K and the other documents filed by VNGP, L.P. with the Commission,
and the financial information below is qualified by reference to such reports
and other documents including the financial statements and related notes
contained therein. VNGP, L.P.'s audited financial statements included in its
1993 Form 10-K as filed with the Commission are set forth in Annex C hereto.
The VNGP, L.P. 1993 Form 10-K and other VNGP, L.P. public documents may be
examined and copies may be obtained from the offices of the Commission as
described under "Available Information."
VALERO NATURAL GAS PARTNERS, L.P.
SUMMARY FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
<TABLE>
<CAPTION>
AS OF OR FOR THE YEAR ENDED DECEMBER 31,
1993 1992 1991
-------- -------- ------
<S> <C> <C> <C>
INCOME STATEMENT DATA:
Operating revenues . . . . . . . . . . . . $ 1,326,458 $ 1,197,129 $ 1,144,001
Depreciation and amortization. . . . . . . 38,905 37,924 42,306
Operating income . . . . . . . . . . . . . 79,478 89,841 99,834
Net income . . . . . . . . . . . . . . . . 14,447 24,986 37,036
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
Ratio of earnings to fixed charges(1). . . 1.20x 1.36x 1.53x
STATEMENT OF CASH FLOWS DATA:
Net cash provided by operating activities. $ 70,481 $ 77,886 $ 84,281
Capital expenditures . . . . . . . . . . . 36,061 35,893 33,074
Cash distributions paid per limited
partner unit . . . . . . . . . . . . . . .50 1.50 2.50
BALANCE SHEET DATA:
Total assets . . . . . . . . . . . . . . . $1,045,082 $1,084,481 $1,061,490
Total debt:
Long-term debt obligations(2). . . . . . 534,286 559,643 582,500
Long-term capital lease obligations(2) . 104,838 104,839 77,542
Total debt . . . . . . . . . . . . . . 639,124 664,482 660,042
Partners' capital:
Limited partners' capital. . . . . . . . 158,448 154,461 158,801
General partners' capital. . . . . . . . 1,598 1,558 1,764
Total partners' capital. . . . . . . . 160,046 156,019 160,565
Total debt as a percentage of total
capitalization(3). . . . . . . . . . . . 80.0% 81.0% 80.4%
</TABLE>
___________________________
(1) The ratio of earnings to fixed charges is computed by dividing (i) the
sum of pre-tax income (equivalent to net income as the Partnership is
not subject to federal income taxes), amortization of previously
capitalized interest and fixed charges (excluding capitalized
interest) by (ii) fixed charges. Fixed charges consist of total
interest, whether expensed or capitalized, amortization of debt
expense and one-third of rents, which is deemed representative of the
interest portion of rental expense.
(2) Includes current maturities.
(3) Total capitalization represents the sum of total debt and total
partners' capital.
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<PAGE> 82
MARKET PRICES OF COMMON UNITS AND DISTRIBUTIONS
The Common Units are traded on the New York Stock Exchange (symbol:
VLP), which is the principal trading market for such securities. On February
28, 1994, there were holders of record of the Common Units and an
estimated 13,200 beneficial holders of the Common Units. The following table
sets forth, on a per Unit basis, for the periods indicated the high and low
sales prices of the Common Units in the New York Stock Exchange-Composite
Transactions listing, as reported by The Wall Street Journal, and the amount of
distributions per Common Unit declared.
<TABLE>
<CAPTION>
COMMON UNITS(1)(2)
----------------------------------- DISTRIBUTIONS DECLARED
HIGH LOW PER COMMON UNIT(1)
-------------- ------------- ----------------------
<S> <C> <C> <C> <C>
1992:
First Quarter . . . . . . . $ 11 3/4 $ 7 3/4 $ .625
Second Quarter . . . . . . 9 1/2 7 3/4 .125
Third Quarter . . . . . . . 8 7/8 7 7/8 .125
Fourth Quarter . . . . . . 9 7/8 7 7/8 .125
1993:
First Quarter . . . . . . . 8 5/8 8 .125
Second Quarter . . . . . . 8 1/2 7 3/4 .125
Third Quarter . . . . . . . 9 3/8 8 1/8 .125
Fourth Quarter . . . . . . 12 9 .125
1994:
First Quarter . . . . . . . 12 11 1/2 (3)
Second Quarter. . . . . . .
</TABLE>
- ---------------
(1) Distributions declared per Common Unit represent distributions
attributable to the periods indicated. For example, the $0.625
distribution indicated for the First Quarter of 1992 was based upon
Distributable Cash Flow for the quarter ended March 31, 1992, was
declared on May 5, 1992 and paid on May 30, 1992 to holders of record
on May 15, 1992.
(2) Prior to May 30, 1992, the limited partner interests in VNGP, L.P. not
held by subsidiaries of VEC were represented by Preference Units. On
May 30, 1992, the Preference Units were automatically converted into
Common Units in accordance with the terms of the Partnership
Agreement. See "The Partnership--Background of the Partnership." The
Common Units have been traded on the Exchange since June 1, 1992. As
reported by the Exchange, during the third quarter of 1993, the
closing prices of the Common Units on the Exchange ranged from $8.25
to $9.375 per Common Unit, and the average trading volume for such
period was approximately 19,200 Common Units per day. During the two
trading days ended October 13, 1993, average daily trading volume in
the Common Units increased to approximately 114,000 Units and the
closing price per Common Unit on the Exchange increased from a closing
price of $9.25 on October 11, 1993 to a closing price of $10.00 on
October 13, 1993. Heavy trading activity continued and the price of
the Common Units further increased on the morning of October 14, 1993.
In response to such activity, on October 14, 1993, VEC issued a public
announcement that the VEC Board would meet on October 16, 1993 for the
purpose of considering management's recommendation that the Merger be
proposed to the Board of Directors of the General Partner. On October
14, 1993, the day of such public announcement, the closing price of
the Common Units on the Exchange was $11.00 per Common Unit.
(3) The General Partner has generally declared quarterly distributions
approximately 20 to 25 days following the end of each quarter,
established a record date of approximately 30 to 35 days following the
end of each quarter, and paid such distributions approximately 60 days
following the end of each quarter. There can be no assurance that a
quarterly distribution will be declared for the first quarter of 1994
or subsequent periods. See "The Merger--Basic Terms of the Merger."
On , 1994, the last sales price of the Common Units in the New
York Stock Exchange - Composite Transactions listing was $ .
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<PAGE> 83
FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER
INTRODUCTION
The following discussion is intended to provide Public Unitholders
with a summary of certain federal income tax matters that should be considered
in connection with the Merger. Although the principal federal income tax
aspects of general application to Public Unitholders regarding the Merger are
discussed herein, no attempt has been made to comment on all tax matters
affecting the Public Unitholders. Moreover, the tax consequences to a
particular Public Unitholder will depend, in part, on the Public Unitholder's
own tax circumstances. The following discussion is not applicable to
nonresident aliens or foreign corporations and has limited application to
domestic corporations. Accordingly, each Public Unitholder should consult his
own tax advisor about the federal, state, local, foreign and other tax
consequences of the Merger in respect of his particular circumstances.
IRS PRIVATE LETTER RULING
VNGC requested and on February 7, 1994 received, a Private Letter
Ruling from the IRS confirming the following federal income tax consequences of
the Merger to the Public Unitholders, VNGC, the Partnership and Newco:
1. Newco's formation and subsequent Merger with and into
VNGP, L.P. will be disregarded for federal income tax purposes. The
Merger will be treated as a purchase by VNGC of the Common Units from
the holders of those units in exchange for cash. No gain or loss will
be realized by Newco or the Partnership as a result of the Merger;
2. Gain or loss will be realized and recognized by the
holders of the Common Units upon the exchange of those units for cash
in the Merger. The amount of the gain or loss will be equal to the
difference, if any, between (a) the amount of cash received and (b)
the adjusted tax basis of the Common Units exchanged. Except as
provided in section 751(a) of the Internal Revenue Code of 1986, as
amended (the "Code"), if a person holds Common Units as a asset, any
gain recognized will be from the sale or exchange of a capital asset,
within the meaning of section 1222. Except as provided in section
751(a), if a person holds Common Units as a capital asset, any loss so
recognized will be loss from the sale or exchange of a capital asset,
within the meaning of section 1222;
3. The amount of cash received by the holders of the
Common Units attributable to VNGP, L.P.'s unrealized receivables (as
defined in section 751(c) of the Code) or inventory items that have
appreciated substantially in value (within the meaning of section
751(d)) shall be considered as an amount realized from the sale or
exchange of property other than a capital asset;
4. The holders of the Common Units will be allocated
their respective distributive shares of the items listed in section
702(a) of the Code, with respect to the Partnership, for the period
beginning on the first day of the taxable year in which the Merger
occurs and ending on the day of the Merger;
5. Provided that a holder of Common Units disposes of
that Unitholder's entire interest in VNGP, L.P., the exchange of
Common Units for cash will be a disposition by the Unitholder of an
entire interest in a passive activity in a fully taxable transaction.
Unless a holder of Common Units has a relationship to VNGC described
in sections 267(b) or 707(b)(1) of the Code, the excess of (i) the sum
of (I) any VNGP, L.P. loss allocated to that Unitholder with respect
to the period beginning with that Unitholder's entry into VNGP, L.P.
and ending on the date of the Merger (including any previously
disallowed loss determined under section 469(b)) and (II) any loss
realized on the exchange, over (ii) any net income or gain for the
taxable year of the Merger (determined without regard to the losses
95
<PAGE> 84
described in clause (i)) will be treated as a loss that is not from a
passive activity;
6. As a result of the Merger, VNGP, L.P. will not
terminate under section 708(b)(1)(B) of the Code, provided that
immediately prior to the Merger, the Public Unitholders own a less
than 50 percent interest in either the capital or the profits of VNGP,
L.P;
7. Provided that VNGP, L.P. interests cease to be traded
on an established securities market or cease to be readily tradable on
a secondary market (or the substantial equivalent of a secondary
market), for its first taxable year beginning after the Merger and for
later years, VNGP, L.P. will cease to be a publicly traded
partnership within the meaning of section 7704 of the Code.
As a result of obtaining the Private Letter Ruling, VNGC has not obtained an
opinion of independent tax counsel with respect to the federal income tax
consequences of the Merger to Public Unitholders because the IRS Private Letter
Ruling addresses such tax consequences.
Prior to receiving the Private Letter Ruling, VEC and VNGP, L.P.
entered into the Memorandum of Understanding with certain plaintiffs' counsel
as described in "The Merger--Conditions of the Obligation of the Parties to the
Merger Agreement." In connection with the Memorandum of Understanding, VEC has
agreed to pay fees of plaintiffs' counsel. VNGC's tax advisors have advised
VNGC that the per-Unit amount of such fees (equal to approximately $0.11 per
Common Unit held by the Public Unitholders) should be included in both the
Public Unitholder' consideration received in the Merger (increasing the nominal
amount of such consideration from $12.10 per Common Unit to approximately
$12.21 per Common Unit) and in the Public Unitholders' basis for calculating
gain or loss. In order to avoid delay in obtaining the Private Letter Ruling,
VNGC did not amend its ruling request to address the treatment of attorneys'
fees but did informally advise the IRS examiner handling such ruling request of
such facts and requested that, if appropriate, he consider such facts in
responding to the ruling request. The Private Letter Ruling therefore does not
formally address the treatment of such attorneys' fees. However, based upon
the advice provided by its tax advisors and the fact that the IRS was aware of
such information but did not alter the Private Letter Ruling in response
thereto, VEC and VNGC believe that the tax treatment of such attorneys' fees
will be substantially as described above and did not consider a further private
letter ruling or formal tax opinion to be necessary.
BACKUP WITHHOLDING
A Public Unitholder may be subject to backup withholding at the rate
of 31 percent with respect to the cash to be received in the Merger unless such
holder (i) is a corporation or is otherwise exempt from backup withholding and,
when required, demonstrates this fact to the Disbursing Agent, or (ii) provides
a taxpayer identification number to the Disbursing Agent, certifies as to no
loss of exemption from backup withholding and otherwise complies with
applicable requirements of the Treasury Regulations.
FORECAST OF CERTAIN FEDERAL INCOME TAX CONSEQUENCES TO PUBLIC UNITHOLDERS
The General Partner is unable to project the exact amount of gain or
loss that will be realized by each individual Public Unitholder as a result of
the Merger; however, Annex D summarizes certain estimated gain or loss tax
information on a per-Unit basis applicable to Common Units held as of January
1, 1994, based upon an acquisition of the Units during each month from March
1987 to December 1993. Annex D-1 provides estimated information regarding Units
purchased at an assumed acquisition price equal to the highest reported trade
price of the Units during each such month. Annex D-2 provides estimated
information based upon an assumed acquisition of Units at a price equal to the
unweighted average of the
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reported "high" and "low" trade prices of the Units during each such month.
Annex D-3 provides estimated information regarding Units purchased at an
assumed price equal to the lowest reported trade price of the Units during each
such month. In each case, Unit prices are the "high" or "low" trade prices for
the Units, as reported in the NYSE-Composite Transactions listing in The Wall
Street Journal. For each acquisition month and assumed acquisition price, the
Annexes provide estimated information regarding the per-Unit cumulative net
income or loss that a Public Unitholder would experience if the Merger is
consummated; the cumulative per-Unit cash distributions that the Public
Unitholder has received; the per-Unit suspended passive ordinary and capital
losses; the Public Unitholder's basis for calculating gain or loss; the
per-Unit gain or loss expected to be realized by a Public Unitholder; and the
per-Unit ordinary and capital gain or loss components included within such
per-Unit gain or loss. In each case, both the Public Unitholder's
consideration received in the Merger and the Public Unitholder's basis for
calculating gain or loss have been increased by a pro-rata share of the
attorneys' fees described above. Therefore, each Public Unitholder's overall
gain or loss should not be affected by such payment of attorneys' fees. As
indicated in the Annex D-1 through D-3, the Merger may result in a Unitholder
recognizing both ordinary income and capital loss; while ordinary income
realized from the Merger would generally be subject to current federal income
taxation, any such capital loss could generally be utilized only to offset
capital gains otherwise realized by the Unitholder, or to the extent otherwise
permitted under the Code.
The Merger Agreement provides that, immediately prior to the
consummation of the Merger, VNGC will make, or cause one or more of its
subsidiaries to make, certain capital contributions to VNGP, L.P. Such capital
contributions are being made in order to prevent a technical termination of
VNGP, L.P. for federal income tax purposes and have no effect upon the Public
Unitholders or the federal income tax treatment of the transaction to such
Public Unitholders.
UNITHOLDERS ARE ADVISED TO CONSULT THEIR OWN TAX ADVISORS REGARDING
THE SPECIFIC TAX CONSEQUENCES TO THEM RESULTING FROM THE TRANSACTION, INCLUDING
THE CONSEQUENCES UNDER FEDERAL, STATE, LOCAL AND FOREIGN TAX LAWS.
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INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
VNGP, L.P. hereby incorporates into this Proxy Statement by reference
its Annual Report on Form 10-K for the year ended December 31, 1993, [and its
Quarterly Reports on Form 10-Q for the quarters ended , 1994].
All documents subsequently filed by VNGP, L.P. pursuant to Section
13(a), 13(c), 14, or 15(d) of the Exchange Act, subsequent to the date of this
Proxy Statement and prior to the date of the Special Meeting, shall be deemed
to be incorporated by reference in this Proxy Statement and to be a part of
this Proxy Statement from the date of the filing of such documents.
Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained herein
or in any subsequently filed document that also is or is deemed to be
incorporated by reference herein modifies or supersedes such statement. Any
statement so modified or superseded shall not be deemed, except as so modified
or superseded, to constitute a part of this Proxy Statement.
Any person receiving a copy of this Proxy Statement may obtain,
without charge, upon written or oral request, a copy of any of the documents
incorporated by reference herein, except for the exhibits to such documents
(other than the exhibits expressly incorporated by reference into the
information that this Proxy Statement incorporates). Written requests should
be directed to: Investor Relations, Valero Energy Corporation, P.O. Box 500,
San Antonio, Texas 78292-0500 (telephone 210-246-2099).
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ANNEX A
AGREEMENT OF MERGER
This AGREEMENT OF MERGER dated this 20th day of December, 1993 (this
"Agreement"), is made and entered into by and between Valero Natural Gas
Partners, L.P., a Delaware limited partnership ("VNGP, L.P." and, together with
its consolidated subsidiaries, the "Partnership"), Valero Merger Partnership,
L.P., a Delaware limited partnership ("Newco"), and Valero Natural Gas Company,
a Delaware corporation ("VNGC" or the "General Partner"), the general partner
of VNGP, L.P. and a wholly owned subsidiary of Valero Energy Corporation, a
Delaware corporation ("VEC"), and VEC.
W I T N E S S E T H
WHEREAS, the limited partner interest of VNGP, L.P. is represented by
18,486,538 Common Units of limited partner interests ("Common Units"); and
WHEREAS, of such Common Units, 8,774,619 Common Units are held by
direct or indirect subsidiaries of VEC ("Subsidiary Unitholders") as shown on
Schedule 1 hereto, and the balance of such Common Units is held by persons
("Public Unitholders") other than subsidiaries of VEC ("Subsidiary
Unitholders"); and
WHEREAS, the Board of Directors of VNGC has established a special
committee of directors (the "Special Committee") to review a proposed merger
involving VNGP, L.P., and to determine the fairness of this Agreement and such
transactions to the Public Unitholders; and
WHEREAS, the Special Committee has (i) considered the fairness of this
Agreement and the transactions contemplated hereby to the Public Unitholders,
(ii) determined that the transactions contemplated hereby are fair to and in
the best interests of the Public Unitholders, (iii) recommended that VNGC
approve this Agreement and (iv) subject to the conditions hereof, recommended
that the transactions contemplated hereby be consummated in accordance with the
terms hereof; and
WHEREAS, VNGC, as the sole general partner of VNGP, L.P., upon the
recommendation of the Special Committee, has approved the adoption and
authorization of this Agreement, the transactions contemplated hereby and the
plan of merger set forth herein and has recommended that this Agreement be
submitted to the holders of the Common Units for their approval pursuant to
Section 17-211 of the Delaware Revised Uniform Limited Partnership Act (the
"Act") at a Special Meeting to be held pursuant to Section 16.4 of the Second
Amended and Restated Agreement of Limited Partnership of VNGP, L.P., effective
March 25, 1987 (the "Partnership Agreement"); and
WHEREAS, on October 18, 1993, VEC filed with the Securities and
Exchange Commission (the "Commission") a Registration Statement on Form S-3,
Commission File No. 33-70454 (as amended, the "Registration Statement"),
registering under the Securities Act of 1933, as amended, 2,875,000 shares of
VEC's Preferred Stock, $1.00 par value, for issuance and sale in a proposed
underwritten public offering, all as more fully described in the Registration
Statement (the "Public Offering"); and
WHEREAS, VEC has advised VNGC that, subject to satisfaction of the
various conditions set forth in Section 2(a) below, and the satisfaction or
waiver of the various conditions set forth in Section 2(b) below, VEC intends
to advance or contribute proceeds from such Public Offering to VNGC to fund the
cash payment to Public Unitholders specified herein; and
WHEREAS, VEC and certain of its subsidiaries are parties to certain
bank credit and other financing arrangements, including without implied
limitation (a) the Amended and Restated Credit Agreement, dated as of December
4, 1992, as amended, among VEC, certain subsidiaries of VEC, Bankers Trust
Company, as Agent, and Bank of Montreal, as Co-Agent, (b) the Credit Agreement,
dated as of December 4, 1992, as amended, among VEC, Bankers Trust Company, as
Agent, and Bank of Montreal, as Co-Agent, (c) the Note Purchase Agreements,
dated as of December 19, 1990, among VEC and the Note Purchasers named therein,
relating to VEC's 10.58% Series A Senior Notes due December 30, 2000 and its
10.58% Series B Senior Notes due December 30, 2000, (d) the Note Purchase
Agreements, dated as of October 15, 1987, among VEC and the Note Purchasers
named therein, relating to VEC's 12.00% Series A Senior Subordinated Notes due
September 30, 1993 and its 12.25% Series B Senior Subordinated Notes due
September 30, 1994, (e) the Note Purchase Agreement, dated as of March 17,
1989, among VEC, Frost National Bank of San Antonio, N.A., as trustee, and the
Note Purchasers named therein, relating to the 9.14% Senior ESOP Notes due 1999
(collectively, together with all other promissory notes, bank credit
agreements, note purchase agreements, indentures related to debt securities,
guarantee agreements and other financial agreements and instruments to which
VEC or any of its consolidated subsidiaries is a party or by which any of them
or their assets is bound, and which is material to VEC and its subsidiaries,
the "Financial Agreements"), some or all of which contain provisions which must
be waived or amended in order to permit the consummation of the Merger
contemplated hereby;
NOW THEREFORE, for good and valuable consideration, the receipt and
sufficiency and reasonably equivalent value of which are hereby acknowledged,
the parties hereto hereby agree as follows:
1. Merger.
(a) Subject to the terms and conditions of this
Agreement, at the Effective Time (as defined hereafter), Newco shall
be merged with and into VNGP, L.P. and the separate existence of Newco
shall thereupon cease (the "Merger"). VNGP, L.P. shall be the
surviving entity in the Merger and shall continue to be governed by
the laws of the State of Delaware, and the separate existence of VNGP,
L.P. shall continue unaffected by the Merger. The Merger shall be
governed by and have the effects specified in the Act. VNGP, L.P.
shall file with the Secretary of State of the State of Delaware (the
"Secretary of State"), a Certificate of Merger in accordance with the
Act. The Merger shall become effective at the time of the filing of
the Certificate of Merger, which shall be filed not earlier than, and
not later than the first business day following, the Closing Date
described in Section 8 herein (such time and date of filing shall be
referred to as the "Effective Time" and the "Effective Date,"
respectively).
(b) At the Effective Time, VNGP, L.P. shall succeed to
all of the assets and shall assume all of the liabilities of Newco,
and, in connection therewith:
(i) each Common Unit of VNGP, L.P. held of record
as of the Effective Date by a Public Unitholder shall become
and be converted into and exchanged for the right to payment
from VNGC of the amount of $12.10 cash;
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(ii) each Common Unit of VNGP, L.P. held of record
as of the Effective Date by a Subsidiary Unitholder shall
remain outstanding and shall not be affected by the Merger;
(iii) VNGC's general partner's partnership interest
in VNGP, L.P. shall remain outstanding;
(iv) The general partner's and each limited
partner's partnership interest in Newco shall become and be
converted into and exchanged for the right to payment from
VNGC of an amount in cash equal to the capital account of such
partner as shown on the books and records of Newco as of the
Effective Date;
(v) Common Units, if any, held in VNGP, L.P.'s
treasury shall be canceled, no consideration shall be paid and
issued therefor, and certificates representing any such
treasury units shall be canceled.
2. Representations, Warranties and Certain Covenants.
(a) VEC and Newco each jointly and severally represent
and warrant to each of VNGC and VNGP, L.P. that:
(i) such company is duly organized, validly
existing and in good standing under the laws of the
jurisdiction of its organization and has the requisite power
and authority to carry on its respective business as now
conducted. VEC owns, directly or indirectly, all the
outstanding partnership interests in Newco. True and complete
copies of the organization documents of VEC, Newco, VNGC and
VNGP, L.P. have been delivered to the Special Committee or
their representatives.
(ii) such company has the requisite power and
authority to enter into this Agreement and to perform its
obligations hereunder. The execution, delivery and
performance of this Agreement by such company and the
consummation of the transactions contemplated hereby have been
duly authorized by all requisite organizational action and no
other organizational proceeding is necessary therefor. This
Agreement has been duly executed and delivered by such company
and constitutes the valid and binding obligation of such
company, enforceable against each such company in accordance
with its terms.
(iii) Neither the execution and delivery hereof by
such company, nor the consummation of the transactions
contemplated hereby, nor compliance with the provisions hereof
will (A) violate or conflict with or result in the breach of
or default under (whether following lapse of time or notice of
both), or terminate or accelerate any right or obligation
under, or create any lien upon any property or assets of such
company or any of its subsidiaries, under any of the terms of
(x) the organization documents of such company or its
subsidiaries or (y) subject to the matters described in the
eighth recital to this Agreement, any material debt or other
agreement to which such company or its subsidiaries or the
assets or properties thereof may be subject; or (B) violate
any judgment, ruling, order, writ, injunction, statute, rule
or regulation applicable to such company; except in the case
of clauses (A) and (B) above, for such violations, conflicts,
breaches, defaults, terminations, accelerations or liens
which, in the aggregate, would not have a material adverse
effect on the transactions contemplated hereby or on the
condition (financial or other), business or operations of
such company and its subsidiaries, taken as a whole. Other
than under the Act, the federal securities laws, the
"blue sky" regulations of various states, and the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, to the
knowledge of such company no notice to, filing with, or
authorization of any domestic or foreign public body or
authority is required for the consummation of the transactions
contemplated hereby.
(iv) Any documents prepared and filed pursuant to
the federal securities laws or any other law or regulation by
such company in connection herewith shall comply in all
material respects with such laws.
(v) VEC and Newco have disclosed to the Special
Committee all material facts (including publicly-available
information relating to VEC and its subsidiaries), known to
VEC or Newco related to the satisfaction of the conditions
specified in Sections 3(a) and 3(b).
(b) VNGC and VNGP, L.P. each severally represent and
warrant to VEC and Newco that:
(i) Such company is duly organized, validly
existing and in good standing under the laws of the
jurisdiction of its organization and has the requisite power
and authority to carry on its respective business as now
conducted.
(ii) Such company has the requisite power and
authority to enter into this Agreement and to perform its
obligations hereunder. The execution, delivery and
performance of this Agreement by such company and the
consummation of the transactions contemplated hereby have been
duly authorized by all requisite organizational action and no
other organizational proceeding is necessary therefor. This
Agreement has been duly executed and delivered by such company
and constitutes the valid and binding obligation of such
company, enforceable against each such company in accordance
with its terms.
(iii) Neither the execution and delivery hereof by
such company, nor the consummation of the transactions
contemplated hereby, nor compliance with the provisions hereof
will (A) violate or conflict with or result in the breach of
or default under (whether following lapse of time or notice of
both), or terminate or accelerate any right or obligation
under, or create any lien upon any property or assets of such
company or any of its subsidiaries, under any of the terms of
(x) the organization documents of such company or its
subsidiaries or (y) subject to the matters described in the
eighth recital to this Agreement, any material debt or other
agreement to which such company or its subsidiaries or the
assets or properties thereof may be subject; or (B) violate
any judgment, ruling, order, writ, injunction, statute, rule
or regulation applicable to such company; except in the case
of clauses (A) and (B) above, for such violations, conflicts,
breaches, defaults, terminations,
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accelerations or liens which, in the aggregate, would
not have a material adverse effect on the transactions
contemplated hereby or on the condition (financial or other),
business or operations of such company and is subsidiaries,
taken as a whole. Other than under the Act, the federal
securities laws, the "blue sky" regulations of various states,
and the Hart-Scott-Rodino Antitrust Improvements Act of 1976,
to the knowledge of such company no notice to, filing with, or
authorization of any domestic or foreign public body or
authority is required for the consummation of the transactions
contemplated hereby.
(iv) Any documents prepared and filed pursuant to
the federal securities laws or any other law or regulation by
such company in connection herewith shall comply in all
material respects with such laws.
(c) VEC and VNGC each represent and warrant to the other
than:
(i) With respect to the payment of regular
quarterly distributions on the Common Units, each such party
intends that such distributions continue to be declared and
paid at the established quarterly intervals through the
Effective Date in the amount of $0.125 per quarter per Common
Unit, and, except as is disclosed in the preliminary proxy
statement furnished to the Special Committee, knows of no
reason why the regular distribution expected to be considered
at a meeting of the Board of Directors of VNGC scheduled to be
held on January 25, 1994 and paid on or about March 1, 1994
cannot be so declared and paid;
(ii) During the period from the date of this
Agreement to the Effective Time of the Merger, the business of
VNGP, L.P. shall continue to be operated in the ordinary
course and in a manner generally consistent with past
practice; and
(iii) If the closing of the Merger occurs more than
30 days after the last record date for such regular quarterly
distribution, VNGP, L.P. intends and expects to declare and
pay to holders of Common Units of record as of the Effective
Date of the Merger a one-time special cash distribution equal
to the product of the regular quarterly distribution per
Common Unit of $.125 and a fraction the numerator of which is
the number of days from and excluding the record date in
respect of which the last regular distribution has been paid
to and including the Effective Date and the denominator of
which is 90.
(d) Subject to the terms and conditions hereof, each of
the parties hereto will use all reasonable efforts to take, or cause
to be taken, all actions necessary to consummate the transactions
contemplated by this Agreement. VEC, on behalf of itself and Newco,
and VNGC, on behalf of itself and VNGP, L.P., shall give prompt
notice to the other and to the Special Committee of the occurrence, or
failure to occur, of any event which is, or is reasonably likely to
cause, a failure of a representation or warranty of any party
hereunder or the breach of any agreement hereunder or the failure of
the satisfaction of any condition to the Closing (including the
condition that the Public Offering be completed), provided, however,
that no such notification shall affect any party's obligations
hereunder. Each party shall cooperate to correct any information
contained in any document filed in connection herewith or mailed to
the Public Unitholders to the extent any such document shall have
become false or misleading in any material respect. Each party shall,
and shall cause its subsidiaries, officers, directors, employees and
agents to, afford each other party and its officers, directors,
employees and agents access at all reasonable times to its relevant
books, records, assets and properties, and shall furnish all
financial, business, operating and other data as such persons may
reasonably request, provided that, subject to the requirements of law,
each such person shall, and shall use reasonable efforts to cause, all
such information to be kept confidential until such time as such
information is otherwise publicly available, provided that no
investigation pursuant hereto shall affect any party's obligations
hereunder.
(e) During the term of this Agreement, VEC and VNGC shall
take all actions necessary such that the Special Committee shall
continue in existence without diminution of its powers or duties and
its members shall consist solely of the members thereof on the date
hereof, or any successors, selected (with the written consent of a
majority of the members of the Special Committee) by the Board of
Directors and/or sole stockholder of VNGC, who are not otherwise
employed by or affiliated with VEC or its affiliates. Any amendment,
waiver or extension of time by VNGC or VNGP, L.P. hereunder, and any
action to be taken by VNGC or the Board of Directors thereof in
connection herewith, shall require the concurrence or consent of a
majority of the members of the Special Committee.
(f) Notwithstanding anything herein to the contrary, the
Special Committee may at any time withdraw or modify its
recommendation regarding the transactions contemplated hereby if, and
only to the extent that, the Special Committee, after consultation
with and based upon the advice of outside legal counsel, determines in
good faith that such action is required for the Board of Directors of
VNGC to comply with any fiduciary duties it may have to the Public
Unitholders under Delaware law as in effect from time to time.
3. Conditions to Closing.
(a) The obligations of all the parties to this Agreement
to effect the Merger shall be subject to the fulfillment of the
following conditions:
(i) the Merger Agreement shall have been approved
by (A) the affirmative vote of the holders of a majority of
the outstanding Common Units entitled to vote thereon,
including Common Units held by Subsidiary Unitholders, and (B)
a majority of the Common Units held by Public Unitholders and
voted at a special meeting of Unitholders (the "Special
Meeting") called to vote upon the Merger;
(ii) there shall not have been any governmental or
judicial action, law or regulation prohibiting, restraining
(whether by imposing additional conditions or covenants or
otherwise) or making unlawful the Merger or prohibiting,
restraining or making unlawful the payment or receipt of cash
for Common Units as contemplated by the Merger Agreement or
the Purchase Agreement (defined in Section 4 hereof);
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(iii) the parties shall have received any necessary
governmental consents or approvals (including the expiration
of all waiting periods required under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976);
(iv) the Internal Revenue Service ("IRS") shall
have issued a response with respect to the private letter
ruling request of VNGP, L.P. dated December 6, 1993, ruling
that the proposed Merger, if effected in the manner described
in such private letter ruling request, will not result in any
technical termination of VNGP, L.P.;
(v) the receipt by the Special Committee, VNGC
and Newco of a true and correct copy of the opinion of Dillon,
Read & Co, Inc., dated December 20, 1993, that the
consideration to be paid to the Public Unitholders in
connection with the Merger is fair to the Public Unitholders
from a financial point of view (the "Fairness Opinion"); and
(vi) neither the Fairness Opinion, nor the
recommendation of the Special Committee referred to in the
recitals of this Agreement, shall have been withdrawn or
modified in any manner materially adverse to VEC, VNGC, VNGP,
L.P. or Newco.
(b) The obligations of Newco to effect the Merger shall
also be subject to the fulfillment of the following conditions, any or
all of which may be waived by Newco in its sole discretion:
(i) any consent, waiver or amendment necessary or
desirable in the opinion of Newco under any Financial
Agreement shall have been obtained, in form and substance
reasonably satisfactory to Newco;
(ii) VEC shall have completed the Public Offering
and shall have received proceeds therefrom, net of all
underwriters' discounts and commissions, equal to not less
than the aggregate amount payable to the Public Unitholders
pursuant to Section 1(b)(i); provided, however, that VEC shall
not be obligated by this Agreement to complete the Public
Offering;
(iii) except for changes in the business or
condition of the Partnership, financial or otherwise, or in
the results of operations of the Partnership, occurring prior
to the date of this Agreement, or expected by the management
of the General Partner to occur based on events occurring
prior to the date of this Agreement, there shall not have
occurred any material adverse change in the business or
condition of the Partnership, financial or otherwise, or in
the results of operations of the Partnership from that set
forth in or contemplated by the financial statements of the
Partnership for the nine months ended September 30, 1993;
(iv) with the exception of actions, suits,
proceedings or claims described in the draft preliminary proxy
statement in the form provided to the Special Committee
(including documents incorporated by reference therein), there
shall not be pending or threatened against VNGP, L.P., or any
subsidiary of VNGP, L.P., any action, suit or proceeding
involving a claim at law or in equity or before or by any
federal, state, or municipal or other governmental department,
commission, board, business, agency or instrumentality,
domestic or foreign, that would be reasonably likely to have a
material adverse effect on the condition, financial or
otherwise, of VNGP, L.P. and, except for developments
occurring prior to the date of this Agreement or expected by
the management of the General Partner to occur based on events
occurring prior to the date of this Agreement in the case of
actions, suits or proceedings described in such preliminary
proxy statement, there shall be no subsequent developments
therein adverse to VNGP, L.P. or its subsidiaries, property or
business which, would be reasonably likely to have a material
adverse effect on the condition, financial or otherwise, of
VNGP, L.P.; and
(v) there shall not be pending or threatened
against VEC, VNGC, VNGP, L.P., Newco, or any affiliate of VEC,
VNGC, VNGP, L.P., or Newco or the property or business of VEC,
VNGC, VNGP, L.P. or Newco, any other action, suit or
proceeding involving a claim at law or in equity or before or
by any federal, state, or municipal or other government
department, commission, board, bureau, agency or
instrumentality, domestic or foreign, relating to the Merger
or the Merger Agreement that would be reasonably likely to
have a material adverse effect on the condition, financial or
otherwise, of VEC, VNGC or VNGP, L.P.
(c) The parties hereto agree that in exercising its
discretion to waive or require the fulfillment of the conditions
prescribed in Section 2(b) above, Newco shall not be required to
consider the interests of any person or entity that may be affected by
the Merger other than Newco, and that Newco shall have no obligation,
fiduciary or otherwise, to the limited partners of VNGP, L.P. in
exercising its discretion under Section 2(b).
4. Purchase Agreement. Upon the execution of this Agreement by
the parties hereto, VNGC and VNGP, L.P. shall enter into a Purchase Agreement,
in the form attached hereto as Exhibit M-1 and by this reference made a part
hereof for all purposes (the "Purchase Agreement"), pursuant to which VNGC
shall agree to purchase directly from VNGP, L.P., 9,711,919 Common Units, such
Common Units to be acquired on the Effective Date.
5. Valuation of VNGC Obligations. The parties hereto agree and
stipulate that the value of the obligations and undertakings of VNGC under this
Agreement is equal to $117,514,210, representing the purchase of 9,711,919
Common Units from VNGP, L.P. at a purchase price of $12.10 per Common Unit.
6. Capital Contributions. In connection with the transactions
contemplated by this Agreement and in order to prevent any technical
termination of VNGP, L.P. caused thereby, VNGC, as general partner of VNGP,
L.P., agrees to contribute cash in the amount of not less than $95,542 to VNGP,
L.P. prior to the Effective Time of the Merger. In addition, VNGC shall cause
one or more of its wholly owned subsidiaries that is presently a limited
partner of VNGP, L.P. to contribute cash in the aggregate amount of not less
than $9,457,335 to VNGP, L.P. prior to the Effective Time of the Merger;
provided however, that if the Merger is for any reason not consummated, such
capital contributions may be withdrawn and shall be repaid by VNGP, L.P.
promptly upon notice from VNGC or such subsidiary.
4
<PAGE> 91
7. Surrender of Certificates. After the Effective Time, each
holder of an outstanding certificate theretofore representing Common Units
(other than VNGC and the Subsidiary Unitholders) shall surrender such
certificate together with the letter of transmittal furnished to unitholders to
VEC, as Transfer Agent for the Common Units, or any bank designated by VNGP,
L.P. pursuant to an agreement to act as an Exchange Agent (hereinafter so
called) under this Agreement. As soon as practicable after the Effective Time
and after surrender to VEC or an Exchange Agent of any certificate which prior
to the Effective Time represented Common Units, VEC or such Exchange Agent
shall deliver, for and on behalf of VNGC to the person in whose name such
certificate has been issued, the amount of cash the right to which any Common
Units previously represented by the surrendered certificate shall have been
converted hereunder. Until surrendered as contemplated by the preceding
sentence, each certificate that immediately prior to the Effective Time
represented any Common Units (other than Common Units held by VNGC or the
Subsidiary Unitholders) shall be deemed at and after the Effective Time to
represent only the right to receive from VNGC upon such surrender the amount of
cash contemplated by the preceding sentence. No service charges, brokerage
commissions or transfer taxes shall be payable by any holder of any certificate
which prior to the Effective Time represented any Common Units, except that, if
any payment is to be made to a person other than the person in whose name the
certificates for Common Units surrendered are registered, it shall be a
condition of such issuance that (i) the person requesting such issuance shall
pay to VEC (or, if appointed, the Exchange Agent) any transfer taxes payable by
reason thereof (or of any prior transfer of such surrendered certificate) or
establish to the satisfaction of VNGC, as general partner of the surviving
entity, that such taxes have been paid or are not payable, and (ii) such
surrendered certificate shall be properly endorsed and otherwise be in proper
form for transfer. VNGP, L.P., VEC or any Exchange Agent may impose such other
reasonable conditions upon the exchange of certificates as it may deem to be
necessary or desirable and as are consistent with the provisions of this
Agreement. No interest shall be accrued or paid upon any cash payable upon the
surrender of certificates.
8. Closing.
(a) The Closing Date shall be the later of the date on
which:
(i) All conditions precedent to the obligations
of VNGP, L.P., VNGC and Newco to consummate and effect the
Merger contemplated by this Agreement shall have been
satisfied or waived; and
(ii) Such later date as the Chairman of the Board
or President of VNGC and the Chairman of the Board or
President of the general partner of Newco may agree upon in
writing.
(b) The closing and consummation of the Merger shall take
place at the offices of VNGC at 530 McCullough Avenue, San Antonio,
Texas, or at such other place as the parties hereto may agree.
9. Further Assurances. If, at any time after the Effective Time,
VNGP, L.P. shall consider or be advised that any deeds, bills of sales,
assignments, assurances or any other actions or things are necessary or
desirable to vest, perfect or confirm of record or otherwise in VNGP, L.P. its
right, title or interest in, to or under any of the rights, properties or
assets of Newco as a result of, or in connection with, the foregoing provisions
of this Agreement or otherwise to carry out the purposes or intent of this
Agreement, the general partner of VNGP, L.P., and any of its officers or
directors, shall be authorized to execute and deliver, in the name and on
behalf of Newco, all such deeds, bills of sale, assignments and assurances, and
to take and do, in the name and on behalf of Newco, all such other actions and
things as may be necessary or desirable to vest, perfect or confirm any and all
right, title and interest in, to and under such rights, properties or assets in
VNGP, L.P. or otherwise to carry out this Agreement. To the extent permitted
by applicable law, Newco hereby makes, constitutes and appoints the general
partner of VNGP, L.P., or any of its officers or directors, with full power of
substitution, as the true and lawful agent and attorney-in-fact for Newco in
its name, place and stead to execute and deliver, in the name and on behalf of
Newco, all such deeds, bills of sale, assignments and assurances, and this
appointment shall be irrevocable and deemed a special power of attorney coupled
with an interest and shall not terminate but shall survive the dissolution,
winding up and termination or cessation of existence of Newco pursuant to the
Merger.
10. Termination. This Agreement may be terminated and the Merger
abandoned at any time before the Effective Time, notwithstanding the prior
approval of the holders of Common Units or the partners of Newco, by the
consent of the Board of Directors of VNGC (with the prior written consent of a
majority of the members of the Special Committee) and the Board of Directors of
the general partner of Newco. This Agreement shall be terminated by any party
and the Merger abandoned if (a) the Closing Date and consummation of the Merger
shall not have occurred by June 1, 1994, or (b) any governmental or judicial
action, law or regulation shall be enacted or become effective which prohibits,
restrains or renders unlawful the Merger or prohibits, restrains, or renders
unlawful the payment or receipt of cash as contemplated by this Agreement or
the Purchase Agreement, or (c) if the Special Meeting is held but the Public
Unitholders do not approve the Merger as set forth in Section 3(a)(i)(B).
Unless such condition is waived by VEC, the Board of Directors of VNGC (with
the written approval of the Special Committee) and the Board of Directors of
the general partner of Newco, this Agreement shall also be terminated by any
party and the Merger abandoned if either the Fairness Opinion, or the
recommendation of the Special Committee referred to in the recitals to this
Agreement, shall have been withdrawn or modified in any manner materially
adverse to VEC, VNGC, VNGP, L.P. or Newco. This Agreement may be terminated by
the Board of Directors of VNGC if VEC or Newco breaches in any material respect
any of its covenants or agreements contained herein, and by VEC or the Board of
Directors of the general partner of Newco if VNGC or VNGP, L.P. breaches in any
material respect any of its covenants or agreements contained herein.
Additionally, this Agreement may be terminated by VEC or by the Board of
Directors of the general partner of Newco if (i) the governmental consents and
approvals referred to in Section 3(a)(iv) have not been obtained, and the
waiting period referred to therein has not expired, all on or before March 31,
1994; (ii) the IRS shall issue a private letter ruling to the effect that the
Merger will result in a technical termination of the Partnership or which is
otherwise materially adverse to VEC or Newco; (iii) appropriate consents,
waivers and amendments to the Financing Agreements have not been obtained on or
before March 31, 1994, and VEC reasonably determines that such consents,
waivers and amendments cannot be obtained upon terms and conditions reasonably
satisfactory to VEC; (iv) the Public Offering has not been completed on or
before March 31, 1994, and VEC reasonably determines that the Public Offering
cannot be completed upon terms and conditions reasonably satisfactory to VEC;
or (v) in the reasonable opinion of VEC, an event specified in Section
3(b)(iii) or 3(b)(v) has occurred, or there has occurred the filing of, or a
development in, any action, suit or proceeding which, unless waived by VEC and
Newco, would result in the failure of a condition to closing the Merger
pursuant to Section 3(b)(iv) or (v). In the event of termination of this
Agreement and abandonment of the Merger as provided herein, this Agreement
shall become wholly void and of no effect and there shall be no liability
pursuant to
5
<PAGE> 92
this Agreement on the part of any party hereto or its respective officers,
directors, stockholders, or general or limited partners.
11. Miscellaneous.
(a) This Agreement may be amended, modified or
supplemented upon the consent of the Board of Directors of VNGC (with
the prior written consent of a majority of the members of the Special
Committee) and the Board of Directors of the general partner of Newco,
provided that the approval of a majority of the Common Units entitled
to vote thereon held by Public Unitholders and voted at a special
meeting of Unitholders called to vote upon such amendment shall first
be obtained for any amendment which under applicable law requires such
approval, if the consideration to be received by the Public
Unitholders pursuant to Section 1(b)(i) of this Agreement is changed
or if this Agreement is modified in a manner materially adverse to the
Public Unitholders.
(b) This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same
agreement and shall become effective when one or more counterparts
have been signed by each of the parties and delivered to the other
parties, it being understood that all parties need not sign the same
counterpart.
(c) It is the intent of the parties that the provisions
of this Agreement shall be enforced to the fullest extent permissible
under law. In the event that any provision would be held invalid or
unenforceable in any jurisdiction for any reason, such provision, as
to such jurisdiction, shall be ineffective without invalidating the
remaining provisions hereof, provided that if such provision could be
more narrowly drawn so as not to be invalid, it shall, as to such
jurisdiction, be so narrowly drawn without affecting the remaining
provisions hereof.
(d) All notices and communications hereunder shall be in
writing and shall be deemed to have been duly delivered if delivered
personally, telecopied, by overnight courier or mailed by registered
mail, postage prepaid, to the parties at the following addresses (or
such other notices as the parties may notify the others in writing):
If to VNGC, VNGP, L.P. or the Special Committee:
VALERO NATURAL GAS COMPANY
530 McCullough Avenue
San Antonio, Texas 78215
Attention: Corporate Secretary
with a copy to:
Special Committee of Directors
VALERO NATURAL GAS COMPANY
c/o Dr. Ronald K. Calgaard
President
Trinity University
715 Stadium Drive
San Antonio, Texas 78212-7200
and:
Wachtell, Lipton, Rosen & Katz
299 Park Avenue
New York, New York 10171
Attention: Edward D. Herlihy, Esq.
If to Newco or VEC:
VALERO MERGER PARTNERSHIP, L.P.
c/o Valero Management Company
530 McCullough Avenue
San Antonio, Texas 78215
Attention: Corporate Secretary
(e) No waiver or modification of the terms of this
Agreement shall be valid unless in writing signed by the party to be
charged and only to the extent therein set forth. Any waiver or
modification hereunder by VNGC or VNGP, L.P. must be approved in
writing by a majority of the members of the Special Committee.
(f) This Agreement shall be binding upon and inure to the
benefit of the parties hereto, their respective successors and
assigns.
(g) The captions appearing in this Agreement are inserted
only as a matter of convenience and for reference and in no way
define, limit or describe the scope and intent of this Agreement or
any of the provisions hereof.
(h) This Agreement shall be governed by, and construed in
accordance with, the laws of the State of Delaware.
6
<PAGE> 93
IN WITNESS WHEREOF, each of the Parties hereto has executed this
Agreement the day and year first above written.
VALERO NATURAL GAS PARTNERS, L.P.
By: VALERO NATURAL GAS COMPANY
its General Partner
By: /s/ Don M. Heep
Name: Don M. Heep
Title: Vice President
Finance
VALERO MERGER PARTNERSHIP, L.P.
By: VALERO MANAGEMENT COMPANY
its General Partner
By: /s/ Stan L. McLelland
Name: Stan L. McLelland
Title: Executive Vice President
VALERO NATURAL GAS COMPANY
By: /s/ Don M. Heep
Name: Don M. Heep
Title: Vice President
Finance
VALERO ENERGY CORPORATION
By: /s/ Stan L. McLelland
Name: Stan L. McLelland
Title: Executive Vice President
7
<PAGE> 94
Schedule 1 to
Agreement of Merger
COMMON UNITS HELD BY SUBSIDIARY UNITHOLDERS
<TABLE>
<CAPTION>
COMMON UNITS
SUBSIDIARY BENEFICIALLY OWNED
---------- --------------------
<S> <C>
VT Company . . . . . . . . . . . . . . . 7,374,282
VM Company . . . . . . . . . . . . . . . 510,970
VH Company . . . . . . . . . . . . . . . 412,626
Rio Pipeline Company . . . . . . . . . . 214,051
Val Gas Company . . . . . . . . . . . . 117,965
Reata Industrial Gas Company . . . . . . 42,552
Valero Management Company . . . . . . . 38,081
Valero Gathering Company . . . . . . . . 25,210
VLDC Company . . . . . . . . . . . . . . 15,126
V.H.C. Pipeline Company . . . . . . . . 14,476
Valero Industrial Gas Company . . . . . 9,280
---------
8,774,619
=========
</TABLE>
8
<PAGE> 95
EXHIBIT M-1
PURCHASE AGREEMENT
This Purchase Agreement ("Agreement") dated December 20, 1993 is
between Valero Natural Gas Partners, L.P., a Delaware limited partnership (the
"Partnership"), and Valero Natural Gas Company, a Delaware corporation (the
"Company").
WHEREAS, pursuant to an Agreement of Merger dated December 20, 1993
(the "Merger Agreement") among the Partnership, Valero Merger Partnership,
L.P., a Delaware limited partnership ("Newco"), and the Company, and subject to
the terms and conditions thereof, among other things, (i) Newco will merge with
and into the Partnership (the "Merger"), and (ii) certain former holders of the
common units of limited partner interests in the Partnership (the "Common
Units") will be entitled to receive $12.10 per Common Unit from the Company
(the "Merger Consideration"); and
WHEREAS, the Partnership desires to issue and sell, and the Company
desires to buy, 9,711,919 common units of limited partner interests in the
Partnership (as surviving partnership to the Merger) (the "New Units") in
exchange for the Company's promise to pay to the former holders of Common Units
the Merger Consideration after the effective time of the Merger, as set forth
in the Merger Agreement.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency are hereby acknowledged, the parties hereto hereby agree:
1. Subject to the closing of the Merger as provided in the Merger
Agreement, the Company hereby agrees to purchase from the Partnership, and the
Partnership agrees to issue and sell to the Company, 9,711,919 New Units in
exchange for the Company's promise to pay the Merger Consideration pursuant to
the Merger Agreement.
2. The closing shall take place on the Closing Date (as defined
in the Merger Agreement), immediately following the Effective Time of the
Merger (as such term is defined in the Merger Agreement). At the closing, the
Partnership shall deliver to the Company or its representative a certificate or
certificates representing the New Units registered in the name of the Company.
3. The parties hereto agree and stipulate that the agreed value
of the obligations and undertakings of the Company under this Agreement (for
purposes of the Delaware Revised Uniform Limited Partnership Act and the Second
Amended and Restated Agreement of Limited Partnership of the Partnership) is
equal to $117,514,210, representing the purchase of 9,711,919 New Units from
the Partnership at a purchase price of $12.10 per New Unit.
4. This Agreement may be amended in writing by the parties
hereto. This Agreement shall terminate upon termination of the Merger
Agreement. No waiver or modification of the terms of this Agreement shall be
valid unless in writing signed by the party to be charged and only to the
extent therein set forth. This Agreement shall be binding upon and inure to
the benefit to the parties hereto, their respective successors and assigns.
This Agreement shall be governed by, and construed in accordance with, the laws
of the State of Delaware.
NOW THEREFORE, the parties have executed this Agreement as of the date
first written above.
VALERO NATURAL GAS COMPANY
By /s/ Don M. Heep
Name: Don M. Heep
Title: Vice President Finance
VALERO NATURAL GAS PARTNERS, L.P.
By: VALERO NATURAL GAS COMPANY,
its General Partner
By /s/ Don M. Heep
Name: Don M. Heep
Title: Vice President Finance
1
<PAGE> 96
ANNEX B
DILLON, READ & CO. INC.
535 MADISON AVENUE
NEW YORK,NEW YORK 10022
212-906-7000
March , 1994
Special Committee of the
Board of Directors
Valero Natural Gas Company
General Partner of Valero Natural Gas Partners, L.P.
530 McCullough Avenue
San Antonio, Texas 78215
Gentlemen:
You have requested our opinion as to the fairness from a financial point of
view to the holders (the "Public Unitholders") of Valero Natural Gas Partners,
L.P. (the "Partnership") common units ("Common Units"), other than Valero
Energy Corporation ("Valero") and its affiliates, of the consideration to be
received by them pursuant to the proposed merger ("Merger") of the Partnership
with Valero Merger Partnership, L.P. ("Newco"). The Merger is to be effected
pursuant to a Merger Agreement (the "Merger Agreement") dated as of December
20, 1993 among the Partnership, Newco, Valero Natural Gas Company ("VNGC"), the
general partner of the Partnership and a wholly-owned subsidiary of Valero, and
Valero.
The Merger Agreement provides that, upon consummation of the Merger, each
issued and outstanding Common Unit owned by the Public Unitholders will be
converted into the right to receive from VNGC cash in the amount of $12.10 per
Common Unit. The conditions precedent to consummation of the Merger include
the condition that the Merger shall be approved by the affirmative vote of a
majority of the Common Units held by the Public Unitholders and voted at a
meeting of the holders of the Common Units called for such purpose, and the
condition that the Merger shall be consummated by June 1, 1994.
Dillon, Read & Co. Inc. is acting as financial advisor to the Special Committee
of the Board of Directors of VNGC in connection with the Merger.
On December 20, 1993, we rendered our opinion (the "First Opinion") that, as of
the date thereof and based on and subject to the matters discussed therein, the
consideration to be received in the Merger by the Public Unitholders was fair
to the Public Unitholders from a financial point of view. In light of certain
developments since the date of our First Opinion discussed below and having
been advised that the Partnership is now prepared to solicit proxies pursuant
to a definitive proxy statement (the "Proxy Statement") relating to a meeting
of Unitholders called to consider the Merger, we elected to review and update
our First Opinion.
<PAGE> 97
Special Committee of the
Board of Directors
March __, 1994
Page 2
In arriving at our First Opinion, we reviewed certain
business and financial information relating to the Partnership, including
certain financial forecasts provided to us by the Partnership, and we reviewed
and discussed the business and prospects of the Partnership with the senior
managements of the Partnership and Valero. We considered certain financial and
stock market data relating to the Partnership and the Common Units, and we
compared that information to similar data for publicly-held companies in
businesses similar to that of the Partnership. We also considered the
financial terms of certain transactions involving the acquisition by
controlling entities of noncontrol equity positions in publicly-owned companies
and certain recent acquisitions of properties similar to those owned by the
Partnership.
In connection with our review of our First Opinion and before rendering this
opinion (the "Current Opinion"), we requested and received from the Partnership
and reviewed, where available, more recent business and financial information
relating to the Partnership, including recent revisions to the financial
forecasts referenced above as well as the information contained in the
Partnership's reports filed with the Securities and Exchange Commission
pursuant to Section 13 of the Securities Exchange Act of 1934, as amended. In
connection with both opinions, we considered such other information, financial
studies and analyses, and financial, economic and market criteria as we deemed
relevant.
In connection with our reviews, we did not independently verify any of the
foregoing information and, with your consent, we relied on its being complete
and accurate in all material respects. We did not make an independent
evaluation or appraisal of any assets or liabilities (contingent or otherwise)
of the Partnership or its subsidiaries, nor were we furnished with any such
appraisal. With respect to the financial forecasts provided to us, we utilized
certain information set forth therein and assumed that such information was
reasonably prepared on bases reflecting the best currently available estimates
and judgments of the managements of the Partnership and Valero as to the future
financial performance of the Partnership.
In connection with our First Opinion, we were requested not to approach and we
did not approach any unaffiliated persons or entities with respect to the
acquisition of the Partnership or any of its subsidiaries or any of their
assets. We are aware, however, that, since our First Opinion, Valero and then
VNGC received an unsolicited offer from an unaffiliated third party (the
"Offeror") to acquire all the Units owned by Valero for $16 in cash and, if the
offer were accepted by Valero, to offer to acquire Units from the Public
Unitholders on the same basis, and we have been apprised of subsequent, related
events to be described in the Proxy Statement.
In rendering both Opinions, we took into account (i) the fact that, given
Valero's ownership of an effective equity interest of approximately 49% in the
Partnership, the role of its wholly-owned subsidiary as general partner of the
Partnership and Valero's stated unwillingness to sell its interests in the
Partnership, a sale of the Common Units held by the Public Unitholders to a
third party was
<PAGE> 98
Special Committee of the
Board of Directors
March _____, 1994
Page 3
unlikely, (ii) the probability of a return of Common Unit market prices to
pre-October 1993 levels if the Offer were withdrawn, (iii) the prospects for
the Partnership given its current structure and ownership in the current
environment if the Offer were withdrawn, and (iv) representations contained in
the Merger Agreement regarding the continuation of Partnership distributions
during the pendency of the Merger Agreement and the payment, subject to
specified conditions, of an interim Partnership distribution through the date
of consummation of the Merger. Moreover, in rendering the Current Opinion, we
took into account (a) the position of the Offeror, as stated to the Special
Committee and independently confirmed by us, that, absent a relinquishment of
some portion of control of the assets and businesses of the Partnership by
Valero, the Offeror was unwilling to pursue any transaction involving payment
of a premium over the market price for Units held by the Public Unitholders and
(b) the agreement of Valero, as more fully described in the Proxy Statement, to
pay or cause to be paid to those persons who were Public Unitholders on the
effective date of the Merger an amount in cash equal to the difference, if any,
between $12.10 and the fair value of any greater amount of consideration per
Unit realized by Valero as a result of any sale of a controlling interest in
the Partnership during the two years following the Merger.
Our Current Opinion is based on economic, monetary and market conditions
existing on the date hereof.
Based upon and subject to the foregoing, we are of the opinion that the
consideration to be received in the Merger by the Public Unitholders is fair to
the Public Unitholders from a financial point of view as the date hereof.
Very truly yours,
Dillon, Read & Co. Inc.
By:
__________________________
James W. Hunt
Managing Director
<PAGE> 99
ANNEX C
CONSOLIDATED FINANCIAL STATEMENTS
OF VNGP, L.P.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
AUDITED FINANCIAL STATEMENTS:
<S> <C>
Report of Independent Public Accountants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . C-2
Consolidated Balance Sheets as of December 31, 1993 and 1992 . . . . . . . . . . . . . . . . . . . . . C-3
Consolidated Statements of Income for the years ended December 31, 1993, 1992 and 1991 . . . . . . . . C-4
Consolidated Statements of Partners' Capital for the years ended December 31, 1993, 1992 and
1991 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . C-5
Consolidated Statements of Cash Flows for the years ended December 31, 1993, 1992 and 1991 . . . . . . C-6
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . C-7
</TABLE>
C-1
<PAGE> 100
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
VALERO NATURAL GAS PARTNERS, L.P.
CONSOLIDATED BALANCE SHEETS
(Thousands of Dollars)
<TABLE>
<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
</TABLE>
C-2
<PAGE> 101
<TABLE>
<S> <C> <C>
LIMITED PARTNERS' CAPITAL. . . . . . . . . . . . . . . . . . . . . . . . . 158,448 154,461
GENERAL PARTNERS' CAPITAL. . . . . . . . . . . . . . . . . . . . . . . . . 1,598 1,558
$1,045,082 $1,084,481
</TABLE>
See Notes to Consolidated Financial Statements.
VALERO NATURAL GAS PARTNERS, L.P.
CONSOLIDATED STATEMENTS OF INCOME
(Thousands of Dollars, Except Per Unit Amounts)
<TABLE>
<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
</TABLE>
See Notes to Consolidated Financial Statements.
VALERO NATURAL GAS PARTNERS, L.P.
CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL
(Thousands of Dollars)
<TABLE>
<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
</TABLE>
See Notes to Consolidated Financial Statements.
VALERO NATURAL GAS PARTNERS, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands of Dollars)
Year Ended December 31,
1993 1992 1991
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<PAGE> 102
<TABLE>
<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
</TABLE>
See Notes to Consolidated Financial Statements.
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
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<PAGE> 103
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
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<PAGE> 104
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
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<PAGE> 105
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
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<PAGE> 106
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
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<PAGE> 107
"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
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<PAGE> 108
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.
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<PAGE> 109
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
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<PAGE> 110
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"),
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<PAGE> 111
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
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<PAGE> 112
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)
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<PAGE> 113
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>
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<PAGE> 114
Annex D-1
(Per Unit Bases & Income Allocations
as of December 31, 1993) (1)(2)(3)(4)
<TABLE>
<CAPTION>
Gain @
Cumulative Cumulative Basis Assumed Character of
Month of Acquisition Net Cash Suspended Losses for Calc Sales Price Gain or (Loss)
Entry Price Inc/(Loss) Distributions(5) Ordinary Capital Gain/(Loss) $12.21(6) Ordinary Capital
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1987 March $22.75 ($7.79) ($13.30) $7.84 $0.95 $10.56 $1.65 ($2.33) $3.98
April $28.00 ($7.10) ($13.30) $7.37 $0.72 $15.80 ($3.59) $1.09 ($4.68)
May $24.02 ($7.50) ($13.30) $7.72 $0.75 $11.81 $0.40 ($0.31) $0.71
June $28.00 ($7.14) ($13.30) $7.34 $0.77 $15.78 ($3.57) ($0.36) ($3.21)
July $26.91 ($7.04) ($12.63) $7.24 $0.76 $15.36 ($3.15) ($0.41) ($2.74)
August $28.22 ($8.28) ($12.63) $8.21 $1.02 $16.66 ($4.45) ($3.06) ($1.38)
September $29.50 ($9.13) ($12.63) $8.99 $1.09 $17.93 ($5.72) ($4.01) ($1.71)
October $29.50 ($6.14) ($12.63) $5.42 $0.71 $16.97 ($4.76) $1.85 ($6.61)
November $24.25 ($6.44) ($11.99) $6.60 $0.77 $13.30 ($1.09) $0.25 ($1.34)
December $24.00 ($5.79) ($11.99) $6.01 $0.70 $13.04 ($0.83) $1.35 ($2.18)
1988 January $23.76 ($6.27) ($11.99) $6.44 $0.74 $12.79 ($0.58) $0.51 ($1.08)
February $23.89 ($6.22) ($11.38) $6.27 $0.85 $13.52 ($1.31) $0.19 ($1.50)
March $22.05 ($5.93) ($11.38) $5.94 $0.87 $11.67 $0.54 ($0.33) $0.87
April $21.00 ($5.97) ($11.38) $5.92 $0.92 $10.60 $1.61 ($0.55) $2.16
May $20.87 ($5.52) ($10.75) $5.53 $0.84 $11.08 $1.13 $0.97 $0.15
June $20.74 ($5.40) ($10.75) $5.38 $0.85 $10.94 $1.27 $0.07 $1.20
July $20.21 ($5.38) ($10.75) $5.41 $0.79 $10.39 $1.82 ($0.12) $1.94
August $19.43 ($4.23) ($10.13) $4.48 $0.56 $10.22 $1.99 $2.46 ($0.47)
September $17.98 ($4.06) ($10.13) $4.29 $0.57 $8.76 $3.45 $2.60 $0.85
October $18.90 ($4.69) ($10.13) $4.68 $0.79 $9.67 $2.54 $0.60 $1.95
November $19.00 ($4.02) ($9.50) $4.13 $0.66 $10.38 $1.83 $1.53 $0.30
December $16.80 ($3.43) ($9.50) $3.61 $0.57 $8.16 $4.05 $3.25 $0.80
1989 January $18.90 ($4.18) ($9.50) $4.13 $0.79 $10.25 $1.96 $1.12 $0.84
February $20.34 ($4.86) ($8.88) $4.61 $0.96 $12.29 ($0.08) $0.36 ($0.44)
March $20.61 ($5.12) ($8.88) $4.78 $1.03 $12.53 ($0.32) $0.09 ($0.41)
April $20.61 ($5.35) ($8.88) $4.93 $1.09 $12.51 ($0.30) ($0.16) ($0.14)
May $20.48 ($5.29) ($8.25) $4.83 $1.10 $12.98 ($0.77) ($0.08) ($0.68)
June $22.18 ($5.25) ($8.25) $4.77 $1.10 $14.66 ($2.45) ($0.05) ($2.40)
July $23.23 ($5.62) ($8.25) $5.13 $1.09 $15.69 ($3.48) ($0.59) ($2.88)
August $20.61 ($5.15) ($7.63) $4.67 $1.04 $13.66 ($1.45) ($0.06) ($1.39)
September $19.29 ($4.85) ($7.63) $4.38 $1.02 $12.32 ($0.11) $0.27 ($0.38)
October $18.51 ($4.44) ($7.63) $3.98 $0.98 $11.51 $0.70 $0.74 ($0.04)
November $19.03 ($4.00) ($7.00) $3.56 $0.94 $12.64 ($0.43) $1.22 ($1.65)
December $17.72 ($3.95) ($7.00) $3.47 $0.95 $11.30 $0.91 $1.27 ($0.37)
1990 January $19.29 ($3.69) ($7.00) $3.19 $0.95 $12.86 ($0.65) $1.24 ($1.89)
February $17.85 ($3.55) ($6.38) $3.05 $0.93 $12.02 $0.19 $1.22 ($1.03)
March $16.67 ($3.40) ($6.38) $2.89 $0.93 $10.83 $1.38 $1.25 $0.13
April $16.44 ($3.32) ($6.38) $2.79 $0.94 $10.58 $1.63 $1.30 $0.33
May $15.88 ($2.83) ($5.75) $2.36 $0.85 $10.63 $1.58 $1.97 ($0.39)
June $15.49 ($2.94) ($5.75) $2.38 $0.93 $10.23 $1.98 $1.63 $0.35
July $17.85 ($2.93) ($5.75) $2.45 $0.85 $12.57 ($0.36) $1.30 ($1.66)
August $17.59 ($3.14) ($5.13) $2.58 $0.90 $12.91 ($0.70) $0.86 ($1.56)
September $18.38 ($3.00) ($5.13) $2.44 $0.89 $13.69 ($1.48) $0.99 ($2.47)
October $18.38 ($2.91) ($5.13) $2.37 $0.90 $13.71 ($1.50) $0.98 ($2.48)
November $17.98 ($2.86) ($4.50) $2.42 $0.74 $13.89 ($1.68) $1.00 ($2.68)
December $16.14 ($2.66) ($4.50) $2.22 $0.72 $12.04 $0.17 $1.19 ($1.01)
1991 January $16.93 ($4.64) ($4.50) $4.21 $0.69 $12.81 ($0.60) ($1.67) $1.07
February $16.80 ($4.71) ($3.88) $4.26 $0.70 $13.29 ($1.08) ($1.79) $0.71
March $16.67 ($4.81) ($3.88) $4.34 $0.71 $13.14 ($0.93) ($1.95) $1.02
April $16.01 ($3.67) ($3.88) $3.29 $0.61 $12.48 ($0.27) ($0.42) $0.15
May $12.73 ($3.67) ($3.25) $3.37 $0.61 $9.91 $2.30 ($0.56) $2.87
June $12.08 ($2.98) ($3.25) $2.60 $0.58 $9.14 $3.07 $0.27 $2.80
July $13.26 ($3.24) ($3.25) $3.10 $0.37 $10.34 $1.87 ($0.57) $2.43
August $12.99 ($3.26) ($2.63) $3.08 $0.36 $10.66 $1.55 ($0.63) $2.18
September $12.73 ($3.30) ($2.63) $3.11 $0.36 $10.38 $1.83 ($0.78) $2.61
October $13.52 ($3.27) ($2.63) $3.06 $0.37 $11.16 $1.05 ($0.86) $1.92
November $13.52 ($2.69) ($2.00) $2.48 $0.36 $11.78 $0.43 ($0.20) $0.63
December $11.68 ($2.08) ($2.00) $1.90 $0.33 $9.95 $2.26 $0.49 $1.77
1992 January $12.34 ($1.90) ($2.00) $1.61 $0.41 $10.56 $1.65 $0.52 $1.13
February $11.42 ($1.91) ($1.38) $1.59 $0.43 $10.26 $1.95 $0.44 $1.51
March $10.50 ($1.62) ($1.38) $1.37 $0.35 $9.34 $2.87 $0.68 $2.19
April $9.84 ($1.75) ($1.38) $1.44 $0.41 $8.68 $3.53 $0.57 $2.97
May $9.98 ($1.78) ($0.75) $1.45 $0.43 $9.43 $2.78 $0.46 $2.32
June $9.32 ($1.59) ($0.75) $1.31 $0.37 $8.76 $3.45 $0.57 $2.88
July $9.32 ($1.31) ($0.75) $1.26 $0.12 $8.76 $3.45 $0.55 $2.90
August $9.32 ($1.29) ($0.63) $1.25 $0.11 $8.88 $3.33 $0.52 $2.82
September $9.32 ($1.25) ($0.63) $1.21 $0.11 $8.87 $3.34 $0.49 $2.85
October $10.37 ($1.25) ($0.63) $1.20 $0.11 $9.91 $2.30 $0.42 $1.88
November $10.11 ($1.23) ($0.50) $1.17 $0.12 $9.77 $2.44 $0.36 $2.07
December $9.32 ($1.18) ($0.50) $1.11 $0.12 $8.98 $3.23 $0.35 $2.88
1993 January $9.06 ($1.71) ($0.50) $1.63 $0.12 $8.71 $3.50 ($0.27) $3.77
February $8.79 ($1.60) ($0.38) $1.52 $0.12 $8.57 $3.64 ($0.23) $3.87
March $9.06 ($1.49) ($0.38) $1.40 $0.12 $8.83 $3.38 ($0.18) $3.57
April $8.79 ($1.36) ($0.38) $1.27 $0.12 $8.56 $3.65 ($0.14) $3.79
May $8.79 ($1.25) ($0.25) $1.16 $0.13 $8.68 $3.53 ($0.13) $3.66
June $8.93 ($1.00) ($0.25) $0.91 $0.12 $8.81 $3.40 ($0.01) $3.41
July $9.32 ($0.81) ($0.25) $0.83 $9.20 $3.01 ($0.03) $3.04
August $9.84 ($0.69) ($0.13) $0.71 $9.85 $2.36 ($0.02) $2.38
September $9.84 ($0.56) ($0.13) $0.58 $9.84 $2.37 $0.00 $2.36
October $11.81 ($0.43) ($0.13) $0.44 $11.81 $0.40 $0.02 $0.38
November $11.81 ($0.30) $0.31 $11.93 $0.28 $0.01 $0.27
December $12.47 ($0.16) $0.16 $12.58 ($0.37) $0.01 ($0.38)
</TABLE>
Assumptions: (1) This schedule uses high trade prices for each acquisition
month
(2) Units held through December 31, 1993
(3) Passive loss restrictions apply
(4) Cumulative Section 754 net income/loss calculated through
12/31/93
(5) Cumulative cash distributions calculated through 12/31/93.
Cash distributions received by Public Unitholders after
December 31, 1993 will reduce the Unitholder's basis in the
Common Units and increase the Unitholders gain (or reduce the
Unitholder's loss) on a dollar-for-dollar basis. Such amount
will be reflected as additional/(decreased) capital
gain/(loss).
(6) Basis and, correspondingly, sales price increased by $.11 for
legal fees
<PAGE> 115
Annex D-2
(Per Unit Bases & Income Allocations
as of December 31, 1993)(1)(2)(3)(4)
<TABLE>
<CAPTION>
Gain @
Cumulative Cumulative Basis Assumed Character of
Month of Acquisition Net Cash Suspended Losses for Calc Sales Price Gain or (Loss)
Entry Price Inc/(Loss) Distributions(5) Ordinary Capital Gain/(Loss) $12.21 Ordinary Capital
<S> <C> <C> <C> <C> <C> <C> <C> <C>
March $22.75 ($7.79) ($13.30) $7.84 $0.95 $10.56 $1.65 ($2.33) $3.98
April $19.24 ($7.10) ($13.30) $7.37 $0.72 $7.04 $5.17 $1.09 $4.08
May $20.43 ($7.50) ($13.30) $7.72 $0.75 $8.22 $3.99 ($0.31) $4.30
June $20.19 ($7.14) ($13.30) $7.34 $0.77 $7.97 $4.24 ($0.36) $4.60
July $20.07 ($7.04) ($12.63) $7.24 $0.76 $8.52 $3.69 ($0.41) $4.10
August $22.92 ($8.28) ($12.63) $8.21 $1.02 $11.36 $0.85 ($3.06) $3.92
September $23.30 ($9.13) ($12.63) $8.99 $1.09 $11.73 $0.48 ($4.01) $4.49
October $15.20 ($6.14) ($12.63) $5.42 $0.71 $2.67 $9.54 $1.85 $7.69
November $16.00 ($6.44) ($11.99) $6.60 $0.77 $5.05 $7.16 $0.25 $6.91
December $17.46 ($5.79) ($11.99) $6.01 $0.70 $6.50 $5.71 $1.35 $4.36
1988 January $19.75 ($6.27) ($11.99) $6.44 $0.74 $8.78 $3.43 $0.51 $2.92
February $20.00 ($6.22) ($11.38) $6.27 $0.85 $9.63 $2.58 $0.19 $2.39
March $19.50 ($5.93) ($11.38) $5.94 $0.87 $9.12 $3.09 ($0.33) $3.42
April $19.13 ($5.97) ($11.38) $5.92 $0.92 $8.73 $3.48 ($0.55) $4.03
May $17.00 ($5.52) ($10.75) $5.53 $0.84 $7.21 $5.00 $0.97 $4.02
June $18.88 ($5.40) ($10.75) $5.38 $0.85 $9.07 $3.14 $0.07 $3.06
July $18.13 ($5.38) ($10.75) $5.41 $0.79 $8.30 $3.91 ($0.12) $4.03
August $16.50 ($4.23) ($10.13) $4.48 $0.56 $7.30 $4.91 $2.46 $2.45
September $16.13 ($4.06) ($10.13) $4.29 $0.57 $6.91 $5.30 $2.60 $2.70
October $16.88 ($4.69) ($10.13) $4.68 $0.79 $7.64 $4.57 $0.60 $3.97
November $15.38 ($4.02) ($9.50) $4.13 $0.66 $6.75 $5.46 $1.53 $3.93
December $14.75 ($3.43) ($9.50) $3.61 $0.57 $6.11 $6.10 $3.25 $2.85
1989 January $15.75 ($4.18) ($9.50) $4.13 $0.79 $7.10 $5.11 $1.12 $3.99
February $17.13 ($4.86) ($8.88) $4.61 $0.96 $9.07 $3.14 $0.36 $2.78
March $18.00 ($5.12) ($8.88) $4.78 $1.03 $9.93 $2.28 $0.09 $2.19
April $18.00 ($5.35) ($8.88) $4.93 $1.09 $9.90 $2.31 ($0.16) $2.47
May $17.88 ($5.29) ($8.25) $4.83 $1.10 $10.38 $1.83 ($0.08) $1.92
June $18.25 ($5.25) ($8.25) $4.77 $1.10 $10.73 $1.48 ($0.05) $1.53
July $18.63 ($5.62) ($8.25) $5.13 $1.09 $11.08 $1.13 ($0.59) $1.72
August $17.63 ($5.15) ($7.63) $4.67 $1.04 $10.68 $1.53 ($0.06) $1.59
September $17.13 ($4.85) ($7.63) $4.38 $1.02 $10.16 $2.05 $0.27 $1.79
October $15.63 ($4.44) ($7.63) $3.98 $0.98 $8.63 $3.58 $0.74 $2.84
November $14.88 ($4.00) ($7.00) $3.56 $0.94 $8.48 $3.73 $1.22 $2.51
December $15.13 ($3.95) ($7.00) $3.47 $0.95 $8.71 $3.50 $1.27 $2.22
1990 January $15.63 ($3.69) ($7.00) $3.19 $0.95 $9.19 $3.02 $1.24 $1.78
February $15.38 ($3.55) ($6.38) $3.05 $0.93 $9.54 $2.67 $1.22 $1.44
March $15.00 ($3.40) ($6.38) $2.89 $0.93 $9.16 $3.05 $1.25 $1.80
April $14.25 ($3.32) ($6.38) $2.79 $0.94 $8.40 $3.81 $1.30 $2.51
May $12.63 ($2.83) ($5.75) $2.36 $0.85 $7.37 $4.84 $1.97 $2.87
June $13.88 ($2.94) ($5.75) $2.38 $0.93 $8.61 $3.60 $1.63 $1.96
July $14.13 ($2.93) ($5.75) $2.45 $0.85 $8.85 $3.36 $1.30 $2.07
August $14.88 ($3.14) ($5.13) $2.58 $0.90 $10.20 $2.01 $0.86 $1.15
September $16.13 ($3.00) ($5.13) $2.44 $0.89 $11.44 $0.77 $0.99 ($0.22)
October $15.88 ($2.91) ($5.13) $2.37 $0.90 $11.21 $1.00 $0.98 $0.02
November $14.88 ($2.86) ($4.50) $2.42 $0.74 $10.79 $1.42 $1.00 $0.43
December $14.13 ($2.66) ($4.50) $2.22 $0.72 $10.02 $2.19 $1.19 $1.00
1991 January $14.25 ($4.64) ($4.50) $4.21 $0.69 $10.13 $2.08 ($1.67) $3.75
February $14.38 ($4.71) ($3.88) $4.26 $0.70 $10.86 $1.35 ($1.79) $3.13
March $14.63 ($4.81) ($3.88) $4.34 $0.71 $11.10 $1.11 ($1.95) $3.06
April $10.38 ($3.67) ($3.88) $3.29 $0.61 $6.84 $5.37 ($0.42) $5.79
May $10.50 ($3.67) ($3.25) $3.37 $0.61 $7.68 $4.53 ($0.56) $5.10
June $10.75 ($2.98) ($3.25) $2.60 $0.58 $7.81 $4.40 $0.27 $4.13
July $10.75 ($3.24) ($3.25) $3.10 $0.37 $7.84 $4.37 ($0.57) $4.94
August $11.00 ($3.26) ($2.63) $3.08 $0.36 $8.66 $3.55 ($0.63) $4.18
September $11.50 ($3.30) ($2.63) $3.11 $0.36 $9.15 $3.06 ($0.78) $3.84
October $11.63 ($3.27) ($2.63) $3.06 $0.37 $9.26 $2.95 ($0.86) $3.81
November $10.63 ($2.69) ($2.00) $2.48 $0.36 $8.89 $3.32 ($0.20) $3.53
December $8.25 ($2.08) ($2.00) $1.90 $0.33 $6.51 $5.70 $0.49 $5.20
1992 January $9.38 ($1.90) ($2.00) $1.61 $0.41 $7.60 $4.61 $0.52 $4.09
February $9.63 ($1.91) ($1.38) $1.59 $0.43 $8.47 $3.74 $0.44 $3.30
March $7.75 ($1.62) ($1.38) $1.37 $0.35 $6.59 $5.62 $0.68 $4.94
April $8.75 ($1.75) ($1.38) $1.44 $0.41 $7.58 $4.63 $0.57 $4.06
May $8.50 ($1.78) ($0.75) $1.45 $0.43 $7.95 $4.26 $0.46 $3.80
June $7.75 ($1.59) ($0.75) $1.31 $0.37 $7.20 $5.01 $0.57 $4.45
July $7.88 ($1.31) ($0.75) $1.26 $0.12 $7.31 $4.90 $0.55 $4.34
August $8.00 ($1.29) ($0.63) $1.25 $0.11 $7.56 $4.65 $0.52 $4.13
September $8.00 ($1.25) ($0.63) $1.21 $0.11 $7.55 $4.66 $0.49 $4.17
October $8.00 ($1.25) ($0.63) $1.20 $0.11 $7.55 $4.66 $0.42 $4.24
November $8.63 ($1.23) ($0.50) $1.17 $0.12 $8.29 $3.92 $0.36 $3.56
December $7.88 ($1.18) ($0.50) $1.11 $0.12 $7.53 $4.68 $0.35 $4.33
1993 January $8.00 ($1.71) ($0.50) $1.63 $0.12 $7.65 $4.56 ($0.27) $4.83
February $8.00 ($1.60) ($0.38) $1.52 $0.12 $7.77 $4.44 ($0.23) $4.67
March $8.13 ($1.49) ($0.38) $1.40 $0.12 $7.89 $4.32 ($0.18) $4.50
April $7.88 ($1.36) ($0.38) $1.27 $0.12 $7.64 $4.57 ($0.14) $4.71
May $8.00 ($1.25) ($0.25) $1.16 $0.13 $7.89 $4.32 ($0.13) $4.45
June $7.75 ($1.00) ($0.25) $0.91 $0.12 $7.63 $4.58 ($0.01) $4.58
July $8.13 ($0.81) ($0.25) $0.83 $8.01 $4.20 ($0.03) $4.24
August $8.75 ($0.69) ($0.13) $0.71 $8.75 $3.46 ($0.02) $3.48
September $8.75 ($0.56) ($0.13) $0.58 $8.75 $3.46 $0.00 $3.46
October $9.00 ($0.43) ($0.13) $0.44 $9.00 $3.21 $0.02 $3.19
November $10.75 ($0.30) $0.31 $10.87 $1.34 $0.01 $1.33
December $10.88 ($0.16) $0.16 $10.99 $1.22 $0.01 $1.22
</TABLE>
Assumptions: (1) This schedule uses low trade prices for each acquisition month
(2) Units held through December 31, 1993
(3) Passive loss restrictions apply
(4) Cumulative Section 754 net income/loss calculated through
12/31/93
(5) Cumulative cash distributions calculated through 12/31/93.
Cash distributions received by Public Unitholders after
December 31, 1993 will reduce the Unitholder's basis in the
Common Units and increase the Unitholders gain (or reduce the
Unitholder's loss) on a dollar-for-dollar basis. Such amount
will be reflected as additional/(decreased) capital
gain/(loss).
(6) Basis and, correspondingly, sales price increased by $.11 for
legal fees
<PAGE> 116
Annex D-3
(Per Unit Bases & Income Allocations
as of December 31, 1993)(1)(2)(3)(4)
<TABLE>
<CAPTION>
Gain @
Cumulative Cumulative Basis Assumed Character of
Month of Acquisition Net Cash Suspended Losses for Calc Sales Price Gain or (Loss)
Entry Price Inc/(Loss) Distributions(5) Ordinary Capital Gain/(Loss) $12.21 Ordinary Capital
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1987 March $22.75 ($7.79) ($13.30) $7.84 $0.95 $10.56 $1.65 ($2.33) $3.98
April $23.62 ($7.10) ($13.30) $7.37 $0.72 $11.42 $0.79 $1.09 ($0.30)
May $22.23 ($7.50) ($13.30) $7.72 $0.75 $10.01 $2.20 ($0.31) $2.50
June $24.10 ($7.14) ($13.30) $7.34 $0.77 $11.88 $0.33 ($0.36) $0.69
July $23.49 ($7.04) ($12.63) $7.24 $0.76 $11.94 $0.27 ($0.41) $0.68
August $25.57 ($8.28) ($12.63) $8.21 $1.02 $14.01 ($1.80) ($3.06) $1.27
September $26.40 ($9.13) ($12.63) $8.99 $1.09 $14.83 ($2.62) ($4.01) $1.39
October $22.35 ($6.14) ($12.63) $5.42 $0.71 $9.82 $2.39 $1.85 $0.54
November $20.13 ($6.44) ($11.99) $6.60 $0.77 $9.17 $3.04 $0.25 $2.78
December $20.73 ($5.79) ($11.99) $6.01 $0.70 $9.77 $2.44 $1.35 $1.09
1988 January $21.75 ($6.27) ($11.99) $6.44 $0.74 $10.79 $1.42 $0.51 $0.92
February $21.94 ($6.22) ($11.38) $6.27 $0.85 $11.58 $0.63 $0.19 $0.45
March $20.78 ($5.93) ($11.38) $5.94 $0.87 $10.39 $1.82 ($0.33) $2.14
April $20.06 ($5.97) ($11.38) $5.92 $0.92 $9.67 $2.54 ($0.55) $3.09
May $18.93 ($5.52) ($10.75) $5.53 $0.84 $9.15 $3.06 $0.97 $2.09
June $19.81 ($5.40) ($10.75) $5.38 $0.85 $10.01 $2.20 $0.07 $2.13
July $19.17 ($5.38) ($10.75) $5.41 $0.79 $9.34 $2.87 ($0.12) $2.99
August $17.96 ($4.23) ($10.13) $4.48 $0.56 $8.76 $3.45 $2.46 $0.99
September $17.05 ($4.06) ($10.13) $4.29 $0.57 $7.83 $4.38 $2.60 $1.77
October $17.89 ($4.69) ($10.13) $4.68 $0.79 $8.65 $3.56 $0.60 $2.96
November $17.19 ($4.02) ($9.50) $4.13 $0.66 $8.56 $3.65 $1.53 $2.12
December $15.78 ($3.43) ($9.50) $3.61 $0.57 $7.14 $5.07 $3.25 $1.82
1989 January $17.33 ($4.18) ($9.50) $4.13 $0.79 $8.67 $3.54 $1.12 $2.42
February $18.73 ($4.86) ($8.88) $4.61 $0.96 $10.68 $1.53 $0.36 $1.17
March $19.30 ($5.12) ($8.88) $4.78 $1.03 $11.23 $0.98 $0.09 $0.89
April $19.30 ($5.35) ($8.88) $4.93 $1.09 $11.20 $1.01 ($0.16) $1.16
May $19.18 ($5.29) ($8.25) $4.83 $1.10 $11.68 $0.53 ($0.08) $0.62
June $20.22 ($5.25) ($8.25) $4.77 $1.10 $12.69 ($0.48) ($0.05) ($0.43)
July $20.93 ($5.62) ($8.25) $5.13 $1.09 $13.38 ($1.17) ($0.59) ($0.58)
August $19.12 ($5.15) ($7.63) $4.67 $1.04 $12.17 $0.04 ($0.06) $0.10
September $18.21 ($4.85) ($7.63) $4.38 $1.02 $11.24 $0.97 $0.27 $0.70
October $17.07 ($4.44) ($7.63) $3.98 $0.98 $10.07 $2.14 $0.74 $1.40
November $16.95 ($4.00) ($7.00) $3.56 $0.94 $10.56 $1.65 $1.22 $0.43
December $16.42 ($3.95) ($7.00) $3.47 $0.95 $10.01 $2.20 $1.27 $0.93
1990 January $17.46 ($3.69) ($7.00) $3.19 $0.95 $11.02 $1.19 $1.24 ($0.06)
February $16.61 ($3.55) ($6.38) $3.05 $0.93 $10.78 $1.43 $1.22 $0.21
March $15.83 ($3.40) ($6.38) $2.89 $0.93 $9.99 $2.22 $1.25 $0.96
April $15.34 ($3.32) ($6.38) $2.79 $0.94 $9.49 $2.72 $1.30 $1.42
May $14.25 ($2.83) ($5.75) $2.36 $0.85 $9.00 $3.21 $1.97 $1.24
June $14.68 ($2.94) ($5.75) $2.38 $0.93 $9.42 $2.79 $1.63 $1.16
July $15.99 ($2.93) ($5.75) $2.45 $0.85 $10.71 $1.50 $1.30 $0.20
August $16.23 ($3.14) ($5.13) $2.58 $0.90 $11.56 $0.65 $0.86 ($0.21)
September $17.25 ($3.00) ($5.13) $2.44 $0.89 $12.56 ($0.35) $0.99 ($1.35)
October $17.13 ($2.91) ($5.13) $2.37 $0.90 $12.46 ($0.25) $0.98 ($1.23)
November $16.43 ($2.86) ($4.50) $2.42 $0.74 $12.34 ($0.13) $1.00 ($1.12)
December $15.13 ($2.66) ($4.50) $2.22 $0.72 $11.03 $1.18 $1.19 ($0.01)
1991 January $15.59 ($4.64) ($4.50) $4.21 $0.69 $11.47 $0.74 ($1.67) $2.41
February $15.59 ($4.71) ($3.88) $4.26 $0.70 $12.08 $0.13 ($1.79) $1.92
March $15.65 ($4.81) ($3.88) $4.34 $0.71 $12.12 $0.09 ($1.95) $2.04
April $13.19 ($3.67) ($3.88) $3.29 $0.61 $9.66 $2.55 ($0.42) $2.97
May $11.62 ($3.67) ($3.25) $3.37 $0.61 $8.79 $3.42 ($0.56) $3.98
June $11.41 ($2.98) ($3.25) $2.60 $0.58 $8.48 $3.73 $0.27 $3.46
July $12.00 ($3.24) ($3.25) $3.10 $0.37 $9.09 $3.12 ($0.57) $3.69
August $12.00 ($3.26) ($2.63) $3.08 $0.36 $9.66 $2.55 ($0.63) $3.18
September $12.12 ($3.30) ($2.63) $3.11 $0.36 $9.77 $2.44 ($0.78) $3.23
October $12.57 ($3.27) ($2.63) $3.06 $0.37 $10.21 $2.00 ($0.86) $2.86
November $12.07 ($2.69) ($2.00) $2.48 $0.36 $10.34 $1.87 ($0.20) $2.08
December $9.97 ($2.08) ($2.00) $1.90 $0.33 $8.23 $3.98 $0.49 $3.49
1992 January $10.86 ($1.90) ($2.00) $1.61 $0.41 $9.08 $3.13 $0.52 $2.61
February $10.52 ($1.91) ($1.38) $1.59 $0.43 $9.37 $2.84 $0.44 $2.41
March $9.13 ($1.62) ($1.38) $1.37 $0.35 $7.96 $4.25 $0.68 $3.57
April $9.30 ($1.75) ($1.38) $1.44 $0.41 $8.13 $4.08 $0.57 $3.51
May $9.24 ($1.78) ($0.75) $1.45 $0.43 $8.69 $3.52 $0.46 $3.06
June $8.53 ($1.59) ($0.75) $1.31 $0.37 $7.98 $4.23 $0.57 $3.66
July $8.60 ($1.31) ($0.75) $1.26 $0.12 $8.04 $4.17 $0.55 $3.62
August $8.66 ($1.29) ($0.63) $1.25 $0.11 $8.22 $3.99 $0.52 $3.48
September $8.66 ($1.25) ($0.63) $1.21 $0.11 $8.21 $4.00 $0.49 $3.51
October $9.18 ($1.25) ($0.63) $1.20 $0.11 $8.73 $3.48 $0.42 $3.06
November $9.37 ($1.23) ($0.50) $1.17 $0.12 $9.03 $3.18 $0.36 $2.82
December $8.60 ($1.18) ($0.50) $1.11 $0.12 $8.25 $3.96 $0.35 $3.60
1993 January $8.53 ($1.71) ($0.50) $1.63 $0.12 $8.18 $4.03 ($0.27) $4.30
February $8.40 ($1.60) ($0.38) $1.52 $0.12 $8.17 $4.04 ($0.23) $4.27
March $8.59 ($1.49) ($0.38) $1.40 $0.12 $8.36 $3.85 ($0.18) $4.03
April $8.33 ($1.36) ($0.38) $1.27 $0.12 $8.10 $4.11 ($0.14) $4.25
May $8.40 ($1.25) ($0.25) $1.16 $0.13 $8.28 $3.93 ($0.13) $4.05
June $8.34 ($1.00) ($0.25) $0.91 $0.12 $8.22 $3.99 ($0.01) $4.00
July $8.72 ($0.81) ($0.25) $0.83 $8.60 $3.61 ($0.03) $3.64
August $9.30 ($0.69) ($0.13) $0.71 $9.30 $2.91 ($0.02) $2.93
September $9.30 ($0.56) ($0.13) $0.58 $9.30 $2.91 $0.00 $2.91
October $10.41 ($0.43) ($0.13) $0.44 $10.40 $1.81 $0.02 $1.79
November $11.28 ($0.30) $0.31 $11.40 $0.81 $0.01 $0.80
December $11.67 ($0.16) $0.16 $11.79 $0.42 $0.01 $0.42
</TABLE>
Assumptions: (1) This schedule uses average trade prices for each acquisition
month
(2) Units held through December 31, 1993 (3) Passive loss
restrictions apply
(4) Cumulative Section 754 net income/loss calculated through
12/31/93
(5) Cumulative cash distributions calculated through 12/31/93.
Cash distributions received by Public Unitholders after
December 31, 1993 will reduce the Unitholder's basis in the
Common Units and increase the Unitholders gain (or reduce
the Unitholder's loss) on a dollar-for-dollar basis. Such
amount will be reflected as additional/(decreased) capital
gain/(loss).
(6) Basis and, correspondingly, sales price increased by $.11 for
legal fees
<PAGE> 117
THIS PROXY IS SOLICITED BY AND ON BEHALF OF THE GENERAL PARTNER
VALERO NATURAL GAS PARTNERS, L.P.
PROXY - SPECIAL MEETING OF UNITHOLDERS - MARCH ___, 1994
The undersigned, revoking previous proxies, hereby appoint(s) William E.
Greehey, Stan L. McLelland and Rand C. Schmidt, or any one or more of them,
Proxies, with full power of substitution, to represent and to vote all common
units of limited partner interests ("Common Units") of Valero Natural Gas
Partners, L.P. ("VNGP, L.P.") owned by the undersigned at the Special Meeting
of Unitholders to be held in San Antonio, Texas on _______, March ___, 1994,
with respect to the proposals set forth in the Notice of Special Meeting and
Proxy Statement and such other business as may properly come before the
meeting, or any original or subsequent adjournment thereof. All powers may be
exercised by a majority of said Proxies or substitutes voting or acting or, if
only one votes or acts, then by that one. Receipt of the Notice of Meeting and
Proxy Statement is hereby acknowledged. THE BOARD OF DIRECTORS OF THE GENERAL
PARTNER AND THE SPECIAL COMMITTEE OF THE BOARD OF DIRECTORS EACH RECOMMENDS A
VOTE FOR THE FOLLOWING:
1. Proposal to approve the merger of VNGP, L.P. with a
subsidiary of Valero Energy Corporation (i) the
Common Units held by persons other than the Company
(the "Public Unitholders") will be converted into
the right to receive $12.10 in cash per Common Unit
from VNGC, (ii) the Common Units held by
subsidiaries of VEC will remain outstanding, (iii)
the 1% general partner interest in VNGP, L.P. held
by VNGC will remain outstanding, (iv) VNGC will
acquire additional Common Units from VNGP, L.P. in
consideration of the cash payment to the Public
Unitholders, (v) VNGP, L.P., together with its
consolidated subsidiaries, will become wholly owned
subsidiaries of VEC and (vi) the Public Unitholders
will cease to be limited partners of VNGP, L.P. The
Merger will be a taxable event to the Public
Unitholders.
/ / FOR / / AGAINST / / ABSTAIN
(PLEASE MARK, DATE AND SIGN ON THE REVERSE AND MAIL IN THE ENCLOSED ENVELOPE).
<PAGE> 118
2. In their discretion, the Proxies are authorized to
vote in accordance with their best judgment upon
such other business as may properly come before the
meeting, including matters which the Board of
Directors did not know were to be presented at the
meeting and matters incidental to the conduct of the
meeting.
THIS PROXY WILL BE VOTED AS DIRECTED. IF NO SPECIFIC DIRECTION IS GIVEN, THE
PROXY WILL BE VOTED FOR PROPOSAL 1.
Dated: , 1994 ______________________________________
(Signature)
---------------------------------------
(Signature)
Where there
is more than
one owner,
each should
sign. When
signing as
an attorney,
administrato
r, executor,
guardian or
trustee,
please add
your full
title as
such. If
executed by
a
corporation
or
partnership,
the proxy
should be
signed in
the
corporate or
partnership
name by a
duly
authorized
officer or
other duly
authorized
person,
indicating
such
officer's or
other
person's
title.
PLEASE SIGN,
DATE AND
RETURN
PROMPTLY IN
THE ENCLOSED
ENVELOPE.
